OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the following North Slope Borough, Alaska (the borough) bonds:

--$19.450 million general obligation (GO) refunding bonds, series 2016A.

Bonds are expected to price the week of March 7th. Proceeds will be used to restructure the borough's outstanding 2007A GO bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem property tax levy on all property within the borough.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: The borough's financial position is sound with a solid general fund reserve and an extraordinarily large permanent fund.

SOLID BUDGET FLEXIBILITY: The borough's budget is structurally balanced, and the elected Assembly has ample tools to respond to potential financial risks, including the ability to raise its operating property tax levy and permanent fund transfers significantly. The expenditure framework is also reasonably flexible.

MAJOR ENERGY PRODUCER: North Slope Borough is home to the U.S.'s largest conventional oil field at Prudhoe Bay as well as smaller but significant oil and natural gas resources. The borough's oil and gas reserves are non-renewable and naturally declining resources, but new investments and improved technology have repeatedly pushed out the estimated lifespan of local oil fields.

OIL-DOMINATED TAX BASE: The $21 billion tax assessed value (AV) is dominated by oil extraction enterprises and highly concentrated in the top 10 taxpayers. AV is insulated from short-term fluctuations in oil prices, but it is vulnerable to erosion during periods of sustained low oil prices.

MODERATE DEBT, RAPID AMORTIZATION: The borough's debt burden is moderate and has been declining as a percent of AV. Debt amortizes very rapidly, well within the lifespan of the borough's existing oil fields.

RATING SENSITIVITIES
The rating is sensitive to changes in the borough's financial, economic and debt profiles, and is unlikely to move higher due to economic concentration. The rating could come under downward pressure if low oil prices led to a sustained and significant decline in assessed values.

CREDIT PROFILE
The borough is located on the north coast of Alaska, encompassing a vast 94,877 square miles, an area slightly larger than the United Kingdom. The borough's modest population of 9,703 swells to 19,638 after including oil and gas industry workers.

ENERGY EXTRACTION DEPENDENT

The borough has a large, energy-dominated economy. The borough produced about 465,000 barrels of oil per day in 2015, down 3% from 2014. Production has fallen from a peak of 2 million barrels per day in the 1980s but still makes up more than 5% of U.S. production. Estimates of total recoverable reserves have increased over the years with improvements in technology and the exploration of areas farther from the first fields developed at Prudhoe Bay in the 1960s and 1970s.

Continued exploration of oil fields across the borough, the participation of more second-tier oil and gas companies, and the prospect of huge gas reserves in the North Slope suggest that activity will continue at a significant level for the foreseeable future. The borough's harsh Arctic environment is likely to support only a very limited economy in the era after energy production, but the borough is actively building its permanent fund to prepare for that time, which is likely to come well after all currently outstanding debt matures in 10 years.

CONCENTRATED TAX BASE

The tax base is highly concentrated with 90.8% of AV related to the top 10 taxpayers, all energy companies. The top two taxpayers, BP PLC (Issuer Default Rating [IDR] 'A'/Positive Outlook) and ConocoPhillips (IDR 'A'/Negative Outlook), account for 60% of fiscal 2015 AV.

AV is driven by the oil industry's capital investments in the borough and is much less volatile than energy prices. AV is based on the depreciated replacement cost value of the capital stock, not the economic value of oil infrastructure or mineral resources in the ground. AV fluctuates as investment rises and falls, but changes are driven by gradual depreciation and the degree to which depreciation is offset by new investment. Investment decisions are driven by long-term energy price expectations and only appear in AV data with a significant lag. AV increased 8.9% as of Jan 1 2015; 2016 AV is not yet available.

While economic concentration limits the rating, the continued growth of the tax base, driven by both reinvestment in existing assets and new fields, suggests that the borough's natural resources will support a significant level of economic activity for much longer than the rated bonds are outstanding. The North Slope produces a significant portion of the revenues and economic output of the state of Alaska (GOs rated 'AAA'/Stable Outlook).

VERY STRONG FINANCIAL POSITION

Solid revenue growth and prudent management practices have allowed the borough to build very large operating reserves. Unrestricted general fund balance (the sum of committed, assigned and unassigned balances under GASB 54) was $138.9 million or 29% of general fund expenditures and transfers out in fiscal 2015. The current rating is dependent on the maintenance of significantly above-average fund balances, as high reserves provide an offset to concerns about the concentrated tax base and time to respond to unexpected changes in tax revenues.

The borough's fiscal 2016 operating budgets appear structurally balanced, and borough policymakers have ample expenditure and revenue flexibility to respond to typical, cyclical financial pressures. A recently relaxed property tax cap (Senate Bill 138) significantly boosted the borough's revenue-raising flexibility and budgeted fiscal 2016 operating revenues. The law allows the borough to use more of its tax levy for operations and less for debt service, which is declining. Net of school district pass-through funding, the borough's budgeted fiscal 2016 operating revenues are projected to rise by $25 million, or about 6.6%, from 2015. The increase reflects a large increase in the operating levy that was fully offset by a reduction in the debt service levy, keeping the overall tax rate unchanged. The increase in revenues allowed the borough to cease annual withdrawals from its permanent fund.

The borough's labor environment and an unusually high level of public services provided by the borough suggest that significant expenditure flexibility exists if the borough needed to reduce expenses. Such reductions might prove politically difficult, however, given the high level of demand for services from the public.

The borough's financial position is further strengthened by a large and growing permanent fund with assets of $579.8 million (121% of fiscal 2015 general fund spending) as of June 30, 2015. The borough may withdraw as much as 8% of the fund annually for general governmental use. However, given the additional operational funding available under SB 138, the borough has ceased withdrawals and begun making annual contributions to the permanent fund. The borough has prudently decided that 25% of growth in unrestricted general fund balance will be deposited in the permanent fund, as well as the money earned by the borough's real property management fund.

MODERATE DEBT BURDEN

The overall debt burden remains moderate at 2% of AV after the current refunding issue. Debt is extraordinarily high on a per capita basis at $40,832 due to the sparse population of the borough. Debt amortizes very rapidly with 100% paid in 10 years. This debt restructuring moves $20 million in principal to mature in fiscal 2019 and 2020 from fiscal 2017. In addition, the borough plans to slow its amortization of new issuance slightly. Both changes reflect more predictable property tax revenues resulting from a five-year agreement with the Trans Alaska Pipeline System (TAPS). Fitch expects debt amortization to remain very rapid.

Pension and other post-employment benefit (OPEB) liabilities are less of a concern for the borough than for many municipalities because the state of Alaska has largely assumed responsibility for underfunded public retirement plans. The borough pays a fixed 22% percentage of payroll to the state for pension and OPEB, but these payments are a small part of its budget (about 2% of governmental funds spending in 2015).

The total carrying cost of pension, OPEB and debt service is high at 30% of spending due to the borough's practice of paying down its bonds very rapidly. The elevated carrying cost is not a credit concern because it does not reflect an excessive debt burden, given moderate debt-to-AV ratios and rapid amortization.

LARGE CONTINGENT LIABILITY

The borough reports a large contingent liability related to ongoing litigation over the taxable valuation of TAPS, which is routinely appealed by taxpayers. While recent court rulings have gone in the borough's favor, the borough estimates its current exposure at up to $154 million if the Alaska Supreme Court were to overturn a 2015 Superior Court's decision.

A second dispute with the state of Alaska centers on whether excess tax revenues collected after revaluations belong to the borough or the state. The state claims the borough exceeded the state tax cap and filed a complaint stating the borough ought to pay the state approximately $60 million. Fitch will continue to monitor judicial rulings on TAPS and the borough's reaction to such rulings, but the borough appears to have the resources and flexibility to respond to even the worst case scenario. In addition to its general fund resources, the borough would have the option of increasing permanent fund withdrawals for a period of time.