DBRS Confirms the Province of Manitoba at A (high) and R-1 (low)

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of the Province of Manitoba (“Manitoba” or the “Province”) at A (high) and R-1 (low). The trends remain Stable. The Province’s credit profile continues to slowly improve aided by solid fiscal results over the past two years, its prudent fiscal management, and the declining debt-to-GDP burden. As a result, the Province is facing its lowest debt-to-GDP ratio in about 20 years and sound fiscal results, although there is some uncertainty over federal Equalization revenues, which are an important source of revenues for the Province, as a review panel is currently expected to present recommendations in the coming months.

The Province posted stronger-than-budgeted results in 2005-06, largely due to improved results at Crown corporations, especially The Manitoba Hydro-Electric Board (“Manitoba Hydro”) that outweighed increased costs for agriculture assistance due to flooding and heavy rains. However, results are expected to slip into a DBRS-adjusted deficit in 2006-07, as a result of a significant increase in capital spending, which DBRS accounts for on a cash basis, rather than as amortized. Boosted by spending on the floodway project, capital spending is expected to remain moderately elevated for the next couple years. These capital spending plans will put some upward pressure on debt, which is expected to reach Cdn$14 billion in 2006-07. However, the debt-to-GDP ratio is expected to continue to slowly decline to 31.7% in 2006-07 from 32.1% in the prior year.

A key uncertainty for Manitoba is the review of the Equalization framework, as the Province receives the largest share, based on total revenues, from Equalization outside of Atlantic Canada at 18.3% in 2005-06. The Province would like to maintain the representative tax system for determining Equalization entitlements, including non-renewable resources. However, there are a number of directions the review panel could take, lending uncertainty as to the impact on Manitoba’s revenues. As any changes will help some provinces and reduce income in others, any proposed revisions to the Equalization program will likely be contentious.

Like most other provinces, Manitoba remains faced with continued cost pressures for health, education, and infrastructure, compounded by volatility due to Manitoba Hydro earnings and the agriculture sector. However, DBRS expects the Province’s financial profile to continue to slowly improve, supported by its continued commitment to fiscal discipline and its legislated debt retirement plan that is expected to eliminate general purpose debt and unfunded pension liabilities by 2036.

Note: Ratings include debt issued/guaranteed by the Province of Manitoba, including The Manitoba Hydro-Electric Board, and its subsidiary Centra Gas Manitoba Inc.