DBRS Confirms City of Edmonton at R-1 (high) and AA (high)

DBRS has today confirmed the Commercial Paper and Long-Term Debt ratings of the City of Edmonton (the City) at R-1 (high) and AA (high), respectively. The trends remains Stable, as the City maintains a strong credit profile buttressed by its record of excellent operating results, a very sizable liquidity position and healthy funding support from the financially-robust Alberta Government (the Province, rated AAA). The City also benefits from solid tax base expansion fuelled by sustained rapid population growth tied to development of the nearby oil sands. However, the need to significantly expand the municipal infrastructure base to handle the influx of new residents is a challenge that continues to limit the upside potential of the rating.

The City extended its string of consecutive annual surpluses last year to 11 by posting a $133 million recurring surplus (after capex) driven by continued tax base expansion, moderate property tax and user fee increases, as well as improved earnings from its subsidiary, EPCOR Utilities Inc. (EPCOR, rated A (low)). The City’s total net tax-supported debt burden remained low last year, at $148 million, although this was 42% above the 2005 level as debt was added to fund work on roads and the new south light rail transit line (SLRT).

The City is expected to continue posting surpluses over the next several years, further bolstering its liquidity position, which at $1.4 billion last year, eclipsed both annual operating expenditures and net debt. The annual budget process is likely to become steadily more challenging, however, due to the City’s needs to expand services and infrastructure to handle population growth.

The City’s five-year capital plan includes a considerable $3.4 billion in spending, a notable portion of which is earmarked for roads, drainage and the SLRT. The plan is expected to be partially financed through debt, sending net tax-supported debt up nearly five fold to a projected peak of $720 million or $910 per capita by 2009, which DBRS views as manageable. In addition, the capital plan is set to occur in tandem with many other large energy-related infrastructure projects in the region, pressuring Edmonton’s already heated construction sector and raising the spectre of cost overruns. Nonetheless, the City has carefully incorporated contingencies into its plan on a project-by-project basis, and has demonstrated an ability to manage capital costs in a tight construction environment.

Note:
All figures are in Canadian dollars unless otherwise noted.