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 or Edmonton) at R-1 (high) and AA (high), respectively, and both trends remain Stable. Edmonton continues to benefit from a solid economic growth outlook, a very healthy liquidity position totalling $1.3 billion at year-end 2010, consistently sound operating performance and the strong financial position of the Alberta government (the Province, rated AAA). However, considerable concerns remain with regard to the significant increases in tax-supported debt observed in recent years and the large capital needs foreseen for upcoming fiscal years, although the City’s debt burden ended 2010 notably below previous forecasts.

Fiscal 2010 marked the second year of the City’s three-year capital program, where investment in transit, roads and drainage services dominated the agenda. In-year capital spending reached $1.15 billion, pushing the DBRS-adjusted net deficit after capital expenditures to $327.7 million in 2010. Despite the challenges imposed by the capital program, the City continues to post sound operating results. The operating surplus (exclusive of capital expenditures and amortization) reached $260.7 million in 2010, a year-over-year improvement of 97.0%. Total operating revenues increased 13.3% over 2009 results due primarily to improved investment income and moderate increases in tax rates and user fees, while operating expenses rose by 6.3%, driven by increased service levels to accommodate the region’s growing population. Despite expectations of continued cost escalation caused by service expansion and wage inflation, balanced operating budgets are expected for the foreseeable future, although they will most likely rely on tax rate increases, which have averaged around 5.6% (which include amounts dedicated to fund neighbourhood renewal projects) over the last five years.
The tax-supported debt burden grew by 28.3% in 2010 to $1.09 billion, or $1,375 per capita. While borrowing has been slower than expected, tax-supported debt remains on an upward trajectory and could reach $1,570 per capita by year-end 2011. City Council will be approving another capital plan for the 2012 to 2014 period before year-end and is considering the amount and use of future tax-supported borrowing. DBRS notes that, in the absence of significant new funding from the Province or a significant scaling back of capital expenditures, tax-supported debt could eventually test the limits of the current rating, which DBRS has established at $2,000 per capita. DBRS intends to review the credit early next year, once the next three-year capital program has been confirmed and its impact on the medium-term debt outlook is better understood.

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

The applicable methodology is Rating Canadian Municipal Governments, which can be found on our website under Methodologies.