DBRS Confirms the City of Calgary at AA (high), Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Long-Term Debt rating of the City of Calgary (Calgary or the City) at AA (high) and the Commercial Paper rating at R-1 (high); all trends are Stable. The City’s strong fiscal performance, relatively low debt burden, high level of financial reserves and stable revenue sources continue to provide support to the ratings despite a challenging economic backdrop. However, the ratings are constrained by rising capital investment requirements to address the growth-related pressures of a still-expanding population, a trend that is projected to drive tax-supported debt moderately higher. The ratings are also constrained by the high reliance of the municipal economy on the provincial energy sector amid the weaker oil price environment, which has significantly reduced the near-term investment and growth outlook for Albertan firms and head offices.

The City’s fiscal performance continued to be sound throughout 2015, with an operating surplus of $750 million and a surplus after net capital expenditures (post-capex) of $507 million, highlighting Calgary’s high degree of fiscal flexibility. Operating revenues rose by 4.2% on account of growth in municipal property tax revenues, fees, user charges and other miscellaneous revenues, partially offset by lower net income from the wholly owned electricity utility ENMAX Corporation (rated A (low) with a Stable trend by DBRS) and government operating grants. Operating expenditures, excluding amortization, rose by a moderate 3.9%, with most areas of spending experiencing growth.

Calgary’s DBRS-adjusted net tax-supported debt burden declined by nearly 5% to $919 million in 2015 or a very manageable $746 per capita. Self-supporting debt declined because of reduced bridge financing for provincial Municipal Sustainability Initiative capital grants. Calgary’s 2016–2020 $8.30 billion capital plan will support major investments in transportation and transit, including the Green Line light-rail transit project, and in utilities infrastructure, such as water and wastewater treatment plants. The debt financing component of the plan (30%) is primarily for self-supporting utilities operations, and projections indicate that DBRS-adjusted net tax-supported debt will peak at $1.28 billion in 2018 or just above $1,000 per capita, a level considered to be acceptable for the current ratings.

RATING DRIVERS
The economy is expected to contract modestly in 2016 after a larger decline in 2015 as a result of ongoing adjustment in the provincial energy sector, which is affecting major local employers. However, DBRS believes the City’s credit profile will remain stable as key municipal revenue streams, such as property taxes, are insulated from economic and home-price cyclicality. Upward pressure on the ratings is unlikely over the medium term given the lack of diversification of the local economy and growth pressures that are driving debt moderately higher, albeit still manageable for the ratings. Although not anticipated, the ratings could come under downward pressure if fiscal discipline and performance materially weaken, producing meaningful post-capex deficits, or if debt rises well above current expectations.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Canadian Municipal Governments (May 2016) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2016), which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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