DBRS Confirms the Province of Alberta at AAA and R-1 (high)

DBRS has today confirmed both the Short-Term and Long-Term Debt ratings of the Province of Alberta (Alberta or the Province) at R-1 (high) and AAA, respectively. The trends on both ratings are Stable, supported by a still-strong fiscal position, negligible debt burden and healthy economic growth. The Province is very well positioned to navigate through the challenging economic conditions expected over the near term, although strong growth in base operating expenditures in recent years and falling oil prices are likely to test its fiscal discipline.

Aided by healthy personal and corporate income tax collections and strong resource revenues, fiscal results were notably better than expected in 2007-08 as the Province realized a DBRS-adjusted surplus of $3.3 billion. Solid fiscal results contributed positively to the growth in financial assets although increased borrowing for the Alberta Capital Finance Authority (ACFA) and the decision to assume a large portion of the teachers’ unfunded pension liabilities resulted in a smaller net asset position relative to the prior year.

Budget estimates for 2008-09 point to a return to a DBRS-adjusted deficit of $514 million in the current year, due primarily to solid growth in capital expenditures, which DBRS recognizes as incurred rather than as amortized. Lower corporate income tax proceeds and investment income is projected to be offset by growing federal transfers, resulting in only a small increase in total revenues when combined with prudent oil and gas price assumptions. Total spending is budgeted to increase by 12.9% on a DBRS-adjusted basis as the Province aims to meet the rapidly growing infrastructure needs of its economy. Capital spending is projected to increase by 25.1% to $8.7 billion for 2008-09 and $22.2 billion over the three-year forecast horizon. Further borrowing required for ACFA and growth in unfunded liabilities along with declining Heritage Fund assets, due to the recent downturn in equity markets, will result in a return to a marginal net debt position for the first time in five years. Nonetheless, Alberta will maintain by far the strongest profile of all provinces.

DBRS notes that while the Province has considerable flexibility within its current rating, Alberta will need to demonstrate greater expenditure restraint in light of high public expectations for government spending, weakening economic conditions and likely soft oil royalties to ensure that a return to deficits is not prolonged. However, the Province is entering this period of economic weakness in a strong position and should be able to manage these challenges without eroding its credit profile over the medium term.

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

The applicable methodology is Rating Canadian Provincial Governments which can be found on our web site under Methodologies.

This is a Corporate (Public Finance) rating.