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

DBRS has confirmed the Commercial Paper, Issuer Rating and Long-Term Debt ratings of the City of Edmonton (the City or Edmonton) at R-1 (high), AA (high) and AA (high), respectively, and all trends remain Stable. Edmonton continues to benefit from a solid economic growth outlook, a very healthy although declining liquidity position totalling $1.2 billion at year-end 2011, consistently sound operating performance and the strong financial position of the Alberta government (the Province, rated AAA). However, sizable and ongoing capital spending since 2007 has led to a steadily rising debt burden, which will continue for the foreseeable future.

The operating surplus reached $332.8 million in 2011, a year-over-year improvement of 27.6%. However, in-year capital spending reached $1.18 billion, resulting in a continued DBRS-adjusted net deficit after capital expenditures, at $190.0 million in 2011. Operating revenues increased 10.3% over 2010 levels attributable primarily to increases in tax rates and user fees and gains in investment income, while operating expenses rose by 7.4% (net of interest expense), driven by increased service levels to accommodate the region’s growing population and rising compensation costs. Cost escalation caused by service expansion, wage increases and inflationary pressures, will largely be supported by tax rate increases going forward, which have averaged around 5% over the last five years.

The DBRS-adjusted tax-supported debt burden continues to rise steadily and was reported at $697.4 million for 2011, or $859 per capita, up 24.6% year-over-year. Tax-supported debt figures have been revised to exclude over $500 million in debt leveraged against federal fuel tax grants, which DBRS considers to be self-supported, recognizing a bill passed by the federal government in December 2011 establishing the permanency of the federal fuel tax fund effective April 2014 and acknowledging the stability of these cash flows since the program was initially introduced in 2005. The City’s use of leverage against federal fuel tax funding was recently disclosed to DBRS. As a result, tax-supported debt is much more manageable for the rating than believed at the time of last year’s rating review, although a loss in full or in part of federal fuel tax funding amounts could have rating implications. Edmonton’s overall leverage is expected to continue to rise notably in the years ahead. City Council will be implementing a new capital plan for the 2012 to 2014 period valued at $2.8 billion, a portion of which is to be funded by almost $600 million of additional tax-supported borrowing by 2014.

Notes:
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.