DBRS Confirms the City of Calgary at AA (high) and R-1 (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) as well as its Commercial Paper rating at R-1 (high); all trends are Stable. The ratings are supported by a low DBRS-adjusted tax-supported debt burden, a high level of liquidity and reserves, stability in key revenue sources and disciplined fiscal management amid a still-challenging economic climate in Alberta. The ratings are constrained by the City’s economic structure and reliance on the provincial energy sector as well as by sizable capital investment needs that are expected to push tax-supported debt moderately higher, albeit to a level considered to be manageable for the ratings.

Calgary’s post-capex fiscal surplus as measured by DBRS (excluding amortization and including net capital expenditure (capex)) narrowed to $75 million in 2016 from $477 million the prior year, primarily because of a notable ramp-up in capital spending from an expanded and accelerated investment plan. Operating revenues fell by 1.2% as user fees and sale of goods and services contracted with the economy, offset by modest growth in property tax revenues and gains in net income from wholly owned electricity utility, ENMAX Corporation (rated A (low) with a Stable trend by DBRS). Operating expenditure rose by 2.9% year over year (excluding amortization), primarily from higher compensation costs.

The City’s DBRS-adjusted tax-supported debt burden remains low compared with peers at $747 per capita at YE2016, essentially unchanged from the prior year. As a share of taxable assessment, tax-supported debt was low and stable at 0.3%. Looking ahead, the tax-supported debt burden is expected to rise moderately to $859 per capita in 2017, receding thereafter to roughly $800 per capita by 2020 based on an assumed 1.0% population growth each year. Projections are likely to be revised upward, however, when the financing plan for the City’s contribution to the $4.6 billion Green Line Light-Rail Transit (LRT) project is completed, pending funding commitments from senior governments.

With firming global oil prices, the Calgary economy is expected to begin to recover modestly with real gross domestic product growth rebounding in the range of roughly 2.0% through 2017.

RATING DRIVERS:
Calgary’s credit profile continues to benefit from important revenue streams, such a property taxes that are insulated from economic and home price volatility; however, the City’s economic structure and its direct and indirect links to the energy sector limits potential ratings improvement. Downward pressure on the ratings, while not anticipated, could come from a material weakening in the City’s balance sheet or from a significant deterioration in fiscal discipline and performance, resulting in sizable post-capex deficits. DBRS will continue to monitor the financing plans for major capital projects, including the Green Line LRT, for impact on the debt outlook, although DBRS does not anticipate that incremental debt will result in material pressure on credit metrics.

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 principal methodologies are Rating Canadian Municipal Governments and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on dbrs.com 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.