DBRS Morningstar Confirms the City of Calgary at AA (high) with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Long-Term Debt rating of the City of Calgary (Calgary or the City) at AA (high) and its Commercial Paper rating at R-1 (high). All trends are Stable. The ratings are supported by the City’s responsible approach to fiscal management; relatively low, albeit rising, debt burden; and robust liquidity. However, ongoing weakness in the global energy market is likely to present challenges over the medium term. The Stable trends reflect DBRS Morningstar's expectation that, while the Coronavirus Disease (COVID-19) will materially affect the City's fiscal outlook, the impact will be temporary and manageable. This view is further supported by provincial legislation, which requires any budgetary shortfall to be recovered in subsequent years.

Since the City introduced its 2020 budget in November 2019, Calgary has adjusted the budget to account for financial impacts from the pandemic (including some one-time relief and other support programs for businesses). At the onset of the pandemic in February 2020, the City Council approved several one-time unbudgeted draws ($50.4 million) on an as-needed basis to address pandemic-led pressures. According to its most recent budget reassessment in May 2020, the City anticipates a funding gap of $158 million in 2020 to be covered by temporary service reductions, savings, and other efficiencies. The City is required by law to post a balanced budget, which may require the City to draw on its reserves. Operating pressures and therefore the budget outlook may worsen if strict pandemic measures remain in place until the end of 2020, though DBRS Morningstar expects the extent of any fiscal deterioration to remain manageable.

Prior to the onset of the pandemic, the City's operating results remained strong in 2019, with an adjusted post-capital expenditure (capex) surplus of $575 million ($175 million in 2018) mainly driven by higher sales of goods and services (increased revenue from land sales and higher rates on transit, recreation, and other programs), and slightly higher property tax revenue. DBRS Morningstar adjusts reported results to remove amortization expenses and to include net capex.

DBRS Morningstar-adjusted tax-supported debt of $766 per capita, or 0.4% as a share of total taxable assessment as at YE2019 is low compared with rated peers. The City’s tax-supported debt burden will likely rise as it needs financing to support the Green Line light-rail transit project; the City is currently seeking City Council approval for Stage 1 of this project. DBRS Morningstar projects that tax-supported debt per capita could reach $1,189 by 2024, or 0.6% of taxable assessment. DBRS Morningstar expects the increase in debt to be manageable, although it will use up flexibility within the ratings, especially if combined with a sustained deterioration in other critical risk or financial risk metrics.

Ongoing weakness in the global energy sector presents an additional challenge for Calgary, which DBRS Morningstar thinks will weigh on the economic outlook, barring a material and unexpected turnaround. This will likely result in slower growth in population and employment, and overall taxable assessment, thereby constraining potential revenue growth.

RATING DRIVERS
DBRS Morningstar plans to reassess Calgary’s prospects for a fiscal recovery when the next budget is introduced in fall 2020, or sooner, if required. A downgrade could arise from a deterioration in the fiscal outlook, with ongoing post-capex deficits and an inability to restore balance, or material acceleration in debt growth beyond current expectations. A positive rating action is highly unlikely in the current environment.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Canadian Municipal Governments (May 13, 2020) and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 under Related Documents or by contacting us at [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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