Edmonton, City of: Confirms at AA (high) & R-1 (high)

Ryan McGaw, CFA; Paul Judson/416-593-5577 ext.2265, ext.2261/rmcgaw@dbrs.com

 

The ratings of the City of Edmonton (“Edmonton” or the “City”) are being confirmed at AA (high) and R-1 (high) and are trending Stable as indicated above.

 

The City’s financial profile remained strong in 2002, supported by a DBRS-adjusted core surplus of $92.1 million and continued reduction in tax-supported debt, which fell by 37% to $26 million. A core surplus was expected to have been posted in 2003. Revenue growth was supported primarily by property tax increases. Tax-supported debt remains relatively constant, as borrowing realized during the year was offset by principal payments.

 

The budget remains balanced in 2004. However, the City is renegotiating certain revenue agreements, making service cuts and raising taxes by 5.3% to offset spending pressures largely related to labour costs and growth-related service needs.

 

EPCOR Utilities Inc. (“EPCOR”) will likely account for a large portion of any surpluses going forward. However, only the dividend portion of EPCOR’s earnings is available to support municipal operations. Therefore, even if the City continues to realize core surpluses, debt may begin to rise as the City continues its expanded tax-supported capital plan.

 

Despite the City’s strong financial position, robust population growth and limited revenue sources correlated with economic growth are expected to continue to pose challenges. More importantly, as with most large Canadian municipalities, Edmonton is faced with a gap between capital spending needs and available funding. The City has identified unfunded needs of $3.5 billion for the next ten years, of which $1.5 billion is for rehabilitation and $2 billion is for planned growth. Although sizeable, these needs are not expected to put undue pressure on tax-supported debt in the medium term due to: (1) the City’s ability to increase taxes because of its low tax burden relative to other municipalities; (2) flexibility to draw upon substantial reserves; (3) the ability to increase development-related fees as almost two-thirds of the gap is for growth requirements and; (4) the requirement that funding from senior levels of government be made available before some large projects go forward (e.g. $500 million for light rail transit (LRT) extension). This explains why the City plans to take on only manageable levels of new debt that will not significantly impair the City’s financial profile.

 

 

Dominion Bond Rating Service Limited (DBRS) will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, please contact us at: info@dbrs.com.