DBRS Upgrades City of Calgary to R-1 (high) and AA (high)

Dominion Bond Rating Service (“DBRS”) has today upgraded the short-term and long-term ratings of the City of Calgary (the “City”) by one notch to R-1 (high) and AA (high). The trends remain Stable. The upgrades reflect the City’s well-established record of robust operating results; its declining tax-supported debt burden; and its ability to better manage infrastructure demands due to the large capital funding injections announced by senior governments earlier this year. The credit profile is also bolstered by the strong credit standing of the Alberta government (the “Province”), rated AAA by DBRS, which translates into healthy funding support for the City.

Propelled by a large and thriving energy sector, high labour participation rate, and a competitive provincial tax regime, real GDP in the Calgary region grew 4.6%, on average, per year over the past decade. New revenue earned from related population growth and construction activity, together with management’s tight fiscal discipline, led to consecutive annual core surpluses (after capex) for the City between 1994 and 2004, sending its unrestricted liquidity balance up over twofold during the period. Moreover, changes to the timing of construction projects have lowered the future peak in tax-supported debt to Cdn$630 per capita by 2006, from last year’s forecast of Cdn$760 per capita by the same year (DBRS estimates).

Bolstered by moderate increases to the property tax rate and user fees, the City posted a core surplus of Cdn$99 million in 2004 amidst strong spending pressure from inflation and population growth. Healthy fiscal results were complemented by a Cdn$2 million drop in tax-supported debt to Cdn$614 million at December 31, 2004, or a moderate Cdn$658 per capita.

DBRS expects the City to stay in solid financial shape over the medium term, with further positive operating results supporting reserves. To handle immediate capital needs, the City plans to invest Cdn$2.8 billion in tax-supported projects between 2006 and 2010, keeping tax-supported debt at roughly Cdn$600 million over the next few years. Tax-supported debt per capita should begin to fall after 2006, however, due to population growth.

While heavy growth-related infrastructure pressures are likely to remain a reality for the City over the long term, its capacity to meet these needs should improve upon the introduction of substantial new capital grants by senior governments. In particular, the Province plans to deliver Cdn$886 million in capital funding over five years, while the federal government will flow up to Cdn$56 million per year in capital money (Cdn$0.05 per-litre in gas tax revenues) by 2009. As a result, DBRS expects the City to adequately address its capital needs while preserving a moderate property tax and user fee burden and avoiding undue pressure on tax-supported debt. While Calgary’s economy is strongly tied to the performance of its oil and gas sector, DBRS believes it could sustain fairly sound growth in the event of a notable and protracted decline in energy prices.

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.

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