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

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of the City of Edmonton (the “City” or “Edmonton”) as indicated above.

The City continues to maintain a strong credit profile supported by good fiscal performance, a substantial liquidity position, and a solid economic base. The City’s rating is also bolstered by the strong credit standing and fiscal position of the Alberta government (the “Province”, rated AAA), which translates into healthy funding support for Edmonton.

However, the rating remains constrained by the impact of the City’s five-year Cdn$3.1 billion capital spending plan which is nearly double the forecast put forward in last year’s budget. The revision in the capital plan primarily reflects the Cdn$595 million extension of the South Light Rail Transit (SLRT) and various projects that will be funded by the Cdn$678 million in Provincial grants provided under the new Alberta Municipal Infrastructure Program (AMIP). The City expects borrowing related to its capital plan to lift its total level of tax-supported debt to a peak of Cdn$720 million, or a notable Cdn$960 per capita by 2009. While this increase is significant, leverage is expected to remain appropriate for the current rating given that new tax-supported debt will be largely serviced by the City’s stream of federal gas tax funds. Nonetheless, by the time Edmonton has completed its capital plan, DBRS expects the City will have exhausted most of its borrowing flexibility at its current rating.

Edmonton’s operating results showed a healthy post-capex surplus of Cdn$127 million in 2004, driven by solid gains from investment income as well as growth in the property tax base. The City’s propensity to record sizeable surpluses has helped build a substantial liquidity position (cash and investments net of deferred revenue and deposits) of over Cdn$1.1 billion as of 2004, covering tax-supported debt many times over. While 2005 financial results are not yet available, Edmonton is expected to have continued its strong fiscal performance, supported by a 5.4% municipal tax increase and moderate increments in user fees. Borrowing raised tax-supported debt to Cdn$104 million in 2005 (an increase of Cdn$45 million over 2004), which represents a relatively low level of Cdn$147 per capita.

The operating outlook for the City remains solid, bolstered by annual increases in tax rates and prudent operating expenditure management. While infrastructure requirements remain significant, the Cdn$108 million in federal gas tax funds and the new AMIP money will go a long way towards helping Edmonton address its immediate capital needs over the next five years.

However, the recent election of a new Conservative federal government has introduced an element of uncertainly into the future of gas tax funding to the municipalities as the program is a Liberal initiative and calls for a review of the agreement before mid-2009. Since Edmonton has fully allocated this money to finance the SLRT, any impairment in funding could strain the City’s ability to maintain its planned level of capital expenditures in the absence of alternate financing sources. Even so, DBRS considers impairment in funding to be unlikely in light of the national significance of the municipal agenda and the sound fiscal position of the federal government.

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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