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

Dominion Bond Rating Service (DBRS) has today confirmed the ratings on the Long-Term Debt and Commercial Paper of the City of Calgary (Calgary or the City) at AA (high) and R-1 (high), respectively. The City’s credit profile remains strong, supported by its impressive operating results, growing tax base, robust economic performance and AAA-rated provincial parent which serves to foster stability in financial support. However, Calgary’s credit strength is tempered by large growth-driven capital requirements, significant construction price inflation, as well as the potential for further borrowing authority to be added over the next few months.

Calgary has consistently recorded post-capex surpluses for more than a decade, a fact that speaks to the City’s strong economic performance and energetic population growth. This trend continued last year ($65 million net surplus) and DBRS expects similar results to extend into 2006 as the City has budgeted a 4.4% tax increase, which will help to offset inflationary pressures in personnel costs across city services.

Net tax-supported debt was down $42 million last year to $736 million, or approximately $770 per capita, as historically high capital expenditures were cushioned by concurrently larger grants from other levels of government. DBRS expects that net tax-supported debt will drop slightly by the end of 2006 as project delays and deferrals temper new debt issuance.

Calgary’s 2006-2010 capital plan has budgeted for the potential of $3.8 billion in projects, $1 billion of which is dedicated to utilities. While the City has placed great emphasis on funding future capital projects with internal sources and contributions from higher levels of government, approximately 20% of the $2.8 billion in tax-supported capex ($568 million) is currently budgeted to be debt financed. This raises the spectre of additional borrowing beyond Calgary’s current plans, an issue that the City will be addressing by early 2007.

DBRS expects to see debt move higher over the medium term, although the pace at which this will occur is subject to variation. While budget projections suggest that debt could reach $986 million by the end of 2007, this is highly unlikely as normally only 40% to 60% of the capital budget is implemented annually, especially with the potential for heavy labour demand in the western construction sector to cause project delays. This should help to smooth the increase in the City’s debt profile over the coming years and keep the peak debt per capita below $1000, which remains supportable by the City at its current credit rating.

Calgary’s strong economic performance, while highly dependent on the oil and gas industry, will help to bolster tax revenues through assessment growth. Alberta’s financial strength also helps to support the City’s credit profile through increased funding support and low tax rates, which make Calgary a financially attractive place to live. These factors help to temper the constraints on Calgary’s credit profile due to upward trending debt and cost pressures resulting from tight labour markets.

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

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.

Ratings

Back to top