Province Of Alberta 'AAA' Ratings Affirmed On Continuing Strong Economy And Financial Management; Outlook Stable
OVERVIEW
- We are affirming our 'AAA' long-term issuer credit and senior unsecured debt ratings on the Province of Alberta.
- We are also affirming our 'AAA' senior unsecured debt ratings on Alberta Capital Finance Authority and Alberta Treasury Branch Financial.
- The affirmation reflects our favorable view of the province's wealthy and growing economy, "very positive" financial management and liquidity levels, and above-average budgetary flexibility.
- The stable outlook reflects our expectations that cash and temporary investment holdings will remain very strong in the next two years, operating surpluses will improve in fiscal years 2014 and 2015, real GDP will increase close to 3% annually over our two-year outlook horizon, and the tax-supported debt burden will not increase materially beyond the 80% of projected operating revenues forecast for fiscal year-end 2016.
RATING ACTION On Dec. 20, 2013, Standard & Poor's Ratings Services affirmed its 'AAA' long-term issuer credit and senior unsecured debt ratings on the Province of Alberta. The outlook is stable. At the same time, Standard & Poor's affirmed its 'AAA' senior unsecured debt ratings on Alberta Capital Finance Authority and Alberta Treasury Branch Financial (ATB). RATIONALE In our opinion, Alberta's wealthy and increasing economy, "very positive" financial management and liquidity levels, and above-average budgetary flexibility are positive for the ratings. The ratings also reflect our favorable view of the "predictable and well-balanced" institutional framework for Canadian provinces and the province's moderate contingent liabilities. Alberta has the highest GDP per capita in the country thanks to its booming oil industry. With that has come volatility, because real and nominal GDP have swung with shifts in oil and gas prices. We estimate the provincial GDP per capita to be about US$76,850 (on a three-year moving average basis). We believe 2012 was a good year for the Alberta economy. Real GDP growth is an estimated 3.8% and nominal GDP about 5.0%, easily outpacing the national economy. Under our base case, we expect Alberta's real GDP to increase by about 3.0% in 2013 and continue at this rate for the next three years. In our view, the lack of additional pipeline capacity might dampen prospects in Alberta's oil sector, and more broadly, its economy. The province's financial management is very positive, in our view. Budget information is comprehensive and detailed. The province produces a three-year capital plan annually and a 20-year plan, which is based more on principles and priorities. The level of transparency and disclosure in financial statements is what we view as high. The independent auditor-general, who reports to the provincial legislature, audits financial statements. Debt and liquidity management and related policies and practices are prudent and risk-averse. The governing party has been in power for several decades and has a capable and experienced administration. Alberta's budgetary flexibility is above average, in our opinion. The province's considerable flexibility stems mainly from low taxes, its Contingency Account, and the high incomes of its residents. In fiscal 2014 (year ended March 31), modifiable revenues should represent 89% of projected operating revenues, in line with the long-term average; capital spending should represent about 12% of projected total expenditures. We believe the province has flexibility to raise modifiable revenues, but raising taxes is difficult to do politically, which negates much of the room the province has for tax increases. Flexibility is more constrained on the spending side due to robust long-term population growth making it difficult to hold down health and education spending, although Alberta has demonstrated a willingness to make deep spending cuts in the past. In our opinion, Canadian provinces benefit from a predictable and well-balanced local and regional government framework that has demonstrated a high degree of institutional stability. Alberta benefits from revenue support through various federal government transfers, with Canada Health Transfer and Canada Social Transfer being the most substantial. It does not receive equalization payments. In fiscal 2013, these transfers constituted about 11% of adjusted operating revenues. In the next two years, we expect the proportion of the province's federal transfers to remain relatively stable. In our opinion, a moderate-but-rapidly-rising tax-supported debt burden and below-average operating and after-capital budgetary balances as in fiscal years 2013 and 2014 are potential constraints on the ratings. Alberta's direct debt currently is very low and tax-supported debt is moderate compared with those of domestic and international peers. At fiscal year-end 2013, tax-supported debt stood at C$23.2 billion, up by about 50% from fiscal 2011 year-end. The province's tax-supported debt burden, which we view as moderate but increasing, stood at about 56% of consolidated operating revenues. The burden is up significantly from its prerecession trough of 16% in fiscal 2007. We expect tax-supported debt to rise further, to about 70% of forecast consolidated operating revenues in fiscal 2014. Direct debt and interest expense will remain minor as interest expense should stay well under 5% of operating revenues. We expect the tax-supported debt burden to rise to more than 80% of projected operating revenues by fiscal year-end 2016, if revenue projections hold. Financial results weakened in fiscal 2013 as the province produced an operating surplus of 3% operating revenues, down substantially from 11% a year earlier. Alberta's high cash reserves help improve our view of its budgetary performances and offset much of the volatility in financial results. Operating revenues actually declined in fiscal 2013, by about 2%. Operating expenditures, on the other hand, increased close to 7% in fiscal 2013 from 2012. For the current budget year, fiscal 2014, Alberta has budgeted for an operating surplus of about 5% of projected operating revenues. Based on our base-case forecast for fiscal years 2011-2015, we expect operating revenue growth should accelerate relative to operating expenditure growth and operating surpluses will remain slightly less than 10% of operating revenues. Operating expenditure growth will be held to rates below 2.5% in both years. After-capital results deteriorated in fiscal 2013: The province recorded an 8% after-capital deficit following near-balanced results in fiscal 2012. Based on this year's budget, in our base-case forecast, we expect the province will produce a somewhat smaller after-capital deficit of about 6% of projected total revenues. Nevertheless, we expect after-capital results to move into surplus territory in fiscal 2016. Alberta's contingent liabilities are substantial, in our view. The province is the sole owner of ATB and guarantees the deposits of its customers. ATB's total deposits and other liabilities were C$31 billion at fiscal year-end 2013. The year's financial statements indicate that the province has contractual obligations totaling close to C$48 billion. Liquidity In our opinion, Alberta's liquidity levels are very positive because of its large holdings of cash and temporary investments. At fiscal year-end 2013, the province had cash and temporary investments of about C$18.5 billion and equity holdings of C$15.9 billion. We expect Alberta's liquidity levels to remain relatively stable in the next three fiscal years. We believe the province also has strong access to Canada's well-developed capital markets. By our calculations, Alberta's liquidity ratios remain strong: The ratio of free cash, liquid assets, and committed facilities to the next 12 months' debt service was more than 6x. OUTLOOK The stable outlook reflects our expectations that cash and temporary investment holdings will remain very strong in the next two years and that operating surpluses will improve in fiscal years 2014 and 2015, with after-capital results reaching surplus by fiscal 2016. We expect that real GDP will increase close to 3% annually in the next two years and employment will rise close to 2% as the unemployment rate remains essentially unchanged. We also expect that Alberta's tax-supported debt burden will not increase materially beyond the 80% of projected operating revenues forecast for fiscal year-end 2016. Persistent large after-capital deficits (greater than 10% of total consolidated revenues) coupled with a long-term and sustained rise in the province's tax-supported debt burden or a precipitous decline in cash and temporary investments could place downward pressure on the ratings. PUBLISHED RATING FACTOR SCORES
Table 1
| Province of Alberta -- Summary Of Published Rating Factor Scores* | ||||
|---|---|---|---|---|
| Rating factor | Score | |||
| Institutional Framework | Predictable and well-balanced | |||
| Financial Management | Very positive | |||
| Liquidity | Very positive | |||
| *Standard & Poor's ratings on local and regional governments are based on, among other things, a scoring system that covers eight main rating factors, as further explained in our criteria (see below). We publish our scores for the three rating factors above. | ||||
KEY STATISTICS
Table 2
| Province of Alberta -- Economic Statistics | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| --Year ended March 31-- | ||||||||||||
| (%) | 2009 | 2010 | 2011 | 2012 | 2013bc | |||||||
| Population | 3,679,092 | 3,732,573 | 3,790,191 | 3,888,739 | 4,025,074 | |||||||
| Population growth | 2.32 | 1.45 | 1.54 | 2.60 | 3.51 | |||||||
| GDP per capita (C$) | 67,059 | 72,363 | 78,637 | 80,205 | 81,208 | |||||||
| Real GDP growth | (4.06) | 4.49 | 5.21 | 3.82 | 2.90 | |||||||
| Unemployment rate | 6.60 | 6.50 | 5.50 | 4.60 | 4.50 | |||||||
| Note: The data and ratios above result in part from Standard & Poor's own calculations, drawing on national as well as international sources, reflecting Standard & Poor's independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. Sources typically include Statistics Canada. bc--Base case. | ||||||||||||
Table 3
| Province of Alberta -- Financial Statistics | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| --Fiscal year ended March 31*-- | ||||||||||||||
| (Mil. C$) | 2010 | 2011 | 2012 | 2013bc | 2014bc | 2015bc | ||||||||
| Operating revenues | 37,640 | 42,345 | 41,588 | 41,711 | 45,053 | 48,212 | ||||||||
| Operating expenditures | 35,972 | 37,676 | 40,160 | 39,725 | 40,620 | 41,579 | ||||||||
| Operating balance | 1,668 | 4,669 | 1,428 | 1,986 | 4,433 | 6,633 | ||||||||
| Operating balance (% of operating revenues) | 4.43 | 11.03 | 3.43 | 4.76 | 9.84 | 13.76 | ||||||||
| Capital revenues | 765 | 633 | 539 | 522 | 464 | 389 | ||||||||
| Capital expenditures (capex) | 5,889 | 5,871 | 5,228 | 5,209 | 5,172 | 4,660 | ||||||||
| Balance after capital accounts | (3,456) | (569) | (3,261) | (2,701) | (275) | 2,362 | ||||||||
| Balance after capital accounts (% of total revenues) | (9.00) | (1.32) | (7.74) | (6.40) | (0.60) | 4.86 | ||||||||
| Debt repaid | 7,579 | 11,637 | 14,829 | 2,763 | 1,922 | 909 | ||||||||
| Balance after debt repayment and onlending | (11,035) | (12,206) | (18,090) | (5,464) | (2,197) | 1,453 | ||||||||
| Balance after debt repayment and onlending (% of total revenues) | (28.73) | (28.40) | (42.94) | (12.94) | (4.83) | 2.99 | ||||||||
| Gross borrowings | 7,667 | 13,022 | 16,916 | 7,340 | 7,060 | 5,707 | ||||||||
| Balance after borrowings | (3,368) | 816 | (1,174) | 1,876 | 4,863 | 7,160 | ||||||||
| Operating revenue growth (%) | (2.63) | 12.50 | (1.79) | 0.30 | 8.01 | 7.01 | ||||||||
| Operating expenditure growth (%) | 2.80 | 4.74 | 6.59 | (1.08) | 2.25 | 2.36 | ||||||||
| Modifiable revenues (% of operating revenues) | 86.65 | 89.23 | 89.17 | 88.99 | 87.53 | 87.70 | ||||||||
| Capital expenditures (% of total expenditures) | 14.07 | 13.48 | 11.52 | 11.59 | 11.29 | 10.08 | ||||||||
| Direct debt (outstanding at year-end) | 2,518 | 4,463 | 4,579 | 8,942 | 12,965 | 16,800 | ||||||||
| Direct debt (% of operating revenues) | 6.69 | 10.54 | 11.01 | 21.44 | 28.78 | 34.85 | ||||||||
| Tax-supported debt (% of consolidated operating revenues) | 41.12 | 50.19 | 55.72 | 69.73 | 76.20 | 80.62 | ||||||||
| Interest (% of operating revenues) | 1.25 | 1.20 | 1.27 | 1.53 | 1.84 | 2.14 | ||||||||
| Debt service (% of operating revenues) | 21.39 | 28.68 | 36.93 | 8.16 | 6.10 | 4.02 | ||||||||
| Note: The data and ratios above result in part from Standard & Poor's own calculations, drawing on national as well as international sources, reflecting Standard & Poor's independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. The main sources are the financial statements and budgets, as provided by the issuer. bc--Base case, which reflects Standard & Poor's expectations of the most likely scenario. Downside case represents some but not all aspects of Standard & Poor's scenarios that could be consistent with a downgrade. Upside case represents some but not all aspects of Standard & Poor's scenarios that could be consistent with an upgrade. *Budget year 2012 equals fiscal year 2013. | ||||||||||||||
KEY SOVEREIGN STATISTICS Sovereign Risk Indicators, July 1, 2013 RELATED CRITERIA AND RESEARCH Related Criteria
- Principles Of Credit Ratings, Feb. 16, 2011
- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010
Related Research
- International Local And Regional Governments Default And Transition Study: 2012 Saw Defaults Spike, March 28, 2013
In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. RATINGS LIST Ratings Affirmed Alberta (Province of) Issuer credit rating AAA/Stable/A-1+ Senior unsecured debt AAA Alberta Capital Finance Authority Senior unsecured debt AAA Alberta Treasury Branch Financial Senior unsecured debt AAA
Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
| Primary Credit Analyst: | Stephen Ogilvie, Toronto (1) 416-507-2524; stephen.ogilvie@standardandpoors.com |
| Secondary Contact: | Mario Angastiniotis, Toronto (1) 416-507-2520; mario.angastiniotis@standardandpoors.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.