city of peterborough credit rating

7/23/2019 City of Peterborough credit rating

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Research Update:

City of Peterborough 'AA-' RatingsAffirmed On Exceptional LiquidityAnd Low Debt Burden

Primary Credit Analyst:

Dina Shillis, CFA, Toronto (416) 507-3214; [email protected]

Secondary Contact:

Nineta Zetea, Toronto (416) 507-2508; [email protected]

Table Of Contents

Overview

Rating Action

Rationale

Outlook

Key Statistics

Ratings Score Snapshot

Key Sovereign Statistics

Related Criteria And Research

Ratings List

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 7, 2015 1

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Research Update:

City of Peterborough 'AA-' Ratings Affirmed OnExceptional Liquidity And Low Debt Burden

Overview

• We are affirming our 'AA-' long-term issuer credit and senior unsecured

debt ratings on the City of Peterborough.

• In part, the ratings reflect our assessment of Peterborough's exceptional

liquidity position, low debt burden, and average budgetary performance.

• The stable outlook reflects our expectations that, over our two-year

outlook horizon, the city's operating balance will remain above 5% of

adjusted operating revenues, tax-supported debt will total about 40% of

consolidated operating revenues, and Peterborough will maintain an

exceptional liquidity position.

Rating Action

On Dec. 7, 2015, Standard & Poor's Ratings Services affirmed its 'AA-'

long-term issuer credit and senior unsecured debt ratings on the City of

Peterborough, in the Province of Ontario. The outlook is stable.

Rationale

The ratings reflect Standard & Poor's view of Peterborough's exceptional

liquidity position, low debt burden, and average budgetary performance. The

ratings also reflect our view of the "very predictable and well-balanced"

institutional framework for Canadian municipalities, satisfactory financial

management, and low contingent liabilities. We believe that Peterborough's

growth constraints, which limit its strong economic profile, and average

budgetary flexibility, mitigate these strengths.

We believe Canadian municipalities benefit from a "very predictable and

well-balanced" local and regional government framework that has demonstrated

high institutional stability. Although provincial governments mandate a

significant proportion of municipal spending, they also provide operating fund

transfers and impose fiscal restraint through legislative requirements to pass

balanced operating budgets. Municipalities generally have the ability to match

expenditures well with revenues, except for capital spending, which can be

intensive. Any operating surpluses typically fund capital expenditures and

future liabilities (such as postemployment obligations and landfill closure

costs) through reserve contributions.

Peterborough has low debt, in our view, with tax-supported debt (as defined by

our criteria and consisting of all debt outstanding) totaling nearly C$100


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million at year-end 2014 or 43% of consolidated operating revenues. In our

base-case forecast, we forecast healthy revenue growth to keep the

tax-supported debt burden relatively stable and represent 41% of consolidated

operating revenues in 2017. Nevertheless, we expect debt to increase in the

outer years to fund the capital plan. Interest costs are stable and we expect

them to remain below 5% of adjusted operating revenues during our two-year

outlook horizon.

The city's contingent liabilities are low and consist primarily of

postemployment benefits and landfill closure and post-closure costs. We

believe the city's exposure to City of Peterborough Holdings Inc. (COPHI), a

utilities company, is limited and does not pose a significant risk to the

ratings.

We believe Peterborough has average budgetary performance and a history of

healthy operating balances. In our base-case forecast, we expect operating and

after-capital balances to average 15% of adjusted operating revenues and more

than negative 4% of adjusted total revenues, respectively, in 2013-2017. In

our base-case forecast, we expect after-capital performance to deteriorate in

the outlook horizon. In addition, we expect operating balances to weaken

somewhat in the next two years, as inflationary and other cost pressures, in

particular those related to personnel, continue to weigh on operating

performance.

We believe Peterborough has satisfactory financial management practices, which

prudent financial policies and debt and liquidity management support. The city

proposed an update to its investment policy to include a broader range of

permitted investments and we expect council to approve the change in early

2016. It prepares a detailed operating budget and a 10-year capital plan,

approved annually, and its financial statements are timely and independently

audited with no qualifications. We assess its management as capable and

experienced.

We view Peterborough's economic profile as strong, benefiting from a good

level of diversification and a large public sector that offers stability. The

aerospace sector continues to increase in line with expansion of the

Peterborough airport, which supports the local labor market. Nevertheless, we

believe that the city's remote location and aging demographic profile continue

to negatively affect its long-term economic potential. Limited availability of

industrial land further weakens Peterborough's economic profile compared with

that of peers. Although GDP data are not available at the local level, we

believe that the city would have GDP per capita slightly below that of

Ontario's three-year average of US$49,000. Labor market results and building

activity were positive in 2014 and we expect these to be stable during the

outlook horizon.

Peterborough benefits from what we consider historically high modifiable

revenues of more than 80% of adjusted operating revenues. However, we assess

the city's budgetary flexibility as average because of its limited ability to

cut spending and raise modifiable revenues. In our base-case forecast, we


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Research Update: City of Peterborough 'AA-' Ratings Affirmed On Exceptional Liquidity And Low Debt Burden



expect modifiable revenues to remain at current levels and capital spending to

average more than 22% of adjusted total spending in 2013-2017. Because of the

city's high tax burden relative to average household income compared with that

of peers, we believe Peterborough is somewhat constrained in its ability to

increase modifiable revenues. Furthermore, and in line with Canadian

municipalities, provinces mandate provision of many services and much of the

personnel costs are subject to collective agreements, which limits the city's

leeway to cut operating spending. The rising cost of discretionary benefits

remains a pressure on operations as well.

Liquidity

Peterborough's exceptional liquidity profile remains a credit strength, in our

view. In addition, we believe the city benefits from robust internal cash flow

generation. We estimate its free cash and liquid assets (Standard &

Poor's-adjusted) to be about C$117 million in 2016, which covers more than 6x

of the estimated next 12 months' debt service. We expect coverage to be stable

in the outlook horizon and remain well above 100% of debt service. In line

with that of domestic peers, we assess the city's access to external liquidityas satisfactory.

Outlook

The stable outlook reflects Standard & Poor's expectations that, in the next

two years, Peterborough's operating balance will remain above 5% of adjusted

operating revenues, tax-supported debt will represent about 40% of

consolidated operating revenues, and the city will maintain an exceptional

liquidity position. Although unlikely in the outlook horizon, we could take a

negative rating action if deterioration in fiscal performance leads to

sustained after-capital deficits exceeding 10% of total adjusted revenues,

tax-supported debt of more than 60% of consolidated operating revenues, and

increased pressure on liquidity balances stemming from growing funding needs.

We could take a positive rating action if there is measurable and sustainable

improvement in economic profile, in particular obtaining additional land to

support future economic development, or the city demonstrated continued

managerial strength and fiscal restraint.

Key Statistics

Table 1

City of Peterborough -- Economic Statistics

--Fiscal year ended Dec. 31--

(%) 2010 2011 2012 2013 2014

Population (total) 78,027 78,698 78,698 78,698 78,698

Population growth 0.9 0.9 0.0 0.0 0.0

Unemployment rate 9.4 9.6 8.5 9.6 8.2


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Table 1

City of Peterborough -- Economic Statistics (cont.)

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. Sourcestypically include Statistics Canada.

Table 2

City of Peterborough -- Financial Statistics

--Fiscal year ended Dec. 31--

(Mil. C$) 2012 2013 2014 2015bc 2016bc 2017bc

Operating revenues 223 221 231 237 243 250

Operating expenditures 185 190 195 202 207 214

Operating balance 38 32 36 36 36 37

Operating balance (% of operating revenues) 17.0 14.3 15.7 15.1 14.8 14.7

Capital revenues 9 13 13 9 14 15

Capital expenditures 46 61 60 40 65 66

Balance after capital accounts 1 (16) (11) 5 (15) (15)

Balance after capital accounts (% of total revenues) 0.4 (7.0) (4.7) 1.8 (5.7) (5.6)

Debt repaid 8 9 9 10 13 14

Balance after debt repayment and onlending (7) (26) (20) (6) (28) (29)

Balance after debt repayment and onlending (% of total revenues)

(3.0) (10.9) (8.4) (2.3) (10.9) (10.9)

Gross borrowings 22 9 10 23 7 13

Balance after borrowings 15 (16) (10) 17 (21) (16)

Operating revenue growth (%) 3.2 (0.8) 4.5 2.7 2.5 3.0

Operating expenditure growth (%) 0.6 2.5 2.7 3.4 2.9 3.0

Modifiable revenues (% of operating revenues) 83.1 84.3 84.4 84.7 85.1 85.5

Capital expenditures (% of total expenditures) 20.0 24.3 23.6 16.6 23.8 23.7Direct debt (outstanding at year-end) 94 94 95 108 101 100

Direct debt (% of operating revenues) 42.2 42.5 41.3 45.5 41.5 39.8

Tax-supported debt (% of consolidated operatingrevenues)

44.3 44.5 43.2 47.2 43.2 41.4

Interest (% of operating revenues) 1.7 1.7 1.7 2.1 2.1 2.0

Debt service (% of operating revenues) 5.3 5.9 5.6 6.4 7.6 7.6

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 mainsources are the financial statements and budgets, as provided by the issuer. Base case reflects Standard & Poor's expectations of the most likelyscenario. Downside case represents some but not all aspects of Standard & Poor's scenarios that could be consistent with a downgrade. Upsidecase represents some but not all aspects of Standard & Poor's scenarios that could be consistent with an upgrade. bc -- base case.

Ratings Score Snapshot

Table 3

City of Peterborough -- Ratings Score Snapshot

Key rating factors Assessment

Institutional Framework Very predictable and well-balanced

Economy Strong


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Table 3

City of Peterborough -- Ratings Score Snapshot (cont.)

Financial Management Satisfactory

Budgetary Flexibility Average

Budgetary Performance Average

Liquidity ExceptionalDebt Burden Low

Contingent Liabilities Low

Note: Standard & Poor's ratings on local and regional governments are based on eight main rating factors listed in the table above. Section A of Standard & Poor's "Methodology For Rating Non-U.S. Local And Regional Governments," published on June 30, 2014, summarizes how the eightfactors are combined to derive the foreign currency rating on the government.

Key Sovereign Statistics

Sovereign Risk Indicators, June 30, 2015. Interactive version available at

http://www/spratings.com/sri

Related Criteria And Research

Related Criteria

• Methodology For Rating Non-U.S. Local And Regional Governments, June 30,

2014

Related Research

• 2014 Annual International Public Finance Default Study And Rating

Transitions, June 8, 2015

• Institutional Framework Assessments For Non-U.S. Local And Regional

Governments, Feb. 5, 2015

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 riskfactors were considered and discussed, looking at track-record and forecasts.

The committee's assessment of the key rating factors is reflected in the

Ratings Score Snapshot above.

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


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consistency with the Committee decision. The views and the decision of the

rating committee are summarized in the above rationale and outlook. The

weighting of all rating factors is described in the methodology used in this

rating action (see 'Related Criteria And Research').

Ratings List

Ratings Affirmed

Peterborough (City of)

Issuer credit rating AA-/Stable/--

Senior unsecured AA-

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.


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