S&P AFFIRMS PROVINCE OF ALBERTA 'AAA' RATINGS
Overview -- We are affirming our ratings, including our 'AAA' long-term issuer credit rating, 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 view of Alberta's strong economic results in 2011 and prospects for 2012 and 2013, very strong liquidity levels, moderate burden of tax-supported debt, and support from the Canadian federal system. -- The stable outlook reflects our expectations that the province's tax-supported debt burden will remain moderate (below 60% of operating revenues), cash and temporary investment holdings will remain very strong, and both real GDP and employment will increase more than 2% annually in the next two years. Rating Action On Oct. 2, 2012, Standard & Poor's Ratings Services affirmed its ratings, including its 'AAA' long-term issuer credit rating, 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. Rationale The ratings on Alberta reflect what we consider to be the following positive factors: -- We believe 2011 was a good year for the Alberta economy. Real GDP rose about 3.5% and nominal GDP about 9.0%, outpacing the national increases of 2.5% and 5.9%, respectively. The economy's recovery from the recession is virtually complete: Real and nominal GDP returned to prerecession levels in 2011 and employment surpassed its prerecession peak. Labor market results were also strong for 2011. Employment soared 3.8%, ending two successive years of decline, and the unemployment rate fell to 5.5% from 6.5% in 2010. Growth in exports and investment were also strong. For 2012 and 2013, the province expects real and nominal GDP in both years to rise close to 4.0% and 7.0%, respectively, and employment to rise more than 2.0% each year as the unemployment rate falls to 4.9% in 2012 and 4.6% in 2013. The most current labor force indicators from July 2012 show that the unemployment rate fell to 4.6% and employment rose more than 2.0% from July 2011. The chief risks to the Alberta economy are softening commodity prices due to a weak U.S. recovery, recession in the eurozone, and slowing growth in emerging economies. -- Alberta's liquidity levels are very positive, in our opinion. The province has very large holdings of cash and temporary investments, which totaled C$38 billion at fiscal year-end 2012 (March 31). After making allowances for equity and bond holdings as per our criteria, we estimate that Alberta had free cash and liquid assets of about C$25 billion at that time, which represents more than 5x projected fiscal 2013 debt service costs. The province also has strong access to Canada's well developed capital markets in our view. For fiscal 2013, we expect Alberta's liquidity to decline somewhat as economic uncertainty continues and resource revenues and the projected operating surplus soften. Liquidity could decline as much as C$3 billion. -- The province's debt burden is moderate, in our view. The after-capital deficits of recent years have been financed through draws on cash and investment holdings and not debt issuance. Alberta's debt and debt burden have increased postrecession but the escalation began from very low levels, unlike in the majority of provinces. At fiscal year-end 2012, direct and tax-supported debt represented 11% and 50% of operating revenues respectively, which was up from 7% and 41% a year earlier. Tax-supported debt was 7% of nominal GDP, up slightly from the end of fiscal 2011. For fiscal 2013, we expect tax-supported debt to represent about 59% of projected operating revenues and 7% of projected nominal GDP. We believe direct debt and interest expense will remain minor. By our estimation, tax-supported debt should stabilize in fiscal 2014 at close to 60% of projected operating revenues. -- Alberta, like all provinces in the country, benefits from revenue support through the federal government's Canada Health Transfer and Canada Social Transfer payments. Total transfers represented C$5.2 billion in fiscal 2012, or about 12% of operating revenues. We believe the province's after-capital deficits of recent years mitigate some of these strengths. Alberta, which steadily produced strong after-capital surpluses before the recession, recorded three consecutive after-capital deficits in the 2009-2011 fiscal period. While the province narrowly avoided a deficit in fiscal 2012 thanks to unexpected revenues from the sale of Crown leases, it might not avoid one this fiscal year. We expect that Alberta will generate another after-capital deficit in fiscal 2013 that should range from 1%-2% of projected operating revenues. Although, unlike most other Canadian provinces, its continuing deficits have not translated into an increase in debt and debt burdens, Alberta's cash and investment holdings have been declining. Its fiscal stabilization fund, the Sustainability Fund, has fallen to C$7.5 billion in fiscal 2012 from about C$15.0 billion in fiscal 2010 and could fall to about C$3.0 billion by the end of fiscal 2013. Outlook The stable outlook reflects our expectations that the province's tax-supported debt burden will remain moderate (below 60% of operating revenues) in the next two years and that cash and temporary investment holdings will remain very strong after a modest decline in fiscal 2013. After-capital results should begin to strengthen in fiscal 2014, moving back to balance or surplus from a likely deficit this fiscal year. We expect that both real GDP and employment will increase more than 2% annually this year and next and that the unemployment rate will fall. Persistent large after-capital deficits coupled with a long-term rise in the province's tax-supported debt burden to above 60% of operating revenues or a precipitous decline in cash and temporary investments could place downward pressure on the ratings. Related Criteria And Research Methodology For Rating International Local And Regional Governments, Sept. 20, 2010 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 on the Global Credit Portal at www.globalcreditportal.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.