Ratings On South Taranaki District Council Raised To #AA-/A-1+# On Stronger Financial Outlook Stable

Stocks and Financial Services Press Releases Friday May 19, 2017 17:35
S&P Global Ratings--19 May--S&P Global Ratings

On May 19, 2017, S&P Global Ratings raised its long-term foreign and local currency rating to 'AA-' from 'A+', and short-term rating to 'A-1+' from 'A-1' on South Taranaki District Council (South Taranaki), a New Zealand local

government. The outlook on the long-term rating is stable.
OUTLOOK

The stable outlook reflects our expectations that South Taranaki will preserve improvements with its financial management. This should ensure that it maintains the improvement in its financial positon by keeping after-capital account deficits to less than 10% of total revenues, on average, and its total tax-supported debt well below 270% of operating revenues.

Upside Scenario

Upward pressure on the rating could occur if South Taranaki maintained its high level of liquidity coverage while achieving after-capital account surpluses over a sustained period allowing the council to reduce its total   tax-supported debt to be in line with 'AA' rated peers, while maintaining a downward debt trajectory over our forecast period.

Downside Scenario

Downward pressure on the rating could occur if we believe improvements with   financial management are being wound back. This could be evident if South   Taranaki increased its capital spending substantially more than we forecast   resulting in a large after-capital accounts deficits and its debt burden   increasing to about 270% of operating revenues.

RATIONALE

We have raised the ratings on South Taranaki after updating our forecasts and extending the horizon until 2019. Stronger financial management focused on core services continues to improve South Taranaki's financial position with better after-capital account balances reducing debt levels compared to ourprevious expectations. Meanwhile, stronger liquidity, the country's institutional setting, and the economic backdrop cotinue to support the ratings on South Taranaki.

Institutional framework and improving financial management support ratings, while economy is broadly supportive-South Taranaki's financial management is improving and is focused on consolidating its financial position and delivering core services to the community. The council prepares 10-year long-term plans and detailed annual plans. Meanwhile, its debt and liquidity is well managed with little market risk and aided by its large investment fund. Further, the council has no plans for any significant capital projects in the next few years that are likely to reverse the substantial gains in its finances. In the past, South Taranaki undertook large capital projects including water infrastructure and a multipurpose sports complex that drove after-capital account deficits to more than 50% of total revenues between 2008 and 2010. This caused debt to rise rapidly toward 230% of operating revenues in 2014 from just 18% in 2008. While this improved the quality of its assets, in our view it left the council little room to address unforeseen risks that could materialize on its balance sheet.

The institutional framework within which New Zealand local governments operate is a key strength supporting South Taranaki's credit profile. We consider it to be one of the strongest globally and ensures a strong management culture, fiscal discipline, and transparency among all New Zealand councils.

The economy broadly supports South Taranaki's credit profile. We rely on regional data for our analysis as district data is limited. The regional economy, which consists of South Taranaki, New Plymouth District Council, and Stratford District Council, has the highest GDP per capita (US$58,200 between 2014 and 2016) in New Zealand. The economy benefits from, but is also concentrated in, the oil and gas industry, and a large agriculture and food processing industry. We consider that GDP per capita overstates the income of the region's residents and doesn't significantly strengthen the council's revenue streams as much of the income generated from the oil and gas industry accrues to its owners that are located outside the region, rather than to the region's residents. In addition, overall population growth has been stagnant since 2006.

Improving budgetary performance resulting in lower debt burden than our previous expectations, while liquidity strengthens--We expect South Taranaki's budgetary performance will improve compared to its long-term trend with after-capital account deficits falling to 2.8% of total revenues between 2015 and 2019, from 26.5% per year between 2006 and 2014. This is because of steady revenue growth and smaller capital expenditure. We forecast operating balances to stay in surplus of about 18% from 2017-2019.

While we expect South Taranaki's after-capital account deficit to widen back to between 5%-10% of total revenues in 2017 and 2018 it will remain stronger than in the past. Our forecasts are based on the assumption that South Taranaki will spend 90% of its budgeted capital expenditure. Any further underspends of its capital expenditure or improvement in operating balances would see these deficits remaining below 5% of total revenues over the next three years and reduce debt below our forecasts. In the past two years, South Taranaki outperformed our expectations due to strong revenue growth and lower capital expenditure, which reduced to 25% of total expenditure from 37% in 2014. It will average about 27% between 2015 and 2019.

We forecast a one-off after-capital account deficit of about 11% in 2017 as the council completes capital projects that were delayed in 2016 due to flooding. This deficit and maturing debt will be cash funded and allow South Taranaki to reduce its gross debt in 2017. Going forward, we expect South Taranaki to debt fund its deficits and refinance its maturing debt. In 2018 and 2019, we forecast South Taranaki will borrow about NZ$25 million per year to repay maturing debt of about NZ$22 million per year and its deficits. We forecast total tax-supported debt to be about 218% of operating revenues in 2019, down from our previous forecasts of 243% in 2018 due to stronger budgetary performance.

The 2016 financials were impacted by flooding that resulted in grant revenue and spending rising more than normal as South Taranaki repaired a bridge, roads, and flood protection. The net impact on the council was just several

million dollars.

South Taranaki's liquidity has also improved with cash and liquid assets (after haircuts) of about NZ$37 million being more than 600% of its upcoming debt maturities and interest payments (NZ$6 million). This ratio is aided by the council having no debt maturities over the next 12 months. We expect South Taranaki's liquidity coverage to remain high even when debt maturities occur next year, because it has large holdings of assets in its investment funds and   bank lines.

Like all New Zealand local councils, there are no restrictions on SouthTaranaki's ability to increase property rates and user charges each year,other than a political imperative to keep increases low. These income streamsare the key source of income, making up about 78% of operating revenues, whichprovides significant budgetary flexibility. It is targeting average rateincreases of 2.5% in 2018.

South Taranaki's contingent liabilities are negligible and don't affect therating.

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