January 28, 2011

Saskatoon (City of)

Primary Credit Analyst:
Suleman Souleyman, Toronto (1) 416-507-2514; suleman_souleyman@standardandpoors.com
Secondary Contact:
Stephen Ogilvie, Toronto (1) 416-507-2524; stephen_ogilvie@standardandpoors.com

Table Of Contents

Major Rating Factors

Rationale
Outlook
Related Criteria And Research

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Saskatoon (City of)
Major Rating Factors
Strengths: Issuer Credit Rating
• Generally strong operating performance AAA/Stable/--
• Strong economy
• Excellent cash and liquidity levels that significantly exceed relatively low
debt

Weaknesses:
• Higher expected debt due to a very large capital program
• Significant unfunded pension solvency deficit

Rationale
The ratings on Saskatoon reflect Standard & Poor's assessment of the city's generally strong operating performance,
strong economy, and excellent cash and investment levels that exceed its debt. We believe unfunded pension
liabilities and greater expected debt from a large capital program slightly mitigates these strengths.

In accordance with generally accepted accounting principles requirements, beginning in 2009, Saskatoon recorded
its audited statements on a full accrual basis. Standard & Poor's has made several adjustments in presenting the
figures on a modified accrual basis to better assess the city's debt servicing capacity from operations. We estimate
that Saskatoon's 2009 operating balance was about 11% of operating revenues, down from 14% the previous year.
Since the city only restated its 2008 audit, for comparability purposes we cannot make direct comparisons before
that year. However, from 2001-2007, the ratio fluctuated from 8%-23%. After capital revenues and expenditures
(in other words, total revenues and expenditures), we estimate that Saskatoon had a 3% surplus of total revenues in
2009, following a 7% deficit the previous year. This ratio has also fluctuated, ranging from negative 13% to
positive 10% during 2001-2009. Some of the fluctuation could be due to the revenue and expenditure timing
differences related to the city's property development operations. Thanks to its large greenfield holdings, Saskatoon
is the area's major property developer, which allows it to guide urban development and generate substantial net
revenues. The city's debt burden (principal plus interest) was a manageable 3.5% of operating revenues, and its debt
service coverage ratio was 7.35x. As of Dec. 31, 2009, its debt was C$115 million, or 24% of operating revenues,
rising from 7% at the end of 2004. Nevertheless, we still believe that this is low and consistent with the 'AAA'
rating category.

Saskatoon is the province's commercial center, and the Conference Board of Canada identified it as one of Canada's
hub cities; it has highway, air, and rail transportation links to markets throughout North America. Despite resources
and agriculture largely being at the core of Saskatchewan's economy, employment in these sectors only accounts for
about 5% of Saskatoon's census metropolitan labor force. In 2009, Saskatoon's population was 219,900, increasing
2.3% from the previous year. Growth has been 1.0% or greater since 2006. This follows population growth ranging
from negative 0.5% to positive 3.0% since 1999, due to some net-out migration. The city has moderate employment
diversity. Prominent sectors of employment are health care, government, trade and transport, retail, utilities (namely
SaskTel and SaskPower), resources (including Potash Corp. of Saskatchewan Inc., BHP Billiton Ltd., and Cameco

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Corp.,) and education (including the University of Saskatchewan). Standard & Poor's believes Saskatoon has
excellent economic fundamentals, although its economy showed signs of moderation since 2008. The city's
unemployment rate was 4.8% in 2009, rising from 4.1% the previous year. However, some of this is attributed to a
rise in the labor force as well as a rise in unemployment. Building permit growth fell 12% in 2009, after peaking at
70% in 2007. Housing starts rose 4% after peaking at 35% in 2007. Following the rise in construction activity
from 2007, assessment base growth increased 35% in 2009, although the city indicated that about 90% of the
growth relates to 2009 being a reassessment year.

According to its 2010-2011 budget, Saskatchewan expects its real GDP to rise 3% in 2011, which should bolster
Saskatoon's economic activity. Also, major infrastructure projects (such as the South River Crossing Bridge and a
C$80 million airport expansion) should create enough economic multipliers to keep the city's economic engine
running relatively strong in the next five years.

Capital program, liquidity, and debt

In 2009, Saskatoon's capital expenditure was C$177 million, or 32% of total expenditure, after reaching about
41% in both 2007 and 2008. Similar to previous two years, land servicing was the largest capital expense (about
36% of the total). This includes the city's land purchases for its land development operation. Based on Saskatoon's
2010 capital budget, transportation should account for about half of its expenditure--some of which will be for the
South Crossing Bridge and Circle Drive South interchange, which the city estimates will cost C$220 million.
Saskatoon expects to share the cost with federal and provincial governments, with each funding about a third. A
C$90 million police headquarters is also proceeding. The city plans to debt finance this and its share of the bridge.
Gas tax funding will service the debt for the bridge, while Saskatoon's mill rate will service the police facility. The
city estimates that it has a 10-year infrastructure deficit of more than C$900 million. Its 2011-2014 capital plan
budgets C$1.14 billion during this period, the bulk of which it will spend on growth and planning. We believe this
should at least contain the infrastructure deficit.

Debt typically funds a small portion of Saskatoon's capital expenditure. It expects its debt to peak in 2014 at about
C$270 million, or 30% of operating revenues. Reserves funded about 54% of the city's capital expenditure in 2009,
dropping from 74%-89% during 2003-2007. In 2009, Saskatoon's cash and investment was C$207 million, or 56%
of operating expenditures, and 1,224% of the next 12 months' debt service. These metrics are consistent with the
'AAA' category. We believe these ratios could weaken in the next five years as the city spends the reserves it has
built from senior government infrastructure stimulus funding. During this period, we believe that Saskatoon's debt
could exceed its cash and investments, although as of 2009 the opposite was true. We estimate that debt could reach
30%-40% of operating revenues in the next three to five years.

The city sponsors three separate pension plans. Based on a Dec. 31, 2009, actuarial valuation, its total unfunded
liability related to these was about C$112 million on a solvency basis. Nevertheless, some developments could
mitigate the payments' financial impact. According to the city, Saskatchewan is providing unconditional three-year
pension solvency funding relief and could eliminate solvency-based funding altogether, similar to Quebec.

Saskatoon has other, more manageable liabilities, including sick leave (C$10 million), vacation (C$16 million), and
postclosure (C$3 million). In total, these equal 6% of operating revenues.

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Outlook
The stable outlook reflects our expectation that Saskatoon's revenue and cash investment balances will rise
commensurately with debt, and that its economic performance will remain relatively robust. It also reflects our
expectation that government support, including funding streams to service some of the new debt, will not fall short
of what is planned. Not meeting any of these expectations could prompt a downgrade, as could a situation where
Saskatoon's debt significantly exceeded cash and investments (which would indicate a loss of the city's net creditor
position) for a prolonged period. A funding requirement of Saskatoon's solvency pension deficit could also lead us
to lower the ratings.

City of Saskatoon--Financial And Economic Statistics

Financial statistics (%) 2009¶** 2008¶** 2007 2006 2005
Operating balance/operating revenue 24.3 28.7 21.4 8.1 12.9
After-capital expenditure balance/total 3.4 (6.9) 1.8 (13.2) (6.6)
revenue
Capital expenditure/total expenditure 32.4 40.9 42.1 33.6 29.2
Direct debt/operating revenue 23.7 20.3 13.9 13.6 16.0
Debt service/total revenue 3.5 3.5 3.4 3.1 4.0
Net direct debt*/operating revenue (49.5) (15.3) (29.1) (42.8) (53.1)
Cash and committed facilities/operating 115.6 59.5 58.4 62.8 80.9
expenditure

Economic statistics
% aged 14 years or % aged 65 years or
Population summary Total younger** older** Median age**
Population 218,900 17.7 13.0 35.9

2009 2008 2007 2006 2005

Population (% change)¶ 2.3 0.5 0.5 0.3 0.3
Unemployment rate (%) 4.7 4.0 4.0 4.4 5.0
Assessment base (% change)§ 35.1 2.4 1.9 2.6 14.6
*Direct debt less cash and equivalents. ¶Based on City of Saskatoon Planning Department. §Includes both unit growth and market value changes; about 90% of the 2009
value represents reassessment. **Based on 2006 Census data.

Related Criteria And Research

Rating International Local And Regional Governments, Sept. 20, 2010

Ratings Detail (As Of January 28, 2011)*

Saskatoon (City of)
Issuer Credit Rating AAA/Stable/--
Senior Unsecured (3 Issues) AAA
Issuer Credit Ratings History
29-Jul-2002 Foreign Currency AAA/Stable/--
12-Jul-2001 AA+/Stable/--
12-Jul-2001 Local Currency AAA/Stable/--
*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard

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Ratings Detail (As Of January 28, 2011)*(cont.)

& Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country.

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