York, Regional Municipality of

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1 CREDIT OPINION 28 August 207 York, Regional Municipality of Update to Discussion of Key Credit Factors Update Summary Rating Rationale RATINGS York, Regional Municipality of Domicile Ontario, Canada Long Term Rating Aaa Type Senior Unsecured Dom Curr Outlook Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. The Regional Municipality of York's Aaa debt rating is supported by () high levels of cash and investments, (2) prudent and far-sighted fiscal management, (3) a track record of positive operating outcomes, as well as (4) the region's diversified and expanding economy supporting growth in the tax assessment base and future revenues. York's healthy liquidity profile, evidenced by cash and investments representing 89% of net direct and indirect debt at the end of 206, mitigates our concerns around the region's elevated level of debt. York's net direct and indirect debt measured 45% of operating revenue in 206. We expect the region's net direct and indirect debt to gradually decline to around 00% of operating revenues over the medium term, if the region's 0-year capital plan comes to fruition in its current state. Exhibit Debt and interest burden are expected to decline moderately over the medium term Net Direct and Indirect Debt as a % of Operating Revenues [LHS] Contacts Jonathan Reid Associate Analyst jonathan.reid@moodys.com Adam Hardi CFA AVP-Analyst adam.hardi@moodys.com Interest Expense as a % of Operating Revenues [RHS] Michael Yake VP-Senior Analyst michael.yake@moodys.com Alejandro Olivo Associate Managing Director alejandro.olivo@moodys.com David Rubinoff MD-Sub Sovereigns david.rubinoff@moodys.com CLIENT SERVICES Americas Asia Pacific Japan EMEA F 208F 209F Source: Moody's, York's financial statements and budget National Peer Comparisons The Regional Municipality of York is rated at the high end of Canadian municipalities, whose ratings remain in a narrow range of Aaa to Aa3. When compared to other Canadian municipalities York exhibits a high level of debt, attributable to the significant level of infrastructure development that has been required to keep pace with the high population growth rate. However, the region's strong liquidity, as measured by the level of cash and investments relative to debt and expenses, strengthens York's credit profile and supports its Aaa rating. The institutional framework governing municipalities in Ontario is mature and well-developed, similar to that of other Canadian provinces where Moody's rates municipalities.

2 Credit Strengths High levels of cash and investments Mature, supportive framework governing municipalities in Ontario Consistent, positive operating results Solid governance and management practices Credit Challenges Debt burden remains elevated due to high infrastructure needs, but is expected to decline Rating Outlook The rating outlook is stable, reflecting expectations that region will maintain strong liquidity over the medium term Factors that Could Lead to a Downgrade Increases in debt issuances beyond current expectations A decrease in the region's level of cash and investments Key Indicators Exhibit 2 York, Regional Municipality of (Year Ending 2/3) Net Direct and Indirect Debt/Operating Revenue (%) Gross Operating Balance/Operating Revenue (%) Cash Financing Surplus (Requirement)/Total Revenue (%).2 (6.8) (7.6) (3.6).3 Interest Payments/Operating Revenue (%) Debt Service/Total Revenue (%) Capital Spending/Total Expenditures (%) Self-financing Ratio Source: Moody's, York financial statements and budget Detailed Rating Considerations The Aaa rating assigned to the Regional Municipality of York combines () a baseline credit assessment (BCA) of aaa for the municipality, and (2) the likelihood of extraordinary support coming from the Province of Ontario (Aa2, Stable) in the event that the municipality faced acute liquidity stress. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history August 207

3 Issuer Profile The Regional Municipality of York is located in the Greater Toronto Area (GTA) and benefits from its proximity to Canada's largest commercial and financial center, as well as adjacent U.S. markets. With a population of.7 million, York is the 6th largest municipality in Canada. Provincial forecasts project that York's population will reach.6 million by 203 and.8 million by 204. York's expanding population has resulted in rapid assessment growth and total taxable assessment value was around CAD242 billion in 206. York's economy continues to expand at a solid rate and is diversified across manufacturing, information technology, life sciences as well as business and personal services. Low business tax rates compared to other municipalities in the GTA have helped to attract new businesses over recent years. The region's unemployment rate was unchanged in 206, measuring 5.8%, lower than both the GTA average and the average in the province of Ontario. Baseline Credit Assessment HIGH LEVELS OF CASH AND INVESTMENTS York has managed to maintain a high level of reserves despite a significant increase in debt over recent years. The increasing levels of liquidity are driven mainly by the region's desire to increase the amount of reserves available to finance its capital plan and minimize reliance on other sources, including direct debt financing. At the end of 206, York held CAD3.2 billion in cash and investments, equivalent to approximately 89% of net direct and indirect debt, or 62% of operating expenditures. At December 3, 206 the region's total reserves (CAD2.75 billion) covered 93% of net direct and indirect debt, a ratio that has improved every year since 20. York has taken several steps to improve reserve balances over the past several years, including a 203 decision by the region to incrementally increase contributions to capital reserves over a five year period from % to 2% of the tax levy, and a policy which allows 50% of the region's supplementary tax revenue to be added to the reserves at the end of each fiscal year. As a result, even in light of the region's robust CAD6. billion 0-year capital plan, the ratio of reserves relative to debt will continue to improve. This focus on strengthening reserve levels, which in turn helps minimize future tax levy supported debt issuance, is credit positive. MATURE, SUPPORTIVE FRAMEWORK GOVERNING MUNICIPALITIES IN ONTARIO The institutional framework governing municipalities in Ontario is mature and highly developed. The division of roles and responsibilities between the province and municipalities is clearly articulated. Historically, changes to the institutional framework have occurred at a measured, evolutionary pace, following discussions between both parties. Nevertheless, in certain cases, changes have occurred more rapidly. York's creditworthiness benefits from the stability inherent in the provincial institutional framework. Provincial legislation dictates a high degree of oversight, including limits on debt servicing costs, while policy flexibility, on both the revenue and expenditure sides of the ledger, helps York to manage pressures as they arise. We note that debentures can only be issued to fund capital infrastructure projects, a large portion of which is repaid via development charges on new property developments and utility rates. CONSISTENT POSITIVE OPERATING RESULTS York's stable operations and prudent fiscal planning have historically supported healthy fiscal outcomes and consolidated surpluses. In 206 the region posted a consolidated surplus representing 22% of revenues, in line with the historical average however below the 29% seen in 205. Revenues fell by CAD28 million in 206, almost entirely driven by a CAD30 million decline in government grants that had been earmarked for the provincial rapid transit expansion (Metrolinx). Since the decline in government grants was related to capital projects, it had little impact on the region's operating results. Demands from a growing population will continue to apply financial pressures to York's budget, with growth in operating expenses expected to remain relatively high. However, given York's track record of strong operating results and commitment to long term planning, we expect the region will continue to register positive operating and consolidated surpluses over the medium term August 207

4 SOLID GOVERNANCE AND MANAGEMENT PRACTICES Similar to other highly rated municipalities in Ontario, York displays strong governance and management characteristics. In addition to long-term planning for capital and operating budgets and a history of meeting fiscal targets, management adheres to conservative debt and investment management policies, thus limiting the region's exposure to market-related risks and ensuring relatively smooth debt servicing costs. These fiscal management measures are also supported by comprehensive, transparent and timely fiscal reporting. York's commitment to continuously improve its budgeting framework also demonstrates the region's commitment to long term planning, which is considered credit positive. DEBT BURDEN REMAINS ELEVATED DUE TO HIGH INFRASTRUCTURE NEEDS, BUT IS EXPECTED TO DECLINE Increasing infrastructure needs to meet York's growing population result in high capital budgets, and the debt financed portion of the capital budget creates pressure on the debt burden. The region's debt burden is currently one of the highest among rated Canadian municipalities, however debt levels are expected to gradually decline over the medium term as the region's capital plan ramps down. The region's current level of net direct and indirect debt registered 45.2% of operating revenues as at December 3, 206 and we expect York's net direct and indirect debt will decline to around 00% of operating revenue over the medium term. According to the capital plan, CAD.7 billion of the CAD6. billion total will be spent over the first two years, with annual spending averaging CAD550 for the rest of the period. The front-loaded nature of the capital plan, in combination with efforts to reduce the reliance on debt financing will support the region's falling debt burden over the medium term. Nevertheless, the region's debt burden will remain elevated compared to Aaa rated peers, and the addition of any currently unplanned projects in the outer years of the capital plan that require debt financing would impact on the region's ability to impact it's debt burden over the medium term. The total capital plan, which is heavily focused on investing in roads and wastewater infrastructure, will require new debt issuance of around CAD. billion, with an additional CAD900 million of maturing debt expected to be refinanced over the same period. New debt issuances will be in the form of sinking fund debentures to fund growth related projects. Like other Canadian municipalities, York has benefited from a low interest rate environment which, in combination with strong operating results, has helped ensure that its interest burden has remained affordable (6.6% of operating revenue in 206, up slightly from 6.% in 205). Extraordinary Support Considerations While York's BCA of aaa already places the regional municipality in the Aaa rating bracket, Moody's also consider the likelihood of extraordinary support coming from the Province of Ontario (Aa2 stable) to prevent a default by York. Moody's assigns a high likelihood of extraordinary support from the Province of Ontario, reflecting Moody's assessment of the incentive provided to the provincial government of minimizing the risk of potential disruptions to capital markets if York, or any other Ontario municipality, were to default. Output of the Baseline Credit Assessment Scorecard In the case of York, the BCA matrix generates an estimated BCA of aa, close to the BCA of aaa assigned by the rating committee. The matrix-generated BCA of aa reflects () an idiosyncratic risk score of 2 (presented below) on a to 9 scale, where represents the strongest relative credit quality and 9 the weakest; and (2) a systemic risk score of Aaa, as reflected in the sovereign bond rating (Aaa, stable). The idiosyncratic risk scorecard and BCA matrix, which generate estimated baseline credit assessments from a set of qualitative and quantitative credit metrics, are tools used by the rating committee in assessing regional and local government credit quality. The credit metrics captured by these tools provide a good statistical gauge of stand-alone credit strength and, in general, higher ratings can be expected among issuers with the highest scorecard-estimated BCAs. Nevertheless, the scorecard-estimated BCAs do not substitute for rating committee judgments regarding individual baseline credit assessments, nor is the scorecard a matrix for automatically assigning or changing these assessments. Scorecard results have limitations in that they are backward-looking, using historical data, while the assessments are forward-looking opinions of credit strength. Concomitantly, the limited number of variables included in these tools cannot fully capture the breadth and depth of our credit analysis August 207

5 Rating Methodology and Scorecard Factors Exhibit 3 Baseline Credit Assessment Score Value Sub-factor Weighting Sub-factor Total Factor Weighting Total % % % % 0.30 Scorecard Factor : Economic Fundamentals Economic strength 5 70% Economic volatility 30% Legislative background 50% Financial flexibility 50% Factor 2: Institutional Framework Factor 3: Financial Performance and Debt Profile Gross operating balance / operating revenues (%) % Interest payments / operating revenues (%) % Liquidity Net direct and indirect debt / operating revenues (%) % 25% Short-term direct debt / total direct debt (%) % Factor 4: Governance and Management - MAX Risk controls and financial management Investment and debt management Transparency and disclosure Idiosyncratic Risk Assessment 2.24(2) Systemic Risk Assessment Aaa Suggested BCA aa Source: Ratings Exhibit 4 Category YORK, REGIONAL MUNICIPALITY OF Outlook Senior Unsecured -Dom Curr Moody's Rating Stable Aaa Source: Moody's Investors Service 5 28 August 207

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7 CLIENT SERVICES 7 Americas Asia Pacific Japan EMEA August 207