Tauranga City Council Ratings Affirmed At 'A+/A-1'; Outlook Remains Stable

Research Update: Tauranga City Council Ratings Affirmed At 'A+/A-1'; Outlook Remains Stable Primary Credit Analyst: Martin J Foo, Melbourne +61 3 9631 2016; Martin.Foo@spglobal.com Secondary Contact: Craig R Michaels, Melbourne (613) 9631 2082; craig.michaels@spglobal.com Table Of Contents Overview Rating Action Outlook Rationale Key Statistics Ratings Score Snapshot Key Sovereign Statistics Related Criteria Related Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 23, 2017 1

Research Update: Tauranga City Council Ratings Affirmed At 'A+/A-1'; Outlook Remains Stable Overview Tauranga City Council's (Tauranga's) institutional settings, financial management, and strong budgetary flexibility support its ratings. Offsetting these strengths is the fact that we expect Tauranga's debt level to climb and after-capital-account balances to weaken as it rolls out a large capital investment program. We are affirming our 'A+' long-term foreign-currency and local-currency ratings and 'A-1' short-term ratings on Tauranga. The stable outlook reflects our expectation that while Tauranga's debt burden will rise from an already high level as the council boosts capital spending, the pace of this rise is likely to be moderate while the council focuses on meeting the demands of strong population growth. Rating Action On Oct. 24, 2017, S&P Global Ratings affirmed its 'A+' long-term foreign-currency and local-currency and 'A-1' short-term issuer credit ratings on Tauranga City Council, a New Zealand local government. The outlook on the rating remains stable. Outlook The stable outlook reflects our expectation that while Tauranga's debt burden will rise from an already high level as the council boosts capital spending, the pace of this rise is likely to be moderate while the council focuses on meeting the demands of strong population growth. Downside scenario Downward pressure on the rating could occur if there are material changes to Tauranga's strategy that we view as negative for its credit metrics and cause us to lower our assessment of Tauranga's financial management strength. For instance, this could occur if capital expenditure is materially higher than forecast, without concomitant revenue growth, leading to a significantly higher debt-to-revenue ratio than we currently forecast. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 23, 2017 2

Upside scenario Upward pressure on the rating could occur if Tauranga's budgetary performance were to strengthen significantly over a sustained period, which might result from higher revenues or lower expenditures. This could lead to the debt ratio falling materially, bringing its debt burden in line with higher-rated peers. Rationale We have updated and extended our forecasts for Tauranga until 2020. We expect that Tauranga's budgetary performance will weaken during this period as capital expenditure grows, and that its high debt level will rise further. Our ratings on Tauranga are supported by New Zealand's institutional settings, the council's experienced management team and budgetary flexibility, and our improved view of the council's liquidity. A supportive institutional framework, sound management, and solid local economy underpin Tauranga's creditworthiness The institutional framework within which New Zealand local governments operate is a key factor supporting Tauranga's credit profile. We believe this framework is one of the strongest and most predictable globally. It promotes a strong management culture, fiscal discipline, and high levels of financial disclosure. The framework allows New Zealand councils to support higher levels of debt than some international peers can tolerate at similar ratings. Tauranga is governed by an elected mayor and 10 elected councillors. The council is run on a day-to-day basis by the chief executive, who was appointed in 2013 and previously served as chief executive of Wellington City Council. The chief executive's term is due to expire in April 2018 and the council has begun advertising the role. Financial management is strong, underpinned by an experienced management team and prudent policies on borrowing and liquidity. Tauranga prepares 10-year long-term plans every three years and annual plans in the intervening years, in line with New Zealand requirements. We expect that next year's 2018-2028 long-term plan, which is currently being drafted, will see Tauranga maintain its strategy of borrowing to invest in infrastructure in order to cater for strong population growth. Tauranga has a population of about 128,200 people and the council expects this to grow by a strong 3.1% in 2017-2018, driven by domestic and international migration. We estimate that GDP per capita in the Bay of Plenty region, which encompasses Tauranga city and neighbouring districts, averaged about US$31,600 between 2015 and 2017, which is relatively high in an international context but lower than New Zealand's national average of US$41,400. The regional economy is somewhat dependent on the horticultural and agricultural industries, with kiwifruit and avocados among the main crops. The local economy is supported by the Port of Tauranga, New Zealand's busiest by cargo volume. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 23, 2017 3

Elevated levels of capital expenditure will lead to weaker budgetary performance and a higher debt burden, but liquidity is improving We expect Tauranga's debt burden to continue to grow during the forecast period. This will be driven by high levels of capital expenditure, necessary to cater for population growth and meet the Crown's requirements for available residential land as per its "National Policy Statement on Urban Development Capacity." The New Zealand government announced in July 2017 that Tauranga had been successful in applying for NZ$230 million from the one-off Housing Infrastructure Fund (HIF). Through the HIF, the Crown intends to provide interest-free, subordinated loans of up to 10 years to fast-growing councils. In Tauranga, we expect the HIF to be used to finance greenfield development at Te Tumu, a capacity upgrade to the Te Maunga Wastewater Treatment Plant, and a new Waiari Water Treatment Plant. Our base case is that Tauranga will execute a funding agreement with the Crown in FY2017-2018 and draw down HIF funds between 2018 and 2021. However, we note that at the time of writing, the Labour Party has won support from minor parties to form government after protracted negotiations following New Zealand's general election of Sept. 23, 2017. It is too early to determine what impact the change of government will have on the HIF and infrastructure policy more generally, if any. In addition, we expect Tauranga to continue to borrow (separately to the HIF) to fund a large capital investment program across other roading, water, and city centre improvement projects. As a consequence, we forecast tax-supported debt to grow to NZ$565 million by 2020, or to 225% of consolidated operating revenues. We forecast interest expenses to average about 9.4% of adjusted operating revenues during 2017-2019. This represents a high debt burden compared with peers. We expect Tauranga to achieve high operating surpluses of about 19% of adjusted operating revenues on average during 2016-2020. We also expect after-capital-account deficits to average about 15% of total revenues during 2016-2020, which is considerably weaker than the 4% average deficit that we forecast in 2016 for the 2015-2019 period. This weakening is driven primarily by our revised forecasts for higher capital expenditure. Budgetary flexibility remains one of Tauranga's key strengths. We consider approximately 96% of Tauranga's revenues to be modifiable. The council's 2015-2025 long-term plan sets a limit on increases in rates revenue of 2%, plus inflation plus growth in rateable properties, per annum. We expect next year's 2018-2028 long-term plan to provide a clearer picture of the council's strategy and capital expenditure plans, which will have been revised materially since the last long-term plan to reflect stronger population growth. Tauranga's net free cash and liquid assets stand at 112% of the next 12 months' debt service. Upcoming debt service includes NZ$30 million of debt maturing in December 2017, which the council has entirely prefunded, as well as approximately NZ$21 million in interest payments. Tauranga's liquidity WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 23, 2017 4

coverage for the past few years has been significantly higher than what we observed previously, and we expect that it will remain elevated. The council also has an unused committed overdraft facility of NZ$50 million. We consider Tauranga's access to external liquidity to be satisfactory; New Zealand's capital markets are comparatively liquid, but lack depth, given their relatively small size. During the severe market dislocation in 2008 and 2009, some New Zealand councils had difficulty issuing unrated commercial paper. Tauranga's participation in the Local Government Funding Agency (LGFA) has allowed it to achieve a smoother maturity profile over the forecast period. We view Tauranga's contingent liabilities as being low. Tauranga has small investments in two council-controlled organizations--tourism Bay of Plenty and Bay of Plenty Local Authority Shared Services--that have accounts that are not consolidated with those of the core council. Tauranga is also a shareholder and guarantor of the LGFA, along with 29 other local authorities and the Crown. We consider the likelihood of the LGFA guarantee being called on to be very low. Quantifiable contingent liabilities stand at NZ$33.5 million, mostly relating to leaky building claims. Key Statistics Table 1 Key Statistics --Year ended June 30-- Selected Indicators (mil. $NZ) 2015 2016 2017 2018BC 2019BC 2020BC Operating revenues 187 201 214 227 236 251 Operating expenditures 129 164 160 184 196 209 Operating balance 58 37 53 43 39 42 Operating balance (% of operating revenues) 30.9 18.6 24.9 18.9 16.7 16.9 Capital revenues 103 46 49 53 42 39 Capital expenditures 75 84 104 151 157 157 Balance after capital accounts 86-1 -2-54 -76-75 Balance after capital accounts (% of total revenues) 29.6-0.4-0.7-19.4-27.3-25.9 Debt repaid 179 75 110 30 50 45 Gross borrowings 114 60 150 83 126 120 Balance after borrowings 21-16 38-1 0 0 Modifiable revenues (% of operating revenues) 88.8 94.9 96.3 97.1 96.5 96.6 Capital expenditures (% of total expenditures) 36.8 34 39.3 45.1 44.4 42.9 Tax-supported debt (outstanding at year-end) 332 321 361 414 490 565 Tax-supported debt (% of consolidated operating revenues) 177.8 159.6 169.1 182.7 207.7 225 Interest (% of operating revenues) 13.6 10.3 8.7 9.5 10.1 10.3 Local GDP per capita (single units) 41,887 44,997 N/A N/A N/A N/A Note: Figures include the revenues and expenditures of Bay Venues Limited, a wholly owned council-controlled organization. BC--Base case. N/A--Not applicable. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 23, 2017 5

Ratings Score Snapshot Table 2 Ratings Score Snapshot Key Rating Factors Institutional framework Economy Financial management Budgetary flexibility Budgetary performance Liquidity Debt burden Contingent liabilities Extremely predictable and supportive Average Strong Strong Weak Strong Very high Low Note: S&P Global Ratings bases its ratings on local and regional governments on the eight main rating factors listed in the table above. Section A of S&P Global Ratings' "Methodology For Rating Non-U.S. Local And Regional Governments," published on June 30, 2014, summarizes how the eight factors are combined to derive the rating. Key Sovereign Statistics Sovereign Risk Indicators. Interactive version available at http://www.spratings.com/sri. Related Criteria General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 Criteria - Governments - International Public Finance: Methodology For Rating Non-U.S. Local And Regional Governments, June 30, 2014 Criteria - Governments - International Public Finance: Methodology And Assumptions For Analyzing The Liquidity Of Non-U.S. Local And Regional Governments And Related Entities And For Rating Their Commercial Paper Programs, Oct. 15, 2009 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Related Research Public Finance System Overview: New Zealand's Institutional Framework For Local And Regional Governments, Dec. 11, 2016 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 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 23, 2017 6

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 risk factors were considered and discussed, looking at track-record and forecasts. The committee agreed that liquidity had improved and that budgetary performance had deteriorated. All other key rating factors were unchanged. Key rating factors are 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 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 Tauranga City Council Issuer Credit Rating A+/Stable/A-1 Tauranga City Council Commercial Paper A-1 S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act). Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 23, 2017 7

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