1. Rating Canadian Provinces: Methodology and Outlook Presentation to the AAAE – September 12, 2011

2. Introduction Credit rating agencies have been in the news due to the downgrades of several European countries and the discussion surrounding the US debt ceiling / fiscal sustainability. Canada and the provinces continue to maintain their high credit ratings. We don’t expect any widespread rating adjustments in 2011. Today’s presentation will give an insight into Moody’s Investors Service, in particular the Sub-sovereign rating process. 2

3. Topics for Discussion Credit rating definitions Regional and Local Government Rating Methodology Outlook for the Provinces 3

4. 4 Credit Rating Definitions

5. What We Measure All credit rating agencies attempt to measure the “credit worthiness” of issuers. However, credit worthiness can vary from one agency to another. At Moody’s Investors Service, we rate the expected loss : EL = probability of default x (1-recovery rate)

6. Moody's Global Rating Scale Idealized 10-Year Expected Loss Rates Time Horizon (in years) 12345678910 Aaa0.0000%0.0001%0.0004%0.0010%0.0016%0.0022%0.0029%0.0036%0.0045%0.0055% Aa10.0003%0.0017%0.0055%0.0116%0.0171%0.0231%0.0297%0.0369%0.0451%0.0550% Aa20.0007%0.0044%0.0143%0.0259%0.0374%0.0490%0.0611%0.0743%0.0902%0.1100% Aa30.0017%0.0105%0.0325%0.0556%0.0781%0.1007%0.1249%0.1496%0.1799%0.2200% A10.0032%0.0204%0.0644%0.1040%0.1436%0.1815%0.2233%0.2640%0.3152%0.3850% A20.0060%0.0385%0.1221%0.1898%0.2569%0.3207%0.3905%0.4560%0.5401%0.6600% A30.0214%0.0825%0.1980%0.2970%0.4015%0.5005%0.6105%0.7150%0.8360%0.9900% Baa10.0495%0.1540%0.3080%0.4565%0.6050%0.7535%0.9185%1.0835%1.2485%1.4300% Baa20.0935%0.2585%0.4565%0.6600%0.8690%1.0835%1.3255%1.5675%1.7820%1.9800% Baa30.2310%0.5775%0.9405%1.3090%1.6775%2.0350%2.3815%2.7335%3.0635%3.3550% Ba10.4785%1.1110%1.7215%2.3100%2.9040%3.4375%3.8830%4.3395%4.7795%5.1700% Ba20.8580%1.9085%2.8490%3.7400%4.6255%5.3735%5.8850%6.4130%6.9575%7.4250% Ba31.5455%3.0305%4.3285%5.3845%6.5230%7.4195%8.0410%8.6405%9.1905%9.7130% B12.5740%4.6090%6.3690%7.6175%8.8660%9.8395%10.5215%11.1265%11.6820%12.2100% B23.9380%6.4185%8.5525%9.9715%11.3905%12.4575%13.2055%13.8325%14.4210%14.9600% B36.3910%9.1355%11.5665%13.2220%14.8775%16.0600%17.0500%17.9190%18.5790%19.1950% Caa19.5599%12.7788%15.7512%17.8634%19.9726%21.4317%22.7620%24.0113%25.1195%26.2350% Caa214.3000%17.8750%21.4500%24.1340%26.8125%28.6000%30.3875%32.1750%33.9625%35.7500% Caa328.0446%31.3548%34.3475%36.4331%38.4017%39.6611%40.8817%42.0669%43.2196%44.3850% http://www.moodys.com/sites/products/DefaultResearch/102249_RM.pdf Investment Grade Speculative Grade

7. Canadian RLG Rated Universe 7 ProvinceRatingOutlook MuncipalityRatingOutlook British ColumbiaAaaStableVancouverAaaStable AlbertaAaaStableWinnipegAaaStable SaskatchewanAa1StableDurhamAaaStable ManitobaAa1StableHaltonAaaStable OntarioAa1StableLondonAaaStable QuebecAa2StableMuskokaAa2Stable New BrunswickAa2StableNorth BayAa1Stable Nova ScoitaAa2StableOttawaAaaStable Prince Edward IslandAa2StablePeelAaaStable Newfoundland and LabradorAa2StableTorontoAa1Stable WaterlooAaaStable TerritoryYorkAaaStable Northwest TerritoriesAa1StableMontrealAa2Stable Quebec CityAa2Stable St. John’sAa2Stable

8. 8 Sub-Sovereign RLG Rating Methodology

9. Regional and Local Government Rating Methodology The rating reflects the application of our Joint-Default Analysis methodology with two main inputs: baseline credit assessment (BCA) and likelihood of extraordinary support. 9 Baseline credit assessment BCA Extraordinary support MOODY’S credit rating ×

10. Regional and Local Government Rating Methodology The BCA: The baseline credit assessment numerically classifies variables from 6 broad categories to ensure uniformity across issuers: 2 are system wide, 4 are issuer specific 2 are qualitative, 4 are quantitative The BCA is neither a matrix for automatically assigning an assessement nor a substitute for rating committee judgements. 10

11. Regional and Local Government Rating Methodology Broad credit factors for the baseline credit assessment: Operating environment Institutional framework Financial position and performance Debt profile Governance and management Economic fundamentals 11

12. Regional and Local Government Rating Methodology Operating environment: The national economic and political context in which RLGs function Wealth – reflection of ability to pay Stability – relates to financial stress Government effectiveness – stability and responsiveness of government institutions By definition operating environment scores are identical for all sub- sovereign issuers within the same country 12

13. Regional and Local Government Rating Methodology Institutional framework: The arrangements that determine intergovernmental relations and shape RLG powers and responsibilities Revenue raising – degree of autonomy RLG has for deciding its own-source revenue Spending powers – degree of autonomy RLG has for deciding spending levels Borrowing capabilities – degree of autonomy RLG has for determining borrowing needs Qualitative 13

14. Regional and Local Government Rating Methodology Financial position and performance: Strength of performance is a consequence of the accumulated decisions of policy makers Revenues and expenses – are they broad-based or narrow? Sustainable and reasonable? Bottom line – are expenses contained below revenue? Liquidity – does RLG have sufficient cash to cover debt service, salaries and suppliers? Interest payments relative to revenue – higher interest payments will impact on spending decisions 14

15. Regional and Local Government Rating Methodology Debt profile: Study the amount of debt, the burden it poses, structure and composition and legal framework Short-term vs long-term – interest rate risks Ratio of net debt to operating revenue – proxy for debt servicing capacity. Multi-year trend also provides assessment of the ability to pay debt Ratio of short-term direct debt to direct debt – helps in assessing market access and interest rate risks over one-year time horizon. 15

16. Regional and Local Government Rating Methodology Governance and management: We take into consideration the government structure, fiscal management practices, transparency and political and administrative arrangements Fiscal management – does RLG consistently meet targets? Investment and debt management – follow strict policies or are they lax? Transparency and disclosure – regular reporting, independently audits Institutional capacity – clearly defined rules and procedures for resolving budgetary issues Qualitatitive 16

17. Regional and Local Government Rating Methodology Economic fundamentals Ability to service debt is tied to the ability to raise revenues, which is tied to the local economy’s ability to generate revenues Economic fundamentals – broad economy, labour market performance Are important sectors growing or fading? GDP per capita 17

18. Regional and Local Government Rating Methodology To complete the analysis, we consider the likelihood of extraordinary support coming from the higher tier government to prevent a default by the lower tier government, should this extreme situation ever occur. 18 Baseline credit assessment BCA Extraordinary support MOODY’S credit rating ×

19. 19 Reports and publications

20. 20 Publications – Credit Analysis / Credit Opinions

21. 21 Publications – Special Comments

22. 22 Publications – Articles in Weekly Credit Outlook

23. 23 Outlook for the Provinces

24. Backdrop: Sluggish World Recovery Source: Moody’s Global Macro-Risk Scenarios 2011-2012: Strong Headwinds Ahead, August 2011 24

25. Backdrop: Sluggish World Recovery Source: Moody’s Global Macro-Risk Scenarios 2011-2012: Strong Headwinds Ahead, August 2011 25

26. Canadian Economy Continuing Its Expansion… 26 Source: Statistics Canada

27. Tale of Two Speeds 27 Growth led by resource-rich provinces, while growth elsewhere, though still improved, looking comparatively weaker. Budget Forecasts Private Sector Forecasts Real GDP Growth 2008200920102011F2012F2011F2012F British Columbia0.2(1.8)3.82.02.6 Alberta1.4(4.5)3.73.33.23.83.4 Saskatchewan4.6(3.9)4.54.22.83.83.5 Manitoba1.90.02.22.7 2.82.7 Ontario(0.9)(3.6)3.12.42.7 2.5 Quebec1.1(0.3)2.82.02.2 New Brunswick(0.2)(0.3)2.81.52.21.82.0 Nova Scotia1.3(0.1)1.9 1.82.0 Prince Edward Island0.4(0.1)2.11.72.21.9 Newfoundland and Labrador2.0(10.2)5.83.00.24.01.9 Canada 0.5(2.5)3.12.92.82.52.4

28. Sector Outlook Remains Negative as Challenges Persist While the sector outlook for Canadian provinces remains negative as fiscal challenges persist and debt increase. But we do not anticipate widespread rating adjustments in 2011. This reflects our view that the core factors underpinning the narrow Aaa to Aa2 rating range will not be affected. As the economy continues its expansion, we expect provincial governments will begin switching their focus from supporting demand to eliminating deficits. 28

29. Provinces Were Affected by the Downturn, But From an Improved Financial Position 29 Significant improvements in fiscal positions and debt burdens of Canadian provinces in the years leading up to the recent downturn placed the provinces, to varying degrees, in stronger positions to face the challenges of the recent recession.

30. Significant Fiscal Imbalances in 2009-10 and 2010-11 30

31. A Switch From Supporting Demand to Eliminating Deficits 31 Consolidated Surplus/(Deficit) as % of Revenues2008200920102011F2012F2013F2014F2015F British Columbia7.00.2(5.0)(3.2)(2.2)(1.0)0.4- Alberta6.2(2.4)(1.2)(5.8(9.6)(1.8)3.0- Saskatchewan16.020.8(3.4)(0.1)6.2--- Manitoba4.63.5(1.6)(3.6)(3.3)(2.5)(1.0)1.2 Ontario0.6(6.6)(20.1)(15.7)(15.0)(13.6)(11.4)(8.7) Quebec2.4(1.8)(4.0)(4.5)(3.5)(0.5)1.2- New Brunswick1.4(2.7)(10.2)(8.4)(5.9)--- Nova Scotia4.50.3(2.9)5.8(4.4)(2.4)0.20.7 Prince Edward Island(0.3)(2.2)(4.9)(3.4)(2.8)--- Newfoundland and Labrador19.927.2(0.4)6.00.720.0(4.0)0.6

32. Expect Debt Burdens to Deteriorate Further in 2011, Albeit Moderately 32

33. But Debt Affordability Has So Far Remained Manageable 33 Interest expense as % of total expenses

34. Challenges: Provincial Elections 34 ProvincePartyElection Date Prince Edward Island Liberal3 October 2011 ManitobaNDP4 October 2011 OntarioLiberal7 October 2011 NewfoundlandProgressive Conservatives 11 October 2011 SaskatchewanSaskatchewan Party 7 November 2011 TerritoryPartyElection Date Northwest Territories Independent3 October 2011

35. Challenges: -Health and education spending -Volatile revenue from natural resources -Federal transfers 35

36. Provinces Have the Fiscal Flexibility to Reverse the Deterioration Moderately paced economic expansion, coupled with continued expense pressures will mean fiscal consolidation will likely take place over several years Canadian provinces have broad discretion over revenues and spending, including unfettered access to a broad range of tax bases and the ability to alter expenditure programs when needed This broad discretion over revenues and spending is the platform on which provinces will execute their fiscal consolidation plans 36

37. 37 Jennifer Wong AVP/Analyst Sub-Sovereign Group Moody’s Investors Service 70 York St., Suite 1400 Toronto, ON M5J 1S9 416.214.3854 jennifer.wong2@moodys.com Michael Yake AVP/Analyst Sub-Sovereign Group Moody’s Investors Service 70 York St., Suite 1400 Toronto, ON M5J 1S9 416.214.3865 michael.yake@moodys.com Aaron Wong Associate Analyst Sub-Sovereign Group Moody’s Investors Service 70 York St., Suite 1400 Toronto, ON M5J 1S9 416.214.3633 aaron.wong@moodys.com

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