Financial Risk

Assessment
06/20/2019
NO ACTION REQUIRED TODAY
PRESENTATION FOR: Information | Feedback | Discussion
 Purpose of today’s discussion:
To review the updated financial risk profile and its
implications for financial capacity.
• The financial risks have evolved since the
adoption of the ST3 plan.
• Risk assessment is one of the tools we use to
monitor risks, and better understand changes and
their implications.

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Updated Financial
Projections
 Major changes to financial projections
(2017-2041) since 2016

• Higher revenues, and higher capital and operating costs

• Cost increase exceeds revenue increase, resulting in:

• More anticipated borrowing, absorbing additional financial
capacity
• Higher risk of reaching legal debt limit
• Increased pressure to maintain debt service coverage ratios

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An Available Tool:
Risk Assessment
 Risk assessment helps to define risks and
better understand changes

1. Highlight key risk areas and potential outcomes

2. Identify opportunities to improve assumptions and
mitigate risks
3. Illustrate how risk profile changes over time

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 Risk Assessment - How it Works
• Use historical trends, correlations and other factors to forecast
outcomes

• Determine major variables that impact the financial plan. Some

of the risk variables include:

Expenditure Tax revenue

growth rates growth rates Capital Cost
Interest Rates
(CPI, CCI, (sales, MVET, Estimates
ROWI) property)

Grant Assessed Value

Fare Revenues
Revenues (AV) Growth

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 Risk Assessment Comparison:
2016 vs 2019

• In 2016, ST engaged WSP to conduct a risk assessment.

• Results were presented to the Board and ST3 Expert Review Panel

• In 2019, risk assessment updated with latest information.

• Incorporating 2016-2019 actuals
• Reflecting current market trends

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 Comparison of Risk Assessment Outcomes
– Tax Revenues:
More certainty about likely outcomes of tax revenues
35% Shift in outcomes due to:
• Higher actuals 2017-2018
30%
2017-41 (In $Billions) • Narrower range of inflation projections

25%

20% 2016 Risk Analysis

2019 Risk Analysis
15%

10%

5%

0%

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 Comparison of Risk Assessment Outcomes
– Operating Expenses:
More certainty about likely outcomes of operating costs

Shift in outcomes due to:

50% • Higher actuals than originally projected
45% 2017-41 (In $Billions)
• Range of inflation projections narrower
40% than 2016 projection
35%
30%
2016 Risk Analysis
25%
20% 2019 Risk Analysis
15%
10%
5%
0%

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 Comparison of Risk Assessment Outcomes
– Capital Costs: Higher probability of higher capital costs

2017-41 (In $Billions)

30% Shift in outcomes due to:
• Recent experience leads to higher
projections
25%

20%
2019 Risk Analysis
15%
2016 Risk Analysis
10%

5%

0%

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Implications for Financial
Capacity
 Financial Capacity Implications

1. Financial Capacity driven by 3 measures

1. Legal debt capacity: 1.5% of ST’s assessed property value
2. Financial Policy: Net Coverage Ratio
3. Bond Covenants: Gross Coverage Ratios

2. The program is affordable under current projections.

However, all three capacity constraints are under more
pressure based on the outcomes of 2019 risk assessment.

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 Capacity Measure #1: Legal Limit (1.5% of AV)
Probability of debt reaching above 90% of legal limit has increased

Probability of Debt Capacity reaching >90%

40%
35%
30%
25%
20%
15%
10%
5%
0%
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2019 2016

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 Capacity Measure #2: Financial Policy (Net Coverage Ratio)
Probability of Net Coverage dropping below 1.5x increased from 17% to 49%

Probability of Net Debt Coverage falling below 1.5x

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

2019 Risk Analysis 2016 Risk Analysis

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 Capacity Measure #3: Debt Covenant (gross coverage ratio)
Probability of Gross Coverage falling below 1.6x increased from 4% to 20%

Probability of Gross Debt Coverage falling below 1.6x

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

2019 2016

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Takeaways
 Evolving Financial Risk Profile

• Expenditures are the largest drivers of future capacity

uncertainties

• Increased risk of reaching financial capacity limits.

• Legal Debt Capacity is no longer the only likely capacity constraint
• Higher costs and more projected borrowing create pressure on coverage ratios.

• Likely higher interest cost, due to increased probability of lower

financial capacity and debt coverage ratios.

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Financial Risk Management Considerations
• Scope discipline remains an imperative

• Contain operating cost growth to ensure program

affordability

• Continuously evaluate assumptions and manage risk

• Closely monitor all three capacity measures and

triggers for potential program adjustments

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Thank you.

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