Oslo (City of) Primary Credit Analyst: Andrea Croner, Stockholm (46) 8-440-5921; [email protected] Secondary Contact: Gabriel Forss, Stockholm (46) 8-440-5933; [email protected]

Table Of Contents Major Rating Factors Rationale Outlook Comparative Analysis Institutional Framework: Strong Government Ties Provide Excellent System Support But Limit Autonomy Economy: Dynamic And Diverse Financial Management: Very Positive, With Commitment To Transparency And Fiscal Discipline Budgetary Flexibility: Revenue Flexibility Constrained By Significant Central Government Control Budgetary Performance: Heavy Investment Program Constrains Balances After Capital Accounts Debt Burden: Increasing Tax-Supported Debt Due To Financing Of Investment Program

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Table Of Contents (cont.) Contingent Liabilities: Limited, As Major Asset Holdings Provide Significant Capital Revenues And Substantial Surplus Values Related Criteria And Research

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Oslo (City of) Major Rating Factors Strengths: • • • •

Very strong system support. Rapidly growing, high-wealth local economy. Substantial revenues and values of corporate assets. Prudent debt management.

Issuer Credit Rating AAA/Stable/--

Weaknesses: • Constraints on balances after capital spending due to investments. • Generally limited revenue flexibility.

Rationale The ratings on the City of Oslo reflect the very close systemic ties to the central government enjoyed by Norwegian local and regional governments (LRGs) and the city's dynamic and rapidly growing local economy and very high income levels. Oslo's sizable surplus values in its company group, and prudent debt management further support the ratings. These strengths are offset by constraints on balances after capital accounts due to a heavy capital-spending program induced by the city's strong population growth. Oslo's relatively limited financial flexibility on the revenue side is also incorporated into the rating. The Norwegian LRG sector benefits from very strong system support. The central government regularly monitors the sector's financial status and distributes revenues through a far-reaching equalization system and extensive grant schemes. Mechanisms to handle financial distress in individual LRGs are well established. Oslo has a very dynamic and diverse local economy. As Norway's capital, the city has a broad representation of general government functions and financial services. Wealth levels are very high, both in a domestic and international context with GDP per capita of Norwegian krone (NOK) 776,322 (about $128,400). In 2012, Oslo reported a sound operating balance of 5.8% of operating revenues, compared with 4.6% in 2011. This was mainly due to higher operating revenue growth. High levels of investment in 2012 led to a deficit after capital accounts of 3.8% of total revenues. For the 2013-2015 planning period, we forecast operating balances at 5.2% of operating revenues. At the same time, we expect investments to average a substantial 12% of total expenditures, leading to a deficit after capital accounts of 6.6%. At year-end 2012, Oslo's tax-supported debt ratio stood at 55% of consolidated operating revenues. Over the next few years, we expect increasing municipal investments and consequently forecast additional net new borrowings from the city treasury. Accordingly, we expect Oslo's tax-supported debt to increase to 71% of consolidated operating revenues over the 2013-2015 planning period.

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While Oslo's regulatory ties to the Norwegian government create budgetary stability and predictability, they limit the city's financial flexibility. On the operating-revenue side, central government revenue distribution schemes effectively determine Oslo's revenues. In addition, fees are constrained by central-government regulations. Oslo finds budgetary flexibility primarily on the spending side as the city currently performs public services above the requirements mandated by the central government and in theory has possibilities to scale down operating expenses.

Liquidity We consider Oslo's liquidity position to be "positive". In May 2013, the city's liquidity covered 85% of debt maturing over the next 12 months. Prudent debt management ensures that all funding is carried out through fixed-rate long-term bonds, which give the city a very predictable maturity profile. The city normally holds a cash balance of NOK1.5 billion with an additional NOK2 billion in unused committed credit facilities to cover its short-term liquidity needs. Moreover, we acknowledge Oslo's strong and reliable capital market access in assessing the city's overall liquidity position.

Outlook The stable outlook reflects our expectations that Oslo's heavy investment program will continue to lead to an increase in the city's tax-supported debt to 71% of operating revenues by year-end 2015. We also expect Oslo's debt and liquidity management to remain prudent and risk-averse in handling refinancing risks. If Oslo pursues a less prudent debt-management strategy, and materially increases its refinancing risk to the extent we would no longer view its liquidity position as a positive rating factor, it could have a negative impact on the rating. However, we do not see this as likely over the next two years.

Comparative Analysis In terms of economic indicators, Oslo compares favorably with its peers. Wealth levels as measured by GDP per capita are comparably strong. In addition, the city has very robust population growth while keeping unemployment at a low 3.2%, a rate which compares favorably with that of its international peers. With regard to budgetary performance, Oslo's operating margins are comparable with those of the City of Stockholm, but weaker than the average of other peers, largely because of different spending structures. Oslo's currently very large investment needs push the city's balance after capital spending to the lower end of its peer group. As a consequence of this very extensive capital spending, we expect Oslo's tax-supported debt to increase over the next few years. Oslo's revenues are not modifiable at the city's discretion to the same extent as those of its peers. In comparison with the City of Stockholm, Oslo has significantly less fiscal flexibility due to Swedish local governments' autonomy in setting local income tax rates which amplifies their modifiable revenues. However, to some extent this is counterbalanced by substantial budgetary stability that we associate with the Norwegian central government's control of the financing of public services within the country's LRG sector. We view the overall supportiveness of Norway's LRG framework as very strong. Unlike some of its peers, Oslo has sizable asset holdings that contribute significant yearly capital revenues and hold

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substantial surplus values. These constitute a buffer against debt accumulation. Table 1

Oslo (City of) -- 2012 Peer Comparison Oslo (City of)

Aargau (Canton of)

Lund (Municipality of)

Saxony (State of)

Stockholm (City of)

Zurich (Canton of)

Issuer Credit Rating on June 14, 2013.

AAA/Stable/--

AAA/Stable/A-1+

AAA/Stable/A-1+

AAA/Stable/A-1+

AAA/Stable/A-1+

AAA/Stable/--

National Scale Rating on June 14, 2013.

--/--/--

--/--/--

--/--/K-1

--/--/--

--/--/K-1

--/--/--

--Five-year averages (two years of actual data, current budget, and two years of Standard & Poor's forecast)-Operating balance (% of adjusted operating revenues) Balance after capital accounts (% of adjusted total revenues)

5.24 [2011-2015]

6.29 [2011-2015]

4.81 [2010-2014]

14.97 [2011-2015]

3.25 [2010-2014]

4.93 [2011-2015]

(4.91)[2011-2015]

0.63 [2011-2015]

(6.1)[2010-2014]

6.82 [2011-2015]

(3.04)[2010-2014]

(3.72)[2011-2015]

--Year ended Dec. 31, 2012-Total adjusted revenues

7,324.0

3,097.4

683.0*

16,549.2

5,106.3*

9,837.1

Transfers received (% of total adjusted revenues)

42.7

33.1

7.3*

30.8

3.5*

25.2

Capital expenditures (% of total adjusted expenditures)

11.9

7.3

13.0*

17.2

8.2*

5.8

Direct debt (% of adjusted operating revenues)

53.0

36.7

31.7*

56.1

28.8*

27.8

Tax-supported debt (% of consolidated operating revenues)

55.0

36.7

30.5*

64.6

23.2*

27.9

Net financial liabilities (% of consolidated operating revenues)

77.1

44.4

68.1*

138.9

58.9*

32.5

6.1

8.5

1.4*

12.5

14.5*

2.4

626,913

614,000*

112,950.0

4,149,480§

881,235.0

N.A.

3.2

N.A.

4.0

N.A.

5.2

N.A.

Debt service (% of operating revenues) Population Unemployment rate (%)

*Figures for 2011. §Figures for 2010. N.A.--Not available. N/A--Not applicable.

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Institutional Framework: Strong Government Ties Provide Excellent System Support But Limit Autonomy Norway's LRG sector is closely tied to the national government. Importantly, it is the central government that decides on tax collection, and, with extensive grant schemes, redistributes income through a comprehensive equalization scheme. The Norwegian equalization system provides for strong equalization on the revenues side and limits Oslo's ability to benefit from favorable economic conditions. Oslo's contribution to the equalization scheme was NOK3.7 billion in 2012. In addition, extensive control mechanisms are built into the system and include state supervision of LRG budgets and medium-term financial plans. In the event that an LRG fails to adopt and follow a balanced budget or financial plan, it is put on the Register for State Review and Approval of Financial Obligations, and its borrowing is subject to approval by the state. As of 2012, municipalities have an extended legal responsibility for preventive healthcare. In addition, they now cofinance a large part of treatments provided by hospitals. Municipalities will incur a fee if a patient needs to stay in hospital due to a lack of municipal services. In 2013, Oslo will receive up to NOK710 million in grants to finance the cost of the reform. However, the expected costs are based on historical figures, so it is still uncertain if they will be fully financed in 2013.

Economy: Dynamic And Diverse Oslo benefits from a dynamic and diverse local economy and has a very large services sector. The labor market has a good mix of private and public sector employers. Oslo's GDP per capita stood at a very high NOK776,322 in 2010. The city's GDP per capita is the highest in Norway and almost twice the national average, excluding Norwegian oil and gas production. At year-end 2012, Oslo had 626,913 inhabitants. The city has had very high population growth figures in recent years, due to an increase in both the birth rate and net inward migration. In 2012, Oslo's population grew by 2.2%. Oslo expects this strong population growth to continue over the medium term, averaging 2.1% through 2015. Even so, the city's labor market has been able to absorb the growth thanks to low unemployment, currently running at 3.2%.

Financial Management: Very Positive, With Commitment To Transparency And Fiscal Discipline Since local elections in September 2011, Oslo has been governed by a coalition of the Conservative Party, the Christian Democratic Party, and the Liberal Party. We observe good cooperation and expect the coalition's current policies to continue. In addition, continuity within Oslo's administration and management team adds further stability to the governance of the city. We have a very positive view of Oslo's financial management and regard it as prudent and sophisticated. The city's

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budgeting procedures conform to national standards and show a high degree of transparency. Budgets reflect goals defined in a long-term financial plan and are based on realistic assumptions. Specifically, Oslo's financial management demonstrates a high degree of expertise, with very good planning and monitoring capacities, well-defined debt and liquidity management, and active external risk management. Oslo's rising indebtedness has been subject to political debate. We observe that the ruling coalition is investigating possible alternatives to limit the debt financing of upcoming investments, such as spending reductions and asset sales. Oslo has significant asset holdings, which, in addition to providing good dividends, constitute a buffer that would generate significant revenues if sold. In 2012, Oslo's two utilities paid out dividends of NOK1.0 billion, which limited the city's overall borrowing needs for 2012.

Budgetary Flexibility: Revenue Flexibility Constrained By Significant Central Government Control Oslo's operating revenue flexibility is limited, because the central government in effect sets taxes and transfers. In addition, central-government regulations constrain flexibility in fees and charges. Oslo's sizable asset holdings could be sold, which gives the city flexibility to raise capital revenues. In addition, the city does not currently use its ability to levy property tax, which would boost revenues if implemented. Oslo projects that the introduction of property tax could generate at least NOK1.5 billion annually. However, these options are not on the current government's agenda and are therefore unlikely to be implemented over the short term.

Spending difficult to rationalize without impairing service levels Operating expenditures constituted 88% of Oslo's total expenditures in 2012. The public services Oslo provides are subject to national standards and legal requirements. Consequently, leeway to cut operating spending is constrained. In terms of provision of some compulsory services, Oslo is above the minimum national standard, which in theory provides for some degree of flexibility in operating costs. However, in practice, reducing the quality of services could prove politically sensitive. In terms of expenditure flexibility, the most obvious leeway can be found in capital expenditure, which accounted for 12% of total expenditures in 2012. However, because a large proportion relates to important infrastructure or already committed projects, we consider Oslo's willingness to substantially reduce capital spending as limited, at least in the short term.

Budgetary Performance: Heavy Investment Program Constrains Balances After Capital Accounts Oslo closed 2012 with a sound operating margin of 5.8% of operating revenues, compared with 4.6% in 2011. This was mainly due to higher operating revenue growth. Oslo's high investment levels resulted in a deficit after capital accounts of 3.8% of total revenues in 2012. For the 2013-2015 planning period, we forecast Oslo's investments will average NOK7.6 billion yearly, leading to a

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deficit after capital accounts. The forecast investments will translate into net new borrowing of about NOK3.9 billion annually over the next three years.

Debt Burden: Increasing Tax-Supported Debt Due To Financing Of Investment Program At year-end 2012, Oslo's debt stood at more than NOK27.0 billion, of which NOK5.0 billion was subject to onlending from state bank Husbanken in the form of mortgage loans to individuals. Even though this onlending represents a type of social policy, the city has not suffered any resulting losses over the past few years. For this reason, debt incurred to meet the needs of the city and its agencies accounted for the remainder. In addition, Oslo has entered a pilot public-private partnership to construct three schools. Related outstanding finance lease funding stood at NOK612 million at year-end 2012 and is reported as debt in the city's accounts. Increasing municipal investments will require additional net new borrowings from the city treasury in 2013-2015. Most of these are investments in municipal facilities and infrastructure. Accordingly, we expect the city's tax-supported debt to increase to 71% of consolidated operating revenues by year-end 2015, compared with 55% in 2012.

Contingent Liabilities: Limited, As Major Asset Holdings Provide Significant Capital Revenues And Substantial Surplus Values Oslo has stakes in a number of limited liability companies. These companies generate substantial dividend revenues and constitute a pool of reserves, which, if divested, would generate significant capital revenues. Oslo's corporate holdings are generally in very good financial health, and all but three public transport companies, Ruter, Kollektivtransportproduksjon, and Oslo Vognselskap, are self-supporting. The most prominent companies in Oslo's corporate holdings are utility companies E-Co Energi and Hafslund, which also generate the bulk of dividends provided by the city's companies. Oslo's 100% shareholding in E-Co Energi (one of Norway's leading hydropower groups) together with the city's 53.7% share in Hafslund, one of the major electricity utilities in the Nordic region, would generate significant revenues if sold. We estimate that Oslo's utility shareholdings alone would generate about NOK30 billion in capital revenues if divested. Divesting some of its corporate holdings would reduce the city's borrowing needs, but is currently not on the political agenda, as the city values the dividend stream from its companies. E-Co Energi is Norway's second-largest producer of renewable energy and demand for Norwegian hydropower is high. High availability at its power plants helped the company achieve a robust financial performance in 2012. Moreover, E-Co Energi will pay NOK750 million in dividends to Oslo, underscoring the substantial financial contribution the company makes to the city. Hafslund is Norway's largest distribution network owner and power provider, and a significant producer of renewable energy. Good cash flow and products that have stable demand throughout the economic cycle provide sound

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commercial and financial operations. Hafslund contributes positively to Oslo's finances with yearly dividends of about NOK250 million. Table 2

Oslo (City of)--Economic Statistics --Year ended Dec. 31-2015bc 2014bc 2013bc Population

2012a

2011a

665,537 653,017 640,138 626,913 613,285

Population growth (%)

1.9

2.0

2.1

Unemployment rate (%)

2.2

2.4

3.2

3.3

GDP (nominal) per capita

805,143

bc--Base case. a --Actual.

Table 3

Oslo (City of)--Financial Statistics --Year ended Dec. 31-(Mil. NOK)

2015bc

2013bc

2012a

2011a

Operating revenues

60,498.0 59,279.0 57,835.0

N.A.

N.A.

Operating expenditures

57,350.0 56,206.0 54,753.0 52,890.0 48,602.0

Operating balance

3,148.0

3,073.0

3,082.0

3,281.0

2,360.0

600.0

600.0

600.0

1,665.0

3,181.0

7,329.0

8,090.0

7,477.0

7,147.0

6,081.0

Capital revenues Capital expenditures (capex) Balance after capital accounts (% of adj. total revenues) Debt repaid

2014bc

(5.9)

(7.4)

(6.5)

(3.8)

(1.0)

2,000.0

1,500.0

1,000.0

1,329.0

1,000.0

(9.1)

(9.9)

(8.2)

(6.1)

(2.8)

Balance after debt repayment and onlending (% of adj. total revenues) Balance after borrowings (% of adj. total revenues)

0.0

0.0

0.0

0.1

0.3

Direct debt (% of adjusted operating revenues)

68.7

64.1

58.1

53.0

54.0

Tax-supported debt (% of consolidated operating revenues)

70.8

66.3

60.7

55.0

56.3

Interest (% of adjusted operating revenues)

4.1

3.7

3.7

3.8

4.8

Debt service (% of adjusted operating revenues)

7.4

6.3

5.5

6.1

6.8

Debt-service coverage ratio (%)

1.3

1.4

1.7

1.6

1.4

bc--Base case. a --Actual. N.A.-Not available.

Table 4

Summary Of Published Rating Factor Scores Institutional framework

Predictable and supportive

Financial management

Very positive

Liquidity

Positive

Indicative credit level

AAA

Overriding factors

Not applied

Standard & Poor's assigns scores across eight main rating factors, of which we publish three.

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Related Criteria And Research Methodology For Rating International Local And Regional Governments, Sept. 20, 2010 Ratings Detail (As Of June 14, 2013) Oslo (City of) Issuer Credit Rating

AAA/Stable/--

Senior Unsecured

AAA

Issuer Credit Ratings History 24-Sep-2007

AAA/Stable/--

03-Oct-2006

AA+/Positive/--

14-Mar-1995

AA+/Stable/--

Default History None Population

626,913 (2012, Statistics Norway)

Per Capita GDP

NOK776,322 ($128,368) (2010)

Current Government Coalition of the Conservative Party, the Christian Democratic Party, and the Liberal Party. Election Schedule Elections were held in September 2011. The next elections are scheduled for September 2015. *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 & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country.

Additional Contact: International Public Finance Ratings Europe; [email protected]

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