DBRS Limited (DBRS Morningstar) changed the trends on the Province of Newfoundland and Labrador’s (Newfoundland or the Province) Issuer Rating and Long-Term Debt rating to Positive from Stable and changed the trend on the Guaranteed Long-Term Debt of Newfoundland and Labrador Hydro to Positive from Stable. DBRS Morningstar also confirmed the Province’s Issuer Rating and Long-Term Debt rating at A (low) and confirmed its Short-Term Debt rating at R-1 (low). Concurrently, DBRS Morningstar confirmed Newfoundland and Labrador Hydro’s Guaranteed Long-Term Debt and Guaranteed Short-Term Debt ratings at A (low) and R-1 (low), respectively. The trends on both short-term ratings remain Stable.
At the time of DBRS Morningstar’s last review in August 2022, DBRS Morningstar indicated that a positive rating action would depend on a combination of (1) the conclusion of the Muskrat Falls agreement in principle and confidence that project costs will be fully recouped through the rate base, (2) continued fiscal improvement, and/or (3) the debt-to-GDP ratio returning to pre-Coronavirus Disease (COVID-19) pandemic levels. While DBRS Morningstar awaits confirmation that the Muskrat Falls project is fully operational and a final rate mitigation plan is complete, Newfoundland’s 2023 budget (Budget 2023), released on March 23, 2023, appears likely to deliver on the latter two conditions and supports the Positive trend. Newfoundland's fiscal performance continues to improve with a return to balance now anticipated two years earlier than planned, and a debt-to-GDP ratio that is returning to pre-pandemic levels.
After posting an anticipated surplus of $784 million in 2022–23, Newfoundland forecasts a budget deficit of $160 million in 2023–24. On a DBRS Morningstar-adjusted basis, this equates to a shortfall of $527 million, or 1.3% of GDP, after making adjustments to recognize capital spending as incurred. Over the medium term, the Province anticipates returning to balance in 2024–25, which is two years earlier than planned, and maintaining small surpluses through 2027–28. This equates to DBRS Morningstar-adjusted deficits of less than 1.0% through 2027–28.
The Province’s fiscal outlook remains subject to execution risk. The Province remains vulnerable to further delays associated with the Muskrat Falls project and to commodity price shocks that could negatively affect public finances. The Province has assumed a Brent oil price of USD 86 per barrel in 2023–24, with a USD 1 per barrel change in prices estimated to affect revenue by $16 million. This assumption appears optimistic in relation to current prices, and a prolonged decline from current levels could pose a challenge.
Generally stronger prices for Newfoundland's key commodities have contributed to better fiscal performance and higher nominal GDP. As a result, the Province estimates net debt-to-GDP will be 37.3% at March 31, 2023, down from a peak of 49.7% in 2020–21. For 2023–24, net debt-to-GDP is expected to increase to 39.9% as nominal GDP declines on weaker commodity prices. On an adjusted basis, DBRS Morningstar estimates debt-to-GDP to have fallen to 50.9% in 2022–23, from a high of 65.3% in 2020–21. DBRS Morningstar expects the adjusted debt-to-GDP ratio to stabilize around 50.0% or below through 2027–28.
Unlike the rest of Canada, real GDP growth is expected to improve in 2023 primarily because of increased mineral production and higher capital investment as the West White Rose project ramps up and the Voisey's Bay Mine Expansion continues. The Province anticipates real GDP growth of 2.8% in 2023; however, nominal GDP growth is expected to turn negative as commodity prices soften. Additionally, heightened near-term macroeconomic risks raise the prospect of a greater-than-anticipated decline in prices for Newfoundland’s key commodities which could stall, or potentially reverse, improvement in its fiscal and debt outlook.
Confirmation that the Muskrat Falls project is fully operational and a final rate mitigation plan is complete, along with continued fiscal improvement and declining debt-to-GDP, is likely to result in a one-notch upgrade for the long-term ratings. Conversely, a material deterioration in fiscal performance and debt metrics and/or absence of a final rate mitigation plan and substantial completion of Muskrat Falls may result in the trends returning to Stable. Given the Positive trend, DBRS Morningstar does not anticipate downward pressure on the ratings in the near term, but a downgrade could result from a major and sustained deterioration in fiscal or economic performance.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies applicable to the ratings are Rating Canadian Provincial and Territorial Governments (June 1, 2022; https://www.dbrsmorningstar.com/research/397817) and DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694).
The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at firstname.lastname@example.org.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at email@example.com.
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577