Morningstar DBRS Confirms the Province of Newfoundland and Labrador at "A" and R-1 (low), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Province of Newfoundland and Labrador's (Newfoundland or the Province) Issuer Rating and Long-Term Debt rating at "A" and Short-Term Debt rating at R-1 (low). Concurrently, Morningstar DBRS confirmed Newfoundland and Labrador Hydro's Guaranteed Long-Term Debt and Short-Term Debt ratings at "A" and R-1 (low), respectively. The trends on all credit ratings are Stable.

CREDIT RATING RATIONALE
Newfoundland, like other provinces, has seen some slippage in its near-term fiscal outlook. For 2024-25, the Province forecasts a deficit of $151.9 million. Over the medium term, the Province anticipates returning to balance in 2025-26, one year later than planned, and maintaining small surpluses through 2028-29. On a Morningstar DBRS-adjusted basis, after making adjustments to recognize capital spending as incurred, this equates to a shortfall of $581.7 million in 2024-25, or 1.4% of GDP, followed by modest adjusted deficits of less than 1.0% of GDP through 2028-29.

Newfoundland's debt outlook has deteriorated relative to Morningstar DBRS' prior expectations due to a combination of weaker fiscal performance, a large capital plan, and sizable contraction in nominal GDP in 2023. On an adjusted basis, Morningstar DBRS anticipates the debt-to-GDP ratio to rise to 62.1% in 2024-25 and 62.7% in 2025-26, before gradually declining toward 57.0% by 2028-29. Morningstar DBRS previously expected adjusted debt-to-GDP to stabilize at around 53.0% over the medium term.

Following two consecutive years of economic contraction, the Province anticipates real GDP growth of 5.1% in 2024 and average annual growth of 5.8% from 2025 through 2028. Expectations of stronger oil, iron ore, and nickel exports support the Province's economic outlook as several major projects reach completion and production increases. However, global economic conditions will continue to influence commodity price volatility and remain a key risk to the outlook.

CREDIT RATING DRIVERS
Morningstar DBRS does not anticipate a positive credit rating action in the near term; this would be dependent on a combination of improvement in multiple critical rating factors and financial risk assessment factors. Conversely, Morningstar DBRS would consider a negative credit rating action if there were a material deterioration in fiscal performance and debt metrics and/or no successful rate mitigation plan.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030

CRITICAL RISK FACTORS (CRF) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of CRF Factors
In the analysis of the Province of Newfoundland and Labrador, the CRFs were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of the Province of Newfoundland and Labrador, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the CRF and the FRA
In the analysis of the Province of Newfoundland and Labrador, the CRF carries greater weight than the FRA.

Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:

Rating Canadian Provincial and Territorial Governments (April 15, 2024)
https://dbrs.morningstar.com/research/431208

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:

-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 info-DBRS@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

These are solicited credit ratings.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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