TEXT-S&P affirms Newfoundland and Labrador at 'A+/A-1+'

Tue Nov 20, 2012 2:58pm EST

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Overview
     -- The Province of Newfoundland and Labrador continues to have a strong 
economy and strong financial management, in our view.
     -- We are affirming our 'A+/A-1+' long- and short-term issuer credit 
ratings on Newfoundland and Labrador.
     -- We are also affirming our 'A+/A-1+' senior unsecured debt and 
short-term issuer credit ratings on Newfoundland and Labrador Hydro, both of 
which are based on the province's guarantee.
     -- The stable outlook reflects our view that Newfoundland's economy will 
continue to have elevated capital investment-related major resource 
developments during our two-year rating horizon.

Rating Action
On Nov. 20, 2012, Standard & Poor's Ratings Services affirmed its 'A+' 
long-term and 'A-1+' short-term issuer credit ratings on the Province of 
Newfoundland and Labrador. At the same time, we affirmed our 'A+' senior 
unsecured debt and 'A-1+' short-term issuer credit ratings on Newfoundland and 
Labrador Hydro, both of which are based on the province's guarantee. The 
outlook is stable.

Rationale
The ratings on the Province of Newfoundland and Labrador reflect Standard & 
Poor's view of the province's strong economy, positive financial management, 
low debt burden, and very positive liquidity. Its moderating budgetary 
performance and risks related to the Lower Churchill hydroelectric project 
constrain the ratings, in our view.

Newfoundland's vibrant resource-based economy supports our assessment of the 
ratings. Its large and active offshore oil and mining sectors contribute 
strongly to its high wealth, with nominal GDP per capita of approximately 
C$50,000 (by our estimate). The province's resource industries, especially 
offshore oil, also pay large extraction royalties that have given it strong 
internal financing capacity to pay down debt, improve tax competitiveness and 
make strategic capital investments.

However, Newfoundland's resource production represents slightly over 40% of 
GDP, leaving economic output subject to commodity price volatility and 
individual project operating risks. Provincial revenues are also sensitive to 
changes in resource production values, with royalties accounting for an 
estimated 40% of the province's adjusted operating revenues in fiscal 2012.

Nevertheless, under our base case scenario, we expect Newfoundland's economy 
to benefit from sustained high capital investment in the next two years, 
largely thanks to construction of the Hebron offshore oil project and Lower 
Churchill. We expect these to generate further steady improvement in 
employment that will support provincial taxation revenues.  

Newfoundland's positive financial management under our criteria also supports 
the ratings. In our view, the province possesses several attributes that 
mitigate the potential downside effect of its high fiscal dependence on 
resource royalties. Chief among them are its accumulation of large cash 
balances, which are available as a potential fiscal stabilizer. The province 
has also chosen to allocate past operating surpluses primarily to 
non-recurring capital investments, as opposed to base budget increases. We 
expect its conservative management practices to continue in the next two years.

The province also has the third lowest debt burden among Canadian provinces. 
We estimate its tax-supported debt at about 75% of operating revenues in 
fiscal 2012 (year ended March 31), down from 180% in fiscal 2005. It has not 
issued debt in five years. However, we expect it to return to the debt markets 
in the next several years, although the timing and magnitude of its borrowing 
will depend on its cash flow generation, preferred minimum cash balances, and 
Lower Churchill's financing strategy. 

We consider Newfoundland's moderating budgetary performance due to the end of 
1985 Atlantic Accord payments and lower royalties to be a ratings constraint. 
Under our base case scenario, we expect the province's operating surplus to 
average approximately 4% of adjusted operating revenues from fiscal years 
2013-2015, compared with an estimated average of 15% from fiscal 2010-2012. We 
also expect its after-capital account balance to swing to deficit, averaging 
approximately 8% of adjusted total revenues. 

Newfoundland's potential funding requirements and contingent liabilities 
related to Lower Churchill also constrains the ratings. Although the decision 
to proceed with the project bodes well for the economy, it could expose the 
province to substantial construction risk and borrowing requirements in the 
next several years. We understand the province and its energy subsidiary, 
Nalcor Energy, will fund C$6.2 billion of the project's estimated construction 
costs, while Emera Inc. will fund C$1.2 billion. We also understand the 
project's financing strategy is not finalized, nor is the planned funding 
contribution, although the federal government has agreed to provide some form 
of loan guarantee.

Outlook
The stable outlook reflects our view that Newfoundland's economy will continue 
to have elevated capital investment related major resource developments during 
our two-year rating horizon, supporting employment and provincial tax 
revenues. Under our base case scenario, we assume the province will need to 
make significant capital expenditures and investments that will lead to 
moderate after-capital deficits in the next two years. We expect this, along 
with the province's reduced internal financing capacity due to smaller 
operating surpluses, to require the province to draw on its liquidity and 
potentially issue new debt. However, we expect Newfoundland to keep free cash 
and liquid investments above 80% of the next 12 months' debt service, and 
tax-supported debt below 120% of operating revenues in the next two years.

We would raise the ratings if, all else being equal, we foresaw a material 
reduction in potential contingent liabilities, which we do not expect until 
after Lower Churchill's transition to operation, coupled with significantly 
reduced pension deficiencies and stronger-than-expected budgetary results. 
Conversely, we could lower the ratings if we came to expect sustained 
deterioration in economic prospects or liquidity, or significantly increased 
contingent liabilities associated with Lower Churchill. Currently, we have no 
visibility of such developments in either direction.

Related Criteria And Research
Methodology For Rating International Local And Regional Governments, Sept. 20, 
2010

Ratings List
Ratings Affirmed

Newfoundland and Labrador (Province of)
 Issuer Credit Rating                   A+/Stable/A-1+     
 Senior Unsecured                       AA-                
 Senior Unsecured                       A+                 
 Commercial Paper
  Global scale                          A-1+               
  National scale                        A-1(HIGH)          

Newfoundland and Labrador Hydro
 Senior Unsecured                       A+                 
 Commercial Paper
  Global scale                          A-1+          
  National scale                        A-1(HIGH)               


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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