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One of the bond-rating agencies has downgraded the provincial government’s credit rating.

Moody’s announced Wednesday that Newfoundland and Labrador’s ratings have dropped from Aa3 with a negative outlook to A1 with a stable outlook. The agency says the downgrade reflects the province’s “elevated debt and interest burdens” and the expectation of deficits for the next two years.

Nalcor and the province’s rate-mitigation plan for the Muskrat Falls project also came in for criticism in Moody’s report.

“The downgrade also reflects heightened credit risk stemming from the large debt level and weak financial metrics of Nalcor, the province’s wholly owned utility, which raises the likelihood the province will need to provide financial support to, or assume debt service from, Nalcor,” the Moody’s news release said.

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“Moody’s expects that the province’s debt burden, expressed as net direct and indirect debt as a share of revenue, will continue to rise in the near-term, peaking at 257% of revenue in 2021 before stabilising around 250% by 2022, up from the expected 227% as of March 31, 2019. This level is elevated among Canadian and international peers and is higher than previously forecasted by Moody’s.

“Finally, the A1 rating reflects Moody’s revised assessment of the risk stemming from Nalcor, which accounts for over one-third of the province’s total direct and indirect debt but which Moody’s currently excludes from the province’s net direct and indirect debt measure. Moody’s notes that the financial health of Nalcor is weak following the construction of the CAD12.7 billion Muskrat Falls hydroelectric dam project and will remain weak over the medium-term due to a forecast of low revenue growth.

“In addition to the possibility that the province may have to inject equity into Nalcor or assume some debt to restore its financial metrics, Moody’s also takes into consideration that rate mitigation efforts, proposed by the province to ensure hydro rates remain relatively affordable despite the high cost of Muskrat Falls, may require direct provincial support. Moody’s notes that the province has a detailed plan that could result in rate mitigation without provincial intervention; however, this plan fails to alleviate Moody’s concerns over Nalcor’s financial health nor impact on the economy as these measures are not yet implemented nor have they been proven to be sufficient. Should rate mitigation efforts not succeed, either the province would have to offer support to Nalcor or electricity rates would need to rise which would hinder economic activity across the province. Both of these outcomes would be credit negative.”

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