The Province gets an “A”. Finance Minister gets a “C” (Part 1)

The Dominion
Bond Rating Service (DBRS) released its economic outlook for the Province of
Newfoundland and Labrador on August 10, 2012. 
A few days later, on August 13th, the Finance Minister
released a Statement informing us that DBRS had confirmed the Province’s ‘‘A’’
credit rating.    

Report had placed the Minister in a jovial mood. 
Likely, he was not surprised about our credit rating being maintained.  What had made him so pleased?  The Report contained a few nuggets about Muskrat Falls he wanted to share.

DBRS is an
important and objective international financial house engaged in the business
of rating the bonds of governments and corporations. 

Banks and their
clients use this information to assess creditworthiness; investors parse every
phrase used by such firms; their words cause interest rates to rise and
fall.  For governments and for large
corporations, a change of credit status may represent millions of dollars of
cost, or of savings.      

It is
important to note that any downgrade is seldom made in the absence of prior
expressions of guidance, subtle hints or outright warnings.

like DBRS are, therefore, important.  No
one knows that better than a Minister of Finance.

the rating confirmation, the Minister added:

“In discussing Muskrat Falls, the DBRS Report
notes that the long-term benefits of the project are substantial and it should
be of economic benefit to the province especially as it relates to diversifying
the economy”.    

The Minister
took to “Open Line” Shows and other media. The DBRS comment on Muskrat was promoted
as a message of support for the government.

The Minister
might have thought that the DBRS Report would put some steel into the spines of
doubters of the project.  We were
supposed to have been impressed. 

Reports like
this one are not as challenging to understand as a missive, say, from the
Governor of the Bank of Canada.  BOC
Statements require the reader to parse every phrase, consider every syllable and
look for conclusions as obscure as a smoke signal.   

DBRS economic verbiage, crafted, as it is, with
caveats and qualifiers, the intended message is loud
and clear.

For example:

Page 2, quote: Uncertainty
remains with regard to the Province’s plan to develop the hydro potential of
the Lower Churchill River. Depending on the financing structure used and the
level of recourse to provincial taxpayers, the rating could be materially
affected, especially in the case of significant cost overruns. 

Page 6, (as if
DBRS needed to reinforce the page 2 comment), quote:  …the financing of the Lower Churchill Project
continues to weigh on the financial outlook (of the Province). Depending on the
financial structure selected and the extent of any potential cost overruns, the
financing of the project may result in debt needs that could have a negative
impact on the rating. .

Page 7, quote: The
$6.2 billion Lower Churchill project will soon begin to have an economic
impact…In spite of any potential pressure that debt incurred to finance the
project could have on the rating, the development should be of economic

(Note: the reference is to a $6.2 billion project not the
figure a former Minister of Natural Resources confirms may have hit $8.5
billion.  Now, re-read the page 2 excerpt,
 with reference to “cost overruns”.) 

The former
Minister of Natural Resources, Sean Skinner, stated “…8.0 to $8.5 billion” figure
recently on CBC’s On-Point Show.  Mr.
Skinner, though defeated in the last election, still enjoys the ear of the
Government and, as one of CBC’s expert analysts, uses that news segment to
float the government’s latest ‘trial balloon’.

At $8.5
billion and construction barely underway (though not officially sanctioned),
DBRS has inscribed a concern many critics of the Project have been voicing: cost
overruns are a serious issue for taxpayers and for the Provincial treasury
including our credit rating.    

DBRS is well
aware of the current pressures on our over-heated economy and aware too of the
fact that full employment already exists, in the Province, for most trades
suited to Muskrat Falls.  Likely, DBRS is
also familiar with more than one mega project that did not come in on budget.

Hence, I
will repeat a point made earlier: any downgrade in a credit rating is seldom
made in the absence of prior expressions of guidance, subtle hints or outright

Finance Ministers
are normally careful about their words, knowing that misleading language is
frowned upon in prudent economic circles. 
Everyone understands that he is a partisan; but, he is the one Minister
who is expected to engage in less rhetorical flourish than any of his
colleagues; he is also expected tell them and the Premier when they are being

Yet, when even
the Minister of Finance feels it is necessary to engage in subterfuge to defend
a risk laden and unnecessary $8.5 billion hydro project, for which only the
Newfoundland taxpayers are on the hook, it is well to recall a popular warning:
“Houston, we have a problem”.

More on the
DBRS Report next week.
Des Sullivan
Des Sullivan
St. John's, Newfoundland and Labrador, Canada Uncle Gnarley is hosted by Des Sullivan, of St. John's. He is a businessman engaged over three decades in real estate management and development companies and in retail. He is currently a Director of Dorset Investments Limited and Donovan Holdings Limited. During his early career he served as Executive Assistant to Premier's Frank D. Moores (1975-1979) and Brian Peckford (1979-1985). He also served as a Part-Time Board Member on the Canada-Newfoundland Labrador Offshore Petroleum Board (C-NLOPB). Uncle Gnarley appears on the masthead representing serious and unambiguous positions on NL politics and public policy. Uncle Gnarley is a fiscal conservative possessing distinctly liberal values and a non-partisan persusasion. Those values and opinions underlie this writer's views on NL's politics, economy and society. Uncle Gnarley publishes Monday mornings and more often when events warrant.


Bill left public life shortly after the signing of the Atlantic Accord and became a member of the Court of Appeal until his retirement in 2003. During his time on the court he was involved in a number of successful appeals which overturned wrongful convictions, for which he was recognized by Innocence Canada. Bill had a special place in his heart for the underdog.

Churchill Falls Explainer (Coles Notes version)

If CFLCo is required to maximize its profit, then CFLCo should sell its electricity to the highest bidder(s) on the most advantageous terms available.


This is the most important set of negotiations we have engaged in since the Atlantic Accord and Hibernia. Despite being a small jurisdiction we proved to be smart and nimble enough to negotiate good deals on both. They have stood the test of time and have resulted in billions of dollars in royalties and created an industry which represents over a quarter of our economy. Will we prove to be smart and nimble enough to do the same with the Upper Churchill?