Rating rationale

The issuer rating reflects a standalone credit quality of BBB and a one-notch uplift. This stems from Scope’s view that the 16 Norwegian municipalities that collectively own Lyse are able and willing to provide support if needed.

The corporate issuer rating reflects Lyse’s credit-supportive business risk profile, backed by a diversified business model with a high share of robust infrastructure segments, such as power distribution, and its dominant position in fibre. Scope also recognises that Lyse’s low-cost hydro portfolio is favourably placed within the merit order system of the Nordpool market. Moreover, Scope regards Lyse’s relatively large reservoir capacity as credit-positive (i.e. nearly one year of production), which enables the company to be flexible and optimise its electricity sales.

Limiting factors for the business risk profile include the low geographical diversification in the fragmented, competitive power-sale business; the high exposure to merchant risks for Lyse’s outright electricity production in the Nordpool market; and the incremental effects that a standstill of Lyse’s largest power generation assets would cause. Going forward, Scope expects Lyse’s business profile to remain robust through a further increase of its fibre services market share, and its profitability in power generation to improve from a rebound of Nordpool wholesale prices.

Regarding the financial risk profile, Scope highlights the utility’s solid debt protection measures and strong liquidity. Despite recent pressures on power prices, Lyse has had relatively robust profitability of above 40%, helped by its business diversification. Internally generated cash flow has also been relatively high through the cycle, and supplementary asset sales have only necessitated a limited amount of new debt, keeping indebtedness – measured by the Scope-adjusted debt/EBITDA – stable between 3-4x.

The financial constraints on the rating are the high adjusted leverage expected for this year, as the investment phase is still ongoing, coupled with lower energy production. From Scope’s perspective, management applies a sound financial policy, which includes an agreed maximum dividend payout ratio from ordinary results, leaving extraordinary income/sales inside the company.

Outlook

The Stable Outlook reflects Scope’s expectations that Lyse will further develop its diversified business model in generation and distribution, as well as in fibre, with current investments weighing to some extent on the utility’s indebtedness. Nevertheless, Scope believes Lyse’s leverage will again decline from 2017, aided by the cash flow from expansion projects, the continued favourable developments in the telecoms business and the stable distribution business. Overall, Scope has incorporated this in its assessment, and recognises that Lyse should be able to fund its investments using its own cash flow over the cycle. This implies that the current rating outlook is supported by the business risk profile in short term, while in the longer term there is potential for additional support from the financial risk profile. The rating outlook also reflects Scope’s perception of an unchanged ownership structure.

A rating upgrade could be warranted if the company deleveraged to a level below 3.0x on a sustainable basis, bolstered by sustainably higher wholesale prices in the Nordpool market or strong cash flow contributions from new investments.

A negative rating action is possible if the company’s financial risk profile was weakened by sustainably depressed wholesale prices, resulting in a leverage of above 4.0x for a prolonged period.

The full rating report, which includes the rating rationale and analytical details, is available HERE.

Regulatory disclosures

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Chief Executive Officer: Torsten Hinrichs, Dr Stefan Bund.
Rating prepared by Henrik Blymke, Lead Analyst . Responsible for approval of the rating Olaf Tölke, Committee Chair.

The rating concerns an entity, which was evaluated for the first time by Scope Ratings AG.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity.
As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of information for the rating
Annual reports/semi-annual reports of the rated entity, Website of the rated entity, Detailed information provided on request, Data provided by external data providers, Interview with the rated entity, External market reports, Press reports/other public information

Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Methodology
The methodology applicable for this rating (Corporate Rating Methodology) is available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.
Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Conditions of use/exclusion of liability
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Rating issued by
Scope Ratings AG, Lennéstraße 5, 10785 Berlin