The issuer rating reflects a standalone credit quality of BBB and a one-notch uplift based on Scope’s view that the unified majority owner (30 Norwegian municipalities in the Agder region) is very supportive and has the ability and willingness to provide support if needed.

Rating rationale

The corporate issuer rating reflects Scope’s view of Agder Energi as a vertically integrated utility with a meaningful share of a robust infrastructure segment, power distribution. Coupled with its low-cost hydro-power portfolio assets and the company’s substantial hedging of anticipated production for the next three years, Scope recognises the measures taken by the company to reduce underlying volatility. Moreover, Agder Energi’s business risk is also supported by the leading market share of LOS, its brand in the retail segment, which is mainly described as a low-margin business with a low-risk sales procurement strategy (back to back). Limiting factors for the business risk profile include low geographical diversification and a competitive environment for its retail activities and contracting services in Otera, with the latter also being loss-making.

Agder Energi’s financial risk profile is supported by stable operating cash flow that has consistently been well above capex each year. Strong debt protection ratios, measured by interest coverage that is well above 8x, and relatively stable indebtedness, measured by Scope-adjusted debt/EBITDA in a range between 3-4x, are important factors for Scope’s assessment of the company’s financial risk. Currently, Scope’s constraints on the financial risk profile of Agder Energi relate to a relatively high dividend payout historically coupled with sizeable investment needs, which has put free cash flow after dividends in negative territory. Still, liquidity has been more than sufficient thanks in part to the company’s good access to bank debt and debt capital markets.

Outlook

The Stable Outlook reflects Scope’s expectation that Agder Energi will continue its vertically integrated business strategy within the key segments of generation, distribution and retail sales. It also reflects Scope’s view that Agder Energi should be able to fund its investments using its own internally generated cash flow over the cycle, coupled with the continued ambition of its management and owners to have a strong financial credit profile. Scope therefore anticipates that key credit metrics will stay relatively unchanged in the medium term, based on Scope’s forecast and key assumption for market developments. The rating outlook also reflects Scope’s assumption of continued majority ownership by the municipalities.

A rating upgrade could be warranted if Agder Energi deleveraged to a level below 3.0x on a sustained basis, bolstered by lower investment needs and dividend payouts, for instance. Negative rating action is possible if the company were to participate in a debt-financed structural transaction that substantially weakens its credit profile on a sustained basis, with Scope-adjusted debt/EBITDA of well above 4x and/or negative free cash flow/Scope-adjusted debt for a prolonged period.

The full rating report, including rating rationale, analytical details, and regulatory disclosures, is available at www.scoperatings.com or 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. The issuer has participated in the rating process.

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
© 2017 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings AG, Scope Analysis GmbH, Scope Investor Services GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope cannot, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided “as is” without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or otherwise damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party, as opinions on relative credit risk and not as a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings AG at Lennéstraße 5 D-10785 Berlin.

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