Rating rationale

Glitre’s business risk profile benefits from its relatively large share of protected power distribution grid operations which is expected to grow further in the future. Scope also recognises the company’s relatively stable profitability and cash generation, backed by substantial hedging in its power generation business, which reduces cash flow volatility after tax. Glitre’s integrated utility value chain is supportive of overall business risk, but low profitability in power sales and some non-core, loss-making operations weigh negatively. Scope also notes the limited geographical outreach for some of the company’s business segments as well as some asset concentration risk driven by the incremental effect of a standstill of one its larger and most important run-of-the-river power plants.

With regard to Glitre’s financial risk profile, Scope highlights the company’s positive free cash flow (before dividends), indicating its ability to fund investments with internally generated cash. Glitre’s conversion of subordinated loans into equity during 2015 helped to reduce the somewhat high leverage and strengthen selected credit ratios. Combining Glitre’s current credit metrics with Scope’s estimates going forward puts the company’s financial risk profile in the low investment grade area, based on Scope’s methodology. The company’s liquidity situation is seen as strong, supported by undrawn credit lines, proven access to bond and bank debt, and an evenly distributed maturity profile.

Scope highlights that Glitre’s issuer credit rating of BBB is not based on explicit support or guarantees from its owners. Nevertheless, Scope regards Glitre’s municipality ownership structure as strongly supportive of its overall credit quality, warranting a one-notch uplift from the company’s standalone credit rating (BBB-).

Outlook

The Stable Outlook reflects Scope’s expectation that Glitre will continue as a diversified utility, with operations in power production, distribution and sales. It also reflects our view that Glitre should be able to fund its medium-term, planned capex programme using its own internally generated cash flow over the cycle. As a result, Scope anticipates that key credit metrics will remain relatively unchanged in the medium term. The agency also assumes that the management and owners will continue to strive towards a healthy financial credit profile. The rating outlook is also based on Scope’s expectation that the municipalities will remain majority owners.

A rating upgrade could be warranted if Glitre were to materially increase the share of its distribution business and deleverage to a SaD/EBITDA level below 3.0x on a sustainable basis.

A negative rating action is possible if the company were to participate in a debt-financed structural transaction that substantially weakens its business profile and results in significant higher than 4x SaD/EBITDA and negative free cash flow before dividends for a prolonged period.

The full rating report, including rating rationale and analytical details is available at www.scoperatings.com or HERE.

Regulatory disclosures

This credit rating and/or rating outlook is issued by Scope Ratings AG.
The rating analysis has been prepared by Henrik Blymke, Managing Director. Responsible for approving the rating: Werner Stäblein, Executive Director
The rating was first assigned by Scope on 04.01.2018. / The rating was last updated on 04.01.2018.

Methodology
The methodologies used for these ratings and/or rating outlooks are Rating Methodology Corporate Ratings 2017 Jan & Rating Methodology European Utilities 2017 Jan. Available on www.scoperatings.com.

Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to 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 definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company under review.
Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources. Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Potential conflicts
Please see www.scoperatings.com. for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2018 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings AG, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions 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 does not, 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 other 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 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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Analyst Contact: Henrik Blymke : h.blymke@scoperatings.com