Rating Action

Scope Ratings affirms its BBB+/Stable corporate issuer rating on Lyse as well as its S-2 short-term rating and senior unsecured ratings of BBB+.

Rating Rationale

The current rating on Lyse is supported by its diversified business model, dominant and profitable position in fibre optics, its low-cost hydro portfolio and relatively large hydro reservoir capacity. As a result, we estimate that the company will continue to see stable operational cash patterns, supporting the rating in a phase when major investments are expected to keep leverage in the 3.5x region (including the subordinated shareholder loan) until 2019.

Scope recognises the stable operational development in all of Lyse’s main business segments since the publication of our last report. The company’s diversified business model, with a large combined share of robust infrastructure segments (such as power distribution and its dominant position in fibre-optic broadband) in addition to its energy segment, is expected to remain firm and support stable cash generation.

Scope acknowledges that Lyse’s FY 2017 credit metrics have proved somewhat better than expected (demonstrated by SaD/EBITDA of 3.6x vs Scope’s expectation of 3.8x). The main financial performance deviations from Scope’s previous 2017 estimates were due to two main items last year, i.e. the consolidation of Viken Fiber and the sell-down of Skangas from 49% to 30%. More detail on these two items and comments on Scope’s updated financial forecast will be provided later in this report.

At the end of 2017, Lyse reported substantial liquidity with cash and undrawn credit lines of NOK 5.2bn which we estimate will comfortably cover expected funding and refinancing needs in the next few years. Lyse’s financial strategy aims to have a cash coverage level of at least nine months, even if the minimum level is set at six months. The cash coverage definition from Lyse only includes liquid funds (excl. undrawn credit lines) which is intended to cover operational and investment activities, in addition to debt maturities and dividends. Based on current company levels and Scope estimates, Lyse has more than met its own targets, with a ratio of around two years. Scope also notes that the company has made an adjustment to its financial strategy going forward, which we judge to be credit supportive. The company now targets an official credit rating of at least BBB+, while maintained is goal to further diversify its funding sources.

Outlook

The Stable Outlook reflects Scope’s expectations that Lyse will maintain its diversified business model (generation, grid and telecom), and not jeopardise its financial risk profile with its current investment programme. Scope expects Lyse’s leverage to stay relatively flat until 2019 and then decline, as investment levels are expected fall. Scope recognises that Lyse should be able to fund its investments using its own cash flow over the cycle. The rating outlook also reflects Scope’s perception of an unchanged ownership structure.

Rating-change drivers

A rating upgrade could be warranted if the company improves its financial risk profile and deleverages to a level below 3.0x on a sustainable basis, bolstered by consistently higher wholesale prices in the Nordpool market for instance.

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

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

Stress testing & cash flow analysis
No stress testing was performed. Scope produced its standard cash flow forecast for the company.

Methodology
The methodologies used for this rating and rating outlook: Corporate Rating Methodology and Rating Methodology: European Utilities are 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.

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 the issuance of the rating or outlook action, 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.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst: Henrik Blymke, Managing Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 30.05.2017.

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 GmbH, 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 GmbH at Lennéstrasse 5 D-10785 Berlin.

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