Rating action

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

Rating rationale

The issuer rating continues to be driven by Agder Energi’s vertically integrated business model, with core activities in power generation, distribution and retail sales. Although the profit from power distribution has declined and is expected to represent a smaller part of the group EBITDA in 2018, Agder Energi benefits from its low-cost hydropower activities which have seen higher volumes and power prices. The company’s substantial hedging measures in power production have somewhat influenced the effects of recent power-price spikes in the market, but the company has also benefitted from adjusting its shorter-term hedging level downwards. Scope still favours the company’s ambition to reduce the segment’s underlying volatility.

The group’s financial risk profile is supported by strong debt protection metrics, measured by interest cover of well above 10x, and relatively stable indebtedness, measured by Scope-adjusted debt/EBITDA of between 3-4x. For these two ratios, Agder Energi outperformed Scope’s expectations from August 2017. At segment level, however, the grid business underperformed in Q1 2018 due to a tough winter with heavy snowfall and a power outage in the Agder region.

With regard to cash flow and liquidity, Scope forecasts a continuation of positive free operating cash flow, but highlights the constraint which high dividends have placed on discretionary cash flow in the past. In May 2018, the company announced a new dividend policy that eliminates the dividend floor and will be based on adjusted underlying profit after tax (International Financial Reporting Standards). While the removal of the minimum dividend is positive, Scope anticipates that the impact on its assessment of available liquidity will be minimal, as this remains supported by the company’s sizeable undrawn credit lines and good access to bank and bond markets.

Outlook

The Stable Outlook reflects an expected continuation of: i) the vertically integrated business strategy; ii) the ability to fund investments over the cycle using internally generated cash flow; and iii) both the management’s and owners’ ambition to maintain a strong financial credit profile. Key credit metrics are therefore anticipated to stay within Scope’s below mentioned range in the medium term, following the agency’s updated forecast and key assumptions regarding market developments. The rating outlook also reflects Scope’s assumption that the majority ownership by the municipalities will continue.

Rating-change drivers

A rating upgrade may be warranted if Agder Energi deleveraged to below 3.0x on a sustained basis, bolstered, for instance, by lower investment needs and dividend payouts.
A 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, measured by a SaD/EBITDA of well above 4x and/or negative FOCF/SaD.

The full rating report, including the 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 2018, Rating Methodology: European Utilities 2018, Government-Related Entities Rating Methodology July 2018)* 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 22.08.2017. The ratings/outlooks were last updated on 17.08.2018.

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.

Scope Ratings GmbH, Lennéstrasse 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Torsten Hinrichs.

* This release was amended on 22 October 2020 with the addition of the Government-Related Entities Rating Methodology July 2018 and the Corporate Rating Methodology January 2018.