Rating action

Scope Ratings has today assigned a corporate issuer rating of BBB+ to Norway-based BKK AS. The Outlook is Stable. Scope also assigns an S-2 short-term rating and a BBB+ long-term rating to the company’s outstanding senior unsecured bonds.

Rating rationale

BKK’s issuer rating is positively influenced by its business risk profile with low-cost hydropower portfolio assets, above-average group profitability margins, a meaningful share of a power distribution business, as well as direct and indirect diversification into power sales, telecommunications and district heating through its own and associated companies. Although most of BKK’s main businesses are in a relatively small geographical area, Scope considers this to be mitigated by its monopolistic position in grid operations and secured utilisation of power generation assets. Scope notes BKK’s exposure to the volatile power production segment, but also recognises its active hedging strategy which has helped to secure more stability in group profitability margins. Going forward, Scope expects BKK to grow both grid and power production segments, as the company is actively exploring potential structural transactions that could provide economy of scale and higher efficiency. BKK is already a minority shareholder in several associate companies (with a total book asset value of approximately NOK 5bn). Although no firm commitments have been made, Scope highlights potential event risk in the future, which could arise if a major transaction is entered into. Scope believes that management would prepare itself well in such event, and BKK has indicated its dedication to keeping its financial profile under control.

BKK’s financial risk profile is improving, supported by the attainment of higher power prices, as well as recent asset divestitures (in particular the ongoing effects from the transfer of central grid assets to Statnett). Overall, we recognize that adjusted operating free cash flow has been positive, enabling the company to reduce its debt level and improve financial credit metrics over time. At present, the solid debt protection metrics are positive for BKK’s overall financial risk profile, while its average Scope-adjusted leverage ratio, although improving, remains a constraint. Scope assesses BKK’s liquidity as adequate, supported by good access to the bank and the bond market as well as sizeable liquid funds as of Q1 2018, which comfortably cover its planned investments and refinancing in the short term.
The BBB+ issuer rating on BKK reflects a standalone credit quality of BBB and a one-notch uplift based on Scope’s assessment of the 17 Norwegian municipalities which act as one majority owner with both the willingness and ability (in accordance with Scope’s Government Related Entity Methodology) to provide support if needed.
Outlook

The Stable Outlook reflects Scope’s expectation that BKK’s financial risk profile will prove more conservative than in the previous three years. The Outlook also assumes that BKK will continue to generate the majority of its EBITDA from its two main segments (hydropower production and distribution) and maintain its hedging strategy in power production.
The Outlook further reflects the fact that BKK still has some major capex investment planned in the short term, counterbalanced by disposals and credit metrics which are expected to be more conservative than in previous years. We also assume that management will maintain its dedication to striving towards a healthy financial credit profile if it pursues an increased growth strategy. The rating outlook is also based on Scope’s expectation that the combined majority of municipality owners will remain unchanged.

Rating-change drivers

A positive rating action could be warranted if BKK continues its positive free cash flow generation after dividend payments and carries on deleveraging, resulting in improved financial credit metrics, e.g. Scope-adjusted debt/EBITDA stabilising at around 3x on a sustainable basis.
A negative rating action would be possible if wholesale power prices achieved fell substantially, leading to negative free operating cash flow and weaker credit metrics, e.g. Scope-adjusted debt/EBITDA of well above 4x on a sustainable basis.

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 2018, European Utilities Rating Methodology 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 22.08.2018. The ratings/outlooks were last updated on 22.08.2018.

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 methodology, Government-Related Entities Rating Methodology July 2018 and the Corporate Rating Methodology January 2018.