Rating action

Scope Ratings affirms its BBB- corporate issuer rating on Eidsiva Energi AS, as well as the S-2 short-term rating and BBB- senior unsecured ratings. Scope also places the issuer rating under review for possible upgrade following the 15 November announcement of a letter of intent (LoI) between Eidsiva Energi and Hafslund E-CO to merge their main businesses. If the transaction is completed, Scope anticipate a minimum one-notch upgrade.

Rating rationale

The issuer rating of Eidsiva benefits from the vertically integrated business model, which helps to stabilise profitability. In the last two years, regulated grid revenues as a share of group EBITDA has declined towards 30%, while hydro and district production have increased. Still, the company’s business risk profile benefits from a meaningful share of protected infrastructure grid business, which, coupled with a growing share of profitability from fibre/broadband activities, is positive for the company’s overall industry risk profile. Although Eidsiva’s geographical footprint is relatively small, Scope considers this mitigated by the monopolistic grid operations and secured use of low-cost hydropower generation assets.

Eidsiva’s financial risk profile continues to be weaker than its business risk profile. The Scope-adjusted leverage ratio (excluding the shareholder loan) has averaged 5.9x over 2016-18, which is aggressive for the company’s rating category. Positively, the recent conversion of the shareholder loan into equity, as agreed by the municipal owners, combined with an anticipated improvement in operational profitability during 2019, should result in better credit metrics going forward. Still, the extensive investment plans until 2020 will have negative impacts via the negative free cash flow anticipated and the need for external financing.

For Eidsiva, the November 15 LoI means that Hafslund Nett (Hafslund E-CO´s regulated grid business) will be merged with Eidsiva Nett, by giving Hafslund E-CO payment in Eidsiva Energi shares. As a result, Eidsiva Energi will have a new 50% owner, which will be the City of Oslo. The LoI also means that Eidsiva’s unregulated production business will be partly sold-off and merged together with E-CO Energi AS, with payment in shares in this new production company (ownership >20%; final percentage is not ready, but it will be a minority ownership for Eidsiva). The rationale by Scope for placing Eidsiva Energi´s rating under review for possible upgrade reflects the following anticipated effects should the transactions go ahead:

• The new Eidsiva entity would generate around 80% of Scope-adjusted EBITDA from monopolistic regulated grid operations, improving the blended industry risk assessment (i.e. the new minority interest in power production would be accounted for as an associated company)
• Improved market dominance and customer diversification with the addition of roughly 720,000 grid customers in the Oslo, Akershus and Øsfold regions (Eidsiva Nett currently has around 162,000 customers, mainly in the Headmark and Oppland counties)
• A larger and more cost-efficient grid company, which should stabilise cash flow
• The expectation that the combined entity’s financial credit metrics will not be weaker than Eidsiva’s on a standalone basis today

Scope anticipates that the agreement could take up to 6 months to be finalised, by which time more information should be available on the companies’ financing structure and the ratings review can by completed. Scope notes that both the Norwegian authorities and the municipality owners would have to approve the transaction. Although, the City of Oslo would become a new 50% owner in Eidsiva alongside with the existing owners (the 27 municipalities and two county municipalities), the proposed transaction is not expected to have any negative effect on Scope’s government-related entity assessment of Eidsiva.

Rating-change drivers

A positive action could be warranted if the letter of intent materialises into a confirmed agreement, which leads to an improvement in the business risk profile without materially worsening the financial risk profile. On a standalone basis, a rating upgrade could also be warranted if the company starts to report positive free cash flow or sells assets with the effect of reducing overall leverage, exemplified by a Scope-adjusted leverage ratio of below 5x on a sustained basis.

A negative rating action is more remote given the letter of intent, but could be triggered if the letter of intent is terminated and Eidsiva instead enters into a debt-financed structural transaction that proves detrimental to its business risk profile, or if Eidsiva's financial risk profile weakens due to an adverse market situation.

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 performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for this rating and rating outlook (Corporate Rating Methodology 2018, European Utilities Methodology 2018, Government Related Entities 2018) are available on www.scoperatings.com.
Historical default rates of the entities rated by 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 08.12.2017.

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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