Rating action

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

Rating rationale

The issuer rating of Akershus Energi is positively affected by the company’s low-cost hydropower assets, which have a strong position in the merit order system, thus helping secure utilisation. Together with an increasingly profitable district heating business, Akershus Energi has generated above-average group profitability margins (>55% in recent years) and uses forwards to hedge around 30-50% of its shorter-term production volume. Akershus Energi is strongly exposed to the energy market, which Scope deems both volatile and cyclical; thus the rating agency views favourably Akershus Energi’s initiatives to improve cash flow predictability through power-price hedging and increased infrastructure investment. Limiting factors for Akershus Energi’s business risk profile, in addition to its industry risk and price exposure for unhedged production output, include modest segmentation and limited water reservoir capacity.

When assessing Akershus Energi’s financial risk profile, Scope highlights the company’s positive free operating cash flow (before dividends), indicating its ability to fund investments with internally generated cash flow over the cycle. The leverage ratio has in recent years stayed below 3x, which Scope forecasts to continue into the medium term. Also positive for the financial risk profile is the strong interest coverage and solid liquidity via the limited need for debt refinancing in the near future. Liquidity is also positively influenced by access to financial assets that can be divested to partially fund the company’s growth plans, coupled with adequate access to bank and capital markets. The financial risk profile is currently constrained by the company’s ambition to increase expansionary investment, which is likely to result in weaker credit metrics (compared to current levels) in Scope’s medium-term base case projection.

The BBB issuer rating reflects a standalone credit quality of BBB- plus a one-notch uplift based on Scope’s assessment of the owner, Akershus County Municipality, which is deemed to have both the willingness and capacity (in accordance with Scope’s Government Related Entity Methodology) to provide support if needed. When assigning the standalone credit rating for the company, Scope has for the moment put slightly more emphasis on the company’s weaker business risk profile than the stronger financial risk profile, due its business mix characteristics and growth ambitions.

The Stable Outlook reflects Scope’s expectation that Akershus Energi’s financial and business risk profiles will remain relatively unchanged in the medium term. The Outlook assumes that i) a substantial share of EBITDA will continue to stem from hydropower production; ii) a medium-to-high share of anticipated power production will remain hedged; and iii) management will continue to act prudently in its green infrastructure and growth investments plans, preserving its financial risk profile and reducing volatility in power production. The Outlook also includes Scope’s expectation that Akershus Energi will remain 100% owned by a Norwegian county municipality.

Rating-change drivers

A positive rating action is possible if Akershus Energi uses excess free cash flow for paying down debt rather than for high dividends and expansionary investment, which would result in an improved financial risk profile over time, exemplified by a Scope-adjusted debt/EBITDA of below 2.2x on a sustained basis.

A negative rating action could be warranted if more aggressive debt-financed growth is pursued or power prices fell substantially, leading to negative free operating cash flow and weaker credit metrics on a sustained basis, e.g. Scope-adjusted debt/EBITDA above 3.5x.

The latest information on the rating, including rating reports and related methodologies are available on this LINK.

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 18.01.2019.

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
© 2019 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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