Rating action

Scope Ratings affirms its BBB+/Stable issuer rating on Lyse, a renewable energy utility that is fully owned by a group of 16 municipalities in south-western Norway. The S-2 short-term rating and BBB+ senior unsecured rating were also affirmed.

Rating rationale

The rating is supported by Lyse’s diversified business model, operating within energy production, power distribution and telecommunications. After a record year of 7.5TWh hydropower production in 2018, Scope expects the energy segment to normalise to mean historical levels in 2019. Combined with further anticipated growth in telecom, this is expected to lead to a nearly even EBITDA contribution between power production and grid/telecom in the medium term (from a 60/40 share today).

Lyse’s financial performance and credit metrics at YE 2018 were better than Scope’s expectations, explained largely by record-high hydro power production, higher achieved market prices for electricity and the Skangass disposal. In terms of cash flow in 2018, Lyse was able to cover capex and dividends and decrease net debt by around NOK 0.9bn. The financial risk profile has been bolstered by strong metrics in 2018. However, Scope believes the 2019 credit metrics will return to a more normalised average, exemplified by Scope-adjusted debt/EBITDA increasing to 3x in 2019 from 2.3x in 2018. Scope also projects negative free operating cash flow in 2019, due to lower anticipated production output, and the continued high investment in telecom. Nevertheless, free operating cash flow is estimated to become positive from 2020 as telecom related investment needs lessen.

The strong cash flow in 2018 also led the company to place some excess liquidity in short-term financial assets (mainly covered bonds and municipality bonds). This has improved the company’s liquidity, further boosted by the undrawn credit facilities that were extended last year.

The Stable Outlook reflects Scope’s expectations that Lyse will maintain its diversified business model (generation, grid and telecom), a robust financial risk profile, and strong liquidity situation that fully covers both shorter-term debt maturities and the current investment programme. Scope expects Lyse’s leverage to stay at around 3x on average in the short to medium term and the EBITDA contribution from the energy segment will decrease slightly going forward.

The rating Outlook also reflects Scope’s expectation of an unchanged ownership structure. According to the rating agency’s government-related entities methodology, capacity and likelihood of support from the owners (16 Norwegian municipalities that own 100% of the Lyse shares) is ‘medium’. Therefore, Scope will continue to give a one-notch uplift for parent support, which is incorporated into Lyse’s BBB+ issuer rating.

Rating-change drivers

A rating upgrade could be warranted if cash flows were higher than Scope’s estimates based on consistently higher achieved market prices or lower capex, which then translate into sustainable positive free cash flow generation, deleveraging, and an improved financial risk profile exemplified by a Scope-adjusted debt/EBITDA staying below 3.0x on a sustainable basis.

A negative rating action is possible if the financial risk profile weakened sustainably through lower wholesale prices or debt-financed transactions or investments, resulting in a leverage of above 4.0x for a prolonged period.

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, European Utilities Methodology, Government Related Entities) 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.
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. The ratings/outlooks were last updated on 07.05.2018.

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
© 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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