Rating action

Scope Ratings affirms its BBB+ issuer rating on Agder Energi, as well as the S-2 short-term rating and BBB+ senior unsecured rating. The Outlook is Stable.

Rating rationale

The issuer rating continues to be driven by the company’s vertically integrated business model, with core activities in power generation, distribution and retail sales. The vertical structure combined with active and high hedging activity helps to reduce the underlying volatility in each business segment. Although the mix of EBITDA contribution from the company’s main segments is expected to improve in 2019 compared to 2018, Scope still expects the distribution segment to underperform until 2020. LOS and Entelios businesses are low margin contributors, which emphasises the importance of Agder Energi’s beneficial low-cost hydropower activities and its current cash generation.

Following an improvement of the financial risk profile in 2018, the rating agency anticipates selected credit metrics to deteriorate through to 2020. Key drivers for this are the lower profit contribution from hydropower and high investment needs. Ongoing hydropower projects include Skjerka, Åseral Nord and Fennefoss, while grid investments also dominate capex. As a result, Scope anticipates free operating cash flow (FOCF) to be more or less break-even for these two years combined. Despite the pressure on FOCF, the financial risk profile is still supported by strong debt protection measures and leverage ratios that remain in line with the agency’s rating range of 3-4x Scope-adjusted debt (SaD)/EBITDA.

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

Rating-change drivers

A rating upgrade may be warranted if Agder Energi deleveraged to below 3.0x (SaD/EBITDA) on a sustained basis, bolstered, for instance, by lower investment needs or higher group operating profitability.

A negative rating action is possible if the company sees negative operating performance or were to participate in a debt-financed structural transaction that substantially weakens its credit profile, measured by a SaD/EBITDA of more than 4x and negative FOCF/SaD on a sustained basis.

Stress testing
No stress testing was performed

Cash flow analysis
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: Sebastian Zank, Executive 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
© 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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