Rating action

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

Rating rationale

The issuer rating continues to be supported by BKK’s business risk profile which includes low-cost hydropower portfolio assets, a meaningful share of a power distribution business and above-average group profitability margins for a vertically integrated utility company. BKK’s business risk profile is also supported by its diversification into power retail sales through its remaining holding in Fjordkraft (approx. 15%) and also into telecommunications and district heating through companies in its ‘FEM’ segment.

Over the last twelve months, BKK’s financial risk profile has continued to improve, with its average leverage ratio (two-year historic and two-year forward looking) declining from 3.8x to 3.4x. Scope recognises that the pressure on BKK’s financial risk profile is positive given the lower leverage at present, but is waiting for more evidence that leverage will stay below 3x due to the company’s growth ambitions towards 2020. Scope has considered BKK’s greater exposure to power price changes that some of its peers (lower hedging), but this does not affect the agency’s assessment materially. Scope still deems the liquidity situation adequate at the moment, when comparing available cash and undrawn credit lines to debt maturities. However, the agency notes that BKK has a somewhat lower-than-average debt tenor and a more front-loaded debt maturity profile than some of its relevant peers.

The Stable Outlook reflects Scope’s expectation that BKK’s financial risk profile will continue to be supported by good interest cover, positive free operating cash flow generation and leverage ratios at more conservative levels than in the past. The Outlook also reflects the fact that BKK generates around two-thirds of its EBITDA from its hydropower production, continues to be engaged in power distribution and maintains its hedging policy in the power production unit.

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 without negatively affecting potential expansionary growth ambitions, resulting in sustainably lower financial credit metrics than in the past, e.g. average Scope-adjusted debt/EBITDA of 3x.

A negative rating action could be warranted by a major debt-financed acquisition/merger or substantially lower wholesale power prices, leading to negative free operating cash flow and weaker credit metrics, e.g. Scope-adjusted debt/EBITDA of well above 4x 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 Methodology) 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 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
© 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.

Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Directors: Torsten Hinrichs and Guillaume Jolivet.