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Implications

Scope Ratings has a BBB+/Stable corporate issuer rating on Lyse. The short-term rating is S-2 and the senior unsecured rating is BBB+. The issuer rating includes a one-notch rating uplift for the municipality ownership.

Lyse’s financial performance and credit metrics in 2019 were robust, but Scope expects them to deteriorate this year due to lower power prices and continued heavy investment in the company (telecoms related). Still, some of the capex planned for 2020 can be postponed or held back according to management, as a notable part was earmarked for expansionary investments and is not fully committed. Nevertheless, Scope’s base case assumes negative free operating cash flow in 2020, and further negative effects of the agreed dividend pay-out this year. As a result, Scope expect the leverage to increase to around 4x this year, a ratio which includes the company´s subordinated shareholder loan. Overall, Scope foresees Lyse’s financial risk profile weakening this year, which is the main constraining factor in the current rating assessment. However, Scope acknowledge also management indications that it could reduce capex and further increase production volumes this year, in order to mitigate the negative cash flow effects of lower power prices than in 2019 and maintain its financial targets.

For 2020 and 2021, the lower spot and forward price curve for electricity is mitigated by Lyse’s previous hedging contracts at higher levels. Post 2021, the company could be more severely impacted if the lower price regime prevails. In addition to the uncertainty around actual achieved power prices, Lyse is in control of large water reservoir capacity, enabling yearly variations in the production volume output. Scope expects the company to produce more in 2020 than in 2019, indicating an annual produced volume of 6TWh, which is more in line with Lyse’s annual mean production level. Although a significant rise in power prices is not imminent at the moment, Scope expects Lyse’s financial risk profile to improve in 2021, based on a higher produced electricity volume, and further profitability improvements in the telecoms and grid business.

Lyse’s diversified business model, with operations in energy production, power distribution and telecommunications, is supportive for Scope’s overall assessment. An increasing share of EBITDA is currently being generated by a combination of robust infrastructure segments, such as monopolistic power distribution and fibre-optic television and broadband services. At the same time, the share of more volatile energy-producing segments is decreasing (i.e. from around 60% in 2018 to an estimated 40% in 2020) due to lower power prices and lower produced volumes.

The Stable Outlook reflects Scope’s expectation that Lyse will maintain its diversified business model (generation, grid and telecoms) and strong liquidity that fully covers both shorter-term debt maturities and the current investment programme. It also assumes that the expected negative pressure on credit metrics in 2020 will be temporary and that the company will operate in an average leverage range of between 3-4x in the medium term.

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