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

Rating action

Scope Ratings changes the Outlook on the BBB+ issuer rating of Agder Energi AS from Stable to Negative. At the same time, the BBB+ issuer rating, S-2 short-term rating and BBB+ senior unsecured rating are affirmed.

Rating rationale

The Outlook change reflects the risk of further pressure on leverage and free operating cash flow generation in the event that low power prices persist. Although Agder Energi’s hedging activities have made a significant positive contribution to achieved prices compared to the spot prices, the company will clearly be affected by the current market situation. Going into 2020, Agder Energi’s financial risk profile was already stretched in relation to Scope’s negative rating drivers, limiting the headroom for a further deterioration in credit metrics. In 2019, low production and lower grid profitability resulted in negative free operating cash flow and a Scope-adjusted debt (SaD)/EBITDA of above 4x. As Scope anticipates key credit metrics to deteriorate throughout 2020, the company’s financial risk profile rating has been lowered, which is the main reason for the current pressure on the issuer rating.

Although investment in 2020 is expected to reduce from the levels in 2019, Scope foresees a further weakening in credit metrics in the absence of cash inflow from other sources like non-core asset sales. Scope therefore estimates the company’s free operating cash flow to be slightly negative and leverage ratios to remain well above the rating agency’s guidance framework for a longer period.

Positively, the EBITDA contribution from the company’s monopolistic distribution segment improved last year and is expected to remain on this trend in 2020. Based on this and the lower contribution from environmentally friendly hydropower production (positive ESG factor), Scope now assumes normalised EBITDA contributions of 70% from hydropower and 25% from grid operations, compared with the previous 80% and 15%, respectively. Contributions from the other businesses remain unchanged at around 5%. In addition to selling guarantees of origin for its own production, Agder Energi also purchases guarantees of origin for all its consumption in Norway and Sweden.

Scope Ratings has revised down the company’s medium-term EBITDA forecast, mainly due to the lower expected contribution from its hydropower businesses. The forecasted numbers do not incorporate new strategic initiatives or non-core asset divestments, but Scope believes the company is likely to revisit these measures during the year, given the new CEO in place and the potential for a new strategy. The company’s active role in venture investments and technological developments affecting the industry are assumed to be still important but insignificant for group profitability. Overall liquidity, including external financing sources like undrawn credit lines, is adequate, helped by further available credit lines secured this year to improve financial flexibility.

In terms of supplementary rating drivers, Agder Energi´s issuer rating remains supported by a one-notch uplift for parent support due to the municipality ownership structure (analysed through Scope´s Government Related Entity Methodology). On the financial policy factor, we make no explicit rating adjustment, although we indirectly assume that the company is dedicated to act when necessarily to keep selected credit metrics on certain levels, due to their public target of having a minimum credit rating of BBB+. As a result, Scope Ratings assume the company to act in due course in order to mitigate against the expected deteriorating FRP.

Outlook and rating-change drivers

The Negative Outlook on Agder Energi’s rating reflects the increased risk of a low-price environment that weakens key credit metrics for a longer period. Scope’s base case indicates that key credit metrics could remain weak throughout 2021 if no other cash inflow measures are taken. As such, the company’s financial risk profile rating has been lowered, which is the main reason for the current pressure on the issuer rating.

A positive rating action (i.e. returning to Stable Outlook) may be warranted if the Nordic power price market improved, or if Agder Energi disposed of non-core assets or reduced investment or dividend payouts, resulting in positive discretionary cash flow and a sustainable improvement in credit metrics, exemplified by SaD/EBITDA returning below 4x.

A negative rating action is possible if the low Nordic power prices were to persist and no external cash inflow is generated from non-core asset disposals, leading to a SaD/EBITDA of above 4x and a negative ratio of free operating cash flow/SaD for a prolonged period.

Long-term and short-term debt ratings

The senior unsecured rating is in line with the issuer rating. The S-2 short-term rating reflects the company’s sufficient short-term debt coverage and good access to banks and debt capital markets.

One or more key drivers for the credit rating action are considered ESG factors.

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(s) and/or rating outlook(s): (Government Related Entities Methodology, 6 July 2020; European Utilities Rating methodology, 18 March 2020; Corporate Rating Methodology, 26 February 2020) are available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
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, 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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0 .
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 August 2017. The ratings/outlooks were last updated on 16 August 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
© 2020 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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