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

Rating action

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

Rating rationale

BKK’s issuer rating is supported by its business risk profile, which remains unchanged at BBB+. Positive factors include its low-cost, environmentally-friendly hydropower portfolio assets (ESG factor), a meaningful share of a power distribution business and above-average group profitability margins for a vertically integrated utility company over time. BKK’s financial risk profile is now weaker than its business risk profile, following a recent deterioration in selected credit metrics. Negative rating pressure on the company’s financial risk profile is mainly driven by higher leverage. At the same time, the company’s history of delivering positive free operating cash flow over the cycle provides comfort that its financial risk profile should return to less aggressive levels in 2021, based on the latest power price forward curves. BKK also possesses substantial liquid reserves in its associated company holdings, which is positive for Scope’s overall assessment.

Even if group EBITDA is affected by the lower achieved power prices this year, cash flow metrics remain healthy, boosted by the Fjordkraft shareholding reduction in early July 2020, which generated around NOK 0.6bn in proceeds. Consequently, free operating cash flow should remain positive in Scope’s base case and is not expected to move into negative territory in the medium term based on updated projections.

Scope foresees reduced event risk for BKK in the short term, as its growth ambitions (which include active participation in potential mergers and transactions in the Norwegian utility market) are deemed less likely to happen at the moment, than Scope anticipated last year. However, Scope believes that further grid efficiency and growth can be achieved in transactions without impacting the company’s capital structure materially. Scope considers liquidity to be adequate at the moment, when comparing available cash and undrawn credit lines to debt maturities.

Among the supplementary rating drivers, Scope assesses BKK’s parent support under its government related entity methodology framework, using a bottom-up approach. The agency continues to assign one notch of uplift for the 54.6% municipality ownership in BKK, increasing the BBB standalone rating to a BBB+ issuer rating. Scope has made no adjustment for financial policy. However, BKK´s Board of Directors and management publicly announced to its owners in late June this year that the dividend ratio for 2020 could be set below the policy of 70% in order to address the low-price environment and preserve the capital structure. Scope has incorporated this into its financial forecast, which positively affects credit ratios and its financial risk assessment.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that BKK’s financial risk profile will continue to be supported by good interest cover and positive FOCF generation, which will mitigate the temporarily spike in leverage in 2020. The recent disposal of the shares in Fjordkraft show that management is dedicated to preserving capital and increasing liquidity in a situation with a lower cash contribution from hydro power generation.

The Outlook further reflects Scope’s expectation that management will defer its previously increased growth ambitions for a while, focusing mainly on attaining a healthy financial credit profile in the short term. The Outlook also incorporates Scope’s expectation of continued majority ownership by the combined municipalities, and that dividend payments will be re-examined next year.

A positive rating action in the current environment is more unlikely, but could be warranted if BKK generates positive discretionary cash flow and deleverages, resulting in lower financial credit metrics, e.g. average Scope-adjusted debt/EBITDA of 3x on a sustained basis.

A negative rating action could be warranted by 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.

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 ratings and rating outlook: (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 2018. The ratings/outlooks were last updated on 23 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. Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Guillaume Jolivet.