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Rating action

Scope Ratings has today assigned an A-/Stable first-time issuer rating to Norwegian utility Tensio AS.

Rating rationale

The strong business risk profile is driven by Tensio’s sole exposure to regulated power distribution, which is associated with very low industry risk. Tensio has a monopoly over its service territory (Trøndelag County, Central Norway), meaning its lack of product and geographical diversification is not important for the rating. The market position assessment is further strengthened by Scope’s view on Norway’s robust and stable economy and well-established regulatory framework governed by NVE-RME. Tensio was formed in June 2019 through a merger between two grid companies, TrønderEnergi Nett and NTE Nett. Over time, Scope expects the combination to result in streamlined operations and, in turn, improved efficiency and profit margins.

As the merger was initially done without transferring much debt from the two owners of the former grid companies, the financial risk profile assessment is based largely on Tensio’s new financial policy and Scope’s financial expectations in the near term. Scope projects that Tensio’s high investment requirements will result in negative free operating cash flow in the medium term, which, combined with the ambition to increase leverage towards 5x by distributing excess capital via dividends, constrains the financial risk profile assessment. The negative discretionary cash flow will also necessitate external financing, but overall liquidity is adequate as Tensio is now arranging debt with long tenors.

With respect to parent support, Scope assigns a one-notch uplift from the standalone rating, based on the application of Scope’s Government-Related Entity Rating Methodology, using the bottom-up approach. The indirect majority municipal ownership in Tensio is based on potential parent support being determined not by the standalone performance or credit quality of the two former grid companies, but by the capacity and willingness of their municipal owners to provide financial support if needed.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that Tensio will continue to generate cash flow from monopolistic and regulated grid operations. The Outlook also assumes the company will strive towards recapitalisation, which should result in leverage, exemplified by Scope-adjusted debt/EBITDA, moving closer to 5x in 2021. Scope also assumes the company will remain indirectly majority owned by Norwegian municipalities.

A positive rating action could be warranted if Tensio keeps Scope-adjusted debt/EBITDA at a significant headroom to its leverage target, following positive free operating cash flow and reduced dividend distributions, at around 4x on a sustained basis.

A negative rating action could be triggered by a financial policy change that could significantly weaken the financial risk profile, exemplified by a Scope-adjusted debt/EBITDA of towards 6x on a sustained basis. A reduction in indirect municipal ownership to below 50% and Tensio losing its status as a government-related entity could also trigger a downgrade.

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): (Rating Methodology: Government Related Entities, 6 July 2020; Rating Methodology: European Utilities, 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, the rated entities’ agents, and Scope internal sources. Historical data used for this rating is limited.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. Scope notes that the rating was based on limited historical data. 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

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
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