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

Rating action

Scope has placed the BBB issuer rating, S-2 short-term rating and BBB senior unsecured debt rating of Glitre Energi under review for a developing outcome.

Rating rationale

The rating action follows the latest development in H2 2020, after which Glitre Energi and Agder Energi have continued to discuss and contemplate merging their businesses. Although a letter of intent is yet to be signed, public announcements¹ from both companies during the autumn indicate that talks are progressing well, thus increasing the likelihood for a deal. Scope notes that there is still no information on the terms and conditions. Thus, the ratings have been placed under review for a developing outcome, indicating that they may go either way or stay unchanged, depending on the terms. However, a fully combined entity would create a larger and more diversified utility than Glitre on a standalone basis and likely create synergies, which could be credit-positive for the business risk profile. If merger talks were to end and the status quo for the two entities kept, nothing would change for Glitre and the issuer rating would continue to reflect its standalone credit quality.

Today, Glitre’s issuer rating benefits from its share of monopolistic grid operations and low-cost hydropower assets (positive ESG factor), which historically have led to relatively stable group profitability, though FY 2020 margins will shrink. Glitre’s vertically integrated value chain supports Scope’s overall business risk assessment, which is, however, slightly impaired by low profitability in some non-core businesses. Limited geographical outreach for selected segments, some asset concentration risk, and a lack of flexibility in water-reservoir capacity due to run-of-the-river power plants also affect the company’s business risk profile.

In Scope’s updated analysis, it is clear that achieved power prices in Glitre’s service territory have fallen substantially this year and are well below Scope’s expectations from a year ago, particularly reducing cash flow in the hydro-power business. Scope acknowledges that the company’s hedging activities have made a positive contribution to achieved prices compared with spot prices and currently provide some protection against future downside risk. Still, the financial risk profile has deteriorated following a recent increase in the company’s leverage ratio and the expectation of negative free operating cash flow this year. Based on the latest forward power price and hedges in place, Scope expects more normalised levels next year, which will ease the pressure on the financial risk profile.

Among the supplementary rating drivers, Scope has assessed Glitre’s parent support under its government-related entity methodology, using a bottom-up approach. The one-notch uplift granted for parent support (municipality ownership) has not changed during the year, and the potential transaction is expected to have no negative effect on Scope’s government-related entity assessment of Glitre.

Scope anticipates that following the potential letter of intent, a final agreement could still take up to six months, by which time more information should be available on the companies’ business and financing structures. At that point, Scope could resolve the rating review. Scope also assumes that both the Norwegian authorities and the municipality owners will have to approve the transaction.

Rating under review and rating-change drivers

As Scope has placed the ratings under review for a developing outcome, it has also removed the previous Stable Outlook. Scope aims to resolve the review as soon as possible. The ratings could be confirmed if ongoing merger talks were to fail and resulted in the status quo. If merger talks were to generate more specific results, the rating outcome would be based on the future operational and financial setup of a merged group, with all directions (positive, negative, neutral) possible.

On a standalone basis, a rating upgrade could be warranted if Glitre Energi were to materially increase the share of its distribution business or deleverage to a Scope-adjusted debt/EBITDA ratio of below 3.0x on a sustained basis. A negative rating action on a standalone basis is possible if the low power price environment persists into the long term, resulting in a Scope-adjusted debt/EBITDA of well above 4x and negative free operating cash flow 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 adequate access to banks and debt capital markets. Along with the issuer rating, long-term and short-term ratings have also been placed under review for a developing outcome. 

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

Rating driver references
1. 10 November 2020, update on the contemplating merger process

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, 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 4 January 2018. The ratings/outlooks were last updated on 18 December 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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