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 Agder Energi under review for a developing outcome.

Rating rationale

The rating action follows the latest development in H2 2020, after which Agder Energi and Glitre Energi continue to discuss and contemplate merging their businesses. Although a letter of intent is yet to be signed, public announcements from both companies during the autumn¹ 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 Agder Energi 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 Agder Energi and the issuer rating would continue to reflect its standalone credit quality.

Today, Agder Energi’s issuer rating benefits from its vertically integrated business model, with core activities in power generation, distribution and retail sales. The vertical structure combined with active and high hedging activity helps to mitigate the underlying volatility in power generation. Although the EBITDA contribution from the company’s monopolistic distribution segment improved last year and is expected remain on this trend throughout 2020, the underperformance of its hydropower segment this year is a clear credit-negative factor. The company’s hedging contracts, at higher power prices than the current market levels, still provide a mitigating effect, making cash flow projections in 2020 higher than if the unhedged position had been greater.

Since Scope’s last update in August, Agder Energi has agreed to sell its 67% ownership in Swedish electrical contracting firm Craftor. The transaction will generate cash inflow of around NOK 750m through the sale of shares and repayment of loans. This is seen as positive by Scope as it will ease some of the pressure on selected credit metrics this year.

Among the supplementary rating drivers, Scope has assessed Agder Energi’s parent support under its government-related entity methodology, using a bottom-up approach. The one-notch uplift granted for parent support (municipality majority ownership) is not expected to be negatively affected by the potential deal.

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.

Ratings under review and rating-change drivers

As Scope has placed the rating under review for a developing outcome, it has removed the previous Negative 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 Agder Energi were to 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 for longer, resulting in a Scope-adjusted debt/EBITDA of above 4x as well as a negative ratio of free operating cash flow to Scope-adjusted debt 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): (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 12 August 2020. 

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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