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

Rating action

Scope Ratings GmbH (Scope) has affirmed its BBB+/Stable corporate issuer rating on Norwegian utility Lyse AS along with the BBB+ senior unsecured debt rating and the S-2 short-term rating.

Rating rationale

The affirmation of the issuer rating is driven by Lyse’s diversified business model. Over time, Lyse has seen an increasing share of its group EBITDA generated by a combination of robust infrastructure segments, such as monopolistic power distribution and fibre-optic television and broadband services. As a result, the company managed to better withstand last year’s low power prices. As of 2021, the company’s more volatile hydro power production segment has increased in size and improved its asset diversification, following the establishment of Lyse Kraft DA together with Hydro Energi AS (25.6% ownership). With the agreed transaction, Lyse is expected to get 750GWh of new yearly output, without any increase in debt. In addition, Scope also expects cost and efficiency improvements in the new company in years to come, and thus sees the transaction as positive for Lyse’s future.

Lyse’s financial performance and credit metrics deteriorated in 2020 due to lower power prices and continued heavy investment into the company (mainly in telecoms). Nevertheless, Scope’s base case expects that this deterioration was temporary, as FY 2021 is already expected to generate positive free operating cash flow and a reduced leverage ratio. Overall, Scope forecasts notably higher profitability in 2021 compared to 2020, driven not only by the rebound in the power production segment, but also its continued EBITDA growth in the telecoms segment. Over time, Scope also expects higher profitability from the grids segment, as new and larger investments should enable higher revenues in the future. With these expectations, Scope expects that the leverage ratio as measured by the Scope-adjusted debt/EBITDA ratio will decrease back to the 3-4x range this year. The financial risk profile assessment of the company has therefore started to improve again.

Within the supplementary rating drivers, Scope continues to use the bottom-up approach within Scope’s Government Related Entity Methodology to analyse Lyse’s parent support. The one-notch uplift assigned for municipality ownership has not changed. The 14 municipality owners are considered as one group, with a long-term, supportive and committed ownership and a predictable dividend policy.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that Lyse will maintain its diversified business model (energy, grids and telecoms) and strong liquidity that fully covers both shorter-term debt maturities and the current investment programme. It also assumes that the main credit metrics in 2021 will improve from 2020, exemplified by Scope-adjusted leverage returning to the 3-4x range in the short to medium term. The Outlook also reflects the expectation that Lyse’s ownership structure will remain unchanged.

A rating upgrade could be warranted if cash flows prove to be higher than Scope’s estimates, due to consistently higher achieved power prices or lower capex, which would translate into sustainable positive free operating cash flow, deleveraging, and an improved financial risk profile exemplified by a Scope-adjusted leverage of below 3.0x on a sustained basis.

A negative rating action is possible if Lyse’s financial risk profile weakens due to lower wholesale prices or debt-financed transactions or investments, resulting in leverage of over 4.0x for a prolonged period.

Long-term and short-term debt ratings

The BBB+ senior unsecured debt rating is in line with the issuer rating. Scope has also affirmed the S-2 short-term rating, still reflecting sufficient short-term debt coverage and good access to both bank loans and debt markets.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and Outlook, (Rating Methodology: European Utilities, 18 March 2020; Corporate Rating Methodology, 26 February 2020; Rating Methodology: Government Related Entities - 6 July 2020), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed
Lead analyst: Henrik Blymke, Managing Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 30 May 2017. The Credit Ratings/Outlook were last updated on 9 May 2019.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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.