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Rating action

Scope Ratings GmbH (Scope) has assigned a BBB+/Stable issuer rating on Hafslund Eco AS along with a BBB+ senior unsecured debt rating and an S-2 short-term rating.

Rating rationale

With regard to Hafslund Eco’s business risk profile, Scope views positively the company’s leading position in the power generation market in Norway and the Nordic area with its low-cost hydro production (positive ESG factor). Hafslund Eco’s sizeable reservoir capacity (about 50% of annual production) gives its power generation segment more flexibility, which is advantageous when operating in a market with volatile prices. Further, its 50% ownership in Eidsiva Energi provides a predictable cash dividend stream, driven by the company Elvia (operating in a monopolistic power distribution market). Scope also recognises Hafslund Eco’s low asset concentration risk, with more than 80 power stations in the southern part of Norway. Limiting factors for Hafslund Eco’s business risk profile include the electricity price exposure for its unhedged production output, the volatile nature of the power generation industry, and the company’s rather complex organisational structure with further probable M&A transactional risks.

In its financial risk profile assessment, Scope notes the volatility in selected credit metrics over the last two to three years. This is due to market conditions and a relatively large exposure to power price volatility. Although the fiscal year 2020 saw negative operating cash flow and weak financial credit ratios, Scope expects a return to more normalised levels in 2021, given the significant improvement in market prices achieved this year. Including subordinated loans in the Scope-adjusted leverage calculation, leverage is expected to stay in the 3x-4x range in the medium term.

Given the company’s prudent financial policy and manageable capex programme for the next few years, Scope expects Hafslund Eco to report positive free operating cash flow in the short to medium term, while discretionary cash flow is expected to break even over time. Most committed capex is related to maintenance investments in several power generation assets, but also some upgrading and improvement of water reservoirs and dams.

The company’s history and clear ambition to further participate in structural transactions to grow its businesses pose potential transactional risk. However, Scope believes this risk is well mitigated by Hafslund Eco’s professional organisation. Scope also notes that its New Energy segment is seen as a vehicle for early value creation rather than large investment plans. This indicates that Hafslund Eco is likely to reduce shareholding interests if/when growth investments become too large. Scope deems liquidity adequate and observes that the company has more than sufficient cash and back-up credit facilities to handle its well distributed debt maturity schedule.

With regard to supplementary rating drivers, Scope has made a one-notch positive rating adjustment for 100% ownership by the Norwegian municipality, the City of Oslo, based on the agency’s government related entities methodology. The one-notch uplift for ownership is in line with other Scope-rated Norwegian utilities with majority or full municipality ownership, but without explicit guarantees.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that Hafslund Eco will continue to be a cost efficient and profitable hydro power generation company, with a majority ownership share in Hafslund Eco Vannkraft and a significant ownership share in Eidsiva. It further assumes that the company will generate positive free operating cash flow over time and maintain its prudent financial policy, including manageable capex plans and reasonable dividend pay-outs. It also assumes that the City of Oslo will continue to be a long-term owner with both the capacity and willingness to support the company if needed.

A positive action could be warranted if excess free cash flow is used to service debt repayment, resulting in a sustainable improvement in credit metrics, exemplified by Scope-adjusted debt/EBITDA of around 2x on a sustained basis. It could also occur in the longer term if Scope sees an increasing contribution from the more stable infrastructure business, which could lead to lower volatility and an improved business risk profile.

A negative rating action could be triggered by lower achieved wholesale prices for electricity, creating a weaker financial risk profile, exemplified by Scope-adjusted debt/EBITDA of above 4x on a sustained basis. Further, the loss of government related entity status, due to a change of ownership, could trigger a downgrade.

Long-term and short-term debt ratings

The BBB+ senior unsecured debt rating, which is in line with the issuer rating, is based on the company’s standard bond documentation, which includes a pari passu clause and negative pledge. Senior unsecured bonds are issued at the Hafslund Eco AS level.

The S-2 short-term rating reflects good short-term debt coverage, as well as good access to both bank loan 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 Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 26 February 2020; Rating Methodology: European Utilities, 18 March 2021; Rating Methodology: Government Related Entities, 5 May 2021), 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/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Henrik Blymke, Managing Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 9 July 2021.

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.