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 issuer rating on BKK AS. At the same time, the BBB+ senior unsecured debt rating and the S-2 short-term rating have been affirmed.

Rating rationale

The issuer rating continues to be supported by BKK’s business risk profile, which reflects low-cost, environmentally friendly hydropower portfolio assets (positive ESG factor), a meaningful share of a power distribution business and above-average group profitability margins over time for a vertically integrated utility company. Although BKK’s financial risk profile is assessed as weaker than its business risk profile, Scope takes comfort in the easing of pressure on credit metrics in 2021 compared to last year. BKK’s business risk profile is also supported by its diversification into telecommunications and district heating through companies in its FEM segment. Although BKK has been in an investment phase and has clear growth ambitions, Scope does not see increased transactional risks at the moment. Scope believes BKK will cautiously seek participation in potential transactions in the Norwegian utility market, driven by a prudent financial policy and company targets. The newly announced cooperation on offshore wind projects with Shell and Lyse is still in an early exploratory phase.

BKK’s financial risk profile came under some negative pressure last year due to historically low power prices in its service territory. However, so far in 2021, there has been much less negative pressure on the leverage ratio thanks to significantly higher power prices achieved, lower taxes paid and the final disposal of the remaining Fjordkraft shares, generating a large amount of cash in 2021. Scope also anticipates a slight increase in the profitability of BKK’s monopolistic distribution business going forward. However, its EBITDA contribution will be marginally below the normalised EBITDA contribution from this segment in the short term, due to the strong production segment. Overall, Scope expects selected credit metrics to improve in 2021, exemplified by Scope-adjusted leverage returning to below 4x.

For its assessment of supplementary rating drivers, Scope used a bottom-up approach to analyse BKK’s parent support, based on its Government Related Entity Methodology. The one notch of uplift assigned for the 54.6% municipality ownership in BKK has not changed. Thus, the issuer rating remains at BBB+, based on a standalone rating of BBB and a one-notch uplift for parent support.

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

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that BKK’s financial risk profile will continue to be supported by good interest cover and positive free operating cash flow generation, which will mitigate the slightly weaker leverage ratio. It further assumes that the company will maintain its prudent financial policy, including manageable capex plans and reasonable dividend pay-outs. The Outlook also reflects Scope’s expectation of continued majority ownership by the combined municipalities.

A positive rating action could be warranted if BKK generates positive discretionary cash flow and deleverages, resulting in lower financial credit metrics, e.g. average Scope-adjusted debt/EBITDA of 3x on a sustained basis.

A negative rating action could be warranted by substantially lower wholesale power prices, leading to negative free operating cash flow and weaker credit metrics, e.g. Scope-adjusted debt/EBITDA of well above 4x on a sustained basis.

Long-term and short-term debt ratings

The BBB+ senior unsecured debt rating is in line with the issuer rating and 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 BKK AS level.

The S-2 short-term rating reflects good short-term debt coverage, as well as good access to both bank loans and debt capital 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/or Outlook, (Rating Methodology: European Utilities, 18 March 2021; Corporate Rating Methodology, 6 July 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 <amended/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 22 August 2018. The Credit Ratings/Outlook were last updated on 17 August 2020. 

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.