Rating action

Scope Ratings GmbH (Scope) has affirmed its A-/Stable issuer rating on Norwegian utility company Tensio AS.

Rating rationale

The affirmation of the issuer rating reflects Tensio’s continued strong business risk profile and the prospect of a weaker financial risk profile. Following the recent refinancing and recapitalisation in the last twelve months, the company’s financial risk profile is moving closer to a normalised capital structure that is in line with its financial policy (i.e. leverage of close to 5x) as well as Scope’s expectations. Since the initial rating, Teniso has carried out two recapitalisation transactions (Q4 2020 and Q3 2021), which combined have transferred NOK 1.5bn back to the owners through extraordinary dividends, relating to the original transactions when Tensio was created.

Tensio’s strong business risk profile assessment is still driven by its sole exposure to regulated power distribution, which is associated with very low industry risk. Given this monopolistic position, the company’s lack of product and geographical diversification is not important for the rating. Over time, Scope expects the combination of the two grid companies to result in streamlined operations and, in turn, improved efficiency.

Profitability developed positively in 2021 thanks to an increased top line due to high volumes and higher regulated income, in combination with good cost control, which lowered other operating costs. Key to Scope’s financial risk assessment are: i) the company’s high investment requirements going forward, which will continue to result in negative free operating cash flow in the medium term; and ii) its plan to distribute excess capital through ordinary (or potential extraordinary) dividends to its owner.

Liquidity ratios have improved, with short-term debt being refinanced via a 10-year loan granted by the Nordic Investment Bank. In September this year, the company also raised NOK 750m with a new five-year senior unsecured green bond. Refinancing needs will therefore be limited until the next debt maturity in 2023. Going forward, Scope projects some new funding needs, due to the negative discretionary cash flow, but much less than during the last year following the recent debt transactions.

As regards supplementary rating drivers, Tensio’s new financial policy leads to no adjustment as it is already incorporated in Scope’s financial risk profile assessment. Parent support continues to warrant a one-notch uplift from Tensio’s standalone rating, based on the application of the agency’s Government Related Entity (GRE) rating methodology, using a bottom-up approach. Scope’s assessment of indirect majority municipal ownership of Tensio is based on potential parent support, determined not by the standalone performance or credit quality of TrønderEnergi and NTE, but by the capacity and willingness of their municipal owners to provide support if needed.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that Tensio will continue to generate cash flow from monopolistic and regulated grid operations. The Outlook also assumes that the company will strive towards planned recapitalisation, which should result in leverage, in terms of SaD/EBITDA, moving closer to 5x. Scope also assumes that the company will remain indirectly majority owned by Norwegian municipalities.

A positive rating action could be warranted if Tensio keeps SaD/EBITDA with significant headroom to its leverage target, following positive free operating cash flow and reduced dividend distributions, at around 4x on a sustained basis.

A negative rating action could be triggered by a financial policy change that significantly weakened Tensio’s financial risk profile, exemplified by SaD/EBITDA moving towards 6x on a sustained basis. A reduction in indirect municipal ownership to below 50% and the loss of GRE status could also trigger a downgrade. 

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 this Credit Rating and/or Outlook, (Corporate Rating Methodology, 6 July 2021; 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 Rating if the Credit Rating 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 Rating: public domain, the Rated Entity and Scope Ratings' internal sources. Historical data used for this Credit Rating is limited.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. Scope Ratings notes that the Credit Rating is based on limited historical data. The information and data supporting the Credit Rating 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 Rating and/or Outlook and the principal grounds on which the Credit Rating and/or Outlook are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
This Credit Rating and/or Outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and/or Outlook is UK-endorsed.
Lead analyst: Henrik Blymke, Managing Director
Person responsible for approval of the Credit Rating: Sebastian Zank, Executive Director
The Credit Rating/Outlook was first released by Scope Ratings on 25 Novemeber 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
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