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Rating action

Scope Ratings GmbH (Scope) has affirmed its BBB+/Stable issuer rating on Norwegian utility company Eidsiva Energi AS. Scope also affirmed the BBB+ rating for senior unsecured debt and its S-2 rating for short-term debt.

Rating rationale

The affirmation of the issuer rating reflects Eidsiva’s continued strong business risk profile and the prospect of an improved financial risk profile going forward. While Scope acknowledges Eidsiva’s growing operations within district heating and broadband, the company’s business risk profile continues to be defined by its monopolistic position within grid operations.

Eidsiva’s grid losses increased in the second half of 2021 due to record-high energy prices. Further, under the Norwegian system, excess losses can only be passed on to end-customers through increased tariffs in the following years. As a result, Scope-adjusted EBITDA at end-2021, at 26%, was slightly less than Scope’s projected 28%. The Scope-adjusted EBITDA also includes contributions from Eidsiva’s minority holding, hydro power producer Hafslund-Eco Vannkraft, which had a good 2021 due to the record energy prices, showing the diversification benefits of the longstanding ownership.

Scope’s medium-term base case expects improved profitability in 2022/2023 once tariffs can be increased in April 2022. Scope also expects Hafslund-Eco Vannkraft to continue to contribute considerably due to the record power prices.

The company’s financial risk profile is weaker than its business risk profile. The lower profitability resulted in higher leverage ratios than Scope’s projections, with a Scope-adjusted debt (SaD)/SaEBITDA ratio of 7.7x against the projected 6.6x. These levels are expected to be temporary and therefore did not negatively impact the overall financial risk profile rating.

Liquidity ratios ended 2021 in line with Scope’s projections and are adequate. The company refinanced a NOK 2.5bn revolving credit facility and issued five bonds since Scope’s last review. Refinancing needs are therefore lower but will remain noticeable as Scope projects continued negative discretionary cash flow of NOK -1.7bn over the next two years. Scope-adjusted debt is therefore expected to increase to more than NOK 18bn at YE 2023.

Within the supplementary rating drivers, Scope continues to apply its bottom-up approach for government-related entities to analyse Eidsiva’s parental support and maintains the one-notch uplift assigned for municipality ownership

Lastly, the company has implemented routines and processes to measure and report the various factors included in EU’s new taxonomy regulations. This reporting will be mandatory for all listed Norwegian companies and has a gradual roll-out from January 2022. While this is a positive development, it has a neutral impact on the credit as it will be mandatory for all listed companies.

Outlook and rating-change drivers

The Stable Outlook continues to reflect Scope’s expectation that i) monopolistic, regulated grid operations will continue to contribute the most to EBITDA; ii) leverage ratios will decrease to below 5.25x into the medium term; iii) capital expenditures will remain high; iv) free operating cash flow will turn positive into the medium term; and v) Eidsiva will continue to be owned by Norwegian municipalities.

A positive action could be warranted by an improving financial risk profile, exemplified by a SaD/SaEBITDA sustained at around 4x through improved free operating cash flow or asset disposals.

A negative rating action could be triggered by a weaker financial risk profile, exemplified by a SaD/SaEBITDA sustained at above 5.25x and an interest coverage at below 5x, due, for example, to higher capex and/or dividends than projected. The company losing its status as a government-related entity is also a trigger for a negative rating action.

Long-term and short-term debt ratings

All debt is issued by Eidsiva Energi AS.

The BBB+ senior unsecured debt rating has been affirmed in line with the issuer rating, based on the company’s standard bond documentation, which includes a pari passu and negative pledge.

The S-2 short-term rating has also been affirmed, reflecting the short-term debt coverage and continued 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/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-EU. 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 Outlooks 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: Michael-Marco Simonsen, Associate Director.
Person responsible for approval of the Credit Ratings: Sebastian Zank, Executive Director.
The Credit Ratings/Outlook were first released by Scope Ratings on 8 December 2017. The Credit Ratings/Outlook were last updated on 23 March  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
© 2022 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.