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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, the effect of high energy prices, the impact of the acquisition of Ice Group Scandinavia Holding AS on Lyse’s financial risk profile and the unchanged one-notch uplift granted for the municipality ownership.

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, which helped to better withstand low energy prices in 2020. In 2021, its unregulated energy generation capacity increased to around 10TW from 7TW thanks to the establishment of Lyse Kraft DA in 2020, which includes Hydro Energi AS power stations (nine out of the group’s 33 plants). The increased capacity helped Lyse’s credit metrics in 2021 thanks to strongly increasing energy prices. The expectation of further rising energy prices has, however, also tilted its industry risk (BBB) further towards this volatile segment.

In September 2021, Lyse (via Altibox) acquired its first 5G licences in a tender, marking its first foray into the mobile business. Lyse intends to bridge the last mile via wireless broadband to customers who are not financially viable for connecting to its fibre network. The company also announced the acquisition of Ice, Norway’s third largest telecoms provider, in February 2022. Lyse will therefore become a complete provider of telecoms services in Norway, extending its fibre broadband business to mobile telecommunications. The acquisition will be settled through a cash consideration of NOK 3bn to Ice, financed using available liquidity at Lyse, while Lyse will also take on NOK 2.8bn of outstanding bond debt from Ice. Scope expects this transaction to strengthen Lyse’s telecoms segment over time and to potentially reap diversification benefits, while profitability will be somewhat stunted in the short term. The transaction has larger effects on the financial risk profile than on the business risk profile.

Lyse’s 2021 financial performance and credit metrics greatly benefited from the strong increase in energy prices throughout the year, brought along by a combination of factors. Cold weather in early 2021 led to a surge in power demand in Norway, which depleted water reservoirs. The following summer was dry and reservoir levels remained low, thereby constraining hydro power capacity. Milder-than-usual winds also led to low wind power production. Finally, a rise in gas and CO2 prices in autumn 2021 drove up overall energy prices both in Norway and in Europe more generally towards the end of 2021. Prices have increased even further due to the cold weather in early 2022 and the war in Ukraine. Given the high energy prices, Lyse produced above capacity in 2021 at 10.4TWh, resulting in the depletion of water reservoirs in a dry year. Scope expects energy production in 2022 to be well below 2021 levels at only around 8.1TWh, with a slight recovery to 8.5TWh in 2023/24.

Leverage as measured by Scope-adjusted debt/EBITDA came in very strong at 1.6x for 2021, after a weak 2020 at 4.9x, demonstrating the high share of unregulated power generation resulting in volatility. Due to the acquisition of Ice and a large capex programme across segments, estimated by Scope to be NOK 4.8bn in total, Scope expects Lyse’s gross interest-bearing debt to increase to NOK 22.6bn in 2022. In addition, the company will take over NOK 2.3bn of leasing debt from Ice. This will increase leverage to 3.4x in 2022, expected to remain between 3x-4x in the years to come. Interest coverage remains strong. Due to the significant capex programme in its existing telecoms segment, the acquisition of Ice and elevated grid investments in the coming years, Scope expects cash flow coverage as measured by free operating cash flow/Scope-adjusted debt to be negative in 2022 and to turn just about positive in 2023.

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.

Lyse has started implementing routines and processes to measure and report the various factors included in EU’s new taxonomy regulations, which the company intends to include in its reports, starting with the annual report 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 reflects Scope’s expectation that Lyse will maintain its diversified business model (energy, grids and telecoms) and strong liquidity, fully covering both short-term debt maturities and the current mandatory investment programme. It also assumes that the acquisition of Ice will go through as planned and take its main credit metrics back to the expected range in 2022, after being above it in 2020 and below it in 2021, as measured by Scope-adjusted leverage returning to the 3x-4x range in the short to medium term. The Outlook also reflects the expectation that Lyse’s ownership structure will remain unchanged.

A positive rating action could be warranted if cash flow proved higher than Scope’s estimates due to consistently higher 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 3x on a sustained basis.

A negative rating action is possible if Lyse’s financial risk profile weakened due to lower wholesale prices or debt-financed transactions or investments, resulting in leverage of over 4x 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/or Outlook, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Utilities, 17 March 2022; Rating Methodology: Government Related Entities, 5 May 2021), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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: Thomas Faeh, Executive 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 4 May 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
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