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Rating action

Scope Ratings GmbH (Scope) has affirmed the issuer rating of BBB+ on Norwegian utility company Hafslund Eco AS and changed the Outlook to Positive from Stable. The senior unsecured debt rating of BBB+ and the S-2 short term rating have also been affirmed.

Rating rationale

The Outlook change from Stable to Positive reflects the likelihood that Hafslund Eco can sustain a more conservative financial risk profile than Scope had anticipated, based on recent power price increases and the prospects of future achieved power prices. Although the market remains volatile, Scope still thinks Hafslund Eco can strive towards a more conservative financial risk profile than expected by Scope following the structural transaction between Eidsiva Energi and Hafslund Eco in 2019. The recent Hafslund Oslo Celsio (“HOC”, new name of Fortum Oslo Varme) acquisition is slightly positive for Hafslund Eco's business risk profile as it will increase its energy production by almost 2TWh annually and secure ownership of important infrastructure in the Oslo region. Given the company’s prudent financial policy and manageable capex programme in the next few years, Scope expects Hafslund Eco to report positive free operating cash flow and strong credit metrics.

The affirmation of the BBB+ rating is supported by the company’s continued 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 provides its power generation segment with more flexibility, which is advantageous when operating in a market that has volatile prices. The somewhat complex organisational structure with further probable M&A transactional risks is limiting the rating. Still, the 50% ownership in Eidsiva Energi gives a predictable cash dividend stream, which is an important mitigating factor in times when the power prices are lower.

After the HOC transaction, the company has four subordinated loans, which are included in Scope-adjusted debt (NOK 7.3bn in total, as HOC will be fully consolidated). Including the subordinated loans, Scope-adjusted leverage is expected to stay below 2x in the medium term; excluding the subordinated loans, the ratio will stay below 1x. The volatility in cash flow is evident due to Hafslund Eco's high exposure to power production, the fluctuating market prices and the timing of taxes paid. Thus, Scope judges funds from operations/Scope-adjusted debt and free operating cash flow over time, expecting 2023 to be much closer to normal levels than those in 2021 and 2022.

In the last two years, annual capex has been around NOK 0.6bn, which Scope expects to increase in the short to medium term due to the inclusion of HOC. Scope has not assumed any major expansionary investments but acknowledge some potential for such projects in the coming years. This is based on ambitions stated in the announcement of the HOC transaction, amongst other about the carbon capture project at Klementsrud, Oslo.

In terms of supplementary rating drivers, Scope makes no adjustment for financial policy but notes that the company actively monitors quantitative and qualitative factors that affect creditworthiness to maintain high flexibility and a strong credit rating. Under the ownership factor, one notch continues to be added for Hafslund Eco’s 100% ownership by the Norwegian municipality, the City of Oslo, based on Scope’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 are lacking explicit guarantees.

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

Outlook and rating-change drivers

The Positive Outlook reflects Scope’s expectation that Hafslund Eco can sustain a more conservative financial risk profile given the prospect of continued higher-than-normal achievable power prices in the medium term, thus generating sufficiently positive free operating cash flow over time.

A higher rating could be warranted if excess free cash flow is used to repay debt and financial policies are maintained, resulting in a sustainable improvement in credit metrics exemplified by a Scope-adjusted debt/EBITDA sustained below 2x.

A negative rating action (back to a Stable Outlook) could be triggered by lower achieved wholesale prices, higher capex or structural transactions that create a weaker financial risk profile than Scope expects, exemplified by Scope-adjusted debt/EBITDA staying in the 2x-4x range.

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 by Hafslund Eco AS.

The S-2 short-term rating reflects the good short-term debt coverage, as well as good access to both bank loan 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 methodology used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021; European Utilities Rating Methodology, 17 March 2022; Government Related Entities Rating Methodology, 6 May 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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: The Rated Entity, public domain 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, Managing 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
© 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.