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 the issuer rating of BBB+ on Norwegian utility company Eviny AS and changed the Outlook to Positive from Stable. Scope has also affirmed the BBB+ senior unsecured debt rating and S-2 short term debt rating.

Rating rationale

The raised Outlook to Positive reflects the likelihood that Eviny can sustain a more conservative financial risk profile than Scope had anticipated, based on recent power price increases, and the current forward market prices. Given the company’s prudent financial policy and controllable capex programme in the next few years, free operating cash flow is expected to be positive and credit metrics strong, exemplified by estimated Scope adjusted debt to EBITDA around or below 2x in the short to medium term. Moreover, Scope notes the issuer’s cautious approach to further large structural transactions, meaning transaction event risks are unlikely to increase for the moment. Instead, the company will focus on existing electrification projects and is longer term organic investment ambitions.

The rating affirmation is also explained by its business risk profile, which benefits from low-cost, hydropower portfolio assets (positive ESG factor) and above-average group profitability margins for a vertically integrated utility company. With the increased power prices recently, the EBITDA share of power distribution business has consequently decreased, but is still a contributor to our positive assessment of cash flow stability. The business risk profile is also slightly supported by the issuer’s diversification into telecommunications and district heating.

Cash flow has been volatile due to Eviny’s large exposure to power production, the fluctuating market prices and the timing of taxes paid. Thus, Scope analyses funds from operations/Scope-adjusted debt and free operating cash flow over a period of time, expecting 2023 to be closer to normal levels than those in 2022. In the last few years, annual capex has been around NOK 1.5bn; Scope expects this to increase in the short to medium term (mainly related to grids but also expansion in the other businesses) but at a level that will still generate positive free operating cash flow.

We assess Eviny’s liquidity as adequate. At Q1 2022, the group had almost NOK 6.5bn in cash and undrawn credit lines compared to NOK 2.4bn in short-term debt. In addition, Eviny’s liquidity is supported by good access to banks and the domestic bond market.

In terms of supplementary rating drivers, Scope used a bottom-up approach to analyse Eviny’s parent support, based on Scope’s Government Related Entity Rating Methodology. Scope continues to apply one notch of uplift for the 54.6% municipality ownership in Eviny, in line with other Scope-rated Norwegian utilities that are majority or fully owned by municipalities but lack 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 the financial risk profile will remain conservative given the prospect of higher-than-normal achievable power prices continuing into the medium term, thus generating positive free operating cash flow. It further assumes that the company will maintain its prudent approach on expansionary capex and dividend payouts.

A higher rating could be warranted if excess free cash flow is used to repay debt while financial policies are maintained, resulting in a sustained improvement in credit metrics exemplified by a Scope-adjusted debt/EBITDA sustained below 2.5x. Increasing share of stable and more efficient grid businesses could be positive for the rating.

A negative rating action (back to a Stable Outlook) could be triggered by lower achieved wholesale prices, higher capex and/or structural transactions that create a weaker financial risk profile than Scope expects, exemplified by Scope-adjusted debt/EBITDA averaging in the 2.5x-4x range.

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 by Eviny AS. 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, (Corporate Rating Methodology, 6 July 2021; European Utilities Rating Methodology, 17 March 2022; Government Related Entities Rating Methodology, 6 May 2022), are 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: 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: 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 22 August 2018. The Credit Ratings/Outlook were last updated on 11 August 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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