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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of BBB/Stable to Norwegian utility Helgeland Kraft AS. Scope has also assigned a first-time BBB senior unsecured debt rating and a first-time S-3 short-term debt rating.

Rating rationale

The issuer rating of Helgeland Kraft reflects a stand-alone credit rating (BBB-) and a one-notch uplift based on Scope’s assessment of parent support from the company’s municipal owners. The uplift is driven by the anticipated capacity and willingness of the 14 municipal owners to provide support if needed.

The company’s business risk profile (BBB) is highlighted by a vertically integrated business model, with a considerable contribution from monopolistic regulated power distribution as well as the efficient and environmentally friendly production of hydropower (ESG factor credit-positive driver). The company also has profitable retail power operations in Norway and Sweden. The retail segment is particularly strong in the Helgeland area due to the company’s engagement with local communities.

The performance in generation and retail is largely linked to price development but the considerable contribution from regulated power distribution dampens this effect significantly. Therefore, the company has reported stable and good Scope-adjusted EBITDA margins in the range of 25%-30% historically, which is slightly below that of other rated integrated utilities. Scope also projects the company’s profitability to remain on the lower end of the historical average due to low power prices and inflationary pressure in the short to medium term.

Scope positively notes the non-cyclical contribution from monopolistic regulated distribution. The company operates 8,100km of regulated distribution networks, distributing power to 46,000 customers in the Helgeland area. Helgeland has 77,000 fairly affluent inhabitants. The population has remained stable over the last 10 years and is projected to remain so in the medium term, supported by strong local industries including ferry operations, transport and fishing. Distribution caters mostly to residential customers, a non-cyclical and stable source of income as they are less likely to adjust consumption based on price fluctuations. The company’s operations are small compared to those of other Norwegian distributors who cater to more densely populated areas, such as Eidsiva with 940,000 customers at YE 2021. However, distribution is a government-protected and monopolistic environment, which makes size less relevant. There is no competition on distribution revenues, and regulation allows for timely cost coverage.

The company operates 18 hydropower production facilities in the Helgeland area. This geographical concentration is partly mitigated by Helgeland’s large geographical area of over 18,000 km2, as compared to Oslo with 454 km2. However, the company’s top three production facilities contribute over 60% of the company’s total yearly production. This poses a risk as any downtime in these facilities could have a large impact on overall performance.

In aggregate, the company has a theoretical production capacity of 1.3 TWh annually, which is estimated to represent a mere 0.8% of the Norwegian generation market. Yet the company’s market position in generation is good, based on the adept and efficient hydropower assets. The largest facilities also have reservoir capacities, enabling the company to regulate production in dry hydrological years. This makes the company less exposed to volume risk, as exemplified by a very stable 10-year mean production of around 1.1-1.2 TWh.

The company’s financial risk profile (BB+) is weaker than its business risk profile. Leverage is historically high relative to peers, with the Scope-adjusted debt/EBITDA averaging 5.5x in the last three years, negatively impacted by record-low prices in 2020. Scope expects a similar effect in 2022 as prices in the issuer’s concession area have been exceptionally low in the year to date, with prices projected to remain high in the short to medium term. Debt protection has been satisfactory as measured by a Scope-adjusted EBITDA/interest coverage averaging 6.6x in the last three years. Going forward, Scope projects some pressure on coverage as interest rates are expected to increase.

Lastly, using Scope’s government related entity methodology, Helgeland Kraft’s parent support used a bottom-up approach. Based on this, Scope has applied a one-notch uplift for the company’s municipal ownership. This is in line with other Scope-rated Norwegian utilities with majority or full municipal ownership.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Stable Outlook reflects Scope's expectation that: i) monopolistic, regulated grid operations and efficient, low-cost hydro production will continue to contribute around 90% of EBITDA; ii) the company’s concession area will remain stable; iii) capital expenditures will remain at around the historical average and be mainly related to maintenance; iv) operating profitability will be lower than in 2021 but still satisfactory in the short to medium term; v) the company will continue to be owned by Norwegian municipalities, whose willingness and capacity to support is deemed as medium by Scope.

A positive action could be warranted by an improved financial risk profile, exemplified by a Scope-adjusted debt/EBITDA of below 3.75x due to improved free operating cash flow or asset disposals.

A negative rating action could be triggered by a weaker financial risk profile, exemplified by a Scope-adjusted debt/EBITDA sustained at around 5.0x and an interest coverage sustained at below 5.0x. This could be due to higher capex and/or dividends than projected. The company losing its status as a government-related entity is another trigger for a negative rating action.

Long-term and short-term debt ratings

The company had NOK 2.9bn of senior unsecured debt as of June 2022. Helgeland Kraft AS is the issuer of all outstanding debt. All senior unsecured debt has a negative pledge and pari passu conditions. Scope has assigned these a BBB rating, in line with the issuer rating.

Scope has assigned a S-3 short-term rating, based on internal and external sources of liquidity (e.g. access to credit facilities and cash on hand), cash flow generation, adequate access to capital markets, and Helgeland Kraft’s long-term issuer credit rating.

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, (General Corporate Rating Methodology, 15 July 2022; 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: Michael-Marco Simonsen, Associate Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 4 August 2022.

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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