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Rating action

Scope Ratings GmbH (Scope) has resolved Glitre Energi AS’s status of under review for a developing outcome, upgraded the issuer rating to BBB+ from BBB and changed the Outlook to Positive. Scope has also upgraded the senior unsecured debt rating to BBB+ and confirmed the S-2 short-term rating.

Rating rationale

On 16 June 2021, Agder Energi’s and Glitre Energi’s owners approved a letter of intent to merge the two companies. On 5 May 2022, the boards of the two companies presented the proposed merger terms to their respective owners. These are: i) Agder Energi will be the acquiring company; ii) Glitre’s current owners will own 26.85% of the merged company and Agder’s current owners will own 73.15%; and iii) Agder’s owners will receive an extraordinary dividend of NOK 1.1bn based on Agder’s stronger 2021 results than Glitre and the different dividend policies between the two (distributed over the following three years).

Scope views the merger as highly likely and has therefore resolved the under-review status. However, the merger is still subject to approval by the owners at an extraordinary general assembly scheduled on 20 September 2022, the Norwegian competition authority, the Norwegian Energy Regulatory Authority (NVE) and the Ministry of Petroleum and Energy (OED). Therefore Glitre is rated on a standalone basis, but given Scope’s view of a full integration in the near term, its ratings are aligned with those of AgderGlitre.

AgderGlitre’s business risk profile (assessed at BBB; Glitre standalone: BBB) benefits from its strengthened market position in low-cost hydropower production with a favourable position in the merit order thanks to its low carbon footprint, benefitting the company’s cash flows (positive ESG factor). The mean production of 11.3 TWh (up from 2.6TWh for Glitre standalone) will make it the third largest producer in Norway. In regulated infrastructure, AgderGlitre will become the second largest grid operator in Norway with around 310,000 customers (up from 100,000 for Glitre’s standalone). Its outreach to residential and commercial electricity customers and its telecommunications exposure (via the 26.6% direct ownership in Vikenfiber and 1.9% through Hadeland Energi) also cement its strong standing as a Norwegian utility. AgderGlitre’s geographical diversification will be broader than Glitre’s through the addition of a second price area (although somewhat correlated). Moreover, its asset concentration risk will lessen through the addition of power plants and its vertical integration strengthened. The operating profitability of AgderGlitre benefits strongly from the high power prices achieved in current spot markets, but is somewhat held back by the significant related grid losses on its regulated business, low retail profitability and high hedging by Glitre. Hedging will be eventually reduced, which Scope expects will boost the EBITDA margin to the 40%s but make it more volatile.

AgderGlitre’s financial risk profile (assessed at BBB+; Glitre standalone: BBB+) has strongly improved over the last 12-18 months thanks to record-high power prices. Glitre’s leverage as measured by Scope-adjusted debt/EBITDA has dropped from its peak of 5.1x in 2020 to 2.6x in 2021, reversing the pressure on its ratios. With the European energy crisis keeping forward prices high, Scope expects leverage to remain well below 2x over the forecast horizon for Glitre standalone and AgderGlitre. Cash flow will remain volatile due to AgderGlitre’s large exposure to power production, the fluctuating market prices and the timing of taxes paid. Thus, Scope analyses Scope-adjusted funds from operations/debt and free operating cash flow over a longer period, while acknowledging the extremely strong ratios at present. Interest cover will remain a strength at well above Scope’s 7x threshold, both for Glitre standalone and AgderGlitre. While standalone and AgderGlitre’s proforma ratios point to an already stronger financial risk profile, Scope remains cautious and reflects the potential upside through the Positive Outlook. This view factors in historical and potential volatility and the unfinished merger process and requires more clarity on the financial policy of the merged AgderGlitre.

AgderGlitre’s liquidity is adequate. At Q2 2022, the proforma merged group had almost NOK 7.9bn in cash and NOK 3.75bn in undrawn credit lines compared to NOK 2.3bn in short-term debt. In addition, AgderGlitre’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 AgderGlitre’s parent support based on Scope’s Government Related Entity Rating Methodology. Scope continues to apply one notch of uplift for the municipality ownership in AgderGlitre (13.4% Drammen municipality; 13.4% Buskerud county municipalities via Vardar, 39.8% Agder municipalities, with the remainder of 33.3% owned by Statkraft), 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 (Scope-adjusted debt/EBITDA of below 2.5x) given the prospect of higher-than-normal achievable power prices into the medium term, which will generate positive free operating cash flow. It further assumes that the company will maintain its prudent approach on expansionary capex and dividend payouts and that the merger will be executed.

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. An increasing share of stable and more efficient grid businesses could be positive for the rating as well.

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 above 2.5x. An abandoned merger or a more aggressive financial policy could also imply a negative rating action.

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. Senior unsecured bonds were issued by Agder Energi AS and Glitre Energi AS. Once the merger is approved by owners and regulators, AgderGlitre will reach out to its lender to reflect the newly formed loaning entity. 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, (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: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 4 January 2018. The Credit Ratings/Outlook were last updated on 17 December 2020.

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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