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Rating action

Scope Ratings GmbH (Scope) has today upgraded the issuer rating on Norwegian integrated utility Lyse AS to A-/Stable from BBB+/Stable. Scope has also upgraded the senior unsecured debt rating to A- from BBB+, and the short-term debt rating to S-1 from S-2.

Rating rationale

The upgraded A- issuer rating reflects the likelihood that Lyse can sustain a more conservative financial risk profile throughout a period of significant growth in its telecommunications division. Scope’s updated assessment is mainly driven by high power prices in southern Norway, which despite raised hydropower taxes, are resulting in strong credit metrics. In addition, the rating continues to be supported by Lyse’s diversified business model and the one-notch uplift granted for parent support based on government-related entity status.

The business risk profile (assessed at BBB+) continues to benefit from the company’s highly profitable and environmentally friendly hydropower business (positive ESG factor) in combination with exposure to robust infrastructure segments such as monopolistic power distribution, fibre broadband and mobile networks. Sizeable and growing contribution to EBITDA from telecommunications and regulated power distribution has historically helped Lyse to better withstand energy price volatility. Lyse holds strong market positions and is one of the largest hydropower entities in Norway through its 74.4% stake in Lyse Kraft DA, which was established in late 2020 by a merger with Hydro’s RSK assets, with a normal annual production of 9.7 TWh located within Norway’s NO2 pricing zone. Lyse’s geographical focus on only one pricing zone somewhat holds the business risk assessment back, as it exposes the company to increased price volatility, although generation in southern Norway is currently well placed within the Nordics in terms of achievable power prices. Further, Lyse keeps strengthening its market position within telecommunications. After the NOK 5.8bn acquisition of ICE in 2022, it expanded its presence into the mobile segment and became a full-fledged telecoms provider. This adds to the company’s leading position in the Norwegian market for fibre broadband and television services under the Altibox brand, where it holds market shares (including partnerships) of around 50% and 26%, respectively. Lyse’s strong profitability with EBTIDA margins of 40%-50% remains a supportive factor for the business risk profile.

Lyse’s financial risk profile (assessed at BBB+) greatly benefited from elevated power prices throughout 2022 with the average NO2 price ending at 213 Øre/kWh while Lyse’s achieved price was 180 Øre/kWh. For comparison, Lyse achieved a price of 68 Øre/kWh in 2021, while the historical average price prior to 2021 was around 30 Øre/kWh. The extraordinary result in 2022 more than offset the negative impact initially expected on Lyse’s credit metrics from the NOK 5.8bn acquisition of ICE, with Scope-adjusted debt/EBITDA decreasing to 1.1x at year-end 2022 (from 1.6x in 2021). Based on the cushion provided by 2022 results and the prospects of power prices remaining supportive, it now seems more likely that Lyse can carry out its large capex programme while maintaining strong credit metrics. Scope expects leverage as measured by Scope-adjusted debt/EBTIDA to stay between 1.8x-2.5x in 2023-2025 and Scope-adjusted EBITDA/net interest of around 10x. These levels are based on the assumption of around NOK 4.8bn in annual capex over 2023-2025, with most funds going into telecoms growth in both mobile and fibre broadband segments. Scope forecasts the high capex level to result in negative free operating cash flows until at least 2025, which is partly offset by the highly positive levels achieved in 2021 and 2022, with Scope-adjusted free operating cash flow of NOK 3bn and NOK 6.7bn, respectively. In sum, the financial risk profile has significantly improved in 2022 and worries about the large capex programme have abated, leading to a two-notch uplift to BBB+ from BBB-.

Lyse’s issuer rating reflects a stand-alone credit assessment of BBB+ and a one-notch uplift for parent support based on its government-related entity status. The uplift is driven by the anticipated capacity and willingness of Lyse’s Norwegian municipality owners to provide support if needed. No adjustment has been made for financial policy since this is already reflected in the financial risk profile. However, Scope notes positively that Lyse aims to maintain a strong investment grade rating and is thus aware of the credit metrics required for such rating levels. Further, the company has a well-established dividend policy with its 14 municipality owners, giving visibility on future payout ratios.

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 view that Lyse will maintain its diversified business model within hydropower generation, monopolistic power distribution and stable telecommunications. It further anticipates that Lyse will maintain strong liquidity, Scope-adjusted debt/EBITDA below 3x, and an unchanged ownership structure.

A positive rating action is currently remote but could be warranted if Lyse significantly improved its business risk profile by increasing its production capacity and expanding its geographical reach while keeping credit metrics at current strong levels, or if Scope-adjusted debt/EBITDA moved towards 1x on a sustained basis.

A negative rating would be possible if Lyse’s financial risk profile weakened with Scope-adjusted debt/EBITDA reaching 3x or above. This could materialise if power prices significantly and unexpectedly dropped without being counterbalanced by lower capex, or, in the event of large debt-financed transactions or investments.

Long-term and short-term debt ratings

The upgraded A- senior unsecured debt rating is in line with the issuer rating. Scope has also upgraded the short-term debt rating to S-1, reflecting sufficient short-term debt coverage and good access to both bank and bond financing.

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 Outlooks, (European Utilities Rating Methodology, 17 March 2022; General Corporate Rating Methodology, 15 July 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 Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 30 May 2017. The Credit Ratings/Outlooks were last updated on 1 April 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory 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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