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Rating action

Scope Ratings GmbH (Scope) has today upgraded the issuer rating of Norwegian integrated utility Å Energi AS (previously known as Agder Energi AS) to A- from BBB+. The Positive Outlook has been maintained. 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 rating is driven by Scope’s view on Å Energi’s improved business risk and financial risk profiles. The stronger business risk profile assessment of BBB+ is driven by an improved profitability assessment in terms of EBITDA margin and its stability in addition to strong Scope-adjusted ROCE, a factor newly included in Scope’s methodology for European utilities. The upgraded financial risk profile of A- is mainly driven by Scope’s view of continued elevated power prices in southern Norway. It also reflects the completed merger with Glitre Energi which removes previous transaction risks. At the same time, the company’s financials will remain volatile and depend strongly on external factors such as achieved power prices. As evidenced from sudden tax increases during 2022, political risks are present although Scope views the likelihood of further tax increases as relatively low. In total Scope remains confident in its assessment of an improved financial risk profile bolstered also by some headroom in credit metrics. In addition, the agency has assigned a Positive Outlook indicating that further ratings upside could be possible if the low leverage of 1.5-2.0x can be sustained in the longer term, i.e. beyond 2025E.

Å Energi’s improved business risk profile (assessed at BBB+) is a stabilising factor for the company’s creditworthiness. With the inclusion of Glitre Energi into Agder Energi, the merged company (i.e. Å Energi) has significantly widened its scale in unregulated power generation and monopolistic power distribution, as illustrated by a combined 11.3 TWh annual mean hydropower volume and the position as Norway’s second largest grid operator with 313,000 customers (after Eidsiva). The transaction also increased the size of the company’s retail activities towards households. For commercial customers, the retail business in Entelios Norden with around 20 TWh in annual sales volumes is largely the same as in the old Agder Energi. Aside from the company’s core business areas, the 28.5% (directly and indirectly) shareholding in Viken Fiber (Norway’s largest supplier of fiber broadband) provides exposure to robust infrastructure cash flows through equity, for which Scope has assumed annual dividends received by Å Energi of around NOK 50m p.a. in 2023E-25E. Both financial and qualitative synergies are expected to be realised from the merger over the next years, including: i) standard cost savings; ii) higher regulatory grid efficiency; iii) more streamlined investment planning; and iv) a widened set of profitable commercial opportunities.

As the third largest power producer in Norway (after Statkraft and Hafslund ECO), with a mean annual production of 11.3 TWh, the company has become a significant power producer in the Nordpool market. Å Energi’s hydro plants are favourably placed in the Nordic and European merit order systems due to the comparatively low marginal costs of hydropower generation which is viewed as a key credit strength. The market position in power generation is further bolstered by significant reservoir capacities of 6.3 TWh (equivalent to 56% of its annual mean hydropower volume) which ensures flexibility in power generation and enables optimisation of power sales towards times with high prices, such as peak-load hours or times with limited production from intermittent generation.

The business risk profile is further supported by Scope’s expectation of an increased contribution from regulated grid operations in Glitre Nett and commercial retail in Entelios Norden as they will provide some stability to cash flows. Nevertheless, the overall cash flow exposure remains highly exposed to the dominant core business in hydropower generation where financial performance is strongly linked to volatile power prices. While Scope assumes a supportive price environment over the next years with levels largely above historical averages, unexpectedly low price developments can be caused by external factors such as adversely high precipitation, and therefore not be fully ruled out. Further, Scope highlights that all of the company’s production is within the NO2 and NO1 bidding zones – where prices are highly correlated – something which is negative from a diversification perspective but positive in terms of expected achieved power prices when compared to production located in mid- and northern Norway.

Scope expects Å Energi to deliver consistently strong profitability as measured by the Scope-adjusted EBITDA margin and the Scope-adjusted ROCE. While the consolidated Scope-adjusted EBITDA margin is expected at around 30% throughout 2023E-25E, this likely provides an inaccurate picture of profitability because of the significant retail business which strongly dilutes group margin due to its nature with high revenues and low margin of 0-2%. Consequently, emphasising an alternative Scope-adjusted EBITDA margin which excludes the retail business is appropriate, based on: i) the low-risk of losses in Entelios Norden and Å Strøm as positions are largely hedged; and ii) the higher retail volumes of Å Energi compared to many Norwegian utility peers. Despite the exposure to volatile power prices, margin fluctuations for Å Energi are relatively limited as the operating costs of hydropower are comparatively low with a fixed marginal cost of around NOK 0.10/kWh. Also incorporating the stable grid business, Scope does not foresee any material risks that group EBITDA margins ex. retail and Scope-adjusted ROCE cannot be maintained at levels around 50% and 15-20%, respectively.

Å Energi’s improved financial risk profile at A- benefits from supportive power price levels which are foreseen by market-based sources to settle well above historical averages in the coming years. Going forward, Scope assumes continued elevated power prices with levels ranging between NOK 1/kWh (2023) and NOK 0.60-0.75/kWh (2025-26) in bidding zones relevant for Å Energi (NO2 and NO1). Combined with Scope’s view that production volumes will normalise from 2023 as the extraordinary low precipitation seen during 2022 has already been reversed, Scope forecasts that the company will generate group EBITDA of around NOK 8bn on average in 2023-25. This includes Scope’s estimates that the grid business in Glitre Nett will contribute with EBITDA of NOK 1bn-1.4bn p.a. and that Entelios Norden will see a normalisation of EBITDA after extreme price levels and volatility led to above usual strong results in 2022-23. It also incorporates the company’s relatively large hedging portfolio for its hydropower generation at prices well below Scope’s applied price curve, and the resulting negative impact on results from these positions, acting as a stabilising effect if achieved spot prices would be reduced below Scope’s base case. Lastly, incorporating negative cash flow effects from higher taxes, the increased interest burden, more assumed capex than historically, and relatively large dividends, the agency still expects credit metrics to remain at strong levels.

The company continues to show solid internal financing capacity as measured by Scope-adjusted FOCF/debt, which Scope foresees remaining structurally neutral to positive over time. However, Å Energi’s policy for dividend payouts of 70% of profits weighs on discretionary cash flows. Scope does not expect dividend payments or capex to be adjusted significantly at current leverage levels to avoid an expansion of net debt, illustrated by Scope’s estimate of an increase of Scope-adjusted debt to around NOK 12bn by 2025. At the same time, Scope does not expect any large capex increase in the event of higher power prices than those assumed in its base case. Consequently, Scope believes the development of net debt in the next years will be somewhat correlated with power price levels.

Scope expects Å Energi’s leverage, as measured by Scope-adjusted debt/EBITDA, to remain comfortably below 2.0x throughout 2023-25 – relatively aligned with levels forecasted in the previous rating update from September 2022. Further, it should be pointed out that high taxes in hydropower generation are not directly reflected in the denominator of the EBITDA-based leverage, but still accounted for in Scope’s assessment of the financial risk profile.

Debt protection metrics, as measured by Scope-adjusted EBITDA interest cover, are expected to be at very strong levels of 20-30x. Consequently, debt protection is a strong factor in Å Energi’s financial risk profile. The interest burden is expected to increase towards 2025 caused by rising interest rates feeding through to the cost of existing and refinanced debt. This is partly offset by a sizeable share of debt being fixed rate or hedged. In addition, the agency estimates an external financing need of around NOK 2bn, assuming that power prices materialise similar to those assumed in the base case.

Liquidity remains strong. At year-end 2022, Å Energi had NOK 4.4bn in unrestricted cash plus NOK 3.5bn in unused credit lines (including a NOK 500m overdraft facility). The company recently expanded its overdraft facility to NOK 1.5bn. While parts of the NOK 3bn of committed credit lines expire in 2024-25, these can in all likelihood easily be renewed, or even expanded, if required. Scheduled debt maturities of NOK 3.2bn in 2023 and NOK 1.3bn in 2024 can likely be covered by available liquidity sources. Scope highlights the periodisation effect in FOCF from an expected cash outlay of around NOK 3.7bn in 2023 relating to the settlement of hedge positions from last year, which explains the high cash position at year-end 2022. Further, refinancing is not assessed to be an issue due to Å Energi’s solid investment grade rating, bolstered by: i) its strong business and financial risk profiles; ii) its status as a government-related entity; and iii) broad access to financing opportunities.

Å Energi has a favourable ESG profile due to its exposure to low-cost and environmentally friendly hydropower production, supported by far below average carbon intensity of 1gCO2e/kWh (Positive ESG factor). This position should support future cash flow generation and access to funding through high utilisation factors of its hydro assets and lower the risk of headwinds from regulation and political interference. In addition, the exposure to hydropower generation guarantees the consistent GRE status.

Å Energi’s financial policy is deemed to have no rating impact. Nevertheless, Scope highlights its relatively aggressive dividend policy of paying out 70% of underlying profit over time. However, such payout ratios are not uncommon for Norwegian municipality-owned utilities. The company has a publicly stated goal of keeping a credit rating of minimum BBB+ and thus it is implicitly aware of credit ratios required to maintain such rating levels. While Å Energi is currently in the process of revising its corporate strategy for the merged company, Scope does not expect any major changes that would alter its rating case.

The issuer rating continues to incorporate a one-notch uplift for parent support on the standalone credit assessment of BBB+, leading to a final issuer rating of A-. Scope has applied a bottom-up approach using the framework outlined in Scope’s Government Related Entities Methodology. The conclusion of a one-notch uplift reflects the public sponsor’s capacity and willingness to provide support and is in line with Scope’s assessment of other Norwegian regional utilities it rates that are majority owned by one or more municipalities.

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

Outlook and rating-change drivers

Scope maintains the Positive Outlook on the rating given further potential rating upside. The Positive Outlook reflects the agency’s view of potential further ratings upside in a scenario where power prices are sustained at elevated levels even beyond 2025. Overall, Scope sees good chances that Å Energi could keep Scope-adjusted debt/EBITDA at around or below 2.0x.

A rating upgrade could be warranted if credit metrics – as exemplified by a Scope-adjusted debt/EBITDA ratio of around or below 2.0x – were sustained.

A revision to the Stable Outlook could be triggered if Scope foresees that leverage (Scope-adjusted debt/EBITDA) moves above 2.0x on a sustained basis. This could be driven by lower-than-expected power prices, or alternatively, an upward revision of the capex programme and/or dividend policy. Further ratings downside could materialise if credit metrics significantly weakened, e.g. if leverage moved towards 4.0x. While considered remote, a loss of GRE status would also cause ratings pressure. 

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/or Outlook, (European Utilities Rating Methodology, 17 March 2023; 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/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: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 22 August 2017. The Credit Ratings/Outlook were last updated on 6 September 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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