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Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating of TrønderEnergi AS (‘TE’) at BBB and changed the rating Outlook to Positive from Stable. Scope has also affirmed the BBB senior unsecured debt rating and the S-2 short-term debt rating.

Rating rationale

The raised Outlook to Positive reflects the likelihood that TrønderEnergi’s profitability will improve significantly in the medium term, as hedges made at low prices roll out of the hedge portfolio and hedge ratios decrease. This is projected to drive profitability up and Scope forecasts the EBITDA margin to increase from 42% in 2022, to above 60% in 2025. Further, this would enable the company to sustain a more conservative financial risk profile than anticipated in Scope’s last review. Assuming the company follows its financial policy and there are no extraordinary expenditures, Scope projects credit metrics to strengthen, exemplified by a Scope-adjusted debt/EBITDA of below 3.0x, which even accounts for the higher resource rent tax applied to Norwegian utilities since 2022.

The business risk profile, assessed at BBB-, continues to benefit from the company’s environmentally friendly and low-cost hydropower production in central Norway (positive ESG factor) as well as its exposure to monopolistic power distribution through its minority stake in Tensio AS. Profitability remains a major strength in the company’s competitive position. TE’s Scope-adjusted EBITDA margins was down to 42% at year-end 2022 due to NOK 342m in realised hedge losses. Albeit below Scope’s projections last year (55%) this is still considered a strong profitability. The company’s highly profitable hydropower generation subsidiary, TrønderEnergi Kraft AS, remains its only consolidated business after it transferred all other assets to newly established, co-owned growth company Aneo in October 2022. The transfer of assets also resulted in significant unrealised gains on both the profit statement and the balance sheet as TE’s shareholdings were fair value-adjusted at the same time. This is considered credit-neutral as it had no cash effect, but also led to the company scoring below average in terms of the recently introduced Scope-adjusted ROCE. Driven by a relatively high asset valuation and no contribution from Aneo to profitability.

TrønderEnergi’s improved financial risk profile at BBB is helped by the stronger-than-expected 2022 financial results and the prospect of more supportive power prices than anticipated in the previous rating update in June 2022. Based on a flat power price assumption in 2023-2025 for the NO3 zone of EUR 40 per MWh (up from around EUR 30 per MWh in the previous rating update) and dividends from Tensio assumed at NOK 100m yearly, Scope-adjusted EBITDA is forecasted to increase to around NOK 630m in 2024-2025 from NOK 477m in 2023, which includes the negative effects from the legacy hedging portfolio. This should support a faster deleveraging than expected despite the increased resource rent tax, with Scope-adjusted debt/EBITDA expected at around 2.75x in 2024-2025 against around 3.5x forecasted in the previous rating update. Given the high capex visibility, which mainly comprises the maintenance of hydropower assets, Scope believes the main risk factors for weaker-than-forecasted credit ratios are lower prices as well as more aggressive shareholder remuneration than assumed.

Aside from the improved leverage, Scope foresees that TrønderEnergi will maintain high internal financing capacity, supported by low and predictable capex of NOK 50m-100m yearly. Further, debt protection metrics as measured by EBITDA interest cover are expected to stay strong at around 9.0x. While rising interest rates are feeding through to the cost of debt, the company’s high share of fixed-rate debt of around 50% helps to slow the acceleration of the interest burden, supported by the relatively limited refinancing needs before 2025 due to a significant liquid portfolio.

Liquidity remains strong. At end-2022, TrønderEnergi had NOK 1.2bn in unrestricted cash and short-term investments, more than sufficient to cover upcoming debt maturities of NOK 297m and NOK 300m in 2023 and 2024 respectively. While committed undrawn credit lines are not sizeable (not required due to the large liquid portfolio), larger facilities could likely be added if needed.

TrønderEnergi’s financial policy has no rating impact. Nevertheless, Scope highlights the relatively high payout ratio established at 75% of the majority owners share of operating profit, with a minimum payment of NOK 150m (down from NOK 200m before the resource rent tax increase). The reduction of the minimum dividend in light of the higher tax burden since September 2022 is positive as it shows a willingness to adapt payouts to capacity. The policy is open to extraordinary dividends, however, but Scope expects that any such payouts would be weighed against TrønderEnergi’s goal of maintaining its investment grade rating.

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 BBB. 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 at least one municipality.

One or more key drivers for the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Positive Outlook reflects the potential ratings upside if power prices in the NO3 zone were able to stay at around EUR 40 per MWh until 2025 and beyond, paired with no material spending on growth and/or extra shareholder remuneration above that included in Scope’s base case.

A rating upgrade could be conducted if financial metrics remained strong and the company would not distribute dividends well beyond Scope’s forecasts leading to a Scope-adjusted debt/EBITDA ratio sustained below 3.0x.

A revision to the Stable Outlook could be triggered if Scope-adjusted debt/EBITDA showed a potential to move and be sustained above 3.0x. This could be driven by lower-than-expected power prices or more aggressive shareholder remuneration than anticipated. Further ratings downside could materialise if credit metrics significantly weakened, e.g. if Scope-adjusted debt/EBITDA moved towards 4.0x. While a remote scenario, a loss by TrønderEnergi of its status as a government-related entity would also cause ratings pressure.

Long-term and short-term debt ratings

The senior unsecured debt rating has been affirmed at BBB, in line with the issuer rating.

The affirmed short-term debt rating of S-2 is backed by the strong short-term liquidity cover and conservative liquidity management. The rating is further supported by well-established bank relationships and good standing in the 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 Outlooks, (General Corporate Rating Methodology, 15 July 2022; European Utilities Rating Methodology, 17 March 2023; 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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks 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/Outlooks were first released by Scope Ratings on 22 June 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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