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Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating on Norwegian integrated utility Helgeland Kraft AS at BBB/Stable. Scope has also affirmed the senior unsecured debt rating at BBB and upgraded the short-term debt rating to S-2 from S-3.

Rating rationale

The affirmation reflects a standalone credit assessment of 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 standalone credit assessment reflects year-end 2022 key credit metrics, which came in stronger than Scope’s last review projected. This performance was driven by higher-than-projected H2 2022 energy prices and good results in the company’s retail and grid segments. The assessment also reflects Scope’s belief that that the company will be able to pursue higher-than-historical grid investments whilst maintaining financial metrics in line with historical averages. Despite the increased resource rent tax on hydropower profits imposed in 2022. This is justified by good and stable projected profitability, with EBITDA margins ranging between 27%-29% and expected NO4 spot prices of around EUR 30 per MWh until 2025.

The company’s business risk profile (BBB) continues to be highlighted by a vertically integrated business model, with a considerable contribution from monopolistic regulated power distribution (about 45% of EBITDA on average), as well as the efficient and environmentally friendly production of hydropower (positive ESG factor). Consolidated EBITDA margins have historically fluctuated between 25%-30% depending on generation performance. The company realised significant hedge losses on its generation for 2022 due to its decision to close all hedged positions after it saw a growing divergence between the SYS price (used as a reference rate for financial hedges) and the NO4 price. Yet it still ended the year with a good EBITDA margin of 26%. This was driven by the substantial and stabilising effect of regulated distribution, which sees stronger profitability when prices are low due to lower grid losses. The company’s retail power operations in Norway and Sweden also contributed, with an EBITDA margin of 14% (8%-10% historically).

Scope projects good generation performance for 2023, with EBITDA margins close to 60%, followed by a return to historical averages (55%). Scope expects the regulated distribution segment to benefit from lower tariffs imposed by the Norwegian transmission service provider (Statnett) until 2024. The agency projects higher inflation and interest rates will increase government-regulated income for the segment throughout the forecasted period. However, Scope also expects higher-than-historical investment in this segment to keep profitability around historical averages, with EBITDA margins around 33%. Lastly, Scope sees some headwinds for the rest of the company from rising inflation and interest rates, which could decrease profitability via other operating expenses and wages. In sum, the agency still projects good EBITDA margins between 27%-29% and a Scope-adjusted ROCE between 14%-16% throughout the duration of its forecast.

Another highlight of the company’s business risk profile is its industry risk. This is driven by the company’s regulated distribution segment, where it operates 8,100 km of regulated distribution networks delivering power to 47,000 customers in the Helgeland area. Further, its end customers are predominantly non-cyclical households, which benefits the stability and predictability of future cash flows. In recent years the company has seen rising demand from local industry, including ferry operators, transport, fisheries, and technology companies. In fact, demand from industrial customers in the region is so high that the company distributes approximately 5% of the energy produced in Norway even though the region only has 1.6% of Norway’s population. Granted, compared to the likes of Eidsiva, which is Norway’s largest regulated distributor with 970,000 customers, Helgeland is small. However, distribution is a government-protected and monopolistic environment, meaning there is no competition for distribution revenues, and regulation allows for timely cost coverage. As a result, size has a minimal impact on Scope’s assessment in this respect too.

The main limiting factor in the company’s business risk profile continues to be asset concentration within hydropower, because the company’s top three production facilities still contribute over 60% of its yearly mean production. A potential standstill at any of these facilities could therefore have a significant impact on cash flows. Further, the company is still geographically concentrated in the Helgeland area. This ties the company to one price region (NO4) which has seen record low spot prices in instances where excess production is trapped in the region because of bottlenecks in the regional grid, effectively pushing the prices down. This may also impact hydropower operations during drier years. However, Scope continues to put less emphasis on this as: i) the geographical area is quite large at over 18,000 sq km (compared to Oslo with 453 sq km); and ii) some of the company’s larger hydropower assets have reservoir capacity, which enables them to compensate for low rainfall.

The company’s financial risk profile (BB+) came in stronger than Scope’s last review projected as performance picked up significantly in H2 2022. This was after a poor H1 2022 with realised hedge losses and record-low NO4 spot prices. Based on the cushion provided by 2022 results and the prospect of power prices remaining around EUR 30 per MWh, it now seems more likely that Helgeland can make higher-than-historical investments in regulated distribution while maintaining credit metrics in line with its stated financial guidance (average NIBD/EBITDA of 4.0x, or less, for last three years). Scope expects leverage as measured by Scope-adjusted debt/EBTIDA to stay between 3.2x-4.1x in 2023-25 and Scope-adjusted EBITDA/net interest of around 6x for the same period. These levels assume around NOK 1.4bn in annual investments over 2023-25 based on the company’s stated goal of NOK 400m-650m in annual investments. Scope forecasts particularly good metrics in 2023 to be driven by satisfactory performance and low taxes payable at year-end 2022 (NOK 17m vs average historical taxes paid of around NOK 100m). For 2024-25 Scope forecasts that high investments will result in slightly negative free operating cash flows, which will be compensated for by increased debt, bringing leverage up towards the company’s stated NIBD/EBITDA target.

Helgeland’s issuer rating also reflects a standalone 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 Helgeland’s Norwegian municipality owners to provide support if needed. No adjustment has been made for financial policy since it is already reflected in the financial risk profile. 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 is 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 hydropower production will continue to contribute around 80%-90% of EBITDA; ii) the company’s concession area will remain stable; iii) capital expenditures will remain around NOK 400m-500m per annum, driven by investments in regulated distribution; iv) operating profitability will pick up after 2022 and remain satisfactory in the short to medium term; v) the company will continue to be owned by Norwegian municipalities, whose willingness and capacity to provide support is deemed medium.

A positive action could be triggered by an improved financial risk profile, exemplified by a Scope-adjusted debt/EBITDA of around 3.5x, sustained.

A negative rating action could be triggered by a weaker financial risk profile, exemplified by a Scope-adjusted debt/EBITDA of more than 5.0x, sustained. The company losing its status as a government-related entity is another trigger for a negative rating action, albeit deemed remote.

Long-term and short-term debt ratings

Helgeland Kraft AS is the issuer of all outstanding debt.

The affirmed BBB senior unsecured debt rating is in line with the issuer rating.

The short-term debt rating has been upgraded to S-2, based on the BBB issuer rating and reflecting sufficient short-term debt coverage and access to internal and external sources of liquidity (e.g. access to credit facilities and cash on hand).

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/Outlook were first released by Scope Ratings on 4 August 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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