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Rating action

Scope Ratings GmbH (Scope) has today upgraded the issuer rating of Norwegian utility Eviny AS to A- from BBB+ and assigned a Positive Outlook. Concurrently, the senior unsecured debt rating has been upgraded to A- from BBB+, whilst the short-term debt rating has been upgraded to S-1 from S-2. Consequently, the under-review status for possible upgrade on the ratings were resolved.

Rating rationale

The rating upgrade is driven by Scope’s view on Eviny’s significantly improved financial risk profile at year-end 2022 and Scope’s belief that this financial flexibility and continued elevated power prices in its region (NO5) will enable Eviny to pursue higher-than-historical investments while maintaining a conservative financial profile. Granted, the utility’s financials will remain volatile and strongly dependent on external factors such as achievable power prices, but Scope is still comfortable assessing the financial risk profile at A. The business risk profile is still assessed at BBB, but the addition of Scope-adjusted ROCE in Scope’s European Utilities Rating Methodology supports the agency’s already strong assessment of Eviny’s profitability, which is among the highest for Nordic utilities. Combined with a one-notch uplift due to the utility’s status as a government-related entity, Scope deems Eviny’s issuer rating to be commensurate with a rating of A-. The Positive Outlook reflects further potential ratings upside, driven by the possibility that Eviny will keep a strong financial risk profile over a prolonged time.

The rating continues to reflect a BBB business risk profile. Highlighted by Eviny’s good market position as Norway’s fifth largest hydropower generator (estimated by Eviny’s 2022 generation divided by Norway’s aggregated hydropower generation in 2022) and its monopolistic-like position as Norway’s third largest regulated distributor (estimated by the number of connection points). Distribution contributes less to aggregated performance as surging prices increase the contribution from Eviny’s hydropower generation, but Scope still considers the regulated operation as a stabilising force for cash flows and a strong component of its aggregated market position. Another highlight of Eviny’s business risk assessment is its adept, efficient and environmentally friendly generation capabilities (positive ESG factor). In contrast, its business risk profile continues to be hampered by a low geographical diversification, in part mitigated by its generating assets being located in geographies with above European-average-rainfall (west coast of Norway with 2,251 mm per annum vs. the European average of 641 mm). Another limiting factor is the perceived concentration risk in its generation portfolio, where its three largest plants contribute above 40% of its aggregated generation capacity. Hence, the effect of a stand-still in one of these plants could have material impact on cash flows. However, based on history it is not a high-probability scenario. Last, despite pursuing a dynamic hedging strategy, the company remains exposed to the heightened volatility of Nordic energy spot prices.

The latter was exemplified as Eviny realised NOK 4.9bn in losses on its hedged portfolio in 2022. These losses led to a lower-than-historical average adjusted EBITDA margin of 45% (54% in 2021). Scope expects continued loss realisations on Eviny’s hedged positions in the medium term. However, a downward price trend in Eviny’s region is expected to dampen this effect. Further, Scope sees a positive impact from older hedges rolling out of the hedging portfolio, and newer hedges rolling in. Lastly, Eviny’s regulated distribution is expected to perform well in the medium term, as rising interest rates and inflation will be reflected in an increased state-set tariff.

This leads to projected consolidated EBITDA margins averaging 56% in the medium term. Further, Scope also projects Scope-adjusted ROCE averaging 25% in the same period, well above Eviny’s historical average of 17%. Eviny’s strong profitability, both historical and projected, places Eviny among the most profitable Nordic utilities.

As a hydropower producer, Eviny has a favourable ESG profile, highlighted by very efficient generation and far below average carbon intensity of 28g CO2e/kWh (vs. a European average of more than 250g CO2e/kWh). Such a strong position should support future cash flow generation and access to funding through high utilisation of its hydro assets and lower the risk of headwinds from regulation and political interference.

In addition, the Norwegian government relies heavily on regulated distributors in order to reach its stated climate goals¹ by 2030. This is because those goals hinge on new intermittent generation and the electrification of Norwegian industry, both of which will lead to an increased strain on power grids. As one of Norway’s largest regulated power distributors, Eviny has a pivotal role in facilitating this green shift. Eviny has shown its intent to honour this responsibility and Scope expects higher-than-historical investments in its regulated power grids over the medium term. This further solidifies Eviny’s status as a government-related entity (GRE).

Eviny’s improved financial risk profile (assessed at A-) strongly supports its standalone credit assessment. Leverage, as measured by Scope-adjusted debt/EBITDA, came in at a very low 0.9x in 2022 and remained low at 0.8x in LTM H1 2023. This is a result of high region NO5 prices, which despite losses on hedged production, generated strong year end cash flow from operations. These enabled Eviny to reduce gross debt while also upholding its capital expenditures and dividend policy. Going forward, Scope projects higher-than-historical, but declining, NO5 prices and increasing profitability. This is likely to translate to continued strong cash flows. Unlike 2022, Scope forecasts pressure on cash flow from operations in 2023E-24E as large tax payments will have to be paid, based on the preceding years’ performance.

Eviny’s highly efficient generation portfolio and the projected NO5 prices will likely enable Eviny to comfortably manage high tax payments, upcoming debt maturities, high investment in power grids and above-historical average dividends to its municipal owners, with minimal need for additional interest-bearing debt. In fact, Scope expects a moderate increase in leverage to about 1.5x in 2025E, keeping the company’s financial risk profile in good shape. As annual free operating cash flow and the resulting cash flow cover (FOCF/Scope-adjusted debt) remain volatile due to tax payments, working capital swings and capex, Scope bases its judgement about the utility’s internal funding capacity on average cash flow cover of about 15% for the years 2020-25E. While Scope expects credit metrics to normalise from the strong levels seen at YE 2022, it has no major concerns about a significant erosion of credit metrics.

Like Eviny’s leverage development, its debt protection metrics have settled at a very solid level following the strong operating results in 2021 and 2022. Scope flags a significant exposure to floating-rate debt, as most of its funding is floating rate, and assumes a rising interest burden over next few years, driven by rising interest rates (effective interest rate is assumed to rise from around 3% in 2022 to a high of 4.6% in 2024E before declining to 4.1% in 2025E), along with a slight increase in gross debt. However, the agency is still forecasting that the company will comfortably sustain EBITDA interest coverage of more than 10x over the next few years.

The sharp increase in prices observed in 2022 led to higher liquidity requirements for many European utilities, by increasing net working capital requirements as well as margin deposit requirements on financially hedged production. In the first half of 2022 Eviny therefore increased its committed credit facilities to NOK 6.5bn (from NOK 2.5bn in 2021). Later in the year Eviny also shifted 50% of its hedges from financial to bilateral contracts, as the latter do not require the same deposits. This move led to the high realised loss observed in 2022. It also substantially reduced its margin deposit requirements, released liquidity and, coupled with strong cash flows, Eviny ended 2022 with a record-high cash reserve of NOK 4.5bn.

Some of these funds have been used to repay interest bearing debt but Eviny still had a solid liquidity position as of H1 2023. Scope expects the liquidity profile to remain strong despite forecasted pressure from large tax payments and higher-than-historical capex. Between 2023E-25E, Eviny faces refinancing needs of about NOK 5bn. These refinancing needs and slightly negative FOCF projections in 2023E-24E are comfortably covered by Eviny’s unrestricted cash buffer of NOK 1.7b and its newly increased commited credit facilities. Moreover, Scope highlights the company’s wide access to different funding sources, including bonds and bank loans.

Eviny’s financial policy remains prudent. It focuses on retaining an investment-grade rating and active monitoring of quantitative and qualitative factors that affect creditworthiness to maintain high financial flexibility. Given the company’s status as a municipality-owned entity, Scope sees negligible risk that Eviny will prioritise shareholder remuneration over creditor protection. While the company does not publicly stick to specific minimum/maximum financial thresholds, Scope believes it steers its capex and shareholder remuneration in a way that will not jeopardise the rating.

The rating continues to incorporate a one-notch uplift to the standalone credit assessment of BBB+, resulting in a final issuer rating of A-. This follows the framework set out in Scope’s rating methodology for government-related entities with a bottom-up rating approach, reflecting a conservative assessment of the capacity of the public sponsor (17 municipalities on the west coast of Norway which hold 54.6% of the shares) to provide a credit uplift and its willingness to provide financial support if needed (something that is deemed highly remote). The public sponsor’s creditworthiness is deemed to be significantly higher than Eviny’s standalone credit assessment, signalling a high capacity for a credit uplift. Scope assesses the public sponsor’s willingness to be significant, given Eviny’s primary exposure to hydropower generation assets, which need to be in the hands of public authorities. Overall, the rating uplift is restricted to just one notch, in line with other Scope-rated Norwegian utilities with majority or full public ownership but no explicit guarantees on their debt or financial support.

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

Outlook and rating-change drivers

The Positive Outlook reflects further potential ratings upside. This upside is driven by the possibility that Eviny will keep a strong financial risk profile over a prolonged time, should power prices remain elevated for some years. In addition, a stronger financial risk profile could be kept if Eviny does not spend its higher-than-historical cash flows on higher-than-expected capex and/or extra shareholder remuneration. In sum, Scope sees good chances that Eviny will keep its conservative leverage, as exemplified by a Scope-adjusted debt/EBITDA close to 1.0x.

A rating upgrade could be warranted if credit metrics, as exemplified by a Scope-adjusted debt/EBITDA of around 1.0x or below, and a Scope-adjusted EBITDA margin of around 60% were sustained.

A negative rating action, revision to the Stable Outlook, could be triggered if expectations about leverage sustained around 1.0x and a Scope-adjusted EBITDA margin of around 60% became less likely, for instance, by significantly lower-than-expected power prices, substantial realised hedge losses, higher-than-expected capex and/or shareholder remuneration. Alternatively, a loss of GRE status could also warrant a ratings downgrade, although this is considered remote. Further ratings downside, such as a Negative Outlook or a ratings downgrade is deemed remote over the next 12-18 months.

Volatile power prices, hedging effects, excecution risks and potential extraordinary dividends continue to be the main risks and may lead to an Outlook revision.

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 the underlying issuer rating of A-/Positive, sufficient short-term debt coverage and good access to both bank and bond financing.

1. https://www.regjeringen.no/en/aktuelt/norways-new-climate-target-emissions-to-be-cut-by-at-least-55-/id2944876/

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 2023; Government Related Entities Rating Methodology, 13 July 2023), 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: 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 August 2018. The Credit Ratings/Outlooks were last updated on 31 March 2023.

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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