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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of BBB+/Stable to Østfold Energi AS. Scope has also assigned a first-time rating of BBB+ to the company’s senior unsecured debt and a S-2 short-term rating.

Rating rationale

The rating reflects a stand-alone credit assessment of BBB and a one-notch uplift based on Scope’s assessment of parent support from Østfold Energi’s Norwegian municipal owners.

The company’s business risk profile (assessed at BBB-) reflects the main exposure to low-cost and environmentally friendly hydropower production (positive ESG factor) – providing high profitability margins and strong Scope-adjusted ROCE. Østfold Energi has a high water reservoir capacity and the ability to quickly switch its production on and off. This provides its production with a high degree of flexibility which is advantageous when operating in a market with short-term price volatility. Flexible generation capacity will likely become more valuable going forward as there is an increasing share of intermittent generation in the Nordic and European energy mix. Negatively, the business risk profile is constrained by lower diversification in terms of utility segments and power generation assets compared to larger and more integrated peers. It is also largely held back by the cyclical operating environment with exposure to volatile power prices, which can vary significantly from year to year.

Most of operating cash flow is generated from only two hydropower plants, Borgund and Naddvik, which constitute for around 90% of the 1.6 TWh consolidated annual mean production. This asset concentration is considered partially mitigated by insurance that cover property damage and an up to two-year standstill period. In addition, the plants are operationally independent so there is no cumulative standstill risk.

The standalone credit assessment is supported by a strong financial risk profile (assessed at A). The financial profile reflects low leverage and good internal financing capacity. Scope notes positively the company’s track record of keeping overall conservative credit metrics which together with the established hedging framework gives a buffer to handle the volatility of power prices.

Enabled by high power prices, the company reduced its gross debt during 2021-2022 and net debt is expected to be around zero at year-end 2023. Scope expects power prices in southern Norway to remain higher than historically in the next years, albeit at lower levels than in 2022 and H1 2023. The company is expected to partially deploy its currently strong balance sheet and leverage headroom for growth investments while maintaining its dividend policy. This will likely lead to a higher but still low leverage, with Scope-adjusted debt/EBITDA forecast to remain below 1.0x. As Scope’s base scenario already accounts for an increase in investment ambitions, the agency is comfortable that credit metrics will remain commensurate with a good financial profile, also in a less supportive pricing environment.

Liquidity is adequate with no maturing debt until Q3 2025. The company also has sufficient available credit lines and wide access to different funding sources, including bonds, bank debt, and potentially shareholder loans, which can provide external liquidity if needed. The only covenant pertaining to the outstanding NOK 400m senior unsecured bond is a requirement of continued two-thirds municipal ownership.

Scope has made no adjustment for financial policy as this is already reflected in the financial risk profile but highlights the dividend policy of paying out 65% of profits and a goal of maintaining an investment grade credit rating.

The issuer rating incorporates 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 ‘high’ capacity and ‘medium’ willingness to provide support. The rating uplift is 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 Stable Outlook reflects Scope’s expectation of the supportive power prices in southern Norway continuing in the next years, albeit at lower levels than in 2022 and H1 2023. Overall, Scope forecasts Østfold Energi’s Scope-adjusted debt/EBITDA ratio to remain below 1.0x in the next two years. The Outlook also assumes no major changes to Østfold Energi’s core business composition or financial policy in addition to continued majority municipal ownership. It also incorporates a large leverage headroom for the current rating.

A positive rating action could be warranted by a sustained net cash position, or alternatively, by improved diversification as exemplified by reduced asset concentration.

A negative rating action may be taken if a return to a higher net debt position became likely, as exemplified by a Scope-adjusted debt/EBITDA ratio sustained above 2.5x. This could be driven by lower-than-expected power prices and/or increased investment ambitions. A loss of the government-related entity status (a remote likelihood) could also cause ratings pressure.

Long-term and short-term debt ratings

Senior unsecured debt has been assigned a BBB+ rating, the same level as the issuer rating. Østfold Energi’s outstanding NOK 400m senior unsecured bond display standard bond documentation, including pari passu and a negative pledge.

The short-term debt rating of S-2 is based on the underlying BBB+/Stable issuer rating, backed by the robust short-term debt coverage as well as good access to external funding from banks and debt 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, 16 October 2023; 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 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: Per Haakestad, Senior Specialist
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 10 November 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
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.