Rating action

Scope Ratings GmbH (Scope) has today affirmed the A-/Stable issuer rating on Norway-based Lyse AS. Concurrently, Scope has also affirmed the A- rating on senior unsecured debt and the S-1 short-term debt rating.

Rating rationale

The rating affirmation reflects Scope’s unchanged view that Lyse can sustain good credit metrics through the ongoing investment phase of its telecommunications division. Lyse’s continued strong credit quality remains driven by the good business risk and financial risk profiles, paired with a one-notch uplift to the standalone credit assessment of BBB+ granted for parent support based on the company’s government-related entity (GRE) status.

Lyse’s unchanged business risk profile of ’BBB+’ continues to reflect its strong competitive positioning in Norwegian energy supply and telecommunications, supported by sizeable operations with solid market positions and strong profitability. Over time, Lyse has seen an increasing contribution to recurring financial results from telecommunications and monopolistic power distribution, which is helping to stabilise overall performance by reducing the exposure to volatile power prices.

The company is among Norway’s largest hydropower producers (positive ESG factor) through its 74.4% ownership in Lyse Kraft DA with an annual production of almost 10 TWh under normal conditions. Scope notes favourably Lyse’s main exposure to flexible hydropower plants with large water reservoirs. Going forward, these power plants will become more important for the energy system owing to their ability to supply electricity in periods with low output from intermittent energy sources such as wind and solar. This should also support the company’s achieved power prices in the future through increased value of active water management.

In December 2023, Lyse and Hydro announced plans to build five additional hydropower plants in the Røldal-Suldal system, thereby doubling the installed capacity from 630MW to 1,280MW. The announcement came after Norway’s government decided to remove the excise duty of 23% on income from power production generated at prices exceeding NOK 700/MWh. The excise duty was introduced in 2022 and largely took away incentives for investing in capacity expansion at existing power plants. The total investment for the Røldal-Suldal upgrade is estimated at NOK 7bn-8bn and can further enhance the flexible capabilities of Lyse’s power production portfolio. However, the commencement of construction is not expected before 2027.

After entering mobile services by acquiring Ice in 2022, the company is currently utilising its existing fibre-optic network to cost-efficiently expand the mobile network of Ice to achieve full 5G coverage across Norway. This is an important step for becoming a viable competitor to Telenor and Telia within the mobile segment. Furthermore, Scope notes the recent merger of Altibox, Ice and most of the fully owned fiber companies into an integrated telecommunications company, Lyse Tele. The merger enables Lyse to bundle the products of Altibox and Ice, offering a complete package of fibre broadband and mobile services. Combined, these efforts are expected to support further growth of the telecommunications division, most notably within mobile services.

Lyse is exposed to political and regulatory risk as it provides profitable, critical public services such as electricity and digital infrastructure. This has been exemplified by an unpredictable taxation framework for Norway’s power producers in recent years and by ongoing discussion about a potential regulation of fibre-optic networks. However, Scope still assesses the overall framework conditions for utilities and telecommunications operators in Norway to be adequately stable.

Following a faster-than-expected normalisation of power prices, Scope’s updated forecast shows a lower consolidated EBITDA in 2024 than previously expected, while the estimate for 2025 of NOK 9.5-10.0bn is largely unchanged. Overall, Scope forecasts an increase in consolidated EBITDA from around NOK 9bn in 2024 to slightly above NOK 10bn in 2026, which is forecasted to be driven by its telecommunications operations. This assumes a flat power price curve of NOK 600/MWh in the NO2 bidding zone throughout 2024-2026 and annual hydropower production in Lyse Kraft DA of 9.0-9.5 TWh. It also assumes an annual EBITDA contribution of around NOK 1bn from power distribution.

Lyse’s unchanged financial risk profile of ‘BBB+’ remains driven by overall good credit metrics despite the investment phase of its telecommunications division. Leverage (Scope-adjusted debt/EBITDA) has varied in 2018-2023 between a maximum level of 4.8x (2020) and minimum of 1.2x (2022). This demonstrates the volatility feeding through to Lyse’s financial risk profile from its power price exposure, something that is viewed as a credit constraint. Leverage increased to 2.3x in 2023, driven by lower power prices, still high capex, and payment of high incurred hydropower taxes from 2022. In 2024-2026, Scope expects leverage to stay in the 2.5x-3.0x range, based on Scope’s assumption of a further normalisation of power prices beyond that witnessed in 2023 and around NOK 5bn in annual capex. The company continues to show good cash flow generation through the cycle, as illustrated by an estimated average level of Scope-adjusted free operating cash flow in 2021-2026 of around NOK 0.8bn.

As regards debt protection, interest cover is forecasted to remain at a strong level of 8x-10x in 2024-2026. The negative impact from higher interest rates and an increasing level of Scope-adjusted debt is partially offset by the company’s exposure to fixed-rate debt, which was around 50% going out of 2023.

Lyse’s liquidity profile remains adequate. For 2024-2025, Scope expects financial debt maturities and negative free operating cash flow to be more than 200% covered by available cash and cash equivalents of around NOK 5.8bn as of year-end 2023 and committed undrawn credit lines of around NOK 3.3bn. The company’s liquidity profile is also supported by very good access to bank financing and capital markets.

The issuer rating incorporates a one-notch uplift for parent support to the standalone credit assessment of BBB+ based on Scope’s view of Lyse’s government-related entity status. This is based on the full public ownership by 14 municipalities in southwestern Norway and the essential public services provided by the company, most importantly power distribution and electricity generated by hydropower plants. Scope has applied a bottom-up approach using the framework outlined in its Government Related Entities Rating Methodology. The 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.

Rating-change drivers

The Stable Outlook reflects Scope’s view that Lyse will maintain its diversified business model within hydropower production, power distribution and telecommunications. It further anticipates that Lyse will maintain strong liquidity, Scope-adjusted debt/EBITDA below 3.0x, and an unchanged ownership structure.

A positive rating action could be warranted if Lyse improved its business risk profile while keeping credit metrics at current good levels, most likely requiring successful materialisation of growth within mobile services. Alternatively, a positive rating action could be possible if Scope-adjusted debt/EBITDA was sustained at 1.0x or below.

A negative rating action may be triggered if Scope-adjusted debt/EBITDA deteriorated to 3.0x and above on a sustained basis. This could be driven by increased investments well beyond Scope’s current rating case and/or lower-than-assumed power prices. Lastly, the loss of GRE status (remote) would also lead to ratings pressure.

Long-term and short-term debt ratings

The A- senior unsecured debt rating is in line with the issuer rating. Scope has also affirmed the S-1 short-term debt rating, reflecting the underlying A-/Stable issuer rating, good short-term debt coverage and very good access to both bank and capital markets 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, (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 these 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 and/or Outlook 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: Per Haakestad, Senior Specialist
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 30 May 2017. The Credit Ratings/Outlook were last updated on 3 April 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.

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