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Rating action

Scope Ratings GmbH (Scope) has today affirmed the A- issuer rating on Norwegian utility Å Energi AS and revised the Outlook to Stable from Positive. Concurrently, Scope has also affirmed the A- rating on senior unsecured debt and the S-1 short-term debt rating.

Rating rationale

The affirmation is driven by Å Energi’s unchanged business and financial risk profiles as well as a one-notch uplift for parent support based on the company’s government-related entity status. The return to a Stable Outlook reflects the prospect of slightly weaker credit metrics following a higher-than-expected increase in Scope-adjusted debt over 2023, combined with reduced forward prices for electricity and Å Energi’s increased capex ambition.

Å Energi’s business risk profile of BBB+ continues to reflect the utility’s solid competitive position as a major integrated utility in Norway. Supported by improved hydrology and the merger with Glitre Energi, the company generated 10.8 TWh of electricity in 2023, up from the 6.8 TWh generated in 2022. Å Energi’s power generation portfolio consists of flexible, low-cost and environmentally-friendly hydropower plants (ESG factor: credit positive) with sizeable water reservoirs, placing it favorably in the merit order while also ruling out transition or stranded asset risk. Scope considers Å Energi’s exposure to power distribution to be a stabilising force and a robust source of long-term cash flow for the overall business, as business risks are low due to the monopoly position and regulated operating environment. The company’s competitive position is also enhanced by downstream activities through the subsidiary Entelios Norden, which is one of the largest energy retailers in the Nordic region focused on the B2B market, with approximately 23 TWh under management.

The group’s EBITDA margin has been in the 20%-30% range in recent years but is diluted by the downstream exposure in energy retail. For the company’s combined upstream and midstream exposure (i.e. hydropower and power distribution), the aggregated EBITDA margin reached a level of almost 60% in 2023. At the same time, Scope-adjusted ROCE is forecast to stay between 15-20% in 2024-26.

The business risk profile is mainly constrained by the exposure to the volatile power prices, although Å Energi manages some of this risk by an active hedging strategy. Another constraint is the geographical concentration of revenues in Norway, which makes Å Energi vulnerable to events like regulatory changes or adverse weather conditions.

Scope anticipates weaker financial performance in the hydropower business in 2024-2026 than previously expected, especially in 2024. This reflects the expectation of more moderate but still supportive power prices of NOK 600/MWh (NO1/NO2) and includes the mitigating effect of reduced losses from hedging. In addition, Scope expects annual EBITDA for Glitre Nett of NOK 1.1bn-1.5bn and annual EBITDA from other activities of around NOK 0.4bn in its updated forecast.

Scope-adjusted debt increased to NOK 13.3bn in 2023 after being at a below-normal level of NOK 6.5bn in 2022 due to periodisation effects in Norway’s taxation (incurred taxes are paid in the subsequent year) and the hedging setup in Entelios Norden. However, the increase was larger than previously anticipated by Scope as a result of the faster-than-expected normalisation of power prices and high investments in 2023, including the NOK 1bn of capital increases in associated companies.

Relating to the hedging activities of Entelios Norden, Scope highlights that there can be a mismatch in cash flow between periods because customer contracts are settled upon delivery while exchange-traded futures used to hedge power price exposure on customer contracts are settled daily. This is particularly evident in times of significant price fluctuations, such as during 2022-2023, when there was major cash receipts in 2022 from the exchange-traded futures while the related cash outflow first occurred in 2023 upon settlement of belonging customer contracts. While this introduces volatility to cash flow, Scope believes this risk to be well managed by Å Energi through its liquidity management.

Å Energi’s financial risk profile at A- reflects continued solid credit metrics and good internal financing capacity, although there has been some negative impact from reduced forward prices for electricity and the expectation of more capex over the next few years. Scope expects Å Energi to generate an average Scope-adjusted EBITDA of around NOK 7bn in 2024-2026 and funds from operations of about NOK 2bn in 2024 and NOK 4bn in 2025-2026. This should enable the company to finance increased capex with operating cash flow. Scope also expects Å Energi to maintain its dividend policy, leading to negative discretionary cash flow. Scope-adjusted debt is therefore expected to increase moderately in the coming years, also considering potential bolt-on M&A or capital increases in associated companies (e.g. in Morrow Batteries or Otovo). As a result, Å Energi’s leverage – as measured by Scope-adjusted debt/EBITDA – is expected to settle at 2.0x-2.5x in the medium term, up from 1.6x in 2023.

Interest cover is expected to remain above 10x, supported by some exposure to fixed-rate debt, which helps to offset higher interest rates and increased debt.

Å Energi’s communicated capex ambition from April 2024 amounts to NOK 15bn in 2024-2028, an increase of approximately 50% compared with last year’s ambition of NOK 10bn for the 2023-2027 period. Most of the funds will continue to be allocated to the electricity network and hydropower businesses, half of which will be reinvestments. Scope therefore expects a gradual step-up of capex in the coming years. Nevertheless, internal financing capacity remain good, with free operating cash flow expected to stay positive, even including growth capex. Over 2021-2026, Scope estimates average free operating cash flow of around NOK 0.9bn.

Å Energi’s liquidity is adequate. While liquidity (internal and external) at the end of 2023 was insufficient to cover debt maturities in 2024, Scope does not view this as a major concern given the company’s very good access to bank and capital market financing.

There is no impact from Å Energi’s financial policy. The company aims to pay dividends corresponding to 70% of net profit over time, with payments coming with a two-year time lag. Å Energi’s goal of sustaining a credit rating of at least BBB+ is regarded positively, giving comfort that management will take measures to preserve the credit metrics needed for this rating level.

Scope defines Å Energi as a government-related entity in accordance with the rating agency’s Government Related Entities Rating Methodology. This is based on the direct and indirect majority ownership by Norwegian municipalities and the essential public services provided by the company, most importantly power distribution and electricity generated by hydropower plants. Scope has applied a one-notch uplift to the standalone rating, reflecting the high capacity and medium willingness of the municipal owners to provide financial support if needed.

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

Outlook and rating-change drivers

The revised Outlook to Stable reflects a lower likelihood of credit metrics being sustained at a stronger financial risk profile than A-. This follows a larger-than-expected increase in Scope-adjusted debt over 2023 and reduced forward prices for electricity. It also incorporates the potential for higher investments over the next years as signaled by Å Energi’s updated ambition. Overall, the Stable Outlook reflects Scope’s view that Scope-adjusted debt/EBITDA will be between 2.0x-2.5x going forward, supported by good internal financing capacity with free operating cash flow expected to remain positive over time.

A positive rating action may be possible if Scope-adjusted debt/EBITDA is sustained at below 2.0x.

A negative rating action may be triggered if Scope-adjusted debt/EBITDA weakens to well above 3.0x on a sustained basis. This could be driven by higher investments well beyond Scope’s current rating case and/or reduced power prices. 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, based on the underlying A-/Stable issuer rating as well as adequate short-term debt coverage and better than adequate access to 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: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 22 August 2017. The Credit Ratings/Outlook were last updated on 5 June 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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