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Rating action

Scope Ratings GmbH (Scope) has today affirmed the A- issuer rating on Hafslund AS and maintained the Positive Outlook. Concurrently, the senior unsecured debt rating and short-term debt rating have been affirmed at A- and S-1, respectively.

Key rating drivers

Business risk profile: BBB+. Hafslund's business risk profile remains largely underpinned by its strong market position as Norway's second largest electricity producer, mainly from clean and low-cost hydroelectric capacity (positive ESG factor), which guarantees a very strong position in the region's merit order and enables the provision of peak load capacity thanks to the company's significant water reservoirs. This is complemented by its reach as Norway's largest producer of district heating and cooling (positive ESG factor) and its indirect exposure to the country's largest distribution grid operator, Elvia, via Eidsiva. While Hafslund's cash flow exposure remains heavily weighted towards its core business of unregulated hydropower generation, the growing cash flow exposure to electricity distribution and district heating provides stability to the business. The overall favourable market fundamentals and the company's set-up will continue to support the company's consistently strong profitability, as evidenced by a group EBITDA margin of more than 60% and an average ROCE of around 15%.

However, the assessment is constrained by Hafslund's high exposure to a volatile price environment in unregulated power generation and its core exposure to spot market prices due to limited hedging activities. While Scope assumes supportive electricity prices in the next few years, well above historical averages, adverse price developments, e.g. due to heavy rainfall, cannot be ruled out. Business risks are also signalled by limited geographical diversification and concentration risks related to electricity price zones and the largest power generation assets.

Financial risk profile: A-. Hafslund’s strong financial risk profile continues to support its standalone credit assessment. Leverage, as measured by Scope-adjusted debt*/EBITDA, has remained at a very low level of less than 1.0x over the past two years, supported by strong operating performance and consistent cash generation. As a result, the leverage is considered to be very solid, especially considering the company's significant exposure to subordinated shareholder loans, which represent more than 30% of total interest-bearing debt.

The further development of Hafslund's debt will continue to depend to a large extent on the pace of implementation of the investment programme and the associated returns, as well as on the achievable electricity prices. Scope projects that debt will increase significantly to NOK 18.6bn at the end of 2026 (NOK 13.4bn excluding shareholder loans) from NOK 10.9bn at the end of 2023, based on the expectation that Hafslund will largely use its very high cash buffer (NOK 10bn at the end of 2023) for tax and investment payments and also take on some debt for growth investments (average capex for 2024-2026 per annum is assumed to be NOK 2.1bn, compared with an average of NOK 900m per annum over the last three years). This development is coupled with an expected deterioration in EBITDA as a result of weakening electricity prices. As a result, Scope projects leverage to trend to around 2.0x in 2026, which could also be the peak as capex is expected to be reduced and investments will strengthen operating cash flow.

Debt protection, as measured by EBITDA to net interest paid, remained very strong (more than 20x over the last few years) despite the utility’s significant usage of floating rate debt (more than 50% of total interest-bearing debt before interest rate swaps). Scope projects that interest coverage will remain at a strong level of around 10x over the next few years, despite the projected downward trend in EBITDA and a significant increase in net interest payments, which is a consequence of rising net financial debt, reduced cash inflows from interest income and a heightened average effective interest rate of around 4.5%.

However, Hafslund is likely to deploy its large leverage headroom for increased capex and opportunistic growth opportunities, which will put pressure on the generation of positive free operating cash flow (FOCF). Scope forecasts that aggregated FOCF over the next three years will become slightly negative (-NOK 50m), which is somewhat offset by the very strong FOCF earned over the last few years. Moreover, Scope believes that FOCF will revert to the positive territory in the medium term after capex is scaled back. As such, this does not constitute a major credit concern.

Liquidity: adequate. The liquidity profile remains very strong as signalled by liquidity ratios consistently standing above 200%, despite forecasted pressure from potential capex and large tax payments.

Supplementary rating drivers: +1 notch. The rating incorporates a one-notch uplift to the standalone credit assessment of BBB+, resulting in an A- issuer rating. 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 (the City of Oslo, which is the 100% shareholder) to provide a credit uplift and its willingness to provide financial support if needed (which is deemed remote).

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

Outlook and rating sensitivities

Scope maintains the Positive Outlook on the rating, which continues to reflect the possibility that Hafslund will maintain a stronger financial risk profile, supported by above-average power prices and strong profitability. However, the potential for ratings upside remains contingent upon the extent to which achievable power prices can be realised and the extent to which Hafslund will utilise the significant headroom on its leverage for investments. Overall, Scope anticipates that Hafslund will maintain its leverage, as measured by the debt/EBITDA, at approximately 2.0x.

The upside scenario for the ratings and Outlook is:

1. Maintenance of debt/EBITDA of around or below 2.0x on a sustained basis

The downside scenarios for the ratings and Outlook are (individually or collectively):

1. Unlikely maintenance of debt/EBITDA of around or below 2.0x on a sustained basis
    
2. Change in the company’s status as a government-related entity (deemed remote)

Debt ratings

The rated debt is issued by Hafslund AS. Senior unsecured bonds display standard bond documentation, including pari passu and negative pledge.

Scope has affirmed the rating for senior unsecured debt at A-, in line with the rating action on the underlying issuer rating.

The affirmed S-1 short-term debt rating is based on the underlying A-/Positive issuer rating and a consistently robust short-term debt coverage, as well as good access to external funding from banks and debt capital markets.

Environmental, social and governance (ESG) factors

As a producer of clean hydroelectric power and to an increasing extent other renewable energy sources, Hafslund‘s business model revolves around sustainability, fulfilling the UN’s Sustainable Development Goal 7 (Affordable and clean energy). This is signalled by the company’s very low carbon intensity, with a specific carbon intensity of less than 20 gCO2e/kWh. Such a position: i) rules out transition risks; and ii) ensures high utilisation of the hydropower generation portfolio and very strong position in the merit order, a high margin, robust cash flow generation and limited headwinds from regulation and political interference. Moreover, the exposure to hydropower generation guarantees a consistent GRE status. Eventually, Hafslund’s exposure to the generation of district heating and cooling is primarily based on waste incineration, which promotes a circular economy.

All rating actions and rated entities

Hafslund AS

Issuer rating: A-/Positive, affirmation

Senior unsecured debt rating: A-, affirmation

Short-term debt rating: S-1, affirmation

*.All credit metrics refer to Scope-adjusted figures.

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; Government Related Entities Rating Methodology, 13 July 2023; European Utilities Rating Methodology, 17 March 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 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: Sebastian Zank, Managing Director
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 9 July 2021. 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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