The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB/Stable issuer rating on Norwegian utility Helgeland Kraft AS. Concurrently, the senior unsecured debt rating and short-term debt rating have been affirmed at BBB and S-2, respectively.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: BBB. Helgeland Kraft’s business risk profile continues to support the rating, highlighted by the company’s vertically integrated business model with operations in power distribution, low-cost, clean hydropower generation (ESG factor: positive), and electricity retail. Performance in power generation is linked to achievable power prices, which can be volatile. At the same time, the long-term contribution to operating results from power distribution is more predictable given the regulated business environment.

Good profitability continues to mitigate Helgeland Kraft’s business risk. The group EBITDA margin has historically fluctuated between 25%-30%. However, Scope notes the dilutive effect from low-margin electricity retail, leading to a margin level which is not fully comparable to that of peers with less downstream exposure. Scope-adjusted ROCE is expected to stabilise around 10%-12% over the next few years, after reaching 14% in 2023.

Helgeland Kraft’s business risk profile is constrained by its exposure to the volatility of achievable power prices and a relatively heavy dependency on its largest power plants, with the three largest contributing more than 60% of volumes. Other constraints includes the small size of Helgeland Kraft’s operations compared to larger domestic utility peers as well as limited geographical diversification outside of the NO4 pricing area and Norway as whole, making the company vulnerable to event risks like regulatory changes or adverse weather conditions.

Financial risk profile: BB+. The company’s financial risk profile reflects moderate credit metrics. Following very strong financial performance in 2023, as exemplified by Scope-adjusted EBITDA of NOK 626m, leverage (Scope-adjusted debt*/EBITDA) improved to 3.3x at year-end. However, Scope expects leverage to increase again in 2024 to around 4x, mainly as a result of lower Scope-adjusted EBITDA reflecting more moderate electricity retail margins and some negative impact in Linea from the adverse weather witnessed in Q1 2024.

Over the next few years, Scope sees some risk that higher expected capex could put pressure on credit metrics, as exemplified by forecasted leverage of 4.1x-4.3x in 2024-2026. However, Scope believes that Helgeland Kraft will adapt investments to the level of operating results as far as possible, so as not to jeopardise its credit profile. This view is also supported by the company’s own target net debt/EBITDA of 4.0x or less (average of the last three years), to which it has stayed committed in the past.

Scope continues to view Helgeland Kraft’s cash flow generation as good. While free operating cash flow is forecasted to be slightly negative in 2024-2026, this should be seen in the context of the investment phase for the grid segment. In 2019-2023, average Scope-adjusted free operating cash flow/debt was slightly positive at 3.1%.

Scope expects debt protection, as measured by EBITDA/net interest paid, to weaken to around 5x in 2024-2026, compared to around 7x in 2022-2023. For 2024, this reflects higher net interest paid but also the expected reduction in Scope-adjusted EBITDA to NOK 0.5bn, from NOK 0.6bn in 2023. The impact of higher interest rates has been dampened by Helgeland Kraft’s exposure to fixed-rate debt over the past years. As of YE 2023, the exposure to fixed-rate debt was 46%.

Liquidity: adequate. Liquidity is adequate, with forecasted liquidity ratios of above 110%. Historically, the company has held a reliable position of cash and cash equivalents of around NOK 500m-700m. This has included a varying portion of restricted cash of NOK 50m-200m, with swings mainly related to cash collaterals as part of hedging activities. Other liquidity sources includes a NOK 100m overdraft facility but also the company’s good access to bank and capital markets financing.

With an equity ratio (group level) of 46.5% as of Q1 2024 and reported net debt/EBITDA of 3.5x, Helgeland Kraft had good headroom under its financial covenants (equity ratio over 30% and net debt/EBITDA below 6x). The net debt/EBITDA covenant applies only to the two loans from the Nordic Investment Bank. The equity covenant applies to both Nordic Investment Bank loans and outstanding bonds. No covenant breaches are expected in Scope’s rating case.

Supplementary rating drivers: +1 notch. The rating incorporates a one-notch uplift to the standalone credit assessment of BBB-, resulting in a BBB issuer rating. This is based on the framework set out in Scope’s Government Related Entities Rating Methodology, which applies a bottom-up approach to reflect public ownership by Norwegian municipalities, the essential public services provided by Helgeland Kraft (mainly power distribution and large-scale hydropower plants), and the anticipated capacity and willingness of the public 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 sensitivities

The Stable Outlook reflects Scope’s expectation that: i) monopolistic, regulated grid operations and efficient, low-cost hydropower generation will contribute with around 90% of Scope-adjusted EBITDA; ii) the company’s concession area will remain stable; iii) yearly capital expenditures will increase to around NOK 0.5bn in 2025-2026, driven by investments in the power grid; iv) the company will continue to be owned by Norwegian municipalities, ensuring GRE status.

The upside scenario for the ratings and Outlook is:

1. An improved financial risk profile, exemplified by Scope-adjusted debt/EBITDA of around 3.5x or below on a sustained basis

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

1. A weaker financial risk profile, exemplified by Scope-adjusted debt/EBITDA of above 5x on a sustained basis
    
2. Loss of government-related entity status (seen as remote)

Debt ratings

The senior unsecured debt rating has been affirmed at BBB, in line with the issuer rating.

The S-2 short-term debt rating has been affirmed, reflecting the issuer rating of BBB/Stable, Helgeland Kraft’s adequate short-term debt coverage and good access to bank and capital markets financing.

Environmental, social and governance (ESG) factors

Helgeland Kraft’s business model is centered around sustainability, underpinned by: i) its generation of clean, low-cost hydroelectric energy; and ii) its responsibility to ensure that the power grid can cope with the requirements of the green transition, such as handling higher loads of intermittent electricity. Both are crucial to reaching climate goals set by Norwegian and European authorities. Within power generation, this position should support future cash flow through high utilisation factors of Helgeland Kraft’s hydro assets and a strong position in the merit order. The portfolio of large-scale hydropower plants (over 10 MW) also protects the company’s GRE status.

All rating actions and rated entities

Helgeland Kraft AS

Issuer rating: BBB/Stable, affirmation

Senior unsecured debt rating: BBB, affirmation

Short-term debt rating: S-2, 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, (European Utilities Rating Methodology, 17 June 2024; General Corporate Rating Methodology, 16 October 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 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 4 August 2022. The Credit Ratings/Outlook were last updated on 30 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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties. 

Conditions of use/exclusion of liability
© 2024 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.