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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of BBB/Stable to Nordkraft AS. Scope has also assigned first-time ratings of BBB to senior unsecured debt and a short-term debt rating of S-3.

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. Nordkraft’s business risk profile supports the rating, reflecting the company’s diversified, core exposure to power distribution and low-cost, environmentally friendly hydropower generation (positive ESG factor). Nordkraft’s sizeable business in energy operation in terms of electricity volumes has a lower impact on business risks given the comparatively low contribution to recurring cash flow generation.

The company’s distribution segment grew significantly in 2021-2022 through consolidation and is expected to contribute with around 50% of Scope-adjusted EBITDA in the next few years. This supports the stability of long-term cash flow given the fully regulated business environment, contrasting to the industry-inherent volatility in power generation where performance is linked to achievable power prices.

Good profitability metrics reduces the company’s business risks. Nordkraft’s Scope-adjusted EBITDA margin has averaged 43% in 2018-2023. Scope expect the margin to remain within a range of 40%-50% over the next few years. Concurrently, Scope-adjusted ROCE is expected to remain around 10%. Scope sees these levels to be supported by the low operating cost in hydropower generation, as well as Nordkraft’s ability to capture above-average prices from its generation portfolio by using hydro reservoirs.

Nordkraft’s business risk profile is constrained by the above-mentioned exposure to volatile power prices for around 50% of Scope-adjusted EBITDA. Other constraints include Nordkraft’s small scale compared to larger domestic and European utility peers and limited geographical diversification as operations are focused in a single, local service territory in northern Norway. This makes the company more exposed to event risks such as regulatory changes or adverse weather conditions. Scope further notes the concentration risks in Nordkraft’s power generation portfolio, reflecting that above 60% of generation capacity comes from the three largest power plants.

Nordkraft’s consolidated businesses are supplemented with stakes in associated companies, which are involved in fibre broadband, electricity retail, small-scale hydropower generation, and facilitation of sites for new power intensive industry within Nordkraft’s concession areas. While these activities can be value creating, Scope does not expect them to contribute with recurring dividend income to Nordkraft, resulting in low impact on the business risk assessment.

Financial risk profile: BB+. Nordkraft’s financial risk profile reflects moderate credit metrics. Leverage (Scope-adjusted debt/EBITDA*) ended at 2.9x in 2023 on the back of solid financial performance, as highlighted by Scope-adjusted EBITDA of NOK 614m. Scope-adjusted EBITDA is expected to decrease in 2024 to around NOK 450m, mainly due to below-normal hydropower volumes and the negative impact from an adverse weather event (‘Ingunn’) on the distribution segment back in Q1 2024. Scope thereafter foresees financial performance to recover in 2025-2026 to an EBITDA capacity of around NOK 550m-600m under normal conditions.

Leverage (Scope-adjusted debt/EBITDA) is expected to increase to around 4.5x in 2024 before stabilising at around 4x in the medium term. This is higher than the average level of 3.1x over 2022-2023, and reflect Scope’s expectation that high investments in the power grid and dividend payments will create some medium-term pressure on free operating cash flow and discretionary cash flow.

Scope expects debt protection (Scope-adjusted EBITDA/interest cover) to weaken to 4x in 2024 but to subsequently improve to around 5x, supported by EBITDA growth. The weaker interest cover compared to 8.5x in 2023 is due to lower EBITDA, as well as higher interest rates and the moderate, forecasted increase of debt levels, which leads to higher interest payments.

Liquidity: adequate. Liquidity ratios are forecasted to remain below 100% in 2024-2025. This reflects NOK 401m of available cash sources at YE 2023 and expected pressure from negative free operating cash flow, which compares with debt maturities of NOK 600m in 2024 and NOK 500m in 2025. However, Nordkraft has good access to external financing which can provide liquidity, and which will likely cover the unfunded part of scheduled growth capex. Other liquidity sources includes two 12-month credit lines, comprising an overdraft facility of NOK 100m and a revolving credit facility of NOK 400m, both undrawn as of Q1 2024, which can provide liquidity as long as these are renewed.

With an equity ratio (group level) of 48.9% and reported EBITDA/net interest (according to company definitions) of 14.3x in 2023, Nordkraft had good headroom under its financial covenants (equity ratio above 35% and EBITDA/net interest above 2x). The covenants applies to Nordkraft’s two loan agreements, of which one with a bank syndicate and the other with Nordic Investment Bank. No covenant breaches are expected in Scope’s rating case.

Supplementary rating drivers: +1 notch. The BBB issuer rating incorporates a one-notch uplift to the standalone credit assessment of BBB-, and reflects Nordkraft’s government-related entity status. Scope has applied a bottom-up approach under the framework outlined in Scope’s Government Related Entities Methodology. The conclusion of a one-notch uplift is based on the 80.1% public ownership by Norwegian municipalities, and the anticipated capacity and willingness among these to provide financial support, if needed. The conclusion is in line with other Norwegian, regional utilities which are rated by Scope and are majority-owned by one or more municipalities.

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 Nordkraft’s leverage (debt/EBITDA) will stabilise at around 4x in 2025-2026. This is higher than in the past two years, as Scope assume that increased investments, mainly in the power grid, will put some medium-term pressure on cash flow generation. The Outlook also assumes: i) that the concession area will remain stable; ii) an unchanged, balanced business mix between regulated power distribution and hydropower generation; iii) an NO4 power price of around EUR 30/MWh; iv) no major investments in associated companies; and v) a continued GRE status based on direct and indirect majority ownership by Norwegian municipalities.

The upside scenario for the ratings and Outlook is:

1. Improved financial risk profile, exemplified by Scope-adjusted debt/EBITDA sustained at around 3.5x or below.

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

1. Weakening financial risk profile, as exemplified by Scope-adjusted debt/EBITDA sustained at around 5x or above.
    
2. Loss of GRE status could also trigger a negative rating action, although Scope deem this possibility remote.

Debt ratings

Scope has assigned a BBB rating to senior unsecured debt, in line with the issuer rating.

The assigned S-3 short-term debt rating is based on the underlying BBB/Stable issuer rating and reflects the expected worse-than-adequate liquidity (internal and external) ratios of below 100%, as well as adequate access to external financing.

Environmental, social and governance (ESG) factors

Nordkraft’s business model is centered around the generation of clean, low-cost hydroelectric energy, and the responsibility of ensuring that its power grid can cope with the requirements of the green transition, such as handling higher loads of intermittent electricity. This reduces transition or stranded asset risk and should support future cash flow through the high utilisation of power plants and a strong position in the merit order. Scope also view the portfolio of large-scale hydropower plants (over 10 MW) as protective for the company’s government-related entity status, given the requirement of at least two-third public ownership.

All rating actions and rated entities

Nordkraft AS

Issuer rating: BBB/Stable, new

Senior unsecured debt rating: BBB, new

Short-term debt rating: S-3, new

*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; European Utilities Rating Methodology, 17 June 2024; 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, Analyst
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 19 August 2024.

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
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