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Rating action

Scope Ratings GmbH (Scope) has today affirmed Haugaland Kraft AS’ A- issuer rating and changed the Outlook to Negative from Stable. Concurrently, Scope has affirmed the A- senior unsecured debt rating and the S-1 short-term debt rating.

The Outlook revision to Negative from Stable is driven by Scope's expectation that leverage (debt/EBITDA*) could increase above 2.5x in the coming years. This view mainly follows higher-than-expected growth investments, including the recent Midtfjellet acquisition, combined with lower power prices than anticipated by Scope previously.

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 (unchanged). Haugaland Kraft's business risk profile continues to reflect its position as a sizeable integrated utility in Norway. The company's cash flow generation is diversified across regulated electricity distribution, fibre networks and services, and highly profitable and environmentally friendly power generation (positive ESG factor) through the company's 59.7% ownership in Sunnhordland Kraftlag AS (SKL). The power generation activities, mainly based on hydro, provide diversification and strong profitability to the group but also introduces volatility due to significant fluctuations in achievable power prices.

SKL completed the acquisition of a 95% stake in Midtfjellet Vindpark on 26 September, as previously announced on 5 September. The wind farm has an installed capacity of 150 MW within Norway's NO2 pricing zone. The acquisition was made at a debt-free valuation of EUR 131.4m and is expected to generate around 0.4 TWh of electricity per year. This supports SKL's ambition to reach an annual mean generation of 4 TWh by 2030. Further investments in new capacity over the next few years are needed for the group to achieve this goal, which is around 0.8 TWh above the current mean annual generation of 3.2 TWh, including the impact of Midtfjellet.

The further moderation of power prices in 2024 has undeniably reduced the company's earnings in power generation. The power price in Norway's NO2 bidding zone has been NOK 562/MWh so far in 2024. This is down from NOK 904/MWh in 2023 and NOK 2,127/MWh in 2022. Scope therefore expects a decrease in the EBITDA margin to between 55% and 60% over 2024-2026. These levels compare to 61% in 2023 and 76% in 2022. Profitability and earnings in regulated distribution and the fibre segment are anticipated to remain robust. This is due to the more stable nature of these business areas.

Financial risk profile: A- (-1 notch). Haugaland Kraft's financial risk profile has been revised to A-. This is mainly due to higher-than-expected investments in 2024 following the acquisition of Midtfjellet Vindpark and lower power prices than accounted for in Scope's previous rating case. Although weaker than Scope expected, credit metrics remain strong.

It is expected that Scope-adjusted debt will exceed NOK 4.5bn by YE 2024, an increase from NOK 2.2bn at YE 2023. The notable increase is mainly due to high investments, which are projected to be nearly NOK 3bn in 2024, including approximately NOK 1.5bn for the acquisition of Midtfjellet Vindpark. Furthermore, the company distributed dividends in H1 2024, amounting to almost NOK 0.7bn. Scope expects that around NOK 0.9bn of these cash outflows will be covered by funds from operations, while the remaining amount will be financed externally.

Scope expects that Haugaland Kraft’s leverage will rise to above 2x in 2024 from 0.9x in 2023. In view of Haugaland Kraft's growth ambitions and the likely maintenance of its dividend policy, Scope sees a possibility that leverage may rise above 2.5x in the next few years. This could have an impact on the current financial risk profile assessment, thus exerting some downward pressure.

Haugaland Kraft's cash flow generation is expected to be slightly negative in 2025-2026 due to high growth capex. However, the company's free operating cash flow will remain positive over time, reflecting that maintenance capex is consistently covered by internal funds and with a healthy margin. This makes periods when external financing is needed to cover capex or other strategic investments less worrisome.

Scope expects interest cover to remain robust at over 10x in 2024 and around 9x in 2025-2026, down from 27x in 2023. The weakening in 2024-2026 compared to 2023 is mainly due to higher interest expenses because of the increase in debt.

Liquidity: adequate. Haugaland Kraft's liquidity is adequate. However, the company is likely to require additional funding beyond its internal resources in the coming years to facilitate growth, dividend payments and refinancing. The assessment of adequate liquidity therefore considers Scope's view that Haugaland Kraft has good access to external financing, supported by its solid credit quality and proven ability to access diverse funding from both banks and capital markets.

Some of Haugaland Kraft’s loan agreements have certain covenants. Scope expects the company to maintain headroom to these covenants in its base case.

Supplementary rating drivers: +1 notch (unchanged). The rating incorporates a one-notch uplift to the standalone credit assessment of BBB+, resulting in a final issuer rating of A-. Scope continues to apply a bottom-up approach under the framework outlined in its Government Related Entities Methodology, reflecting an assessment of the municipal owners’ ability to provide a credit uplift and their willingness to give financial support if needed. The one-notch uplift is in line with all other Norwegian, regional utilities rated by Scope that 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 Negative Outlook reflects Scope’s expectation that debt/EBITDA could increase above 2.5x in the coming years following higher-than-expected growth investments, including the recent Midtfjellet acquisition, and the lower power prices than anticipated by Scope previously. The Outlook further assumes continued majority municipal ownership.

The upside scenario for the rating (i.e. back to a Stable Outlook):

1. Scope-adjusted debt/EBITDA sustained at or below 2.5x.

The downside scenarios for the rating and Outlook are (individually):

1. Scope-adjusted debt/EBITDA sustained above 2.5x.
    
2. Loss of GRE status.

Debt ratings

The senior unsecured debt rating has been affirmed at A-, the level of the issuer rating.

The affirmed S-1 short-term debt rating is based on the underlying A-/Negative issuer rating and reflects Haugaland Kraft’s adequate access to bank and capital markets financing. The change in Outlook to Negative from Stable on the issuer rating exerts some downward pressure on the short-term debt rating.

Environmental, social and governance (ESG) factors

Haugaland Kraft is mainly exposed to renewable energy generation (mainly hydro) and the distribution of electricity as the sole distribution system operator within its service territory. This position largely rules out transition or stranded asset risk as the long-term utilisation of power plants is secured given their strong position in the merit order and clean carbon footprint. Scope further considers the exposure to large-scale hydropower plants (over 10 MW) as protective for Haugaland Kraft’s government-related entity status given the requirement in Norway of at least two-third public ownership in such assets.

All rating actions and rated entities

Haugaland Kraft AS

Issuer rating: A-/Negative, Outlook change

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 Outlook, (General Corporate Rating Methodology, 16 October 2023; European Utilities Rating Methodology, 17 May 2024; Government Related Entities Rating Methodology, 4 September 2024), 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings and Outlook were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Per Haakestad, Analyst
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 24 November 2021. The Credit Ratings/Outlook were last updated on 25 October 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
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