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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB+ issuer rating on Sunnhordland Kraftlag AS (SKL) and revised the Outlook to Stable from Positive. Scope has also affirmed the BBB+ senior unsecured debt rating.

The Outlook revision to Stable from Positive is mainly driven by Scope’s expectation that leverage (Scope-adjusted debt/EBITDA*) will exceed 1x in the coming years, reflecting higher debt following the acquisition of Midtfjellet wind farm and SKL's further growth ambitions, as well as more moderate power prices than previously expected by Scope.

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). SKL's business risk profile continues to reflect its low-cost and environmentally friendly power generation portfolio (ESG factor: positive) in southwest Norway, mainly based on hydropower, which benefits from a strong position in the merit order and the flexibility provided by access to hydro reservoirs.

SKL's exposure to industry-inherent volatility of achievable market prices, coupled with low diversification by utility segment and geography, as well as the company's relatively high reliance on its largest power plants, continue to constrain its business risk profile.

SKL entered wind power for the first time in September 2024, when it acquired a 95% stake in Midtfjellet Vindkraft AS. The wind farm is located within SKL's current operating area (NO2) and has an installed capacity of 150 MW. This complements SKL's hydropower business, which still accounts for most of the company's generation capacity and cash flow generation.

Profitability remains strong given the exposure to low-cost power generation. However, SKL's margins continue to normalise as power prices have fell from their peaks in 2022 and H1 2023, with the EBITDA margin declining to 75% in 2023 from 88% in 2022. Scope expects the margin to stabilise in a range of 70%-75% in the current price environment, which is based on an average power price in NO2 of around NOK 600/MWh.

Financial risk profile: A (unchanged). SKL's financial risk profile reflects strong credit metrics, supported by significant cash accumulation during favourable market fundamentals in 2021-2023, which helps the company to digest high investments in 2024.

From a net cash position of NOK 0.7bn at YE 2023, Scope-adjusted debt is expected to increase by YE 2024 to around NOK 1.2bn. This is mainly driven by the acquisition of Midtfjellet, which increases the net debt with approximately NOK 1.5bn. However, based on the strong result in 2023, the company has also paid taxes of NOK 1bn and dividends of NOK 0.4bn this year.

As a result, SKL's leverage is forecasted to be around 1x by YE 2024. Given SKL's growth ambitions and the likely maintenance of its dividend policy, the company's leverage is expected to gradually increase beyond 2024 but remain in the range of 1.0x-1.5x.

The agency expects slightly negative free operating cash flow on average in 2025-2026. This is mainly due to high investments in the modernisation and expansion of the power generation portfolio, which will weigh on cash flows, despite the impact of tax deductions for some of the investments in hydropower under the resource rent tax regime.

Debt protection is expected to remain very strong with EBITDA interest coverage standing at above 15x in the forecast period.

Liquidity: adequate (unchanged). SKL's liquidity is expected to remain adequate. Scope highlights that SKL's liquidity ratio for 2025 is forecasted to below 100%, mainly due to the NOK 1.2bn bridge financing arranged in connection with the Midtfjellet acquisition, which matures in Q3 2025. However, this is expected to be managed by SKL through its good access to external financing from banks and capital markets, which makes the occasionally low liquidity ratios less worrying.

Supplementary rating drivers: credit-neutral (unchanged). SKL’s issuer rating incorporates a one-notch uplift to the standalone credit assessment of BBB for parent support, resulting in a final issuer rating of BBB+. 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 provide financial support if required. The one-notch uplift is in line with other Norwegian regional utilities rated by Scope that are directly or indirectly 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 Outlook is Stable, reflecting Scope’s expectation that SKL’s leverage will remain around 1x for the next few years, despite more moderate power prices and continued, higher-than-historical investments in line with the company’s ambition for further growth.

The upside scenario for the ratings and Outlook is:

1. Leverage remaining well below 1x on a sustained basis.

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

1. Leverage weakening to above 2.5x on a sustained basis.
    
2. A change that negatively would impact our assessment of potential financial support from the indirect municipal owners.

Debt ratings

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

Environmental, social and governance (ESG) factors

SKL's core business is the generation of clean, low-cost electricity, mainly from hydropower plants. This largely eliminates transition or stranded risks and supports the company's future cash flow generation by ensuring high utilisation of power plants and the continued strong position in the merit order of the power generation portfolio.

In addition, SKL's portfolio of large-scale hydropower plants protects its government-related entity status, as these assets must be at least two-thirds publicly owned.

All rating actions and rated entities

Sunnhordland Kraftlag AS

Issuer rating: BBB+/Stable, Outlook change.

Senior unsecured debt rating: BBB+, 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, (European Utilities Rating Methodology, 17 June 2024; General Corporate Rating Methodology, 16 October 2023; 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 13 December 2021. The Credit Ratings/Outlook were last updated on 29 November 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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