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Rating action

Scope Ratings GmbH (Scope) has today affirmed the A-/Stable issuer rating on Eidsiva Energi AS (Eidsiva). Concurrently, Scope has affirmed the ratings for senior unsecured debt at A- and short-term debt at S-1.

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

Key rating drivers

The A- issuer rating on Eidsiva reflects a standalone credit assessment of BBB+ and a one-notch rating uplift for the company's status as a government-related entity.

Business risk profile: A (unchanged). Eidsiva's business risk profile is the primary support for its standalone credit assessment. It benefits from a high exposure to regulated activities, with around two-thirds of recurring EBITDA* coming from Elvia, a leading electricity distribution system operator in Norway. At the same time, Eidsiva's other business areas (mainly telecoms, district heating and power generation) have weaker market positions and less robust cash flow generation. Scope particularly notes Eidsiva’s 43.5% stake in Hafslund Kraft AS (positive ESG factor), which is exposed to volatile market prices with earnings mainly derived from non-regulated power generation. The dividend income from Hafslund Kraft is expected to remain Eidsiva’s second largest EBITDA exposure.

Eidsiva's profitability (as measured by its EBITDA margin) averaged around 35% in 2020-2023. Profitability has been volatile in recent years, ranging from 22% (2021) to 42% (2023), driven by high fluctuations in Elvia's costs for grid losses and usage of overhead grids. These fluctuations were mainly due to exceptional power price volatility and the scheme for the transfer of extraordinary congestion revenues from the Norwegian transmission system operator (Statnett). As concerns about another energy crisis in Europe have eased, Scope expects Eidsiva's profitability to become more stable in the years ahead.

Investments are expected to increase over the next few years in line with Eidsiva's growth strategy and the required development of Elvia’s power grid. Specifically, the rating agency projects investments of around NOK 3.5bn-4.0bn per year in 2024-2026, up from NOK 2.5bn-3.0bn per year in 2020-2023. Given the expected allocation of investments, with an overweight in Elvia, the business mix is likely to remain fairly stable, assuming no significant M&A activity.

Financial risk profile: BBB- (unchanged). Eidsiva’s financial risk profile reflects moderate leverage and ongoing pressure on cash flow generation, with the current investment and dividend plans expected to result in higher debt levels.

The rating agency expects leverage (debt/EBITDA) of 4.0x-4.5x in 2024, up from 3.6x in 2023, when EBITDA was boosted by NOK 0.5bn of excess regulatory revenues in Elvia. Thereafter, Scope expects leverage to exceed 5x in 2025 before improving to around 4.5x in 2026. The spike in 2025 is mainly driven by the expectation that Elvia will have a deficit in regulated distribution revenues of around NOK 0.7bn, which will have a negative but temporary effect on EBITDA. Scope has therefore placed less emphasis on the spike in 2025 when assessing leverage. The agency currently sees a level of around 4.5x as a normalised leverage for the company.

From a level of 8.5x in 2023, the company's interest cover is expected to weaken to a likely bottom of slightly below 5x in 2025. This is due to less EBITDA on the one hand, while on the other hand, the company sees higher interest payments given growing debt and increased interest rates despite its sizeable exposure to fixed-rate debt (around 50% at YE 2023). Looking into 2026, Scope believes interest cover will improve to around 6x, driven by gradually declining interest rates and an expected recovery in EBITDA, supported by a lower deficit in regulated distribution revenues compared to 2025.

While forecasted credit metrics are slightly weaker than Scope’s previous expectations, they are still commensurate with the current financial risk profile assessment. However, the company has less financial headroom to Scope’s downside scenario.

Liquidity: adequate (unchanged). Eidsiva's liquidity remains adequate. As of 30 September 2024, the company had cash and cash equivalents of NOK 2.0bn and committed credit lines of NOK 2.5bn (unused) with tenors exceeding one year. This comfortably covers financial debt maturities and expected negative free operating cash flow by more than 200%.

Supplementary rating drivers: +1 notch (unchanged). Scope defines Eidsiva as a government-related entity in accordance with its rating methodology for government-related entities. This is based on the essential public services provided by Eidsiva and the ultimate ownership by municipal entities, which include the City of Oslo and the County of Innlandet. Applying the bottom-up rating approach of Scope’s Government Related Entities Methodology, the agency assesses the public owners' capacity ('high') and willingness ('medium') to provide financial support as unchanged, thus maintaining a one-notch uplift to the standalone credit assessment.

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 Eidsiva’s leverage will temporarily weaken to above 5.0x in 2025 due to a large deficit in regulated distribution revenues, but that it will stabilise at around 4.5x thereafter. Scope also expects a stable business mix, with approximately two-thirds of EBITDA coming from regulated distribution revenues over the next few years.

The upside scenario for the ratings and Outlook is:

1. Improved financial risk profile, with leverage sustained below 3.0x.

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

1. Weakening of the financial risk profile, with leverage sustained above 5.0x or EBITDA interest coverage weakening below 5.0x on a sustained basis.
    
2. Loss of GRE status (remote).

Debt ratings

The rating for Eidsiva’s senior unsecured debt has been affirmed at A-, the same level as the issuer rating.

Eidsiva’s short-term debt rating is affirmed at S-1. This is based on the company’s A-/Stable issuer rating and reflects a strong liquidity position with better-than-adequate short-term debt coverage. Scope also notes that Eidsiva has several well-established banking relationships and a strong standing in domestic capital markets, sufficing the company’s funding needs.

Environmental, social and governance (ESG) factors

Eidsiva derives a high share of its earnings from activities that align with the EU taxonomy, mainly power distribution and renewable energy generation. Scope believes this business mix reduces the risk of facing long-term headwinds related to ESG developments.

In particular, Eidsiva has a sizeable exposure to cost-efficient hydropower generation through recurring dividend income from its 43.5% stake in Hafslund Kraft AS. Unlike CO2-intensive technologies, hydropower has low transition risks related to decarbonisation, which Scope considers as a credit-supportive rating driver.

All rating actions and rated entities

Eidsiva Energi AS

Issuer rating: A-/Stable, affirmation

Short-term debt rating: S-1, affirmation

Senior unsecured debt rating: A-, 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; European Utilities Rating Methodology, 17 June 2024; Government Related Entities Rating Methodology, 10 December 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/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 8 December 2017. The Credit Ratings/Outlook were last updated on 24 January 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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