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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB+/Stable issuer rating on Norwegian electricity grid operator Arva AS (Arva). Concurrently, Scope has affirmed the BBB+ rating on senior unsecured debt and the short-term debt rating at S-2.

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

Key rating drivers

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

Business risk profile: A+ (unchanged). Arva's rating remains underpinned by its strong business risk profile. This reflects its sole exposure to electricity distribution in the north of Norway, which is associated with low business risks given the natural monopoly and fully regulated operating environment. With approximately 125,000 customers, Arva remains the seventh-largest domestic electricity grid operator and the largest in the north of Norway. Its service area includes 19 municipalities in the counties of Nordland and Troms.

In Scope’s view, the applicable regulatory framework in Norway is well developed and allows the timely pass-through of an increased cost base. This underpins the robustness of Arva's cash flow generation and the assessment of low business risks, despite challenges such as comparatively low customer and geographic outreach.

Scope expects profitability to remain solid overall, with a Scope-adjusted EBITDA margin* of around 50%. Arva had excess accumulated regulatory revenues of NOK 213m at end-2023. This is expected to support EBITDA in the next few years, helping to offset a decreasing regulated benchmark return (weighted average cost of capital/WACC). The WACC decreased to 7.6% in 2024 (2023: 8.4%) and is expected to fall further to around 7% in 2025-2026 on the back of lower inflation and market rates.

Based on interim results for the first eight months of 2024, full-year EBITDA is expected to be below Scope’s previous forecast. This is mainly driven by an adverse weather event (Ingunn), which led to high costs, as well as a revision of the estimated revenue cap due to a data correction, which reduced Arva’s revenue cap. In addition, Scope has lowered its capex expectations for 2024-2026, with Arva’s current project pipeline indicating a more evenly distributed capex profile over the next few years than previously anticipated. Overall, this reduces both expected debt levels and EBITDA compared to Scope’s previous forecast from April 2024.

Financial risk profile: BB- (unchanged). Arva’s financial risk profile reflects moderate credit metrics and continued pressure on cash flow generation despite lower capex.

Given the lower but still significant capex expectations, Scope foresees debt increasing gradually due to persistently negative free operating cash flow, which, along with dividend payments, will require external financing. Overall, the agency projects that debt will rise to around NOK 4.5bn by YE 2026, from around NOK 3.8bn at YE 2024.

In terms of credit metrics, Scope expects leverage (debt/EBITDA) to be around 5.5x at YE 2024, up from 5.1x at YE 2023, subsequently settling at about 6.0x over the next few years. At the same time, Scope projects EBITDA interest cover to remain between 3.5x and 4.0x. These levels are similar to Scope’s previous forecast from the rating update in April 2024, with lower EBITDA being largely offset by lower debt levels.

Liquidity: adequate (unchanged). Arva’s liquidity is adequate, driven by Scope’s view that the company has good access to external financing to cover cash uses, supported by its good overall credit profile, which is underpinned by its regulated business model and government-related entity status. This helps to mitigate Scope expectation that Arva’s liquidity ratios will be below 110% in 2025-2026, with negative free operating cash flow and maturing debt of NOK 0.7bn in 2025 and NOK 1.4bn in 2026 not being fully covered by the company’s available cash and cash equivalents and its NOK 750m of undrawn committed credit lines, which matures in July 2026.

Arva has financial covenants on its outstanding debt. These require an equity ratio of at least 25% and net-interest bearing-debt/EBITDA below 9x. Scope expects that Arva will comply with both covenants.

Supplementary rating drivers: +1 notch (unchanged). The issuer rating incorporates a one-notch uplift to the standalone credit assessment of BBB for parent support, leading to an issuer rating of BBB+. This is based on Scope’s view of Arva’s government-related entity status, reflecting the indirect public majority ownership by municipalities in north Norway and the essential public services provided by the company as the sole power distributor within its service territory. Scope applied a bottom-up approach using the framework outlined in its Government-Related Entities Methodology. The one-notch uplift reflects the anticipated capacity (“high”) and willingness (“medium”) of Arva’s indirect Norwegian municipality owners to provide financial support if needed.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s expectation that Arva’s leverage will stabilise at around 6.0x over the next few years, which is commensurate with the rating sensitivities. Scope expects EBITDA growth to offset a moderate increase in debt, with Arva’s capex and dividend plans likely to require additional external financing.

The upside scenario for the ratings and Outlook is:

1. Debt/EBITDA improving to around 5x.

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

1. Debt/EBITDA sustained at well above 6.5x, paired with interest cover below 4x.
    
2. Loss of government-related entity status (remote).

Debt ratings

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

Scope has also affirmed the S-2 short-term debt rating. This is based on the underlying BBB+/Stable issuer rating and reflects the company’s worse-than-adequate short-term coverage and adequate access to bank and capital markets financing.

Environmental, social and governance (ESG) factors

Overall, ESG considerations are neutral for the rating.

All rating actions and rated entities

Arva AS

Issuer rating: BBB+/Stable, affirmation

Short-term debt rating: S-2, affirmation

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/or Outlook, (General Corporate Rating Methodology, 14 February 2025; 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 and the Rated Entity.
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 29 March 2023. The Credit Ratings/Outlook were last updated on 5 April 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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