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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB+/Stable issuer rating on Sunnhordland Kraftlag AS (SKL). Scope has also affirmed the BBB+ senior unsecured debt rating.

The affirmation is driven by Scope's expectation that leverage (debt/EBITDA*) will decrease to 0.3x in 2025, balancing further upcoming growth ambitions. Higher-than-expected power prices allowed for debt reduction over the last 12 months following the debt-financed acquisition of the Midtfjellet wind farm. However, the positive deleveraging trend is offset by SKL's growth ambitions and Scope's expectation of more moderate power prices, which will lead to an increase in leverage towards 1x over the next two years.

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 be reflected by its low-cost and environmentally friendly power generation portfolio (ESG factor: positive) in southwest Norway, mainly based on hydropower with some exposure to wind power. A strong position in the merit order and the flexibility provided by access to hydro reservoirs benefits the company.

SKL's exposure to the volatility of achievable market prices inherent in the industry, coupled with low diversification by utility segment and geography, continues to constrain the rating. The latter is somewhat mitigated by the fact that regional prices are also impacted by price levels in surrounding Nordic and European power markets through interconnectors.

Further constraints include the company's relatively high reliance on its largest power plants, although this has improved somewhat with the addition of Midtfjellet. In September 2024, SKL entered the wind power segment for the first time 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 the majority of the company's generation capacity and cash flow.

Profitability remains strong given the exposure to low-cost power generation. SKL's EBITDA margins are expected to exceed 75% in 2025 thanks to high power prices. However, Scope anticipates a normalisation to around 75% based on an expected power price in NO2 of approximately NOK 600–670/MWh. Profitability, as measured by return on capital employed (ROCE), remains supportive of the rating, with normalised levels of around 25% expected. Conversely, ROCE may potentially be affected by the recently announced resource rent tax proposal for small power stations (småkraft), which is part of the government's budget for 2026. However, this proposal still has to go through hearings, and there is no political consensus outside of the main governing party in favour of such a tax proposal. Therefore, its final impact is uncertain. This adds to a series of regulatory changes imposed by the Norwegian government in recent years, which has decreased regulatory certainty in the sector.

Financial risk profile: A (unchanged). SKL's financial risk profile is supported by strong credit metrics and significant cash accumulation during favourable market conditions from 2021 to 2023, as well as in 2025. This helped the company digest the Midtfjellet acquisition in 2024.

Scope-adjusted debt increased to NOK 1.1bn by the end of 2024, up from a net cash position the previous year. This was mainly driven by the acquisition of Midtfjellet, which increased net debt by around NOK 1.5bn, resulting in leverage of 0.8x. Helped by high power prices in 2025 and strong operating cash flows, SKL reduced its debt burden by NOK 500m, with leverage forecast at 0.3x for 2025. However, given SKL's growth ambitions, the company's continuation of its dividend policy and more moderate expected power prices going forward, leverage is expected to gradually increase beyond 2025 towards 1x.

Scope expects an on-average slightly positive free operating cash flow in 2025–2027, though there will be a dip into negative territory in 2026. This is primarily due to significant investments in modernising and expanding the power generation portfolio, which will impact cash flows.

However, debt protection is expected to remain very strong, with EBITDA interest coverage standing at over 15x during the forecast period.

Liquidity: adequate (unchanged). SKL's liquidity is expected to remain adequate. Following the refinancing of the NOK 1.2bn bridge financing arranged in connection with the Midtfjellet acquisition, future debt repayments remain manageable, with the sole capital markets debt being a NOK 300m bond maturing in 2026.

Supplementary rating drivers: +1 notch (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 all 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 our expectation that SKL’s leverage (debt/EBITDA) will remain below 1.5x 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):

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. (remote)

Debt rating

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 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, 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 2025; Government Related Entities Rating Methodology, 3 September 2025), are available on 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 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 scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): registers.esma.europa.eu/cerep-publication/. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at 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 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: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Ratings: Karl Yuan Pettersen, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 13 December 2021. The Credit Ratings/Outlook were last updated on 12 November 2024.

Potential conflicts
See 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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