The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has assigned a BBB+/Stable issuer rating on Norwegian utility company Haugaland Kraft AS along with a BBB+ senior unsecured debt rating and an S-2 short-term rating.

Rating rationale

The issuer rating reflects stand-alone credit quality of BBB and a one-notch uplift based on Scope’s assessment of parent support. The uplift is driven by the anticipated capacity and willingness of Norwegian municipal owners to provide support and was assessed in accordance with Scope’s Government Related Entities Methodology.

Regarding Haugaland Kraft’s business risk profile, Scope notes positively its diversification into various segments, especially the combination of robust infrastructure segments, such as monopolistic power distribution and fibre broadband services. In addition, the company is exposed to profitable, environmentally friendly, low-cost hydropower production (positive ESG factor) via its 59.7% ownership stake in Sunnhordland Kraftlag AS (SKL). Although SKL adds segment diversification, it also indirectly adds volatility through its high electricity price exposure from its fully unhedged production output. Further business risk elements include limited geographical outreach in selected segments and indirect high asset concentration risk via SKL.

The financial risk profile can be described as relatively conservative historically, although FY 2020 consolidated figures was negatively impacted by weak results at SKL. Having a significant equity ratio and low leverage gives the company a buffer to handle this volatility. This is also part of its strategy, given the inherent indirect volatility risk via SKL. Although FY 2020 showed negative free operating cash flow and weak financial credit ratios, Scope expects 2021 to return to more conservative leverage given the significantly improved market prices achieved this year. Still, going forward, Scope anticipates that the company will increase its capex (compared to recent historical years) and maintain its dividend policy. Based on our estimates and assumptions, this would increase its average leverage ratio to a range of 3x-4x.

Scope deems liquidity to be adequate and notes that the company has more than enough cash and back-up credit facilities to handle its well-distributed debt maturity schedule. However, Scope also notes that the company is likely to raise additional funding to enable expected capex growth.

Scope has made no adjustment for financial policy. Scope notes that the company aims to keep an investment-grade profile and maintain a strong overall FRP. The company analyses capex plans against this goal before making any commitments. Scope sees dividend pay-outs to owners as very predictable, with an established policy of distributing 60% of results during the last three years.

One or more key drivers for the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that Haugaland Kraft will remain a diversified utility with grid, power sales and fibre broadband operations as well as a majority owner in hydropower generation via SKL. It assumes that the company will maintain a conservative capital structure and a high equity ratio, paired with prudent investment and growth ambitions. It also assumes the combined group of Norwegian municipalities will continue to be a majority shareholder in Haugaland Kraft.

A positive action could be warranted if free operating cash flow was used to service debt repayment, resulting in sustained, conservative credit metrics. This could be exemplified by Scope-adjusted debt/EBITDA of around (or below) 2.5x on a sustained basis. A positive action could also occur in the longer term if Scope saw a larger contribution from the more stable infrastructure business, leading to lower volatility and an improved business risk profile.

A negative rating action is possible if the company’s financial risk profile weakened due to lower wholesale prices or debt-financed transactions or investments, resulting in leverage above 4.0x for a prolonged period. The loss of its status as a government related entity following a change in ownership could trigger a downgrade as well.

Long-term and short-term debt ratings

The BBB+ senior unsecured debt rating, which is in line with the issuer rating, is based on the company’s standard bond documentation, which includes a pari passu clause and a negative pledge. Senior unsecured bonds are issued at the Haugaland Kraft level. The S-2 short-term rating reflects acceptable short-term debt coverage as well as good access to domestic bank loans and debt capital markets. 

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, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Utilities, 18 March 2021; Rating Methodology: Government Related Entities, 5 May 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
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-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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-scale. 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://www.scoperatings.com/#!methodology/list.
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 the 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 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: Henrik Blymke, Managing Director
Person responsible for approval of the Credit Ratings: Tommy Träsk, Director
The Credit Ratings/Outlook were first released by Scope Ratings on 24 November 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.