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Rating action

Scope Ratings GmbH (Scope) has affirmed the BBB+ issuer rating on Norwegian utility company Haugaland Kraft AS along with a BBB+ senior unsecured debt rating and an S-2 short-term rating. The Outlook has been raised to Positive from Stable.

Rating rationale

The raised Outlook to Positive reflects the likelihood that Haugaland Kraft can sustain a more conservative financial risk profile than Scope had anticipated, based on the significantly higher power prices already achieved and the current forward market prices. Based on the company’s prudent financial policy and dividend expectations, continued high capex and higher expected tax payments (following the recent proposal by the Norwegian government), Scope now expects strong credit metrics exemplified by a Scope-adjusted debt/EBITDA of well below 2.5x in the short to medium term.

Regarding the business risk profile, segment diversification is credit-positive, especially with the combination of robust infrastructure segments such as monopolistic power distribution and fibre broadband services. The company is also increasingly exposed to profitable, environmentally friendly, low-cost hydropower production (positive ESG factor) via its 59.7% stake in Sunnhordland Kraft lag AS (SKL). Although SKL adds segment diversification, its unhedged production output also indirectly adds volatility through a high electricity price exposure. FY 2022 EBITDA is set to more than double from the already relatively high level last year, with SKL contributing significantly to this. Further business risk is posed by the limited geographical outreach in selected segments and the indirect high asset concentration risk via SKL.

The financial risk profile has been relatively conservative but also volatile given the inherent indirect volatility risk via SKL. The significant equity ratio (71% reported by H1 2022) and low leverage gives the company a buffer to handle this volatility, which is also part of its strategy. Scope expects even more conservative leverage by the end of 2022 given the significantly improved market prices this year.

From 2023, leverage is set to increase towards 1x following the exceptional situation in 2022 of a nearly net cash position. The expected increase is based on the much higher tax payments, continued high investments and stable dividends. However, uncertainty and volatility remain very high because of the uncontrollable power prices, the new proposed tax regime, and the potential plan of moving more into solar. The establishment of Endra Solenergi AS could lead to large-scale solar power production in the longer run.

Liquidity is adequate. Cash and back-up credit facilities are more than enough to cover debt maturities, which are also well distributed.

Scope has made no adjustment for financial policy. The company aims to keep an investment-grade profile and a strong overall financial risk profile. The company analyses capex plans against this goal before making any commitments. Dividend pay-outs are predictable, with an established policy of distributing 60% of net profit during the last three years. The issuer rating reflects a stand-alone credit quality of BBB and a one-notch uplift based on the capacity and willingness of the Norwegian municipal owners to provide support if needed, assessed in accordance with Scope’s Government Related Entities Methodology.

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

Outlook and rating-change drivers

The Positive Outlook reflects Scope’s expectation that selected financial credit metrics will remain much more conservative than expected given the prospect of higher-than-normal achievable power prices continuing into the medium term. It also assumes that the company will maintain a high equity ratio, paired with prudent investment and growth ambitions. Further, it assumes 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.

A rating upgrade could be warranted if power prices remain high, keeping credit metrics conservative. This could be exemplified by a Scope-adjusted debt/EBITDA of below 2x, and the current financial strategy and external growth ambitions as indicated by management would keep leverage within this range. A rating upgrade could also occur in the longer term if the more stable infrastructure business contributed more to overall group EBITDA, leading to lower volatility and an improved business risk profile.

A negative rating action (i.e. back to a Stable Outlook) is possible if the financial risk profile weakened due to lower wholesale prices or debt-financed transactions or investments, exemplified by Scope-adjusted debt/EBITDA of 2x-4x. The loss of the company’s status as a government-related entity following a change in ownership could also trigger a downgrade.

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 Outlooks, (Corporate Rating Methodology, 15 July 2022; Government Related Entities Rating Methodology, 6 May 2022; European Utilities Rating Methodology, 17 March 2022), 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 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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Barna Szabolcs Gáspár, Associate Director
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 24 November 2021. The Credit Ratings/Outlooks were last updated 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
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