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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB issuer rating of Nordkraft AS (Nordkraft) and revised the Outlook to Negative from Stable. Scope has also affirmed the BBB rating on senior unsecured debt and the S-3 short-term debt rating.

The Negative Outlook reflects limited headroom in forecasted credit metrics, with an increased risk of a weaker financial risk profile in the medium-term, which could trigger a rating downgrade. This is driven by weaker achievable power prices than Scope’s previous expectations, combined with still moderate debt growth due to high capex and shareholder remuneration. Scope still sees a likelihood that ratings pressure could be alleviated, for example through a stronger-than-expected recovery in achievable power prices, or countermeasures that dampen debt growth. This likelihood supports the affirmed ratings.

Key rating drivers

The issuer rating 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: BBB (unchanged). Nordkraft’s business risk profile supports the rating. It reflects the company’s diversified business mix, mainly of electricity distribution and non-regulated power generation, with a competitive power generation portfolio based on hydropower (positive ESG factor), supported by low operating costs, flexibility provided by reservoirs, as well as a clean carbon footprint. Nordkraft’s growing management of third-party renewables and its stakes in associated companies have a more limited impact on the company’s business risk, given the smaller contributions these activities make to recurring cash earnings.

Nordkraft’s distribution segment grew significantly in 2021-2022 through consolidation. Scope expects it to contribute around 50% of EBITDA over time, albeit a higher share in the next years given currently depressed power prices in northern Norway. This continues to reduce business risks given the monopolistic position and fully regulated environment. At the same time, the industry-inherent volatility in power generation, where performance is linked to achievable power prices, which can vary significantly from year to year, remains a key business risk constraint. Other challenges include Nordkraft’s small size, its low geographical diversification outside northern Norway, as well as its vulnerability to disruptions at single power plants, with the three largest providing over 60% of generation capacity.

In 2024, Nordkraft’s EBITDA was NOK 460m, down from NOK 614m in 2023. The decrease was driven by reduced earnings in hydropower generation, as performance in 2023 was above average and achievable power prices in H2 2024 were negatively impacted by significant hydrology. Scope expects EBITDA of around NOK 260m in 2025, around NOK 400m in 2026 and around NOK 500m in 2027. The weak EBITDA in 2025 is mainly due to low achievable power prices in Nordkraft’s regional market, NO4, caused by an exceptionally strong hydrological balance, which has persisted since H2 2024, as well as mild weather, and transmission bottlenecks, resulting in excess electricity supply. This impact is exemplified by the year-to-date market price in the NO4 price zone of around NOK 60/MWh, as compared to NOK 270/MWh in 2024 and NOK 342/MWh in 2023. Scope also expects lower EBITDA in the electricity distribution segment in 2025, as Nordkraft benefitted from excess regulatory revenues in 2024, which are non-recurring.

Scope expects the downward pressure on profitability metrics from low power prices to lift once hydrological conditions normalise. Still, the volatility highlights the company’s high merchant risk in its hydropower generation, with limited hedging, and reliance on regional developments.

Financial risk profile: BB+ (unchanged). Nordkraft’s financial risk profile reflects moderate credit metrics and cash flow generation. Scope’s financial projections are mainly based on weak results in 2025 and a market normalisation in 2026-2027, with the NO4 power price increasing to around NOK 300/MWh from around NOK 100/MWh in 2025. Scope expects capex to be around NOK 250m in 2025 and then increase to an average of about NOK 375m yearly in 2026-2027, with the majority for electricity grid developments and the remainder for maintenance and upgrades of power plants. Combined with higher net interest payable, this is expected to result in negative free operating cash flow in the next few years. Scope expects cash proceeds from the announced realisation of the 20% stake in Aker Narvik to cover some of the financing needs stemming from the negative free operating cash flow and anticipated shareholder remuneration. Still, debt is expected to increase to above NOK 2,300m at end-2027, from NOK 2,000m at end-2024.

Based on these expectations, Scope believes leverage* – as measured by debt/EBITDA – is likely to peak at around 8x at end-2025, up from 4.3x at end-2024, before gradually recovering to around 5x in 2026-2027. At the same time, interest cover is likely to weaken to around 2x in 2025, from 6x in 2024, and recover to about 4x in 2027. Cash flow generation, defined by free operating cash flow/debt, is expected to remain negative in a range of 0% to -6%.

Consequently, Scope sees an increased risk that credit metrics will be weaker than expected in the next few years, despite scaled-back net investment levels. The agency previously expected leverage of around 4x and interest cover of roughly 5x in 2025-2026.

Liquidity: adequate (unchanged). Scope assesses liquidity as adequate. This reflects Nordkraft’s available cash and cash equivalents of NOK 522m at end-2024. It also reflects Scope’s view that the company has adequate access to external financing to cover refinancing and expected negative free operating cash flow, given its sustainable business model, as well as presence in domestic capital markets and established banking relationships.

At year-end 2024, Nordkraft’s gross debt comprised NOK 1,500m of bank loans and NOK 1,000m of bonds. The next major debt maturity is a NOK 500m loan maturing in September 2025, which the company plans to refinance with a similar loan. Scope also expects the company to renew its NOK 100m overdraft facility and NOK 400m revolving credit facility, both maturing in September 2025, as these have historically been rolled annually. The two credit lines are excluded from Scope’s liquidity calculation given their short-term nature with tenors not exceeding 12 months.

Nordkraft’s bank loans have financial covenants requiring a minimum equity ratio of 35% and interest coverage – as measured by EBITDA/net interest expenses in the loan agreements – above 2.0x. The covenants are measured quarterly. Scope believes that banks are likely to remain supportive in the event of temporary breaches caused by power price fluctuations.

Supplementary rating drivers: +1 notch (unchanged). The issuer rating incorporates a one-notch uplift to the standalone credit assessment of BBB-, reflecting the company’s status as a government-related entity. Scope applied a bottom-up rating approach under the framework outlined in its Government Related Entities Methodology. The one-notch uplift is based on 80.1% public ownership by the Norwegian municipalities that largely constitute Nordkraft’s service territory, and an anticipated ‘high’ capacity and ‘medium’ willingness of the public sponsors to provide exceptional support, if needed, in the event of financial distress. The one-notch uplift is in line with other Norwegian utilities rated by Scope with majority ownership by one or more municipalities but no explicit guarantees on their debt or financial support.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating sensitivities

The Negative Outlook reflects the risk that credit metrics will remain under pressure as a consequence of potentially depressed power prices in the relevant price zones over a prolonged period. A rating downgrade could occur if leverage spikes significantly in 2025, as forecast, with no timely recovery to below 5x thereafter.

The upside scenario for the ratings and Outlook is:

• Debt/EBITDA sustained below 5.0x, which could result in an Outlook revision to Stable

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

• Debt/EBITDA not sustained below 5x
   
• 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.

The affirmed short-term debt rating of S-3 is based on the BBB/Negative issuer rating. Scope expects Nordkraft to have adequate access to external financing. The lower of the two possible short-term debt ratings is mainly driven by the company’s worse-than-adequate liquidity cover and the Negative Outlook.

Environmental, social and governance (ESG) factors

Nordkraft’s renewable energy generation is a credit-positive ESG factor. Its ownership of large hydropower plants with low operating costs, flexible capabilities and a clean carbon footprint result in low transition risks. The company’s large-scale hydropower generation, requiring at least two-thirds public ownership by law, which reduces the potential for privatisation, also underpin its long-term government-related entity status.

All rating actions and rated entities

Nordkraft AS

Issuer rating: BBB/Negative, Outlook change

Short-term debt rating: S-3, 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, 10 December 2024), 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: Per Haakestad, Specialist
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 19 August 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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