Fitch Affirms Statkraft at 'BBB+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Norway-based Statkraft AS's (Statkraft) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+' and Short-term IDR at 'F2'. The Outlook is Stable. Statkraft's government-guaranteed debt has also been affirmed at 'AAA', in line with the rating of its guarantor, the Kingdom of Norway (AAA/Stable/F1+).
The affirmation reflects our expectation that Statkraft's credit metrics will remain commensurate with the rating despite some weakening during 2015-2018. This is due to the weak profitability outlook, reflecting low electricity prices in the Nordic region and a large capital expenditure programme including in emerging markets. Investments are partly funded through equity injections, reduced dividends and disposals. The sovereign support continues to underpin the one-notch uplift incorporated in the IDR.
KEY RATING DRIVERS
Reduced Revenues from Nordic Hydropower
Nordpool electricity prices remain low due to exceptionally high hydro reservoir levels, weak electricity demand, in part structurally and also due to warm conditions, and ongoing transmission constraints. Forward prices in the Nordic region may remain below EUR30/MWh until 2020. We expect EBITDA to remain below NOK9bn until 2018 for the Nordic hydropower segment. Declining revenues from spot sales are mitigated by higher and more predictable income from long-term contracts with industrial off-takers (approximately 40% of the Nordic hydropower segment's production).
Large Capital Expenditure Programme
Statkraft continues to implement its 2014-2018 NOK61bn expansionary capital expenditure programme. However, management has emphasised that the implementation of the plan is subject to financial capacity and some investments are made jointly with other Norwegian institutions. Fitch therefore assumes annual capital expenditure to be around NOK7.5bn for 2016-2018, meaning that some parts of the programme may be delayed beyond 2018, reducing near term funding needs and expected leverage. Given the long lead time of the investments, Fitch expects that declining earnings from Nordic Hydropower are unlikely to be fully offset by growth projects in the medium term.
Despite our assumptions, the capital expenditure programme and lower earnings are still likely to drive funds from operations (FFO) adjusted net leverage above 4.0x for 2017-2018 (assuming no further equity injections or major asset disposals). However, this is still within our rating guidance and we expect that leverage will start to decline once the expansionary period is over, and new projects begin generating more cash flow.
Low-Cost Green Generator with Multi-Year Reservoirs
Statkraft's business profile benefits from a highly competitive asset base in the Nordics and low carbon dioxide emissions. The company possesses large multi-year water reservoirs, which enables flexible production with very low operating cost (around EUR7/MWh in 2014), and little marginal cost. The benefit from production flexibility should increase in the long term, due to increasing demand for balancing capacity in Europe resulting from large installations of wind and solar power plants. Statkraft's competitiveness is somewhat reduced by the high tax burden for its Norwegian hydropower plants and obligation to sell concession electricity to Norwegian municipalities at below market prices.
Fitch includes a one-notch uplift in the IDR reflecting our view of the strength of Statkraft's legal, operational and strategic links with the Norwegian government. The Norwegian government directly supported Statkraft with equity injections in 2010 (NOK14bn) and 2014 (NOK5bn) to strengthen the company's balance sheet. In 2013, the government (through the holding company Statkraft SF) also contributed power plants valued at NOK3.4bn as equity in kind. In addition, we expect Statkraft will reduce dividends for 2015-2017 by NOK5.0bn in total.
Fitch's key assumptions within the rating case for Statkraft AS include:
- Achieved electricity price from Nordic spot-sales of around EUR23/MW for 2016-2018
- Annual capital expenditure of NOK7.5bn for 2016-2018
- Dividend payments reflecting the updated dividend policy from the Norwegian government
- Long lead time for new investments, hence only marginal EBITDA contribution before 2018
Positive: Positive rating action is unlikely at this stage. Future developments that could lead to a positive action nonetheless include:
- A fundamental review of business and financial strategy leading to substantially stronger expected credit metrics, such as FFO net adjusted leverage trending towards 3.0x (FYE14: 2.7x).
- Stronger links with the government.
Negative: Future developments that could lead to negative rating action include:
-FFO net adjusted leverage rising sustainably above 4.5x or FFO fixed charge cover falling below 4.5x (FY14: 5.8x), as a result of a further material downward shift in the Nordic and German wholesale electricity forward prices; and management implementing the full NOK61bn gross capital expenditure programme (NOK56bn net after taking account of NOK5bn disposals) over 2014-2018, or an increase in dividends without commensurate adjustments to the capital structure.
-Weakening links with the Norwegian government.
As of September 2015, Statkraft held cash and cash equivalents of NOK7,552m and committed, undrawn credit facilities of NOK14bn (NOK2bn maturing in 2016 and NOK12bn maturing in 2018) and NOK2.2bn overdraft facilities. This funding position will cover the expected operating requirements, capital expenditure and upcoming debt maturities of around NOK6.7bn until the end of 2016. Statkraft faces foreign exchange risk on part of its euro-denominated debt, but sales are also partially euro linked or denominated.