Nordic Credit Rating (NCR) has affirmed its 'BBB+' long-term issuer rating on Norway-based regulated electricity distribution system owner and operator Fredrikstad Energi AS. The outlook is stable. The 'N3' short-term issuer rating and 'BBB+' senior unsecured issue rating have also been affirmed. Since the affirmations, the ratings have been withdrawn at the issuer's request.
Rating rationale
The affirmation reflects our opinion that the likelihood of timely extraordinary ownership support remains unchanged after Fredrikstad municipality sold its 51% stake in Fredrikstad Energi to Å Energi, making it a majority-owned subsidiary of Å Energi. Hafslund AS, which is wholly owned by Oslo municipality, owns the remaining 49% stake. Following the acquisition, Fredrikstad Energi remains controlled by two municipal-owned entities, resulting in continued indirect municipal ownership. Å Energi has taken board positions and actively participates in the running of the company. Fredrikstad Energi's governance and financial structures remain unchanged, indicating that Hafslund's approval is necessary for major changes.
We believe the new ownership structure has reduced the combined ownership strength, distancing the municipal owners from Fredrikstad Energi. However, in our view, they remain strong enough to support the company, if necessary. We see some positive implications in the change in ownership. We assess Å Energi as having a greater willingness to take supportive actions than the previous owner. We also believe it capable of providing extraordinary support to Fredrikstad Energi, if needed. In addition, we think owner support could be more timely than previously due to a shorter decision-making process.
In our opinion, Å Energi has a complex group structure, with some subsidiaries being partly owned, and significant interests in joint ventures and associated companies, some of which are loss-making. We think the company is likely to have to provide support for some of these entities. Leverage in the combined group looks set to rise following the acquisition of Fredrikstad Energi and a payment of extraordinary dividends of NOK 1bn in the current quarter. We do not expect the additional operating cash flows to be sufficient to offset the negative impact of increased debt on the combined group's key credit metrics. We expect leverage to increase due to projected average annual investments of NOK 3bn through 2028 and a dividend policy of paying 70% of net profit after tax. In addition, its largest and most profitable segment, hydropower, is burdened with an additional marginal tax on production (resource rent tax). Together, these factors limit available cash for debt repayment.
We anticipate that Fredrikstad Energi will refinance loans affected by the change in ownership and successfully refinance affected bonds on 11 Feb. 2025, when bondholders decide whether to exercise put options. If the options are exercised, the company has available credit facilities to meet the necessary payments. We anticipate no alterations in the company's dividend policy or other measures that might impact our assessment of the standalone entity's credit quality. We also note that Fredrikstad Energi bondholders have structural priority over Å Energi bondholders.
Stable outlook
The stable outlook at the point of withdrawal reflected our expectations that Å Energi would not significantly alter Fredrikstad Energi's financial risk profile. We expect Fredrikstad Energi to remain a majority-owned subsidiary of Å Energi. We anticipate no major acquisitions, further extraordinary dividend payments, or other activities that could increase leverage beyond our base-case expectations and believe that the group's credit quality will remain stable.
Related rating actions
i) Fredrikstad Energi AS 'BBB+' long-term issuer rating placed on watch negative, 5 Nov. 2024.
ii) Fredrikstad Energi AS assigned 'BBB+' long-term issuer rating; Outlook stable, 10 Nov. 2023.
Related publications
i) NCR Comments: Main owner initiates sale of 51% stake in Fredrikstad Energi, 13 May 2024.
ii) Unregulated Nordic power producers well positioned to capitalise on higher prices, 2 Oct. 2023.
| Rating list | Withdrawal | To | From |
|---|---|---|---|
| Long-term issuer credit rating: | NR | BBB+ | BBB+ |
| Outlook: | - | Stable | |
| Watch: | Watch Negative | ||
| Short-term issuer credit rating: | NR | N3 | N3 |
| Senior unsecured issue rating: | NR | BBB+ | BBB+ |
Contacts:
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@nordiccreditrating.com
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Elisabeth Adebäck, analyst, +46700442775, elisabeth.adeback@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Rating Methodology published on 8 May 2023, NCR's Rating Principles published on 14 Feb. 2024 and NCR's Group and Government Support Rating Methodology published on 14 Feb. 2024. For the full regulatory disclaimer please see the rating report.