Nordic Credit Rating (NCR) has revised the outlook on its 'BB' long-term issuer rating on Norway-based small-scale hydropower producer Småkraft AS to negative from stable. At the same time, the 'N4' short-term issuer rating and 'BBB-' senior secured issue ratings were affirmed.
Rating rationale
The outlook revision reflects lower electricity prices and price achievement than we previously expected. This has led to reduced cash flow from operations and higher financial leverage relative to earnings. In our previous base-case forecast, we expected electricity prices to rebound, with Småkraft's NCR-adjusted interest coverage remaining above 2x and funds from operations to net debt above 5% for full-year 2024. These figures were approximately 1x and 0.8%, respectively. We expect ongoing pressure on cash flows due to the company's planned investments in new hydropower plants. In addition, we see elevated risk that Småkraft's credit metrics could remain below the minimum levels we require for the current rating for quite some time. Despite relatively high margins, the company is dependent on higher electricity prices to service debt through cash flows.
Hydropower is the main form of energy in Norway, where it generates over 89% of electricity output. It benefits from low marginal production costs, which positions the country's power plants well in the merit order system. As a result, electricity prices are closely linked to available hydro capacity and storage. Currently, Norway's hydropower stocks are close to their highest level in over 20 years, which we believe points to lower electricity prices. In the first two months of 2025, the average spot price was lower than in recent years. Småkraft, which mainly operates run-of-river plants, cannot adjust production as flexibly as many of its domestic peers to achieve better prices. Although the company's costs vary with prices, we expect lower electricity prices to reduce cash available for debt servicing. We consider a significant rise in electricity consumption and demand unlikely in the short term. However, we acknowledge the volatility of Nordic electricity prices.
Negative outlook
The negative outlook reflects elevated risk that Småkraft's credit metrics could remain below the minimum levels we require for the current rating. This is due to lower electricity prices reducing cash flows for debt servicing. We think that the company's investment plan will pressure cash flows over the next two years, even though the owners have committed equity capital to offset some debt uptake.
We could lower the rating if Småkraft continues to operate with interest coverage below 2x or funds from operations to net debt below 5% over a protracted period. We could also lower the rating to reflect worsening operating conditions, such as lower energy prices or reduced power generation. Ownership changes that negatively affect risk appetite could also trigger a lower rating. However, the owners have a long-term commitment to the company.
We could assign a stable outlook if the company's key credit metrics are restored such that interest coverage remains above 2x and funds from operations above 5% over a protracted period, either through a reduction in debt or sustained improvement in cash flow generation.
Related rating actions
i) Småkraft 'BB' long-term issuer rating affirmed; Outlook stable, 16 Aug. 2024.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BB | BB |
| Outlook: | Negative | Stable |
| Short-term issuer credit rating: | N4 | N4 |
| Senior secured issue rating: | 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.