Norway’s hydro-power utilities set to shrink debt ratios faster on higher power prices, says Scope

Norway’s vertically integrated hydropower utilities are well placed to trim debt ratios faster than expected in the quarters ahead. Surging power prices could offset lower output after a dry summer and possible lower-grid segment profitability.

Scope Ratings’ expectations for the NordPool power price have increased in line with recent movement of the forward curve in the market. Nordic weekly spot prices are up more than 70% YoY, while the Q4 futures price recently hit a seven-year high.

 “The pricing trend could continue well into 2019, helped by the bullish local and European market outlook,” says Henrik Blymke, analyst at Scope. The effect will be largest for the utilities with higher shares of unhedged power production.

Based on a recent simulated 2019 estimate using an updated Nordpool forward curve, the average Scope-adjusted debt/EBITDA ratio for Norwegian utilities rated by Scope could fall by around 0.4 percentage point to an estimated 3.7x in 2019.

Water levels in Nordic reservoirs could be near record lows next spring given the current levels and latest simulation estimates from NVE. Norway’s reservoirs stood at 65.5% of capacity in late-August, 17pp below the seasonal average and only 6pp above the lowest level recorded since 1990.

Higher Nordpool power prices also reflect steep increases in coal and CO2 prices in Europe related to efforts by the EU to reduce surplus CO2 emission allowances. A long-term programme to reduce the surplus though the Market Stability Reserve comes into effect in January 2019.

By inflating earnings, higher power prices are also providing more room for utilities to undertake capital spending without taking on more debt. “However, current electricity prices would have to prove durable for there to be a material impact on the ratings in the Norwegian sector,” says Blymke.

The outlook remains bright for many Nordic utility companies. As important sources of renewable energy in Europe, the Nordic utilities should benefit from new environmental regulations, including expected higher CO2 allowance prices, and increased interconnector capacity after 2020. Hydropower utilities, with their ability to “store” electricity in reservoirs, will benefit in particular from being able to produce and sell electricity when market conditions are most favourable.

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Norwegian utilities rated by Scope comprise: Lyse Energi AS (BBB+/Stable), Agder Energi AS (BBB+/Stable), Eidsiva Energi AS (BBB-/Stable), Glitre Energi AS (BBB/Stable), BKK AS (BBB+/Stable).

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