London, 08 September 2021 -- Moody's Investors Service (Moody's) has today assigned a Baa3
long-term issuer rating to Orkuveita Reykjavikur (OR) and concurrently
withdrawn the Ba1 corporate family rating (CFR), following the rating
agency's practice for corporates transitioning to investment grade.
The outlook on the rating remains stable.
The upgrade to Baa3 principally reflects an improvement in the company's
underlying credit quality, as represented by a ba1 baseline credit
assessment (BCA), upgraded from ba2, which in turn reflects
the company's strong operating performance, significant improvements
in aluminium prices, and an improved balance between earnings and
liabilities denominated in foreign currencies. Financial strategy
and risk management, including the management of foreign exchange
risks, is a governance consideration under Moody's methodology
for assessing ESG risks.
RATINGS RATIONALE
OR's ba1 BCA reflects (1) the company's strong market position and
strategic importance to Reykjavik and Iceland (A2 stable) as the provider
of essential utility services to around 75% of Iceland's population;
(2) the low business risk profile associated with regulated activities,
which account for around 55% of the company's EBITDA and provide
a good degree of cash flow predictability; and (3) low and predictable
levels of capital expenditure.
The company achieved resilient operating performance in 2020, despite
headwinds associated with the with coronavirus pandemic, and strong
cash flow in the twelve months to June 2021 attributable to lower borrowing
costs and a 7% reduction in operating expenditures compared to
the prior year. OR has also benefited from significant improvements
in aluminium prices since the start of 2020, which directly benefit
revenues through aluminium-linked contracts. As a result,
OR's ratio of Funds From Operations (FFO) to net debt increased
to 19.2% in the twelve months to June 2021. Stronger
aluminium prices have also contributed to an improvement in the credit
quality of Century Aluminum Company (B3 stable), which owns Nordural,
OR's largest single customer.
OR has significantly improved its exposure to foreign exchange risks by
reducing its debt denominated in foreign currencies relative to US dollar-denominated
earnings. Borrowings in foreign currencies, mainly the US
dollar, have declined from 63% of debt in December 2016 to
around 40%, and Moody's expects this to continue to
fall. US dollar revenue was equivalent to 21% of 2020 EBITDA.
OR benefits from a transparent and supportive regulatory framework in
its electricity distribution segment. Iceland's National
Energy Authority (NEA) followed a well-established methodology
to set allowed revenues for the 2021-26 regulatory period,
which includes a post-tax real allowed return of 5.21%
in 2021 that will decline gradually over the period. The real allowed
equity return, 7.25% in 2021, is higher than
comparable regimes in Europe and globally, in part reflecting high
interest rates following Iceland's financial crisis. The
regulatory framework for the hot water segment, which is significantly
larger than electricity distribution, is less developed, but
tariff-setting in recent years has followed the NEA's analytical
approach. Tariffs for cold water and sewage have increased steadily
in recent years, and in Moody's opinion allow OR to achieve
a reasonable return on invested capital.
Liquidity is very strong, with ISK 36.0 billion of cash and
equivalents and access to ISK 10.0 billion of undrawn credit facilities
as of June 2021.
OR is considered a government-related issuer under Moody's methodology
because of its ownership by municipal authorities, which include
the City of Reykjavik (93.5%), the Town of Akranes
(5.5%) and the Municipality of Borgarbyggd (1%).
OR's Baa3 rating incorporates one notch of uplift for potential extraordinary
support to the company's ba1 BCA. This recognises that, despite
strong incentives for the owners to provide timely financial support to
OR, their ability to do so may be constrained by OR's significant
debt burden relative to the financial resources of its shareholders.
Moody's would expect the central government to coordinate with the local
governments to arrange timely intervention, if necessary.
On 20 August Moody's affirmed the A2 rating and stable outlook of
the Government of Iceland, reflecting expectations of a solid economic
recovery and significantly stronger and more credible institutions,
offset by limited diversification of the economy.
ESG CONSIDERATIONS
Orkuveita Reykjavikur's ESG Credit Impact Score is low/neutral (CIS-2),
an improvement from its previous score of moderately negative (CIS-3),
reflecting improved financial risk management. The effect of ESG
risks to the rating is mitigated by the expectation that its government
shareholder would support the company, if this were to become necessary.
OR's low/neutral environmental risk (E-2 issuer profile score)
reflects the company's fully renewable generation portfolio.
Heat and electricity from geothermal energy, which accounts for
substantially all of OR's output, is highly reliable and dispatchable,
and is unaffected by climactic variability that affects other renewable
technologies. Despite Iceland's extreme weather, which
creates risk of physical damage to OR's assets and those of Landsnet,
the transmission network owner, OR has maintained consistently high
network reliability since 2015 and has not faced material storm-related
costs. Emissions of carbon and hydrogen sulphide from OR's
geothermal plants are within permitted limits and have fallen over time
as OR has reinjected an increasing share of these gases. In 2019,
the company established a subsidiary to commercialise it carbon capture
technology.
OR's social risk is moderately negative (S-3), reflecting
the risk, common to all regulated utilities, that public concern
over environmental, social or affordability issues could lead to
adverse regulatory or political intervention. These risks are balanced
by neutral to low risks to health and safety, human capital,
customer relationships and responsible production.
Governance risks are low/neutral (G-2), a change from the
previous score of moderately negative (G-3), reflecting reductions
in OR's foreign exchange risk. Because Reykjavik City owns
the company and appoints five of six directors, we view the independence
of OR's board as relatively weak. However, a published
"ownership strategy" and well-defined financial policies,
and the shareholders' track record of appointing non-political
external experts to the board, moderate the risk of political interference
in the company's operations.
RATIONALE FOR STABLE OUTLOOK
The stable outlook on the rating reflects Moody's expectation that
OR will maintain FFO/net debt in the high teens, in percentage terms,
with prudent liquidity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
There could be upward pressure on the rating if OR demonstrated further
reductions in foreign currency risk, further improvement in the
predictability of its key regulatory frameworks, or FFO/net debt
trending toward the mid-20s in percentage terms.
These ratings could be downgraded if OR's FFO/net debt falls persistently
below the high teens, if liquidity is insufficient to insulate the
company from market risks (particularly in relation to exchange rates
or aluminium prices), or if the supportiveness of OR's regulatory
frameworks diminishes.
The methodologies used in these ratings were Regulated Electric and Gas
Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530
and Government-Related Issuers Methodolgy published in Febuary
2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
Orkuveita Reykjavíkur (OR) is Iceland's largest multi-utility,
operating its own power plants, electricity distribution system,
geothermal district heating system and providing cold water and waste
services in 22 communities in the southwest of the country, covering
approximately 75% of the Icelandic population. The company
is also a fibre-optic service provider, offering internet
access to businesses and households. More than 95% of the
company's installed generation capacity is based on geothermal sources,
while the remainder comes from hydro. OR is the second largest
electricity producer in Iceland. with a share of around 18%
in total electricity output. The company services mainly the Reykjavik
city area, but is also present in southern and western parts of
Iceland.
Orkuveita Reykjavíkur is a partnership between three municipalities:
the City of Reykjavik (93.5%), the Town of Akranes
(5.5%) and the Municipality of Borgabyggd (1%).
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
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affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
These ratings has been disclosed to the rated entity or its designated
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These ratings is solicited. Please refer to Moody's Policy
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
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the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Graham Taylor
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Paul Marty
Senior Vice President/Manager
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
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JOURNALISTS: 44 20 7772 5456
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