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Rating Action:

Moody's upgrades Orkuveita Reykjavikur's rating to Ba1; stable outlook

23 Mar 2018

London, 23 March 2018 -- Moody's Investors Service, ("Moody's") has today upgraded to Ba1 from Ba2 the corporate family rating of Orkuveita Reykjavikur (OR). Concurrently, the outlook has been changed to stable from positive.

RATINGS RATIONALE

The upgrade of OR's rating to Ba1 reflects the continuous progress the company has made with regard to reducing its financial leverage and improving its liquidity position and diversifying its funding sources. It also takes into account Moody's expectation that OR should be able to maintain its improved financial profile and continue to benefit from the positive macroeconomic dynamics in Iceland, which should drive demand growth for utility services.

The standalone credit strength of OR, which is represented by a ba2 baseline credit assessment (BCA), upgraded from ba3, positively reflects (1) the company's strong market position and strategic importance to Reykjavik, and Iceland more broadly, as the provider of essential utility services to almost 70% of Iceland's population; (2) the low business risk profile associated with regulated activities, which account for around 60% of the company's EBITDA and provide a good degree of cash flow predictability; and (3) its asset base with predictable and low levels of capital expenditure requirements.

At the same time, the Ba1 rating / ba2 BCA also incorporates OR's exposure to the unregulated business and long-term power contracts with aluminium smelters, which exposes OR's revenue to some degree of volatility of the price of aluminium. Albeit materially improved from the past, OR continues to have a significant foreign currency exposure given that the majority of its revenues are generated in Icelandic krona but more than half of its debt balance is denominated in foreign currency. Whilst Moody's does not expect a material depreciation of the Icelandic krona in the next two years, OR remains exposed to exchange rate movements, albeit against a background of lower exchange rate volatility. More positively, Moody's expects that the company will continue to reduce its foreign currency exposure, as it has done over the last years, through issuance of bonds in the local market and refinancing of its debt portfolio.

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%). The owners provide a guarantee of collection in support of OR, which currently covers almost 70% of the total outstanding debt. OR's Ba1 rating incorporates one notch of uplift for potential extraordinary support to the company's ba2 BCA. This recognises that despite the very strong incentives of the owners to provide timely financial support to OR its ability to do so in potential stress case scenarios may be constrained, given OR's significant debt burden relative to the financial resources of its shareholders. Therefore, considering the critical nature of utility services that OR provides to the City of Reykjavik and the surrounding communities, Moody's would expect the central government to try and coordinate with the local governments to arrange timely intervention, if necessary.

The corporate family rating is an opinion of the OR group's ability to honour its financial obligations and is assigned to OR as if it had a single class of debt and a single consolidated legal structure.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that OR will continue to prudently manage its liquidity position and its financial profile will remain aligned with our ratio guidance for a Ba1 CFR / ba2 BCA, namely the maintenance of an Funds from operations (FFO)/ Net debt ratio in the mid to high-teens in percentage terms.

WHAT COULD CHANGE THE RATING UP/ DOWN

Moody's could consider an upgrade of OR's rating if its financial profile were to continue to improve resulting in FFO / Net debt sustainably in the low-twenties in percentage terms, provided that the company does not increase its business risk or exposure to foreign exchange fluctuations, and it maintains a liquidity position that will allow it to cover more than twelve months cash requirements. This would also assume no change to the assumption of support from the owner incorporated into OR's rating.

Conversely, downward pressure on OR's rating could develop (1) as a consequence of a weakening of the company's financial profile, such that FFO/Net debt was expected to remain consistently in the low teens in percentage terms; or (2) it would appear likely that the company's liquidity was not sufficient to insulate it from market risks, particularly in relation to exchange rates, aluminium prices or interest rates.

CORPORATE PROFILE

Headquartered in Reykjavik, Orkuveita Reykjavikur is the largest multi-utility in Iceland. The company operates its own power plants, electricity distribution system, geothermal district heating system and provides cold water and waste services in 20 communities in the southwest of the country, covering almost 70% of the Icelandic population. For the fiscal year ending 2017, the company had revenues of ISK44 billion (c.USD440 million) and EBITDA of ISK26.7 billion (c.USD267 million).

PRINCIPAL METHODOLOGY

The methodologies used in this rating were Regulated Electric and Gas Utilities published in June 2017, and Government-Related Issuers published in August 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 to the assignment of the definitive rating in a manner that would have 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Erica Gauto Flesch
Asst Vice President - Analyst
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

Andrew Blease
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
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

No Related Data.
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