Research Update: Norwegian Toll Road Co. Fjellinjen Outlook Revised To Positive; 'AA-/A-1+' Ratings Affirmed Primary Credit Analyst: Dennis Nilsson, Stockholm (46)84405354; dennis.nilsson@spglobal.com Secondary Contact: Carl Nyrerod, Stockholm (46) 8-440-5919; carl.nyrerod@spglobal.com Table Of Contents Overview Rating Action Rationale Outlook Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 21, 2017 1
Research Update: Norwegian Toll Road Co. Fjellinjen Outlook Revised To Positive; 'AA-/A-1+' Ratings Affirmed Overview Fjellinjen continues to enjoy a monopoly position collecting tolls on traffic going to and from the Norwegian capital of Oslo, with a strong financial position from the very low cost base in relation to revenues. We expect that the change in Fjellinjen's setup in the coming years when toll collection is separated from toll charging will improve its efficiency without hurting its cash flow stability or financial flexibility. We are revising our outlook on Fjellinjen to positive from stable and affirming our 'AA-/A-1+' ratings. The positive outlook reflects our expectation that Fjellinjen will continue to strengthen its financial risk profile as debt is paid off. Rating Action On June 21, 2017, S&P Global Ratings revised its outlook on Norwegian toll road company Fjellinjen AS to positive from stable. At the same time, we affirmed our 'AA-/A-1+' long- and short-term issuer credit ratings on Fjellinjen. Rationale The outlook revision reflects our view that Fjellinjen has strengthened its financial position from increasing tolls and debt amortization. We have revised upward our assessment of Fjellinjen's stand-alone credit profile (SACP) to 'aa-' from 'a+', based on the overall strengthening of its debt ratios from our previous expectations. We continue to believe that there is a moderate likelihood that the Kingdom of Norway (AAA/Stable/A-1+), through the Norwegian Public Roads Administration (NPRA), would provide timely and sufficient extraordinary support to Fjellinjen in the event of financial distress. The importance of Fjellinjen to finance infrastructure projects in the region, together with the possibility of controlling environmental aspects of traffic, is a key aspect for our assessment. We consider that the Norwegian government's limited level of contingent liabilities does not constrain its capacity and willingness to, through the NPRA, support Fjellinjen in a timely manner in the event of financial distress. More generally, we don't consider the Norwegian government's general propensity to support the government-related entity (GRE) sector to be doubtful. We consider that Fjellinjen's SACP has strengthened due to its very low operating risk and continued very low and stable enterprise risk profile. The company has a monopoly position in collecting road tolls on traffic going to and from the Norwegian capital of Oslo. In addition, unlike most international road toll companies, Fjellinjen's operational mandate is restricted to collecting tolls. The operational risk is thus limited to systems and processes around toll collection, while budget risk for projects falls outside their responsibility. The limited scope WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 21, 2017 2
of activities--with no responsibility for maintenance and lifecycle expenditures of the infrastructure--further strengthens its overall business risk. In addition, Fjellinjen's strong financial risk profile underpins its SACP. Its limited expenditure responsibilities and strong cash-generating capacity translate into very strong cash flows and robust debt-servicing ability. We believe there is a moderate likelihood of timely and sufficient extraordinary government support to Fjellinjen from the Norwegian government in the event of financial distress. Even though Fjellinjen is owned by the City of Oslo and the County of Akershus, we consider that any extraordinary support would come from the Norwegian government through the NPRA. We base our assessment on Fjellinjen's: Strong link with the Norwegian government, due to the state's strong influence on Fjellinjen's activities. Strategic decisions on Fjellinjen's operations are taken by a steering group consisting of representatives of the two owners, the Norwegian National Rail Administration, and the NPRA. Fjellinjen's loan levels conform to those set out in the national budget and depend on the volume of projects the NPRA initiates within Oslo Package 3. Role of limited importance for the Norwegian government. Fjellinjen contributes to the financing of regional infrastructure, but we assess the entity's individual importance to the government as relatively minor. We note Fjellinjen's role with regard to the regional infrastructure development. Road toll collection companies, such as Fjellinjen, have an established position in Norway in supplying financing for local infrastructure projects. Essentially, they help to ensure that funds generated in a specific region are transferred back to that region for financing infrastructure. There are about 60 toll road companies in Norway, but Fjellinjen is by far the largest in terms of the scope of toll collection. Typically, toll road companies benefit from guarantees on their financial liabilities from their respective owner, generally a county or a group of counties. In Fjellinjen's case, the owners have not found such guarantees necessary. We note that Fjellinjen's organizational setup will change within a few years as toll collection and toll charging must be separated units. The toll collector will charge end customers and handle subscriptions, customer service, and toll collection. Fjellinjen's role as toll charger will thus be to register and identify passes and supply the toll collector with billable items. Under this setup, toll collection risk is moved from Fjellinjen, which will no longer be as close to the customer-service function. Overall, we expect this change will improve Fjellinjen's efficiency without hurting its cash flow stability or financial flexibility. Oslo owns 60% of Fjellinjen, with the remainder held by Akershus county. However, since the central government, through the NPRA, actively monitors the company and directs its financial activities, we believe the central government would provide extraordinary support in the event of need. Such support could come from using the leeway to adjust the funding requirement sought from Fjellinjen. Within Oslo Package 3 infrastructure projects, there are possibilities to delay and postpone projects, thereby limiting the expected financial requisition from Fjellinjen. Fjellinjen was set up with the purpose of collecting tolls to cofund Oslo Package 3, with a total project portfolio of Norwegian krone (NOK) 90 billion ( 10 billion), of which NOK60 billion-nok65 billion are expected to come from Fjellinjen. The WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 21, 2017 3
company's payments to Oslo Package 3 are regular and directed through the NPRA on a monthly basis. The NPRA can instruct Fjellinjen to provide funding in addition to its yearly net operating result. Fjellinjen's payments exceeded our previous expectations in 2016, leading to a decrease in debt. On average we expect debt to be paid off linearly, adjusted for the irregularities in size and timing of maturing debt. Fjellinjen has a robust financial risk profile, on the back of low operating risks from a sound and predictable revenue pattern. Given its limited expenditures, Fjellinjen generates very strong cash flows. Constraining Fjellinjen's financial risk is the company's lack of influence on its funding contributions to Oslo Package 3 and subsequently on its debt accumulation. The NPRA initiates and manages the projects in Oslo Package 3. Every year, the steering group presents an updated four-year rolling action plan that lays out the future direction of Oslo Package 3, including the strategic remittance of Fjellinjen in terms of operating performance and debt accumulation. Ultimately, this plan needs the central government's approval. In the latest revisions to Oslo Package 3, we note that it was decided that Fjellinjen would increase tariffs over the coming years to be able to increase contributions to the NPRA while amortizing on its debt. We don't expect contribution levels will be increased to surpass the cash flow Fjellinjen generates. The current concession period is valid until 2036, at which point we expect debt to be fully amortized. We assess the enterprise profile as very strong, as Fjellinjen benefits from its monopoly standing within the fast growing region around Oslo. An important factor in our assessment is that Fjellinjen, contrary to many other toll road companies, has no direct technical or maintenance risk with regard to infrastructure. We note that Fjellinjen's plans to expand operations by introducing new toll rings--to capture traffic in the city center that does not pass through current tolls--will decrease risks further and make the instrument of tolls in controlling traffic stronger. Liquidity Fjellinjen has a strong liquidity position, in our view. This is due to the company's very strong cash-generating capacity and to its low refinancing risks, given the limited short-term debt repayments. We view positively that interestbearing debt holds priority over contributions to the NPRA; the flexibility in financing risk for Fjellinjen is greatly enhanced through this characteristic. Fjellinjen's debt management is prudent and its loan portfolio is primarily long term, limiting short-term refinancing risks. In addition, the strategic plan for Oslo Package 3 includes a policy stating that Fjellinjen's debt service, including amortization, should be handled by the company's own cash flows and taken into account when deciding on the annual funding requirement. From 2012, Fjellinjen has provisioned earnings yearly to build up funds to accommodate its upcoming maturing debt. In our base-case scenario, we forecast that Fjellinjen will generate funds from operations in excess of NOK2.4 billion in 2017 and increasing by more than 50% until 2019. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 21, 2017 4
We observe close cooperation between the NPRA and Fjellinjen with regard to Fjellinjen's distribution of funds. As such, we consider that Fjellinjen has a degree of flexibility to adjust its regular payments to the NPRA, if necessary. Importantly we note that a single month's cash generated from operating activities, together with cash credit available, covers the largest maturity in the debt portfolio. Outlook The positive outlook reflects our view that Fjellinjen is likely to further strengthen its financial standings in coming years as debt is paid off. We expect that future adjustments to toll fees will improve the company's debt and performance ratios. Furthermore, we expect Fjellinjen will maintain its focus on long-term financing when refinancing maturing debt, as well as its robust liquidity position. The positive outlook assumes there will be no increase in payments to the NPRA put forth that would require Fjellinjen to take up additional debt. We could raise the ratings over the next two years if Fjellinjen continues to strengthen its financial risk profile. We could revise the outlook to stable if Fjellinjen's management fails to demonstrate risk prudency as debt decreases and revenues increase. We could also revise the outlook to stable if new big projects are introduced that force Fjellinjen to take up additional debt. Related Criteria And Research Related Criteria General Criteria: Methodology For Linking Long-Term And Short-Term Ratings - April 07, 2017 General Criteria: Rating Government-Related Entities: Methodology And Assumptions - March 25, 2015 Criteria - Governments - General: Toll Road And Bridge Revenue Bonds In The U.S. And Canada - February 25, 2014 General Criteria: Principles Of Credit Ratings - February 16, 2011 General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating - October 01, 2010 General Criteria: Use Of CreditWatch And Outlooks - September 14, 2009 Ratings List Rating To From Fjellinjen AS Issuer Credit Rating Foreign and Local Currency AA-/Positive/A-1+ AA-/Stable/A-1+ WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 21, 2017 5
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420- 6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. Additional Contact: International Public Finance Ratings Europe; PublicFinanceEurope@spglobal.com WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 21, 2017 6
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