Creditworthiness and economic development in the Norwegian electric utility industry from 2007- 2016

Abstract

This thesis consists of three parts. In the first part we implement five models of bankruptcy prediction, namely three versions of Altman Z-score, Ohlson O-score and Zmijewski’s model. We rank the electric utilities and investigate the relationship between short-term probability of default and official credit ratings and automatically generated credit scores (ACS). We find these models better for relative ranking across the industry than for measuring a default probability for the utilities. All three Altman Z-scores result in noticeably low scores for the majority of the utilities, which may suggest that Altman Z-scores are unsuitable to measure creditworthiness for Norwegian electric utilities. Ohlson O-score and Zmijewski’s model seem to give a more probable score according to the official credit ratings and the ACS. In the second part we examine the economic development of the electric utilities in the tenyear period from 2007-2016, both relative performance and as an industry. The financial ratios utilized indicate that there has been a weakening in economic performance, mainly in the equity ratio, financial coverage, and EBITDA/total debt. The economic development seems to be driven by pressure from lower electricity prices. Green certificates and lower interest rates incentivize leveraging for historically advantageous hydro investments. The score from Zmijewski’s model, which is implemented to investigate the historical development of creditworthiness, has on average increased (meaning a decline in creditworthiness) in the period. We see a slight improvement in the last few years, which may be a sign that the utilities have initiated measures to improve upon their creditworthiness. There are also apparent differences in creditworthiness across the utilities as shown especially in the solidity and profitability measures. In the third part we utilize a Wilcoxon ranked-sum test to test whether there are any statistically significant differences in the financial ratios between the defined groups based on official credit ratings and ACS. The results indicate that the equity ratio, financial coverage, and EBITDA/total debt are the statistically significant different ratios.