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Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating of BBB+ on Vardar AS and changed the Outlook to Negative. Scope has also affirmed the company’s BBB+ senior unsecured debt rating and the S-2 short-term debt rating

The Outlook revision to Negative reflects the increased leverage of the issuer and the uncertainty surrounding the pace and extent of deleveraging. This is because both depend on power price development and/or the company's adherence to its financial policy, which involves adjusting discretionary spending and shareholder remuneration in order to reduce leverage.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: BBB- (unchanged). Vardar's business risk profile continues to reflect its main exposure to low-cost and environmentally friendly hydropower generation (ESG factor: credit-positive), which supports strong profitability. The company's consolidated operations are small and include 0.7 TWh of average annual hydropower production from a 2/7 stake in the Usta and Nes power plants, 69 MW of installed wind capacity (including the newly acquired Västraby wind park; and Kvalheim Kraft which is 50% owned) and around 60 GWh of annual district heating. The business risk profile is supported by the company's robust dividend income from a 12.91% stake in Å Energi, reflecting the recurring cash flow generated by more diversified and vertically integrated utility operations. The business risk profile is hampered by the company's small size and high asset concentration of directly owned power plants, as well as the cyclical operating environment with exposure to volatile electricity prices.

Vardar's investment in Å Energi is considered to be part of its core business, as the dividends received are expected to be a significant and recurring part of the operating cash flow. This creates some concentration risk, but this risk is partially offset by the high robustness of these dividends, which is supported by Å Energi's good credit profile (rated A-/Stable by Scope) and dividend policy of paying out 70% of underlying profit from two years back with a floor of minimum dividends. In addition, Scope is positive on Vardar's ability to veto changes to Å Energi's payout policy and core business composition, enabled by a joint ownership agreement with Drammen Municipality.

For the next two years, Scope expects electricity prices to be around EUR 47/MWh in the NO5 bidding zones in southern Norway. Under these market conditions, Scope-adjusted EBITDA* is expected to be in the range of NOK 420-470m, including annual dividends from Å Energi of NOK 160-230m. This implies an EBITDA margin (excl. dividends from Å Energi) of around 55%.

Financial risk profile: BBB+ (unchanged). The financial risk profile supports the company's credit rating and is driven by good leverage and interest cover, and strong free operating cash flow. This, combined with low capital expenditure requirements, results in good financial flexibility.

Vardar's leverage, as measured by debt/EBITDA has increased to 3x in 2024 due to the debt funded acquisition of Västraby Wind park, and is expected to remain at these levels in 2025 and 2026. This is driven by lower expected electricity prices and lower dividend income from Å Energi than in 2024, despite continued strong free operating cash flow that allows for a reduction in net debt. Scope expects the company to deleverage to around 2.5x in 2027, benefiting from the likely increased dividend from Å Energi based on the strong operating development of 2025. As Å Energi's dividends are expected to account for 40-50% of EBITDA in the coming years, the company's leverage ratio is comparatively less exposed to taxation than Norwegian utilities with a larger share of directly owned hydropower plants. The two-year time lag in Å Energi's dividend payments also improves the visibility of forecast cash flows and reduces the volatility of Vardar's credit metrics. Furthermore, the rating case continues to assume that Vardar will use its financial flexibility to bring net debt (excluding Scope’s adjustment for non-accessible cash and lease obligations) down to around NOK 1.2bn by balancing discretionary investments and shareholder remuneration with free operating cash flow. Interest cover at 8.9x in 2024 and expected between 5.5x-7x in 2025-2027 supports the financial risk profile, with recent refinancings at favourable levels and an expected slowly tapering interest curve in addition to lowered debt needs supporting the positive trend.

Vardar’s cash flow cover is seen as strong and benefits the rating, characterised by limited capex requirements in its directly owned energy generation and discretionary spending on associated companies otherwise. Free operating cash flow has been positive for all the observed historical years and is expected to remain so in 2025-2027 supporting a high internal financing capacity across the cycle.

Liquidity: adequate (unchanged). Liquidity is adequate, with the next debt maturity in May 2027 (NOK 475m in bank debt). In May 2025 Vardar refinanced its only outstanding capital market debt of NOK 440m with a bank facility over NOK 500m. The company currently has NOK 75m undrawn long-term facilities in addition to a NOK 50m RCF available. Liquidity is further supported by expected positive free operating cash flow of more than NOK 200m per annum.

Supplementary rating drivers: +1 notch (unchanged). The issuer rating incorporates a one-notch uplift on the standalone credit assessment of BBB reflecting the company’s GRE status and leading to an issuer rating of BBB+. Scope has applied a bottom-up approach using the framework outlined in Scope’s Government Related Entities Methodology. The conclusion of a one-notch uplift reflects the public sponsor’s ‘high’ capacity and ‘medium’ willingness to provide support. The rating uplift is in line with other Scope-rated Norwegian utilities with majority or full public ownership but no explicit guarantees on their debt or financial support.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating sensitivities

The Negative Outlook reflects Scope's view that there is an increased risk of Vardar maintaining a debt/EBITDA ratio of around 3x for an extended period unless it acts in line with its financial policy to protect its credit profile, or unless power prices develop in line with Scope’s expectations. The Outlook also reflects Scope's expectation that Vardar will maintain its core assets, including the Usta and Nes power plants, as well as its stake in Å Energi.

The upside scenario for the ratings and Outlook is:

1. Debt/EBITDA of below 3x on a sustained basis.

The downside scenarios for the ratings and Outlook are (individually):

1. Debt/EBITDA ratio of around 3.0x for a prolonged period.
    
2. The loss of government-related entity status (remote).

Debt ratings

The senior unsecured debt rating has been affirmed at BBB+, in line with the issuer rating.

The affirmed S-2 short-term debt rating is based on the underlying BBB+/Negative issuer rating and also reflects adequate short-term debt coverage as well as adequate access to external financing from banks and capital markets.

Environmental, social and governance (ESG) factors

Vardar’s business model is mainly exposed to hydropower generation. This limit transition and stranded risk and should support the company’s future cash flow generation through high utilisation factors of power plants with a continued, strong position in the merit order. The core hydropower business is supplemented with other types of sustainable energy generation.

All rating actions and rated entities

Vardar AS

Issuer rating: BBB+/Negative, Outlook change

Short-term debt rating: S-2, affirmation

Senior unsecured debt rating: BBB+, affirmation
 
*All credit metrics refer to Scope-adjusted figures.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 14 February 2025; European Utilities Rating Methodology, 17 June 2025; Government Related Entities Rating Methodology, 3 September 2025), are available on scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): registers.esma.europa.eu/cerep-publication. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings and/or Outlook were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 21 November 2023. The Credit Ratings/Outlook were last updated on 28 November 2024.

Potential conflicts
See scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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