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Rating action

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

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

Key rating drivers

The rating reflects a standalone credit assessment of BBB, and a one-notch uplift based on Scope’s assessment of parent support from Vardar’s Norwegian municipal owners.

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. It 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. 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 470-520m, including annual dividends from Å Energi of NOK 170-230m. This implies an EBITDA margin (excl. dividends from Å Energi) of around 60%.

Financial risk profile: BBB+ (unchanged). The financial risk profile supports the company's credit rating and is driven by good leverage 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, is expected to peak at 3.2x in 2024 following the acquisition of the Västraby wind park, lower achieved electricity prices and lower dividend income from Å Energi. Scope expects a rapid recovery to 2.4x in 2025, based on the higher dividend from Å Energi, moderately higher power prices and the benefit of the new wind park EBITDA. As Å Energi's dividends are expected to account for 40% 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 - a factor that was taken into account in peer comparison. The two-year time lag in Å Energi's 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 keep net debt around the pre-acquisition level of NOK 1.2bn by balancing discretionary investments and shareholder remuneration with free operating cash flow.

Liquidity: adequate (unchanged). Liquidity is adequate, with the next debt maturity in July 2025, when there is a refinancing of the company’s outstanding bond over NOK 440m. At end-2023, available liquidity included unrestricted cash of NOK 130m and NOK 50m in committed undrawn credit lines. Liquidity is further supported by expected positive free operating cash flow of more than NOK 250m per annum. Scope believes that maturing capital market debt will likely be refinanced by new capital market issuance.

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 Stable Outlook reflects Scope’s expectation of the lower but still supportive power prices in southern Norway continuing over the next few years. It further reflects Scope's view that Vardar will maintain debt/EBITDA between 2x and 3x over 2024-2026. This view is underpinned the company’s willingness (as per its financial policy) and ability to keep net debt constant by adapting discretionary cash outflows to operating results. The view also incorporates Å Energi’s dividend policy, under which the payout in year (t) is based on the result in year (t-2), which provides high visibility on Vardar’s dividend income through 2026. Lastly, Scope expects the company to maintain its core assets, including the Usta and Nes power plants and its stake in Å Energi.

The upside scenario for the ratings and Outlook is:

1. Debt/EBITDA of around or below 1.0x. This is seen as remote given the company’s intention to keep reported net debt near the current level.

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

1. Debt/EBITDA ratio of around 3.0x for a prolonged period as a result of i.e. a significant deterioration in Å Energi’s credit profile (and therefore its perceived dividend capacity).
    
2. The loss of government-related entity status (deemed 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+/Stable 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.

Vardar focuses its growth investments on sustainable areas, including wind power and solar, as well as other areas supporting its overall sustainability target of contributing to reduced greenhouse gas emissions.

All rating actions and rated entities

Vardar AS

Issuer rating: BBB+/Stable, affirmation

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, 16 October 2023; Government Related Entities Rating Methodology, 4 September 2024; European Utilities Rating Methodology, 17 June 2024), are available on https://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 https://www.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 https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.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 https://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.

Potential conflicts
See www.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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