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Rating action

Scope Ratings GmbH (Scope) has today assigned an A+/Stable issuer rating to Austrian utility EVN AG. Concurrently, Scope has assigned an S-1+ short-term rating as well as an A+ rating for senior unsecured debt.

Rating rationale

EVN’s A+ issuer rating reflects a standalone credit quality of A plus a one-notch uplift based on Scope’s view of EVN as a government-related entity.

The standalone issuer rating reflects Scope’s view of EVN’s robust business model paired with a financial risk profile that is one of the best among European integrated utilities. EVN is well able to manage challenging economic phases without threatening its credit quality. This is thanks to its fully integrated business model, diversification, and dominant exposure to regulated activities (such as energy distribution and regulated power generation) and robust utility segments (such as water and heat supply, cable television and telecommunications). Scope expects the group’s business to be further strengthened by its plan to accelerate capex in regulated and quasi-regulated assets in its core region of Lower Austria. At the same time, the capex programme will likely be balanced with operating cash flow and dividends at levels that do not jeopardise the low indebtedness.

Despite its small size compared to other pan-European utilities, Scope assesses EVN’s business risk profile as comparatively low risk and widely diversified, leading to largely resilient operating performance. This is due to: i) its fully integrated utility business model in electricity supply focused on robust regulated infrastructure; ii) diversification across different markets in central and south-eastern Europe; iii) significant exposure to other low-risk and less cyclical infrastructure segments such as television/cable networks, drinking-water supply, and heat generation; iv) its increased focus on strengthening its regulated business in its core market (Lower Austria) through an ongoing ramp-up of renewable energy capacities and the upgrade of its grid infrastructure, supporting the energy transition in Austria (ESG factor: credit-positive environmental rating driver); and v) limited legacy risks related to the generation portfolio, already rectified through the operation of remaining thermal capacities as reserve capacity (ESG factor: credit-positive environmental rating driver). However, EVN’s business risk profile remains constrained by i) its exposure to volatile energy trading and supply as well as project development activities in environmental services; ii) higher market risks for activities in south-eastern Europe; and iii) the company’s overall profitability profile.

Scope regard EVN’s financials to be fully commensurate with an A+ financial risk profile. This is reflected in the low indebtedness, robust debt protection metrics, and focus on positive free operating cash flow and break-even discretionary cash flow. The financial risk profile strongly supports the solid investment grade rating and is among the strongest of the European integrated utilities.

EVN’s leverage as measured by Scope-adjusted debt/Scope-adjusted EBITDA is expected to be sustained within a corridor of 1.0-1.5x. Reflecting the company’s accelerated capex plan under ‘Strategy 2030’, which balances net capex against operating cash flow and shareholder remuneration, Scope expects EVN’s indebtedness to remain stable. The acceleration of annual capex to EUR 450m-500m (vs an average of around EUR 330m-370m over the past few years) will be offset by gradual improvements in operating cash flow that are likely to keep free operating cash flow positive. Incorporating some headroom for slightly increasing dividend payouts, discretionary cash flow is expected to remain at breakeven, which will keep net debt, including 100% of pension obligations, broadly unchanged at around EUR 1.0bn. Bolstered by a gradually increasing Scope-adjusted EBITDA (to EUR 753m in BY 2022/23E from EUR 635m in BY 2020/21E), leverage is expected to slightly improve within the above-mentioned corridor of towards 1.0x over the medium term. Debt protection metrics – as measured by Scope-adjusted EBITDA/interest – will likely remain very solid at above 14x, particularly after the upcoming refinancing of the 4.25% EUR 300m bond in April 2022.

EVN’s low sustained indebtedness is consistent with what Scope regards as a risk-averse financial policy. This is reflected by: i) its focus on organic growth from internal sources, primarily in its core market, and limited aspirations for major M&A or growth in international projects beyond its current activities; ii) a focus on low-risk assets; iii) a net debt target (net financial debt plus pension obligations) of around EUR 1bn; iv) a prudent dividend policy; and v) a clear focus on maintaining ratings in the A category.

Scope deems EVN’s liquidity as strong. Expected debt maturities of EUR 407m in BY 2021/22 and EUR 120m in BY 2022/23 (including EUR 75m from drawn credit lines being rolled over to the next year annually) are expected to be comfortably covered by internal liquidity sources. Liquidity sources include the unrestricted cash buffer of more than EUR 500m at end-June 2021, positive estimated free operating cash flow, and the strategic liquidity reserve related to its 12.6% stake in Verbund AG currently worth more than EUR 4.0bn. Scope foresees a limited need to draw down additional liquidity from the multi-year credit facilities of more EUR 500m as of June 2021.

Scope incorporates a one-notch uplift on EVN’s standalone rating of A, leading to a final rating of A+. This follows the framework set out in Scope’s rating methodology on government-related entities, reflecting the controlling parent’s ‘high’ capacity and ‘medium’ willingness to provide support.

The federal state of Lower Austria, whose credit quality Scope deems equal or close to the Republic of Austria’s (rated AAA/Stable by Scope), holds a 51% majority stake in EVN through its investment vehicle, NÖ Landes-Beteiligungsholding GmbH. The law¹  stipulates that the Lower Austrian province’s equity stake in EVN must be at least 51%. Scope deems EVN as essential to the federal state, particularly its gas and electricity distribution infrastructure. Scope notes, however, that EVN would rather dispose of non-core assets in south-eastern Europe than risk a liquidity shortfall and request funding from its controlling shareholder.

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

Outlook and rating-change drivers

The Stable Outlook reflects a consistently improved financial risk profile with a Scope-adjusted leverage (Scope-adjusted debt/Scope-adjusted EBITDA) sustained at 1.5x or below. This is underpinned by Scope’s view of the group’s solid ability to balance capex and shareholder remuneration against operating cash flow and thereby keep net debt constant. The Outlook also reflects Scope’s view that EVN’s ownership structure will not change as the government of Lower Austria is required by law to retain a majority stake.

A negative rating action could be warranted by the Scope-adjusted leverage deteriorating to above 1.5x on a sustained basis. This could be due to higher-than-expected net capex or lower-than-expected earning contributions from new investments and/or the volatile businesses such as energy supply and environmental services. Alternatively, a negative rating action could be triggered if Lower Austria reduced its share to a minority stake (unlikely due to the legislation).

A positive rating action could occur if Scope-adjusted leverage moved to 1.0x or below. However, Scope deems this remote as the company would likely balance additional deleveraging against higher capex and/or shareholder remuneration.

Long-term and short-term debt ratings

All senior unsecured debt has been assigned an A+ rating, the same level as the issuer rating.

While EVN does not have a commercial paper programme at present, Scope assigned a short-term rating at S-1+. Scope expects internally and externally available liquidity to cover upcoming debt maturities by more than 200%. Moreover, the group is expected to have strong access to external funding from banks and investors through Schuldschein debt and public bonds.

1. ‘NÖ Beteiligungsgesetz’ (7 February 2018) in conjunction with the ‘Bundesverfassungsgesetz, mit dem die Eigentumsverhältnisse an den Unternehmen der österreichischen Elektrizitätswirtschaft geregelt werden‘ (7 February 2018)

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, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Utilities, 18 March 2021; Rating Methodology: Government Related Entities, 5 May 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
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-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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-scale. 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://www.scoperatings.com/#!methodology/list.
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 the 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 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: Sebastian Zank, Executive Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 2 November 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.