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Rating action

Scope Ratings GmbH (Scope) has today affirmed the A+/Stable issuer rating on EVN AG. Concurrently, Scope has affirmed the S-1+ short-term rating as well as the A+ rating on 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’s status as a government-related entity and its ties to the sub-sovereign majority shareholder under Scope’s bottom-up rating approach for government-related entities.

Scope continues to view EVN’s creditworthiness as largely supported by its solid and well diversified business model, which ensures resilient operating performance. This is due to: i) its fully integrated utility business model in electricity supply, focused on robust regulated and quasi-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; and v) limited legacy risks related to the generation portfolio, already rectified through the operation of remaining thermal capacities as reserve capacity.

EVN’s exposure to robust utility segments will likely grow further over the next few years, reflecting the group’s updated investment plan for the next few years under its ‘Strategy 2030’. The annual investment budget has been increased to net capex (including investment grants) of about EUR 500m for the next few years compared to about EUR 350m per annum over the last few years. The largest portion of this net investment is earmarked for investment in the grid infrastructure, renewables and water supply infrastructure. Scope therefore expects EVN’s operating profit exposure to robust regulated and quasi-regulated utility segments to improve further to above 80% on a sustained basis over the next few years compared to an average of about 75% over the past few years. This investment focus will not only grow the group’s share of robust infrastructure activities but also contributes to the ongoing energy transition (ESG factor: credit-positive environmental rating driver). This will largely be driven by an accelerated ramp-up of renewables capacities, which EVN plans to expand to 750 MW by 2030 for onshore wind assets (from currently 394 MW) and to 300 MW in photovoltaic capacity by 2030 (compared to 12 MW at present). This investment will further strengthen the group’s environmental footprint, which has already been improved over the past few years by the exit from coal-fired power generation (Walsum and Dürnrohr power plants), and result in a further reduction of power generation volumes from fossil-based power plants to towards 25% over the next few years (compared to 43% in BY 2020/21) (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 group’s overall profitability profile. This is clearly exemplified by the current market environment, with elevated energy prices affecting EVN’s energy trade and supply segment as well as its business in south-eastern Europe, which combined contribute 30%-40% to the utility’s recurring EBITDA. Firstly, the upward pressure on electricity and gas prices will likely add more volatility to EVN’s group margin and will put temporary pressure on working capital requirements, resulting in adverse effects on operating and free operating cash flow. Scope sees little hope that energy prices will revert to historical levels any time soon in light of the geopolitical environment in Europe. While Scope believes that EVN faces limited risks regarding the timely passing on of higher energy procurement costs due to its large exposure to flexible back-to-back or indexed tariff schemes for its customers (higher procurement cost is passed on with some delay), the higher absolute revenue contribution of the low-margin energy trading and supply business will likely have a dilutive effect on the group margin. Overall, Scope does not expect that EVN will need to cover significant losses in energy trading and supply, like in former periods, due to the nature of such flexible pricing. Secondly, group EBITDA and profitability will likely be temporarily burdened by elevated electricity wholesale prices and corresponding cost pressure from grid losses in Bulgaria and North Macedonia that cannot be passed on in the short term by increasing grid tariffs. This will temporarily put additional strain on EVN’s group margin until costs related to grid losses can be compensated for with adjusted tariffs in upcoming tariff decisions in July 2022 and July 2023. This will likely move the group margin towards the lower end of its historical range of 20%-30%.

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

Scope expects EVN’s leverage, as measured by Scope-adjusted debt/Scope-adjusted EBITDA, to stay within a range of 1.0-1.5x amid increased net capex over the next few years. Scope also expects EVN’s indebtedness, as measured by Scope-adjusted debt, to remain stable at a level of around EUR 900-1,000m. This reflects the group’s accelerated capex plan under its ‘Strategy 2030’, which balances net capex and shareholder remuneration against operating cash flow. Leverage is expected to remain within the above corridor, bolstered by solid operating earnings as measured by a Scope-adjusted EBITDA within a range of EUR 650-750m over the next few years. Debt protection metrics – as measured by Scope-adjusted EBITDA/interest – will likely remain very solid at above 15x, backed by the anticipated operating performance and further savings on annual interest payments after the group’s refinancing of its 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 in its core market and limited aspirations for major debt-funded M&A or growth in international projects beyond its current activities; ii) a focus on low-risk assets; iii) the balancing of payouts for net capex and shareholder remuneration with operating cash flow, which will likely result in a broadly unchanged net financial debt position; iv) a prudent dividend policy; and v) a clear focus on maintaining ratings in the A category.

Scope considers EVN’s liquidity to remain strong, indicated by liquidity ratios that are expected to stand above 200% at all times. Expected scheduled debt maturities of EUR 324m in BY 2021/22 (of which EUR 300m have already been redeemed through new Schuldschein debt, cash and short-term bank debt), EUR 27m in BY 2022/23 and EUR 110m in BY 2023/24 are likely to be comfortably covered by internal liquidity sources, such as an unrestricted cash buffer of more than EUR 837m at end-Dec 2021, solid average free operating cash flow (positive with the exception of the current business year due to higher working capital requirements), and the strategic liquidity reserve related to EVN’s 12.6% stake in Verbund AG, currently worth more than EUR 4.4bn. Scope foresees a limited need to permanently draw down additional liquidity from the group’s multi-year credit facilities of around EUR 550m as of June 2021.

EVN’s issuer rating incorporates a one-notch uplift on the 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 under a bottom-up rating approach, 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 Scope’s expectation of an unchanged robust financial risk profile as displayed by sustained Scope-adjusted leverage (Scope-adjusted debt/Scope-adjusted-EBITDA) of 1.5x and below over the next few years. This is underpinned by Scope’s view of EVN’s solid ability to balance capex and shareholder remuneration against operating cash flow, thereby keeping its net debt broadly constant. The Outlook also reflects the agency’s view that EVN’s ownership structure will not change as the province of Lower Austria is required by law to retain a majority stake.

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

A negative rating action could be warranted by leverage deteriorating to above 1.5x on a sustained basis. This could be due to higher-than-expected net capex or a lower-than-expected earnings contribution 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).

Long-term and short-term debt ratings

The rating for senior unsecured debt has been affirmed at A+, the same level as the issuer rating.

While EVN does not have a commercial paper programme at present, Scope has affirmed the short-term debt rating of S-1+, which applies to short-term debt maturities. Scope expects internally and externally available liquidity to cover upcoming debt maturities by more than 200%. Moreover, Scope regards the group as having 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; European Utilities Rating Methodology, 17 March 2022; Government Related Entities Rating Methodology, 6 May 2022) 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 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.