The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has affirmed the A+/Stable issuer rating on EVN AG. Concurrently, Scope has affirmed the S-1+ short-term debt rating as well as the A+ rating on senior unsecured debt.

Rating rationale

EVN’s A+ issuer rating continues to reflect a standalone credit assessment of A and a one-notch uplift based on Scope’s view of the utility’s status as a government-related entity.

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 business model, which is focused on robust regulated and quasi-regulated infrastructure segments; ii) solid diversification across different markets in central and southeastern 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) an increased focus on strengthening its regulated business in its core market (Lower Austria) through an ongoing ramp-up of renewable energy capacities and upgrades to grid infrastructure; and v) limited legacy risks related to the utility’s generation portfolio, already rectified through the closure/disposal of significant thermal capacities in recent years and 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 during the execution of the company’s investment plan under its ‘Strategy 2030’. Its annual investment budget is likely to exceed net capex (including investment grants) of about EUR 500m. The largest portion of this net investment is earmarked for investment in 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 last few years. This investment focus will not only grow the company’s share of robust infrastructure activities but also contribute to the ongoing energy transition (ESG factor: credit-positive environmental rating driver). This is displayed by continued strengthening of the electricity distribution grid, which needs to handle increasingly volatile generation volumes, and by a continued ramp-up of renewables capacities. EVN plans to expand these to 750 MW by 2030 for onshore wind assets (from 407 MW currently) and 300 MW for photovoltaic capacity (from 14 MW currently) by 2030. Increased investment in renewable energy capacity will further strengthen the company’s environmental footprint, which has already improved significantly over the past few years thanks to its exit from coal-fired power generation. In addition, more investment in renewables capacity will likely result in a further reduction in power generation volumes from fossil fuel power plants to near 25% over the next few years (estimated) compared to 43% in BY 2020/21 and 33% in BY 2021/22 (ESG factor: credit-positive environmental rating driver). As a result, transition risks for EVN’s energy generation fleet have already been largely addressed. This is reflected in the specific carbon intensity of EVN’s energy generation fleet, which was less than 250 grams CO2e/kWh in BY 2021/22 that is slightly less than the average for European power generation incumbents.

However, EVN’s business risk profile which is assessed at A- remains constrained by: i) its exposure to volatile energy trading and supply as well as project development activities in environmental services; ii) higher market risk for activities in southeastern Europe; and iii) the company’s overall margin profile. This is particularly evidenced by credit weakness pertaining to the energy supply business’ dilutive effect on company profitability amid elevated energy prices, whose procurement may not be fully covered by contracted prices. While Scope recognises EVN’s efforts to restructure tariff models with end-customers to allow for more timely reflection of volatile energy procurement costs or an indexation to market conditions, the drag on company profitability from energy supply activities can hardly be mitigated in the short term. Nonetheless, Scope regards EVN’s overall business setup as accommodating the risks associated with energy supply, given the fully integrated business and the natural hedge provided by recurring income from associates, such as Austria’s leading power generator Verbund AG and gas storage company RAG Austria AG.

In fact, Scope sees a good chance that the company EBITDA margin will return to slightly above 20% in the medium term (up from about 16% in BY 2021/22), backed by: i) containment of operating losses from the energy supply business; ii) a shrinking share of revenue contributions from energy supply and environmental services; iii) a growing share of EBITDA contributions from power generation and distribution; and iv) a likely reversion of the achievable EBITDA margin from regulated grid activities amid a changing interest rate environment and a gradually growing regulated asset base. Moreover, the dilutive effect on the company margin from low-margin segments, such as energy supply and environmental services, comes into perspective when reflecting on the utility’s solid operating profitability as measured by its Scope-adjusted return on capital employed, which balances out the different asset intensity of EVN’s business segments. The Scope-adjusted return on capital employed has settled within a range of 15%-20%, which is perceived as very solid, particularly for a utility with significant exposure to asset-intensive energy distribution activities.

EVN’s financial risk profile – assessed at A+, one of the strongest rankings among European integrated utilities – continues to support its solid investment-grade rating. It is grounded in the utility’s sustained low indebtedness, its robust debt protection and its focus on internal funding of annual net capex and shareholder remuneration.

The company continues to balance annual net capex and shareholder remuneration against operating cash flow. Although overall debt exposure could be tempered by working capital swings related to energy procurement, Scope believes the average net debt burden is likely to remain between EUR 1.0bn-1.2bn over the next few years. The combination of such stable net debt exposure, the company’s operating strength, which is signalled by projected operating cash flow between EUR 600m-850m, and the rating’s headroom to a lower rating allow for a gradual increase in annual net capex from the minimum level of about EUR 500m. Scope believes EVN can ramp up its annual net capex to about EUR 650m without risking a significant debt increase, pointing to the company’s high internal financing capacity and structurally neutral-to-positive free operating cash flow.

The agency expects EVN’s leverage, as measured by Scope-adjusted debt/EBITDA, to stay within a very solid corridor of 1.0x-1.5x amid increased net capex and slightly increased dividend payouts over the next few years. Likewise, debt protection metrics, as measured by Scope-adjusted EBITDA interest cover, will likely remain at a very strong level of around 20x. Such strong level is expected to be bolstered by anticipated operating performance, interest savings from the company refinancing a 4.25% EUR 300m bond in April 2022, very limited exposure to variable interest rate debt and – apart from refinancing – no significant external financing needs over the next few years.

Liquidity is expected to remain strong, indicated by liquidity ratios that are projected to continuously remain above 200%. Scheduled debt maturities of EUR 378m in BY 2022/23 (which includes EUR 255m of bank overdrafts that can likely be used on a sustained basis), EUR 256m in BY 2023/24 and EUR 24m in BY 2024/25 are likely to be comfortably covered by internal liquidity sources, such as an unrestricted cash buffer of more than EUR 200m at end-December 2022, solid average free operating cash flow of more than EUR 100m per annum, and the availability of more than EUR 600m in multi-year credit facilities. Moreover, the company’s strategic liquidity reserve pertaining to its 12.6% stake in Verbund AG, currently worth more than EUR 3.0bn, provides further comfort about EVN’s very solid liquidity profile.

EVN’s risk-averse financial policy is deemed to support a consistently strong financial risk profile. This is reflected by: i) its focus on organic growth in the utility’s 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, such as regulated energy grids and networks; iii) balancing payouts for net capex and shareholder remuneration with operating cash flow; iv) a prudent dividend policy; and v) a clear focus on maintaining ratings in the A category. As a result, Scope perceives a low risk of EVN jeopardising its current setup.

The issuer rating incorporates a one-notch uplift on the standalone credit assessment of A, leading to a final issuer rating of A+. This follows the framework set out in Scope’s rating methodology on government-related entities with a bottom-up rating approach, reflecting the public sponsor’s capacity and willingness to provide support. The federal state of Lower Austria, whose credit quality Scope deems to be close to that of the Republic of Austria (rated AAA/Stable by Scope), holds a 51% majority stake in EVN through its investment vehicle, NÖ Landes-Beteiligungsholding GmbH. It is stipulated by law 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. The upnotching on EVN’s standalone credit assessment is limited to one notch considering: i) that a large part of EVN’s activities are not deemed essential public services; ii) that EVN’s large business outreach to southeastern European markets would make it likely that non-core assets in such markets would be disposed of before the company requests funding from its controlling shareholder; and iii) the lack of full ownership by the public sponsor.

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/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 government 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 significantly 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 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 legislation).

Long-term and short-term debt ratings

Scope has affirmed EVN AG’s senior unsecured debt rating at A+, the same level as the issuer rating.

Scope has also affirmed the S-1+ short-term debt rating for short-term debt maturities. Scope notes that EVN does not have a commercial paper programme at present and that it uses bank overdrafts for short-term funding purposes instead. Scope expects internally and externally available liquidity to cover upcoming debt maturities by more than 200%. Moreover, Scope regards the company as having strong access to external funding from banks and investors through Schuldschein debt and public bonds. 

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 Outlook, (General Corporate Rating Methodology, 15 July 2022; European Utilities Rating Methodology, 17 March 2023; 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Sebastian Zank, Managing Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 2 November 2021. The Credit Ratings/Outlook were last updated on 16 May 2022.
 
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.
 
Conditions of use/exclusion of liability
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund 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.