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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 reflects a standalone credit assessment of A and a one-notch uplift reflecting the company’s status as a government-related entity.

Scope continues to view EVN’s creditworthiness as largely supported by its solid and well-diversified business risk profile (assessed at A-), which ensures resilient operating cash flow. This is backed by: i) its fully integrated business model, which is focused on robust regulated and quasi-regulated infrastructure segments; ii) a solid diversification across different markets in central and southeastern Europe; iii) a 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.

In fact, the business model is evolving towards a greater proportion of regulated and quasi-regulated utility activities, which have contributed approximately 75% of recurring EBITDA over recent years. In light of the utility’s annual capital allocation, which remains geared towards regulated and quasi-regulated activities such as grid infrastructure, renewables and water supply infrastructure (75-80% of annual capex), Scope anticipates a further strengthening of EVN’s business setup and an increasing robustness of its market position.

This is also indicated by EVN’s consistent de-risking of its power generation activities through the continued ramp-up of renewable energy generation capacity, in particular onshore wind, which provides an increasing granularity of power generation assets and a steadily improving carbon footprint of power generation assets through the increase of the share of clean power generation (ESG factor: credit-positive environmental rating driver). Renewable energy power plants (hydro, onshore wind and photovoltaics) have already provided approximately 75% of total generation volumes in BY 2022/23, which demonstrates the company's significant efforts over the past five years. In BY 2018/19, the share of renewables was only 41%. Similarly, EVN’s carbon footprint of its power generation fleet has been reduced to below 200 gCO2e/kWh in BY 2022/23, which is significantly below the average of European power generation incumbents. This positive trend is expected to continue over the next few years, given EVN’s continued expansion of renewable energy capacities under its “Strategy 2030”. EVN is planning to expand onshore wind capacities to more than 750 MW by 2029/30, up from 478 MW at YE 2023, and its solar capacity to about 300 MW from just about 40 MW at YE 2023.

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 risk for activities in southeastern Europe; and iii) the company’s overall margin profile, although this is improving. Credit risk is particularly demonstrated by the volatile cash flow profile of its energy supply business (direct exposure and indirect exposure via EVN KG), where the company still faces operating losses due to adverse energy procurement. EVN has taken multiple measures to mitigate the risk of operating losses through a more flexible tariff setting with customers. However, the possibility of negative effects cannot be ruled out, as evidenced by the results of the last two business years. Nevertheless, Scope acknowledges that EVN’s integrated business model and its exposures to power generation and dividend income from Austria’s largest power generator Verbund can largely offset the potential pressure in EVN’s downstream energy supply business.

Scope sees good chances that EVN can solidify its EBITDA margin on the group level to around 25% (Scope-adjusted EBITDA margin at 24.8% in BY 2022/23 after an average of about 21% over the past 5 years) driven by i) reduced losses and a return to positive operating results in the energy supply business; ii) a shrinking share of revenue contributions from energy supply and environmental services; and iii) a steadily growing share of EBITDA contributions from power generation and distribution. The company’s solid profitability profile is further evidenced by a solid Scope-adjusted return on capital employed of about 20%, which signals a strong level for a utility that has a high share of asset-intensive energy distribution activities.

EVN's financial risk profile – assessed at A+, one of the strongest among European integrated utilities - continues to support its solid investment grade rating. It is based on the utility's continued low leverage, its robust debt protection and its focus on internal financing of annual net investments.

EVN is increasingly exploiting its very low leverage (signalled by a Scope-adjusted debt/EBITDA of 1.0x in BY 2022/23) and solid operating results to ramp up its capex allocation. Net capital expenditure has reached an interim peak of approximately EUR 580m in BY 2022/23, which is above the five-year average of approximately EUR 500m. Scope anticipates that capital expenditure levels will remain significantly above the five-year average over the next three business years, with a projected level of approximately EUR 800m. While operating cash flow is likely to be sufficient to cover this level, discretionary spending such as dividends might not be fully covered by internal funding capacity. Consequently, EVN’s indebtedness, as measured by Scope-adjusted debt, is likely to increase gradually to approximately EUR 1.57bn at the end of BY 2025/26 from EUR 1.28bn at the end of BY 2022/23.

While Scope anticipates an increase in EVN’s net debt and Scope-adjusted debt, this development is accompanied by a growing EBITDA base (expected to be within a range of EUR 870-960m) which maintains leverage within a corridor of 1.2x to 1.6x over the next few years, which remains commensurate with the current rating. Scope also believes that EVN would adjust its capital expenditure and/or shareholder remuneration in the event that leverage were to deviate from the range that supports current ratings.

Despite the projected increase in EVN’s net debt exposure and the related rise in net interest payments, interest coverage – as signalled by Scope-adjusted EBITDA/interest cover – is projected to remain at a robust level of between 15x and 20x. This reflects a recurring Scope-adjusted EBITDA within a range of EUR 870-960m over the next few years, and a gradual increase in effective average interest rates (interest rate projected to grow to 3.3-3.4% in BY 2024/25 and BY 2025/26 from 2.95% in BY 2022/2023).

Nevertheless, Scope highlights the slightly detrimental impact of volatile working capital developments and rising capex, which provide stronger volatility to free operating cash flow. While EVN has a strong track record of positive free operating cash flow up to BY 2020/21, there has been a significant shift in the trend since then, with free operating cash flow fluctuating strongly from slightly negative values to largely positive amounts. Scope acknowledges that EVN displays a strong internal funding capacity throughout the investment cycle, with the ability to largely fund scheduled investments through internal cash sources. Nonetheless, the increasing volatility of free operating cash flow and the associated effect on net financial debt slightly weighs on the company’s financial risk profile.

However, EVN’s liquidity position is expected to remain robust, as indicated by liquidity ratios that are projected to remain consistently above 200%. The scheduled debt maturities of EUR 343m in BY 2023/24, EUR 125m in BY 2024/25 and EUR 15m in BY 2025/26 can be comfortably covered by a cash buffer of approximately EUR 337m as of September 2023. This is in addition to access to multi-year unused committed credit lines with a volume of more than EUR 650m and an aggregated positive free operating cash flow over the three-year period. Furthermore, EVN benefits from a strategic liquidity reserve from its 12.6% stake in Austria’s Verbund AG, which has a current market value of over EUR 3.0bn. This could provide additional liquidity if needed. While Scope acknowledges that credit lines have an average remaining tenure of just 1.3 years, Scope is confident that credit lines will be extended in light of the company’s robust financial position and its GRE status.

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 AA+/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 demonstrated by sustained Scope-adjusted leverage (Scope-adjusted debt/EBITDA) of approximately 1.5x and below over the next few years. This assumes that, on average, EVN will continue to fund its investment plan through operating cash flow. The Outlook also reflects the agency’s view that EVN’s ownership structure will remain unchanged, as the government of Lower Austria is legally required 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 1.75x 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, the ratings pressure would rise if EVN showed a significant weakening of EVN’s ability to cover annual investments by operating cash flow, resulting in a prolonged period of free operating cash standing a breakeven or turning negative. Eventually, a negative rating action could be triggered if Lower Austria reduced its share to a minority stake (deemed remote due to legislation).

Long-term and short-term debt ratings

All public debt is raised at the group level. 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 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. Scope expects internally and externally available liquidity to cover upcoming debt maturities by more than 200%. Scope acknowledges that the company has a strong track record of accessing external funding from banks and investors through private placements and capital market debt.

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; European Utilities Rating Methodology, 17 March 2023; Government Related Entities Rating Methodology, 13 July 2023), 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: 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 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.

Conditions of use/exclusion of liability
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