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Rating Action:

Moody's upgrades EVN's ratings to A1; stable outlook

15 May 2019

London, 15 May 2019 -- Moody's Investors Service (Moody's) has today upgraded to A1 from A2 the senior unsecured ratings of EVN AG (EVN). Moody's has concurrently upgraded to (P)A1 from (P)A2 the rating of EVN's EUR2.0 billion senior unsecured euro medium term note (EMTN) programme. The outlook has changed to stable from positive.

RATINGS RATIONALE

The upgrade reflects EVN's track record of maintaining a financial profile commensurate with the rating agency's ratio guidance for the A1 rating level and an expectation that this will continue. This sustainably stronger financial profile reflects continued strong operational performance with the majority of the positive non-recurring cash flow in the last two financial years being used to substantially decrease net debt. Consequently, although Moody's projects EVN's operating cash flow in absolute terms to fall back slightly in FY2018/19, the rating agency expects EVN's cash flow based metrics to remain at a similar level, i.e. Funds From Operations (FFO) / Net Debt at or slightly above 50% as compared to ratio guidance for the A1 rating level of at least the mid 40s in percentage terms.

EVN has deleveraged significantly in recent years, as reflected in net debt falling from €2.34 billion at 30 September 2013 to just under €1 billion at 30 September 2018, with €0.6 billion of this reduction coming in the last two financial years. Moody's expects this prudent financial policy to continue over the medium term. On publication of its FY2017/18 results in December 2018, EVN committed to maintain a modest dividend payout ratio, 40% of net income over the medium-term, and set a fixed nominal level for the base dividend (EUR0.44/share), in line with the base level since FY2016/17 (the prior level of EUR0.42/share applied for five years), which will help EVN maintain this lower leverage.

This stronger financial profile provides a solid basis for forthcoming investments in regulated and stable activities in EVN's core market of Lower Austria where it has a strong competitive position, with supply market shares of 66% in electricity and 33% in gas. Moody's forecasts EVN's net capital expenditure to be around €350-400 million per annum over the next few years with around 80% of this in Lower Austria, primarily in its distribution network business and subsidised renewable generation, but also in other multi-utility activities that we view as having a low risk profile such as district heating and water treatment. Given the continued capital discipline at EVN's operations in South East Europe, e.g. only pursuing growth capital expenditure to improve operational performance of distribution networks, Moody's does not expect any material change in the composition of the group's earnings, with around half of the group's earnings coming from activities that Moody's views as having either a very low or low business risk profile.

Moody's expects EVN's Austrian distribution networks to continue to account for the largest proportion of the group's earnings, around 30%, over the period to 2022. This reflects that whilst allowed returns are lower in the current regulatory periods, which run through 2022 and 2023 for gas and electricity respectively following recent regulatory determinations by the Austrian energy regulator (E-Control), this will be partially offset by significant growth in the regulated asset base over the next few years, in turn increasing regulatory depreciation and regulatory return, and some outperformance against regulatory allowances.

The A1 ratings are constrained by the large proportion of the group's earnings coming from activities which we view as having a high business risk profile, in particular operations in South East Europe (typically around 20% of group EBITDA) and the international projects.

EVN's A1 rating incorporates a one-notch uplift from its standalone credit quality or Baseline Credit Assessment of a2. Moody's assumption of moderate support and moderate dependence under the rating agency's methodology for Government-Related Issuers published in June 2018, reflects EVN's majority ownership by the State of Lower Austria (Aa1 stable), required by legislation, and the fact that EVN generates the majority of its EBITDA in the region.

RATIONALE FOR STABLE OUTLOOK

The stable outlook for EVN reflects Moody's view that the company will maintain FFO / Net Debt at least in the mid 40s and Retained Cash Flow (RCF) / Net Debt at least in the mid 30s (both in percentage terms) respectively, without an increase in business risk.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's sees no potential for an upgrade in the medium term. EVN's ratings are constrained by (1) its small size relative to rated peers in the European utilities universe; (2) the dependence on prevailing market conditions in its core market of Lower Austria, with Austria accounting for 75-80% of group EBITDA in recent years; and (3) the material proportion of group EBITDA derived from activities carrying a high business risk profile.

Downward rating pressure would develop if EVN's financial profile deteriorated such that the company appeared unlikely to maintain Moody's ratio guidance for FFO / Net Debt and RCF / Net Debt in the mid 40s and mid 30s (both in percentage terms) respectively. Downward rating pressure would also arise if there was a material deterioration in EVN's business risk, e.g. as a result of a change in (1) investment strategy; (2) the operating environment of its activities in South East Europe and the international projects business; or (3) the composition and size of the international project business.

The methodologies used in these ratings were Unregulated Utilities and Unregulated Power Companies published in May 2017, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

EVN AG is a multi-utility with primary focus on the State of Lower Austria, where the company typically generates around half its revenues and 75% of EBITDA. EVN reported revenues of EUR2.07 billion for FY2017/18.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Philip Cope
AVP - Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Andrew Blease
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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