Summary Rating Rationale. Moody's estimated breakdown of group EBITDA

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1 CREDIT OPINION EVN AG Update after ratings upgraded to A2 from A3 Update Summary Rating Rationale RATINGS EVN AG Domicile Austria Long Term Rating A2 Type Senior Unsecured Dom Curr Outlook Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Analyst Contacts Philip Cope Analyst EVN AG's (EVN's) A2 senior unsecured debt ratings are supported by over half of the group s EBITDA, around 60% we estimate, being derived from regulated domestic network activities, which we view as having a very low business risk, and other non-regulated but relatively low-risk utility activities in Lower Austria, e.g. power generation from subsidised renewable energies and supply of district heating and water. In addition, the company has a strong competitive position in its core market Lower Austria, with supply market shares of over 60% in electricity and over 30% in natural gas, a market characterised by high customer loyalty. The residual proportion of group earnings is coming from activities which Moody s view as having a high business risk profile, in particular operations in South East Europe (around 20% of group EBITDA in the last two financial years) and the international projects division. Although EVN has (1) taken steps to manage these risks to the extent possible in recent years, e.g. tight capital discipline in South East Europe, securing reserve capacity contracts in southern Germany for its thermal fleet, and resolution and project completion of a sodium hypochlorite plant in Moscow; and (2) pursued an investment programme predominantly allocated to low-risk activities in recent years, material exposure to these high risk activities remains and act as a constraint on the rating. Finally, EVN's A2 rating incorporates a one-notch uplift from its stand-alone credit quality given its majority ownership (51%) by the State of Lower Austria (Aa1 stable). Tom Neugebauer Associate Analyst tom.neugebauer@moodys.com Exhibit 1 Paul Marty VP-Sr Credit Officer paul.marty@moodys.com Moody's estimated breakdown of group EBITDA Around 60% of EVN's earnings come from activities which we view as having a very low or relatively low business risk profile Supply business Austria, South East Europe operations, international projects, RAG Multi-utility activities in Lower Austria and contracted generation Gas and electricity distribution networks in Lower Austria 100% CLIENT SERVICES 90% Americas % Asia Pacific Japan 80% % 35% 27% 29% 28% 32% 35% 37% 37% 2015/16 A 2016/17 E 2017/18 E 2018/19 E 42% 28% 27% 29% 2014/15 A 60% 50% 40% 30% 20% 10% EMEA 38% 43% 0% Source: Moody's estimates

2 Credit Strengths Majority of earnings derived from activities with a very low (gas and electricity distribution networks in Lower Austria) or relatively low (multi-utility activities primarily) business risk profile which generate stable and predictable cash flows Strong competitive position in Lower Austria Positive free cash flow generation supports ongoing deleveraging of business and strong cash flows based credit metrics Majority ownership by State of Lower Austria provides one notch of uplift to final rating Credit Challenges Significant proportion of earnings derived from activities which we deem as having a high business risk profile, in particular operations in South East Europe (around 20% of group EBITDA in the last two financial years) and international projects Operating conditions for some business segments remain challenging, e.g. generation and operations in South East Europe, despite measures taken to manage these risks Rating Outlook The stable outlook for EVN reflects our view that the company will maintain Funds From Operation (FFO) / Net Debt in the mid-30s in percentage terms and Retained Cash Flow (RCF) / Net Debt approaching 30%, over the forecast horizon. The stable outlook also factors in that the sewage treatment contract in Kuwait may be awarded to the consortium that EVN is a part of. Factors that Could Lead to an Upgrade We see no potential for an upgrade in the medium term. EVN s ratings are constrained by: its small size relative to rated peers in the European utilities universe the dependence on prevailing market conditions in its core market of Lower Austria, with Austria accounting for c75-80% of group EBITDA in recent years the material proportion of group EBITDA derived from activities carrying a high business profile in our view an absence of a track record to maintain a financial profile at a higher rating level Factors that Could Lead to a Downgrade Downward rating pressure would develop if EVN s financial profile deteriorated such that the company appeared unlikely to reach our ratio guidance for FFO / Net Debt and RCF / Net Debt at the current rating level, in the low 30s and mid 20s (both in percentage terms) respectively EVN s prevailing ratio guidance will continue to reflect any changes in business risk as a result of a change in (1) investment strategy; (2) the operating environment of its higher risk activities in South East Europe and the international projects business; and (3) the composition and size of the international project business, including type, size and location of the individual projects This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Key Indicators Exhibit 2 EVN AG 9/31/2016 9/31/2015 9/31/ x 6.6x 5.4x 6.2x (CFO Pre-W/C) / Net Debt 33.7% 29.0% 20.5% 22.7% RCF / Net Debt 27.7% 23.4% 15.5% 17.9% (CFO Pre-W/C) / Debt 28.2% 24.2% 18.6% 20.5% RCF / Debt 23.2% 19.6% 14.0% 16.2% (CFO Pre-W/C + Interest) / Interest 9/31/2013 Note: All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. Source: Moody's Financial Metrics Source: Moody's Financial Metrics Detailed Rating Considerations Low business risk of domestic network activities underpinned by developed regulatory regime EVN s regulated electricity and gas distribution networks in Lower Austria are the largest contributor to the company s group EBITDA, contributing around a third in recent years. These monopoly activities are governed by a well-defined and stable regulatory regime, ex-ante incentive based regulation has existed for around 10 years in distribution (since 2006 and 2008 for electricity and gas respectively), and thus generate relatively stable and predictable cash flows. The current control period runs until 31 December 2017 for gas and 31 December 2018 for electricity. Impact of likely fall in allowed returns for forthcoming control expected to be manageable We expect the impact of further asset based growth, driven by EVN's capex programme (which includes the roll-out of smart meters), to largely offset the decline in allowed returns from the continued low interest rate environment (the risk-free rate in recent allowed return determinations has been based off the 5-year trailing average of the 10-year government bond). Earnings for this segment will be positively impacted from the recovery, through tariffs, of prior under-recovered revenues (due to out-turn volumes being lower than forecast in recent years). EVN entered the current controls with a high level of cost efficiency, reflected in the company specific factors being set at or close to 0% for both gas and electricity, and we understand the company continues to remain one of the most efficient distribution companies. Therefore, we expect the company to perform at least in line with cost allowances set for the forthcoming controls, with any outperformance retained by the company for the whole control period, with a determination expected in autumn 2017 for gas and autumn 2018 for electricity. Exhibit 3 Summary of regulatory framework for EVN's Austrian distribution networks Electricity Gas Regulatory authority E-Control E-Control Control period start 01-Jan Jan-13 Control period end 01-Jan Jan-18 Control length Regulatory method RAB (EURm) 5 years 5 years Revenue cap Revenue cap Annually adjusted Annually adjusted Comment Annual investments are added to the RAB in the following year WACC (pre-tax, nominal) 6.42% 6.42% Set for length of regulatory period General productivity factor 1.25% 1.95% Annual adjustment Annual adjustment Gains from cost reductions remain with the company during the regulatory period Network operator price index consists of consumer (30%) and building price (40%) indices as well as wage increase index Inflation Source: E-Control; Moody's Investors Service 3

4 Strong competitive position in Lower Austria EVN is a multi-utility with primary focus on the State of Lower Austria, where the company typically generates around half of its revenues and 70-80% of EBITDA respectively. Its strong competitive position is reflected in supply market shares of above 60% and 30% in electricity and natural gas respectively in the region. These markets are characterised by high customer loyalty, reflected in annual churn rates in the region averaging around 2.4% and 4.2% in electricity and gas respectively over the last five years. Exhibit 4 EVN's strong competitive position in Lower Austria reflected in low churn rates and relatively stable earnings contribution from household supply business in region Churn rates in Lower Austria and earnings contribution from EVN KG 6% Churn rate elec (left-hand scale) EVN KG earnings contribution (right-hand side) Churn rate gas (left-hand scale) million % 50 4% 40 3% 30 2% 20 1% 0% Year ending Notes: (1) If a customer changes tariff but retains with the supplier this still counts as customer switching and so is included in the churn statistics. (2) EVN KG is a supplier of electricity and natural as for household customers in Lower Austria. EVN KG's earnings contribution reflects share of results from equity accounteed investees with operational nature and refer to year ending 30 September, EVN's reporting year end, rather than 31 December for churn rates. Source: EVN; E-Control; Moody's Investors Services Lower Austria accounts for around 16% of national GDP, which is the third-highest contribution after Vienna and Upper Austria and its per capita GDP is below the Austrian average. We expect the province to have positive economic growth ( % per annum over the medium term), reflecting both economic fundamentals and population growth of around 1% per annum. The regional economy is strongly slanted towards services, which account for around 80% of regional value-added. Corporate services, public services, retailing and tourism comprise a significant proportion of the regional economy, but Lower Austria also boasts a substantial industrial base, with companies operating in the chemical, food and beverages, steel, automobile, textile, electronics and paper sectors. High cash flow contributions from other low-risk activities Further earnings stability is derived from activities in Lower Austria which we consider as relatively low risk and estimate that collectively have accounted for around a quarter of the group s EBITDA in recent years, with broadly similar, and largely stable, earnings contributions from each activity. These include: (1) wind, subsidised by feed-in tariffs (part of the generation division), (2) drinking and wastewater (monopolistic but not regulated), thermal waste utilisation (long-term contracts with municipalities in place), both are part of the environmental services segment, (3) district heating (not regulated; risks mainly relate to prices of substitute sources of heat), part of energy supply and trade, and (4) telecommunication and cable TV. Steps taken to manage challenging operating environment for some business segments Against an operating environment that continues to remain challenging for some of EVN's business segments, in particular its generation division and its operations in South East Europe, primarily Bulgaria, EVN has delivered strong operational performance in recent years. This reflects (1) the steps taken to mitigate the associated impact on earnings; and (2) EVN s continued investment focus on regulated and relatively low-risk activities in its core market of Lower Austria for future growth. 4

5 EVN has reduced its exposure to wholesale power prices in recent years through securing for its thermal power plants winter reserve capacity contracts in southern Germany since 2011/12, and more recently in Austria during the summer months. The increased need by transmission system operators for such capacity to provide network stability, evidenced by record calls on EVN s thermal power plants during FY2015/16 and Q1 FY2016/17, supports the viability of this segment in the continued low power price environment. Concurrently, EVN has increased its onshore wind capacity in Lower Austria, which is eligible for feed-in tariffs. In South East Europe, the group has employed capital discipline with most of the limited investments in this business segment focused on grid investments to reduce network losses, a key driver of operational performance. Whilst energy affordability concerns persist in the region, increasing the risk of further adverse tariff settlements, EVN has recently settled out of court a dispute with the stateowned Bulgarian electricity company regarding compensation for pre-financed additional costs for renewable energy. This strong operational performance, coupled with the successful sale and transfer of its sodium hypochlorite plant in Moscow in FY2014/15, has resulted in a significantly deleveraging of the group in recent years adjusted net debt has fallen from 2.34 billion at 30 September 2013 to 1.59 billion at 30 September Investment plan focused primarily on relatively low-risk activities EVN s continued focus on domestic regulated and stable markets as the main source of investment and growth reduces the associated investment risk and should help to provide stable and predictable cash flows with modest EBITDA growth going forward. Outside of investments in the distribution business, we expect the majority of the remaining capex to be spent on relatively low risk activities: growing the renewable wind portfolio in Austria, eligible for feed-in tariffs (FITs), and the district heating and water businesses in Austria. Whilst EVN is approaching the end of its four-year investment programme, announced in 2013/14, of around 1 billion of total capex in Lower Austria, of which 70% is attributable to network activities (both before network subsidies), we do not anticipate any material change in strategy. Rating constrained by material proportion of earnings still derived from high risk activities profile As shown in Exhibit 1, EVN generates around 40% of group EBITDA from activities which we view as having a high business risk profile, in particular operations in South East Europe and the international projects division, and faces elevated risks despite the measures taken, outlined above. OPERATIONS IN SOUTH EAST EUROPE In the last two financial years, operations in South East Europe (SEE) have accounted for around half of this total, with the majority of the earnings of this division coming from Bulgaria and Macedonia. Whilst there has not been a repeat of the large tariff cuts, primarily in Bulgaria, in end customer electricity prices imposed by the regulatory authorities (end prices are regulated) in these two countries in 2013 and early 2014, energy affordability remains a concern in the region. Consequently, EVN remains exposed to the risk of an adverse tariff decision. We also note that (1) the Bulgarian energy supply market has recently been liberalised, which may reduce electricity supply margins going forward; and (2) key regulatory determinations for network operations, where performance against targets for network losses are a key driver of the performance of this division, are expected in

6 Exhibit 5 Improvement in electricity network losses towards current regulatory allowed accepted losses but in the past target level has been reduced much faster, e.g. in Bulgaria Network loss target Bulgaria Network loss actual Bulgaria Network loss target Macedonia Network loss actual Macedonia 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Source: EVN; Moody's Investors Services INTERNATIONAL PROJECTS EVN's German subsidiary, WTE, has undertaken international projects predominantly in Central and South Eastern Europe and Russia, all primarily in the area of water and wastewater services. Whilst EVN has reportedly adopted more stringent eligibility criteria for evaluating new projects, elevated risk remains in our view. If difficulties are encountered the impact on the group's performance can be material, as demonstrated by a thermal waste utilisation project for the City of Moscow which resulted in a 191 million valuation allowance loss on lease receivables, included in reported EBITDA, in September In March 2017, EVN reported it had submitted the lowest bid as a part of a consortium for a sewage treatment project in Kuwait with a total contract value of c 1.55 billion. Whilst the project is very large compared to prior projects undertaken by the group, and in the context of the group, we note the group s track record in delivering projects on budget and on time, including these types of projects. We also assess the country risk, although elevated, as lower than in some other jurisdictions that EVN has previously undertaken projects in. COMMODITY PRICES EVN retains some exposure to commodity prices, partly through remaining merchant power exposure but primarily through the majority stake it owns in an oil and gas exploration company (RAG). We expect German one-year forward baseload prices (a joint price zone exists between Austria and Germany) to remain near historic lows over the next five years, with 1-year baseload power prices trading in the range 25-30/MWh. We expect oil prices to trade within the $40-60 a barrel over the next few years. One-notch rating uplift from government shareholding EVN s A2 ratings incorporate one notch of uplift from the company's a3 baseline credit assessment (BCA), a measure of standalone financial strength. EVN is 51% owned by the State of Lower Austria (Aa1 stable), via the holding company NÖ LandesBeteiligungsholding GmbH. We view moderate dependence between the State of Lower Austria and the company reflecting that EVN generates the majority of its earnings in Lower Austria, a trend expected to continue given the company s focus on domestic regulated and stable businesses. EVN's rating factor in our expectation of moderate support from the State of Lower Austria, reflecting EVN s stable ownership structure, supported by the federal and provincial constitutional law requiring a minimum 51% stake to be owned by the Province of Lower Austria, and the economic importance of EVN as the main supplier of utility services in Lower Austria. Liquidity Analysis EVN has multi-year liquidity and its liquidity profile is excellent. We expect the group to remain highly freely cash flow generative over the forecast horizon, has a well-spaced debt maturity profile with limited debt maturities over the next five years (c 0.6 billion in total), and total credit commitments, fully undrawn, of 575 million (with the 400 million revolving credit facility maturing July 2021 covenant-free). 6

7 Exhibit 6 EVN has excellent liquidity reflecting highly free cash flow generative nature of the business Liquidity position for the next 12 months at 30 September 2016 (all figures in millions) 1, , Cash and cash equivalents Multi-year syndicated RCF Cash Flow from Operations Dividends (inc. payment to (July 2021) minorities) Capex (net of network subsidies) Debt repayments (bank debt and 150m bond) Total Notes: The above analysis excludes (1) 74.7 million of securities which we reclassify as cash and cash equivalents; and (2) 175 million of bilateral credit commitments by 6 banks which have a remaining tenor of up to 4 years. Inclusion of both of these would further strengthen the group's already strong liquidity profile. Source: Annual report; Moody's estimates Corporate Profile EVN is a multi-utility with primary focus on the State of Lower Austria, where the company typically generates around half its revenues and 70-80% of EBITDA. EVN is the second-largest Austrian electric utility, with its energy activities (comprising electricity generation, distribution and supply; gas distribution and supply; and district heat generation and supply) accounting for more than 90% of revenues. Other operations include environmental services (including drinking water, wastewater treatment and thermal waste utilisation) and strategic investments and other shareholdings, mainly comprising a stake in Austria's largest generator Verbund (12.63% stake, 2 stable), a 73.63% stake in Burgenland Holding AG (with a 49.00% shareholding in the regional electric and gas utility Energie Burgenland AG), and the Austrian oil and gas company Rohoel-Aufsuchungs AG (RAG; 50.03% stake). Exhibit 7 EVN's reporting segment and associated activities Business area Energy business Environmental services business Other business Reporting segments Activities Generation Electricity generation from thermal sources and renewable energies at Austrian and international location Energy Trade and Supply Procurement of electricity and primary energy carriers, trading and sale of electricity and natural gas to end customers and on wholesale markets as well as heat generation and sale Networks Infrastructure Austria Operation of regional electricity and natural gas networks as well as cable TV and telecommunications networks Energy Supply South East Europe Operation of electricity networks and electricity sales to end customers in Bulgaria and Macedonia, heat generation and sale in Bulgaria, electricity generation in Macedonia, construction and operation of natural gas networks in Croatia, energy trading throughout the entire region Environmental Services Drinking water supply, wastewater disposal and thermal waste utilisation in Austria, operation of combined cycle heat and power co-generation plants in Moscow as well as international project business Strategic Investments & Other Strategic and other investments, corporate service Source: EVN EVN's main shareholders are the State of Lower Austria (51.0% ownership) and the EnBW Trust e.v. (32.0% stake), with the balance (17.0%) being free float (including own shares which are being acquired as part of an ongoing share buyback programme). 7

8 Exhibit 8 Province of Lower Austria is EVN's majority shareholder, in accordance with Austrian federal and provincial constitutional law Shareholder structure as of 30 September 2016 Free float 15.9% Treasury shares 1.1% NÖ Landes-Beteiligungsholding GmbH 51.0% EnBW Trust e.v. 32.0% Notes: (1) NÖ Landes-Beteiligungsholding GmbH is a subsidiary of the province of Lower Austria. (The NÖ Holding GmbH is the sole owner of the NÖ Landes-Beteiligungsholding GmbH. The Province of Lower Austria solely owns the NÖ Holding GmbH.) (2) EnBW Trust e.v. holds its investment in trust for EnBW Energie Baden-Württemberg AG (EnBW, A3 negative). (3) Free float includes shares held by employees. Source: EVN Rating Methodology and Scorecard Factors EVN's a3 BCA reflects the application of our rating methodology for Unregulated Utilities and Unregulated Power Comapnies, published in October 2014, under which EVN is rated under the unregulated utilities segment. EVN's improved financial profile in recent years is the main driver for the grid-indicated rating being (a very strong) baa1 under projected metrics and baa2 under historical metrics. 8

9 Exhibit 9 EVN AG Rating Factors Grid Current As of 30/ 9/ 2016 Unregulated Utilities and Unregulated Power Companies Industry Grid [1][2] Moody's Month Forward View As of April 2017 [3] Fact or 1 : Scale (10%) a) Scale (USD Billion) Fact or 2 : Business Profile (40%) a) Market Diversification b) Hedging and Integration Impact on Cash Flow Predictability c) Market Framework & Positioning d) Capital Requirements and Operational Performance e) Business Mix Impact on Cash Flow Predictability Fact or 3 : Financial Policy (10%) a) Financial Policy Fact or 4 : Leverage and Coverage (40%) a) (CFO Pre-W/C + Interest) / Interest (3 Year Avg) b) (CFO Pre-W/C) / Net Debt (3 Year Avg) c) RCF / Net Debt (3 Year Avg) Rat ing: a) Indicated Rating from Grid b) Actual BCA Assigned Measure Score Measure Score Ba Aa Ba Aa Ba Aa Ba Aa 6.6x 27.0% 21.6% 8.5x - 10x 35% - 37% 29% - 30% A A A Government -Relat ed Issuer a) Baseline Credit Assessment b) Government Local Currency Rating c) Default Dependence d) Support e) Final Rating Outcome Fact or a3 Aa1 Moderate Moderate A2 2 1 a3 Note: (1) All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. (2) As of 30/9/2016; Source: Moody's Financial Metrics. (3) This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures Source: Moody's Financial Metrics Given its majority ownership by the province of Lower Austria, EVN falls within the scope of our rating methodology for GovernmentRelated Issuers (GRIs), published in October EVN's rating incorporates a one-notch uplift to its a3 BCA. This reflects our view of a moderate probability of government support in the case of financial distress, the credit quality of the State of Lower Austria (Aa1 stable), as well as a moderate default dependence (i.e. the degree of exposure to common drivers of credit quality). Ratings Exhibit 10 Category EVN AG Outlook Senior Unsecured -Dom Curr Moody's Rating Stable A2 Source: Moody's Investors Service 9

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