KELAG AG

The stable outlook on KELAG captures S&P Global Ratings' expectation that the company will continue to deliver solid operating performance thanks to its predictable regulated earnings profile from domestic networks, and district heating operations, and its prudent risk management, mitigating commodity price risk. We expect KELAG's FFO-to-debt ratio to remain above 35% over the medium term. We could lower our rating if KELAG's weighted average FFO-to-debt ratio falls below 35% without short-term recovery prospects. Although this is not our base case, it could result, for example, from a slower economic recovery than we currently expect, and a sluggish power pricing environment that affects KELAG's earnings as its hedge positions gradually expire. This could also happen from a severe loss of

...We expect KELAG's earnings to benefit from increased commodity prices, supporting credit ratios such as funds from operations (FFO) to debt at higher levels than previously expected. KELAG's earnings are meaningfully exposed to Austrian and German wholesale power prices--directly via its hydro power generation (94% of total generation capacity totaling 3.3 terawatt-hour (TWh) annual output) and indirectly via its investment income from Verbund Hydro Power GmbH (10%+ equity accounted ownership as per significant influence). As such, we expect the company to benefit from recent power price increases (European Energy Exchange [EEX] futures) up at about 120/megawatt-hour (MWh) for delivery in 2022 and about 80/MWh in 2023--as of November 2021, compared with about 43/MWh and 46/MWh, respectively, as of one year ago (chart 1)). The improvement will come with some delay, since over 80% of 2022 of sustainable run-of-river and hydro reservoir production (50% of 2023 production) is hedged forward....

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