Fitch Assigns PetroVietnam Power Corporation First-Time 'BB' Rating; Outlook Positive

Diep Nguyen

Fitch Ratings has assigned PetroVietnam Power Corporation - Joint Stock Company (PV Power) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BB' with a Positive Outlook.

Fitch Assigns PetroVietnam Power Corporation First-Time 'BB' Rating; Outlook Positive
The rating reflects PV Power's Standalone Credit Profile (SCP) of 'bb', which is on par with the IDR of its 80% parent, Vietnam Oil and Gas Group (PVN, BB/Positive). PV Power's financial profile is stronger than that commensurate with the 'bb' level and its business profile is underpinned by stable, long-term power purchase agreements (PPA) with Vietnam Electricity (EVN, BB/Positive), the main off-taker. The Positive Outlook on PV Power's rating is in line with that on EVN's rating; EVN's rating is a major constraint on PV Power's SCP.  
PV Power's ratings will be equalised to those of PVN should its SCP weaken due to our assessment of 'Strong' linkage under Fitch's Parent and Subsidiary Linkage Rating Criteria.
PPAs Provide High Visibility: PV Power's long-term PPAs with a cost pass-through mechanism and primary counterparty exposure to EVN provide high revenue and cash-flow visibility. The PPAs have total tenors of 20-25 years and a capacity weighted-average remaining tenor of around 12 years. Long term PPA's with EVN account for 80%-90% of PV Power's revenue, with the balance coming from the sale of power in the wholesale electricity market.
The PPA tariffs include capacity payments that are intended to cover debt service and fixed operating costs and provide a return on equity. Tariffs also include variable payments and operation and maintenance charges to cover fuel, repair and maintenance costs.
Leading Market Position: PV Power benefits from its position as Vietnam's second-largest electricity producer, accounting for 8% of installed capacity. Its market position is also supported by two-thirds of its capacity being present in the country's southern region, which has a shortage in power generation. The company expects to maintain its market position in the medium-term through capacity additions, even as overall installed capacity in the country increases.
Diversified Fuel Source: PV Power's plants benefit from diverse fuel sources, including gas (64%), coal (29%) and hydro (7%). Post commissioning of the 1,500 MW Nhon Trach 3 and 4 thermal power plants, the proportion of gas in the fuel mix will increase. However, unlike existing domestic gas-based plants, the new plants will use imported liquefied natural gas (LNG) as fuel. PV Power has fuel-supply arrangements in place for all its plants to ensure timely availability of fuel. Most of the required gas is supplied by Petrovietnam Gas Joint Stock Corporation (PV Gas), a PVN group entity.
High Availability, Steady Profitability: PV Power's steady cash flow generation is assisted by the high availability of its plants and routine maintenance to ensure optimal operating efficiency. Plant load factors (PLF) have been stable, benefiting from rising electricity demand, except at the Nhon Trach I (NT I) project, which saw a drop in PLFs to 29% in 2020 (2019: 84%). This stemmed from lower scheduling due to a fall in gas from its usual provider and reliance on more expensive supplies.
However, this did not affect PV Power's profitability much, as capacity payments are availability based and fuel costs are passed through as per the PPAs.
Moderate Leverage Despite Capex: Fitch expect group net leverage, measured by FFO net leverage, to peak at around 3.4x in 2023 (2019: 1.6x) as PV Power incurs annual capex of around VND9 trillion from 2021 to 2023 for its Nhon Trach 3 and 4 projects. However, the company's credit metrics should remain above that indicated by its rating and leverage should come down post commissioning of the project in 2023-2024. The LNG for the project will be imported and re-gasified by PV Gas. PV Power plans to sign a fuel-supply agreement and start construction in 2021.
Strong Linkages with PVN: Fitch assesses that PV Power has 'Moderate' legal and operational ties, but 'Strong' strategic ties, with its 80% parent. PVN helped PV Power gain government guarantees on the majority (2020: 56%) of its long-term borrowings, approves PV Power's budget and capex plan and appoints its key executives, including the chairman. PVN does not intend to take dividends from PV Power for next five years and has agreed to extend payable days for gas purchases from PV Gas by up to six months to support PV Power's liquidity, if required.
PV Power's IDR, which reflects its SCP, is driven by its strong market position, diversified fuel mix and long-term PPAs with EVN. Its IDR is on par with that of its parent, PVN.
Similarly to PV Power, EVN's ratings reflect its SCP, which is at the same level as that of the Vietnam sovereign (BB/Positive). EVN owns and operates the majority of the country's installed power generation capacity and has a monopoly over Vietnam's electricity transmission and distribution. However, our assessment of EVN's SCP is constrained by lack of a record of consistent application of electricity regulatory reform, including tariff adjustments that reflect cost changes.
Fitch assesses the SCP of National Power Transmission Corporation (EVNNPT, BB/Positive), Vietnam's electricity distribution utility that is fully owned by EVN, one notch higher than that of PV Power. However, EVNNPT's IDR is at the same level based on the consolidated profile of EVN due to the strong linkages between the two under our Parent and Subsidiary Linkage Rating Criteria. EVNNPT's higher SCP assessment reflects its lower operating risk, as it is a pure transmission company with better geographical diversification across Vietnam, although the two entities' financial profiles are comparable.
NTPC Limited (BBB-/Negative), India's largest power-generation company, accounts for 14% of the country's installed power-generation capacity and 19% of its electricity generation. We assess its SCP at 'bbb-', the same level as its IDR. NTPC's two-notch higher SCP assessment compared with PV Power reflects its stable operating profit due to a well-established regulatory return framework, which allows for timely pass-through of cost changes, despite its higher leverage.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Around 85% of the power generated to be sold through PPAs with EVN and balance in the wholesale market
- Revenue from long-term PPAs to include capacity charges to recover initial costs and return on investment as well as variable charges to cover fuel and operating and maintenance costs
- Average annual capex of around VND9 trillion from 2021 to 2023, including annual maintenance capex of VND300 billion, mainly for the Nhơn Trạch 3 and 4 project
- Blended interest rate of 6% over 2021-2024
- No dividend pay-out from 2021 to 2024