Fitch Strongly Believes in EVN’s Potential

Nhat Trung

16:39 17/09/2019

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However, an upward revision of EVN's standalone profile is contingent on consistent application of electricity regulatory reforms, including a longer record of tariff adjustments that reflect cost changes, while FFO adjusted net leverage is sustained below 5.0x.

Fitch Strongly Believes in EVN’s Potential
Fitch Ratings has affirmed Vietnam Electricity's (EVN) Long-Term Foreign-Currency Issuer Default Rating at 'BB' with a Positive Outlook. The Outlook reflects the agency's Outlook on Vietnam (BB/Positive), which was revised to Positive from Stable on 9 May 2019. Fitch has also affirmed EVN's senior unsecured rating of 'BB'. EVN's Standalone Credit Profile (SCP) is assessed at 'bb'.
EVN's ratings are equalised with those of the sovereign under Fitch's Government-Related Entities Rating Criteria due to Fitch's assessment of a strong likelihood of state support in light of the group's strategic importance to the power sector in Vietnam. 
EVN's SCP reflects its position as the owner and operator of Vietnam's electricity transmission and distribution network, and its near 58% share of Vietnam's power generation capacity. Fitch expects EVN's financial profile to be much stronger than the one that is commensurate for its SCP assessment. 
However, an upward revision of EVN's standalone profile is contingent on consistent application of electricity regulatory reforms, including a longer record of tariff adjustments that reflect cost changes, while FFO adjusted net leverage is sustained below 5.0x.
Hydrology, Currency and Demand Risks: Hydropower accounts for about 42% of Vietnam's power-generation capacity. Years with productive hydropower generation lift EVN's profit margin, but times of lower rainfall force the company to rely excessively on expensive coal. About 65% of EVN's borrowings are denominated in foreign currency, exposing the company to substantial currency risk. 
Lower gains in electricity sales volume also subject EVN to financial stress due to the company's high capex plans. However, Fitch expects EVN to adjust its investments if there is a structural decline in demand. Fitch believes EVN's financial profile can deteriorate rapidly in the absence of regular tariff increases.
Restrictive Tariff Increase Allowance: EVN can increase electricity tariffs every six months, in line with rising production costs, in accordance with the regulatory framework that was introduced in August 2017. 
However, automatic adjustments are limited to 5%; price increases between 5% and 10% require approval from the Ministry of Industry and Trade and larger increases require approval from the prime minister.
In March 2019, the government increased the average electricity tariff by 8.36% to VND1,864/kWh. According to management, the increase took into account the higher cost of power supply in 2018 and the company's expected operation and investment plan in 2019. Fitch expects the higher tariffs to support EVN's financial profile, which is stronger than that commensurate for its SCP. 
However, the increase in March was the first since a 6.1% jump in December 2017. We expect delays in implementing tariff increases to continue due to the effect on inflation and economic growth.
Capex to Increase: Fitch expects EVN to incur significant capex to address continuing increases in power demand, tackle a shortage of power plants in the country's southern region and the low transmission capacity from north to south, and improve supply services. Fitch estimates group capex will rise to around VND120 trillion a year after delays in starting the construction of a number of projects drove capex to a lower-than-anticipated VND64 trillion in 2018 (2017: VND119 trillion). Fitch expects Vietnam's installed capacity to increase to about 58 gigawatts (GW) by end-2020 (2018: 49GW).
The share of coal-fired capacity has increased steadily over the previous few years and we expect this to account for the majority of Vietnam's capacity addition in the near term. The increase in coal capacity coupled with development of domestic gas fields and liquefied natural gas import terminals will address hydrological risks to an extent in the medium term. The country turned into a net importer of coal in 2015 and Fitch believes its reliance on imported coal will continue rising as most of Vietnam's hydro potential has been utilised.
Standalone Credit Profile: Fitch assesses EVN's SCP at 'bb'. We expect the company to generate more than VND90 trillion in operational cash flows each year through 2021. However, it is likely to face negative free cash flow due to its high capex plans and will require external funding to manage its capex targets, which we believe it can secure due to its close links to the sovereign. Fitch estimates EVN's FFO adjusted net leverage to increase to about 4.0x by 2021 (2018: 3.1x).

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