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Fitch Ratings has assigned Vietnam Electricity Northern Power Corporation (EVNNPC) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BB' with a Stable Outlook.

Fitch Assigns Vietnam's Northern Power Corporation First-Time 'BB' Rating; Outlook Stable
EVNNPC's rating is based on the consolidated credit profile of Vietnam Electricity (EVN, BB/Stable), which owns 100% of the company, in line with Fitch's Parent and Subsidiary Linkage (PSL) Rating Criteria.
Fitch Ratings has assigned Vietnam Electricity Northern Power Corporation (EVNNPC) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BB' with a Stable Outlook.
EVNNPC's rating is based on the consolidated credit profile of Vietnam Electricity (EVN, BB/Stable), which owns 100% of the company, in line with Fitch's Parent and Subsidiary Linkage (PSL) Rating Criteria. The consolidated rating approach is driven by the strong integration of EVNNPC's credit profile with that of its parent. Fitch assesses EVNNPC's Standalone Credit Profile (SCP) at 'bb', same as that of EVN and the Vietnam sovereign rating (BB/Stable).
EVN's SCP benefits from its position as the owner and operator of Vietnam's electricity transmission and distribution network, and the company's near 54% share of the country's installed generation capacity. Fitch's Government- Related Entities Rating Criteria equalises EVN's rating with that of the sovereign should its SCP weaken, provided the likelihood of state support remains intact.
Strong Integration with Parent: EVN determines EVNNPC's profit through a bulk-supply tariff-setting mechanism. The bulk-supply tariff aims to cover EVNNPC's costs and earn a profit that will allow the company to maintain operations and meet investment plans. EVN also appoints EVNNPC's key management, approves its business and investment plans, oversees the subsidiary's financial management, and approves key executives' compensation packages. EVN guaranteed around 12% of EVNNPC's total borrowings at end-2019.
Strong Market Position Supports SCP: EVNNPC's SCP is assessed at the same level as EVN's given the high influence the parent has on EVNNPC's business plans and financial profile including profitability, though we believe EVNNPC's credit metrics are stronger than that commensurate for its credit assessment.
EVNNPC's SCP is supported by its dominant market position in electricity distribution in north Vietnam, its diversified counterparties and low receivable days. EVNNPC's credit profile, similar to that of its parent, is constrained by the regulatory framework's short history and political risks, and the short period of six months for which tariffs are set in the framework.
Low Impact of Coronavirus: EVNNPC's electricity sales volume increased by 6.6% yoy to 56 billion units in 9M20, benefitting from Vietnam's resilient economy and success in containing the pandemic. Nevertheless, power demand growth has decelerated due to the coronavirus and Fitch expects EVNNPC's electricity sales volume to rise by 5.5% in 2020, slower than the 12% yearly average increase in the past four years.
Diversified Counterparties, Low Receivable Risks: EVNNPC's credit profile benefits from its diversified customer base of about 11.5 million, the largest covered by any EVN distribution company. Around 61% of revenue is from high growth industrial customers, with more stable residential customers contributing 31%. Its top-20 customers account for only about 7.5% of revenue. Lower counterparty risk is also reflected in EVNNPC's high collection rates of almost 100% and low receivable days of around five, which is also driven by above 80% revenue collection through digital payment.
Tariff Increase Restrictions; Low ROE: EVN can increase retail electricity tariffs every six months to meet rising production costs, in accordance with the regulatory framework that was introduced in August 2017. However, automatic adjustments are limited to 5%, with price increases of 5%-10% requiring approval from the Ministry of Industry and Trade, and larger increases requiring approval from the prime minister.
Nevertheless, Fitch expects delays in implementing tariff increases in general and the current challenging macroeconomic conditions may adversely affect businesses and individuals, who may strongly oppose any tariff increases. EVN sets the major cost of electricity purchase through the bulk-supply tariff for distribution companies, including EVNNPC, with the aim of providing a modest profit.
High Capex Forecast: Fitch expects EVNNPC's capex to remain high, as the company plans average annual outlay of VND13 trillion over the medium term (2019: VND12 trillion). EVNNPC's capex is mainly for the enhancement of the distribution grid and transmission lines to improve power supply capacity, with around 30% for maintenance. Fitch estimates EVNNPC's FFO net leverage will stay at around 3.3x over the next four years (2019: 2.3x).
EVN's Strong State Linkages: Fitch sees EVN's status, sovereign ownership and control as 'Very Strong'. The state fully owns EVN, appoints its board and senior management, directs investments and approves tariff hikes in excess of 5%. EVN's record of state support is 'Strong'. The state has provided guarantees, stepdown loans, state-owned bank loans at preferential rates, subsidies and tax incentives. Fitch expects support to be available, if needed, although the government plans to cut direct support for state-owned enterprises and contain sovereign debt.
Strong Incentive to Support EVN: Fitch believes the socio-political implications of a potential EVN default are 'Strong', as this would lead to service disruption in light of its entrenched position across the electricity-sector value chain. It would also be difficult to import fuel stock and fund new power investments. Fitch sees the financial implications of a potential EVN default as 'Very Strong', as this would significantly affect the availability and cost of domestic and foreign financing options for the state and government-related entities, as EVN is one of Vietnam's key borrowers.

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