Fitch Ratings has affirmed Vietnam-based PetroVietnam Power Corporation - Joint Stock Company's (PV Power) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB' with a Positive Outlook.
PV Power's rating, based on its Standalone Credit Profile (SCP) assessment of 'bb', is on a par with the IDR of its parent, Vietnam Oil and Gas Group (PVN, BB/Positive), which owns around 80% of the company.
PV Power's SCP is driven by its strong market position as the second-largest electricity producer in Vietnam, accounting for around 7% of the country's total electricity output and 6% of installed capacity in 2021. It also benefits from diversified fuel sources, long-term power-purchase agreements (PPAs) with Vietnam Electricity (EVN, BB/Positive) for more than 80% of its electricity output and a strong financial profile. PV Power's Positive Outlook is driven by that on EVN's IDR, which constrains PV Power's SCP, even though PV Power's financial profile is stronger than its SCP assessment indicates.
Key Rating Drivers
Gas Power PLFs to Improve: PV Power's plant load factors (PLFs) at its gas plants were affected in 2021 by lower demand during the Covid-19 pandemic as a result of higher gas fuel cost. We expect a PLF rebound at its Nhon Trach I plant to 22% in 2022 from 11% in 2021, supported by an electricity demand recovery, and higher gas plant PLFs over the medium term.
Production Decline at Coal Plant: Fitch expects PV Power's electricity sales volume to decline by 9% in 2022 after a 24% drop in 2021, as a result of a generator turbine issue at the S1 unit of its Vung Ang 1 Thermal Power Plant in September 2021 when the unit was shut for repairs. We expect the PLF to drop to 36% in 2022 from 53% in 2021 before rebounding in 2023 once the repairs are completed.
EBITDA Margin to Decline: We estimate 2022 EBITDA will drop by 13.7% after a 16% decline in 2021 before recovering by 22% in 2023. We forecast an EBITDA margin of around 17% in 2022 (2021: 21.2%) as PV Power expects around 10% of electricity volume from the Ca Mau 1 and 2 plant to be sold in a competitive market from 2022. However, most of PV Power's capacity benefits from the long-term PPAs with EVN, which include capacity payments and a cost pass-through mechanism, supporting its relatively stable operating cash flows.
Moderate Leverage Despite Capex: We expect group net leverage, measured by net debt/EBITDA, to peak at around 4.0x in 2024 as the Nhon Trach 3 and 4 projects are constructed, before decreasing after the projects are commissioned (2021: net cash, 2022 estimate: 1.2x, 2023 estimate: 2.4x). We consequently expect capex to rise from 2022 (2021: VN286 billion; 2020: VND146 billion). The total capex estimate for the Nhon Trach 3 and 4 projects is around VND32 trillion over the next three years.
The liquefied natural gas (LNG) for Nhon Trach 3 and 4 will be imported and converted into natural gas by PetroVietnam Gas Joint Stock Corporation (PV Gas), a PVN group entity. PV Power signed an engineering, procurement and construction (EPC) contract in March 2022 and expects to start construction on the projects in mid-2022.
PPAs Provide High Visibility: PV Power's long-term PPAs with EVN provide high revenue and cash-flow visibility. The PPAs have 20-25 year tenors and a capacity weighted-average remaining tenor of around 12 years. The long-term PPAs account for 85%-90% of PV Power's revenue, with the remaining power sold in the wholesale electricity market. The tariffs' capacity payments cover debt servicing and fixed operating costs, return on equity, variable payments and operation and maintenance charges for fuel, repair and maintenance costs.
Leading Market Position: PV Power is Vietnam's second-largest electricity producer. Its market position is supported by having two-thirds of its capacity in the country's southern region, which faces a shortage in power generation. The company expects to maintain its market position in the medium term through capacity additions, even as the country's installed capacity increases.
Diversified Fuel Sources: PV Power's plants benefit from diverse fuel sources, including gas (64%), coal (29%), hydropower (7%) and solar (less than 1%) as of end-2021. The proportion of gas and LNG in the fuel mix will increase to 73% after the commissioning of the 1,500MW Nhon Trach 3 and 4 thermal power plants. However, unlike other domestic gas-based plants, the new plants will use imported LNG as fuel. PV Power has fuel-supply arrangements for all its plants to ensure timely availability of fuel. Most of the required gas is supplied by PV Gas.
Derivation Summary
EVN is similar to PV Power as its ratings also reflect its SCP, which is at the same level as the Vietnam sovereign rating (BB/Positive). EVN owns and operates most 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 the lack of a record of consistent application of electricity regulatory reform, including tariff adjustments that reflect cost changes.
NTPC Limited (BBB-/Negative), India's largest power-generation company, accounts for 17% of the country's installed power-generation capacity and 23% of its electricity generation. We assess its SCP at 'bbb-', the same level as its IDR. NTPC's two-notch higher SCP assessment than that of 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.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Around 85% to 90% 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, operating and maintenance costs
Average interest rate of 6% from 2022 to 2025
No dividend payout from 2022 to 2025
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Improvement in the IDR on EVN, the key counterparty
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Weakening of EVN's IDR
For EVN's rating, the following sensitivities were outlined by Fitch in a rating action commentary on 13 September 2021:
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action on the sovereign, provided the likelihood of state support does not deteriorate significantly.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Negative rating action on the sovereign.
Deterioration in EVN's SCP, along with significant weakening in likelihood of support the state. We see this as a remote prospect in the medium term.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: PV Power had VND8.7 trillion in cash and cash equivalents at end-2021, against current debt maturities of VND4.8 trillion, including VND2.9 trillion in short-term loans. We expect the company to generate negative free cash flow in the near-to-medium term due to capex for its Nhon Trach 3 and 4 projects. However, we do not think liquidity will be a problem for the company, as it has direct and indirect linkages to PVN and the state, respectively, and sound banking relationships with both domestic and international banks.
Issuer Profile
PV Power, the second-largest electricity producer in Vietnam, has total capacity that accounts for around 6% of national installed capacity. Its energy output in 2021 was 14,701 billion kWh, equivalent to around 7% of the nation's commercial electricity output.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
The ratings on PV Power are directly linked to the credit quality of its key counterparty, EVN. A change in Fitch's assessment of EVN's IDR would automatically result in a change in the ratings on PV Power.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
PETROVIETNAM POWER CORPORATION - 
