State-run Vietnam Electricity (EVN)'s Standalone Credit Profile (SCP) of 'BB' has reasonable headroom to absorb the impact of the proposed reduction in electricity tariffs in the country, Fitch Ratings said in a statement.
| Illustrative photo. Source: EVN. |
The Ministry of Industry and Trade (MoIT) has decided to cut electricity tariffs for certain customers by 10% for the next three months to support economic activities amid the Covid-19 pandemic, leading to expectation that there would be delays in the country’s sole power distributor’s cash collections.
Fitch also assumed electricity sales volume growth of only 4% in 2020, compared to the growth of 9% in 2019.
Fitch estimated that the proposed tariff cuts will raise EVN's 2020 leverage, as measured by funds for operations (FFO) adjusted net leverage, to 4.5x from its previous forecast of 3.9x. The leverage will increase to 4.9x should receivables stretch to 35 days from around 5 days historically.
Fitch said it would revise EVN's SCP down if leverage is above 6.0x for a sustained period, indicating it has considerable headroom. Under Fitch's Government-Related Entities Rating Criteria, EVN's ratings will be equalized to that of the sovereign in case of any weakening in its SCP given the company's strong linkages with the state.
EVN's SCP is constrained at 'BB' due to the lack of a longer record of tariff adjustments that reflect cost changes. Under the regulatory framework introduced in August 2017, EVN is entitled to increase or decrease tariffs every six months in line with its production costs. However, automatic adjustments are limited to 5%. Price increases between 5% and 10% require approval from the MoIT, and larger increases need sign-off from the Prime Minister.
EVN's financial profile can be significantly affected if tariffs are not adjusted regularly as it faces major hydrology, currency and demand risks, stated Fitch.
Fitch previously revised the outlooks on major state-run EVN, National Power Transmission Corporation (EVNNPT) and Vietnam Oil and Gas Group (PVN) to Stable from Positive, while affirming the three companies' Issuer Default Ratings and senior unsecured ratings at 'BB'.
