S&P raises rating outlook on Meralco
By Richmond Mercurio – November 4, 2023 | 12:00am
from The Philippine Star
Electrical linemen conduct maintenance check on electric posts along BIR Road in Diliman, Quezon City on Aug. 7, 2023.
Jesse Bustos / The Philippine STAR
Stable cash flow, stronger financials
MANILA, Philippines — S&P Global Ratings has upgraded Manila Electric Co.’s rating outlook to positive from stable due to the company’s stable cash flow and stronger financials.
It likewise affirmed Meralco’s “BBB-” long-term issuer credit rating.
According to S&P, Meralco’s credit profile will likely improve, with support from the improving profitability of the company’s unregulated power generation business and stable cash flow from its distribution business.
“The positive rating outlook reflects our expectation that Meralco’s improving operating performance and clarity on regulatory tariffs could lead to stronger financial metrics over the next 12 to 24 months,” S&P said.
S&P expects the company to benefit from an earnings recovery in its power generation business, as well as terms of the regulatory tariff reset to remain supportive of its operations, given the Philippines’ continued regulatory philosophy of cost pass through.
“We anticipate steady cash flow from the regulated power distribution business, despite continuing delays in regulatory tariff reset. This will support Meralco’s financial strength,” it said.
Meralco’s adjusted EBITDA is expected to increase to P78 billion to P81 billion in 2023 to 2024 from P66 billion last year, while the company’s power generation earnings could also materially improve during the period, according to S&P.
“Strong dividends from Meralco’s associate/joint-venture companies in the power generation business, mainly PacificLight Energy Pte. Ltd. and San Buenaventura Power Ltd. Co., will also support stronger cash flow over the next two years. In addition, contribution from its three commissioned renewable plants (mostly solar projects) will add to the earnings over the next two years,” it said.
In addition, S&P anticipates Meralco’s capital spending to remain elevated due to sustained capex and sizable investments in power generation.
The company is expected to post a sizable distribution-related growth capex of P17 billion to P20 billion annually to support network strengthening and asset renewal.
“The company will likely ramp up its capex and investments in power generation assets (including renewables) over the next two to three years. This is given its increased appetite to hold controlling stakes in such assets, versus its previous preference for holding largely equity stakes in joint ventures,” S&P said.
In particular, S&P sees Meralco starting major spending on a key growth project, the A1E power plant, in 2026.
S&P is forecasting an annual spending of P15 billion to P20 billion for the company on this project from 2026 onward.
In striving toward cleaner and greener energy, Meralco PowerGen earlier announced the conversion of its Atimonan One Energy project from coal to liquefied natural gas or LNG for baseload supply, with an ongoing environmental compliance certificate application for the development of a gasfired power plant.
“We believe Meralco has an adequate governance framework that is in line with that of domestic peers. This reflects management’s experience and expertise in power distribution. In our view, the two strategic shareholder groups also exercise sufficient checks and balances, despite a lower proportion of independent directors on the board,” S&P said.
“Moreover, the board has been effective in providing oversight of key risks and reviewing the company’s strategic decisions over the past few years. As a regulated entity, Meralco also requires regulatory approval to significantly increase leverage,” it said.
