S&P upgrades Meralco credit rating

MANILA, Philippines - Standard & Poor’s (S&P) Ratings Services has upgraded the credit rating of power distribution giant Manila Electric Co. (Meralco) on the back of improved business and financial risk profiles.

In a statement, S&P said it raised the long-term corporate credit rating of Meralco to BB- with a stable outlook from B+.

“We upgraded Meralco because we believe the company’s competitive position and cash flow stability have strengthened, supported by a sustained improvement in the regulatory landscape,” S&P said.

S&P said Meralco’s business risk profile improved to fair from weak.

“Meralco’s dominant position in power distribution in the Philippines supports the company’s business risk profile,” the credit rater said.

Consolidated reported net income of Meralco surged 37 percent to P13.6 billion in the nine months to September from P10 billion last year due to strong electricity sales.

Specifically, Meralco’s business risk profile benefited from two main factors.

“One is healthy volume growth in electricity sales and increasing number of customers across all segments, stemming from a buoyant domestic economy,” S&P credit analyst Rajiv Vishwanathan said.

Consolidated customer accounts of the country’s largest power distributor rose 3.5 percent to a record 5.16 million as of end-September as the company added 130,042 new customers from the start of the year.

Meralco’s consolidated sales in the nine-month period grew 7.6 percent to 24,448 gigawatt-hours from a year ago.

“The other is timely tariff adjustments and recovery of charges approved by the regulator, which reflect improving regulatory track record and reducing industry risk,” Vishwanathan said.

For this year, Vishwanathan said S&P expects Meralco’s financial profile to remain strong due to increasing customers and low distribution system losses.

Last month, Meralco upgraded its forecast profit for the entire year to P16 billion due to robust sales from P15.5 billion in July and P15 billion announced in April. Last year, the company recorded P14.9 billion in core earnings.

S&P gave Meralco a stable credit rating outlook as improvements in the regulatory landscape are seen to continue while Meralco maintains robust sales over the next 12 months.

“We also expect increasing demand to provide a cushion against potential marginal decrease in the company’s distribution rates during this time,” S&P said.

But the credit rater warned that the re-entry of Meralco into power generation might weaken its financial risk profile depending on the scale of investment and funding profile.

Meralco, through its subsidiary Meralco PowerGen Corp., targets an installed power generation capacity of 2,700 megawatts (MW) from now until 2020 to ensure adequate, reliable and cheap supply of electricity.

Its first power generation project is the $1.2-billion, 600-MW coal-fired power plant in the Subic Bay Freeport Zone in partnership with Aboitiz Power Corp. and the local unit of Taiwan Cogeneration International Corp.

“The project could increase Meralco’s debt-funded capital expenditure and expose the company to execution risks,” S&P said.

The credit rating of Meralco might be lowered if the company’s financial risk profile is dampened by increased debt to fund the power generation projects, it added.

Other risks to the credit rating are lower-than-expected electricity sales that will weaken cash flow adequacy measures and the aggressiveness in dividend payments to shareholders.

“We believe the prospect for an upgrade in the next 12 to 18 months is limited,” S&P said.