S&P upgrades Meralco's credit rating, gives it stable outlook

Standard & Poor's Ratings Services has raised Manila Electric Company's (Meralco) credit rating on expectations it will improve cash flows while giving it a stable outlook on better sales in the next two years.

S&P said Thursday it has raised its rating to BB from BB- on long-term corporate credit rating alongside the company's long-term ASEAN regional scale rating to axBBB- from axBB+.

"We raised the rating on Meralco because we expect the company's cash flows to improve over the next two years," Standard & Poor's credit analyst Rajiv Vishwanathan said in a statement.

"Our view is based on our forecast of robust sales, and a stable regulatory framework in the Philippines, which will enable the company to fully recover all pass-through charges  on time. These charges include generation, transmission, taxes, system loss, and universal charge," he added.

S&P raised its assessment of Meralco's financial risk profile to "significant" from "aggressive" on its lower imputed debt, higher cash flows, and strong cash balance.

"Under our criteria, we apply a risk factor to the net present value of Meralco's fixed obligations (capacity payments) under its power purchase agreements (PPA)," it said.

S&P lowered Meralco's risk factor to 25 percent from 50 percent on "higher confidence in stable regulation to allow the company to recover all costs related to the PPA."

"We estimate this will result in lower imputed debt of about P50 billion for Meralco and will support the improvement in the financial risk profile," it said, noting its earnings before interest, tax, depreciation and amortization  (EBITDA) will grow steadily in 2013 mainly due to an increase in customers.

Meralco's dominant position in power distribution in the country supports its 'fair' business risk profile, however, its re-entry into power generation--with an aggressive strategy and high dividend payout--"could weaken its financial risk profile," S&P said.

Meanwhile, the credit rating agency said the stable outlook "incorporates our expectation that the regulatory regime will remain steady and that Meralco's sales will stay strong over the next 18 to 24 months."

"We also expect that Meralco will expand its power generation business at a balanced pace and will prudently fund the expansion, such that it does not hurt the forecast improvement in the company's financial performance. Further, we anticipate that Meralco will manage dividend payout within its policy levels of 50 percent of consolidated core net income of the year," it added.

Meralco's rating could be lowered if:
(1) regulatory changes adversely affect Meralco;
(2) demand weakens significantly;
(3) Meralco's expansion in power generation is more aggressive or results in higher debt incurrence than we anticipated; or
(4) the company is aggressive in dividend payments to shareholders. The debt-to-EBITDA ratio deteriorating to about 3x-3.5x on a sustained basis (after adjusting for PPA obligations) could be a downgrade trigger.

S&P said prospects for an upgrade appear limited over the next 12 to 24 months, given Meralco's significant planned capital spending and the execution risks associated with expansion into the generation business.

Meanwhile, an improvement in Meralco's cash flows and a significant change in business risk profile could positively affect the rating, assuming that the company maintains financial discipline while investing in its power generation projects, including more conservative dividend payout to preserve cash, if required, S&P said. — Danessa O. Rivera/BM, GMA News