S&P raises Meralco's credit rating to 'BB+'

Standard & Poor's Ratings Services on Monday said it raised the long-term corporate credit rating on Manila Electric Co. (Meralco) to 'BB+' from 'BB' with a stable outlook.

 

The stable outlook over the next 12 months reflects S&P's expectation of a steady regulatory regime and Meralco's consistent operational performance and increasing electricity sales to support the company's competitive position, said S&P's credit analyst Bertrand Jabouley. 

 

"We upgraded Meralco because we expect the company's profitability to remain resilient over the next four years, given the regulated nature of cash flows," Jabouley said. 

 

"We have therefore revised our assessment of the company's business risk profile to 'satisfactory' from 'fair'," the analyst added.

 

The debt-watcher also raised its ASEAN regional scale rating on the Philippines-based power distributor to 'axBBB+' from 'axBBB-'.

 

"The established regulatory framework in the Philippines allows Meralco to fully recover all pass-through charges (including generation, transmission, taxes, system loss, and universal charge). As a result, Meralco's EBITDA over the past two years has been more stable than we initially expected," S&P noted.

 

"The company has also outperformed the regulatory benchmarks since 2010. It has steadily increased its operating efficiency, with system losses consistently below the regulatory ceiling of 8.5 percent. We believe Meralco's robust operating standards contribute to make its earnings predictable," it added.

 

Risks

However, the debt-watcher views the sizable returns to Meralco shareholders could undermine the company's balance sheet. 

 

"The company is also exposed to risks associated with the construction of its generation assets. Our 'negative' assessment of Meralco's financial policy captures both the above factors."

 

S&P also sees some uncertainty in the timing and magnitude of the tariff reset for the upcoming regulatory period, which has a material influence on Meralco's free operating cash flow or FOCF – over the next four years – as well as on the financial metrics. 

 

"We therefore assign a 'negative' score to Meralco in our comparable rating analysis," the debt-watcher noted.

 

Combining the power utility's financial risk profiles in terms of "satisfactory" business risk and "intermediate" financial risk profile boils down to a 'bbb'/'bbb-' anchor. 

 

"Our choice of the higher score reflects Meralco's dominant market position in its core distribution business," S&P said.

 

Incurring more debt, going for aggressive dividend payments to shareholders and weakening power demand are three scenarios that would prompt S&P to lower Meralco's rating.

 

A deterioration in the ratio of funds from operation or FFO to debt toward 20 percent-22 percent in the absence of prospects for improvement, after adjusting for power purchase agreement obligations, could also trigger a downgrade.

 

Any upgrade hinges primarily on a timely regulatory tariff reset.

 

"However, we could raise the rating even if the reset is delayed or undermines FOCF generation if we believe Meralco can maintain a conservative capital structure. An upgrade trigger could be the FFO-to-debt ratio remaining close to 28 percent-30 percent on a sustainable basis. 

 

"An upgrade would likely require timely progress in the construction of the company's generation projects, steady operational performance, and no marked change in returns to shareholders," S&P noted.

 

As of Dec. 31, 2014, Meralco has a net cash position of P39.4 billion. – VS, GMA News