S&P GLOBAL RATINGS has affirmed Manila Electric Co.’s (Meralco) credit rating at “BBB” and revised its outlook to “positive,” citing expectations of improved business integration and project execution in power generation.
“The positive outlook reflects our expectation that business integration, scale, and diversity could improve with project execution in power generation, without material delays or cost overruns,” S&P said in an e-mailed report on Tuesday.
S&P revised the credit outlook for Meralco to “positive” from “stable,” indicating that its “BBB” rating could be upgraded.
A “BBB” rating indicates that Meralco has adequate capacity to meet its financial commitments but remains more subject to adverse economic conditions.
S&P said the outlook revision reflects Meralco’s stronger business position, citing “improving scale and profitability in power generation and further diversification as an integrated power utility.”
The development enables the company to continue generating robust operating cash flow from its core distribution business, supported by the recent renewal of its distribution franchise, the agency said.
This is despite increased leverage resulting from significant capital expenditures for a large solar project and recent acquisitions.
“Backed by… exclusive franchise, the company will likely maintain its natural monopoly within its franchise area, including Metropolitan Manila, the Philippines’ national capital and economic center,” S&P noted.
President Ferdinand R. Marcos, Jr. on April 11 signed into law the measure extending Meralco’s franchise by another 25 years, which was supposed to end in 2028.
Meralco serves around eight million customers across 39 cities and 72 municipalities.
Meanwhile, S&P said that the company’s expansion into power generation will strengthen its business diversification as an integrated power utility.
Meralco’s stake in two operational natural gas power plants with a combined capacity of 2.6 gigawatts (GW), as well as the construction of the 3.5-GW MTerra Solar power project, will bring the company’s gross operating generation capacity to 8.8 GW by 2027 from 2.6 GW in 2024.
The credit watcher expects the solar power project and gas power plants to contribute 24% and 7%, respectively, to Meralco’s adjusted earnings before interest, taxes, depreciation, and amortization by 2027.
“We assume predictable cash flow from the projects, given their long-term power supply agreements with favorable tariffs,” S&P said. “These upstream investments will also help Meralco better secure power supply and evolve as an integrated power utility from a stand-alone distribution company.”
Meralco’s controlling stakeholder, Beacon Electric Asset Holdings, Inc., is partly owned by PLDT Inc. Hastings Holdings, Inc., a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc., has an interest in BusinessWorld through the Philippine Star Group, which it controls. — Sheldeen Joy Talavera
