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S&P upgrades Meralco outlook to positive, affirms ‘BBB-’ rating


S&P GLOBAL Ratings has affirmed its “BBB-” long-term issuer credit rating on Manila Electric Co. (Meralco) with a positive outlook.

“We revised the rating outlook on Meralco to positive from stable,” the credit rating agency said in an e-mailed media release on Wednesday.

A BBB- rating is considered lowest investment grade by market participants, according to S&P.

S&P’s positive outlook on Meralco represents its expectations that the distribution utility’s improving operating performance and clarity on tariffs “could lead to stronger financial metrics over the next 12-24 months.”

“We forecast the company to maintain a healthy ratio of funds from operations (FFO) to debt of 33%-40% over the next two years, above our 30% upside trigger. We expect Meralco to generate steady cash flow from its distribution business, as well as a material earnings recovery in its unregulated power generation business,” the rating firm said.

It expects that the revised contracts of Meralco’s subsidiary, Global Business Power Corp., with its offtakers — which now incorporate fuel pass-through — will mitigate its exposure to volatile prices.

Strong dividends brought about by the utility’s associate/joint-venture companies in the power generation business are also seen to support stronger cash flow over the next two years.

“We see rating upside if the regulatory tariff reset allows Meralco to continue passing through all costs and in a more timely manner,” S&P said.

The Energy Regulatory Commission has said that it has completed the fourth regulatory process (RP) for the National Grid Corp. of the Philippines and plans to initiate the RP for private distribution utilities.

The rating firm also noted that the distribution utility is seen to ramp up its capital expenditure (capex) and investments in power generation assets over the next two to three years due to its “increased appetite” to hold controlling stakes in such assets.

This is compared to its previous preference for holding large equity stakes in joint ventures.

“We expect the company to incur sizable distribution-related growth capex of PHP17 billion-PHP20 billion annually to support network strengthening and asset renewal,” it said.

S&P said it could lower Meralco rating “if the company’s ratio of FFO to debt declines sustainability below 23% or its financial policy becomes more aggressive.”

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

Neil Banzuelo

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