S&P Upgrades Meralco Rating, Warns Against Aggressive Power Investments

Manila Bulletin 
By James A. Loyola 
Published: June 22, 2013 
Standard & Poor’s Ratings Services has raised its long-term corporate credit rating on Manila Electric Company (Meralco) to ‘BB’ from ‘BB-’ with a stable outlook while its long-term ASEAN regional scale rating for Meralco was upgraded to ‘axBBB-’ from ‘axBB+’.
However, S&P warned against an aggressive expansion by Meralco into the power generation business and does not expect an upgrade in the next two years because of Meralco’s large capital expenditures and power investments.
“We raised the rating on Meralco because we expect the company’s cash flows to improve over the next two years,” said Standard & Poor’s credit analyst Rajiv Vishwanathan.
He added that “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.”
S&P said it raised its assessment of Meralco’s financial risk profile to “significant” from “aggressive” as Meralco’s lower imputed debt, higher cash flows, and strong cash balance underpin the improvement in the financial risk profile.
The ratings agency also lowered the risk factor to 25 percent from 50 percent because it has higher confidence in stable regulation to allow Meralco 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,” S&P and noted that Meralco’s EBITDA is likely to continue to grow steadily in 2013 mainly because of an increase in customers.
However, S&P said “we believe Meralco’s re-entry into power generation could weaken its financial risk profile if it pursues an aggressive strategy coupled with high dividend payouts.”
S&P said it could lower the rating if regulatory changes adversely affect Meralco; demand weakens significantly; Meralco’s expansion in power generation is more aggressive or results in higher debt incurrence than anticipated; or 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.
Prospects for an upgrade appear limited over the next 12-24 months, given Meralco’s significant planned capital spending and the execution risks associated with expansion into the generation business.
An improvement in Meralco’s cash flows and a significant change in business risk profile could positively affect the rating.
This assumes that the company maintains financial discipline while investing in its power generation projects, including more conservative dividend payout to preserve cash, if required.  source