S&P raises Meralco’s long term-credit rating

MANILA, Philippines–Standard & Poor’s Rating Services has raised the long-term corporate credit rating of Manila Electric Co. (Meralco), the country’s biggest power distributor, to BB- from B+ due to the utility’s improved business and financial risk profiles.

In a statement, the global credit watchdog said it upgraded Meralco’s rating as it believed that the company’s “competitive position and cash flow stability have strengthened, supported by a sustained improvement in the regulatory landscape.”

It further assessed the power firm’s business risk profile as “fair” from a previous assessment of “weak,” noting that Meralco’s dominant position in the power distribution sector in the Philippines supported the company’s business risk profile.

“The improvement in business risk profile is attributable to two factors. One is healthy volume growth in electricity sales and increasing number of customers across all segments, stemming from a buoyant domestic economy. The other is timely tariff adjustments and recovery of charges approved by the regulator, which reflect improving regulatory track record and reducing industry risk,” noted S&P’s credit analyst Rajiv Vishwanathan.

Meralco posted an 11-percent growth in its consolidated core net income to P12.9 billion in the first nine months of 2012 from P11.7 billion a year ago. Consolidated revenues, which consisted largely of electricity sales, increased by 14 percent to P214.7 billion as of end-September, due to 8-percent increase in the volume of power sold and higher average cost of power sold.

“We forecast Meralco’s Ebitda (earnings before interest, taxes, depreciations and amortization) growth to remain strong in 2012 due to increasing customers and low distribution system losses. We also expect steady electricity sales in 2012 and 2013,” Vishwanathan added.

S&P added that this stable outlook reflected its view that improvements in the regulatory landscape will continue and Meralco will maintain its robust sales over the next 12 months. It also expected increasing demand to provide a cushion against potential marginal decrease in the company’s distribution rates during this time.

S&P warned, however, that Meralco’s re-entry into power generation could weaken its financial risk profile, depending on the scale of investment and funding profile, as it incurs additional debt to fund new projects.
The company and its partners are currently preparing to put up a 600-megawatt coal-fired power facility within the Subic Bay Freeport Zone in Zambales–a project that S&P believes could increase Meralco’s debt-funded capital expenditure and expose the company to execution risks.

S&P further said that it may lower Meralco’s BB- rating if the company’s financial risk profile weakens considerably because of increased debt to fund the proposed power generation projects; or if cash flow adequacy measures weaken because of lower-than-expected electricity sales.