(The following statement was released by the rating agency)
Nov 27 -
-- We expect Manila Electric Co. (Meralco) to sustain its improved operating performance. Meralco’s industry risk has fallen; its competitive position, operating efficiency, and cash flow stability have improved, in our opinion.
-- We are raising our long-term corporate credit rating on the Philippines-based power utility to ‘BB-’ from ‘B+'. We are also raising our ASEAN regional scale rating on the company to ‘axBB+’ from ‘axBB’.
-- The stable outlook reflects our expectation that Meralco will maintain its financial position and robust sales over the next 12-24 months while it incurs capital expenditure toward its generation projects.
On Nov. 27, 2012, Standard & Poor’s Ratings Services raised its long-term corporate credit rating on the Philippines-based power utility, Manila Electric Co. (Meralco) to ‘BB-’ from ‘B+'. The outlook is stable. At the same time, we raised the ASEAN regional scale rating on the company to ‘axBB+’ from ‘axBB’.
We upgraded Meralco because we believe the company’s competitive position and cash flow stability have strengthened, supported by a sustained improvement in the regulatory landscape. We assess the company’s business risk profile as “fair.” Meralco’s “aggressive” financial risk profile reflects our expectation that the company’s ratio of consolidated debt to EBITDA will remain below 4.0x in 2013, after adjusting for obligations under power purchase agreements (PPAs). We expect Meralco’s improved operating performance to be sustainable.
Meralco’s dominant position in power distribution in the Philippines supports the company’s business risk profile. Its business risk profile improved to “fair” from “weak.” The improvement is attributable to: (1) healthy volume growth in electricity sales and increasing number of customers across all segments, stemming from a buoyant domestic economy; (2) timely tariff adjustments and recovery of charges approved by the regulator, which reflect improving regulatory track record and reducing industry risk.
However, we believe Meralco’s re-entry into power generation could weaken its financial risk profile, depending on the scale of investment and funding profile. The company is preparing for a 600 megawatt (MW) coal-fired power plant project in the Subic Bay Freeport Zone, Zambales, in the Philippines. The project could increase Meralco’s debt-funded capital expenditure and expose the company to execution risks. In addition, Meralco is identifying possible partners for building a total generation capacity of about 2,700 MW between 2012 and 2020.
We expect Meralco’s EBITDA growth to remain strong in 2012 due to increasing customers and low distribution system losses. Meralco’s reported EBITDA grew to Philippine pesos (PHP) 24 billion in 2011, from PHP18.84 billion in 2010, despite lower sales in the first quarter of 2011 and a dip in the company’s distribution rates. EBITDA growth was about 16% in the first three quarters of 2012, compared with the same period in 2011. The company’s 12-month system loss was 7.19% as of Sept. 30, 2012, compared with the 8.5% regulatory cap. Meralco’s sales and number of customers increased about 7.6% and 3.5%, respectively, in the same period. We expect steady electricity sales in 2012 and 2013.
Meralco’s liquidity is “adequate,” as defined in our criteria. As of Sept. 30, 2012, the company had about PHP56 billion in cash and cash equivalents, compared with repayment of short-term debt and redeemable preferred stock of about PHP1.1 billion over the next 18 months and customer deposits of about PHP25 billion. Our liquidity assessment incorporates the following factors and assumptions:
-- Meralco’s ratio of sources of liquidity to uses is more than 1.2x in the next 12-18 months. The company’s cash balance is strong and sufficient to cover its obligations in the coming year.
-- Its cash balance is sufficient to cover all its stand-alone debt. Nevertheless, we believe that Meralco’s liquidity position is adequate, given its plans to invest in power generation projects.
-- We believe net liquidity sources would be sufficient to meet cash requirements even if EBITDA declines by 10%.
We expect Meralco to generate about PHP25 billion in funds from operations in 2013. Its liquidity uses include projected total capital expenditure of about PHP13 billion in 2013 for its distribution business, potential equity infusion of about PHP3.7 billion into its generation subsidiary, Meralco Powergen, and dividend payments of about PHP10.8 billion. In our view, the company has good relationships with its banks and has a good standing in the credit markets.
The stable outlook reflects our view that improvements in the regulatory landscape will continue and Meralco will maintain its robust sales over the next 12 months. We also expect increasing demand to provide a cushion against potential marginal decrease in the company’s distribution rates during this time. Nevertheless, Meralco’s entry into power generation could weaken its capital structure and financial risk profile as it incurs additional debt to fund new projects.
We may lower the rating if: (1) Meralco’s financial risk profile weakens considerably because of increased debt to fund the proposed power generation projects; (2) the company’s cash flow adequacy measures weaken because of lower-than-expected electricity sales; or (3) the company is aggressive in dividend payments to shareholders. These factors may cause Meralco’s debt-to-EBITDA ratio to deteriorate to above 4.25x on a sustainable basis after adjusting for obligations under PPAs.
We believe the prospect for an upgrade in the next 12-18 months is limited. However, we may raise the rating if:
-- the company’s business risk profile improves significantly, helped by a supportive track record of regulations and a stable distribution business;
-- the company significantly improves in its cash flow and leverage while investing in power generation projects; and
-- Meralco demonstrates financial discipline while investing in its power generation projects, including having a more conservative dividend payout to preserve cash, if required, to support its projects.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Manila Electric Co.
Corporate Credit Rating BB-/Stable/-- B+/Stable/--
ASEAN Regional Rating Scale axBB+/--/-- axBB/--/-- (Bangalore Ratings Team, Hotline: +91 80 4135 5898, Bhanu.firstname.lastname@example.org, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.email@example.com))