The upgrade was indicative of Meralco’s improved standing as a more reliable borrower with a lower risk of default. This was justified by strong cash flow from its regulated power distribution and growing profitability in unregulated power generation.
S&P also assigned Meralco a stable outlook, which is based on its expectations of steady cash flow from its regulated distribution business, supported by a regulatory framework that allows full cost passthrough.
“We also expect the company to prudently manage its leverage and growth spending while managing execution risks for its unregulated power generation assets,” S&P said in a report dated Aug. 27 this year.
SMC-Aboitiz tie-up helps blunt spending impact
S&P noted that Meralco is planning capital expenditures of around P120 billion in 2024 and P30 billion to P40 billion in 2025, driven by investments in power generation and network upgrades.
This includes a P40 billion capital injection into SP New Energy for its 3.5 gigawatt Terra Solar project, which is expected to receive further support from a potential foreign investor.
Strategic partnerships with San Miguel Corp. (SMC) and Aboitiz Power for liquefied natural gas projects will help manage the financial impact, it noted.
Strong financial ratios
S&P said Meralco is set to maintain a funds from operations (FFO)-to-debt ratio of 39 percent to 45 percent, significantly higher than the previous threshold of 30 percent.
Moreover, earnings before interest, taxes, depreciation and amortization is projected to rise to P62 billion to P68 billion in 2024-2025, up from P54 billion in 2023 and P39 billion in 2022.
Key drivers include improved power purchase agreements and added revenue from the local contingency reserve market. Meralco’s subsidiary, Global Business Power Corp., has secured contracts with fuel cost pass-through terms, mitigating exposure to fuel price volatility.
This, along with new certifications from the National Grid Corporation of the Philippines, will further enhance earnings.
Favorable regulations
S&P said the Philippines is expected to keep a regulatory approach that allows Meralco to pass on costs, such as for power generation and transmission, to its customers.
Even during the pandemic’s high fuel prices, Meralco successfully passed these costs to customers, helping maintain stable profit margins despite delays in regulatory updates.
