BUSINESS
S&P: Meralco credit profile improving
‘We expect this to mitigate GBPC’s exposure to volatile fuel prices, which partly led to losses in 2022’
The credit profile of dominant power distributor Manila Electric Co., or Meralco, will likely improve, with support from improving profitability of its unregulated power generation business and stable cash flow from its distribution business, which has a consistent record of cost pass-through, according to credit watchdog Standard & Poor's.
Meralco will have headroom to our current rating trigger over the next 12 to 24 months, despite sizable capital expenditure, or capex, and investments.
"We forecast the company to maintain a healthy ratio of funds from operations to debt of 33 percent to 40 percent over the next two years, above our 30 percent 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," according to S&P.
Meralco's adjusted earnings before interest, taxes, depreciation and amortization could increase to P78 billion to P81 billion until 2024, from P66 billion in 2022.
S&P identified the key downside risk to its assumption, the weaker profitability in the unregulated business, higher contracted power purchase agreements than expected or major delays in the recovery of fuel costs.
Improving cash flow from the unregulated power generation businesses will support better earnings.
Meralco's power generation earnings may materially improve in 2023 to 2024.
Revised contracts between subsidiary Global Business Power Corp. and its off takers now incorporate fuel pass-through.
"We expect this to mitigate GBPC's exposure to volatile fuel prices, which partly led to losses in 2022. The company will also be able to recover its losses incurred in 2022, given the Energy Regulatory Commission's recent approval to allow recovery of fuel cost under-recoveries," according to S&P.
Strong dividends from Meralco's associate/joint-venture companies in the power generation business, mainly PacificLight Energy Pte. Ltd. and San Buenaventura Power Ltd. Co., will also support stronger cash flow over the next two years.