Its robust capital structure will allow dominant electricity distributor Manila Electric Co. (Meralco) to withstand lower energy sales volume this year amid the coronavirus disease 2019 (COVID-19) outbreak, Standard and Poor’s Global Ratings (S&P) said in a report.
The credit watchdog noted the company’s ratio of funds from operations (FFO) to debt will remain resilient at 45 percent in 2020 and 37 percent in 2021.
S&P affirmed the power firm’s ‘BBB-’ rating on its resilient financial performance, while it was given a stable outlook.
“We expect revenues to fall by 9 percent to 10 percent in 2020 as the commercial and industrial segments will be adversely affected by the containment measures in Luzon island and a weaker economic environment. That said, we forecast Meralco’s revenue growth to recover in 2021 by about 9 percent, backed by a pick-up in sales volume after the outbreak and the solid fundamentals of its power distribution business,” according to S&P.
In addition, we recognize that Meralco has demonstrated financial prudence over the past five years by consistently maintaining sizable contingency funds of about P40 billion, the ratings firm noted.
It projected Meralco will continue with its financial practice of preserving investments as contingency funds and not distribute them as shareholder returns, “thereby supporting its balance sheet.”
Capex to be sustained
Sustained capital expenditure (capex) and sizable investments in power generation assets will likely erode the rating headroom over the next two to three years, S&P added.
Meralco’s leverage (or debt volume) will increase steadily over the next two to three years, with its FFO-to-debt ratio falling to about 32 percent in 2022.
“This is due to a significant increase in spending of P55 billion to P60 billion annually over 2021 to 2022, from an estimated P24 billion in 2020,” the company explained.
Meralco plans to accelerate investment spending in its power generation business over the next two to three years.
S&P said the company will build and fully own the P160-billion 1,200 megawatt capacity Atimonan One Energy Inc. coal plant in the absence of a joint venture partner.
“At the same time, Meralco will also incur sizable growth capex of P24 billion to P30 billion for its distribution business from 2021 onward to support network strengthening and asset renewals,” it noted.