S&P Global Ratings has affirmed its BBB- investment-grade credit rating for Manila Electric Co. (Meralco) with a stable outlook as the listed firm takes on the impact of lower energy sales in 2020 and the delay in resetting its tariff regime.

The credit rating agency said Meralco’s “robust” capital structure can help it weather the impact of the global coronavirus disease 2019 (COVID-19) on its energy sales volume this year.

A BBB- rating means that the company has an adequate capacity to meet financial commitments, but more subject to adverse economic conditions.

S&P’s stable outlook on Meralco represents its expectation that the utility will maintain steady cash flows from its regulated business over the next two years.

“We expect Meralco to appropriately manage its leverage and growth spending over the period, while containing execution risks for the generation assets,” it said.

It expects its revenues to fall by 9% to 10% as both commercial and industrial segments will be “adversely affected” by the quarantine measures imposed in Luzon and “weaker economic environment.”

“That said, we forecast Meralco’s revenue growth to recover in 2021 by about 9%, backed by a pick-up in sales volume after the outbreak and the solid fundamentals of its power distribution business,” S&P added.

The Philippines’ biggest distribution utility posted lower electricity revenues of P67.91 billion in the first quarter of 2020, due to the impact of the Taal Volcano eruption in January and the enhanced community quarantine imposed in mid-March.

Meralco Chairman Manuel V. Pangilinan expects a further decline in revenues in the second quarter.

The rating firm noted that the listed distribution utility’s “sustained” capital expenditure (capex) and “sizable” investments in power generation assets will “likely erode the rating headroom over the next two to three years.”

Its unit, Meralco PowerGen Corp., is constructing a 1,200 megawatt (MW) capacity coal-fired plant led by its subsidiary, Atimonan One Energy, Inc.

Moreover, the company will be spending between P24 billion and P30 billion for its distribution business starting 2021 to bolster its network and to support asset renewals.

Meanwhile, S&P claimed that the persisting delay on the regulatory tariff reset is affecting Meralco’s credit rating.

The utility’s fifth tariff reset, it predicts, will come in as early as 2022, and is expected to decrease “due to over-recoveries in the past and lower return on capital assumptions.”

“The extent of decrease in the tariff rate over the next regulatory period is uncertain and limits earnings visibility,” it added.

There is an ongoing stalemate in Meralco’s tariff setting as the Energy Regulatory Commission has yet to come up with its rules on the computation of the utility’s distribution charges to customers.

S&P could lower its Meralco rating “if the company’s ratio of FFO (funds from operations) to debt declines sustainably below 30% or its financial policy becomes more aggressive.”

The firm sees the company’s FFO-to-debt ratio to remain resilient at 45% in 2020 and 37% in 2021, with an expectation of a 32% drop in 2022 as the company increases its annual spending to between P55 billion and P60 billion over the next two years.

Meanwhile, an upgrade on its rating is unlikely over the next two years.

Meralco’s controlling stakeholder, Beacon Electric Asset Holdings, Inc., is partly owned by PLDT Inc. Hastings Holdings, Inc., a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc., has interest in BusinessWorld through the Philippine Star Group, which it controls. — Adam J. Ang