S&P Global Ratings revised its credit rating outlook for Manila Electric Co. (Meralco) to positive from stable, while affirming our ‘BBB’ long-term issuer credit rating.
It said Meralco is strengthening its business proposition with improving scale and profitability in power generation and further diversification as an integrated power utility.
The company will also likely maintain strong operating cash flow from its core distribution business on the back of the recent renewal of its distribution franchise, it said, despite higher leverage due to sizable capital expenditure (capex) on a large solar project and recent acquisitions.
“The positive outlook reflects our expectation that business integration, scale and diversity could improve with project execution in power generation, without material delays or cost overruns. We forecast an adjusted ratio of funds from operations [FFO] to debt of about 30 percent or higher for 2025-2027 despite high capex,” S&P Global said.
Meralco’s existing franchise is set to expire in June 2028. In April 2025, Meralco renewed it for another 25 years, until 2053. Backed by the exclusive franchise, the company will likely maintain its natural monopoly within its franchise area, including Metropolitan Manila, the Philippines’ national capital and economic center, it said.
Meralco continues to serve 39 cities and 72 municipalities, including Metro Manila. A significant portion of the company’s revenue comes from the region. The output from the company’s franchise area accounts for about 50 percent of the national gross domestic product, and the economic weight and importance of this franchise area supports demand for power and the company’s continued growth.
Meralco’s growing scale and market position in power generation will strengthen its business diversification as an integrated power utility, S&P Global said.
Meralco acquired a 60-percent stake in Chromite Gas Holdings Inc. (CGHI) in January 2025. CGHI owns a 67-percent interest in two operational natural gas power plants with a total capacity of 2.6 gigawatts (GW) (effective stake of 40.2 percent).
It is also constructing a 3.5-GW Terra solar project under its 60/40 joint venture (JV) with Actis. These will increase Meralco’s gross operating generation capacity to 8.8 GW by 2027 from 2.6 GW in 2024, S&P Global said.
“We forecast the Terra solar project and CGHI will contribute to 24 percent and 7 percent of Meralco’s adjusted EBITDA by 2027. We assume predictable cash flow from the projects, given their long-term power supply agreements with favorable tariffs. These upstream investments will also help Meralco better secure power supply and evolve as an integrated power utility from a stand-alone distribution company,” it said.
The first phase of the Terra solar project (2.5 GW) is on track and could be operational in the first half of 2026, with the second phase (1.0 GW) in 2027.
“We expect execution risks to be manageable without material delays. This is given the less complex nature of solar projects, their low gestation period, and Meralco’s experience in developing such projects,” S&P Global said.
It said the addition of significant renewable energy capacity could also improve profitability for Meralco’s generation business. This is because solar projects have EBITDA margins exceeding 80 percent.
“We forecast Meralco’s adjusted EBITDA margin will improve to 21 percent to 22 percent by 2027 from 16 percent in 2024,” it said.
The Terra solar project has a 20-year power supply agreement with Meralco at a fixed tariff. This supports high revenue visibility and cash flow stability, it said.
All of Meralco PowerGen Corp.’s (Meralco’s power generation investment vehicle) power purchase agreements with its customers incorporate fuel cost pass-through. Currently, about 85 percent of the power generation operating capacities are contracted. We expect this to mitigate its exposure to volatile fuel prices, it said.
“The positive outlook on Meralco reflects our expectation that the company’s business integration, scale, and diversity could improve with project execution in power generation. We expect the company to manage execution risks without material delays or cost overruns. We forecast an adjusted FFO-to-debt ratio of about 30 percent or higher for 2025-2027 despite high capex,” S&P Global said.
