Manila Electric Co. outlook revised to positive by S&P Global

Investing.com -- S&P Global Ratings revised Manila Electric Co.’s (Meralco) outlook to positive from stable on Monday, while affirming its ’BBB’ rating.

The rating agency cited Meralco’s improving business integration and growing market position in power generation as key factors for the outlook change.

In April 2025, Meralco renewed its distribution franchise for another 25 years until 2053, extending beyond its current June 2028 expiration. This renewal supports Meralco’s continued dominance in power distribution across its franchise area, which includes Metropolitan Manila, the Philippines’ economic center.

The company currently serves 39 cities and 72 municipalities, with its franchise area accounting for approximately 50% of the national GDP.

Meralco’s business diversification is strengthening through strategic acquisitions and investments in power generation. In January 2025, the company acquired a 60% stake in Chromite Gas Holdings Inc. (CGHI), which owns a 67% interest in two operational natural gas power plants with a total capacity of 2.6 gigawatts.

Additionally, Meralco is constructing a 3.5 GW Terra solar project through a 60/40 joint venture with Actis. These investments will increase Meralco’s gross operating generation capacity from 2.6 GW in 2024 to 8.8 GW by 2027.

S&P forecasts that the Terra solar project and CGHI will contribute 24% and 7% of Meralco’s adjusted EBITDA by 2027, respectively. The first phase of the Terra solar project (2.5 GW) is expected to be operational in the first half of 2026, with the second phase (1.0 GW) following in 2027.

The rating agency expects Meralco’s adjusted EBITDA margin to improve to 21%-22% by 2027 from 16% in 2024, partly due to the addition of solar projects with EBITDA margins exceeding 80%.

Despite increased capital expenditures, S&P estimates Meralco will maintain a funds from operations (FFO)-to-debt ratio of 29%-33% over the next three years. The company’s capital spending is projected at Philippine peso (PHP) 212 billion in 2025 and PHP91 billion in 2026, up from PHP41 billion in 2024.

S&P could raise Meralco’s rating if the company continues to recover timely regulated returns, successfully executes its power generation projects, maintains prudent financing structures, and sustains an adjusted FFO-to-debt ratio above 30%.

The outlook could revert to stable if the FFO-to-debt ratio falls below 30% or if the company adopts a more aggressive financial policy through debt-funded acquisitions, increased exposure to risks from affiliates, aggressive dividend payments, or unfavorable regulatory resets.

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