February 19, 2014

SC extends and expands coverage of power rate hike TRO

Various newspapers today reported that the Supreme Court has extended by another 60 days the temporary restraining order (TRO) on the P4.15/kWh that the Manila Electric Co (MER, Buy) sought to implement last December. The proposed rate hike arose from the sudden spike in generation costs in November.

The TRO, which will be effective until 22 April, also ordered power generation companies, the National Grid Corp of the Phils and the spot market operator Philippine Electricity Market Corp (PEMC) from demanding or collecting the deferred amounts from MER. The gencos covered by the TRO are Masinloc Power Partners Co Ltd “c/o AES Philippines,” San Miguel Energy Corp, South Premiere Power Corp, and First Gas Power Corp.

Our Take: We believe that the expansion of the TRO’s coverage to include the gencos and the PEMC should provide some relief to MER. The original TRO stopped MER from passing through the higher power costs to its customers but did not prevent the gencos and the PEMC from collecting the payments from MER.

This could have created a lopsided and significant pressure on MER’s cash flows. In the meantime, we continue to view the unresolved power rate hike issue as a near-term concern that will hound investor sentiment on MER and the gencos until the regulator has finally ruled on the validity of the higher power prices at the spot market in November and December.

However, we believe that MER’s positive long-term prospects remain intact given its strong cash flows, high dividend payout, and continued investments in power generation that should help ensure supply as well as strengthening its bargaining position vis-à-vis its suppliers. – WealthSec