S&P affirms credit ratings for PSALM, National Power Corp.

S&P GLOBAL RATINGS has affirmed the credit rating of stateled energy companies Power Sector Assets and Liabilities Management Corp. (PSALM) and National Power Corp. (Napocor), citing their stable outlook that reflects that of the Philippines.

“We affirmed the rating to reflect our opinion that there is an almost certain likelihood that the Republic of the Philippines (BBB/Stable/A-2) would provide timely and sufficient extraordinary support to PSALM in the event of financial distress. We have therefore equalized the rating on the governmentowned PSALM with that on the sovereign,” the ratings agency said.

For Napocor, S&P Global Ratings said: “[ The company] benefits from an almost certain likelihood of receiving timely extraordinary support from its owner, the Philippines government, based on its critical public policy role and integral link with the government.”

S& P Global Ratings gave PSALM and Napocor a “BBB” rating as their obligations exhibit adequate protection parameters. The rating, however, also means adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the obligation.

In affirming PSALM’s longterm issue credit rating, S& P Global Ratings said it based its assessment on two characteristics of electricity generation and transmission asset management company.

The firm said PSALM plays a critical role in implementing government reforms to restructure and liberalize the country’s power sector.

“Besides ownership of some generation assets, PSALM has the task of privatizing government-owned generation assets, implementing an open access system ( where users can chose their power supplier), and increasing retail competition in the Philippines’ power sector,” it said.

S&P Global Ratings also noted PSALM has an integral link with its owner — the government — “which provides an irrevocable, unconditional, and timely guarantee on all of the company’s debts.”

“The Philippines wholly owns and controls PSALM, with the government appointing all members of the board of directors,” it said. “The government has also committed to assume all remaining assets and liabilities of PSALM after 25 years from its creation.”

It also cited crossdefault triggers on the government’s external indebtedness.

S& P Global Ratings said it could lower the rating on PSALM by one or more notches if it believes the government support is weakening.

“This could occur via a change in law, privatization plans, or the refusal of future guarantees could trigger such a reassessment of the company’s role for and with the government. However, we believe these developments are highly unlikely,” it said.

“We could raise the rating on the company if we upgrade the sovereign, provided we believe continued timely and unconditional government support for PSALM,” it added.

For Napocor, the rating firm also gave similar views on the possibility of lowering or raising its rating.

It said Napocor’s overall profitability is likely to remain weak due to the company’s limited directive. It said the country’s principal provider of electricity for the small power utilities group areas also has little flexibility around rates increases, as these are subject to regulatory approval from the Energy Regulatory Commission.

“[ Napocor’s] poor aptitude to generate cash flow is offset by the Philippine government’s ongoing support and guarantee,” it said, adding the continuity of this sovereign guarantee remains the primary consideration for its ratings on the company. —