National Power Corp. #BBB# Rating Outlook Remains Stable

Stocks and Financial Services Press Releases Wednesday January 31, 2018 18:05
SINGAPORE--31 Jan--S&P Global Ratings
SINGAPORE (S&P Global Ratings) Jan. 31, 2018--S&P Global Ratings affirmed its 'BBB' long-term issuer credit rating on National Power Corp. The outlook remains stable.

We affirmed the rating to reflect our opinion that there is an almost certain likelihood that the Philippines (BBB/Stable/A-2) would provide timely and sufficient extraordinary support to National Power in the event of financial distress. We have therefore equalized the rating on government-owned National Power with those on the sovereign.

We base our assessment on the following National Power characteristics:
  • Critical role as the only provider of electricity to the Philippine missionary region, which is not connected to the central transmission grid. National Power's explicit mandate is to undertake missionary electrification, which we view as a key social policy initiative of the government. The private sector is unlikely to fill National Power's electricity provider role because of the low profitability of the sector and the narrow market size.
  • Integral link with the Philippine government via 100% sovereign ownership, government appointments to the board of directors, strategies, and significant control over key budgetary and strategic decisions. The government also provides an irrevocable, unconditional, and timely guarantee on all of National Power's debt obligations.

We do not assign a stand-alone credit profile to National Power because the likelihood of government support is almost certain, in our view. In addition, we do not believe government support is subject to transition risk. We believe National Power executes strategic government policies for power sector reforms and it is difficult to differentiate National Power from the Philippine government.

National Power is the principal provider of electricity for the small power utilities group (SPUG) areas. The company's authorized role is to support the Philippine missionary electrification program by utilizing SPUG assets. The Philippine government is encouraging small-scale private sector companies to partake in missionary electrification by providing subsidies, with the aim to overcome shortfalls in the sector.

Additionally, the government has introduced support in the form of a universal charge (in addition to an electricity tariff). However, the missionary electrification business is unattractive in terms of expected capital investment returns, resulting in only a handful of very small locally based private companies entering into the segment.

We believe National Power's overall profitability is likely to remain weak due to the company's limited directive. The company has little flexibility around rates increases, as these are subject to regulatory approval from the Energy Regulatory Commission. National Power's poor aptitude to generate cash flow is offset by the Philippine government's ongoing support and guarantee. The continuity of this sovereign guarantee remains the primary consideration for our ratings on National Power.

The stable outlook on National Power reflects that on the Philippines. Therefore, any rating action on the sovereign would result in a corresponding action on National Power.

The outlook also reflects our assessment that, given National Power's strategic importance to the Philippine government, there will be no significant changes to extraordinary government support for the company, guarantees, or operational framework.

We could lower the rating on National Power by one or more notches if we believe that 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 as highly unlikely.

We could raise the rating on the company if we upgrade the sovereign, provided we believe continued timely and unconditional government support for National Power.

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