Manila Electric Company: Downgrade to Neutral: Tariff reset risk resurfaces, but dividend yield caps the downside

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Manila Electric Company: Downgrade to Neutral: Tariff reset risk resurfaces, but dividend yield caps the downside

gainst a ~Php70bn industry-wide impact (MER mgmt. estimate). We do DPS - 27E (Php) 34.37 29.24 -14.9%

not see this as the base case given that disallowing largely unavoidable FCFF - 26E (Php mn) (70,578) (71,022) -0.6%

technical losses would push the many DUs and electric cooperatives less FCFF - 27E (Php mn) 28,403 46,469 63.6%

Adj. net income - 27E (Php mn) 62,073 52,808 -14.9%

efficient than MER toward financial stress, and we expect due process to

prevail. A narrower disallowance of only the non-technical, pilferage-related Style Exposure

portion (0.83% out of 5.85% in 2025) would cost just Php2.6bn for MER (or

5% of 2027E base-case). The bigger risk, in our view, is that this will require

amending EPIRA, opening the door to potentially sweeping reforms such as

stricter generation-distribution cross-ownership limits, though it could also

introduce favorable ones, such as generation-based rather than MW-based

market-share caps with rising renewable adoption.

• The narrowing odds of a reset drive our tariff cut. Political posturing seems

to be building ahead of the May 2028 presidential elections, and inflation is

already squeezing consumers as average power retail rates run 15–20%

higher than last year. We no longer assume a tariff award by Jan. 1, 2027 and Please see our takeaway note on potential

have cut our distribution rate to Php1.35/kWh from Php1.61/kWh next year, in

EPIRA amendments here: Philippine

line with the current interim rate. This reflects a 18% cut in RAB to Php203bn,

Power: Proposed power sector reforms

removing both the contingency threshold and CPI adjustment; 55% cut in

bear watching; stricter cross-ownership,