Conglomerate San Miguel Corporation's "strong fundamentals" isn't what it has been painted to have, owing to bad business decisions that resulted in losses piling up for its Asian powerhouse's energy unit.

A recent report by economic think-tank Bloomberg International showed SMC faces a serious backlash in terms of a weakening credit profile and legal risks following the Energy Regulatory Commission's dismissal of its unit SMC Global Power's rate hike petition and multiple sources of financial drain.

SMC could face a shortfall of P46.5 billion, in a best-case scenario, that can reach up to P57.8 billion, not including penalties SMC might incur from the 2019 power supply agreements with Meralco.

The SMC energy unit has threatened to back out of the PSAs that its generation company affiliates South Premiere Power Corp, and SMC Energy Corp. have with distributor Manila Electric Co.

"If it makes good of the withdrawal, SMC Global may face legal risks," the Bloomberg International report said.

A default scenario will cost SMC Global Power P255.5 billion each for its two PSAs over the remaining seven years of the contract. It will also be liable for daily penalties in case it terminates the deals with Meralco unilaterally.

"SMC Global Power's potential termination of 1 gigawatt in power supply agreements with Meralco could curb losses but heighten legal risks," the report added.

PSAs, it said, don't allow SMC to pass through fuel costs and are unprofitable amid rising coal and gas prices.

'Meralco could take legal action if the power utility stops supplying electricity under the PSAs, after an unsuccessful attempt to temporarily hike tariffs," the report said.

(Read the full Bloomberg International report here.)

Crippling penalties loom