Bloomberg: Lower credit profile, legal risks for SMC energy unit

Bloomberg: Lower credit profile, legal risks for SMC energy unit

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

Meanwhile, SMC president and CEO Ramon Ang said SMC Global Power can weather its present challenges.

Ang's assurances to SMC's debtors were in contrast to the conglomerate's lament to the ERC that it incurred losses of P15 billion due to the PSAs and thus SMC Global Power needed a P4.80 per kilowatt hour total adjustment in rates.

The potential penalty will be huge if Meralco calls a default under PSA.

For starters, a substantial P255.5 billion in charges face SMC Global Power if it unilaterally ends the PSAs.

An industry source said counting the PSAs of SPPC and SMEC, SMC will have to pay up to P511 million within 15 days from the time that Meralco issues a written demand for payment.

SMC Global Power's generation companies also face a penalty for reneging on supplying power to Meralco "due to unavailability of supply from its plant, Wholesale Electricity Spot Market, and any other source."

In such case, "the power supplier shall pay a fine equivalent to P908 multiplied by each megawatt-hour during a day," the PSA read.

Since SMC Global Power has committed to supply a total of 1 gigawatt, the arrears may run up to P28 million a day or P654 million a month.

Under the PSA, this particular penalty "shall be used to reduce the generation charge to consumers."

While the San Miguel Corp. energy arm is citing the PSA provision on change in circumstances for its threat to withdraw from the Meralco deal, it is likely that "termination upon the event of default" may apply if a unilateral pullout happens

SMC Global Power recognizes the possibility of a default in the shelf registration for fixed-rate bonds of P60 billion it filed with the Securities and Exchange Commission.

"SMC Global Power risks a funding shortfall as high as $1 billion by June next year. Most of its $3.4 billion in dollar-denominated perpetual notes, callable between 2024 and 2026, face high extension risk given its rising funding costs and poor liquidity," according to the Bloomberg International report.

Red link

The main source of red ink for SMC Global Power are two power supply agreements that required straight pricing involving the Sual coal and the Ilijan natural gas plants.

Sual is owned by San Miguel Energy Corp. while Ilijan is operated by South Premiere Power Corp.

SMEC and SPPC are generating companies under the SMC energy unit SMC Global Power.

What takes the cake for SMC Global Power, which business news organization Bloomberg described as having a deteriorating credit profile, is its failure to hedge on coal supply amid the soaring global prices and the fouled-up operation of Ilijan that has lost a supplier of natural gas.

SMC Global Power is now buying from the Wholesale Electricity Spot Market just to comply with its contract with Meralco which is proving to be costly.

The Energy Regulatory Commission has dismissed the petition of SMC Global Power for rate increases in the fixed price terms of the PSA for SMEC and SPPC.

An Independent Electricity Market Operator of the Philippines official confirmed to Daily Tribune that SMC Global Power is buying from the spot market.

The official, however, said he can't divulge the volume of the purchases because of the confidentiality agreement in the contracts of the WESM participants.

Nonetheless, whatever higher costs it pays for in the WESM purchases, SMC must absorb because of its straight and fixed pricing PSA with Meralco

The Independent Power Producer Agreement signed in 2010 resulted in SPPC acquiring ownership of Ilijan last June.

Almost simultaneously, SMC Global Power severed a supply contract with the Malampaya consortium for the supply of natural gas.

SMC is relying on the banked gas that it purchased from the government for $1.2 billion and its liquefied natural gas going on stream as a source of fuel for Ilijan.

Both, unfortunately, suffered setbacks as its LNG terminal and power plant project in Batangas has been delayed by protests from environmental groups while the banked gas supply will have to wait until next year.

SMC is trying to jump the line on the banked gas supply by using the state energy firm Philippine National Oil Co. to compel the Malampaya consortium to give it a priority in the supply of banked gas as it threatened to call off the $1.2 billion purchase deal with PNOC-Energy Corp. for the banked gas.

The Lopez group's First Gen Corporation which operates natural gas plants obtained priority for the supply of banked gas which the Malampaya consortium said comprises the whole capacity of its available supply for banked gas until the end of the year

An Offtake Framework Agreement signed between PNOC and the Malampaya consortium in December 2014 provided that the lifting of banked gas is only limited to 35 terajoules annually, which is the entire volume committed to First Gen for the year.

SMC hopes to resume the operations of Ilijan in February next year when it expects Malampaya to start its banked gas supply.

SMC also projects a February resumption in synchronization with the availability of LNG that will be brought into the country at the time.

Instead of an LNG terminal, SMC is using a floating storage unit to supply the gas requirements of the Ilijan plant.

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