SMC energy unit’s debts flagged anew

San Miguel Global Power Corp., the energy unit of conglomerate San Miguel Corp., received another profit alert, this time from global think tank Institute for Energy Economics and Financial Analysis.

The Detroit-based group warned that without an immediate pivot to renewable energy, the company "risks further locking in exposure to global fossil fuel prices."

It cited SMC's "overexposure to fossil fuels" that has "weighed negatively on the financial health of SMGP in recent years, highlighting risks to its expansion strategy focused heavily on coal and natural gas projects."

A new IEEFA report said the shift from coal to more expensive liquefied natural gas could hinder SMGP's ability to meet growing financial obligations.

"As the largest power generation company in the Philippines, SMGPH should be well positioned to benefit from the country's accelerating shift to renewable energy," Sam Reynolds, the report's co-author and LNG/Gas research lead at IEEFA, said.

He cautioned, however, "without an immediate, material pivot to renewables, IEEFA believes the company is at risk of locking in financial instability caused by overexposure to volatile fossil fuel prices."

Late last year, Fitch Ratings research unit CreditSights also flagged the company stating the rising interest and debt payments of mainly SMGP, that may also affect key projects of the company.

"Given the worsening financial profile of SMC Global Power, any concerns over its hypothetical default raise fears of triggering a cross-default on SMC," the report said.

The highly-leveraged operation of the Asian conglomerate was also a concern raised by Bloomberg Intelligence which indicated that it may impair the ability of the parent to come to the rescue of its subsidiaries in a financial fix.

Caution advised

"SMGP investors should tread cautiously," co-author of the report Hazel James Ilango, an IEEFA energy finance analyst, said.

"The company's elevated net debt-to-earnings, potential difficulties meeting financial obligations, and high fossil fuel exposure create additional risk of devaluation, particularly in the long term," she added.

SMGP aims to complete 1,900 megawatts, or MW, of new coal capacity and 1,313 MW of new gas-fired capacity by 2025, with more than 10,000 MW of proposed gas-fired capacity.

The company also plans to complete 800 MW of solar capacity and 1,000 MW of battery storage capacity in three years.

The IEEFA research said despite a 2018 goal to complete 10,000 MW of renewables capacity by 2028, the company does not yet own any operational wind or solar assets.

"As a result of its ambitious expansion plans, SMGP has increased its capital expenditures dramatically, funded largely by increased loans, bonds, and issuances of perpetual securities," Ilango said.

Since 2019, SMGP has issued more than P232 billion worth of perpetual securities and over P56 billion in bonds.

According to IEEFA's analysis, however, just 0.1 percent funds from its most recent bond issuance in July 2022 went to renewable projects, compared with 76 percent for fossil fuel projects.

In the 2022 financial year, the study said SMGP's operating income fell 22 percent, due largely to higher fuel costs following Russia's invasion of Ukraine.

It also posted an all-time-low EBITDA (earnings before income tax, depreciation and amortization) margin, a measure of operating profitability. Free cash flow, a measure of available cash after capital expenditures, fell to negative P71.3 billion.

"Moreover, SMGP is expected to take almost twice as long, from four years to nine years, to service its current debt based on current earnings, signaling the company's ability to service debt may be under pressure," it added. IEEFA's analysis also revealed major challenges in covering interest payments and capital distributions for perpetual securities holders.

"In IEEFA's assessment, SMGP fell short across all major performance metrics compared with top competitors in the Philippine power market," Ilango said.

"And while SMGP's earnings have shown improvement in the first half of 2023, ongoing challenges in meeting its financial obligations persist," it added.

IEEFA added: "SMGP's liquidity crunch could evolve into a longer-term funding shortfall, with $3.4 billion (P167 billion) of US dollar-denominated perpetual securities callable through 2026. Moreover, its access to low-cost capital could be constrained as global financial institutions increasingly recognize climate-related investment risks," it said.

"SMC's power arm has turned into a cautionary tale on the risks involved in a power business centered on coal and gas as a recent report showed SMGPH's financial issues due to its overexposure to volatile fossil fuel prices," local think tank Center for Energy, Ecology and Development said.