Think tank: SMGPH faces liquidity crunch

The declining profitability of San Miguel Corporation's energy unit San Miguel Global Power Holdings Corp. has affected the capability of the company to meet near-term financial obligations, according to a report of the Institute for Energy Economics and Financial Analysis, or IEEFA.

Local groups held a forum on Wednesday ahead of the 133rd anniversary of the Adian conglomerate that focused on the "losing strategy" of maintaining its dependence imported fossil fuel with its planned shift from traditional coal to liquefied natural gas, or LNG.

Think tank Center for Energy, Ecology and Development indicated during the event that SMGPH is implementing "a losing strategy that is having devastating consequences on shareholders and investors, energy consumers, and the environment."

"While SMC is pursuing the country's further dependence on fossil fuel, it is also losing on the actual energy transition development. SMC had lost in the race to secure new permits for renewable energy capacity, which will be built in the next two to three years," Gerry Arances, CEED executive director, said.

Sam Reynolds, author of an Institute for Energy Economics and Financial Analysis, or IEEFA, report titled San Miguel Global Power: Fossil fuel-oriented growth strategy raises financial red flags, said the article detailed the financial issues SMC faces because of its reliance on coal and gas.

IEEFA is a Detroit-based advisory group for energy industry strategies.

He warned the company's overexposure to volatile fossil fuel prices could sink its financial health and that "SMGPH's overreliance on fossil fuels has weakened its financial health — moving from coal to LNG is not going to solve the fundamental problem of overexposure to fossil fuel prices."

SMGPH debts are falling due between 2024 and 2026, according to the study.

The company's financial position would likely remain inadequate to address the callable perpetual securities, amounting to $3.4 billion (P193 billion).

"SMGPH could face a double-edged sword. On one hand, the need to redeem perpetual securities demands additional capital or funding. On the other, opting not to exercise the call option subjects the company to additional financial costs, further straining its financial position," according to IEEFA.

No contract to back up projects

"This is especially true when you consider the company's lack of contracts for its existing and proposed LNG facilities," he added.

SMC's status as one of the country's biggest conglomerates entails that the company should be among those leading the transition away from fossil fuels, Reynolds added.

Reynolds also doubts the company will be able to fulfill the 2050 net zero commitment it unveiled earlier this year.

"Unless there is a major, material pivot within the company to transition to renewables and phase out its fossil fuel expansion plans, the company is going to have very little chance of achieving its 2050 net zero target. Without a strategic, material, immediate pivot, that goal is simply unrealistic," he said.

Liquidity crunch possible

As a result of SMGPH's declining profitability, IEEFA's analysis indicated that its ability to cover near-term financial commitments in the form of debt, interest and capital distribution for perpetual securities may have worsened considerably. This points to an overall liquidity crunch, which could translate to a longer-term funding shortfall if not carefully managed.

IEEFA indicated that its view "aligns with conclusions from Bloomberg Intelligence, which stated that the company may need $900 million (P51 billion) by the end of this year to meet its financial commitments.

"SMGPH's funding constraints also depend on its ability to extend P21 billion worth of short-term loans. There is also a possibility of obtaining local funding due to its connection to parent company SMC," IEEFA indicated.

Its financial SMGPH's perpetual securities come with a notable feature: a step-up interest mechanism. If the call option on the security is not exercised, the interest rate increases by a certain percentage each year.

SMGPH has strategically tapped into the issuance of bonds and loans to fund its expansion plans, increasing its total debt.

Total equity has also grown, driven largely by the company's issuance of perpetual securities.

The paper added that a broader assessment, beyond operating cash flows, reveals a rising liquidity risk for SMGPH.

It measured the SMGPH's cash flow from operations (CFO)-to-current liabilities ratio, the results of which pointed a "concerning trend."

The ratio has been on a downward trajectory since 2019. In 2022, the CFO-to-current liabilities ratio plummeted to an all-time low of -0.12, indicating insufficient cash flow to cover short-term liabilities. The same ratio remained weak in the first half.

Its ratio in 2022 was 1.00, down from 1.43 in 2021, meaning the company has exactly one dollar of current assets for every dollar of current liabilities.

"In essence, the company holds a relatively tight margin of assets available to cover its immediate financial obligations. Meanwhile, the accounts receivable turnover ratio stood at 3.15, marking its lowest value since 2016."