"Thread cautiously" on San Miguel Power Global Holdings Corp., or SMPGH, an international think tank advised investors after assessing the prospects of the energy unit of the Asian conglomerate.
The Detroit-based Institute for Energy Economics and Financial Analysis, or IEEFA, issued the call for caution due to SMPGH's piling debts in contrast to its earnings.
In a review of the dominant power producer, IEEFA said the company's elevated net debt-to-earnings and potential difficulties meeting financial obligations "create additional risk of devaluation, particularly in the long term."
Likewise, SMPGH investors were cautioned about its mounting challenges in securing favorable funding terms due to its high fossil fuel exposure and high non-call risk for its sizable US dollar-denominated perpetual securities.
IEEFA said the backing of parent San Miguel Corporation, one of the most diversified Asian multinationals, offers only "some comfort." It said SMC's own elevated debt and "business uncertainties will be critical to monitor" when assessing financial risks to SMGPH.
Thus, due to its ongoing fossil fuel expansion, the company needs more strategic options to address financial risks in the near to medium term.
However, IEEFA expressed the belief that an immediate material pivot toward low-cost domestic renewable energy represents the best hedge against exposure to imported fossil fuels, prices of which remain on an upswing.
A compilation of the financial performance of the SMC units last year showed that only SMGPH tallied a huge loss.
By the numbers
Food unit San Miguel Food and Beverage Inc. reported a P34.6 billion or 10 percent gain; beer unit San Miguel Brewery Inc., a P31.75 billion profit, up eight percent; SMC Infrastructure a P14.24 billion net income, 110 percent higher; San Miguel Foods, P9.218-billion profit, up nine percent; Petron Corp., P6.697-billion, a nine percent increase; Ginebra San Miguel, P4.547 profit, a nine percent growth; San Miguel Packaging Group, 42 percent growth at P1.648-billion, and SMGPH, P3.134 billion or an 80 percent loss.
SMGPH controls 4,719 megawatts or MW of operational power capacity, making it the largest power generation company in the Philippines by installed capacity.
As of April 2022, the company owned 21 percent of installed capacity nationally and 28 percent of the Luzon grid, the largest of the three Philippine grids.
However, SMC announced a 2050 net-zero target at its annual general meeting in June 2023. IEEFA said, "implementation details are sparse."
SMGPH's existing generation portfolio is dominated by fossil fuel power plants, which comprise 87 percent of its operational capacity. Hydropower accounts for 12 percent. As of August 2023, the company does not have equity interests in wind or solar assets, IEEFA pointed out.
"Without a change in strategy away from dependence on volatile fossil fuels, the company may increasingly find itself locked into financial instability," according to IEEFA's study.
Fitch Ratings research unit CreditSights issued a similar report last year, saying the rising interest and debt payments of SMGPH may affect the company's key projects.
"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 parent's ability to rescue its subsidiaries in a financial fix.