SAN MIGUEL Global Power Holdings Corp.’s (SMGPH) fossil fuel expansion is seen facing financial risks, particularly with its transition to liquefied natural gas (LNG), according to the Institute for Energy Economics and Financial Analysis (IEEFA), a US-headquartered think tank.

The volatile fossil fuel prices make the company’s expansion of coal and natural gas-fired power capacity susceptible to financial issues, the think tank said in an e-mailed statement on Monday.

SMGPH, a wholly owned subsidiary of San Miguel Corp., controls 4,719 megawatts (MW) of operational power capacity.

BusinessWorld contacted SMGPH for comments.

In its report, IEEFA cited the 2022 financial year operating results of SMGPH’s key power plants, which showed that higher fuel costs for coal and natural gas resulted in lower operating income.

“In IEEFA’s assessment, SMGPH fell short across all major performance metrics compared with top competitors in the Philippine power market,” IEEFA energy finance analyst Hazel Ilango said.

“And while SMGPH’s earnings have shown improvement in the first half of 2023, ongoing challenges in meeting its financial obligations persist,” she added.

Of its projects in the pipeline, the company aims to complete 1,900 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.

IEEFA projected the company’s energy mix to be 46% coal, down from 62% in June last year. Meanwhile, natural gas is expected to have a higher contribution of 28%, up from 25% previously.

Renewable energy and battery electric storage system capacity are projected to contribute 15% and 11%, respectively.

The think tank said the company’s shift from coal to LNG could “worsen the situation” as LNG is a more expensive fuel than coal and is expected to remain costly.

“SMGPH does not have any active long-term LNG supply contracts, meaning it could remain entirely exposed to extreme volatility in global LNG spot markets,” IEEFA said.

“Finally, none of SMGPH’s existing or proposed LNG-to-power plants have power offtake contracts beyond 2024 that might ensure long-term recovery of fuel costs. This presents a significant risk to the company’s financial well-being,” it added.

IEEFA also said that the company may aim to raise additional capital with the backing of SMC but may struggle to access affordable capital markets due to its “weak financial profile, tight funding conditions, and fossil fuel-focused strategy.”

Another option for addressing financial challenges is to continue trying to pass all fuel costs through to end users through legal or regulatory channels, the think tank added.

“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,” IEEFA LNG/Gas research lead Sam Reynolds said.

“But 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,” he added. — Sheldeen Joy Talavera