My cynical view is that 90 percent of financial
strategy is either tax minimization, regulatory arbitrage (coming up with
instruments to comply with the letter of regulations while violating their
spirit), or accounting charades (complying with the letter of accounting rules
while disguising reality)— Arnold Kling
In this issue
Inside the SMC–Meralco–AEV
Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop
Segment 1.0: The PSEi Debt
Financed Asset Transfer Charade
1A.
Debt, Not Productivity, Drives the Philippine Economy
1B.
The Big Three Borrowers: MER, SMC, AEV The Mechanism: Asset Transfers
1C.
The Circular Boost: A Fragility Loop
Segment 2.0: San Miguel
Corporation — The Minsky Ponzi Finance Core
2A.
Fragility in Plain Sight
2B.
SMC’s Camouflage Tactics
2C.
The Mirage of Liquidity
2D.
Political Angle: Deals, Influence, and the Administration’s Footprint
Segment 2.1 — Meralco: A
Utility Showing Profit, But Hiding Stress
2.1A.
Chromite Gas Holdings: Meralco’s New Largest Exposure
2.1B.
Q3 and 9M Performance: Meralco’s Money Illusion Revenues
2.1C.
GDP Mirage and Debt Surge and Asset Inflation
2.1D.
What This Really Means: Meralco as the Balance-Sheet Absorber
Segment 2.2 – AEV: Revenue
Spikes as Balance-Sheet Shock Absorption
2.2A
AEV’s Q3–9M: Not Evidence of Business Growth
Segment 3.0 — The Batangas
LNG–Ilijan–EERI Triangle
3.A
How One Deal Created Three Balance-Sheet Miracles
Segment 4.0: Conclusion:
How Concentration Becomes Crisis: The Philippine Energy Paradox
Inside the
SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility
Loop
SMC, Meralco, and AEV’s energy partnership reveals how
asset transfers inflate profits, recycle fragility across balance sheets
Disclaimer: This article presents an independent
analysis and opinion based solely on publicly available financial reports,
regulatory filings, and market data. It does not allege any unlawful conduct,
nor does it assert knowledge of internal decision-making or intent by any
company or individual. All interpretations reflect broader political-economic
dynamics and systemic incentives rather than judgments about specific actors.
Readers should treat this as an analytical commentary, not as a statement of
fact regarding any wrongdoing.
Segment 1.0: The PSEi
Debt Financed Asset Transfer Charade
1A. Debt, Not
Productivity, Drives the Philippine Economy
Debt, not productivity, is the engine of the Philippine
economy. We’ve said this repeatedly, but what’s striking in 2025 is how debt
growth has concentrated in just a handful of dominant companies.
Figure 1
In the first nine months of 2025, the 26 non‑bank members
of the elite PSEi 30 added Php 603.149 billion in debt—a growth rate of 11.22%,
pushing their total to an all‑time high of Php 5.979 trillion. This was the second
fastest pace after 2022. (Figure 1, upper window)
The banks were not far behind. Bills payable of the four
PSEi 30 banks rose Php 191.8 billion to Php 1.125 trillion.
Meanwhile, BSP data shows bills
and bonds payable across the entire banking industry climbed 9.34% YoY in
September (Q3) to Php 1.861 trillion, the third highest on record. (Figure 1,
lower chart)
For clarity, let’s stick to the 26 non‑bank PSEi firms.
Note: these figures exclude the rest of the 284
listed companies as of Q2. Because holding companies consolidate subsidiary
debt, there are double counts here. And these are only published
debts—some firms appear to have shifted borrowings into other liabilities or
kept exposures off balance sheet.
Even with those caveats, the Php 5.979 trillion in
published PSEi non-bank debt is large enough to equal:
The Php 603.15 billion increase alone accounts for 75%
of nominal GDP growth (Php 796.224 billion, or 4.96%) in the same period.
In short, the debt of the non‑bank PSEi 30 is not just a
corporate statistic—it is macro‑significant, shaping both banking
dynamics and GDP itself.
1B. The Big Three
Borrowers: MER, SMC, AEV The Mechanism: Asset Transfers
Figure 2
In January–September 2025, the top three debt expanders
among the non-bank PSEi 30—Meralco [PSE:MER], San Miguel [PSE:SMC], and Aboitiz
Equity Ventures [PSE:AEV]—accounted for 52.65% of the Php 603.15 billion
increase. (Figure 2, table and chart)
Meralco (MER) debt more than doubled, rising 139.4% from Php
89.147 billion to Php 213.43 billion Php (+Php 124.283 billion).
San Miguel (SMC) debt rose 7%, adding Php 103.312B,
reaching a record Php 1.581 trillion. Yes, a T-R-I-L-L-I-O-N!
Aboitiz Equity Ventures (AEV) debt jumped 24.26%, or Php 89.945B,
to Php 460.7B.
This was not coincidence.
The synchronized surge reflects the Meralco–Aboitiz
buy-in to San Miguel’s energy assets.
As discussed last August
"Beneath the surface, SMC’s
debt dynamics resemble quasi-Ponzi finance—borrowing Php 681 billion to repay Php
727 billion in 1H 2025, while plugging the gap with preferred share issuance
and asset monetization. The latter includes the deconsolidation and valuation
uplift of its residual stakes in the Ilijan power facility and Excellent Energy
Resources Inc. (EERI), as well as the $3.3 billion LNG deal with Meralco and
AboitizPower in Batangas. Though framed as strategic partnerships, these
transactions involved asset transfers that contributed heavily to the surge in
reported profits.
"The simulacrum of
deleveraging—from Php 1.56 trillion in Q4 2024 to Php 1.506 trillion in Q2/1H
2025—appears to be a product of financial engineering, not structural
improvement."
In other words, SMC’s Q2 “deleveraging” was cosmetic.
Its debt didn’t fall because operations improved; it fell
because SMC dumped assets, liabilities, and valuation gains onto Meralco and
Aboitiz.
1C. The Circular Boost:
A Fragility Loop
This buyout sequence increasingly resembles an asset
transfer charade:
- SMC unloads assets with embedded liabilities.
- Meralco and AEV borrow heavily to “acquire” them.
Both sides book accounting gains via fair-value
adjustments, reclassification, and deconsolidation.
- Optics improve—higher assets, higher income, stronger
balance sheets.
- Substance does not—real cash flow remains weak, debt
dependence accelerates, and system-wide concentration rises.
Each company props up another’s balance sheet,
recycling fragility and presenting it as growth.
The Philippine power sector is already intensely
politicized, dominated by quasi-monopolies that operate in their respective
territories. Markets exist only in form; in substance, the sector functions as
a pseudo-market inside an oligopolistic cage.
Approximate generation market shares illustrate this
concentration: SMC
Global ~20–25%, Aboitiz
Power ~23%, First Gen + EDC ~12–18%,
Meralco/MGen
~7–10%, and ACEN ~5–7%
(figures vary by region, fuel type, and year).
Recent deals only deepen this centralization,
reinforcing the economic and political power of these dominant
players, while regulatory bottlenecks and concentrated capital ensure that true
competition remains largely symbolic.
Segment 2.0: San Miguel
Corporation — The Minsky Ponzi Finance Core
The Chromite Gas Holdings acquisition is central to
understanding SMC’s 2025 numbers.
MGen acquired 60% and Aboitiz’s TNGP took 40%, giving Chromite a 67% stake in
several former San Miguel Global Power (SMGP) entities. SMGP retained 33%. This
was not an expansion — again, it was an asset transfer.
Q2: The Illusion of Improvement
This maneuver produced a dramatic one‑off effect
in Q2:
- Debt dipped slightly from Php 1.511 trillion (Q1) to Php 1.504
trillion.
- Cash surged +26.5% YoY to Php 321.14 billion.
- Profits exploded +398% YoY, from Php 4.691 billion to Php
23.4 billion.
Q3: The Underlying Reality Reappears
But the illusion unraveled in Q3:
- Revenues contracted –4.5% in a weak economy.
- Profits collapsed –49.5% to Php 11.9 billion.
- Cash rose again +22.4% to Php 344 billion.
Figure 3
Debt
soared Php 103.312 billion YoY, Php 76.28 billion QoQ, bringing total debt
to a staggering Php 1.58 trillion. (Figure 3, topmost graph, middle table)
2A. Fragility in Plain
Sight
Even with the current the sharp rebound in SMC’s share
price — whether due to benchmark-ism (potential gaming market prices by the
establishment to conceal embedded fragilities) or implicit cross-ownership
effects from the Chromite transaction — market cap remains below Php 180B.
- Borrowing growth this quarter alone equaled ≈40-45%
of SMC’s entire market cap (as of the third week of November).
- Debt outstanding exceeds annual sales.
- Debt equals 4.44% of the entire Philippine financial
system’s assets.
This is not normal corporate leverage.
This is systemic leverage.
2B. SMC’s Camouflage
Tactics
SMC has been masking its worsening debt structure
through:
- Preferred share issuances (debt disguised as equity),
another Php
48.6 billion raised in October.
- Asset transfers involving Meralco and Aboitiz (the
Chromite–Ilijan–EERI triangle)
- Aggressive fair-value reclassification and balance-sheet
engineering
All three are textbook Minsky
Ponzi Finance indicators: Cash flows cannot meet obligations; survival
depends on rolling over liabilities and selling assets.
2C. The Mirage of
Liquidity
SMC reports cash reserves (Php 344 billion) rising to nearly
matching short‑term debt (Php 358 billion). (Figure 3, lowest diagram)
But internal breakdowns suggest:
- A portion of “cash” is restricted
- Some is pledged to lenders
- Some sits inside joint ventures
Balance-sheet “cash” includes mark-to-model items tied to
asset transfers
Meaning: true liquidity is far lower than
reported.
2D. Political Angle:
Deals, Influence, and the Administration’s Footprint
In the current political climate, the administration’s
footprint is crucial for every major economic deal.
SMC’s transactions likely benefited from proximity
to the leadership — but political shifts also show how influence-connection-network
shapes outcomes across the corporate landscape.
Take the Villar group: after apparently losing favor with
the administration, their Primewater
franchise has been terminated in several provinces, and authorities have cracked
down on their real estate assets, claiming prior valuations were inflated.
The SEC even revoked
the accreditation of the appraiser involved.
Meanwhile, MVP of Meralco reportedly
eyes Primewater, underscoring how political favor reshapes corporate
fortunes. Where Villar faces contraction, SMC and its allies (Meralco, Aboitiz)
secure expansion through administration‑blessed asset transfers.
In any case, it is possible that the deal had
administrative blessing—or at least the nudge, given the proximity of the
principals involved. The other possible angle is that this could be an
implicit bailout dressed up as a buy-in deal.
But the more important point is this:
Even political closeness cannot permanently mask
structural insolvency.
SMC is too big to fail on paper — but too
debt-bloated to hide forever, or political cover buys time, not solvency.
Segment 2.1 — Meralco:
A Utility Showing Profit, But Hiding Stress
2.1A. Chromite Gas
Holdings: Meralco’s New Largest Exposure
Meralco’s
Chromite Gas Holdings investment has become its largest exposure among
joint ventures and associates, carried at Php 84.08 billion in 2025. Yet,
despite the size, Chromite has contributed no direct revenues so far.
The assets acquired from San Miguel Global are framed as
enhancing Meralco’s ability to deliver
reliable, stable, and cost‑effective electricity—but the numbers tell a
different story—one shaped more by accounting and regulatory pass-throughs
than by genuine economic or demand strength.
2.1B. Q3 and 9M
Performance: Meralco’s Money Illusion Revenues
Figure 4
The headline 4% GDP in Q3 exposed Meralco’s fragility:
- Revenues in gwh: –2.08% YoY, –6.64% QoQ.
- Electricity sales in pesos: +7.09% YoY, –3.35% QoQ.
- 9M gwh sales: –0.37% YoY, while peso sales rose +6%.
- Profitability: +18.19% in Q3, +9.93% in 9M.
This is classic money illusion: peso revenues rise
while physical demand falls. (Figure 4, upper and lower graphs)
Operational output is not driving earnings.
Instead, tariff pass‑throughs, higher generation charges, and regulatory
adjustments inflate nominal sales. It is a regulatory inflation windfall,
not genuine demand strength.
2.1C. GDP Mirage and Debt
Surge and Asset Inflation
Meralco’s results reinforce that Q3 GDP was effectively
lower than the 4% headline once adjusted for inflation and real‑sector
contraction. Nominal growth masks real decline—exactly the GDP mirage motif
you’ve been threading.
More troubling is the balance sheet:
- Debt surged +139% to Php 213.4 billion.
- Assets inflated +34.5% to Php 792 billion.
This scale of short‑term expansion is not normal
for a utility. It only happens when major assets are shuffled, revalued, or
purchased at non‑market prices. Capex and operations do not explain it. Asset
transfers do.
2.1D. What This Really
Means: Meralco as the Balance-Sheet Absorber
Regulated returns (tariff-based profits) look stable, but
the underlying structure is growing riskier. A utility with:
- falling physical demand,
- surging debt, and
- massive non-operational asset expansion
is not strengthening — it is absorbing leverage for some
entity.
And that entity is SMC.
The Chromite/Ilijan/EERI structure effectively places
Meralco in the role of balance-sheet absorber for San Miguel’s asset-lightening
strategy.
Meralco’s earnings stability conceals a fragile,
debt-heavy balance sheet inflated by SMC-linked asset transfers, not by real
demand or utility fundamentals
Segment 2.2 – AEV:
Revenue Spikes as Balance-Sheet Shock Absorption
Almost the same story applies to Aboitiz
Equity Ventures.
While AEV publicly emphasizes energy security, stability,
market dominance, and regulatory
influence as its core
priorities, the weakening macro economy reveals a different angle.
Figure 5
AEV posted Q3 revenues of +19.6%, pushing net income up
+12.8%. (Figure 5, upper visual)
But on a 9M basis, revenues were only +2.84% while net
income fell –10.6% — a clear mismatch between quarterly momentum and
year-to-date weakness.
In its 17Q
report, AEV notes that fresh contributions from Chromite Gas Holdings, Inc.
(CGHI) drove the 5% rise in equity earnings from investees. This aligns
precisely with the pattern seen in Meralco: newly consolidated or newly
transferred assets creating a one-off jump.
Meanwhile, the balance sheet shows the real story:
- Debt surged 24.3% to Php 460.7B
- Cash jumped 15% to Php 90.84B
- Assets expanded 14.94% to Php 971B
A sudden Q3 revenue surge combined with a weak 9M total
is entirely consistent with:
- Newly absorbed assets booking revenue only after
transfer
- Acquisition timing falling post–June 2025
- Consolidation effects appearing sharply in Q3
This means the revenue spike is not organic growth
— it is the accounting after-effect of assets acquired or transferred in 1H but
only recognized operationally in Q3.
AEV’s cash swelling amid rapid debt accumulation strongly
suggests:
- bridging loans used during staged acquisition
payments
- temporary liquidity buffers ahead of full
transfer pricing
- staggered settlement structures typical in
large utility-energy asset sales
- pending regulatory approvals delaying full cash
deployment
Cash rises first →
debt stays elevated →
assets revalue → revenue
shows up later.
This pattern is classic in large asset transfers, not in
real economic expansion.
2.2A AEV’s Q3–9M: Not Evidence
of Business Growth
They are the accounting shadow of San Miguel’s 1H
asset unloading—financed by AEV’s debt surge and disguised as operational
growth.
What looks like stability is really fragility
recycling: AEV, like Meralco, has become a balance-sheet counterparty
absorbing the system-wide effects of SMC’s asset-lightening strategy, with
short-term profitability masking long-term stress.
Segment 3.0 — The
Batangas LNG–Ilijan–EERI Triangle
3.A How One Deal
Created Three Balance-Sheet Miracles
If Segment 2 showed the operational weakness across SMC,
Meralco, and Aboitiz, Segment 3 explains why their balance sheets still looked
strangely “strong.”
The answer lies in one of 2025’s most consequential but
least-understood restructurings:
The Batangas LNG–Ilijan–EERI triangle.
This single transaction is the hidden engine behind the
debt spikes, asset jumps, and sudden income boosts in Q2–Q3.
Once you see this triangle, everything else snaps into
place.
1. The Triangle in One Line
This wasn’t three companies expanding.
It was one deal split three ways, enabling:
- SMC to book gains and create a “deleveraging” illusion
- Meralco to justify its 139% debt explosion
- Aboitiz to absorb a 24% debt spike while looking
“strategically positioned”
All this happened without producing a single
additional unit of electricity.
While the EERI–Ilijan complex is designed to deliver 1,200–2,500 MW of gas-fired capacity, as of Q3 only 850 MW are fully operational and a 425 MW unit remains uncertified — meaning the promised output exists largely on paper, not yet in reliable commercial dispatch. This reinforces the point: the triangle deal moved balance sheets faster than it delivered power.
2. How the Triangle Worked
Here’s the real flow:
- SMC restructured and monetized its stakes in Ilijan, Excellent
Energy Resources Inc. (EERI) and Batangas LNG terminal
- Meralco bought in — financed almost entirely by new debt
- AboitizPower bought in — also financed by new debt
The valuation uplift flowed back to SMC, booked as
income and “deleveraging progress”
The result:
- All three balance sheets expanded
- None of them improved real output
- This was transaction-driven balance-sheet inflation,
not industrial growth.
3. Why This Triangle Matters: It Solves Every Q3
Puzzle
Without this transaction, Q3 numbers look impossible:
- Meralco’s debt doubling despite falling electricity
volume
- AEV’s Php 90B debt jump despite declining operating
income
- SMC’s “improving leverage” despite worsening cash burn
Once the triangle is added back in, the contradictions
vanish:
- Meralco and AEV levered up to buy SMC’s assets
- SMC booked the valuation uplift as earnings
- All three appeared financially healthier — e.g. cash
reserves jumped— without becoming economically healthier (Figure 5, middle
graph)
Q3 looked disconnected from reality because it was.
4. The Illusion of Progress
On paper:
- SMC: higher profit
- Meralco: larger asset base
- AEV: greater scale
In substance:
- SMC gave up future revenue streams
- Meralco and AEV loaded up on liabilities
- System-wide fragility increased— e.g. accelerates
the rising trend of financing charges. (Figure 5, lowest chart)
The triangle recycles the same underlying cash flows,
but layers more leverage on them.
This is growth by relabeling, not growth by
production.
5. What This Signals for 2025–2026
The triangle exposes the real state of Philippine
corporate finance:
- cash liquidity is tight
- banks are reaching their risk limits
- debt has become the default funding model
- GDP “growth” is being propped up by
inter-corporate transactions, not capex
- conglomerates are supporting each other through
balance-sheet swaps
Most importantly:
This is a leverage loop, not an investment cycle. The mainstream
is confusing balance-sheet inflation for economic progress.
The Batangas LNG–Ilijan–EERI triangle created no new
power capacity. Instead, it created the appearance of
corporate strength.
Segment 4.0: Conclusion:
How Concentration Becomes Crisis: The Philippine Energy Paradox
The Philippine energy sector operates as a political
monopoly with only the façade of market competition.
The triad of San Miguel, Aboitiz, and Meralco illustrates
deepening centralization, pillared on a political–economic feedback loop.
Major industry transactions, carried out with either
administration blessing or tacit nudging, function as implicit bailouts channeled
through oligarchic control.
This further entrenches concentration,
while regulatory capture blinds the BSP, DOE, and ERC to mounting risks—encouraging
moral hazard and ever-bolder risk-taking in expectation of eventual
government backstops.
This concentration funnels public and private savings
into monopolistic hands, fueling outsized debt that competes directly with
banks and government borrowings, intensifying crowding-out dynamics, resulting
in worsening savings conditions, suppressing productivity gains, and
constraining consumer growth.
Fragility risks do not stop with the
borrowers: counterparties—savers, local and foreign lenders, banks, and bond
markets—are exposed as well, creating the potential for contagion across
the broader economy.
The feedback loop is self-reinforcing: policies
fuel malinvestments, these malinvestments weaken the economy, and weakness
justifies further interventions that deepen concentration, heighten
vulnerability, and accelerate structural maladjustments.
Viewed through a theoretical lens, San Miguel’s
ever-expanding leverage fits a Minsky-style financial instability
pattern—now extending into deals that serve as camouflaged
backstops. This reflects what I call "benchmark-ism": an
engineered illusion of stability designed to pull wool over the public’s eyes,
mirroring Kindleberger’s cycle of manipulation, fraud, and corruption.
Taken together, these dynamics reveal unmistakable
symptoms of late-cycle fragility.
What is framed as reform is, in truth, a vicious cycle
of concentration, political capture, extraction, and systemic decay.
____
references
Prudent Investor Newsletters, Q2–1H
Debt-Fueled PSEi 30 Performance Disconnects from GDP—What Could Go Wrong,
Substack, August 24, 2025
Prudent Investor Newsletters, Is
San Miguel’s Ever-Growing Debt the "Sword of Damocles" Hanging over
the Philippine Economy and the PSE? December 02, 2024
