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This article first appeared in The Edge Malaysia Weekly on August 21, 2017 - August 27, 2017

IN anticipation of lower reserve margins in the coming years, Tenaga Nasional Bhd is negotiating with the Energy Commission for a fast-track combined cycle gas turbine (CCGT) power plant, say sources.

It is understood that TNB is proposing to install 600mw to 800mw of additional capacity at the Connaught Bridge Power Station in Klang. Based on an estimated cost of US$550,000 per mw, this project will potentially cost RM1.426 billion to RM1.896 billion. As a brownfield development, however, the actual cost should be lower.

“Typically, it takes about 36 months to build a combined cycle gas plant. But because Connaught Bridge already has the gas supply and the transmission lines in place, it can be built very quickly. TNB is proposing to have the plant online as soon as 2020. It argues that it will be crucial to ensure the country’s reserve margin stays at a comfortable level,” explains one industry executive with knowledge of the matter.

For reference, TNB completed its 1,071mw CCGT power plant in Perai, Penang, and put it into operation in about 28 months.

So why the rush? A slew of power plant projects have been awarded and are already in the pipeline. However, most are running behind on their originally proposed commercial operation dates (CODs).

First, there is the 1,440mw CCGT power plant that was directly awarded to SIPP Energy Sdn Bhd, a company linked to the Sultan of Johor. This project was supposed to be fast-tracked with an original deadline set for mid-2018, which is most certain to be missed.

SIPP, lacking the financial muscle and in-house expertise to undertake the project, needed a partner to help it develop the RM4.7 billion power plant. In May, TNB agreed to take up a 51% stake in the project, a deal that was only concluded last Thursday, after conditions precedent on both sides were met. The COD for this project is set for Jan 1, 2020.

Then, there is the 2,242.13mw CCGT power plant that was directly awarded to Edra Global Energy Sdn Bhd, the former energy unit of 1Malaysia Development Bhd. Although the project was awarded in 2015, the power purchase agreement (PPA) was only signed in April this year.

Edra, now a subsidiary of China Nuclear Power Corp, is expected to complete the first 747.4mw block of the project by the Jan 1, 2021 COD. The second and third generating blocks are set for March 1 and May 1 later that year.

Another 1,000mw to 1,200mw CCGT power plant project was awarded to Tadmax Resources Bhd. However, Tadmax has yet to sign a PPA with TNB. For now, it only has a conditional letter of award.

Against this backdrop, TNB has a generation capacity of 12.904mw, or a market share of 56.3%, in Peninsular Malaysia. Overall, the proposed additional capacity of 600mw to 800mw will add only about 5% to TNB’s existing capacity.

Of course, how lucrative the project will be depends on the tariff TNB is able to command. It is understood that SIPP and Edra managed to secure tariffs of around 38 sen per kW hour — an estimated 38.2 sen and 37.9 sen per kWh respectively.

These tariffs are seen as relatively lucrative. In TNB’s case, securing a similar tariff would be highly attractive since Connaught Bridge has the supporting infrastructure in place.

Last week, TNB’s share price closed slightly higher at RM14.22, up 3.57% year on year. This values the company at a relatively cheap 11.57 times historical earnings. The group’s share price has been trading sideways over the past few months, with some concerns over the upcoming revision in base tariffs next year — a once-in-three-years event.

With an estimated RM33 billion in capital expenditure planned over the next five years or so (based on a report by Malaysian Rating Corp Bhd), TNB needs a solid tariff revision to fund it. As it stands, TNB’s gearing has already been creeping upwards to fund its foreign acquisitions as well as the RM8.98 billion raised to fund its Jimah East power plant.

While not yet at uncomfortable levels, gearing is expected to rise further on the back of a proposed Islamic medium-term notes Sukuk Wakalah programme of up to RM5 billion that TNB plans to use to fund overseas acquisitions and expansion.

Its adjusted gearing ratio stood at 1.25 times while funds from operations debt coverage stood at 0.2 times for FY2017, ending Aug 31, says a ratings report by RAM Rating Services Bhd.

All things considered, the proposed 600mw to 800mw CCGT project would not be a problem for TNB to take on. In fact, it will probably have one of the quickest turnaround times for the utility.

While aggressive expansion is expected to weigh on TNB’s balance sheet, analysts remain relatively bullish on the stock. According to Bloomberg data, there are 18 “buy” calls on TNB, against four “hold” and three “sell” calls. Overall, the consensus 12-month target price for TNB’s shares is RM16.24. This represents a potential 44.7% upside for the shares.

 

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