Frankly Speaking

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EXCLUDE 1MDB as well

The Association of Independent Power Producers (Penjana Bebas) has called on the Energy Commision (EC) to exclude Tenaga Nasional Bhd from competing in future tender exercises to build power plants because it has a significant advantage over them.

The contention by Penjana Bebas is valid. Tenaga, by virtue of being the sole off-taker of power in the country, has a significant advantage. It also gets cheaper funding compared with the others because the government is its ultimate owner.

The key parameter the EC takes into account in deciding the winner of a tender process is which proposal is able to provide electricity at the cheapest cost to the system.

Among the factors that determine this is the availability of cheap financing because power plants involve huge upfront cost. In this respect, Tenaga seems to have an advantage.

It won the tender for a 1,071mw combined cycle power plant in Prai last year and is the preferred bidder for the construction of a 1,000mw coal-fired power plant to be completed on a fast-track basis.

Another tender yet to be decided is the construction of a 2,000mw coal-fired power plant in which six parties, including Tenaga and 1Malaysia Development Bhd (1MDB), are in the running.

Apart from Tenaga, 1MDB has a significant advantage in securing relatively cheap financing by virtue of the government being its sole shareholder.

This was evident in its acquisition of power plants from Tanjong plc and the Genting group, as well as a 75% stake in Jimah Energy in early July.

1MDB has managed to expand its power generation business within a short time through borrowings because bankers view it as an entity that will not be allowed to fail.

So, if Tenaga is to be excluded from power plant projects, 1MDB should also not be allowed to tender for such projects too.

Sudden change in Petronas' strategy

Petroliam Nasional Bhd (Petronas) announced on August 1 that it had decided to procure its own liquefied natural gas (LNG) tankers to meet its transport requirements.

Petronas says in the statement that this is a strategy to "optimise" the value of its LNG business, adding that this will allow it to have direct access to LNG shipping capacity at the lowest possible cost.

This is a rather unexpected move by the national oil firm, which has over the years chartered LNG tankers from its subsidiary, MISC Bhd, since it bought into the shipping giant in the late 1990s. Why the sudden change of strategy?

Coincidentally, the decision comes a few months after Petronas' failed attempt to take MISC private at RM5.50 per share. Petronas currently holds a 62.67% stake in MISC.

In the announcement, Petronas says it will be engaging MISC Bhd to provide project management and technical consultancy services for the construction of the new LNG ships, given MISC's extensive experience and expertise in the LNG shipping sector and familiarity with its business needs.

But like it or not, the national oil corporation's decision to build its own fleet of LNG tankers does not augur well for MISC's growth prospects.

The latest development implies that MISC may not play a role in Petronas' ventures in Canada. MISC's tankers will probably be left with plying the route from Bintulu to Japan, South Korea and Taiwan.

What's surprising is that MISC has a lean balance sheet that will enable it to build up a cash pile, should it need to expand its fleet. So, why must Petronas look beyond its subsidiary?

Why not buy all?

During the week prior to August 5, Tiong Nam Logistics Holdings Bhd announced a proposal to repurchase the assets it had disposed of to special purpose vehicle ABS Logistics Bhd (ALB) in 2006 for RM176.3 million.

Back then, it sold 23 properties to ALB for RM191.56 million under an arrangement whereby Tiong Nam leases back the properties. This allowed Tiong Nam to raise funds to repay borrowings and for working capital.

Under the arrangement, Tiong Nam had the option to purchase the assets from the fifth year. The option would expire 12 months before the expiry of the 10-year lease period.

In the announcement during that week (July 29-Aug 5), Tiong Nam said if it did not exercise the option to repurchase, ALB would be free to sell the assets to a third party. The assets, located in several states in the peninsula, are instrumental to its logistics business, it added.

If these were sold, there is no assurance that Tiong Nam will be able to lease them from the new owners. Thus, it is acquiring the assets.

However, ALB had already sold two of the 23 assets. Also, one asset that currently houses Tiong Nam's corporate headquarters will be left with ALB, as this asset is not used in its logistics business.

Furthermore, it has other parcels of land in Johor on which it can build a new corporate headquarters.

Instead of leaving that one asset with ALB, Tiong Nam should exercise the option to buy it too, given future opportunities to redevelop the land. With the rising interest in Johor properties, surely Tiong Nam sees the investment case for acquiring this asset. After all, it has just proposed to acquire 20.

This story first appeared in The Edge weekly edition of August 5-11, 2013.