Jimah East seeks extension

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1MDB Energy Group Bhd has applied for a six-month extension for its 2,000mw coal-fired power plant project, Jimah East, in anticipation of delays in the RM11 billion project.

According to industry sources familiar with the project, the application for extension was submitted to the Energy Commission (EC) following an unexpected disruption to land reclamation works that need to be done at the site.

Jimah East’s first phase of 1,000mw was scheduled for a commercial operation date (COD) of Nov 15, 2018, while the second phase was due in May 15, 2019.

An extension would bode well for 1MDB Energy’s upcoming listing that is expected to raise almost RM10 billion, as well as some RM8.4 billion in sukuk that is being raised to fund the construction of the power plant itself.

This is because it will reduce 1MDB Energy’s exposure to the risk of delays that could result in expensive liquidated ascertained damages (LAD) that could run into several hundred million ringgit.

Delays in the project have long been anticipated due to the extensive amount of reclamation works that need to be completed at the site in Jimah, Negeri Sembilan. It is estimated that over 100 acres of land need to be reclaimed.

To make matters worse, it is understood that works on land reclamation have come to a standstill pending certain approvals from the state government.

Nonetheless, 1MDB Energy’s prospectus was submitted to Securities Commission Malaysia on Nov 14 and the group is currently addressing queries from the regulator. A revised version of the prospectus is expected to be exposed on the SC website sometime this week.

Jimah East, which was also known as Project 3B during the tender stage, is critical to the listing as it will be one of the most visible catalysts in the pipeline for the group. 1MDB Energy does have another 2,000mw project for a combined cycle gas turbine plant, but it has a distant COD of 2021.

Interestingly, 1MDB Energy is in the process of raising some RM8.4 billion in sukuk to fund the construction of Jimah East, which is scheduled to be completed by the end of the month. It is noteworthy that the sukuk was supposed to be issued in two tranches of RM1.1 billion and RM7.3 billion.

The first tranche was originally supposed to be raised by end-August but has since been delayed. Now the entire sum is to be raised by the end of the month. The sukuk will be issued as a bought deal with the lead arranger, AmInvestment Bank, undertaking the bulk of the bonds. Several other investment banks are said to be involved in underwriting the issuance as well.

The sukuk have been given an initial rating of AA-IS by Malaysian Rating Corp Bhd and have an average profit rate (or coupon rate in conventional terms) of 6.27% with maturities ranging from 5½ to 23 years.

“The application has been submitted to the EC, but the EC still needs to meet with other stakeholders like Tenaga Nasional Bhd and the Ministry of Energy, Green Technology and Water (KeTTA) to discuss the implications of an extension while weighing the rationale,” says one industry executive.

By 2018, the 2,000mw block of power would represent an estimated 10% of peak power demand. Any delays in getting this supply of power in would be very costly for the grid system operator and ultimately, Malaysian consumers.

“Energy security is paramount. Malaysia cannot afford to dim the lights … Tenaga will have to find a way to make up for the shortfall and it will be a costly affair. Foregoing the LAD is secondary at this point, tertiary even,” explains another industry veteran.

He says the extension of expiring power purchase agreements (PPAs) are starting to look more likely given another substantial delay — Malakoff Corp Bhd’s 1,000mw coal-fired power plant in Tanjung Bin. Malakoff Corp is controlled by billionaire Syed Mokhtar Albukhary’s MMC Corp Bhd.

On paper, YTL Power International Bhd’s 1,200mw worth of PPAs that are expiring next year are the top candidates for an extension, albeit at lower tariffs.

The situation is exacerbated by the fact that both the delayed plants are coal-fired power plants, designed for baseload. This means that the plants were supposed to be one of the cheapest for Tenaga to generate power from, and are typically operated at maximum load.

Without these plants, older and less efficient plants with higher tariffs will have to be used instead. It is likely that Tenaga will have to burn more expensive fuels as well, like gas.

Ultimately, any additional costs will ultimately be borne by tariff payers, something that the EC, Tenaga and KeTTA will have to think about when considering the extension.

This article first appeared in The Edge Malaysia Weekly, on November 24 - 30, 2014.