Tenaga may have to take over Project 3B

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GOVERNMENT-OWNED strategic development company 1Malaysia Development Bhd’s (1MDB) financial difficulties and struggle to list its power assets have opened the door to the possibility of Tenaga Nasional Bhd stepping in and taking over the delayed Project 3B.

Sources say the Energy Commission (EC) is worried that any further delay in the construction of the 2,000mw coal-fired power plant, called Jimah East — which is supposed to come onstream in November 2018 — will lead to a power shortage.

They add that the EC and Tenaga are in informal consultation to explore options, including the possibility of Tenaga taking a 70% stake, with Japan’s Mitsui & Co owning the remaining equity interest, as the foreign partner.

At the same time, Tenaga itself is applying to the EC for an extension of time for the 1,100mw to 1,400mw combined cycle gas turbine plant that it is developing together with the sultan of Johor’s SIPP Energy Sdn Bhd.

Politically, it will be tough for Tenaga to take over Project 3B, as it would be seen as a bailout of one government-controlled entity by another. Commercially, however, it might make sense for all the parties involved while ensuring the country gets its much-needed power, the sources say.

Also, keep in mind that it would be equally untenable for the government to allow Project 3B to fail as well.

To recap, 1MDB has until mid-April to secure RM8.4 billion in financing to fund the construction and development of Jimah East. If it fails meet this deadline for the project’s financial close, Tenaga, as the sole off-taker, and the EC have every right to walk away from the project.

This would leave 1MDB high and dry, and jeopardise the already challenging listing of its energy unit, Edra Global Energy Bhd, which has been postponed several times. The listing is crucial for debt-laden 1MDB.

Political repercussions aside, from 1MDB’s perspective, it might make sense to sell its 70% stake in Jimah East, which is expected to incur over RM220 million in penalties, stemming from an estimated one-year delay.

In its current state, Jimah East stands to only hurt Edra Global’s valuations heading into the initial public offering. It might be a better idea to take some cash upfront for the project, instead of struggling to complete it over the next four years, especially considering 1MDB’s negative cash flow.

In fact, industry sources say 1MDB has even been delaying payments to some contractors that have begun work on Jimah East. 1MDB was supposed to have raised the RM8.4 billion in sukuk for the project by end-November 2014.

However, it is learnt that AmInvestment Bank Bhd has pulled out as principal adviser, lead arranger and lead manager of the fundraising exercise. Now, Edra Global is looking to Japan Bank for International Cooperation for funds, but it could be very expensive, given the volatile foreign exchange rates at the moment.

Tenaga’s options

The amount Tenaga will pay for Jimah East would be another political hurdle to cross. An indicative value of the licence could be around RM300 million. That was the amount 1MDB wanted to collect from the RM8.4 billion fundraising exercise for so-called development costs.

With the delays and penalties, however, the amount Tenaga would be willing to pay could be much lower.

More importantly, even Tenaga would have a tough time making a commercial case to acquire the project in its current state. For the acquisition to make sense, Tenaga would have to apply to the EC for an extension to the commercial operation date.

On top of that, Tenaga could also lobby for a tariff hike from the EC to cover cost escalations, keeping in mind the internal rate of return on Jimah East prior to the problems was already very low — around 6%.

Due to the sensitive nature of this proposal, sources say nothing has been put in writing yet and discussions are informal.

In the meantime, Tenaga has been exploring other options through official channels, including submitting unsolicited proposals to the EC to build alternative power plants elsewhere, with the view that Jimah East will be delayed.

Soon-to-be-listed Malakoff Corp Bhd has also submitted similar unsolicited bids to the EC, say sources, proposing to redevelop the 440mw open-cycle Port Dickson power plant that was acquired from Sime Darby Bhd last year.

It is worth noting that Malakoff also has a project of its own that is delayed. The group’s 1,000mw coal-fired Tanjung Bin 4, which is scheduled to be completed next year, is six months to a year behind schedule.

“Can Tenaga walk away from Project 3B [if 1MDB misses the financial close]? Yes. Realistically? No. It will look bad on the EC, but they can give 1MDB more time, maybe one or two years. In the meantime, the grid needs the power, and everyone is trying to get a slice of the action,” explains one industry source.

“Awarding a new project may solve the grid’s power requirements, but extensions won’t solve 1MDB’s problems with Jimah East.”

 At the same time, there is some uncertainty over another project due in mid-2018 — the plant that Tenaga is developing with SIPP Energy.

According to industry sources, the consortium is applying to the EC for an extension of two months for the submission of documents for the project. However, the extension is not likely to affect the commercial operation date of the project as there is plenty of time left.

“It only takes 32 months to power up a gas plant. That means Tenaga and SIPP Energy have until October for financial close. There is more than enough time,” explains a source familiar with the project.

However, some quarters say there is disagreement over the shareholding structure of the project, which, if not resolved, could see Tenaga walk away.

“Tenaga is doing all of the work for the project. They have the resources. Yet, they might end up with a non-controlling stake in the project. If they are not comfortable with the shareholding structure, there is a chance they may walk away from the project,” say the sources.

While it may be a game of brinkmanship, SIPP Energy will probably not be able to develop the project alone, even though it has the sultan of Johor as a major shareholder. The company had only a small team and a total equity of RM70,411 as at March 2012, based on filings with the Companies Commission of Malaysia.

Recall that SIPP Energy was awarded the project on a direct basis last year, together with YTL Power International Bhd and Tenaga as consortium partners. Shortly after that, YTL Power withdrew from the project.

Nonetheless, another source working on the project has brushed off the extension, noting that it was not unusual. “If SIPP Energy and Tenaga can’t develop this project, who can? Both parties are capable of undertaking the project financially and technically,” he says.

With hindsight, YTL Power must be relieved to have avoided all these problems even if it did not get to win a project. In fact, looking ahead, the uncertainty over power supply puts the group in a good position to get an extension for its power concessions, which will expire later this year.

This article first appeared in The Edge Malaysia Weekly, on February 9 - 15, 2015.