KUALA LUMPUR: Tenaga Nasional Bhd (TNB) has signed a share sale and purchase agreement (SSPA) with 1Malaysia Development Bhd (1MDB) for the acquisition of the latter's 70% stake in Jimah East Power Sdn Bhd (JEP) for RM46.98 million.

JEP is the special purpose vehicle set up to develop the 2,000mw coal-fired power plant in Jimah, Negeri Sembilan, known as Project 3B. Japan's Mitsui & Co Ltd owns the remaining 30% equity interest in JEP.

This follows the submission of a letter of acceptance to the Energy Commission’s addendum to the letter of award issued to TNB on June 29.

In a filing with Bursa Malaysia last Friday, TNB said the 70% shareholding in JEP comprises 3.5 million shares and 259 redeemable preference shares, with a premium of RM99,999 each.

TNB said it will utilise its internal funds to pay for the proposed acquisition.

Upon completion of the proposed acquisition, JEP will become a subsidiary of TNB.

The power plant project has been delayed by 1MDB, which faces cash flow problems as it sits on a RM42 billion debt. However, TNB noted that the actual project development cost incurred by 1MDB was RM83.68 million as at April 17.

“The estimated project costs are RM11.7 billion and will be financed through a combination of project finance and equity. Any debt raised will not have an adverse impact on TNB’s credit profile, and the consolidated gearing will remain within appropriate levels,” said TNB.

“The effects on TNB’s future earnings and earnings per share will only be determined upon completion of the project,” it added.

“For illustrative purposes, based on TNB’s consolidated balance sheet as at Feb 28, 2015, and a debt amount of RM9 billion, TNB’s consolidated gearing will increase from 35% to 42%. The increased gearing is within the appropriate level of gearing for TNB,” said the group.

Etiqa Insurance and Takaful head of research Chris Eng said the RM46.98 million purchase consideration is within expectations, given that the groundwork is already done for Project 3B.

“We believe that taking over Project 3B is positive for TNB. However, concerns remain over whether the national utility company has to take over other Edra Global Energy Bhd's (1MDB's power arm) assets and at what prices,” he told The Edge Financial Daily last Friday.

The project will add another 2,000mw of generating capacity and will increase TNB's generation market share from the current 53.3% to 57.7% by 2020.

Project 3B is expected to meet its scheduled commercial operation date for Unit No 1 and Unit No 2 no later than June 15, 2019 and Dec 15, 2019, respectively.

TNB said the acquisition consideration of RM46.98 million was derived upon the completion of a detailed due diligence conducted by it and its appointed consultants on all technical, legal and financial aspects; verification by TNB’s external adviser for JEP’s accounts and the costs incurred and paid by 1MDB; and the agreed reduction on the costs incurred and paid by 1MDB, and verified by the external adviser.

“Completion is expected within five days upon fulfillment of conditions precedents, and a retention sum equivalent to 15% of the acquisition consideration will be held as security for compliance by 1MDB of its warranties and undertakings pursuant to the SSPA.

“The retention sum will be held for a period of two years in an escrow account in accordance with the terms and conditions of the escrow agreements between TNB, 1MDB and CIMB Commerce Trustee Bhd acting as the escrow agent,” said TNB.

It added that the government approved for TNB to acquire the project at a higher-level tariff as compared with the previous award to 1MDB-Mitsui.

“The higher-level tariff is justified to offset the increase in construction costs and foreign exchange rates,” said TNB.

TNB (fundamental: 1.3; valuation: 1.8) shares fell 4.3% on June 18 to RM12.60, after Energy, Green Technology and Water Minister Datuk Seri Dr Maximus Ongkili announced that the Cabinet had given its nod for TNB’s takeover of Project 3B.

“TNB does not assume any guarantee of 1MDB. [Our] financial obligations will only be in respect of equity funding of JEP,” said TNB in last Friday's filing.

TNB shares closed up two sen or 0.16% to RM12.68 last Friday, with a market capitalisation of RM71.56 billion.

This article first appeared in The Edge Financial Daily, on July 6, 2015.