PETALING JAYA: Genting Bhd has announced that it was selling its power generation business to 1Malaysia Development Bhd (1MDB) for RM2.3bil. This would also see Genting booking in a tidy extraordinary gain of RM1.9bil for its financial year ending Dec 31.
Genting Sanyen supplies electricity to Tenaga Nasional Bhd (TNB) under a 21-year power purchase agreement expiring in February 2016.
It obtains gas from Petroliam Nasional Bhd under a 21-year gas purchase agreement expiring in November 2015.
Most analysts, in their research reports yesterday, acknowledged that the deal was positive for Genting.
“The book value of Genting Sanyen is roughly RM400mil. Pricing wise, it has a really good deal, considering the power purchase agreements (PPAs) for first generation independent power producers (IPPs) are expiring by 2016. This also solves Genting’s headache. It doesn’t need to worry whether or not the PPA agreement will be renewed or not,” said a power analyst.
However, is it positive for 1MDB?
Certainly, this purchase has made 1MDB the second largest independent power producer (IPP) in the country after Malakoff Bhd. Genting Sanyen has a capacity of 720MW, while Malakoff has a capacity of 7.9GW. On the surface, it looks like 1MDB is paying full price for a power plant that is about to expire soon.
This is 1MDB’s second major power asset acquisition this year after the RM8.5bil deal to buy the power assets of Tanjong Energy Holdings Sdn Bhd from T. Ananda Krishnan in March.
A source close to 1MDB said that the Genting Sanyen plant was situated in Ulu Langat, which is a key energy hub. Therefore, there are high possibilities of the plant operating beyond its present 720MW.
“Do not just look at the RM2.3bil price purely from a static view. Obviously 1MDB is highly confident of the PPA agreement being renewed. There is significant potential to increase the extension of the PPA agreement, as well as the capacity of the plant,” said the source.
It would appear that 1MDB is positioning itself to becoming a competitive player in the IPP sector.
Apart from the acquisition of Genting Sanyen, it is also one of the bidders for the new 1,000MW combined cycle gas turbine Prai power plant. This plant is expected to cost about US$1bil (RM3.1bil).
“With the first generation IPPs going into 1MDB hands, this would make it easier for the negotiation of the IPPs to crystalise. While the terms won’t be as positive as before, with 1MDB involved in the negotiations, the terms still ought to be fairly attractive. Whatever it is, the power business is a cash cow business where the cashflow is pretty certain,” said one power analyst.
1MDB also bought power assets of Tanjong Energy, which owns Powertek, for RM8.5bil.
CIMB Research concurred that with 1MDB paying full price for a soon-to-be expiring contract, the Genting Sanyen plant was likely to be renewed.
“1MDB’s appetite for risk may also entice more power transactions. There is now a shift of generation ownership to public hands, which is positive for TNB,” said CIMB Research.
CIMB added that 1MDB’s 10-year bonds sold for 6% and are guaranteed by the Finance Ministry. This is lower than the 10% to 13% cost of equity for private owners of power plants.
“As a result, we believe new capacity and the first generation PPA renewal process will be priced aggressively at equity internal rate of returns of 8% to 10% from 25% to 30% previously. This could result in capacity payment reductions of about 50% on average,” said CIMB Research.
Malaysia’s power sector has long been afflicted by the first-generation IPPs because they enjoy lucrative terms in their concession agreements since the 90s.
The five first-generation power plants are YTL Power Generation Sdn Bhd, Genting Sanyen Power, Segari Energy Ventures Sdn Bhd, Port Dickson Power Sdn Bhd and Powertek Bhd.
The IPPs have a collective capacity of 4,115MW compared to the country’s overall power consumption of about 21,800 MW
These power producers got sweetheart deals at the expense of TNB, which had to buy up the excess capacity from them.
At that time, TNB was unable to meet the country’s power demand, and IPPs were roped in to supply the additional power at very favourable terms.
The expensive rate has caused TNB to bleed financially as it was forced to pay capacity payments close to RM2bil to the IPPs. Whether or not the power was used, TNB had to pay for the extra power.
CIMB Research sees TNB as the biggest winner from energy reforms.
“Expect more news flow on Malaysia’s energy reforms. After gas imports in September, the regulator could next implement an automatic fuel cost pass-through for TNB,” said CIMB Research.
Source: The Star Dated: 15/08/2012
