1MDB bags power plant deal, IPO could be delayed

by **Cals** Tue 02 Sep 2014, 10:29

Business & Markets 2014

Written by Ben Shane Lim of theedgemalaysia.com

Tuesday, 02 September 2014 10:16

KUALA LUMPUR: 1Malaysia Development Bhd (1MDB) has bagged a contract to build a 2,000mw combined cycle gas power plant in Melaka from the government, said industry sources, giving a boost to its upcoming listing of its power assets.

When contacted by The Edge Financial Daily, 1MDB officials declined to comment.

Interestingly, this comes after a spate of reports raising concerns about a shortage in the nation’s power reserves margin.

Sources also said 1MDB’s power asset-initial public offering (IPO) has been delayed till early next year and the amount raised from the IPO could be increased to RM4.5 billion. The listing was originally slated for the end of this year to raise RM3 billion.

The reason for the delay is not known, but it would certainly help accommodate another power project award.

If 1MDB were to secure this project, this would be the third it has won this year leading up to its proposed listing. It would be a big boost to 1MDB, since it paid a high price for the RM12 billion worth of power assets that it acquired in the past three years.

1MDB’s power assets contributed an estimated RM1.2 billion in write-downs for impairment of goodwill in its financial year ended March 2013.

Gas-fired plants are relatively simpler, smaller and cleaner to build and operate than coal-fired plants.

An industry expert estimated that it would take two years to complete a 2,000MW plant. Such a plant would only need about 60 acres (24.3ha) of land, he added.

According to sources, the 2,000MW project awarded to 1MDB, however, comes with certain caveats. They include capping the maximum internal rate of return for the project to about 11%. Nonetheless, such a project would certainly help justify 1MDB’s plans to raise more money from the IPO.

On top of that, this is not the only catalyst for 1MDB. Previous reports also indicate that 1MDB is proposing to plant up another 2,000MW coal-fired power plant in Pulau Indah, Klang, on a 300-acre piece of land from that was acquired from Tadmax Resources Bhd for RM317.3 million last year.

Earlier this year 1MDB won the RM11 billion, 2,000MW coal-fired power plant project known as 3B in a controversial open tender, which has since been named Jimah East. 1MDB then secured a 50MW solar project on a direct award basis a month later.

It is noted that 1MDB through its subsidiary Powertek Energy Sdn Bhd, controls two power plants in Malacca — Teluk Gong Power Station 1 and Teluk Gong Power Station 2. The power purchase agreement (PPA) for the 440MW open cycle Teluk Gong Power Station 1 is due to expire in 2016.

This gives rise to speculation that the new award could include replacing outgoing plants. However, it could take up to one year to tear down an existing plant.

This would not be the first time a gas-fired plant has been proposed in Malacca.Other power players have in the past proposed similar projects, albeit on a smaller scale, given Petroliam Nasional Bhd’s (Petronas) liquid natural gas (LNG) regasification plant located in Sungai Udang, Malacca.

Energy Commission (EC) chairman Datuk Abdul Razak Abdul Majid had stated that in the past the regulator would not entertain unsolicited bids, and would focus on handing out projects via open tenders

Nonetheless, this hasn’t stopped a slew of projects from being awarded on a direct basis.

Other than 1MDB’s solar project, the EC has awarded Project 4A, for a 1,100MW to 1,400MW gas-fired plant to SIPP Energy Sdn Bhd and Tenaga Nasional Bhd as its consortium partner. The plant will be located in Johor and SIPP is controlled by Johor’s Sultan Ibrahim Ismail Sultan Iskandar.

When Project 4A was awarded, the EC’s rationale for the direct award was due to the anticipated shortfall in the nation’s power reserve margins. Recall that only a year ago, the EC was adamant that the country had a more than adequate reserve margin of 30%.

The same rationale is being used to justify awarding the new project to 1MDB, said sources.

Nonetheless, grid service operator (GSO) officials have previously come on record to state that the country’s power reserves were sufficient, taking into account the retiring of older power plants and the incoming plant ups.

Following a spate of small localised blackouts in five states back in May this year, the GSO defended the country’s energy security, pointing out that outages were a result of controlled load shedding to protect the grid from an unexpected temporary shortfall in power when one of TNB’s coal-fired plants in Manjung, Perak was forcibly shut down.

Notably, the nation’s power capacity has been hamstrung in the past year or so due to unscheduled shutdowns at Malakoff Corp Bhd’s 2,100MW coal-fired plant in Tanjung Bin and the 1,400MW coal-fired Jimah Power Station that was recently acquired by 1MDB.

Not including the proposed 2,000MW gas project in Malacca, there are 4,450MW of capacity that will be completed over the next three years, while some 3,200MW worth of PPA’s are due to expire.

This article first appeared in The Edge Financial Daily, on September 2, 2014.