- Federal and state governments sign HoA: Last Friday, the Federal and state governments signed the Heads of Agreement (HoA) to finalise the restructuring exercise in Selangor. The HoA is an extension of the Memorandum of Understanding (MoU) that was signed in Feb between the two parties. The state was represented by Mentri Besar Tan Sri Khalid Ibrahim while the Federal government was represented by Energy, Green Technology and Water Minister Datuk Seri Dr Maximus Ongkili.

- HoA covers Langat 2, water restructuring exercise and mitigation projects: The HoA covers both the proposed RM9.65bil takeover of assets belonging to the four water concessionaires in the state as well as the implementation of the Langat 2 water treatment plant (WTP) and its distribution system.

- Key points on the water restructuring exercise:

(i) Transfer of RM2bil worth of assets to PAAB: The state will transfer RM2bil worth of assets not linked to the four concessionaires to Pengurusan Aset Air Bhd (PAAB). The proceeds from this will then be used to acquire the equities of the water assets;

(ii) Consolidation under an SPV: The water operators will be consolidated under a special purpose vehicle (SPV) which will be wholly-owned by the Selangor government and licensed under the Water Services Industry Act 2006 (WASIA); and

(iii) Operating via an asset light model: The SPV will operate via an asset light model by transferring the liabilities and water assets related to the liabilities to PAAB. The SPV will then lease the water assets from PAAB.

- Key points on the Langat 2 project:

(i) Commitment to complete Langat 2 by mid-2017: The agreement outlines the commitment by two parties to ensure the completion of Langat 2 by mid-2017;

(ii) State to issue all approvals: In regards to this, the state is committed to issue all approvals, including those related to land, planning permission, permits and way leaves for electricity transmission lines, needed for the implementation of the project; and

(iii) A special implementation committee and two working committees established: To implement Langat 2, a special implementation committee co-chaired by the Mentri Besar and the Energy, Green Technology and Water Minister was established. In addition, two working committees (including one chaired by the Selangor State Secretary) were established to resolve matters relating to the implementation of the project.

- No water tariff hike for the next three to four years: Following the signing of the HoA, Khalid said that there will be no water tariff hike in the Klang Valley for the next three to four years.

- SPLASH left to accept offer: Recall that K.Abass, Puncak Niaga Sdn Bhd and SYABAS have agreed to their respective offers in the restructuring exercise. SPLASH is the only concessionaire left to accept the offer. Gamuda Bhd, which owns a 40% stake in SPLASH, had noted that the RM250.6mil offer was less than 10% of SPLASH’s NAV of RM2.54bil.

- Fed to ensure negotiations continue: Nevertheless, the Federal government noted that it is committed to ensure negotiations continue between the state and SPLASH to ensure an ultimate closure for the water saga. We understand that a revision in bulk water supply rates could result in SPLASH’s acceptance to an offer.

- Maintain NEUTRAL: We are not surprised with the signing of the HoA as it would mitigate any uncertainties following calls for Datuk Seri Dr Wan Azizah Wan Ismail to take over as Mentri Besar of the state. There are talks that the terms of the water consolidation exercise could be revised if Wan replaces Khalid as the chief executive. Meanwhile, Puncak Niaga Holdings Bhd is expected to sign a definitive agreement on the water restructuring exercise within the next two months. Maintain NEUTRAL.

Source: AmeSecurities