CMSB says RM266m contingent liability could possibly be reflected in FY2022 statements if unit's PPA deemed terminated

KUALA LUMPUR (May 15): Cahya Mata Sarawak Bhd (CMSB) said a possible contingent liability of RM266 million could be reflected in its FY2022 audited financial statements if the power purchase agreement (PPA) between its unit Cahya Mata Phosphates Industries Sdn Bhd (CMPI) and Syarikat SESCO Bhd is deemed terminated.

In a filing to Bursa Malaysia on Monday (May 15), CMSB said CMPI (formerly known as Malaysia Phosphate Additives Sarawak Sdn Bhd) had already referred a dispute involving the PPA to the Asian International Arbitration Centre under the dispute resolution mechanism of the PPA.

“The final details of the potential impact are yet to be determined as legal and arbitration proceedings are continuing and ongoing, and Cahya Mata will provide further updates as new information becomes available,” said CMSB.

As a result of the Emergency Arbitrator's refusal to grant interim measures, CMPI had commenced a legal action in the Kuching High Court on May 10, 2023 to seek an injunction to restrain SESCO from proceeding with termination of electricity supply to CMPI's plant after SESCO had deemed the PPA terminated.

On May 11, 2023, SESCO had issued a default notice to inform CMPI that the PPA was deemed terminated and that the termination of electricity supply to CMPI's phosphate complex at Samalaju Industrial Park, Sarawak would take effect on May 13, 2023.

On May 13, 2023, SESCO informed CMPI that it would not proceed with the supply disconnection, subject to further advice from SESCO, said the filing.

“Also on May 13, 2023, SESCO issued a letter affirming their purported termination with effect from May 13, 2023 at 12.00pm. The top management of Cahya Mata vehemently disputes the alleged termination and maintain that the PPA is still on foot,” said CMSB in the filing.

CMSB said its top management is continuing to assert its claims through arbitration proceedings and explore all other possible legal recourse to protect all its rights.

CMSB has, based on its 60% (2021: 60%) ownership interest in CMPI, extended an unsecured proportionate corporate guarantee to SESCO to guarantee the payment by CMPI of its obligations under the PPA entered with SESCO.

Under this arrangement, CMPI must either take a minimum electric supply capacity based on the computation in the contract upon commencement of commercial operations or pay for the electricity consumption shortfall.

As of Dec 31, 2022, the integrated phosphate complex has not achieved the stage of completion to produce phosphate on a commercial basis and therefore, CMPI is not deemed to have commenced commercial operations.

However, SESCO has billed CMPI for approximately RM266 million for cumulative electricity consumption shortfall and payment security shortfall as of Dec 31, 2022.

Based on advice obtained from an external legal counsel, the group has evaluated that CMPI is not liable to pay for the amount billed by SESCO on the basis that it has yet to commence commercial operations during that financial year.

As there is a possible obligation arising from this event although the group has assessed that there is no probable outflow of resources to settle the obligation, this event has been disclosed as a contingent liability in this financial statement.

CMPI had provided an irrevocable and unconditional guarantee to a consortium of banks in respect of all CMPI obligations and liabilities in a facility agreement dated Jan 18, 2020 entered into for a credit facility of US$80 million (RM360 million) and RM64.8 million provided that the aggregate does not exceed the facility limit of RM400 million granted to CMPI to part finance the construction and development cost of its project.

“As at the reporting date, no values were placed on the unsecured corporate guarantees provide by the company as the directors regard the value of the credit enhancement provided by the corporate guarantees to be minimal and the likelihood of default to be low,” said CMSB in its 2022 annual report.