Renegotiations completed. The Energy Commission has completed the renegotiations for the first-generation Independent Power Producers (IPP), comprising five PPAs. The outcomes are: 1) Tenaga has been offered to build, own and operate a new power plant in Prai; 2) two IPPs (Genting Sanyen Power, Segari Energy Ventures) will be granted a 10-year PPA extension; 3) three IPPs (YTL Power, Powertek Berhad, Port Dickson Power) will be discontinued upon expiry of their PPAs; and 4) Tenaga’s Pasir Gudang plant will extend its services for another five years. At first glance, the terms and revised tariffs appear reasonable.

Sweetheart deals are over. The key takeaway of this development is that the renewed deals were done on a commercial basis at competitive rates. We estimate project IRRs to be in mid-single digits, a vast improvement from the mid-teen IRRs enjoyed by the first-generation IPPs. Furthermore, PPAs of obsolete non-viable power plants were not renewed and will be allowed to lapse upon maturity.

Impact on Malaysian power related companies

Tenaga Nasional benefits the most. Tenaga benefits in three ways. First, the new Prai power plant with a capacity of 1,071MW will boost its installed capacity by 9.3%. Second, the new IPP tariff is reasonable and not a burden. Third, its Pasir Gudang plant receives a five-year extension. Its share price should receive a lift from this development. Maintain BUY with an unchanged target price of MYR7.70/share.

YTL Power lost this round, but expected. YTL Power’s plants did not get their licenses renewed, but this is within our expectation. Its power plants are effectively at the end their useful lives, and are no longer competitive. Our implied value for its Malaysian power plants is a mere 10sen/YTL Power share, and therefore this development is a non-event for us. Maintain BUY with an unchanged TP of MYR2.20 on a 10% discount to our SOP-based valuation of MYR2.45/share.

Malakoff (under MMC) on good route to relisting. Malakoff obtained a 10-year extension for its Lumut plant under Segari Energy Ventures with a tariff of 36.3sen/kWh. This extension was expected given the scale of the plant, its high operational reliability (>90%) and the fact that it is has hardly been fully used (<50% utilisation) for the past six years. Malakoff is wholly owned by MMC (MMC MK, Not Rated) and is slated for an IPO early 2013. This is a positive development for its IPO effort.

Sime Darby will let PD Power’s PPA lapse. We understand that Port Dickson Power did not seek an extension for its PPA. This is not a surprise given that this is peaking plant which close to the end of its life. The move is also in line with the group’s strategy to exit the power sector and focus on other, more lucrative businesses. The impact of the PPA expiry is immaterial as Port Dickson Power only contributed to 1.4% of Sime’s group PATAMI for FY12. Maintain BUY on Sime with an unchanged TP of MYR11.00 based on 16x FY6/14 PER.

Tenaga Prai. This is the latest power plant project to be awarded by the Energy Commission (EC) after a bidding process. Competition was stiff; it was reported that as many as 18 participants ranging from local to international consortiums submitted bids. Tenaga has successfully outbid the rest, with a levelised tariff of 34.7sen/kWh and a project IRR of between 6-7%.

The project will cost approximately MYR3.0b and will use Siemens H-class gas turbines. This is one of the most sophisticated and efficient technologies available, boasting a thermal efficiency of greater than 60% (versus Tenaga’s current gas turbine average of 42%) with superior emissions. The final terms and conditions of this project are under negotiations and should be completed by mid-Dec 2012.

Tenaga Pasir Gudang. This is a small-scale power plant in Johor that has been awarded a five-year extension with a levelised tariff of 37.4sen/kWh. We suspect that the purpose of this extension is as a buffer in case the Tanjung Bin power plant expansion faces some delay to its targeted completion date of late 2016. The Pasir Gudang plant is relatively old, and is higher-cost due to its small scale.

YTL Power. Its 100%-owned 1,212MW gas-fired Paka and Pasir Gudang power plants did not have their licenses renewed. Their current PPAs will expire on 30 Sep 2015 as scheduled, as the plants are near the end of their useful lives and no longer cost competitive. We are not overly concerned as we estimate that Paka and Pasir Gudang will only contribute MYR392.2m or 18% to YTLP’s group EBIT in FY6/13. The majority of YTLP’s EBIT is contributed by PowerSeraya and Wessex Water (approximately 50% each), tempered by start-up losses at YES.

Segari Energy Ventures. Segari Energy Ventures was awarded a 10-year PPA extension for its Lumut power plant with a levelised tariff of 36.3sen/kWh. This is the single largest IPP facility in Malaysia with an installed capacity of 1,303MW. We are not surprised at the extension of this PPA given the huge scale of this facility (6.0% of Malaysia’s capacity) and the fact that the plant is in good condition. As shown in the graph overleaf, the plant utilisation rate has been very low for the past six years (<50%) due to gas supply interruptions and other issues. Due to the low usage, the operational reliability factor is good at >90%.

Genting Sanyen Power. This is a medium-scale power plant in Port Dickson that has been awarded a 10-year extension with a levelised tariff of 35.3sen/kWh. We are not surprised at the extension of services due to the strong demand for power in the area from the heavy industries in Port Dickson, the KLIA and upcoming KLIA2 airport. This plant was recently purchased by 1MBD consortium for MYR2.3b.

Powertek Bhd. This 440 MW gas-fired peaking plant did not have its license renewed. This is probably due to its nature as a peaking plant, which implies it is hardly used and redundant under the current power infrastructure as there is plenty of spare capacity in the system. Furthermore, we believe its cost of production is high and therefore not competitive. However, we are surprised by the discontinuation of services because Powertek is owned by the 1MBD consortium, a new shareholder which bought into its parent, Tanjong Energy, this year.

Port Dickson Power. This 440 MW gas-fired peaking plant is 60%-owned by Sime Darby, and 20% each by Malakoff and Tenaga. We understand that Sime and the other partners decided not to seek an extension for this PPA, probably due to its uncompetitive cost structure and inability to provide an attractive base tariff. This is not a surprise as it is in line with Sime’s overall group strategy to suspend further investments into the power sector (as highlighted in our London Non-Deal Roadshow report issued on 19 Sep 2012) given the high capex requirements and relatively lower returns vis-à-vis Sime’s other core businesses.

Source: Maybank Research - 10 Oct 2012