UTILITIES (NEUTRAL) Sector News Flash: Prai Shortlist Surprises

THE BUZZ

A StarBizWeek report last Saturday said the Energy Commission (EC) has shortlisted 9 consortia and sole bidders to participate in  the tendering for the Prai Combined Cycle Gas Turbine (CCGT) power project. Sources said the EC hoped to announce the winner of the bid by October or November, with final approval from the Government. The tender this time would be for a capacity of 1000MW to 1400MW. Among the shortlisted are all the 5 Independent Power Producers (IPPs) bound by the 1^st generation Power Purchase Agreements (PPA).

OUR TAKE

• The going so far. To recap, the sequence of events is as follows:
• Dec 2011 – Government announced plans for 4500MW of new power plants
• 31 Jan 2012 – Sale of Request for Qualification documents by the EC
• 23 Feb 2012  – The EC received  prequalification statements from 33 buyers comprising 18 consortia and sole bidders
• 16 Mar 2012 – The EC shortlists the bidders to 9 consortia and sole bidders

Some surprise bidders. Among the surprises from the latest announcement is that 9 bidders were shortlisted instead of the earlier expected 5 or 6. Also, some of the names that made it to the  list are non-traditional power players such as CI Holdings and Petronas. While we had expected a  wide  range of  bidders, we also expected many of the non-traditional power players to be  dropped. Nonetheless, these non-traditional players are teaming up with traditional power players, as shown in Figure 1 below. CI Holding’s participation is also a surprise as  the company  had earlier indicated that it intends to take over an ailing business which it would turn around instead of entering a green field business.

But a Long Road Ahead. Despite this development, we note that the award is only expected in October or November. This too is surprising as we had expected the award to be out by July. As such, it will take some time before the winner of this power plant is identified. Also, while another 1000MW of new  capacity should be tendered out, we are uncertain of the rest of the 4500MW as this would depend on whether or not any 1^st Gen PPAs are re-negotiated.

Putting it all into context. We understand from our sources that negotiations on the 1^st Gen PPAs have reopened between the Government and the 1^st Gen IPPs. The 1^st Gen IPPs have been invited to submit proposals whereby the capacity payments  for the PPAs can be reduced immediately in exchange for an extension of some 10 years in their PPAs. The benchmark for these submissions is that the cost of electricity in the renegotiated PPAs must be lower than that  from the new Prai Power Plant. Also, the EC may not accept all the 4105MW of renegotiated 1^st Gen IPP capacity. Instead, indications are that only 2500MW of renegotiated 1^st Gen capacity will be accepted for extension. This ensures that there is competition between the 1^st Gen capacity and the upcoming new power plants as well as among the 1^st Gen IPPs so that only the most efficient get to extend their PPAs. We believe that these steps are the right approach in ensuring that the most efficient parties (whether new plant ups or 1^st Gen extensions)  earn  the right to generate more power in the future.

Not as positive for TNB as some would expect. While the renegotiation of the capacity payments by some of the 1^st Gen IPPs will be beneficial to TNB, it may not be as bottomline-enhancing as some would expect.This is because:

• 1^st Gen renegotiations are expected to be concluded together with the new Prai power plant award. As such, it may only materialize in October or November of TNB’s FY13 Not all of the 1^st Gen IPPs may see their PPAs extended. Early indications are that only 2500MW may be extended
• Some of the cost savings may be utilized to offset  current Government subsidies to pay for all the electricity bills of less than RM20 per month. As such, TNB may not get to enjoy all the cost savings from the capacity payment cuts.
• As an indication, we are assuming that 2500MW of 1^st Gen IPP capacity (or 22.3% of total IPP capacity) will see a capacity payment reduction of 20% while 50% of the cost savings are then used to offset Government subsidies on households with low usage. The net effect is that this may bump up our FY13 TNB profit forecast by 7.2%, or RM159.4m, but this alone would be insufficient to raise our call to a BUY. At the same time, we are still uncertain if the renegotiations will pan out as expected.

Maybe minimally positive  for IPPs. Given that the 1^st Gen IPPs have to compete with both the new Prai power plant as well as against each other, we do not expect any renegotiated PPAs to be lucrative. Hence IRRs may be in the high single digits, or just over 10%. As such, we do not expect the 10-year extension on PPAs to be particularly value enhancing for the IPPs, especially given that the upfront profit will drop with the cut in capacity payments.

Neutral for Petronas Gas too. Whether the 1^st Gen PPAs are renegotiated or new CCGT plants are set up, both will require gas supply. As such, this development is bottomline Neutral  for Petronas Gas, which only acts as a transporter of gas.

Maintain NEUTRAL on the sector. As such, we remain NEUTRAL on the sector, with MMC (FV: RM3.70) remaining as our sole Trading BUY.  That too because of its non-power catalysts such its role in the upcoming MRT as well as the impending listing of its subsidiary Gas Malaysia. Certainly, we think that MMC has a good chance of securing the Prai Power Plant given its proximity to MMC’s existing 350MW Prai Power Plant, on top of its partnership with Mitsubishi Corp ensuring Japanese financing for the new plant.

Source: OSK188