National Power of the UK has dropped plans to buy a 20% stake in Tenaga Nasional's 2,420 megawatt (MW) Kapar Power Station, owing to excessive refinancing risks. These stemmed from the fact Tenaga is providing three-year finance for the deal, which involves a 25-year lease on the power plant.
"It was the refinancing risk in year three that was the issue," says Mike Baker, National Power's project development manager in Malaysia.
Under the terms of the deal, Tenaga planned to sell the power plant for M$6.27 billion ($1.65 billion) to a special purpose vehicle, called Kapar Energy Ventures (KEV), split 60:20:20 between Tenaga, Malakoff and National Power. M$2.27 billion would be paid upfront to Tenaga, of which M$908 million would come from Malakoff and National Power. The remaining M$4 billion payable by KEV was going to be financed by Tenaga, with M$1 billion to be repaid over three years and the remaining M$3 billion due for repayment in year three.
Tenaga offered the money at an interest rate of 10% a year and wanted a M$20 million incentive payment as well. Baker says the cost of the financing offered by Tenaga wasn't an issue in National Power's decision to pull out of the deal. "It wasn't really an issue of interest rates. The issue is what would happen if you were, due to market conditions, unable to refinance and repay the loan," he says. Industry analysts in Kuala Lumpur agree the terms of the financing offered by Tenaga weren't unreasonable.
As it is, National Power isn't completely out of the deal. Malakoff, which is 20% owned by National Power, is taking the entire 40% interest Tenaga is selling in Kapar Power Station, giving National Power an effective 8% interest. Had National Power gone ahead with a direct purchase of 20% of the power plant alongside Malakoff, it would have had a 24% stake.
Baker insists National Power is still interested in investing in Malaysian generating assets. "We are still looking for suitable opportunities through our strategic alliance with Malakoff," he says.
Cautious investors
If National Power were backing out of Asia, it would not be alone. Foreign power companies' investments in the region have had mixed success to date. "It could be symptomatic of the sector as a whole. Foreign players are in many cases reluctant to commit fresh capital to this part of the world," says one analyst.
UK, US and German power companies in Indonesia have been taught the meaning of political risk, having seen inflated power purchase agreements signed in the Suharto era (with the assistance of the former president's cronies and kids) ripped up. In China, those power companies which invested have made little or no money to date, with hoped-for tariff increases in many cases having failed to materialize.
In the main, Malaysia, the Philippines and Thailand have all honoured power agreements signed with foreign companies.
