How Worthless Are 1MDB Power Assets?

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With all the information reported by the Edge digital, I guess the big "hoohaa" about 1MDB buying worthless power assets (because PPA expiring soon) is an episode of Benny Hills Show (or, if Malaysians are not familiar with the British comedy, let us use Jangan Ketawa or Scenario)

MALAYSIANS, including me, have been following the 1MDB issue quite closely particularly from the business perspective. The biggest issue is of course the RM42 billion debt that is claimed to be backed by assets worth RM52 billion. There are many components to this RM52 billion but I will need the full Balance Sheet to analyse it, which I do not have. Nevertheless, some qualitative comments can be made and in this case, I would like to refer to the power assets, the power plants. The amount paid for the power plants was alleged to have been overpriced as those are plants with Power Purchase Agreements (PPA) that will expire soon. How true is this?

The Edge digital article for yesterday's edition (1 August 2015) "Can TNB get a good price for 1MDB’s power assets?" reported some delightful information. Why delightful? Well, now I am comforted that many of those power plants do still have significant remaining concession years under each PPA. It should be noted that 1MDB paid RM12 billion and assumed RM6 billion of legacy debt to buy all the power plants. The Edge says "1MDB may be hoping for RM18 billion to RM21 billion in terms of enterprise value, but industry executives estimate that the assets might only be worth around RM14 billion in these fire-sale circumstances." They further said that it is not fire-sale time and there are immense interest from a bunch of people including from Qatar, China, Malaysia, Philippines, Indonesia, Saudi Arabia and others to buy those power assets.

In this case, they might just be able to get the RM18 billion to RM21 billion that they were hoping for. In fact, if not break even to recover acquisition price as well as the assumed debt, they may even get profits out of it. Now, what would be a good indicator for those power assets to be able to meet that value expectation? One of the answer would be the remaining useful lives of those assets as I had mentioned earlier. The Edge digital had listed the power plants in their article (as reprinted in the below table). As mentioned earlier, only small portion of that portfolio will expire soon (or has expired). 

Looks like only Teluk Gong and EPC in Bangladesh is expiring soon or expired recently. The 2 totals to 550MW which is small when compared to the total of 5,594MW that 1MDB owns. The PPA that is expiring in January 2016 could easily be renewed by the Government (Via Tenaga Nasional Berhad). The other one that has expired is a small 110MW power barge moored off Bangladesh that is still running and in negotiations with the Bangadeshi Government for an extension. Even if the extension is not given, the barge can simply sail to another area where power is needed.

With all the information reported by the Edge digital, I guess the big "hoohaa" about 1MDB buying worthless power assets (because PPA expiring soon) is an episode of Benny Hills Show (or, if Malaysians are not familiar with the British comedy, let us use Jangan Ketawa or Scenario). I think 90% of the people have or had this perception (of worthless assets) but we are now revealed, with this enlightening information, that the reality is contrary to the popular believe. My sincere hope is that 1MDB can recover monies (with profits) so that the Rakyat's interest (in our sovereign wealth) can be protected. Amen.

* kopihangtuah

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