RM 10 b Bonds to fund cable project

The Star
Friday September 4, 2009
RM10b bonds to fund cable project
By YAP LENG KUEN

First issuance to commence early next year

PETALING JAYA: Tenaga Nasional Bhd (TNB) and other members of the consortium responsible for the Bakun transmission cable project are likely to raise RM10bil worth of bonds on a staggered basis to fund the eight-year job.
StarBiz has learnt that the first issuance would commence early next year and the consortium was in discussion with the Government for a potentially higher credit wrap to ensure better investor appeal.

“The funding will be sourced domestically as liquidity is still strong. But the bond market is still conservative and investor appetite is still towards the AAA grades,’’ a source said.
In May, RAM Ratings had reaffirmed the long-term ratings of AA1(s) with a stable outlook for TNB’s repackaged Tenaga Income Securities represented by two tranches amounting to RM150mil.

However, a similar rating would not be good enough for the consortium to raise such a big amount and over the repayment tenure of the bonds which may stretch 20 to 25 years.
The consortium – comprising TNB, Sarawak Energy Bhd and the Ministry of Finance (MOF) – is likely to submit its first tranche of bonds for rating some time in the middle of next year.
No doubt the consortium will get to pay lower interest on a higher investment grade but the major benefit will be the cost savings passed back to consumers via a cheaper landed cost of electricity.

“This cost that includes generation and transmission is still being worked out,’’ the source said, adding that jobs for the 1,000km high voltage direct transmission line and 680km undersea cable were likely to be tendered in the first quarter of next year.

The shareholding structure is still not finalised, and neither is the actual amount to be raised.
“The actual figure has not been finalised but the amount will be raised by the consortium on a project finance basis which includes equity (20% or about RM2.5bil) and debt (80%),’’ the source said.

The debt portion is in the form of bonds in tranches depending on the funding requirements.
It will not be raised in one go but over eight years.
On comments that part of the financing should be in US dollars since a lot of imported materials will be used, the source explains that since the project revenue will be in ringgit, raising even a part of the bonds in US dollars will result in a long-term mismatch problem.
Moreover, for US dollar procurements, the consortium can take a short-term hedge.

“Anyway, the country is still enjoying a positive trade balance. So it will not have a negative impact on the balance of payments,’’ he added.

The cable project, which upon completion will result in the longest undersea transmission cable in the world, will cater for the 2,400-megawatt (MW) Bakun hydroelectric dam.
Electricity will be transferred via transmission towers from the RM6bil dam in the Kapit division in central Sarawak to the Bintulu division along the coastal belt and then southwards to the Kuching division. From the southernmost tip of Kuching, the last transmission tower will join the undersea cable that will transmit electricity across the South China Sea to Johor, and then to the rest of the peninsula.At least 10,000MW will be exported to Peninsular Malaysia.

TNB has been a strong advocate for hydro electricity which is more cost effective in the long run compared with electricity produced by coal-fuelled plants.

The fact that hydroelectricity will only be transmitted to the peninsula at the earliest by 2015 (when the first line is ready for take-up of 800 to 1,000MW) poses a challenge for the Sarawak government and MOF as the Bakun hydro generating plant is expected to be completed about two to three years earlier.

A lot of hope is pinned on high energy users such as Rio Tinto Alcan (which is investing in a RM8bil aluminium smelter together with Cahya Mata Sarawak Bhd); Tokuyama Corporation (which recently announced plans to set up a RM2.36bil polycrystalline manufacturing plant in Sarawak) and a potential foreign consortium for a solar panel plant at the Sarawak Corridor of Renewable Energy (SCORE).

In the long term, Sarawak hopes to be an exporter of electricity.
Sarawak Energy had projected some time back that the state would have a total capacity of 10,000MW, out of which 75% will come from hydro.
The projected peak demand through organic growth is expected to reach 1,500 MW, while smelter and other heavy energy users will take up about 4,000 MW. The rest would be exported from Bakun to the peninsula (2,400 MW) and neighbouring states (1,200 MW).