PETALING JAYA: 1Malaysia Development Bhd’s (1MDB) latest annual report for the financial year ended March 31, 2014, has revealed details on the salient terms for its purchase of power plants in 2012 that had paved the way for its fast-track entry into the sector.
Based on the deals it had entered into with the Usaha Tegas group and International Petroleum Investment Company PJSC (IPIC), 1MDB’s entry cost is estimated to be as high as RM4.29bil for the purchase of the Powertek and Genting power plants, which eventually led to it getting three other power plant projects in the country.
The cost comprises the goodwill incurred, the cost to buy out IPIC’s options, the cost to buy out the option from Usaha Tegas should it not convert its warrants to equity in 1MDB’s power division listing, and the fees paid to Goldman Sachs to raise US-dollar debt papers tied to the purchase of the two power plants in 2012.
This does not include the opportunity cost of putting an estimated RM4bil in as deposit that was held as collateral for the IPIC guarantee.
In the same annual report, 1MDB revealed that it would get a dividend of RM435mil from its US$2.3bil (RM7.1bil) invested in a Cayman Islands-based Segregated Portfolio Co (SPC) and managed by a firm in Hong Kong. The amount is paltry compared with the cost incurred in making its foray into the power sector.
According to the annual report, 1MDB had incurred a goodwill of RM2.6bil to buy the power plants owned by Tanjong plc and the Genting group in 2012. The goodwill is part of the RM10.88bil that 1MDB had paid for these power assets to mark its foray into the power sector in which it had no track record.
During the purchase, 1MDB also issued US$3.5bil debt papers in two tranches of US$1.75bil each. The papers were issued by 1MDB Energy Ltd and 1MDB Energy (Langat) Ltd.
One of the tranches – 1MDB Energy Ltd – was arranged by Goldman Sachs, and according to a weekly, the fees incurred was RM627.84mil (US$196.2mil).
The US-dollar debt papers were secured by guarantees from IPIC, a company backed by the Abu Dhabi Government.
IPIC came into the picture as the owner of the Tanjong power plant was not comfortable with guarantees from 1MDB, as it would have been perceived to be receiving favours from the Government. This is because 1MDB is wholly owned by the Federal Government.
Subsequently, IPIC guaranteed the US-dollar debt papers to the tune of US$3.5bil (RM11.2bil) to facilitate 1MDB’s purchase of the power plants from Tanjong and Genting.
In return for the corporate guarantee from IPIC, 1MDB had given a 10-year option to Aabar Investments PJS to acquire up to a 49% equity interest in the Tanjong and Genting power plants when the energy division goes for listing.
The annual report stated that 1MDB had taken a bridging loan facility worth US$250mil (RM836mil) in May this year and that the proceeds were used to extinguish the options granted to IPIC.
Bankers said 1MDB’s entry into the power sector would have cost less had it utilised the US$2.3bil funds invested with the SPC in the Cayman Islands.
1MDB, also in the report, revealed that the monies that have been placed in the SPC in the Cayman Islands are to be returned to Malaysia no later than the end of the year, and that so far, it has received US$1.22bil (RM4.03bil). In the report, 1MDB said it had used part of the money it had received from the SPC as payments pursuant to the settlement of the put option with Aabar.
Apart from Aabar, the accounts also revealed that 1MDB had repaid a sum of RM670mil of the RM6.17bil bridging loan taken to purchase the Powertek power plants from the Tanjong group.
In April this year, 1MDB kicked off the listing of 1MDB Energy, slated for some time by the first quarter of next year. Bankers said 1MDB could end up with a higher stake of up to 51%, following the cancellation of options given to Aabar to subscribe in the listing of its power unit.
If Aabar had converted its option, 1MDB’s stake in the listing of its power division would have been diluted.
According to bankers, 1MDB Energy’s initial public offering (IPO) has to raise a minimum US$3bil, given its high entry cost into the power sector. StarBiz had earlier reported that 1MDB’s much-anticipated listing of its power arm, 1MDB Energy, may offer an indicative dividend yield of 2.5% to 3.5%.
Based on its latest annual report, 1MDB seems to have extracted better value from the purchase of a 75% stake in Jimah Energy Ventures Holdings Sdn Bhd, which was completed in January this year. A goodwill of RM669.5mil was incurred for Jimah for which 1MDB had paid RM1.2bil. The goodwill for Powertek, meanwhile, was RM1.83bil, while for Genting’s power asset, it was RM787.3mil.
1MDB still owes Usaha Tegas RM2bil outstanding from the purchase of the power plant, for which Usaha Tegas has been given the option to convert the debt to an equity stake in the power division of 1MDB when it goes for listing.
Tanjong has the option to exercise the 214 million warrants or request a cash settlement from 1MDB Energy. If Usaha Tegas, the owner of Tanjong, chooses to exercise the warrants, then it could hold up to 15% in the listed entity.
If the cash settlement is opted for, then the amount to be paid would be the institutional price of the proposed IPO less 7.5% discount or 3.88% compounded annual return rate from RM2bil commencing May 2012, whichever is higher, the annual report stated.
Assuming that the warrants are settled by cash, then 1MDB Energy would have to fork out an additional RM200mil or so above the RM2bil that is owed to Usaha Tegas.