This article first appeared in The Edge Malaysia Weekly on September 18, 2017 - September 24, 2017

AT 205m high, with an installed capacity of 2,400mw, Bakun hydroelectric plant (HEP) is one of Asia’s largest outside China.

Having spent RM2.5 billion cash, plus debt assumption of RM5.6 billion, its new owner — Sarawak Energy Bhd (SEB) — has to make the hydroelectric dam work harder to ensure the huge investment yields good returns.

“The first thing we want to look at is how we can maximise power from the current eight turbines. And I think there are quick wins there,” group CEO Sharbini Suhaili tells The Edge. “There is good synergy with Murum Dam.”

He says SEB is talking to four potential customers for long-term power purchase agreements (PPAs) in the Samalaju Industrial Park, which focuses on energy-intensive industries such as aluminium smelting, oil refining and steelmaking.

“In fact, they are trying to sign PPAs sometime this year,” says Sharbini, adding that each of them may require 150mw to 300mw.

The talks precede the upcoming capacity increase from SEB’s Baleh HEP, which is under construction, designed to produce up to 1,285mw and targeted for commissioning by 2025.

“So it’s a good time to start talking now,” says Sharbini.

To date, SEB has signed eight PPAs in Samalaju with a committed supply of over 2,000mw. It maintains a reserve margin of 25%, though it feels it can lower the margin to 20% in the long term.

The 7,000ha Samalaju Industrial Park is one of five growth nodes under the Sarawak Corridor of Renewable Energy initiative.

SEB’s customers in Samalaju include high-carbon ferro-manganese and silico-manganese producer Sakura Ferroalloys Sdn Bhd, aluminium smelter Press Metal Bhd and Cahya Mata Sarawak Bhd’s associate OM Materials (Sarawak) Sdn Bhd.

Sakura Ferroalloys is a partnership between South African mining firm Assmang Ltd (54.36%), Japan’s Sumitomo Corp (26.64%) and Taiwan’s China Steel Corp (19%).

In the long term, Sharbini is optimistic about Samalaju’s prospects as the infrastructure is now established.

Bakun, which produces 1,771mw at normal water levels, is located downstream of Murum Dam. Releasing more water from Murum into Bakun would allow the latter to generate more power.

In future, both dams may be placed under a single holding entity to better manage the reservoir between them, according to Sharbini. SEB is also mulling installing a ninth turbine to boost Bakun’s output.

Murum Dam, commissioned in 2014, cost RM4.1 billion and is designed to produce 635mw (constant) and up to 944mw (peak), with current output at about 700mw.

When asked whether releasing more water to Bakun would hit Murum’s output, Sharbini explains that the water levels at Murum have remained high due to heavy rainfall over the past year. “We have had to release water onto the spillway even after maximising all the turbines.”

SEB completed its acquisition of Bakun’s holding company, Sarawak Hidro Sdn Bhd (SHSB), from the federal Ministry of Finance (MoF) for RM2.5 billion cash, plus debt assumption of RM5.6 billion, last month.

It has said MoF will maintain its existing letter of undertaking and government guarantee for SHSB’s debts.

SEB is the state-owned sole electricity distributor that was delisted in December 2009 at RM2.65 per share, which valued the utility at RM4.1 billion. Prior to the privatisation, the state held a 61.33% stake.

Digesting the Bakun acquisition

The takeover of Bakun is weighing heavily on SEB’s balance sheet. The acquisition has raised its gearing to 2.48 times, when it is funding a long-term growth plan to meet projected demand of 7,000mw by 2025.

The attached RM5.6 billion in liabilities is about a third of SEB’s existing total liabilities of RM15.03 billion as at Dec 31 last year. In comparison, Tenaga Nasional Bhd’s adjusted gearing was 1.25 times as at Aug 31, according to a RAM Ratings Services Bhd report.

“Our revenue is keeping up, by 2018 it should hit RM5 billion,” Sharbini responds. “The gearing will rapidly drop to below two times by 2019.”

Part of that revenue increase will come from its power export growth. SEB currently supplies 150mw to Indonesia via a power exchange agreement and Sharbini expects that to hit 230mw by end-2018.

“We are talking to Sabah as well, they want 50mw from us for a start,” he says. “Hopefully, we can do that by 2020 or 2021.”

Sharbini expects the gearing level to hit 1.02 times by 2024 and subsequently reduce to 0.87 times in 2025, thanks to a positive earnings outlook driven by industrial customers.

In the financial year ended Dec 31, 2016 (FY2016), SEB posted RM4.15 billion in revenue, up 37.4% year on year. However, net profit fell 19.5% y-o-y to RM545.85 million, according to a filing with the Companies Commission of Malaysia (CCM).

‘A good buy’

The price tag for Bakun sparked criticism as some felt SEB overpaid, considering the attached liabilities. Asked to comment by The Edge, Sharbini says the price was negotiated on a willing buyer, willing seller basis and was mutually acceptable.

“To us, it’s a good buy,” he says, stressing that SHSB is profitable and had been paying dividends to MoF.

He adds that the asset is mature and completed without construction risks. For perspective, he points to SEB’s own Baleh Dam — designed to produce 1,285mw — which is under construction and will cost about RM8 billion.

For FY2016, SHSB recorded revenue of RM1.11 billion compared with RM671.91 million in FY2015. Net profit soared to RM388.75 million in FY2016 from RM69.51 million. It paid net dividends of over RM15 million for FY2016 and FY2015 but only RM5.7 million in FY2014, according to the filing with CCM.

Analysts tracking SEB’s financials felt the price was okay given the circumstances. “It may not be the best price but the federal government wouldn’t have sold it below cost,” one analyst says.

The deal was first announced by Chief Minister Datuk Amar Abang Johari Tun Openg in March, who said the acquisition will pave the way for the potential development of the surrounding lake as a tourism project.

Prior to the acquisition, SEB had been the sole buyer of the power generated by Bakun HEP. Its total capacity of 4,628mw had always included Bakun’s capacity.

SEB’s move to take over Bakun HEP came as a surprise to some as it already has a 30-year PPA with the latter.

So, how did the acquisition come about?

Sharbini says talks began six months before he took over as group CEO on Nov 1 last year. When asked which side initiated the talks, SEB simply says it had been a long discussion to find a win-win situation.

He declines to disclose the estimated cost savings from acquiring Bakun but reiterates that it is “net positive” for SEB and that the benefits will be seen in the next few financial years.

MoF did not respond to emailed queries on the matter.

Sharbini is optimistic about the prospect of signing more PPAs, which in turn means more demand for the power generated.

But if that optimism comes true, can SEB keep up?

For perspective, hydroelectric plants require long lead times — Baleh will take almost a decade — and SEB is also in the process of de-gearing after the Bakun acquisition.

Hydroelectric dams are controversial, as seen by SEB’s proposed 1,000mw dam in Baram, which was shelved indefinitely by the state government due to protests.

Sharbini feels SEB has room to manoeuvre, expanding existing plants and looking at gas-fired power plants, which have a shorter lead time of about three years.

“So, if we know something three years [in advance] we can do it,” he says.

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