Tenaga caught between a rock and a hard place

From The Edge:

KUALA LUMPUR: No offer has been made by the government to Tenaga Nasional Bhd (TNB) ( Financial Dashboard) to take over Project 3B, a 2,000mw coal-fired power plant which 1Malaysia Development Bhd (1MDB) has not been able to commence on time, said TNB president and chief executive Datuk Seri Azman Mohd.

Azman acknowledged that TNB is keen to take over Project 3B amid concerns that any delay in the project would result in a power shortage in the future. However, he stressed that if and when TNB does take over the struggling project, it would not be a bailout since the utility giant would not pay a premium.

“I want to clarify that as of this moment we have not received any offers from the Energy Commission (EC) or the government to take over the project. We are interested no doubt,” Azman told The Edge Financial Daily in an interview yesterday.

TNB cannot be forced to take over the project by the government, Azman noted, since the “final decision rests with our (TNB’s) board”.

“Even if the commercial terms are favourable, the board can still reject the project on other grounds. We have to answer to our shareholders.

“We will not pay a premium for the project. We will just pay them (1MDB) for costs incurred. If anything, we will ask for a discount. They (1MDB) are not in a position to dictate the terms,” said Azman, brushing aside the perception that TNB may bail out 1MDB.

“Whatever the decision of the government, it will be subject to commercial considerations and in line with our corporate governance,” he said.

I like the President and CEOs statement regarding Tenaga not paying any price.  But it's hard to see them trying to defy the government.  The profits Tenaga is enjoying now is a factor of two things:  lower coal prices and Government allowing them to keep the tariff rates high.

It doesn't take much to revise the rates down and put Tenaga in a bad spot.  Yes the board can reject, but I don't think it'll be good.  Tenaga seems to be caught between a rock and a hard place, stuck with a bill of 11 billion ringgit to construct the new power plant or rejecting the project and see the potential for electricity tariffs to get cut.

If Tenaga undertakes the project, the government might not do anything with the tariffs, but if they reject the possibility of tariffs being cut is extremely real. I think investors would generally like them to take the project up.  Less of a bigger pie is better than more of a smaller pie.  But that comes with the 1MDB stigma.  So what is Tenaga to do?