PETALING JAYA: Tenaga Nasional Bhd (TNB) has received a letter of invitation from the Energy Commission (EC) to submit its proposal pertaining to the takeover of 1Malaysia Development Bhd's (1MDB) 70% stake in the RM11 billion Jimah East (Project 3B) coal power plant. "EC in consultation with the government has accepted TNB's participation as the lead developer in the project for the development of 2x1000MW coal fired power plant in Jimah in consortium with Mitsui Co. Ltd (Mitsui)," TNB said in a filing with Bursa Malaysia last Friday. 1MDB owns 70% while Mitsui controls 30% of the project. The project is scheduled for commissioning in stages from Oct 1, 2018. TNB said the take over will be subject to terms and conditions, namely the premise that TNB-Mitsui Consortium would undertake all obligations of Jimah East Power Sdn Bhd (JEP) as a developer and in particular with respect to the selection and appointment of engineering, procurement and construction contractor which also incorporates the principal equipment suppliers. "The firm and final levelised tariff shall not exceed 26.67 sen/kWh. No further adjustments to the levelised tariff will be allowed for any reason whatsoever," it added. It also said that the occurrence of financial closing date shall not be beyond Oct 15, 2015. TNB president and CEO Datuk Seri Azman Mohd said in a statement that TNB has conducted due diligence and commenced negotiations with 1MDB. He also stressed that no premium will be paid for the acquisition of the 70% stake in the project. "We expect to submit a proposal in relation to the takeover of 1MDB's 70% ownership in the project soon, taking into consideration among others the cost of delay in the project, higher forex exchange based on current situation and TNB's expected return," he said. Azman expressed confidence that the acquisition will enhance its shareholder's value and bring positive value in the long term, and as a power utility, TNB is keen to participate as the developer to ensure reliability and security of supply for the nation while maximising shareholder value. Azman also stressed that the takaover of project 3B is not a bailout of 1MDB. "It is a greenfield power plant with good prospect and with the increased generation capacity of 2,000 MW upon completion of the project, the acquisition will bring about positive value to TNB in the long run. "Based on financial analysis, the project is expected to have a positive impact on the earnings of TNB. It is not a bailout of 1MDB," he said. Affin Hwang Capital said TNB may need to take into account its higher WACC of 8% compared with 1MDB's lower WACC, which is around mid-single digits. "As it stands, Track 3B has an existing levelised tariff of 25.33 sen/kWh. Time is running short as the original commercial operation dates (split into two phases) are Nov-18 and May-19, which suggests that TNB would likely receive a higher tariff to prevent a power generation capacity shortfall. Track 3B was initially reported to cost RM11 billion," it said in its research note last Friday. According to Affin Hwang, the imbalance cost pass-through (ICPT) mechanism would be used to address the potential higher tariff for Track 3B, which means that the additional costs associated with Track 3B may be passed on to consumers under the generation-specific cost adjustment portion of the ICPT. "However, this may not necessarily translate into higher electricity tariffs going forward, as these costs may be offset by TNB's over-recovery of fuel costs due to minimal use of expensive imported liquid natural gas and soft coal prices," it added. It maintained its "buy" rating on TNB with an unchanged target price of RM17.50 and remains positive on the stock based on decent electricity-sales growth, benign coal prices and indirect ICPT implementation.