Friday, September 12, 2008

Tenaga & IPPs- the Windfall Profit Tax Saga

The government has reversed its earlier decision to levy the windfall profit tax on independent power producers (IPPs) with immediate effect and replace it with a one-off payment instead. The earlier windfall profit tax is a 30% levy on any excess above 9% of the fixed assets. The excess is based on earnings before interest and tax.

The Windfall Profit Tax story (in brief). [Source: Business Times]

The imposition of the "30% windfall profit tax on the IPPs in June sent shockwaves throughout the industry. RAM Ratings had warned that a third of the RM30 billion IPP-related bonds it rated were likely to be affected. Bankers also said that the move would make it costlier for IPPs to finance future projects." as reported by Business Times (go here).

The government has now decided that the IPPs would make a one-off payment equivalent to the levy for one year as well as to suspend power purchase agreement (PPA) renegotiations pending a comprehensive study into the restructuring of the electricity supply industry. Last month, the IPPs had made their first quarterly payment of the the windfall profit tax. With this decision, I believe the IPPs will soon make another payment equivalent to 3 times of the amount of the first payment & that will be the end of the story.

IPPs' first quarterly payment made in August 2008 (Source: The EdgeDaily)

This decision will be "negative" for Tenaga, but "positive" for all the IPPs as well as tolled-road concession-holders. The latter was supposed to be the next batch of concession-holders to be hit by the windfall profit tax.

From the chart below, I expect Tenaga to test its immediate support at the previous gap-up level of RM7.50. If the RM7.50 support level cannot hold- which I think will be the likely scenario- then, Tenaga will drift to the support level of RM7.00 & RM6.50. For now, we should avoid Tenaga.

Chart: Tenaga's daily chart as at September 10th, 2008 (source:

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