5. RISK FACTORS 5. RISK FACTORS Before investing in our Shares, you should pay particular attention to the fact that, to a large extent, our and our associates’ and joint venture’s operations are sUbject to the legal, regulatory and business environment in the countries in which we, our associates and our joint venture operate. Our business is subject to a number of factors, many of which are beyond our control. Before making an investment decision, you should carefully consider, along with the other matters in this Prospectus, the risks and investment considerations set out below. The risks and investment considerations set out below are not an exhaustive list of the risks and challenges that we currently face or that may develop in the future. These and other risks, whether known or unknown, may in the future have a material adverse effect on us or our Shares. 5.1 RISKS RELATING TO OUR INDUSTRY 5.1.1 Any inability of our power plants to generate or deliver power could decrease, if not eliminate, revenues derived by us from our power plants A number of factors could prevent our power plants from generating or delivering power, including the foliowing: (i) the breakdown or failure of power generation equipment or other equipment or processes, leading to unexpected maintenance needs, unpianned outages or other operational issues;
(ii) flaws in equipment design or in power plant construction;
(iii) the faiiure of civil structures or transmission systems; (iv) issues with the quality of, or interruptions in the supply of, key inputs, including water, fuel or other key inputs;
(v) the inability to operate due to a failure to meet licencing requirements or to obtain or maintain required regulatory permits and approvals;
(vi) human error, including mistakes made by an operator when operating any equipment leading to unintended consequences of plant operations;
(vii) pollution or environmental contamination affecting the operation of our power plants; (viii) force majeure and catastrophic events, including fires, explosions, landslides, tropical storms, floods and terrorist acts, any of which could cause forced outages, suspension of operations, personal injury, ioss of life and severe damage and destruction to our power plants; and (ix) scheduled and unscheduled outages due to maintenance, expansion or refurbishment works. If any of these risks or any similar risk materialises, our ability to generate or deliver power through one or more of our power plants could be adversely affected, thereby decreasing or eliminating revenues that we can derive from availabie capacity payments, energy payments and, where applicable, daily utilisation payments under our PPAs. For example, the Tanjung Bin Power Plant experienced unscheduled outages as described in Section 7.15 of this Prospectus. For further information on the unscheduled outages at the Tanjung Bin Power Plant and their impact on our financial performance, see Sections 7.15 and 12.2.2(ii)(a) of this Prospectus, respectively. Although we have implemented a recovery programme of remedial and improvement works and other steps to address the issues that caused the unscheduled outages at the Tanjung Bin Power Plant, there can be no assurance that we have properly identified and remedied these issues, or that such issues will not recur. 5. RISK FACTORS (Cont’d) In addition, if we are unable to deliver power for prolonged periods such that we are in material breach of one or more of our PPAs, TNB may terminate our PPAs after the lapse of the applicable cure periods, which in turn may lead to an event of default under our power plants’ financing documents. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and cash flows.
5.1.2 Interruptions in fuel supply could adversely affect our financial results Our power plants rely on the availability of fuel for their operations, and we are subject to the risk of interruptions in our fuel supply. Purchases from PETRONAS, the sale supplier of natural gas for our plants, accounted for 14.7%,26.3% and 23.9% of our total purchases of fuel and purchases from TFS, the sale supplier of coal for our plants, accounted for 74.4%,62.7% and 65.6% of our total purchases of fuel for the FYE 31 December 2012, 2013 and 2014, respectively. If our fuel supplies are interrupted for any reason, including fuel shortages in the market, disruptions in fuel transportation or issues related to our fuel suppliers, operations at our plants may be disrupted. Historically, we have experienced shortages of natural gas for our gas-fired power plants when the natural gas supply to our power plants was curtailed. Although we were able to use distillate oil as back-up fuel during periods when natural gas supply to our power plants was curtailed, there can be no assurance that we will always be able to do so. In the event we do not have sufficient fuel to operate one or more of our plants, the availability of our plants for despatch may be reduced or our plants may not be able to declare themselves available for despatch. Any of these events could have a material adverse effect on our business, financial condition, results of operations and cash flows. 5.1.3 Due to the higher price of natural gas compared to the price of coal, our gasfired power plants may not be as competitive as coal-fired plants when the renewal or extension of our gas-fired plants’ PPAs are being considered by TNB Declining natural gas production in Malaysia, particularly in Peninsular Malaysia, and disruptions in the supply of natural gas have influenced government policies resulting in higher natural gas prices and other associated costs. The Economic Transformation Programme of the Government anticipates a decline in the production of natural gas in Peninsular Malaysia between 2010 and 2025. According to the Economic Transformation Programme, the production of natural gas is expected to decline by 73.8% from 6.1 billion standard cubic feet per day (“bscfd”) in 2010 to 1.6 bscfd in 2025. Nevertheless, the actual production of natural gas in 2012 was higher than expected at 6.5 mmscfd as compared to expected production of 5.8 mmscfd From January 2007 to June 2008, the Government had set the domestic price of natural gas at RM6.40 per mmbtu, but this price was revised to RM14.41 per mmbtu in July 2008 and RM10.70 per mmbtu in March 2009. On 30 May 2011, the Government announced a revision in the regulated natural gas price for the electricity and industrial sectors, whereby the price was scheduled to be increased by RM3.00 per mmbtu every six months from 1 June 2011 to 1 December 2015. Accordingly, effective 1 June 2011, the price of natural gas was increased to RM13.70 per mmbtu when sold to the power generation sector. The price was subsequently revised to RM15.20 per mmbtu in January 2014, which in turn led to an electricity tariff hike of around 14.9% for every kWh in Peninsular Malaysia. 5. RISK FACTORS (Cont’d) The decline in natural gas production has also led to an increase in other associated costs, including TNB’s costs for compensating CCGT and OCGT power plants for using costly distillate oil as a back-up fuel when there are gas shortages. [n the event of a natural gas curtailment, PETRONAS will notify TNB of such event, and a national gas task force, formed by the Energy Commission and whose members include PETRONAS, TNB and the IPPs, wil[ meet to discuss future actions in light of a curtailment, which may include TNB directing the IPPs to run on distillate oil. [n addition, the importation of LNG into Malaysia has led to higher natural gas prices. [n tandem with the importation of LNG into Malaysia in May 2013, a two-tier natural gas pricing formula has been adopted by the Government for gas used for power generation. Under the two-tier pricing mechanism, any new gas demand of up to 1,000 mmscfd sold to the power sector is priced at a controlled price, and any additional volume requirement will be priced at market rate based on a Governmentapproved gas pricing formula. Using this mechanism, effective January 2014, the price of natural gas has been set at RM15.20 per mmbtu for the first 1,000 mmscfd and RM41.68 per mmbtu for quantities exceeding 1,000 mmscfd. When TNB contracts for IPP capacity, these and other factors may contribute to greater demand for coal-fired power plants, whose fuel cost is relative[y lower. [n terms of TNB’s decision as to which contracted IPP to despatch from time to time, these factors may make TNB more [ikely to despatch power generated from a coal-fired plant over that from a gas-fired plant. In Malaysia, four of the five power plants currently owned by our subsidiaries are gas-fired plants, representing approximately 46.5% of our total effective power generation capacity in Malaysia. The revenue generated from our subsidiaries that own gas-fired power plants accounted for 36.1 %, 43.9% and 40.2% of our total revenues for the FYE 31 December 2012,2013 and 2014, respectively. In light of their higher fuel costs, we cannot assure you that the PPAs for our gas-fired plants (including our PD Power PPA) will be renewed or extended upon their expiration on similar or satisfactory terms or at a[l, and any failure to renew or extend such PPAs on similar or satisfactory terms or at all could have a material adverse effect on our business, financial condition, results of operations and cash flows. 5.1.4 Economic, market and regulatory conditions that are beyond our control may adversely affect the power industry Sustained downturns in the economy general[y affect the power industry and negatively affect our power generation operations. If we seek to renew or extend our existing PPAs or secure new PPAs during economic downturns that result in declines in energy demand in Ma[aysia or other countries in which we and our associates operate, the tariffs that we receive could be reduced, as further detailed in Section 5.2.9 of this Prospectus. Similar[y, there are other market conditions beyond our control that could negatively impact the power industry and our power generation operations, including the fo[lowing: (i) supply of, and demand for, energy commodities, which may impact the prices of such commodities;
(ii) increased avai[ability of competitively priced alternative energy sources that are preferred by some customers over natural gas-or coal-produced electricity; and
(iii) changes in government and government policies. 5. RISK FACTORS (Cont’d) In addition, in the long-term, there may be a possibility of the Government changing the structure of the power industry through the introduction of a market system where power producers make competitive offers to supply electricity in a wholesale market and derive revenue primarily based on the quantities and prices at which their electricity is sold, as determined by supply and demand in the market. Currently in Malaysia, the sale of power by an IPP is regulated by its PPA. IPPs under a different industry structure may not enjoy a fixed tariff rate, a pass through of their fuel costs and/or a stable available capacity payment as provided in PPAs currently in effect. In addition, under each PPA of our power plants, with the exception of the PD Power PPA, in the event of an industry restructuring, if we and TNB cannot reach an agreement on revising the terms of our PPA within six months of such restructuring, TNB may terminate our PPA and purchase our power plant at a purchase price set forth in our PPA. If any of the foregoing occurs, we cannot assure you that we could continue to operate as an iPP in Malaysia. The salient terms of our PPAs, including terms relating to an industry restructuring, are set out in Section 7.24 and Annexure C of this Prospectus. Failure to address the negative impact of these economic, market and regulatory conditions may have a material adverse effect on our business, financial condition, results of operations and cash flows. 5.1.5 Competition could adversely affect our business, financial condition, results of operations and cash flows The independent power industry is composed of numerous capable competitors, some of whom may have more extensive operating experience in the acquisition and development of power projects, larger staff and greater financial resources and operating capabilities than we have. Further, newer power plants owned by our competitors may have more attractive cost structures, particUlarly in respect of fuel costs, may be more efficient than our facilities and may be less capital-intensive than our facilities, any of which may place some of our facilities at a competitive disadvantage to the extent that our competitors are able to produce more power from each increment of cost or fuel than our facilities are capable of producing. In addition to the competition already existing in the markets in which we and our associates and joint venture presently operate, or may consider operating in the future, we may encounter significant competition from new market entrants. Further consolidation of the power industry could also create strong competition. Any or all of these developments could adversely affect our business, financial condition, results of operations and cash flows. 5.1.6 Failure to comply with laws and regulations applicable to the power industry, including health, safety and environmental laws and regulations, or the cost of complying with these laws and regulations could have a material adverse effect on our business, financial condition, results of operations and cash flows The power industry is subject to various laws and regulations, including health, safety and environmental laws and regulations, administered by local, national and overseas governmental authorities. These laws and regulations address, among others, occupational safety and health of employees; air and water discharges; the storage, treatment, discharge and disposal of waste; the location of facilities; site clean-ups; plant and wildlife protection and other aspects of the operations of our business. Failure to comply with any relevant laws and regUlations, as well as injuries or other harm caused by such failure, may result in financial penalties or administrative or legal proceedings against us, including the termination or suspension of the operation of our facilities. 49 5. RISK FACTORS (Cont’d) In addition, we must obtain various licences, concessions, permits and approvals to operate our businesses. Even when we obtain the required licences, concessions, permits and approvals, we are subject to continuous review under the applicable laws and regulations, the implementation of which is subject to change from time to time. Further, we have incurred, and expect to continue to incur, operating costs to comply with government regulations, and we have made, and expect to continue to make, capital expenditures on an ongoing basis to comply with health, safety and environmental laws and regulations. In addition, future environmental legislation, including those relating to the Kyoto Protocol and greenhouse gas emissions, may materially impact our operations and increase our capital expenditures and operating and maintenance costs. For further details on the legislations pertaining to the Kyoto Protocol and greenhouse gas emissions, see Section 8 of this Prospectus. There can be no assurance that we will be able to remain in compliance with applicable health, safety and environmental laws and regulations, that we will be able to obtain, maintain or renew required licences, concessions, permits and approvals or that we will not become involved in future litigation or other proceedings (or be held responsible in any future litigation or other proceedings) relating to health, safety and environmental matters or other regulatory matters, the costs of which could be material. In addition, there can be no assurance that the adoption of new health, safety and environmental laws and regulations, new interpretations of existing laws and regulations or other similar developments will not result in our power plants being subject to forced shutdowns or the imposition of fines and penalties. Our failure to comply with any or all applicable government regulations, or a change in any or all such regulations, may disrupt our operations and could have a material adverse effect on our business, financial condition, results of operations and cash flows. 5.1.7 Energy conservation and greenhouse gas reductions could negatively impact our growth prospects Certain regulatory and legislative bodies have introduced, or are considering, requirements and/or incentives to reduce energy consumption and greenhouse gas emissions. For example, the Promotion of Investments Act 1986 provides companies that undertake energy conservation or renewable energy projects with various tax incentives and these companies may also apply for import duty and sales tax exemptions on imported machinery, equipment and other materials. Additionally, improvements in, or applications of, technology could lead to declines or slower than anticipated growth in per capita energy consumption. To the extent energy conservation efforts or greenhouse gas emission reductions result in reduced energy demand or significantly slows the growth in energy demand, the growth prospects of our business could be adversely impacted. 5.1.8 IPPs in Peninsular Malaysia rely on TNB as the ‘sole offtaker for the power produced by their power plants IPPs in Peninsular Malaysia rely on TNB to purchase the power generated by their power plants. For the FYE 31 December 2012, 2013 and 2014, TNB accounted for 96.2%, 95.9% and 94.3% of our total revenues, respectively. However, there can be no assurance that TNB will be able to continue to meet its obligations under our PPAs in the future. TNB’s failure to make payments under our PPAs could materially and adversely affect our business, financial condition, results of operations and cash flows. 50 5. RISK FACTORS (Cont’d)
5.2 RISKS RELATING TO OUR BUSINESS 5.2.1 We may not be successful in implementing our business strategies Our overall business strategy may involve substantial investments in new facilities and businesses, acquisitions relating to expanding capacity and entering into new businesses and the formation of strategic alliances, partnerships and joint ventures. Due to inherent uncertainties, our strategic initiatives may expose us to a number of risks and challenges, including the following: (i) new and expanded business activities may require higher capital expenditures and operating costs than initially planned or anticipated, may result in temporary increases in costs arising from the development of new technologies and may involve additional challenges in meeting compliance requirements;
(ii) new and expanded business activities may result in lower growth or profit than we currently anticipate, with no assurance that these business activities will become profitable at the level that we anticipate or at all;
(iii) new and expanded businesses may require substantial government subsidies to become profitable, and these subsidies may be sUbstantially reduced or entirely discontinued in the future; (iv) we may fail to identify and enter into new business opportunities in a timely manner or we may be unable to obtain sufficient financing to pursue growth strategies, placing us at a disadvantage in comparison with our competitors, particularly in overseas markets; and
(v) we may need to hire or retrain greater numbers of skilled and qualified personnel than we had anticipated to supervise and conduct the new and expanded business activities.
For our business strategies in certain markets, particularly those outside Malaysia, we depend on relationships with partners and co-investors to provide expertise, develop relationships with local clients, participate in the management of existing projects and identify project opportunities. Disagreements or disputes between us and our partners or co-investors or changes in the scope of a project, the local political or economic conditions or a partner’s or co-investor’s financial condition may affect our business activities, may result in us dissolving relationships with these partners or co-investors or may reqUire us to buy or sell a portion of the remaining interests in an affected project, which could adversely affect our reputation in the markets in which we operate or intend to operate. As part of our business strategy, we may also seek, evaluate or engage in potential acquisitions, mergers, joint ventures, strategic alliances, partnerships, restructurings, combinations, rationalisations, divestments or other similar opportunities. As the prospects of these initiatives are uncertain, there can be no assurance that we will be able to successfully implement or grow new ventures or that these ventures will not prove more difficult or costly than we had originally anticipated. In addition, in conducting due diligence in connection with a potential acquisition of interests in existing businesses, we will rely on resources available to us, including information provided by the target business and, where appropriate, third-party Investigations or reports. However, there can be no assurance that our due diligence would necessarily reveal all facts that may be relevant to evaluating the opportunity. 5. RISK FACTORS (Cont’d) We are pursuing a strategy of increasing the diversity of our energy portfolio. For example, in June 2013, we acquired a 50.0% participating interest in the unincorporated joint venture that owns the Macarthur Wind Farm. While more stringent environmental requirements in Malaysia and overseas may provide new business opportunities such as those related to green technologies, we may incur additional costs in pursuing these ventures, and we may not realise our anticipated levels of profits from these ventures. There can be no assurance that we will be able to identify suitable acquisitions or investments, successfully bid for new projects or successfUlly integrate newly acquired companies into our existing portfolio. In addition, there can be no assurance that any acquired assets will be free from default or operational limitations. We regularly review the profitability and growth potential of our existing and new businesses. As a result of these reviews, we may decide to exit from, or to limit our investments in, these ventures. Systemic and other risks may cause these ventures not to achieve profitability to the extent originally anticipated, and we may fail to recover investments or expenditures that we have incurred. Any of the foregoing may have a material adverse effect on our business, financial condition, results of operations and cash flows. 5.2.2 For our projects under development, the estimated timeframe and budget for the completion of critical tasks may be materially different from the actual completion date and costs, which may delay the COOs of, or reduce the economic returns from, such projects We are currently involved in several development projects, the most significant of which is the construction of the Tanjung Bin Energy Power Plant in Johor, Malaysia. These projects involve many risks, including the following: (i) environmental, engineering, construction and commissioning risks relating to cost overruns, delays Or performance that ;s below expected levels of output or efficiency; and
(ii) the breakdown or failure of equipment.
In addition, projects under development may be affected by the timing of the issuance of permits and licences by government agencies, the manufacturing and delivery schedules for key equipment and the supply and cost of materials such as cement, steel and other items. Further, project delays or cancellations or adjustments to the scope of work may occur from time to time due to incidents of force majeure or legal impediments and may result in the imposition of financial penalties, including the payment of liquidated damages, if a project does not commence commercial operation by the target date. The EPe contractors for the construction of the Tanjung Bin Energy Power Plant have reported to us that as at 25 February 2015, the actual physical completion of the construction of the Tanjung Bin Energy Power Plant stood at approximately 88.7% against the schedUled completion of approximately 95.4%, representing a variance of approximately 6.7% in the construction progress. For further information on the progress of the construction of the Tanjung Bin Energy Power Plant and possible consequences should the scheduled eOD of the plant be delayed beyond 1 March 2016, which would include loss of revenue from available capacity payments of approximately RM1.9 million per day and liquidated damages of RM600,000 per day payable to TNB, see Section 18.104.22.168 of this Prospectus. 52 5. RISK FACTORS (Cont’d) Depending on the severity and duration of the relevant events or circumstances, these risks may significantly delay the commencement of new projects or reduce the economic benefit from such projects, including as a result of higher capital requirements, loss of revenue and liquidated and other contractual damage claims, which in turn could have a material adverse effect on our business, financial condition, results of operations and cash flows. 5.2.3 Our operations are primarily conducted in Malaysia, which exposes us to risks associated with Malaysia and the performance of the Malaysian economy We are incorporated in Malaysia, and historically, we have derived, and continue to derive, substantially all of our revenues from Malaysia. Our revenues from Malaysia accounted for 99.8%, 97.9% and 96.6% of our total revenues for the FYE 31 December 2012, 2013 and 2014, respectively. Accordingly, our business is highly dependent on the state of the Malaysian economy. Demand for electricity is directly related to the performance of the Malaysian economy (including overall growth and income levels) and the overall levels of business activity in Malaysia. Between July 1997 and 1999, Malaysia experienced a significant financial and economic downturn that resulted in, among others, a significant devaluation of the RM and an increase in the number and size of companies filing for corporate reorganisation and protection from their creditors. Recent developments in the Middle East and general weakening of the global economy have increased the uncertainty of global economic prospects and may continue to adversely affect the Malaysian economy. For example, the Malaysian economy was affected by the global economic crisis that began in late 2007, as evidenced by the 1.5% decline in Malaysia’s GDP in 2009 and the decline in the growth rate of Malaysia’s GDP to 4.8% in 2008, compared to 6.3% in 2007. The Malaysian economy recovered in 2011 with a 5.1 % GDP growth rate, which continued to increase to 5.6% in 2012. The GDP growth rate declined to 4.7% in 2013 but subsequently increased to 6.0% in 2014. We cannot assure you that the Malaysian economy will continue to grow or that Malaysia’s GDP will not decrease. Factors that may adversely affect the Malaysian economy include: (i) decreases in business, industrial, manufacturing or financial activities in Malaysia;
(ii) scarcity of credit or other financing, resulting in lower demand for products and services provided by companies in Malaysia;
(iii) exchange rate fluctuations; (iv) a prolonged period of inflation or increase in interest rates;
(v) changes in the Government’s taxation policies;
(vi) a re-emergence of Severe Acute Respiratory Syndrome, avian influenza (commonly known as bird flu), swine flu or the emergence of the Ebola virus or any other disease or epidemic in Malaysia;
(vii) natural disasters, including landslides, tropical storms, fires, floods or similar events; (viii) political instability, terrorism or military conflict in Malaysia, other countries in the SEA region or globaliy; and (ix) other regulatory, political, economic or social developments in or affecting Malaysia. 53 5. RISK FACTORS (Conl’d) The factors above and other factors beyond our control may reduce the demand for electricity in Malaysia and could have a material adverse effect on our business, growth prospects, financial condition, results of operations and cash flows. 5,2.4 Our current projects and our expansion plans in overseas markets may subject us to different or greater risks than those associated with our domestic operations While our operations have been primarily based in Malaysia, through our SUbsidiary, associates and joint venture, we have operations overseas and plan to expand these operations. In particular, we plan to further diversify the geographic focus of our operations to include other parts of SEA, South Asia, the MENA region, Australia, the United Kingdom, Turkey and South Africa. Overseas operations generally carry risks that are different from, or greater than, those we face in our domestic operations, including the following: (i) challenges of complying with multiple foreign laws and regulatory requirements, including tax laws and laws regulating our operations, investments and foreign exchange;
(ii) volatility of overseas economic conditions, including variations in demand for the products and services of our overseas operations and fluctuations in foreign currency exchange rates;
(iii) legal systems that may be less predictable and less well-developed; (iv) difficulties in enforcing legal judgments or arbitral awards and creditors’ and shareholders’ rights in foreign jurisdictions;
(v) risk of expropriation and exercise of sovereign immunity, where the counterparty is a foreign government;
(vi) difficulties in establishing, staffing and managing foreign operations;
(vii) differing labour regulations; (viii) political and economic instability, natural calamities, war and terrorism; (ix) lack of familiarity with local markets and competitive conditions;
(x) changes in applicable laws and regulations in Malaysia that affect foreign investments;
(xi) obstacles to the repatriation of dividends, earnings and cash; and
(xii) other economic, market and regulatory conditions beyond our control that may adversely affect our overseas operations and expansion plans. Any failure by us to recognise, or respond to, these differences may adversely affect the success of our operations in overseas markets, the ability of our international operations to pay dividends or make other distributions to us, the amount of our equity contributions to, and distributions from, our international operations and other developments that we may not be fUlly capable of insuring against or otherwise mitigate. Any of these developments could materially and adversely affect our business, financial condition, results of operations and cash flows. 54 5. RISK FACTORS (Cont’d) 5.2.5 We may fail to effectively manage our present or future assets, projects, associates or joint ventures in which we have, or will have, minority interests We have previously expanded our business through acquisitions, partnerships and joint ventures, and these remain our key strategies in the future growth of our business. Acquisitions, partnerships or joint ventures may require us to make significant cash investments, issue stock or incur substantial debt. Further, problems may arise preventing the effective integration of expanded operations and the ability to maintain key pre-acquisition relationships. We may not be able to effectively manage or execute our business strategy with respect to our present or future assets, projects, associates or joint ventures in which we have, or will have, equity interests of 50.0% or less. Our control over these assets, projects, associates or joint ventures is generally subject to the terms of applicable agreements and arrangements. Other than as provided for in these agreements and arrangements, our ownership interests do not provide us with the right to control the actions of these assets, projects, associates and joint ventures. For example, the Kapar Power Plant, which is owned by our associate, KEV, over which we do not have management control, experienced various operational issues in recent years. For further information on the issues at the Kapar Power Plant and their impact to our financial performance, see Section 12.2.2(ii)(b) of this Prospectus. Further, our partners in these assets, projects, associates or joint ventures may: (i) have economic or business interests or goals that are inconsistent with ours;
(ii) take actions contrary to our instructions or requests or contrary to our policies or objectives; or
(iii) be unable or unwilling to fulfil their obligations under the applicable agreement or arrangement or to provide anticipated levels of support. Any disagreement with any of our partners in connection with the scope of performance of our respective obligations with respect to any of these assets, projects, associates or joint ventures, or with respect to their provision of anticipated levels of support, could affect our ability to develop or operate the respective asset, project, associate or joint venture. Any serious dispute with any of our partners could adversely affect our business, financial condition, results of operations and cash flows. 5.2.6 The use of derivative instruments, such as forwards, futures and options contracts, may not fully hedge the risks of adverse fluctuations in foreign exchange and interest rates We use derivative instruments such as forwards, futures, non-deliverable forwards, swap and options contracts, or other similar transactions or combination of these transactions, in the ordinary course of our business to hedge the risks of adverse fluctuations in foreign exchange and interest rates. However, because foreign exchange and credit markets are very volatile, we may not be able to fully hedge the future gains or losses with these instruments against the corresponding change in the underlying currency or note. Any severe or wide fluctuation in these currencies or notes could adversely affect our business, financial condition and results of operations if we are unable to manage such fluctuations effectively through these derivative instruments. 5. RISK FACTORS (Cont’d) 5.2.7 Our insurance coverage may not be adequate to cover all losses or liabilities that may arise in connection with our operations We maintain insurance at levels that we believe are customary in the industry in which we operate to protect against various losses and liabilities. We maintain insurance to cover, among others, damage to the equipment, infrastructure and facilities of our power plants, business interruption risks and workers compensation. For example, we have insurance coverage for construction delays at the Tanjung Bin Energy Power Plant. There can be no assurance that this insurance or other insurance will be sufficient to cover any losses related to construction delays or other losses or liabilities that might be incurred in our operations, including at the Tanjung Bin Energy Power Plant. For a discussion of the progress in the construction of the Tanjung Bin Energy Power Plant, see Section 22.214.171.124 of this Prospectus. The operation of our facilities involves many risks and hazards, and if we were to incur a significant loss or liability for which we were not fully insured, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. Our insurance coverage is also subject to periodic renewal. If the availability of insurance coverage is reduced significantly for any reason, we may become exposed to certain risks for which we are not and/or could not be insured. Further, if premium levels for the insurance coverage required for these facilities increase significantly, we couid incur substantially higher costs for such coverage or may decide to reduce the coverage amount, either of which could have an adverse effect on our business, financial condition, results of operations and cash flows. 5.2.8 We depend on experienced, skilled and qualified personnel and senior management, and our business, results of operations and cash flows may be disrupted if we are unable to retain their services We rely on experienced, skilled and qualified personnel for the management and operation of our business. The loss of such experienced, skilled or qualified personnel may lead to operating challenges and increased costs. These challenges include lack of resources, loss of knowledge and lengthy period of time associated with skill development. In this case, costs, including costs related to contract labour, productivity and safety, may rise. Failure to hire and adequately train replacement employees, inclUding the transfer of significant internal historical knowledge and expertise to new employees, or the limited availability and rising cost of contract labour may adversely affect our ability to manage and operate our business. The loss of a significant number of qualified personnel could adversely affect our ability to compete in our industry, which in turn could have a material adverse effect on our business, results of operations and cash flows. In addition, we rely, and will likely continue to rely, significantly on the continued individual and collective contributions of our senior management. There can be no assurance that we will be able to retain our senior management. The loss of any of these key employees without a suitable replacement, or our inability to retain these key employees, could have a material adverse effect on our business, results of operations and cash flows. 5. RISK FACTORS (Cont’d) 5.2.9 We and our associate may not be able to renew or extend our or its existing PPAs or secure new PPAs on similar or satisfactory terms or at all, and we and our associate may not be able to renew our or its IPP Licences Given the possibility of the Government changing the structure of the power industry, IPPs are coming under increasing pressure to provide more competitively priced tariffs when renewing or extending existing PPAs or bidding for new PPAs. Terms and conditions in the PPAs could become more stringent under each successive generation of PPAs with TNB. In addition, to the extent PPAs are renewed or extended, they may be for shorter periods than current renewals or extensions. For example, in February 2013, SEV signed a supplemental agreement to the Existing SEV PPA, which applies from March 2013 to June 2017, and the New SEV PPA, which takes effect upon the expiration of the Existing SEV PPA in June 2017. The New SEV PPA, which applies from July 2017 to June 2027, has a shorter term of 10 years compared to the 21-year term under the Existing SEV PPA. In addition, these new contractual arrangements for SEV provide for lower levelised tariffs as compared to the Existing SEV PPA. We and our associate sell the power generated by our and its power plants pursuant to our and its PPAs and we and our associate plan to seek to renew or extend our and its existing PPAs and bid for new PPAs in the future. We cannot assure you that we and our associates will be able to renew or extend our or its existing PPAs (including our PD Power PPA) or secure new PPAs upon similar or satisfactory terms or at all, and failure to do so could have a material adverse effect on our business, financial condition, results of operations and cash flows. If we or our associate are unable to renew or ex1end any of our or its existing PPAs, we or our associate will not be able to sell power using the relevant power plant at that juncture. In such event, we or our associate may consider either selling our or its power plant equipment to a third-party or using the equipment in our other power plants in or outside of Malaysia. In Malaysia, the power plants owned by our subsidiaries and our associate are SUbject to the Electricity Supply Act. The entities owning these power plants operate under licences awarded by the Energy Commission, which is itself subject to the Electricity Supply Act. Only those licenced under the Electricity Supply Act (or otherwise exempted or created by statute to generate and/or supply electricity as a supply authority) are permitted to participate as suppliers of electricity in Malaysia. The power plants of our subsidiaries and associate have licences that expire on various dates in the future and we cannot assure you that the Energy Commission will renew the licences of our subsidiaries or associate upon their expiry dates. Any such non-renewal could have a material adverse effect on our business, financial condition, results of operations and cash flows. For further information on the licences held by our subsidiaries that operate power plants, see Annexure A of this Prospectus. (The rest of this page has been intentionally left blank) 5. RISK FACTORS (Cont’d) 5.2.10 The loss of certain tax exemptions and tax incentives or the imposition of new taxes would increase our tax liability and decrease our future profits We currently benefit from certain tax exemptions and tax incentives pursuant to the Income Tax Act, Customs Act and Sales Tax Act. With respect to the Customs Act and the Sales Tax Act, the Government, through the Malaysian Investment Development Authority, agreed to exempt import duty and sales tax pursuant to Section 14(2) of the Customs Act and Section 10 of the Sales Tax Act, respectively, in relation to qualifying machinery, equipment and materials to be imported for electricity generation and located at the Tanjung Bin Energy Power Plant. This exemption must be applied for on an annual basis and is subject to evaluation by the Government based on current policy and merit. In the FYE 31 December 2012, we also enjoyed tax incentives of RM120.0 million per year meant to address changes in the tax system that had affected the deductibility of certain of our interest expenses. These tax incentives ceased after the assessment year 2013. For information on the impact of such tax incentive on our income tax expenses, see Section 12.2.5(xi) of this Prospectus. There can be no assurance that these tax exemptions or tax incentives will not be revoked or repealed, or that we will be able to obtain and benefit from these or similar tax exemptions and tax incentives in the future, in which case our income from these sources would be subject to corporate income tax and accordingly, our tax expense would increase and our profitability would decrease. The loss of these tax exemptions and tax incentives or the imposition of new taxes, and any associated impact on us, could have a material adverse effect on our business, financial condition, results of operations and cash flows. 5.2.11 Global capital and credit market issues could negatively affect our liquidity, increase our costs of borrowing and disrupt the operations of our suppliers and customers Global capital and credit markets have experienced extreme volatility, disruption and decreased liquidity in recent years, making it more difficult for companies to access capital and credit markets. While there have been periods of stability in these markets, the environment has become more volatile and unpredictable. Volatility in global financial markets has added to the uncertainty of the global economic outlook and a number of countries, including European countries, the United States and China, are experiencing slow economic activity. While we do not have direct exposure to the affected European countries, the United States or China, the main risks we face are the damage to market confidence and access to, and costs of, funding and a slowing down in the activity of our business partners or other adverse impacts on entities with whom we have business dealings. We depend on stable, liquid and well-functioning capital and credit markets to fund our future projects and development and to make timely repayments of our debt obligations. If market conditions continue to deteriorate due to economic, financial, political or other reasons, our ability to obtain bank financing and access the capital markets in the future may be adversely affected. We cannot assure you that any required additional financing, either on a short-term or long-term basis, will be made available on terms satisfactory to us or at all. If adequate funding is not available when needed, or is available only on unfavourable terms, meeting our capital needs or otherwise taking advantage of business opportunities or responding to competitive pressures may become challenging. Our business could also be negatively affected if our suppliers or customers are unable to perform their obligations owed to us under our contracts with them due to tighter capital and credit markets or a slowdown in the general economy. Any or all of these developments could have a material adverse effect on our business, financial condition, results of operations and cash flows. 5. RISK FACTORS (Cont’d) 5.2.12 We are controlled by a substantial shareholder, whose interests may not be aligned with those of the other shareholders of our Company As disclosed in Section 9.3.3 of this Prospectus, upon the successful completion of our IPO and assuming that the Over-allotment Option is not exercised, MMC will own (directly and indirectly through its wholly-owned subsidiary, AOA) 37.8% of our enlarged issued and paid-up share capital. As the controlling shareholder of our Company, other than in respect of certain votes regarding matters in which it is an interested party and must abstain from voting under the Listing Requirements and the Act, MMC will be able to influence the election of our Directors and the approval of any corporate proposals or transactions requiring the approval of our shareholders. The interests of MMC may differ from, or conflict with, the interests of our other shareholders. Although we will be required to comply with the conflicts of interests rule under the Listing Requirements, there can be no assurance that the interests of MMC will be aligned with the interests of the other shareholders of our Company. 5.2.13 We are a holding company and as a result, are dependent on dividends from our subsidiaries, associates and joint venture to meet our obligations and to provide funds for payment of dividends on our Shares We are a holding company and conduct substantially all of our operations through our subsidiaries, associates and joint venture. Accordingly, dividends and other distributions received from our subsidiaries, associates and joint venture are our principal sources of income. Consequently, the amount of these dividends and distributions are an important factor in determining our ability to pay dividends on our Shares (to the extent declared by our Board). The ability of our subsidiaries, associates and joint venture to pay dividends or make other distributions to us is subject to the availability of their distributable reserves and them having sufficient funds that are not needed to fund their operations, debt servicing and other obligations or business plans. The ability to pay dividends or make other distributions is also subject to applicable laws, including restrictions on repatriation of profits, and restrictions on such payments contained in relevant financing and other agreements. In addition, changes in applicable accounting standards may affect the ability of our subsidiaries, associates and joint venture, and, consequently, our ability, to pay dividends. As we are a shareholder of our subsidiaries, associates and joint venture, our claims as a shareholder will generally rank junior to all claims of our subsidiaries’, associates’ and joint venture’s creditors and claimants. In the event of a liquidation of a subsidiary, associate or joint venture, there may not be sufficient assets for us to recoup our investment in that entity. 5.2.14 A delay or failure in the supply of our specialty parts, components or equipment from third-party suppliers may adversely affect our business and results of operations We rely on third-parties for the timely supply of our specialty parts, components and equipment required for operation and maintenance of our plants. Our plants use specialty parts, components and equipment developed by our chosen technology suppliers, which may not be available from other companies If we are not supplied with the specialty parts, components or equipment that we require in a timely manner for any reason, including as a result of logistical, technical or financial difficulties at the third-party suppliers, we may experience disruptions to our business operations. 5. RISK FACTORS (Cont’d) Further, our third-party suppliers may request for changes in pricing, payment terms or other terms that couid result in us having to make substantial additional payments or incur additional costs. In addition, any cancellation of, dispute arising from or inability to maintain business relationships with our third-party suppliers could adversely affect the operations of our power plants, and we may not be able to secure similar specialty parts, components or equipment from other third-parties. Any of these events could have a material adverse effect on our business and results of operations. 5.2.15 Exchange rate fluctuations could negatively affect our financial condition and results of operations Part of our income and expenses, particularly those relating to our overseas investments and operations, are denominated in foreign currencies, while our reporting currency is the RM. Fluctuations in the exchange rate between the RM and foreign currencies may not have a material impact on our foreign currency denominated cash flow, but they may have an adverse impact on our reported income and expenses as they are reqUired to be stated in RM, as well as on financial and other covenants contained in our indebtedness that are based upon such reported financial figures. For further information on the net foreign exchange gain and loss recognised by our Group for the FYE 31 December 2012, 2013 and 2014, see note 37 of Section A of the Accountants’ Report included in Section 13 of this Prospectus. 5.2.16 Existing or future claims against our Company, subsidiaries, associates or joint venture, or our Directors or key management may have an unfavourable impact on us From time to time, our Company, our subsidiaries, associates or joint venture, or our Directors or key management may be subject to litigation, investigations, claims and other legal proceedings. For a description of certain legal proceedings, see Sections 12.2.7(vii) and 15.5 of this Prospectus. Legal proceedings could cause us to incur unforeseen expenses, could occupy a significant amount of our management’s time and attention, and could negatively affect our business operations and financial position. Further, legal proceedings could be time consuming with unpredictable outcomes and it is difficult for us to predict the possible losses, damages or expenses arising from such legal proceedings. An unfavourable outcome in these or other legal proceedings could have a material adverse effect on our business, financial position, results of operations and cash flows. (The rest of this page has been intentionally left blank) 5. RISK FACTORS (Cont’d) 5.3 RISKS RELATING TO OUR SHARES AND OUR IPO 5.3.1 The offering of our Shares may not result in a liquid market for our Shares Prior to the Listing, there has been no public market for our Shares. There can be no assurance as to the development of any market, or the liquidity of any market that may develop, for our Shares, the ability of holders to sell our Shares or the prices at which holders would be able to sell our Shares. None of us, the Promoters, the Selling Shareholders or the Placement Managers have an obligation to make a market for our Shares. Bursa Securities has granted its approval for the Listing. It is expected that there will be an approximate 10-Market Day gap between the closing of the Institutional Offering and trading of our Shares. We cannot assure you that there will be no event or occurrence that will have an adverse impact on the securities markets, our industry or us during this period that would adversely affect the market price of our Shares when they begin trading.
5.3.2 Our Share price may be volatile The market price of our Shares could be affected by numerous factors, including the following: (i) general market, political and economic conditions;
(ii) trading liquidity of our Shares;
(iii) differences in our actual financial and operating results and those expected by investors and analysts; (iv) changes in earnings estimates and recommendations by financial analysts;
(v) changes in market valuations of listed shares in general or shares of companies comparable to ours;
(vi) perceived prospects of our business and the industry in which we operate;
(vii) changes in government policy, legislation or regulation; and (viii) general operational and business risks. In addition, many of the risks described elsewhere in this Prospectus could materially and adversely affect the market price of our Shares. Accordingly, there can be no assurance that our Shares will not trade at prices lower than the Institutional Price or the Retail Price. Over the past few years, the Malaysian, regional and global equity markets have experienced significant price and volume volatility that has affected the share prices of many companies. Share prices of many companies have experienced wide fluctuations that are often unrelated to the operating performance of these companies, including fluctuations as a result of developments in other emerging markets. There can be no assurance that the price and trading of our Shares will not be subject to fluctuations. 5. RISK FACTORS (Cont’d)
5.3.3 There may be a delay in, or termination of, our Listing The occurrence of certain events, including the following, may cause a delay in, or termination of, our Listing: (i) the Joint Underwriters’ exercise of their rights under the Retail Underwriting Agreement to discharge themselves of their obligations thereunder;
(ii) our inability to meet the minimum pUblic spread requirement as determined by Bursa Securities, that is, having at least 25% of our enlarged issued and paid-up share capital in the hands of at least 1,000 public shareholders holding at least 100 Shares each at the point of our Listing; or
(iii) the revocation of approvals from the relevant authorities for our Listing for whatever reason. In such an event, investors will not receive any IPO Shares, and we and the Selling Shareholders will become liable to return in full all monies paid in respect of all applications for the IPO Shares. If such monies are not returned in full within 14 days after we and the Selling Shareholders become liable to repay it, then, in accordance with the provision of Subsection 243(2) of the CMSA, we and the Selling Shareholders (including the officers of our Company and the Selling Shareholders) shall be jointly and severally liable to return such monies with interest at the rate of 10% per annum or at such other rate as may be prescribed by the SC from the expiration of that period until the full refund is made. In the event that our Listing is aborted and our Shares have been allotted to the shareholders, a return of monies to our shareholders could only be achieved by way of a cancellation of share capital as provided under the Act and its related rules. Such cancellation requires the sanction of our shareholders by special resolution in a general meeting, consent by our creditors (unless dispensation with such consent has been granted by the High Court of Malaya) and the confirmation of the High Court of Malaya. In the event the approval of the High Court of Malaya is not obtained, there can be no assurance that such monies can be recovered within a short period of time or at all in such circumstances.
5.3.4 We may not be able to pay dividends We propose to pay dividends out of cash generated by our operations after setting aside necessary funding for capital expenditures and working capital needs. For further information on our dividend policy and our ability to pay dividends, see Sections 12.8 and 5.2.13 of this Prospectus, respectively. Dividend payments are not guaranteed, and our Board may decide, in its sole and absolute discretion, at any time and for any reason, not to pay dividends or to pay smaller dividends than we currently propose If we do not pay dividends, or pay dividends at levels lower than that anticipated by investors, the market price of our Shares may be negatively affected and the value of the investment in our Shares may be reduced. Further, our payment of dividends may adversely affect our ability to fund unexpected capital expenditures as well as our ability to make interest and principal repayments on any borrowings that we may have outstanding at the time. As a reSUlt, we may be required to borrow additional money or raise capital by issuing equity securities, which may not be on favourable terms or available at all. Further, in the event we incur new borrowings subsequent to our Listing, we may be subject to covenants restricting our ability to pay dividends. 62 5. RISK FACTORS (Cont’d) 5.3.5 The sale, or the possible sale, of a substantial number of our Shares in the public market following our IPO could adversely affect the price of our Shares Following the IPO, up to 1,521,740,000 IPO Shares, representing up to approximately 30.4% of our enlarged issued and paid-up share capital, will be pUblicly heid by investors participating in our IPO, while 1,890,434,000 Shares, representing approximately 37.8% of our eniarged issued and paid-up share capital, will be held by MMC (directly and indirectly through its wholly-owned subsidiary, AOA), assuming that the Over-allotment Option is not exercised. Following the Listing, the Shares sold in our IPO will be tradable on the Main Market of Bursa Securities without restriction. Our Shares may also be sold in the United States, subject to the restrictions of the U.S. Securities Act, or outside the United States, subject to the restrictions of Regulation S. We, EPF, KWAP, SEASAF and SCI Asia are expected to enter into lock-up arrangements and MMC and AOA, as the Promoters, are subject to moratorium in accordance with the Equity Guidelines and are also expected to enter into lock-up arrangements. Notwithstanding our eXisting level of cash and cash equivalents, we may issue additional Shares after the end of the lock-up period in connection with financing activities or otherwise. In addition, any of EPF, KWAP, SEASAF, SCI Asia, MMC or AOA could dispose of some or all of our Shares that they hold after the lock-up period and moratorium period pursuant to their own investment objectives. If any of EPF, KWAP, SEASAF, SCI Asia, MMC or AOA sells, or is perceived as intending to sell, a substantial amount of our Shares that they hold, the market price for our Shares could be adversely affected. 5.3.8 Because the Retail Price and the Institutional Price are higher than our NA per Share, purchasers of our Shares in our IPO will experience immediate and substantial dilution, and purchasers of our Shares may experience further dilution if we issue additional Shares in the future The Retail Price and the Institutional Price are higher than our NA per Share. Therefore, purchasers of our Shares in our IPO will experience an immediate dilution in NA per Share of RMO.53 per Share assuming that the Retail Price is RM 1.80 and Institutional Price is RM1.80, and our existing shareholders will experience an increase in NA per Share. In order to meet our funding requirements, we may consider offering and issuing additional Shares or equity-linked securities in the future. Purchasers of our Shares may experience further dilution in NA per Share if we issue additional Shares or equity-linked securities in the future.
5.3.7 Forward-looking statements in this Prospectus may not be accurate This Prospectus contains forward-looking statements. All statements, other than statements of historical facts, included in this Prospectus, including, without limitation, those regarding our financial position, business strategies, plans and objectives for future operations, are forward-looking statements. Such forward-looking statements are made based on assumptions that we believe to be reasonable as at the date of this Prospectus. Forward-looking statements can be identified by the use of forwardiooking terminologies, such as the words “may”, “will”, “would”, “couid”, “believe”, “expect”, “anticipate”, “intend”, “estimate”, “aim”, “plan”, “forecast” or similar expressions, and include all statements that are not historical facts. Such forwardlooking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry resuits, to be materially different from any future results, performance or achievements, or industry resuits expressed or implied by such forward-looking statements. 53
5. RISK FACTORS (Cont’d) Such forward-looking statements are based on numerous assumptions regarding our present and future business strategies and the environment in which we will operate in the future. Such factors include, among others, general economic and business conditions, competition, the impact of new laws and regulations affecting our industry and initiatives of the Government. In light of these uncertainties, the inclusion of such forward-looking statements in this Prospectus should not be regarded as a representation or warranty by us or our advisers that such plans and objectives will be achieved. (The rest of this page has been intentionally left blank)