This article first appeared in digitaledge Weekly, on September 14 - 20, 2015.

YTL Power International Bhd may have won the London arbitration for an estimated RM700 million from Petroliam Nasional Bhd (Petronas) and secured a short extension for its Paka power plant, but finalising both may not be so simple.

According to industry sources, Petronas has filed an application with the High Court to review the arbitration. If this action is successful, it may result in further arbitration to decide on the award of damages.

At the same time, it is understood that YTL Power (fundamental: 1.50; valuation: 2) has not yet been able to renew its gas supply agreement (GSA) with Petronas, for the extension of the Paka plant’s power purchase agreement (PPA). According to industry sources, one of the conditions of the PPA is to secure a GSA, but YTL Power has not been able to do so.

Keep in mind that YTL Power’s PPA for the 808mw combined cycle gas turbine (CCGT) power plant in Paka, Terengganu, will expire on Sept 30.

In notes accompanying YTL Power’s latest financials, the company says it “has been selected as a successful bidder for supply of power from the existing facility in Paka, under the short-term capacity bid”.

“The discussion on the terms and conditions is ongoing, and on completion, a new PPA is expected to be signed for the period from March 1, 2016 to Dec 31, 2018,” it adds.

It is important to note that Petronas has a virtual monopoly on gas supplies in Malaysia, and YTL Power has no other alternative. Furthermore, there shouldn’t be any dispute over pricing, as all fuel costs are passed through to Tenaga Nasional Bhd (TNB).

Also note that the national grid cannot afford to lose the generation capacity of Paka due to delays in several large power plant projects. One example is the 2,000mw coal-fired power plant that 1Malaysia Development Bhd was unable to deliver and had to be transferred to TNB — Project 3B.

When contacted, YTL Power declined to comment on the matter.

The delay in signing the GSA is concerning, but this would not be the first time YTL Power would find itself at odds with Petronas.

The two companies are in dispute over an estimated RM700 million that YTL Power is claiming for overpayment of gas supplies for its power plant concessions.

The disagreement arose back in 1997, after Petronas raised the price of gas it supplied to YTL Power’s power plants — the Paka plant and the 400mw plant in Pasir Gudang, Johor.

Note that YTL Power did not manage to secure an extension for the Pasir Gudang plant.

Based on the original GSA signed in 1993, Petronas was supposed to sell gas to YTL Power at a price that was calculated based on a pre-determined formula against the market price of gas.

However, when the government migrated to a fixed price for gas, YTL Power, in its annual report, states that Petronas “unilaterally withdrew a discount provided for under the market price-related formula and as a consequence, a dispute arose over whether the discount is, in the circumstances, applicable under the GSA”.

In a nutshell, Petronas was supposed to supply gas to YTL Power at a discounted price but withdrew the discount after 1997, when the gas price was fixed by the government at RM6.40 per mmbtu (million British thermal units) for all power plants in the country, in light of the Asian financial crisis.

Since then, YTL Power claims, it has been reluctantly overpaying for gas supplies and is now attempting to recover the sum from Petronas. Notwithstanding the so-called overpayment, YTL Power’s power plants continued to be profitable.

It has been previously reported that the London-based arbitration, which had held evidential hearings since March, had ruled in favour of YTL Power and awarded some RM700 million in damages.

However, at a time when oil prices are low and the government needs high dividends, it may be difficult for Petronas to fork out the money.

YTL Power currently recognises RM261.06 million as “amount recoverable from supplier” in its 2014 annual report in relation to the arbitration. Its directors have advised that there is a “more than reasonable prospect that the amount of RM261 million paid under protest would be recoverable, pending arbitration proceedings against the gas supplier”.

However, the actual amount awarded could be much higher — around RM700 million — which would be the upside for shareholders if YTL Power can get Petronas to pay up.