YTL Power International Bhd is one step closer to recovering up to RM700 million from Petroliam Nasional Bhd (Petronas) for overpaying on gas supplies over the course of the former’s power plant concessions.

According to sources, arbitrators in London have reached a decision in favour of YTL Power (fundamental: 1.20; valuation: 2.40) after conducting evidential hearings since March this year.

However, the exact quantum of the settlement, when and how it will be paid were not made clear as the settlement is still being finalised.

It is worth noting that YTL Power has already recognised RM261.06 million as “amount recoverable from supplier” in its 2014 annual report in relation to the arbitration. The company’s directors had advised that there was “more than reasonable prospect that the amount of RM261 million paid under protest would be recoverable pending arbitration proceedings against the gas supplier.”

Nonetheless, the quantum of the settlement is expected to be substantially higher, as much as RM700 million, say sources.

When contacted, YTL Power executives declined to comment, saying that all announcements relating to the arbitration’s outcome will be announced in due course in line with the guidelines for listed companies.

While the potential sum recoverable appears large, it is relatively small compared to YTL Power’s RM10.9 billion market capitalisation.

Assuming the sum is RM700 million, it works out to a gain of about a 10 sen per share. Based on last week’s closing price of RM1.55, this represents 6.5% of the share price.

The disputed sum stems from a disagreement between YTL Power and Petronas that dates back to 1997, on the gas price the former has to pay.

Recall that YTL Power had in 1993 entered into a gas supply agreement with Petronas, where the price of the gas to be supplied is calculated based on a market price-related formula.

The gas was for YTL Power’s 800mw and 400mw power plants in Paka, Terenganu, and Pasir Gudang, Johor, respectively.

However, when the government migrated to a fixed gas price, YTL Power, in its annual report, says 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 the light of the Asian financial crisis. Since then, YTL Power claims it has been reluctantly overpaying for gas, and is now attempting to recover the sum from Petronas.

Another point for investors to consider is the fact that Petronas may not settle the amount owing to YTL Power promptly and that the nature of the settlement may not be in cash.

However, Petronas will not be able to appeal against the outcome of the arbitration as both parties have agreed to accept the final decision by the three-judge panel.

Note that YTL Power and Petronas each nominated one judge while the third was co-nominated by both companies. The judges were Lord Nicholas Phillips, Lord Mark Saville and Lord David Hope.

This article first appeared in The Edge Malaysia Weekly, on June 29 - July 5, 2015.

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