The long-awaited Third Party Access (TPA), which was delayed twice in the past two years, is finally implemented. Earnings impact is expected to be neutral and should cleared earlier concerns of severe rate cut. The Incetive Base Regulation (IBR) framework, which provides transparency and efficiency-driven reward system, is positive for both PETGAS and end-users. BUY with a TP at RM22.65. 

PETGAS announced that the Energy Commission, has prescribed the IBR framework in setting the Base Tariff in 2019 for the Peninsular Gas Utilisation (PGU) at RM1.072/GJ, Melaka RGT at RM3.518/mmbtu and Pengerang RGT at USD0.637/mmbtu. In addition, it also revealed the 2nd term of remuneration structure of Gas Processing Agreement (GPA) of: (i) fixed Reservation Charge of RM2,524/mmbtu from RM2,300/mmbtu, (ii) flow rate charge of RM0.20/GJ of dry gas processed above the committed target of 1,750mm btu per day, (iii) performance incentive for higher overall equipment effectiveness performance targets for Ethane, Propane, Butane as well as the production target for Ethane, and (iv) penalty and incentive system for operating within the +5%/-5% range for Agreed Operating Parameters. 

Separately, PETGAS is paying parent Petronas RM 108.0m for the purchase of linepack for PGU and heel for Melaka RGT and Pengerang RGT under the requirement of TPA. Linepack is the minimum quantity of gas in the pipelines which allows the instantaneous offtake of natural gas from the pipeline system and provides sufficient buffer to cater for fluctuations of gas demand within the PGU system. 

We expect neutral earnings impact from the TPA as the higher fixed Reservation Charge of c.RM124m is offset by the lower Base tariff against our assumptions of RM1.232/GJ for PGU and USD1.00/mmbtu for both Melaka RGT and Pengerang RGT. We remain optimistic on the company as the TPA offers transparency with detailed RGT tariff, which was not made known previously.

Source: Rakuten Research - 2 Jan 2019