PETRONAS GAS BHD: DIVIDEND PAYOUT POLICY Farid was the Chief Financial Officer (CFO) for PETRONAS Gas Bhd. He was sitting in his office, pouring a cup of coffee for himself when he read an article published in a local newspaper on Thursday, 18th of May, 2012 on Gas Malaysia's (its competitor) dividend policy that is set for high dividend payout as shown in Exhibit 1. Being the CFO of Petronas Gas Bhd., he gave a careful thought on whether the increment of dividend payout would be the right move or not for the firm. He was thinking whether would benefit the shareholders or he should choose another alternative. So he started to review the Petronas Gas Bhd's financial position. He knew then that the company has changed its financial year end from 31 March to 31 December yearly. The annual revenue reported was RM2,765.1 million which represents 4.2% increment from RM2,652.4 million, which was recorded in the last nine months period in the financial year of 2010/2011. This was due to a higher Gas Processing Revenue (GPR) and higher Industrial Utilities Revenue, which were RM90.3 million (an increase of 7.5%) and RM55.4 million (an increase of 9.1%) respectively. Farid compared the revenue from 31 March 2010 to 31 March 2011 and he could also see a 9.4% growth in revenue from RM3,221.8 million to RM3,525.0 million as shown in Exhibit 2, 3, and 4. Earnings Per Share (EPS) recorded a decrease from 72.8 sen to 54.5 sen, a considerable drop in 31 December 2011 compared to the nine months earlier. The decrease is due to the reduction of net income from RM1,439,049 to RM1,080,793 in the respective period. On the other hand, the financial statements illustrated that in the year 2010, EPS was 47.6 sen, and the company managed to increase EPS by 52.7% in March I am grateful to Foroogh Farzami for providing the informations on the case. 2011. Based on the PGB's annual report, "During the year, the Company paid interim dividend of 15 sen per share under the single tier system amounting to RM296.8 million. The Board of Directors recommended a final dividend of 25 sen per share under the single tier system, amounting to RM494.7 million with respect of the financial period ended 31 December 2011. This, together with the interim dividend, will result in total gross and net dividend of 40 sen per share, representing a payout ratio of 73.2% on the profit after tax for the financial period ended on 31 December 2011. This marks an increase in dividend payout ratio as compared to 68.7% in the previous financial year." A question crossed Farid's mind once again. Considering the increase of GBP's sales revenue and also the operation costs and taxes in addition to other factors, should the company maintain a stable consistent payment policy or should they let payment vary as condition changes?" Exhibit 5 to 9 shows PETRONAS Gas Berhad's Financial Statements and Share Price Performance for the period ended 31 March and 31 December 2011. PETRONAS Gas Berhad Background PETRONAS Gas Berhad (PGB) was incorporated in 1983 and its main activities are processing and performing a series of transmission on natural gases in Malaysia. PGB's core business portfolio is divided into four major divisions; Plant Operations, Transmission Operations, Centralized Utility Facilities and Technical, as well as Facilities Development. The first two are directly related, whereby the former is responsible for processing the gas piped from PETRONAS oil and gas fields offshore Peninsular Malaysia whilst the latter is responsible for transporting the processed gas via PGB's Peninsular Gas Utilization (PGU) pipeline network to PETRONAS' customers nationwide. The third division, which is the Centralized Utility Facilities and Technical, supports the gas value chain by supplying industrial utilities to various petrochemical plants operating in Kerteh, Terengganu and Gebeng, Pahang. The fourth division is a technical services outfit for PGB, which also extends its expertise in engineering and project management to other entities within the PETRONAS Group of Companies. PGB's growth and expansion involving new ventures also led to the establishment of a fifth full-fledged division, which is the Regasification Terminal Division. This new division is dedicated to oversee and drive the engineering, constructing, and commissioning the operations and maintenance of the country's first ever Liquefied Natural Gas (LNG) Regasification Facilities currently underway within the vicinity of Sungai Udang Port in Melaka and also other similar ventures in the near future. Natural gas from the offshore fields is processed at its six Gas Processing Plants. With total combined sales gas processing capacity of over 2,000 million, these gas processing plants process natural gas into sales gas and other by-products such as ethane, propane, and butane to be transmitted to PETRONAS' customers in power and non-power sectors via PGB's Peninsular Gas Utilization pipeline network. The Transmission Operations Division is responsible for the transmission and delivery of sales gas to customers in the power, industrial, and commercial sectors throughout Peninsular and East Malaysia. In 1998, PGB expanded and diversified the business into manufacturing, supplying and marketing of industrial utility products to customers in Kerteh Integrated Petrochemical Complex and Gebeng Industrial Area through its Centralized Utility Facilities Division. PGB today gives out a strong track record in transmission operations, whereby in 2007, it entered into an agreement with PETRONAS Carigali Sdn. Bhd. for the provision of project execution services on Sabah-Sarawak Gas Pipeline project. Natural Gas Industry The structure of the natural gas industry has changed dramatically since the middle of 1980s. In the past, the structure of the natural gas industry was not seen as complicated at all. It has limited flexibility and few options for natural gas delivery. Moreover, the price of natural gas that each producer could charge to local distribution companies was regulated by the Malaysian Government and was monitored by related authority closely in order to prevent any unnecessary price fluctuation. However, this regulation caused less competitive market place and eventually led to natural gas shortage in the 1970s. Nowadays, this industry is more open to competition and wellhead prices are not regulated anymore, thus the price of natural gas is more dependent on supply and demand interactions. In this new era of natural gas industry, marketers play a great role. Marketers serve to facilitate the movement of natural gas from the producer to the end-user, whether they can do the natural gas transfer or just simply facilitate the sale or purchase of natural gas. Natural gas obeys the law of supply and demand like other competitive commodity market. When demand for gas is rising, prices will rise accordingly and producers will respond by increasing their exploration and production capabilities. However, increase in natural gases production is not as easy and fast as other industries, and it also consumes a lot of time and money in order to acquire leases, secure required government permits, do exploratory seismic work, drill wells and connect wells to pipelines. This can take as little as six months, and in some cases, it can be up to ten years. Furthermore, in this particular industry, there is always uncertainty involved with the geologic productivity of existing wells and planned new wells. Thus, it takes time to adjust supplies in the face of increasing demand and rising prices. When the gas price drops, producers will lose their interest to supply in vast amount and they will start to reduce their expenditure for new exploration and production. This situation, one way or another, will increase the demand again. The relationship between changes in the price of natural gas and variations in the supply and demand for natural gas is sometimes referred to as the "natural gas market cycle." The Situation Based on the information provided, Petronas Gas Berhad intends to pay high dividend for the financial year ending Dec 31, 2012 in order to attract more investors. There are questions to be answered in this type of situation: 1. Should Petronas Gas Berhad pay cash dividend, or is stock repurchase a better choice? Discuss. (10 marks) EXHIBIT 1 NEWS: Gas Malaysia sets for high dividend payout, May 18, 2012 KUALA LUMPUR (Bernama): Its position as the sole licensed operator and distributor of natural gas in Peninsular Malaysia and a high dividend payout policy are among factors attracting investors to Gas Malaysia Bhd. The debt-free company, with small capital expenditure requirements for the next few years, expects to pay out as dividends its entire consolidated after tax profit for the financial year ending Dec 31, 2012. It is looking at a payout ratio of not less than 75 per cent of its consolidated after tax profit for 2013. Its managing director, Datuk Muhamad Nor Hamid, said on Friday, Gas Malaysia's major spending will take place this year where it will invest RM130 mil to RM140 mil for pipeline expansion and infrastructure in preparation for the distribution of the liquefied natural gas that would be supplied by Petronas from Malacca. It would be expanding its pipeline by 70 km to 90 km to supply new customers and strengthen supply security. Even then, it would be financed with internal funds, he said at a press conference after the launching of Gas Malaysia's prospectus. "At least for the next three to four years, we don't need to raise extra capital," he said, adding that for the next few years, the annual capex requirement for Gas Malaysia would be around RM30 mil to RM40 mil. Gas Malaysia, which operates 1,800 km of pipelines across Peninsular Malaysia, gets all its natural gas supply from Petronas. Commenting on the dip in net profit to RM229.2 mil for 2011 against RM298.3 mil in 2010, he said it was due to the new gas tariff which resulted in the lower margin. Gas Malaysia has 700 industrial customers, 519 commercial customers and 10,612 residential customers for natural gas, while its liquefied petroleum gas customers comprise one industrial customer, 1,132 commercial customers and 20,663 residential customers. He said 99% of Gas Malaysia's revenue is derived from the 701 industrial customers. The company is scheduled for listing on the Main Market of Bursa Malaysia Securities Bhd on June 11. In conjunction with its listing, the existing shareholders will offer for sale 333.840 million shares with indicative initial public offering price of RM2.20 each. Upon listing, MMC-Shapadu (Holdings) Sdn Bhd will see its stake reduced to 40.7% from 55%, while Tokyo Gas-Mitsui & Co Holdings Sdn Bhd's stake will come to 18.5% from 25% and Petronas Gas Bhd's stake will be reduced to 14.8% from 20%. EXHIBIT 2 RM Million Revenue Profit Before Tax Profit After Tax Total Assets Total Equity Long Term Liabilities Profit as % Revenue - Before Tax - After Tax Earnings Per Share (sen) - Basic Net Assets Per Share (sen) EXHIBIT 3 Five-year group financial highlights Year ended 31.3.2008 31.3.2009 31.3.2010 31.3.2011 3,125.7 3,415.1 3,221.8 3,525.0 1,394.1 1,231.4 1,243.8 1,900.3 1,092.9 928.0 940.7 1,439.1 9,793.3 9,867.1 9,834.7 10,509.9 7,922.4 8,038.3 8,017.0 8,515.2 1,636.5 1,610.9 1,583.3 1,542.5 44.6 36.1 38.6 53.9 35.0 27.2 29.2 40.8 55.2 46.9 47.6 72.7 400.4 406.3 405.1 430.3 Earnings Per Share and Net Dividends Per Share (sen) 35.0 35.0 33.7 31.3 25.0** 15.0 15.0 15.0 10.9 11.3 2008 2009 2010 2011 PE2011* Financial year ended 31 March *Based on a 9 months' financial period from 1 April 2011 to 31 December 2011. **To be approved at the Company's Twenty Ninth Annual General Meeting on 15 May 2012 Nine months period ended 31.12.2011 2,765.1 1,433.0 1,080,8 10,746.5 8,643.9 1,508.4 51.8 39.1 54.6 436.8 Final Dividend Interim Dividend Revenue (RM million) Earning per share (sen) FREE 31.3.2008 31.3.2009 31.3.2010 31.3.2011 31.12.2011 31.3.2008 31.3.2009 31.3.2010 31.3.2011 31.12.2011 EXHIBIT 4 STATEMENTS OF COMPREHENSIVE INCOME FOR THE NINE MONTHS PERIOD ENDED Group Increase/(Decrease) 31.03.2011 31.12.2011 RM million RM million RM million Gas processing revenue 1,299.9 1,209.6 90.3 7.5 -Throughput services 931.5 933.5 (2.0) (0.2) - Performance based structure income 368.4 276.1 92.3 33.4 Gas transportation revenue 803.4 836.4 (33.0) (3.9) Sale of industrial utilities 661.8 606.4 55.4 9.1 Revenue 2,765.1 2,652.4 112.7 4.2 Cost of gas processing (570.3) (8.7) (1.5) Cost of gas transportation (306.4) 75.2 24.5 Cost of industrial utilities (488.4) (48.6) (10.0) Cost of revenue (1,365.1) 17.9 (1.3) Gross profit 1,287.3 130.6 10.1 Other income and 67.2 (64.4) (95.8) administrative expenses Operating Profit 1,354.5 66.2 (4.9) Financing costs (15.1) (1.2) (7.9) Share of profit after tax of accounted 47.7 (19.1) (40.0) associate and jointly controlled entity Profit before tax 1,387.1 45.9 3.3 Taxation (330.7) (21.5) (6.5) Profit after tax 1,056.4 24.4 2.3 Basic earnings per share (sen) 53.39 1.2 2.3 Profit before tax / Revenue margin 52.3% Profit after tax / Revenue margin 39.8% (579.0) (231.2) (537.0) (1,347.2) 1,417.9 2.8 1,420.7 (16.3) 28.6 1,433.0 (352.2) 1,080.8 54.62 51.8% 39.1% EXHIBIT 5 Statements of Financial Position AT 31 DECEMBER 2011 Group Company Note 31.12.2011 31.03.2011 31.12.2011 31.03.2011 RM'000 RM000 RM 000 RM 000 3 7,458,272 6,830,609 6,449,104 6,702,248 4 881,716 75,729 5 179,567 175,087 103,336 103,336 6 5,414 2,606 250 250 7,643,253 7,008,302 7,434,406 6,881,563 7 102,449 100,399 102,449 100,399 8 386,371 369,997 428,441 374,513 9 245,562 275,082 245,562 275,082 10 2,368,834 2,756,079 2,322,896 2,743,731 3,103,216 3,501,557 3,099,348 3,493,725 10,746,469 10,509,859 10,533,754 10,375,288 1,978,732 1,978,732 1,978,732 1,978,732 6,487,024 6,504,923 6,415,176 6,578,673 8,557,405 8,465,756 8,483,655 8,393,908 86,516 49,415 8,643,921 8,515,171 8,483,655 8,393,908 444,735 423,580 444,735 423,580 1,053,000 1,107,000 1,053,000 1,107,000 10,692 11,937 1,508,427 1,542,517 1,508,427 10,692 11,937 1,542,517 447,632 340,030 395,198 326,728 146,489 112,141 146,474 112,135 594,121 452,171 541,672 438,863 2,102,548 1,994,688 2,050,099 1,981,380 10,746,469 10,509,859 10,533,754 10,375,288 ASSETS Property, plant and equipment Investment in subsidiaries Investment in associate Investment in jointly controlled entity TOTAL NON-CURRENT ASSETS Trade and other inventories Trade and other receivables Fund and other investments Cash and cash equivalents TOTAL CURRENT ASSETS TOTAL ASSETS EQUITY Share capital Reserves Total equity attributable to the owners of the Company Non-controlling interests Borrowings Deferred tax Deferred income TOTAL NON-CURRENT LIABILITIES Trade and other payables Taxation TOTAL CURRENT LIABILITIES TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES TOTAL EQUITY LIABILITIES 11 12 13 14 15 16 17 EXHIBIT 6 PETRONAS GAS BERHAD (181671-4) 133 Statements of Comprehensive Income FOR THE PERIOD ENDED 31 DECEMBER 2011 Revenue Cost of revenue Gross profit Administration expenses Other expenses Other income Operating profit Financing costs Share of profit after tax of equity accounted associate and jointly controlled entity Profit before taxation Tax expense Profit for the period/Total comprehensive income for the period Profit for the period/Total comprehensive income for the period attributable to: Owners of the Company Non-controlling interests TOTAL COMPREHENSIVE INCOME FOR THE PERIOD Note 18 18 18 19 22 23 13 Group Company 1.4.2011 1.4.2011 1.4.2010 to 1.4.2010 to 31.03.2011 RM 000 31.12.2011 to 31.12.2011 RM'000 31.03.2011 RM'000 RM'000 2,765,124 3,524,952 2,765,124 3,524,952 (1,347,251) (1,737,779) (1,347,251) (1,737,779) 1,417,873 1,787,173 1,417,873 1,787,173 (113,038) (93,450) (107,363) (92,921) (97,068) (67,576) (97,068) (67,576) 232,353 234,112 294,974 212,887 1,420,654 1,858,500 1,447,554 1,921,650 (16,263) (20,096) (16,263) (20,096) 28,600 61,851 1,432,991 1,900,255 1,431,291 1,901,554 (352,198) (461,206) (352,179) (461,177) 1,080,793 1,439,049 1,079,112 1,440,377 1,081,014 1,439,251 1,079,112 1,440,377 (221) (202) 1,080,793 1,439,049 1,079,112 1,440,377 Statement of Changes in Equity FOR THE PERIOD ENDED 31 DECEMBER 2011 Attributable to owners of the Company- -Non-distributable Distributable Share Share Retained Non-controlling Interests Note Capital Premium Profits Total RM 000 RM 000 RM 000 RM000 RM 000 1,978,732 1,186,472 4,850,666 8,015,870 1,131 1,439,251 1,439,251 (692,556) (692,556) (296,809) (296,809) 1,978,732 1,186,472 5,300,552 8,465,756 1,081,014 1,081,014 (692,556) (692,556) (296,809) (296,809) 37,322 1,978,732 1,186,472 5,392,201 8,557,405 86,516 Note 11 Note 12 Note 13 Note -Attributable to owners of the Company- -Non-distributable Distributable Share Share Capital Premium RM 000 Retained Profits Total RM'000 RM 000 RM'000 1,978,732 1,186,472 4,777,692 7,942,896 1,440,377 1,440,377 24 (692,556) (692,556) 24 (296,809) (296,809) 1,978,732 1,186,472 5,228,704 8,393,908 1,079,112 1,079,112 24 (692,556) (692,556) 24 (296,809) (296,809) 1,978,732 1,186,472 5,318,451 8,483,655 Note 11 Note 12 EXHIBIT 7 Group Balance at 1 April 2010 Total comprehensive income for the year Dividends 31.03.2010 final - 31.03.2011 interim Issue of ordinary share capital to non-controlling interests Balance at 31 March 2011/1 April 2011 Total comprehensive income for the period Dividends 31.03.2011 final - 31.12.2011 interim Issue of ordinary share capital to non-controlling interests Balance at 31 December 2011 Company Balance at 1 April 2010 Total comprehensive income for the year Dividends 31.03.2010 final - 31.03.2011 interim Balance at 31 March 2011/1 April 2011 Total comprehensive income for the period Dividends 31.03.2011 final - 31.12.2011 interim Balance at 31 December 2011 24 24 24 24 Total Equity RM'000 8,017,001 1,439,049 (692,556) (296,809) 48,486 48,486 49,415 8,515,171 (221) 1,080,793 (692,556) (296,809) 37,322 8,643,921 (202) EXHIBIT 8 Statements of Cash Flows FOR THE PERIOD ENDED 31 DECEMBER 2011 Note CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers Cash paid to suppliers and employees Interest income from fund and other investments Taxation paid Net cash generated from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Advances to subsidiary Subscription of additional shares in subsidiaries Purchase of fund and other investments Dividends received Purchase of property, plant and equipment Proceeds from disposal of other investments Proceeds from disposal of property, plant and equipment Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Financing costs paid Dividends paid Advances from non-controlling interests Issue of ordinary share capital to non-controlling interests Net cash used in financing activities NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD/ YEAR CASH AND CASH EQUIVALENTS AT END OF THE PERIOD/YEAR 10 Company Group 1.4.2010 1.4.2011 to 1.4.2011 to 31.12.2011 31.03.2011 RM'000 to 31.12.2011 RM'000 1.4.2010 to 31.03.2011 RM'000 RM'000 2,806,156 3,562,770 2,806,156 3,562,770 (989,578) (1,004,189) (990,444) (998,034) 1,801,967 2,572,326 1,808,122 2,573,192 72,624 63,010 72,537 62,965 (371,850) (402,601) (371,840) (402.578) 1,502,741 2,232,735 1,508,819 2,233,579 (36,724) (805,987) (61,373) (20,000) (195,165) (20,000) (195,165) 21,312 58,997 21,312 58,997 (1,016,191) (575,044) (252,640) (478,366) 50,000 20,043 50,000 20,043 22,059 1,421 113,963 1,421 (942,820) (689,748) (930,076) (654,443) (10,213) (19,961) (10,213) (19,961) (989,365) (989,365) (989,365) (989,365) 16,772 35,640 40,916 (947,166) (968,410) (999,578) (1,009,326) (387,245) 574,577 (420,835) 569,810 2,756,079 2,181,502 2,743,731 2,173,921 2,368,834 2,756,079 2,322,896 2,743,731 EXHIBIT 9 31/03/08 31/03/09 31/03/10 31/03/11 31/12/11 Highest price Lowest price Highest price Lowest price Highest price Lowest price Highest price Lowest price Highest price Lowest price SHARE PRICES RM11.90 RM8.80 RM10.40 RM9.20 RM10.40 RM9.40 RM13.48 RM9.63 RM15.64 RM11.10 RM11.90 + RM8.80 2 = RM10.35 RM10.40 + RM9.20 2 = RM9.80 RM10.40 + RM9.40 2 = RM9.90 RM13.48 + RM9.63 2 = RM11.56 RM15.64 + RM11.10 2 = RM13.37 PETRONAS GAS BHD: DIVIDEND PAYOUT POLICY Farid was the Chief Financial Officer (CFO) for PETRONAS Gas Bhd. He was sitting in his office, pouring a cup of coffee for himself when he read an article published in a local newspaper on Thursday, 18th of May, 2012 on Gas Malaysia's (its competitor) dividend policy that is set for high dividend payout as shown in Exhibit 1. Being the CFO of Petronas Gas Bhd., he gave a careful thought on whether the increment of dividend payout would be the right move or not for the firm. He was thinking whether would benefit the shareholders or he should choose another alternative. So he started to review the Petronas Gas Bhd's financial position. He knew then that the company has changed its financial year end from 31 March to 31 December yearly. The annual revenue reported was RM2,765.1 million which represents 4.2% increment from RM2,652.4 million, which was recorded in the last nine months period in the financial year of 2010/2011. This was due to a higher Gas Processing Revenue (GPR) and higher Industrial Utilities Revenue, which were RM90.3 million (an increase of 7.5%) and RM55.4 million (an increase of 9.1%) respectively. Farid compared the revenue from 31 March 2010 to 31 March 2011 and he could also see a 9.4% growth in revenue from RM3,221.8 million to RM3,525.0 million as shown in Exhibit 2, 3, and 4. Earnings Per Share (EPS) recorded a decrease from 72.8 sen to 54.5 sen, a considerable drop in 31 December 2011 compared to the nine months earlier. The decrease is due to the reduction of net income from RM1,439,049 to RM1,080,793 in the respective period. On the other hand, the financial statements illustrated that in the year 2010, EPS was 47.6 sen, and the company managed to increase EPS by 52.7% in March I am grateful to Foroogh Farzami for providing the informations on the case. 2011. Based on the PGB's annual report, "During the year, the Company paid interim dividend of 15 sen per share under the single tier system amounting to RM296.8 million. The Board of Directors recommended a final dividend of 25 sen per share under the single tier system, amounting to RM494.7 million with respect of the financial period ended 31 December 2011. This, together with the interim dividend, will result in total gross and net dividend of 40 sen per share, representing a payout ratio of 73.2% on the profit after tax for the financial period ended on 31 December 2011. This marks an increase in dividend payout ratio as compared to 68.7% in the previous financial year." A question crossed Farid's mind once again. Considering the increase of GBP's sales revenue and also the operation costs and taxes in addition to other factors, should the company maintain a stable consistent payment policy or should they let payment vary as condition changes?" Exhibit 5 to 9 shows PETRONAS Gas Berhad's Financial Statements and Share Price Performance for the period ended 31 March and 31 December 2011. PETRONAS Gas Berhad Background PETRONAS Gas Berhad (PGB) was incorporated in 1983 and its main activities are processing and performing a series of transmission on natural gases in Malaysia. PGB's core business portfolio is divided into four major divisions; Plant Operations, Transmission Operations, Centralized Utility Facilities and Technical, as well as Facilities Development. The first two are directly related, whereby the former is responsible for processing the gas piped from PETRONAS oil and gas fields offshore Peninsular Malaysia whilst the latter is responsible for transporting the processed gas via PGB's Peninsular Gas Utilization (PGU) pipeline network to PETRONAS' customers nationwide. The third division, which is the Centralized Utility Facilities and Technical, supports the gas value chain by supplying industrial utilities to various petrochemical plants operating in Kerteh, Terengganu and Gebeng, Pahang. The fourth division is a technical services outfit for PGB, which also extends its expertise in engineering and project management to other entities within the PETRONAS Group of Companies. PGB's growth and expansion involving new ventures also led to the establishment of a fifth full-fledged division, which is the Regasification Terminal Division. This new division is dedicated to oversee and drive the engineering, constructing, and commissioning the operations and maintenance of the country's first ever Liquefied Natural Gas (LNG) Regasification Facilities currently underway within the vicinity of Sungai Udang Port in Melaka and also other similar ventures in the near future. Natural gas from the offshore fields is processed at its six Gas Processing Plants. With total combined sales gas processing capacity of over 2,000 million, these gas processing plants process natural gas into sales gas and other by-products such as ethane, propane, and butane to be transmitted to PETRONAS' customers in power and non-power sectors via PGB's Peninsular Gas Utilization pipeline network. The Transmission Operations Division is responsible for the transmission and delivery of sales gas to customers in the power, industrial, and commercial sectors throughout Peninsular and East Malaysia. In 1998, PGB expanded and diversified the business into manufacturing, supplying and marketing of industrial utility products to customers in Kerteh Integrated Petrochemical Complex and Gebeng Industrial Area through its Centralized Utility Facilities Division. PGB today gives out a strong track record in transmission operations, whereby in 2007, it entered into an agreement with PETRONAS Carigali Sdn. Bhd. for the provision of project execution services on Sabah-Sarawak Gas Pipeline project. Natural Gas Industry The structure of the natural gas industry has changed dramatically since the middle of 1980s. In the past, the structure of the natural gas industry was not seen as complicated at all. It has limited flexibility and few options for natural gas delivery. Moreover, the price of natural gas that each producer could charge to local distribution companies was regulated by the Malaysian Government and was monitored by related authority closely in order to prevent any unnecessary price fluctuation. However, this regulation caused less competitive market place and eventually led to natural gas shortage in the 1970s. Nowadays, this industry is more open to competition and wellhead prices are not regulated anymore, thus the price of natural gas is more dependent on supply and demand interactions. In this new era of natural gas industry, marketers play a great role. Marketers serve to facilitate the movement of natural gas from the producer to the end-user, whether they can do the natural gas transfer or just simply facilitate the sale or purchase of natural gas. Natural gas obeys the law of supply and demand like other competitive commodity market. When demand for gas is rising, prices will rise accordingly and producers will respond by increasing their exploration and production capabilities. However, increase in natural gases production is not as easy and fast as other industries, and it also consumes a lot of time and money in order to acquire leases, secure required government permits, do exploratory seismic work, drill wells and connect wells to pipelines. This can take as little as six months, and in some cases, it can be up to ten years. Furthermore, in this particular industry, there is always uncertainty involved with the geologic productivity of existing wells and planned new wells. Thus, it takes time to adjust supplies in the face of increasing demand and rising prices. When the gas price drops, producers will lose their interest to supply in vast amount and they will start to reduce their expenditure for new exploration and production. This situation, one way or another, will increase the demand again. The relationship between changes in the price of natural gas and variations in the supply and demand for natural gas is sometimes referred to as the "natural gas market cycle." The Situation Based on the information provided, Petronas Gas Berhad intends to pay high dividend for the financial year ending Dec 31, 2012 in order to attract more investors. There are questions to be answered in this type of situation: 1. Should Petronas Gas Berhad pay cash dividend, or is stock repurchase a better choice? Discuss. (10 marks) EXHIBIT 1 NEWS: Gas Malaysia sets for high dividend payout, May 18, 2012 KUALA LUMPUR (Bernama): Its position as the sole licensed operator and distributor of natural gas in Peninsular Malaysia and a high dividend payout policy are among factors attracting investors to Gas Malaysia Bhd. The debt-free company, with small capital expenditure requirements for the next few years, expects to pay out as dividends its entire consolidated after tax profit for the financial year ending Dec 31, 2012. It is looking at a payout ratio of not less than 75 per cent of its consolidated after tax profit for 2013. Its managing director, Datuk Muhamad Nor Hamid, said on Friday, Gas Malaysia's major spending will take place this year where it will invest RM130 mil to RM140 mil for pipeline expansion and infrastructure in preparation for the distribution of the liquefied natural gas that would be supplied by Petronas from Malacca. It would be expanding its pipeline by 70 km to 90 km to supply new customers and strengthen supply security. Even then, it would be financed with internal funds, he said at a press conference after the launching of Gas Malaysia's prospectus. "At least for the next three to four years, we don't need to raise extra capital," he said, adding that for the next few years, the annual capex requirement for Gas Malaysia would be around RM30 mil to RM40 mil. Gas Malaysia, which operates 1,800 km of pipelines across Peninsular Malaysia, gets all its natural gas supply from Petronas. Commenting on the dip in net profit to RM229.2 mil for 2011 against RM298.3 mil in 2010, he said it was due to the new gas tariff which resulted in the lower margin. Gas Malaysia has 700 industrial customers, 519 commercial customers and 10,612 residential customers for natural gas, while its liquefied petroleum gas customers comprise one industrial customer, 1,132 commercial customers and 20,663 residential customers. He said 99% of Gas Malaysia's revenue is derived from the 701 industrial customers. The company is scheduled for listing on the Main Market of Bursa Malaysia Securities Bhd on June 11. In conjunction with its listing, the existing shareholders will offer for sale 333.840 million shares with indicative initial public offering price of RM2.20 each. Upon listing, MMC-Shapadu (Holdings) Sdn Bhd will see its stake reduced to 40.7% from 55%, while Tokyo Gas-Mitsui & Co Holdings Sdn Bhd's stake will come to 18.5% from 25% and Petronas Gas Bhd's stake will be reduced to 14.8% from 20%. EXHIBIT 2 RM Million Revenue Profit Before Tax Profit After Tax Total Assets Total Equity Long Term Liabilities Profit as % Revenue - Before Tax - After Tax Earnings Per Share (sen) - Basic Net Assets Per Share (sen) EXHIBIT 3 Five-year group financial highlights Year ended 31.3.2008 31.3.2009 31.3.2010 31.3.2011 3,125.7 3,415.1 3,221.8 3,525.0 1,394.1 1,231.4 1,243.8 1,900.3 1,092.9 928.0 940.7 1,439.1 9,793.3 9,867.1 9,834.7 10,509.9 7,922.4 8,038.3 8,017.0 8,515.2 1,636.5 1,610.9 1,583.3 1,542.5 44.6 36.1 38.6 53.9 35.0 27.2 29.2 40.8 55.2 46.9 47.6 72.7 400.4 406.3 405.1 430.3 Earnings Per Share and Net Dividends Per Share (sen) 35.0 35.0 33.7 31.3 25.0** 15.0 15.0 15.0 10.9 11.3 2008 2009 2010 2011 PE2011* Financial year ended 31 March *Based on a 9 months' financial period from 1 April 2011 to 31 December 2011. **To be approved at the Company's Twenty Ninth Annual General Meeting on 15 May 2012 Nine months period ended 31.12.2011 2,765.1 1,433.0 1,080,8 10,746.5 8,643.9 1,508.4 51.8 39.1 54.6 436.8 Final Dividend Interim Dividend Revenue (RM million) Earning per share (sen) FREE 31.3.2008 31.3.2009 31.3.2010 31.3.2011 31.12.2011 31.3.2008 31.3.2009 31.3.2010 31.3.2011 31.12.2011 EXHIBIT 4 STATEMENTS OF COMPREHENSIVE INCOME FOR THE NINE MONTHS PERIOD ENDED Group Increase/(Decrease) 31.03.2011 31.12.2011 RM million RM million RM million Gas processing revenue 1,299.9 1,209.6 90.3 7.5 -Throughput services 931.5 933.5 (2.0) (0.2) - Performance based structure income 368.4 276.1 92.3 33.4 Gas transportation revenue 803.4 836.4 (33.0) (3.9) Sale of industrial utilities 661.8 606.4 55.4 9.1 Revenue 2,765.1 2,652.4 112.7 4.2 Cost of gas processing (570.3) (8.7) (1.5) Cost of gas transportation (306.4) 75.2 24.5 Cost of industrial utilities (488.4) (48.6) (10.0) Cost of revenue (1,365.1) 17.9 (1.3) Gross profit 1,287.3 130.6 10.1 Other income and 67.2 (64.4) (95.8) administrative expenses Operating Profit 1,354.5 66.2 (4.9) Financing costs (15.1) (1.2) (7.9) Share of profit after tax of accounted 47.7 (19.1) (40.0) associate and jointly controlled entity Profit before tax 1,387.1 45.9 3.3 Taxation (330.7) (21.5) (6.5) Profit after tax 1,056.4 24.4 2.3 Basic earnings per share (sen) 53.39 1.2 2.3 Profit before tax / Revenue margin 52.3% Profit after tax / Revenue margin 39.8% (579.0) (231.2) (537.0) (1,347.2) 1,417.9 2.8 1,420.7 (16.3) 28.6 1,433.0 (352.2) 1,080.8 54.62 51.8% 39.1% EXHIBIT 5 Statements of Financial Position AT 31 DECEMBER 2011 Group Company Note 31.12.2011 31.03.2011 31.12.2011 31.03.2011 RM'000 RM000 RM 000 RM 000 3 7,458,272 6,830,609 6,449,104 6,702,248 4 881,716 75,729 5 179,567 175,087 103,336 103,336 6 5,414 2,606 250 250 7,643,253 7,008,302 7,434,406 6,881,563 7 102,449 100,399 102,449 100,399 8 386,371 369,997 428,441 374,513 9 245,562 275,082 245,562 275,082 10 2,368,834 2,756,079 2,322,896 2,743,731 3,103,216 3,501,557 3,099,348 3,493,725 10,746,469 10,509,859 10,533,754 10,375,288 1,978,732 1,978,732 1,978,732 1,978,732 6,487,024 6,504,923 6,415,176 6,578,673 8,557,405 8,465,756 8,483,655 8,393,908 86,516 49,415 8,643,921 8,515,171 8,483,655 8,393,908 444,735 423,580 444,735 423,580 1,053,000 1,107,000 1,053,000 1,107,000 10,692 11,937 1,508,427 1,542,517 1,508,427 10,692 11,937 1,542,517 447,632 340,030 395,198 326,728 146,489 112,141 146,474 112,135 594,121 452,171 541,672 438,863 2,102,548 1,994,688 2,050,099 1,981,380 10,746,469 10,509,859 10,533,754 10,375,288 ASSETS Property, plant and equipment Investment in subsidiaries Investment in associate Investment in jointly controlled entity TOTAL NON-CURRENT ASSETS Trade and other inventories Trade and other receivables Fund and other investments Cash and cash equivalents TOTAL CURRENT ASSETS TOTAL ASSETS EQUITY Share capital Reserves Total equity attributable to the owners of the Company Non-controlling interests Borrowings Deferred tax Deferred income TOTAL NON-CURRENT LIABILITIES Trade and other payables Taxation TOTAL CURRENT LIABILITIES TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES TOTAL EQUITY LIABILITIES 11 12 13 14 15 16 17 EXHIBIT 6 PETRONAS GAS BERHAD (181671-4) 133 Statements of Comprehensive Income FOR THE PERIOD ENDED 31 DECEMBER 2011 Revenue Cost of revenue Gross profit Administration expenses Other expenses Other income Operating profit Financing costs Share of profit after tax of equity accounted associate and jointly controlled entity Profit before taxation Tax expense Profit for the period/Total comprehensive income for the period Profit for the period/Total comprehensive income for the period attributable to: Owners of the Company Non-controlling interests TOTAL COMPREHENSIVE INCOME FOR THE PERIOD Note 18 18 18 19 22 23 13 Group Company 1.4.2011 1.4.2011 1.4.2010 to 1.4.2010 to 31.03.2011 RM 000 31.12.2011 to 31.12.2011 RM'000 31.03.2011 RM'000 RM'000 2,765,124 3,524,952 2,765,124 3,524,952 (1,347,251) (1,737,779) (1,347,251) (1,737,779) 1,417,873 1,787,173 1,417,873 1,787,173 (113,038) (93,450) (107,363) (92,921) (97,068) (67,576) (97,068) (67,576) 232,353 234,112 294,974 212,887 1,420,654 1,858,500 1,447,554 1,921,650 (16,263) (20,096) (16,263) (20,096) 28,600 61,851 1,432,991 1,900,255 1,431,291 1,901,554 (352,198) (461,206) (352,179) (461,177) 1,080,793 1,439,049 1,079,112 1,440,377 1,081,014 1,439,251 1,079,112 1,440,377 (221) (202) 1,080,793 1,439,049 1,079,112 1,440,377 Statement of Changes in Equity FOR THE PERIOD ENDED 31 DECEMBER 2011 Attributable to owners of the Company- -Non-distributable Distributable Share Share Retained Non-controlling Interests Note Capital Premium Profits Total RM 000 RM 000 RM 000 RM000 RM 000 1,978,732 1,186,472 4,850,666 8,015,870 1,131 1,439,251 1,439,251 (692,556) (692,556) (296,809) (296,809) 1,978,732 1,186,472 5,300,552 8,465,756 1,081,014 1,081,014 (692,556) (692,556) (296,809) (296,809) 37,322 1,978,732 1,186,472 5,392,201 8,557,405 86,516 Note 11 Note 12 Note 13 Note -Attributable to owners of the Company- -Non-distributable Distributable Share Share Capital Premium RM 000 Retained Profits Total RM'000 RM 000 RM'000 1,978,732 1,186,472 4,777,692 7,942,896 1,440,377 1,440,377 24 (692,556) (692,556) 24 (296,809) (296,809) 1,978,732 1,186,472 5,228,704 8,393,908 1,079,112 1,079,112 24 (692,556) (692,556) 24 (296,809) (296,809) 1,978,732 1,186,472 5,318,451 8,483,655 Note 11 Note 12 EXHIBIT 7 Group Balance at 1 April 2010 Total comprehensive income for the year Dividends 31.03.2010 final - 31.03.2011 interim Issue of ordinary share capital to non-controlling interests Balance at 31 March 2011/1 April 2011 Total comprehensive income for the period Dividends 31.03.2011 final - 31.12.2011 interim Issue of ordinary share capital to non-controlling interests Balance at 31 December 2011 Company Balance at 1 April 2010 Total comprehensive income for the year Dividends 31.03.2010 final - 31.03.2011 interim Balance at 31 March 2011/1 April 2011 Total comprehensive income for the period Dividends 31.03.2011 final - 31.12.2011 interim Balance at 31 December 2011 24 24 24 24 Total Equity RM'000 8,017,001 1,439,049 (692,556) (296,809) 48,486 48,486 49,415 8,515,171 (221) 1,080,793 (692,556) (296,809) 37,322 8,643,921 (202) EXHIBIT 8 Statements of Cash Flows FOR THE PERIOD ENDED 31 DECEMBER 2011 Note CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers Cash paid to suppliers and employees Interest income from fund and other investments Taxation paid Net cash generated from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Advances to subsidiary Subscription of additional shares in subsidiaries Purchase of fund and other investments Dividends received Purchase of property, plant and equipment Proceeds from disposal of other investments Proceeds from disposal of property, plant and equipment Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Financing costs paid Dividends paid Advances from non-controlling interests Issue of ordinary share capital to non-controlling interests Net cash used in financing activities NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD/ YEAR CASH AND CASH EQUIVALENTS AT END OF THE PERIOD/YEAR 10 Company Group 1.4.2010 1.4.2011 to 1.4.2011 to 31.12.2011 31.03.2011 RM'000 to 31.12.2011 RM'000 1.4.2010 to 31.03.2011 RM'000 RM'000 2,806,156 3,562,770 2,806,156 3,562,770 (989,578) (1,004,189) (990,444) (998,034) 1,801,967 2,572,326 1,808,122 2,573,192 72,624 63,010 72,537 62,965 (371,850) (402,601) (371,840) (402.578) 1,502,741 2,232,735 1,508,819 2,233,579 (36,724) (805,987) (61,373) (20,000) (195,165) (20,000) (195,165) 21,312 58,997 21,312 58,997 (1,016,191) (575,044) (252,640) (478,366) 50,000 20,043 50,000 20,043 22,059 1,421 113,963 1,421 (942,820) (689,748) (930,076) (654,443) (10,213) (19,961) (10,213) (19,961) (989,365) (989,365) (989,365) (989,365) 16,772 35,640 40,916 (947,166) (968,410) (999,578) (1,009,326) (387,245) 574,577 (420,835) 569,810 2,756,079 2,181,502 2,743,731 2,173,921 2,368,834 2,756,079 2,322,896 2,743,731 EXHIBIT 9 31/03/08 31/03/09 31/03/10 31/03/11 31/12/11 Highest price Lowest price Highest price Lowest price Highest price Lowest price Highest price Lowest price Highest price Lowest price SHARE PRICES RM11.90 RM8.80 RM10.40 RM9.20 RM10.40 RM9.40 RM13.48 RM9.63 RM15.64 RM11.10 RM11.90 + RM8.80 2 = RM10.35 RM10.40 + RM9.20 2 = RM9.80 RM10.40 + RM9.40 2 = RM9.90 RM13.48 + RM9.63 2 = RM11.56 RM15.64 + RM11.10 2 = RM13.37