PETRONAS Gas Berhad (PETGAS) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to PGB analyst briefing for financial year 2019. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ms. Izan Hajar Ishak. Thank you. Please go ahead.

Thank you, Davina. [Foreign Language] Good morning, everyone. Thank you for dialing in and joining us on the webcast. Welcome to PETRONAS Gas Berhad results briefing for financial year ended 31st December, 2019. Today, from PETRONAS Gas, we have Kamal Bahrin Ahmad, Managing Director and CEO; Puan Shariza Sharis M. Yusof, CFO; and Che Abdul Razak Saim, Head of Business Development and Commercial. We will start today's session with the presentation to be followed by Q&A. As you may know, we have announced our financial results to Bursa Malaysia yesterday. The company's presentation for today's analyst briefing is available at our website and also at the webcast platform. Without further ado, I'll hand over to Che Kamal to start the presentation. Kamal?

All right. Thank you, Izan. [Foreign Language] and very good morning to everyone. I know we're already in February, but I guess not -- still not too late to wish every one of you a happy new year. All right. Thank you for joining us today, and I'm pleased to share with you the full year performance of PETRONAS Gas Berhad for year 2019. It was a milestone year for us with the implementation of this pilot period under the third-party access system, resulting in lower tariff at our Gas Transportation and also Regasification businesses. Nevertheless, PGB remained resilient, amidst these headwinds, capitalizing on our very strong plant performance, extensive marketing effort as well as our pursuit for growth opportunity that has come into fruition. Operationally, PGB undertook a scheduled factory turnaround activities at 2 of our gas processing plant and also Air Separation Unit in Kertih as well as other planned maintenance activities at our facilities. At the same time, we also executed plant rejuvenation activities at the Gas Processing plant Santong complex during the year. As a result, we sustained high plant reliability and also high delivery reliability of PDR across all business throughout the year. So specifically, for the Gas Processing business segment, the good performance has led us to achieve the PBS, or performance-based scheme and agreed ethane target, AET, which is our additional income. Commercially, PETGAS has managed to expand and secure new contract for our utilities customers. These are long-term arrangements with our customers that will ensure the sustainability of our operation while we seek to secure more sales in the future. We have also introduced a new ancillary services in 2019, such as GUCD or getting up cooling down and also LNG reloading at our Regas Terminal in Pengerang down south. This is to add further value in our offering to the customers. We have also commenced work in the third nitrogen generation unit in Kertih to support additional demand as well as ensuring supply reliability to our new and also our existing customers. On a more recent development as known to the Bursa last year in December, we are currently in the first regulatory period 1 or better note as RP1 beginning January 1, 2020, and this will last until December 31, 2022, which is 3 years. Business run as well -- sorry, business run as usual with the only change is the new tariff applicable to their customers. Looking at the financial for the year ended 31st December, 2019, PETGAS recorded MYR 5.46 billion revenue comparable to the same period previous year. This was mainly driven from higher revenue from the Gas Processing and also Utilities segment, which negated the lower revenue received from the Gas Transportation also Regas segment. Gross profit was at MYR 2.39 billion, which is 6% lower than in 2018. This is mainly due to lower revenue from the regulated business and also higher cost of sales from the Utilities segment. Profit after tax, however, was 5% higher at MYR 1.98 billion compared to the corresponding period of MYR 1.89 billion. This was mainly due to higher share of profit from our joint ventures company, also unrealized ForEx gain and also higher interest income from our fund investment. Of course, more detail we will cover in our financial arteries. If I -- moving on to slightly detail on our operation. We start first with our Gas Processing, where this business continue to sustain its good performance. In 2019, we achieved 100% salesgas reliability for both processing and also delivery to our customers. With this higher plant reliability and also availability, liquid plant extraction performance exceeded its target, resulting in performance incentive of MYR 79.6 million year-to-date versus last year. The pro performance incentive comprised of PBS income and also the agreed ethane target from the recent GPA with PETRONAS, this is a gas processing agreement with PETRONAS. And next, on this Gas Transportation and also Regasification business. Our Gas Transportation business continues to sustain. It committed toward ensuring the security of gas supply to the nation, which is very critical under the third-party assess. Pipeline network reliability continue to sustain at 100%. On the Regasification side, both Regas in Udang and also Regas Pengerang recorded 100% for OEE and also 100% product delivery reliability. For the year of 2019, Regas Sungai Udang received a total of 14, 1-4, LNG cargoes, while Regas Pengerang received 31 LNG cargoes, making total cargoes combined to be 45. Next, on our Utilities business and our electricity, steam and also our industrial gas plant continue to perform strongly with a sustained sales volume and PDR at 97% and above. Delivery of product are in line with our customer demand. And I guess that's all for now on the operational side. And next, I want to -- I will hand over to Sharis for the financial segment. Over to you, Sharis.

Thanks, Che Kamal. [Foreign Language] and good morning, everyone. Sharis here, and I'll be taking you through the financials. So if you could please refer to Slide 13. We will start with segmental performance. Firstly, our Gas Processing business. Gas Processing business saw higher reservation charge as well as additional incentives, as you are aware, under the second term of the gas processing agreement, which took effect 1st January, 2019. Revenue for the quarter was MYR 429 million compared to preceding quarter, marginally higher. Gross profit improved by 5% on higher revenue as well as lower depreciation expense. Against the corresponding quarter, quarter 4, 2018, we saw revenue growing by 10% on the back of higher reservation charges. Profit was higher by 31% at MYR 206 million with the higher revenue as well as lower depreciation expense. Similarly, against the corresponding period or corresponding year 2018, revenue and gross profit were both higher by 8% and 28%, respectively. Moving to Gas Transportation. As announced, our Peninsular Gas Utilisation pipeline network, or PGU, has adopted lower tariffs under IBR pursuant to the third-party access. Comparing against quarter 3 2019, revenue was lower by 6% at MYR 277 million, mainly due to a slight revision for the Miri Gas Transportation tariffs effective 1st January, 2019, as well as handover on the operations and maintenance services for the Sabah Sarawak Gas Pipeline in September of 2019. Gross profit was slightly lower by 9% at MYR 183 million on higher operating costs. Against the corresponding quarter, quarter 4 of 2018, we saw segment revenue decreasing by 18%, which is in line with the IBR implementation. Gross profit was 32% lower. Against the same period last year, 2018, revenue and profit were both corresponding low -- correspondingly lower by 15% and 22%, respectively. Onto the Regasification business segment, which also adopted new tariffs under IBR. Against the third quarter of 2019, revenue remained steady at MYR 304 million. Segment results was 9% lower at MYR 140 million on higher operating costs. Against the corresponding quarter, quarter 4 2018, revenue was slightly lower by 2% as lower revenue from Regasification Terminal turnaround offset higher revenue from Regasification Terminal Sungai Udang. Gross profit declined by 13% on -- 18%, sorry, on higher depreciation expense upon recognition of assets, namely the least jetty facilities at Pengerang. Against the same period last year, 2018, revenue was level, while profit was 12% lower, mainly due to higher depreciation, again, on the recognition of jetty facilities at Pengerang as asset. Last but not least, on Utilities business. Comparing against preceding quarter, quarter 3 2019, we saw an improvement in revenue by 14% to MYR 353 million. This follows higher sales volume as we completed the planned statutory turnaround at our Air Separation Unit in Kertih. Segment gross profit rose to MYR 44 million on higher revenue and lower operating costs. Against the corresponding quarter, quarter 4 2018, revenue increased by 4%, mainly driven by higher prices charged to customers, following upward fuel gas price revision on 1st January, 2019, and 1st July, 2019. Segment gross profit was also correspondingly higher on the back of higher revenue and lower maintenance costs, partially offset by higher utilities cost of sales. For the full year 2019 versus 2018, we saw revenue growing by 3% on higher fuel gas prices, coupled with additional surcharge on national electricity tariffs under the imbalanced cost pass-through mechanism. Segment recorded lower gross profit by 12% on higher cost of sales, following the upward revision of fuel gas price. As a result, at the PGB group level against the preceding quarter, quarter 3 2019, group revenue was 3% higher at MYR 1.37 billion as we saw higher sales volume from the utility segment, following the completion of planned statutory turnaround, as mentioned previously. Gross profit also improved by 2% to MYR 574 million on the back of higher revenue, amidst higher utilities cost of sales and higher repair and maintenance costs as there was quite a high level of maintenance activities in quarter 4. Profit after tax was 11% higher at MYR 493 million in line with higher gross profit, unrealized ForEx gain from translation of USD lease liabilities as well as higher interest income from our fund investments. Moving to the financial results. Against the corresponding quarter, quarter 4 2018, group revenue was marginally lower as we saw higher revenue from Gas Processing and Utilities businesses mitigating the lower revenue from Gas Transportation and Regasification segments. Gross profit remained resilient, declining only by 3% on the back of lower revenue and higher utilities cost of sales in line with upward fuel gas price revision. Profit after tax, however, was 52% higher at MYR 493 million for the quarter. This was attributable to higher share of profit from our joint ventures, unrealized ForEx gain, particularly on the translation of USD lease liabilities as well as higher interest income. The higher share of profit from joint ventures came about due to positive contribution from Kimanis Power Sdn Bhd, which is a 60% joint venture of the group, which had derecognized deferred tax assets in the corresponding quarter 2018. This was in relation to time utilization limit on certain tax benefits. The high share profit was also supported by higher profit from Pengerang Gas Solutions Sdn Bhd, which is our 51% joint venture. This follows the commencement of operations at our Air Separation Unit in Pengerang Johor, which occurred in the first quarter of this year. Finally, year-on-year, group revenue remained very resilient compared to the corresponding year. Gross profit was lower by 6%, mainly attributable to the Gas Transportation and Utilities segment, amidst improved results from our Gas Processing business. Profit improved by 5%. Again, which is due to the higher contribution from the joint ventures as well as unrealized ForEx exchange gains, which mainly arose due to the discontinuance of hedge accounting relating to the lease liabilities at our Regasification Terminal Sungai Udang. This relates to the floating storage unit. Moving on to the balance sheet. The group's balance sheet remain very, very solid with over MYR 19 billion in total assets, higher than as at 31st December, 2018. Cash and cash equivalents remain very healthy at just over MYR 4 billion. Moving on to dividends. With clarity on the regulatory period 1 or RP1 tariff and level of earnings in the near term, I am pleased to inform that at the Board sitting yesterday, which is February 18, 2020, the Board has approved a dividend policy for PGB, which is a payout ratio of around 50% of consolidated profit after tax and minority interest or noncontrolling interest. Of course, the dividend payout ratio will depend on factors such as earnings, capital requirements, distributable reserves and other relevant consideration. Reflecting our resilience and robust financial performance for the year, the Board was also -- has also approved a fourth interim dividend of MYR 0.22 per share, which will be payable on 26th of March 2020. In addition, taking into consideration PGB's achievements since 25 years of being listed and also post our transformation assets, which has focused on operational excellence and performance delivery, the Board also approved a special dividend of MYR 0.10 per share, which is also payable on 26 March of 2020. The dividend policy as well as the total dividend paid for 2019 demonstrate PGB's commitment to ensure sustained level of returns to our shareholders. With that, we will end the financial section, and I will now pass the line over to Che Kamal to share on some company updates.

Thanks, Sharis. Okay. Ladies and gentlemen, now I would like to share with you several key updates relating to the company, other than our operational performance you just know. First, as announced to Bursa Malaysia on 12th of February, 2020, our joint venture company, KPSB or Kimanis Power Sdn Bhd, has signed a settlement agreement with SESB on the outstanding arbitration, which began in 2017. Both parties have withdrawn from the arbitration proceedings and are pleased to have come to an agreement to settle the matter amicably out of court. There is very minimal or immaterial impact to both KPSB and also to PGB. Moving forward, Kimanis Power, KPSB, will continue to focus on ensuring reliable operation and delivery to SESB, which is its customer and is looking forward to continuing the mutually beneficial relationship under the existing power purchase agreement. On another note, effective 1st January, 2020, PGB Miri Gas Distribution System, or MGDS, and also Bintulu Gas Distribution System, they both are in Sarawak, are now operated by PETROS Gas, which is the wholly-owned subsidiary of Petroleum Sarawak Berhad or PETROS. This follows the conclusion of an asset sales agreement with -- between PGB and also PETROS Gas in late December 2019. The transfer of MGDS and also BGDS asset will not have a significant impact to PGB either operationally or financially and this aligned to PGB portfolio management. And last but not least, as mentioned by Sharis just now, the PGB dividend policy, which underlines our commitment to continuously deliver return to our shareholder. To close this morning session, I would like to highlight that even in the pilot period, our business model have proved to be resilient toward the change in the operating environment as evident in the sustainable financial performance achieved in 2019. As we step into 2020, now that the IBR is into its first relative period or RP1, we expect a stable operation and earnings from this regulated business for the next 3 years. Moving forward, we will intensify our efforts to become the solution partner to our customer, while sustaining good operational performance at all of our assets. We look forward to more growth opportunities, such as more ancillary services to be launched at both Regasification Terminal by quarter 2 this year. We are also looking towards expanding our Utilities business further with the additional capacity coming from the new nitrogen generation unit in Kertih in 2021, when the current project completed. More to come in the coming months [Foreign Language], and I think that's all for now. So I think we can move on to the Q&A.

[Operator Instructions] Your first question comes from the line of Alex Goh from AmBank.

I have 3 questions, I hope this is okay. The first is regarding the Gas Transportation unit under RP1 that's starting in January this year. Given the announcement that you have made on -- back in December, could you give us some sort of estimate what would be the impact to the bottom line of PETRONAS Gas from -- for first quarter, you were to compare with that the fourth quarter of last year? And also, the second question, is regarding your, I'll say -- well, Kimanis plant. If you were to strip out the exceptions, what would be the run rate in terms of the profit contribution that we can expect from Kimanis in this year? And for your dividend policy, the payout ratio of 34%, is that sustainable? Or should we be looking back at historic levels?

Thank you, Alex, and good morning. And thank you for joining us, as you said, quite early this morning. If I can take your first question, in terms of the impact of the RP1 tariff on Gas Transportation. First of all, I think one thing to understand, as far as the tariffs that were published in December, these tariffs now include an element of internal gas consumption. So whilst optically, we do see the numbers increasing, there is that element of internal gas consumption, which is a pass-through element. So basically, it is also revenue, but there's also an associated cost to it. So if we were to strip down the impact or the amount relating to the IGC, actually the PTU tariff is slightly lower because there was some adjustment in terms of the WACC for PGU. Although, again, you know we are not in a position to disclose the actual figure. The WACC is still competitive for the Gas Transportation or the PGU, and it's still higher than -- remains higher than other regulated businesses in Malaysia. And the other thing as well as that affects the tariff for PGU is, of course, the transition to the regulated asset base -- on the regulated asset base from DRC to net book value. So in terms of the impact, the financials, we do expect maybe with all things being equal in terms of the costs incurred, there might be an impact of about 8% to 10% as far as gross profit is concerned for this segment, okay? And I think one of your...

Sorry, Sharis. When you talk about 8% to 10% gross profit, is it -- are you referring to the whole group?

Yes. On the Gas Transportation segment -- business segment.

8% to 10% only on the Gas Transportation segment alone? Is it?

Yes. Yes. Correct.

Not for the group?

No. No. No. Yes, so as a baseline, if you see business gross profit -- business segment gross profit, yes. Okay. Then the second question, in terms of Kimanis Power. As you are also aware, last year, there was an adjustment as far as the deferred tax asset was concerned in 2018. So basically, for 2019, if we were to strip out that impact, 2019 versus 2018, 2019 was the profit from -- share of profit, which is 60% attributable to PGB was slightly lower at around MYR 50 million for KPSB. But this is taking into account that the KPSB actually had a turnaround, which is a statutory turnaround at one of its operating blocks. So you would see, generally, it's about MYR 80 million on a normal year in terms of the contribution. But that would depend on, of course, the costs incurred for that particular year. Okay. And your third question, regarding the dividend payout. Obviously, the MYR 0.10 is a special dividend for this year. So the -- in terms of ordinary dividend, that was MYR 0.72, which is similar to 2018. And as we have mentioned previously, we will endeavor to look at sustaining this level of dividend as in so far possible. But again, we have also put in place a dividend policy, which is around 50% of the profit after tax and minority interest.

So that 50% profit after tax policy is still maintained. So that a special dividend of $0.10 may or may not recur next year. Is that what you're saying?

I mean, yes, because it's a special dividend, right? And as far as the dividend policy is concerned, of course, we will endeavor to try and be what is possible. So it's not necessarily going to be 50%. Obviously, we paid above 70% previously. So it's just an indication. But the -- as far as the MYR 0.72 is concerned, I mean that is the same as 2018.

I see. Okay. Just to come back to my first question, regarding the transportation tariff. Could you tell us what is the regulated asset base that was used in the computation of the tariffs in the first regulatory period?

At this particular point of time, there is no plan to disclose the exact figures as far as the regulated asset base is concerned. But in so far as a guidance, and we have been talking about this for several quarters, I think. The DRC versus the NBV, it's roughly about between 2 to 3x.

[Operator Instructions] Your next question comes from the line of Chi Wei Tan from Maybank.

[indiscernible] for the Transportation revenue. I think I couldn't really catch it just now. Also, second thing on the associate and JV income line, the Q-on-Q decline. Can I just confirm that, that has to do with the timing of the Kimanis turnaround?

Chi, can you please repeat question -- the first question?

Sorry, which question?

The first one.

Sure. First question had to do with the Transportation revenue. The decline -- the Q-on-Q decline that we saw, I think that you -- Sharis, you mentioned just how it has to do with some of the East Malaysia side, I couldn't really catch it. Can you elaborate?

Great. Yes. So against quarter 3, there was a decline -- slight decline in so far as the gas transportation revenue is concerned, there were 2 things. First of all, there's a slight revision for our Miri tariffs. Again, we have different tariffs for the East Malaysia. So similar to say the RP1, this was also reviewed, but it's not regulated at this particular time. So there was a small downward revision on that. In addition, we have also transferred over our operations and maintenance for the Sabah Sarawak Gas Pipeline to PETRONAS Carigali. So both of these factors contributed to the slight decline from quarter 3 to quarter 4 of 2018 -- 2019, sorry. Yes. Okay. Then the next question is to do with the joint venture income in terms of quarter -- again, quarter 3 versus quarter 4 versus quarter 3 of this year. This is more or less a timing effect because there was quite a large tax -- a deferred tax adjustment that was made in Kimanis Power for 2019, but it occurred in 20 -- in quarter 4, rather than progressively throughout the year. So if we were to normalize for that adjustment, actually, we would see quarter 4 results would be better compared to quarter 3. Because in quarter 3, Kimanis Power actually had this planned statutory turnaround at one of their operating blocks. So I guess quarter 4 versus quarter 3 is not an apple-to-apple comparison because there were some adjustments that were put through in quarter 4 itself.

Your next question comes from the line of Ajay Mirchandani from JPMorgan Singapore.

I just wanted to kind of confirm specifically on that transition of book -- eventually to book value from the current value that you're using for asset base. Can I confirm that transition period would be roughly 6 years? Or is that transition period then extended to a longer period of time? Just wanted to clarify on that one, please.