PETRONAS Gas Berhad (PETGAS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the PETRONAS Gas Berhad analyst briefing for quarter ended 31 March 2020 conference call. [Operator Instructions] I would now like to hand the conference over to Izan Ishak. Please go ahead.

Thank you, Rachel. [Foreign Language] And good evening, everyone. Welcome to PETRONAS Gas Berhad's analyst briefing for quarter ended 31st March 2020. My name is Izan from Investor Relations. It's a later part of the day in Ramadan. Nevertheless, thank you for joining our session today. With us from PGB, we have Encik 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. For reference, our financial results are available at both Bursa Malaysia and PGB website. We also uploaded the presentation material at the webcast host platform. Without further ado, I'll hand over to Encik Kamal for the highlights. Encik Kamal?

Okay. Thank you, Izan. Again, Kamal here, and good afternoon. Can you hear me clearly? Okay. [Foreign Language] And very good evening. Again, thank you for joining us today. Before we begin, I would like to talk about the COVID-19 pandemic, which has led to economic slowdown, and it changed the dynamics of the demand of the energy. Oil price has gone down as a result of lower demand at a time when there is an oversupply situation. This, in turn, has affected businesses worldwide, including here in Malaysia. Nevertheless, PGB remains stable under this challenging environment. Obviously, demand for gas sector, slightly lower. But PGB, our business model, we are supported by our long-term agreement with PETRONAS. Operationally, our plant activity are running normal, within minimum [ manning ]. And we are committed to ensure sustainable delivery of gas supply to the entire nation while ensuring safety of our staff and also our competitors. If you could turn to Page 6 of the pack, we will look at the highlight of quarter 1 2020. Operationally, we have a sustained high gas -- high plant reliability across all our business segments. For Gas Processing, the high plant performance has resulted in PGB achieving the incentives, i.e., the performance-based structure of PBS and also the existing target of AET. This was accomplished even with the turnaround activities undertaken at one of our plants in Kertih. On the commercial side, this year marked our first year under the Regulatory Period #1, or better known as RP1 of the Third Party Access system, after our pilot period last year. The new tariff for PDU, RGTSU and also RGTP, are effective 1st of January 2020 until December 31, 2022. With the certainty of the tariff imposed on the 3 facilities, our earnings from the regulated businesses should remain steady for the next 3 years. As for growth, we are focused on executing the already approved project. We are working hard to ensure our LNG bunkering at Regas Sungai. Udang and also LNG trucking loading at Regas Pengerang to be ready by the second half of the year, while nitrogen generation unit at Kertih will be up and running in 2021. Next, let's turn to Page 7. Looking at the financial for the quarter ended 31st March 2020, PGB recorded a MYR 1.4 billion revenue, higher than the last quarter and the same quarter last year. This is mainly due to higher efficiency at our Gas Processing plant as we recorded lower internal gas consumption, or lower IGC, which resulted in higher pro forma incentives. Another reason from the higher tariff is the inclusion of jetty lease asset and regulated asset base at RGT Pengerang. Gross profit was also higher at MYR 610 million. Profit after tax, however, was lower at MYR 348 million as this quarter, our profit are impacted by unfavorable foreign exchange movement, particularly the U.S. dollar. During -- sorry, excluding the ForEx impact, our profit after tax for the quarter would be comparable again quarter 1 2019 and higher, again, quarter 4 2019. More detail on our financials will be presented by Shariza after this. Moving on to the detail on the operation on Page 9. Our Gas Processing business continue to sustain its good performance. During the quarter, we also successfully undertook planned turnaround activity at our second gas processing plant in Kertih, both successfully and also ahead of schedule. Our operation -- our overall equipment effectiveness, or OEE, maintained similar level at quarter 4 2019 and was better than quarter 1 2019. We also achieved 100% reliability that demonstrated our commitment to our customers. With the higher plant reliability and also operational efficiency, we achieved higher performance incentives at MYR 20.5 million. The incentive consist of both PBS additional income target and also our internal gas consumption. All right. Next, our Gas Transportation and also Regasification business, which is on Page 10. Our Gas Transportation business continues to sustain its commitment towards ensuring the security of gas supply to the nation. Pipeline network's reliability sustained at 100%, and we delivered an average of 2.1 Bcf of salesgas to customers. For the Regasification business, both Regas Sungai Udang and also Regas Pengerang sustained each OEE level at 100%. In quarter 1 2020, Regas Sungai Udang received 4 LNG cargoes, while Regas Pengerang received 9 LNG cargoes, making the total cargoes combined to be 13 numbers, 1-3. On Page 11, for our Utilities business, our electricity, steam, industrial gases plant continue to fulfill customer demand with 100% product delivery reliability recorded across all products. The volume of electricity was, however, lower due to lower export to the grid. The low offtake stemmed from availability of new coal-fired plant as well as very competitive pricing for single marginal producer, SMP, at the moment due to lower feedstock price for non-cogen power. Otherwise, all our products sustained their sales volume, meeting our customer demand. That's all for operational performance for now, and we will next move to the financial segment, will be covered by Shariza. And over to you, Shariza.

Thank you very much, Encik Kamal. [Foreign Language] And a very good evening, everyone. Shariza here, and I hope everyone is safe. I'll be taking you through the financials. So please turn to Page 13. We will start with financial performance, first, with Gas Processing. Beginning quarter 1 2020, the business successfully completed plant turnaround, as mentioned by Encik Kamal and our second gas processing plant at the Kertih power plant. For financial results against the preceding quarter, quarter 4 2019, revenue was marginally higher at MYR 431 million. Gross profit improved by 8% to MYR 223 million and this came on the back of lower operational and depreciation expense as well as higher internal gas consumption, or IGC, performance incentive, which is reflective of our efficient plant operations. Against corresponding quarter, quarter 1 2019, revenues increased slightly by 2%, mainly attributable to higher IGC incentive. Segment results increased by 14% as the higher revenue was further supported by lower depreciation and other operational expenses. Now moving on to Gas Transportation. And as announced, Suruhanjaya Tenaga or ST has booked a regulated tariff of MYR 1.129 per gigajoule for the PGU pipeline network. This is going to be applicable for Regulatory Period 1, or RP1, which is going to run from 1st January 2020 to 31st December 2022. It compares to the regulated tariff of MYR 1.072 per gigajoule in 2019 under the pilot regulatory period or PRP. The higher RP1 tariffs follows the inclusion of IGC cost recovery, which is a positive cost. Prior to RP1, IGC cost was borne directly by the shipper. So in essence, we do have higher revenue from the tariff, but we also had a corresponding cost of revenue insofar as the IGC is concerned. Comparing with this quarter 4 2019, revenue was higher by 6% at MYR 292 million as higher RP1 tariffs introduced a lower operational and maintenance revenue following the transfer of our Sabah Sarawak Gas Pipeline or SSGP operations, [indiscernible] as well as a transfer of our Sabah Serawak Gas distribution assets, the asset to a third-party. Gross profit was lower by 3% at MYR 189 million as a result of lower net RP1 tariff, excluding the IGC effect at lower operating expenses. The net RP1 tariffs, which excludes IGC, was lower because this is the transition of our regulated asset base from [indiscernible] existing cost to net book value, which begins in RP1. Against corresponding quarter, quarter 1 2019, revenue was slightly higher by 1%. Again, we had higher RP1 tariffs, mitigating the lower revenue following the SSGP transfer as well as the transfer of the gas distribution assets in Serawak. Gross profit was similarly 6% lower from the lower RP1 tariffs, excluding the IGC impact amidst lower operating expenses. Moving on to Page 15, which is the Regasification business. The Regasification business segment also adopted new tariffs under IBR. The approved regulated tariff of MYR 3.41 -- MYR 3.45 per gigajoule for RGTSU and MYR 3.485 per gigajoule for our RGT Pengerang, are going to be applicable for RP1, similarly, running from 1st January 2020 through 31st December 2022. In 2019, tariffs were MYR 3.518 per mmbtu and USD 0.67 per mmbtu, respectively, under PRP. And now on a comparable unit basis, because the unit as far the tariff are concerned have changed, on a comparable unit basis, the RP1 tariffs are higher, again, due to the inclusion of the IGC cost recovery which is a positive comp. Prior to RP1, again, the IGC cost was borne directly by the [indiscernible] In addition, RGT Pengerang tariff was higher due to the inclusion of jetty assets within the regulated asset base for RP1. Financially, against quarter 4 2019, revenue was 10% higher at MYR 345 million, mainly due to the higher tariff with the inclusion of jetty facility assets, as mentioned, at RGTP. Segment result was 18% higher at MYR 165 million, in line with the higher RGT Pengerang tariff. Additionally, the preceding quarter included a onetime cost in terms of information technology systems, which was charged to RGT Pengerang. Against the corresponding quarter, quarter 1 2019, revenue improved by 14%, in line with high tariffs. Gross profit increased by 4%, attributable to higher contribution from RGTP, offset by higher operational expenses. Last but not least, the Utilities business segment, which is on Page 16. Comparing against preceding quarter, quarter 4 2019, revenue was lower by 7%, mainly attributable to lower electricity sales, in line with lower export within the group at the [indiscernible] which did come out just now. Segment profit. Gross profit stood at MYR 17 million, lower by 25% due to lower contribution from electricity. This is despite lower depreciation expense and utilities profit sales in line with lower production. Similarly against quarter 1 2019, our revenue was lower by 7%, while segment gross profit was lower by 28%. Moving on to the overall group results on Page 17. Against preceding quarter, quarter 4 2019, we saw group revenue increasing by 2% to MYR 1.4 billion on the back of higher RP1 tariffs across all of our regulated business segments. This is offset by lower revenue from Utilities, again, attributable to the lower sales volume of electricity. Our gross profit levels, gross profit increased by 6% to MYR 610 million on high contribution from Regasification and Gas Processing segment. And this was offset by lower operational expenses during the quarter. Profit after tax, however, was lower by 29% at MYR 348 million, as we were affected by the weaker ringgit against USD. This had led to higher unrealized foreign exchange losses and translation of [indiscernible] reliability, of which totaled MYR 152 million, which compared to a gain of MYR 11.4 million in the preceding quarter. Excluding the currency impact, our PAT would actually be higher than the preceding quarter. Against the corresponding quarter, quarter 1 2019, group revenue was higher by 2%, following high revenue from Gas Transportation and Regasification segments, offset by lower revenue from Utilities. Gross profit was also higher by 2% with lower operational costs for Gas Processing segment as well as the inclusion of gas asset at RGPT. Profit after tax was 34% lower on similar reason, due to the unrealized foreign exchange losses. Again, the amount of MYR 152 million loss for this quarter compared to a gain of MYR 67.7 million in the corresponding quarter. And it's clearly a currency impact, profit after tax should have been comparable. Moving on to the balance sheet, which is on Page 18. The group's balance sheet remains solid with just over MYR 19 billion worth of -- ringgit worth of assets, similar to December 31, 2019, with cash and cash equivalents remaining very healthy at MYR 54 billion. This quarter, we are also sharing the group's assets by segment for better appreciation of our asset base. As for dividends, on the next page, Page 19, the Board has approved a fourth interim dividend of MYR 0.16 per share, which amounts to MYR 206.6 billion payable on 30th June 2020. The interim dividends, that includes PGB's commitment to ensure sustained level of return to the shareholders despite these challenging times. So with that, we end the financial section. I will now pass the line over to Encik Kamal, to share on company updates.

Okay. Thank you, Sharis. Moving on to update a bit on Page 21. Okay. Again, ladies and gentlemen, the current unprecedented COVID-19 pandemic has caused a slowdown in energy demand and also business operation worldwide. However, for PGB, we continue to run our operation to ensure as quickly our gas supply delivery to the nation. As such, we expect stable operation across all our businesses even in these trying times. In line with the current economic condition, PGB is reviewing our OpEx and also our CapEx plan and to prioritize some of the activities compared to the rest. For CapEx, there is no intention for major scale-back, only that the timing may change depending on how the situation develops. We also remain committed to ensure execution of approved projects, such as the LNG bunkering, truck loading and also our nitrogen generation units. However, the risk of a delay due to the prolonged lockdowns implemented globally and also in Asia and further disruption anticipated to the global supply chain and service providers. We are sparing no effort on addressing this to ensure the delivery of announced project. It is -- at the same time, we are also looking to execute several pipeline projects this year. More will be shared once details are finalized. And that's all for now. Let's also move to Q&A next.

[Operator Instructions] Your first question comes from Ajay Mirchandani from JPMorgan.

Four questions from me. The first one was specifically on CapEx for 2020. Could you give us any kind of guidance or indication of what's the expected CapEx for 2020? Number two, specifically in depreciation, on a Q-on-Q basis, we have seen depreciation dropped by MYR 30-odd million. Is this going to be the new trend forward? And any perspective of why the drop? And number three is specifically on minority, we've also seen that number drop into the negative quite dramatically, on a Q-on-Q basis. Any color on why that's the case?

Right. Ajay, thank you for your questions. Again, please let me know if I got the questions right. There's a little bit [ fuzziness ] in terms of the connection. But the first question is on CapEx in 2020 and what is the anticipated level. Previously, we have guided the CapEx level to be around MYR 1.2 billion for 2020. As mentioned by Encik Kamal, we are looking at our -- both our OpEx and CapEx spending because of these uncertain times. So there are going to be some CapEx optimization, not only cancelation but perhaps to determine. So we could look at a slightly lower CapEx from that MYR 1.2 billion, probably just over MYR 1 billion for 2020. I think the second question is, I believe, is on the depreciation, that there has been a -- because there's been a drop in terms of our depreciation. The reason for this is that we do have several of our assets which have ended in terms of their useful life. And hence -- but we still actually are utilizing those assets because they are still in very good condition, because they are very well maintained. That's why the depreciation has dropped. And you see a reduction in terms of the expenses. So the third question, if you could repeat that again. I didn't quite catch that one.

So this was -- the third question was regarding the minorities line item. If I actually look at it, with regards to 1Q '20, the nonconsolidated interest, where it was MYR 8 million versus MYR 20 million negative in Q1 '20. So I'm just trying to understand what's happened there to explain that kind of change, Q1.

Sorry. This is the minority interest in the profit and loss, yes?

That is correct.

Yes. Yes, you will see that, as you observed, it's actually a negative figure or a lot. Again, this is mainly to do with the unrealized ForEx loss that we had to recognize. Just some background on that, as everyone is aware, the -- our [ translating ] has to put all the tariffs in ringgit for RP1. However, at PLNG2, which houses the Regasification Terminal Pengerang, it is a USD company, tariffs certainly as reliability. So this is not 100% owned. So there's some minority interest there. So because the PLNG2 is a loss, that's why the minority interest line is less. Next on the line, Rachel. Can we have next question on the Q&A line?

Your next question comes from Alex Goh from AmBank Research.

Your attention to Page -- Slide 14 for your Gas Transportation slide. Under your gross profit, you've shown the fourth quarter to first quarter, there is a -- you're showing a drop of 3%, but actually, it's an increase, MYR 183 million to MYR 189 million in the first quarter. Actually, you're showing an increase -- you have an increase in your gross profit for the Gas Transportation segment. But I recall in your fourth quarter briefing, you've given a guidance that -- because of the RP1, the gross profit for the Transportation segment would drop by about 8% to 10%. I just want find out if -- was that over conservative? Or what was the reason behind that? And my second question is, can we take this first quarter gross profit for the Gas Transportation as the run rate for the next 3 years?

Alex, yes. Sharis, do you want to take this? Sharis?

, Alex? Thank you. Yes. Again, thank you for it pointing out. My sincere apologies. The -- as you mentioned, it's actually a slight increment, and it's not a drop for the incorrect slide. What happened in quarter 4 was that we had, for Gas Transportation, quite significant operating expenses. So if we were to normalize for this, actually, you would see a similar trend compared to the same, as if we have compared to quarter 1. So a better comparison would be quarter 1 2020 compared to quarter 1 2019, but you do see the reduction. And in fact, there is a net of -- net of the IGC, the impact of the tariff is negative to get Transportation. As mentioned, this is only due to the transition of the SMP, because we are looking to net book value from the [ PCP ] cost. Sorry. For your second question, could you repeat that again?

Yes. Taking the MYR 189 million gross profit for the Gas Transportation in this first quarter, can we use this as a run rate for the next 3 years?

It should be around that ringgit, around MYR 180 million -- MYR 189 million. Yes, around that, yes.

Your next question comes from Sean Lim Ooi Leong from RHB Investment Bank.

I have 1 question. What is the RGT Pengerang contribution this quarter? And how much is it compared to the previous quarter, in the fourth quarter itself?

It is -- for Pengerang, there is an increment. As mentioned, this is due to the inclusion of the jetty assets, the jetty facility asset base [indiscernible] but the impact is mainly an uplift of -- in gross profit by about 3%, mainly from RGTP because of the tariff impact.

Sorry. Gross profit -- the 3% increase is due to the RGT Pengerang EBIT?

Yes, yes.