PETRONAS Gas Berhad (PETGAS) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to PETRONAS Gas Berhad analyst briefing for quarter ended 30th of September 2020. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to your first speaker, Izan Ishak. Thank you. Please go ahead.

Thank you, Rochelle. So welcome, and very good morning, everyone. Thank you for joining our session today. I'm Izan from Investor Relations, PETRONAS Gas Berhad. Welcome to our analyst briefing for quarter ended 30th of September 2020. With us from PGB, we have Encik Kamalbahrin Ahmed, Managing Director and CEO; Shariza Mohd Yusof, CFO; and Encik Abdul Razak Saim, Head of Development and Commercial. We will start today's session with the presentation, followed by Q&A. For reference, our financial result is available at both Bursa Malaysia and PGB website. The presentation material for today's analyst briefing, yes, it's available at both sites. Without further ado, I'll hand over to Encik Kamal for the highlights. Encik Kamal? I'm sorry. Encik Kamal is -- has -- will join us a bit later. I will pass it to Encik Razak, Head of our Business Development and Commercial. Over to you, Encik Razak.

[Foreign Language], and very good morning. Thank you, Izan, and thank you all, participants, for joining us today. I'm pleased to report that PGB has continued to sustain our operations and financial performance in the 9 months of 2020 and our plan -- our plants and facilities remain running with minimal manning. And operationally, we sustained high level of reliability across all our business segments and also achieve our target incentive. And commercially, we are backed by our long-term agreements with PETRONAS for gas processing, gas transportation and regasification. The RP1 tariffs under the third party, I said which have been set for the next 3 years, also ensures us of steady earnings. And I'm also pleased to inform that our LNG truck loading and LNG bunker and service activity costs in September and November, respectively, more of that in the following section. Looking at the financials for the quarter ended September 30, 2020. PGB recorded MYR 1.41 billion revenue better than both quarter 2 2020 and quarter 3 2019. This is mainly due to higher revenue from our regasification business, which offset lower revenue from utility segment. The higher regasification revenue was from the higher tariff at Regasification Terminal Pengerang while the lower utilities revenue was from lower electricity sales volume. Gross profit was higher at MYR 749 million, mainly driven by lower operating costs. Profit after tax was also positive at MYR 640 million on higher gross profit and favorable foreign exchange movement. Looking at 9 months' performance. Revenue was 3% higher at MYR 4.2 billion, mainly from higher regasification and gas transportation tariff. Gross profit was 12% higher at 2 -- MYR 2.03 billion on lower operating costs. Our profit after tax was 5% higher at MYR 1.56 billion. More details on our financials will be presented by Sharis after this. I'll go through now our operations. On next on Page 9. Our gas processing business continues to sustain its good performance. We maintained OEE levels limited to quarter 2 2020 and better than quarter 3 2019. We also achieved 100% reliability, which demonstrates our commitment to the customers. As business continues to operate even during MCO, we achieved MYR 60.1 million of performance incentive year-to-date. The incentive cover performance-based structure, PBS, additional ethane target, AET, and internal gas consumption. Next on the gas transportation and regasification segment on Page 10. We continue to deliver our commitment towards ensuring the security of gas supply to the nation. In the 9 months operation in 2020, pipeline network reliability was close to -- partner network reliability was close to 100%, and we delivered an average of close to a 1.9 billion standard cubic feet per day of sales gas to customers. For the regasification business, both Regas Terminal Sungai Udang and Regas Terminal Pengerang sustained each OEE level at 100%. Within this period, Regas Terminal Pengerang -- Regas Terminal Sungai Udang received 16 cargoes, while Regas Terminal Pengerang received 20 LNG cargoes, making a total of 36 cargoes within this period. Okay. Let's move on to utilities. For utilities, please refer to Page 11. Our electricity, steam and industrial gases plants continue to fulfill customers' demand, with 100% product delivery, reliability recorded across all products. Comparing against 9-month performance in 2019, the overall volume for steam remained level, which volume for electricity -- while volume for electricity and industrial gases were lower. That's all for operational performance, and now we'll next move to financial segment with Sharis. Over to you, Sharis.

Thank you, Encik Razak. [Foreign Language], and a very good morning, everyone. Sharis here, and I'll be taking you through the financials to start on Page 13. Fortunately, for us financial results were not particularly affected by the COVID-19 pandemic. But to start with the segmental performance, which is the gas processing, during quarter 3 2020, the gas processing business continued to run at full capacity, with minimum manning against preceding quarter, quarter 2 2020. Our revenue for the quarter was comparable at MYR 427 million, gross profit was also comparable at MYR 248 million, in line with revenue. Comparing against the corresponding quarter, which is quarter 3 2019, revenue remained comparable. However, segment results improved by 26% as we recorded lower operating cost attributable to depreciation expense and maintenance costs. The depreciation cost was lower as a result of fully depreciated assets as well as extension of our planned statutory turnaround interval. For results against the corresponding period, which is the 9 months 2019, revenue improved slightly by 1% at MYR 1.29 billion on higher internal gas consumption incentives, coupled with new revenue stream from our LPG importation and exportation services at Tanjung Sulong Export Terminal in [indiscernible]. Segment results rose by 18% to MYR 720 million, similarly due to lower depreciation and maintenance costs. Moving on to gas transportation on Page 14. Under the incentive-based regulation or IBR, gas transportation, or GT, adopted higher regulatory period 1 tariffs following the inclusion of internal gas consumption, or IGC, cost recovery, which is a path to cost. Prior to RP1, this IGC cost was borne directly by the shipper. Comparing against preceding quarter, quarter 2, our revenue remained comparable at MYR 294 million. Gross profit improved by 9% up to MYR 226 million on lower operating expenses during the quarter. Against corresponding quarter last year, revenue also was comparable as higher RP1 tariff mitigated lower revenue following the transfer of our Sabah-Sarawak Gas Pipeline O&M as well as through our assets. Gross profit increased by 12% on the back of lower operating costs, which negated the lower regulated asset base due to transitioning from depreciated replacement cost to net book value. Against corresponding period for the 9 months, similar reasons to corresponding quarter, with revenue remaining level at MYR 879 million. Segment results also remained level at MYR 622 million as lower operating costs negated the impact of lower regulated asset base or RAB. Next, regasification business segment, which also adopted the new tariffs under IBR. Similar to GT, or gas transportation, the RP1 tariffs were higher on a comparable basis, following the inclusion of IGC cost recovery, which is in part to cost. In addition, RGTP tariff or the turnaround regas tariff was higher due to inclusion of jetty leased asset as part of the regulatory asset base under RP1. Against quarter 2 2020, revenue remains steady for the segment at MYR 351 million. Results was 29% higher at MYR 216 million on the back of lower operating costs. Against corresponding quarter, last year, we saw revenue improving by 12%, in line with high tariffs, while gross profit increased by 39%, attributable, again, to lower operating costs and higher regulated asset base for the Pengerang Regas Terminal. On a similar basis to corresponding quarter, the corresponding results also saw improvement in terms of revenue by 13% to reach MYR 1.05 billion, while gross profit was 17% higher at MYR 549 million. Last but not least, utilities business segment. Comparing against the preceding quarter, we saw slightly higher revenue at MYR 336 million. Segment gross profit, however, was lower at MYR 461 million as we had higher operating costs, mainly to do with repair and maintenance. For results against last year corresponding quarter, quarter 3 2019, revenue improved by 9%, mainly attributable to higher steam and industrial gas sales. And during the same quarter last year, we also undertook scheduled statutory turnaround at the air-separation unit in Kerteh, Terengganu. At gross profit level, we saw higher gross profit for the segment due to higher revenue, which was further supported by lower depreciation expense. For the 9 months compared to last year, segment revenue was lower by 2% at MYR 992 million, while gross profit was higher by 12% at MYR 130 million, again on lower operating costs despite the lower revenue registered. So next, moving to the group results. So we saw good revenue compared to preceding quarter remaining steady at MYR 1.41 billion as we sustained our revenue from all of our business segments. Gross profit improved by 9% to MYR 736 million due to lower operating costs, particularly by the regasification and gas transportation segments, mainly attributable to internal gas consumption, which was offset by higher repair and maintenance costs. Profit after tax also rose by 12% to MYR 640 million, with the higher gross profit, coupled with favorable exchange rate movement, although this was slightly negated by lower share of profit from one of our joint ventures, namely, Kimanis Power. Against corresponding quarter, quarter 3 2019, group revenue rose by 5% due to high revenue from regasification and utility segment. Gross profit improved 31% as we saw lower operating costs across all of our businesses, while profit after tax was in line with gross profit with a 44% improvement. We had unrealized foreign exchange gain further adding on to the profit line. Year-on-year, group revenue remained resilient. Gross profit grew on the back of lower operating costs, while profit after tax also improved, although we were slightly affected on a year-to-date basis by unrealized foreign exchange loss. Moving on to the next slide in terms of total assets, as you would be aware on October 21, we concluded the issuance of Sukuk for our subsidiary, Pengerang LNG2, or PLNG2, which is 65% owned by PGB. The Sukuk saw strong interest from institutional investors, comprising both local and overseas institutions, which resulted in the final order book registering an overall -- oversubscription of 3% -- 3x. The proceeds from the Sukuk was primarily used to repay PLNG2's outstanding USD shareholders' loans in full. On the same day, PGB, in turn, settled our unsecured term loan in full. So this exercise addressed a significant portion of the currency mismatch between the regulated tariffs, which is in -- all now in ringgit and the USD obligations within the group. The timing of the Sukuk also capitalized on the favorable debt market conditions. So this goes, to some extent, addressing the unrealized ForEx gain for losses that we have been seeing in terms of our results. So looking at our balance sheet, our balance sheet remains very robust with close to MYR 19 billion of total, assets as at September 30, 2020. Cash and cash equivalents was slightly lower but remain extremely healthy at MYR 3.65 billion. While the division of segmental assets remain similar -- somewhat similar to last quarter. Finally, on the dividends, as also -- as you would be aware as well, the Board has approved third interim dividend of MYR 18 per share yesterday, amounting to a total of MYR 356.2 million, and this will be payable on December 22, 2020. The interim dividend continue to demonstrate our commitment to ensure sustained level of returns to our shareholders despite these challenging times. So with that, the -- we end the financial section, so I will now pass the line over to Encik Kamal, who will share on the company updates. Encik Kamal?

All right. Okay. Sorry, thank you, sorry again. Yes. Thank you, Sharis. Okay, let -- I'll take you through this company update. And as of 5th September, recently, PETRONAS launched, we call it a virtual pipeline business, or it's energy trucking, which is the integrated value change initiative basically to cater for gas demand for off-grid and small-scale customers, customers that don't have access to the main pipeline PG1. This virtual pipeline is the first of its kind, leveraging PETRONAS' available infrastructure and also taking advantage of the well-connected road system in Peninsula Malaysia. And as part of our pilot phase, PETRONAS completed its first LNG delivery from our Pengerang facility all the way to our manufacturing plant in Alor Setar, Kedah. It's a Continental Tyre facility, to be exact. And I'm very proud to highlight that this our Regas Terminal in Pengerang is a part of this one-stop solution for this off-grid customer covering supply, loading facility as well as logistic services to ensure that their cleaner energy needs are met by us. The introduction of this VPS, or virtual partner system, solution is form -- part of PETRONAS Group commitment to environmental sustainability and also to drive the growth of natural gas use usage in Malaysia. Following that, on November 11 recently, PETRONAS also obviously launched its LNG land bunkering business, which is another integrated value chain project, which established PETRONAS' position as one of the first service provider in this Southeast Asia. This bunkering activity began at our Regas Terminal Sungai Udang, where the LNG was loaded from our floating storage unit, or FSU, into a vessel named Avenir, where PETRONAS Gas' LNG bunkering vessel before a ship-to-ship transfer to our first customer Siem Aristotle of Pasir Gudang in the Port of Johor. So with this LBV -- or LNG bunkering business, PETRONAS is now able to serve its customer in the region by leveraging on the strategic location of our regas terminal facility in Sungai Udang as well as our regas terminal facility in Pengerang. So this LBV can also operate as an LNG carrier for delivery for small gas demand centers inaccessible by large conventional LNG vessels. With this, PETRONAS has strengthened Malaysia position as LNG bunkering hub that provides reliable and also cost-competitive, cleaner energy solution. It also reflects our commitment to sustainability and our support on the implementation of the International Maritime Organization, or IMO, 2020 regulation. Before we move to Q&A, probably allow me to show a video on -- to cover what I just mentioned just now. Can we play the video? [Presentation]

Right. That's the end of our presentation. Thank you, Encik Kamal. Can we move please to the Q&A?

[Operator Instructions] The question from the line of Alex Goh, AmBank.

I have several questions. And I think, perhaps, you may have mentioned that in your presentation earlier, but I couldn't download your presentation pack from the website so far. But maybe I'll just run through one at a time. First is regarding your -- the gas transportation segment, where revenue was flat year-on-year on -- from the third quarter. I'm just taking a 3-month in third quarter compared to 1 year ago. Your revenue was flat, but your profit was up 12%. Now I understand under the [ Hanyang ] mechanism -- under the RP1, where you move to from replacement cost to book value, it was supposed to lead to lower returns in state. Could you explain exactly how is it that your profit went up so much instead?

Yes. Right. Thank you, Alex, for the question. And we will look into the availability of the presentation on the website. Referring to the gas transportation results for quarter 3, and this is also similar to the regasification results as well. For quarter 3, there is a lower cost element. And as I mentioned earlier, quite a significant chunk of this relates to the internal gas consumption. As you are aware, starting from January, we are required to purchase this internal gas consumption, or IGC for our regulated business, and the cost is recovered via the tariff. So it should be an offset by right. We have a revenue element, and we also have a cost element, and previously, this wasn't in the books, so to speak, because it was borne by the shipper. Now during quarter 3, there was a normalization of the internal gas consumption volume used for gasification as well as for the gas transportation, obviously, because this is the first time that we are having this IEC arrangement. So in quarter 3, there were 2 things that happened. First of all, the actual volume of the IDC, which we recognized in quarter 1 and quarter 2, was revised downwards, so this affected the IDC costs, which we previously recognized. Then in addition, the actual volume for quarter 3 was lower than what was in the tariff, so there was a positive impact there as well. So this led to the improvement in the results. In addition, there's -- as a general direction as far as costs are concerned, the costs for this year compared to last year are also lower. Things like repairs, repair maintenance, some of the other operational costs, so that explains the reason for the improvement at the gross profit level.

Wonderful. If -- so looking at this gross profit level for your gas transportation, is this supposed to be a run rate that we should look in the fourth quarter or for the full 1 year over the next 2 -- another 2 years? Or is that -- was that a one-off because of this, you've got changes in your volume, your revision down? So how should we look at your numbers?

Right. Right. I understand. The best thing would be to look at the year-to-date as an indication or a reflection for the year, and hence, the quarter, if that makes sense.

Yes. But even if I were to look year-to-date at full 9 months against last year, it was slightly up by 1%. So it doesn't look like the RP1 had a negative impact on your earnings.

Yes. Because as was mentioned, the cost element actually outweighed any impact in terms of the REB transition.

In other words, water repair and maintenance side that more than offset it. Is it -- are you talking about internal gas consumption?

Yes. Yes. Yes. So the IGC element, the repair and maintenance and other costs were lower. And actually, it's not just for the regas. It actually applied to all the other business segments as well.

Okay. But if that is the case, then the -- but if -- you mentioned the internal gas consumption that it is -- you knocked off -- normally, it is offset against the revenue. So by right, it should have a knockoff effect, right?

Yes. So what I was trying to explain is that the actual cost compared to the element inside the tariffs, the actual cost is also lower because of efficiencies and also -- yes, the efficiencies, yes. So there is also a plus side there. Yes.

Going into the fourth quarter, should we expect additional costs to suddenly come in? Normally, your 4th quarter tends to have these additional costs. Should we expect the similar maintenance trend?

Yes. There may be. There may be, especially as -- but again, really not sure because of this development as far as the CMCO is concerned because we did see activity kind of picking up before the CMCO got clamped down again. So there might be -- yes. But again, it's quite hard to kind of pin down sort of like the indicative, percentage-wise or so on.

I see. Okay, so in other words, the normally higher cost in the fourth quarter may not recur this time around because of the CMCO, is that right?

Yes, yes. It may not, yes.

I see. Okay. But looking at the 9 months so far for this year, we can use that for the next 2 years, right, under RP1? Can we make that assumption?

You can. You can, but we will -- if there is any changes, we will, of course, update accordingly, yes.

I see. Wonderful. And the other one thing I want to ask also is regarding our gas processing. Quarter-on-quarter for the 3 months compared against the second quarter, your revenue was down as well as your profit was down by about -- slightly. I'm just wondering what was the cause of that?

This is, again, the preceding quarter? Quarter 2?

Yes, correct.

I mean, the difference wasn't particularly significant, yes. It's more or less level. Yes, for the gas processing.

Yes. But the fact that revenue dropped a little bit, was there something regarding your utilization of the plants? Was there any scheduled shutdown that caused that to happen?

No, no, no. The -- as you are aware, the baseline reservation charge, that remains intact. On a month-to-month basis, sometimes the performance incentives, there's a slight movement there, so it's mainly that. But the core revenue remains broadly intact, yes.

Okay. And regarding your depreciation, yes, it has come down, and you mentioned because of the fully depreciated assets and the extension of life assets, so you're stretching over longer depreciation period. But was there any one-off items inside? And should we take the third quarter as a normalized numbers, run rate?

Yes. The third quarter, it should be. But again, you need to take into consideration if there's additional CapEx, obviously.

Yes. Okay. Yes. Then another question I have is regarding your Kimanis shutdown. How many months was that because it caused your profit to drop by almost half. So how many months was the shutdown? And should -- how should we see that going into next year, any such shutdowns as well?

Again -- okay, the -- with regards to the scheduled shutdown related to one of the generating blocks, as mentioned, it's scheduled. It was roughly about a month. So yes, so that was the impact. And also, during shutdown, of course, there is usually slightly higher expenses to do with sort of work that needed to be done. Sometimes we do it during the shutdown as well. So that was the reason for the drop in terms of the share of profit, Alex. Moving forward, again, we will update if there is any significant shutdown or planned shutdown. But at this point of time, yes, there's nothing that we would like to share.

Okay, yes. Now I think my final question is more on your dividend, where, if you look at the 9 months, you're paying more than 100% of your earnings, right, for the 9 months. Should we expect, going forward, your dividend will be above this level, 100%? Because you're going through what you got capital optimization strategy? So should we be looking at above 100% with PL?

Well, yes, in terms of -- what we've always maintained is making sure the level of the baseline dividend is at same as much as possible. The higher DPR this year was mainly due to the special dividends. But whether that's going to continue in the future, we do need to balance that with whatever else is happening in terms of the CapEx requirements and so on. So I think it will be quite difficult to say that this is something that is going to continue. At the very least, it's more on the baseline level of dividends that we will try to sustain.

But your baseline level, would you think it will move towards that 100% level?

I think our dividend policy, actually, it doesn't mention about 100%. So that continues to be something that we revisit on a quarterly basis, obviously, depending on the requirements. So I -- yes. I mean, at the end of the day, I cannot make any promises as usual. Yes, Alex.

Yes. I understand. But just to revisit the MYR 0.50 special dividend, I was -- why was it paid off during that second quarter?

One of the reasons is, as mentioned, because we are undergoing some review in terms of our capital structure, so one of the items identified was the special dividends at this point of time.

Okay. In other words, can we simply say that we should expect more of such special dividends going forward?