PETRONAS Gas Berhad (PETGAS) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to PETRONAS Gas Berhad's analyst briefing for year-end ended 31st December 2020. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today from the management team of PETRONAS Gas Berhad. Thank you. Please go ahead.

Hi. Hello. Good morning. Thank you, Amber. [Foreign Language] and good morning, everyone. I'm Izan from Investor Relations. Thank you for joining our session today. Welcome to PETRONAS Gas Berhad analyst briefing for financial year ending 31st December 2020. With us from PGB, we have Encik Abdul Aziz Othman, Managing Director and CEO; Puan Shariza Sharis M. Yusof, CFO; and Encik 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 is available at both Bursa Malaysia and PGB websites since yesterday. The pack for today's briefing is available at our website and also at the webcast host platform. So without further ado, I'll hand over to Encik Aziz for the highlights. Aziz?

Thank you, Izan. [Foreign Language] and good morning, everyone. Once again, thank you for joining us today. As I'm new in PGB, allow me to introduce myself quickly. Just I'm -- I've been at PETRONAS for a long time. In fact, this is my 34th year in PETRONAS. In PETRONAS Gas, I believe this is my fifth team in PETRONAS Gas. The first team from the day I joined in 1987 to the year 2000. Primarily, at that time, as project engineer. I'm responsible for the construction of GPP 2, 3 and 5 and 6 as well as the PGU pipeline loop that we contracted from [ the government ] to Meru. I also had a second team in PGB from 2005 to 2009 as the Head of Utilities. So all in all, I spent almost 19 years in PGB. I would like also to highlight that I had a short stint in Canada from 2017 to 2020, primarily with an exposure in so-called fully liberalized market and a matured TPA regime, which seem to be very relevant to what PGB is in today. So I'm pleased to report on our performance. I'm pleased to report that PGB has recorded one of our better performance in 2020. Operationally, we sustained high level of reliability across all our business segments despite how plants and facilities are running with minimal manning which was designed as precaution against COVID-19 issue. We also achieved our target incentive under the gas processing agreement, again, due to high level of efficiency at our gas processing plant. Commercially, our long-term agreements with PETRONAS for Gas Processing, Gas Transportation and Regasification will ensure steady return on our revenue stream. The RP1 tariff, under the Third Party Access, which have been set for the next 3 years, is due to expire in end of 2022, also assure us of steady earnings. On top of that, we successfully delivered the first steam supply to our long-term customer in December. This is a new contract in the bank, alongside an extended electricity supply contract we signed in April 2019. With that, almost all of our steam capacity in UG is actually sold to customer. On growth, despite the restriction imposed by MCO, 2 of our projects, LNG truck loading and LNG reloading as part of PETRONAS bunkering services have kicked off in September and November, respectively. So those operational performance have translated well into our financial performance. For the year ended 31 December 2020, our good results were supported by sustained revenue stream and lower costs. Revenue was at MYR 5.59 billion, which is 3% higher than in 2019. And this is mainly due to higher revenue from our regulated business, i.e., the Regasification and Gas Transportation segment, which has offset the low revenue from the Utilities segment. Gross profit improved by 11% to reach MYR 2.66 billion as a result of lower operating costs at our Gas Processing, Regasification and Utilities segment. Profit after tax was higher by 5% at MYR 2.08 billion, as higher gross profit was partially offset by lower other income, unfavorable ForEx and lower investment income. Nevertheless, the details and quarterly comparison will further be elaborated by Sharis later. Let's go through our operation, yes. Yes. Let's -- can we move the slide to the one? Yes. So on the Gas Processing, our Gas Processing business continued to sustain its good performance. The overall equipment effectiveness, or OEE, for both C1 and C2 were better than last year. And the OEE is the basis for performance incentive under our GPA with PETRONAS. We achieved 100% salesgas reliability, which demonstrated our commitment to customers. The high level of efficiency also resulted in MYR 82 million of performance incentives achieved compared to MYR 79.6 million in 2019. The performance-based structure incentive cover ethane, propane, butane, OEE and C2 production volume. And all this we have done well, have continued an upward trend over the last 3 years. If you go to Gas Transportation and Regasification. In 2020, pipeline network reliability was close to 100%. And we delivered an average of close to 1.9 billion standard cubic feet per day of salesgas to customers. Regasification business, both RGT to Sungai Udang and RGT Pengerang, sustained OEE level at 100% each. Throughout the year, RGT Sungai Udang received 18 LNG cargoes, while RGT Pengerang received 27 LNG cargoes, making a total of 45 cargoes that we have handled. On Utilities, our electricity team and industrial gases plant continue to fulfill customers' demand with close to 100% product delivery reliability recorded across all products. In 2020, due to COVID, we saw lower volume of electricity delivered, which resulted in lower offtake of excess electricity that PGB generates. We have a plan to mitigate this for 2021, which was essentially entering into a new scheme for the sales of excess with TNB as well as pursuing for captive customers, further captive customers in the vicinity of Kerteh and Gebeng. As for steam and industrial gases, total volume was higher also compared to 2019. This was mainly due to customers' fewer turnaround days in 2020. So the less turnaround of our customers, essentially, they will take more of our products. So with that, that's all I have for operation. We shall next move to financial with Sharis. Sharis?

Thank you, Encik Aziz. So good morning, everyone. I'm Sharis here, and I will be taking you through the financials. Now as you're aware, PGB ended 2020 on a relatively strong note. So as usual, I will start with the segmented results before going through the Q. So first of all, Gas Processing segment on Page 13. For 2020, the business continued to run despite COVID-19 challenges. Against preceding quarter, quarter 3 2020, we saw slightly lower revenue at MYR 424 million. This follows lower internal gas consumption incentive due to a revision in pricing from regulated price to reference market size. Gross profit was lower by 9% at MYR 225 million, mainly due to higher operating costs recorded in the quarter as activities picked up. Against corresponding quarter, quarter 4 2019, segment revenue was also slightly lower. Segment results improved by 9%, mainly attributable to lower depreciation expenses. The depreciation expense was lower because we had fully depreciated assets. In addition, we also benefited from the extension of statutory turnaround -- plant turnaround interval. For the full year results against 2019, revenue improved by 1% to MYR 1.7 billion, mainly as we had new revenue stream from LPG importation and exportation services at our Tanjung Sulong Export Terminal, coupled with higher PBS incentives as mentioned by Encik Aziz earlier. Segment results rose by 16% to MYR 945 million on the back of lower operating costs. Moving on to Gas Transportation on Page 14. Under the IBR, or incentive-based regulation, we saw higher RP1 tariff following the inclusion of internal gas consumption, or IGC cost recovery. This is a pass-through cost. Prior to RP1, this cost was borne directly by the shipper. Against quarter 3 2020, gas transportation revenue was comparable at MYR 294 million. Gross profit was lower at MYR 172 million (sic) [ MYR 173 million ] as we saw higher operating costs, similarly in line with pickup in level of activity following easing of MCO restrictions. Also, in the preceding quarter, in quarter 3, we did have a onetime IGC adjustment as we revised the actual IGC volume consumed for the first 9 months of 2020 in quarter 3, and we also touched on this at the last analyst briefing. Comparing against quarter 4 of 2019, revenue was higher by 6% as higher RP1 tariffs distributed the lower revenue following transfer of the Sabah Sarawak gas pipeline operations and maintenance as well as slower assets. Additionally, the corresponding quarter, revenue was also lower because there was a downward adjustment on the Miri Gas transportation tariff. Gross profit was 6% lower, reflecting the impact of the regulated asset base, which is transitioning, as you are aware, from the depreciated replacement cost to net book value basis. This was offset by lower IGC costs. For the year against 2019, revenue was slightly higher at MYR 1.17 billion, similarly since to corresponding quarter. Segment results slightly declined, but was comparable at MYR 795 million due to lower net RP1 tariff, excluding IGC, partially offset by lower operating costs. Moving on to Regasification on Page 15. This -- the segment also adopted new tariffs under IBR. And similar to Gas Transportation, we saw higher RP1 tariffs following the inclusion of IGC cost recovery. So against quarter 3 2020, our revenue was slightly higher at MYR 354 million, attributable to ancillary services, including the newly introduced LNG truck loading at PLNG2 as well as the LNG reloading services at RGTSU. Segment results was 24% lower at MYR 164 million on the back of higher operating costs in line with the level of active. Similarly, the segment also recorded a one-time IGC adjustment in quarter 3, similar to the transportation as we revised the actual IGC volume consumed for the first 9 months of 2020. Against corresponding quarter, quarter 4 2019, revenue improved by 13%, in line with the tariff. Gross profit increased by 17%, attributable to higher RAB for the Pengerang Regas Terminal due to the inclusion of jetty-leased assets as part of the RAB. This was offset by higher operating expense, mainly due to electricity supply contract at -- against the Regas Terminal in Pengerang. On a similar basis, the corresponding quarter 2019 -- against 2019, revenue improved by 13% to MYR 1.4 billion, while gross profit was 17% higher at MYR 730 million. Last but not least, the Utilities business segment. Against the preceding quarter, revenue declined by 6% to MYR 317 million. As mentioned by Encik Aziz, this again was due to the lower sales of excess electricity. Segment gross profit, however, rose by 61% on the back of lower fuel gas costs due to revision of pricing from regulated price to reference market price during the quarter. Against quarter 4 2019, revenue declined by 10%, mainly again due to the lower excess electricity uptake. Segment gross profit improved by 68%, again due to lower fuel gas costs as well as lower depreciation expense. Against 2019, revenue was lower by 4% at MYR 1.3 billion, due to lower excess electricity offtake despite higher sales of steam and industrial gases. Despite the lower revenue, we did see higher profit -- gross profit by 27% at MYR 204 million due to the lower fuel gas costs as well as lower operating costs. Next, on Page 17. This is the impact on the overall group and results. Despite the unconventional economic conditions due to the ongoing pandemic, as mentioned, the group recorded robust financial performance on the back of sustained revenue stream, coupled with lower cost across all the business segments. Against the preceding quarter, revenue was slightly lower at MYR 1.39 billion, mainly due to the Utility segment, as explained earlier. Gross profit declined by 14% to MYR 636 million, largely due to the higher operating expenses. This included things like the IGC as well as repair and maintenance costs at the Gas Transportation and Regasification segment. PAT was corresponding lower -- correspondingly lower by 19% at MYR 521 million on the back of the lower gross profit as well as unfavorable foreign exchange movements. Against the corresponding quarter, quarter 4 of 2019, revenue was slightly higher, mainly due to the Gas Transportation and Regasification segment, which offset the lower Utilities revenue. Gross profit improved by 11%, but as we saw lower operating costs from Utilities, Regas and Gas Processing segment, PAT grew by 6%, in tandem with the higher gross profit, complemented by higher share of profit from joint ventures. Year-on-year, against 2019, group revenue was MYR 5.59 billion with higher revenue from Gas Transportation and Regasification, offset by lower revenue from Utilities. Gross profit grew 11% due to lower operating costs, while profit after tax also improved by 5%, although this was slightly affected by lower other income, unfavorable ForEx as movement well as lower investment income. Next, on the balance sheet. Our balance sheet remains very, very robust with over MYR 18 billion worth of total assets as at 31st December 2020. Cash and cash equivalents also stood at a healthy MYR 3 billion. And in terms of distribution of the group segmented assets, this remained similar to the previous quarter. We are also pleased to update that we have secured Islamic financing facility for a combined aggregate principal amount of MYR 1.3 billion from RHB Islamic Bank, as announced yesterday. Proceeds from the facility will primarily be used to finance capital expenditure and working capital requirements, particularly for the Gas Transportation business. So as you are aware, the PGB company level has settled its external borrowings last year with the proceeds received from the LNG to Sukuk in October. So the PGB company is currently not carrying any debt. So this new term loan will allow us to diversify our funding sources as well as better optimize our capital structure, and hence, the group's balance sheet. As for dividends, the Board has approved a fourth interim dividend of MYR 0.22 per share and a special dividend of MYR 0.05 per share, amounting to MYR 534 million, and this will be payable on 22nd of March 2021. The dividends demonstrate our continued commitment to ensure sustained level of returns to our shareholders despite the ongoing economic conditions. So with that, I end the financial section, and we'll pass the line over now to Encik Razak to share on some company updates.

Thank you, Sharis. Moving on to updates on some of the initiatives that we are doing. So yesterday, as the -- what we have announced, PGB bought has approved a final investment decision for the construction of new lateral gas pipeline project. This project is an extension from our existing PGU 2, stretching 42 kilometers from tie-in point somewhere in Puchong to a prospective Pulau Indah power plant and related industrial areas. The projects -- the award of EPCC and line pipe supply contracts are expected to be done shortly, upon which detailed engineering for the pipeline installation as well as the manufacturing of the line 5 to commence. The project is estimated to be completed and commissioned in quarter 1 2023. Total costs, as announced yesterday, is MYR 541 million. The new lateral pipeline will be part of the regulated Gas Transportation business. And therefore, the cost recovery for the project will be determined by Energy Commission under the incentive-based regulation. Second update is on 7 January 2021, our Regas Terminal Sungai Udang RGTSU had received the second TPA cargo deliveries from Shell Malaysia trading Sendirian Berhad. The delivery via Methane Heather Sally had successfully uploaded -- unloaded 155,640 meter cubic of LNG. Subsequently, the regasified gas from RGTSU was transported via PU pipeline to Gas Malaysia Berhad and customers. With this, the Malaysian gas market liberalization is progressing and continue to encourage competitive market and gas prices. For information, Energy Commission as today has approved a total of 11 shippers, of which, from time to time, there are discussions with us in as far as capacity booking for both Regas as well as our pipeline. We look forward to more participation from all listed parties shippers in the future. Lastly, moving forward, we also aim to explore growth potential, primarily leveraging on the energy transition. We will focus on the area, one, on the integrated utility solution where we do have an offering, an integrated offering of power, steam, chilled water and industrial gases, and the focus will be to look at several up-and-coming infrastructure projects in Peninsular Malaysia so that we can link the gas supply to this integrated solution to meet the need of utilities for these infrastructure projects that we expect to come up soon. The second opportunity is to pursue opportunities in power generation. While today, the power generation is very much overcapacity with a high reserve margin, but in the long term, a lot of those coal power plant is actually coming to the end of their PPA. With the energy transition, we expect the replacement for this coal power plant will either be gas or renewable. At this moment, we think gas will be having an advantage to renewable, considering the cost of renewables, which are still very high at this moment. And we intend to leverage on our experience in operation and maintenance of our power generation assets. And with this, we plan to pursue available opportunities. The last areas that we would like to explore will be on step-out opportunities, again, emerging from energy transition. I have mentioned about the transition using gas as transition. But nevertheless, there are areas that we think could be pursued by PGB, considering the expertise that we have in O&M for the opportunities brought about by the energy transition. So that's all we have for now. I left -- let's proceed the session with a question-and-answer. Thank you very much.

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

I'm so glad to hear from you, Encik Aziz, and hi, Shariza. I have actually a few questions, but maybe I'll just stick with the first 2 ones. It's regarding your -- in the pipeline, the 42 kilometers. I know the investment costs MYR 541 million. Could you give me -- first, what are your investment parameters? What is the project IRR? And what is your expected revenue or profit returns you are looking at from this project? And given the fact that it will fall under the Gas Transportation segment, if you were to look under the RP2, what would you -- what sort of guidelines would you give in terms of the expected reduction in terms of the gas transportation revenue in 2023? And my second question is regarding your dividend. You have a payout of 125%. I know last part of that is because of your special dividend. But looking into this year and next year, what sort of dividend assumption should we take, given the fact that you are still moving towards what your optimal capital strategy policy.

Let me take on the first question, the Tulip investment. First and foremost, the return for this pipeline investment will be part of RP2 to start in 2023. So the IRR or whatnot will be determined by ST, and we expect to have that discussion with ST sometime early next year. We expect the return to be within what we have seen under the current RP1. That's the response to that question, which also lead into the guide for RP 2. We expect to be similar, but I think that's the call of energy commission. There are other precedent that you can refer to, but we expect to be of similar to what we have seen for RP1. And I'll let Sharis take on question 3.

Right. Okay. Thanks, Alex. On question 3, as you rightly mentioned, the dividends and the dividend payout ratio for 2020 was really quite expected by the special dividends. Obviously, we had the MYR 0.50, which was primarily for the capital restructuring exercise in quarter 2. And the MYR 0.05 dividend was driven mainly because of the performance, which was very strong for 2020. Looking at 2021, obviously, we don't do forecast, but we continue to reiterate the commitment of maintaining the level of dividend in terms of absolute dividend payout because, given our business, it's very stable, underpinned by these long-term contracts. So I hope that helps as far as the core dividend expectation. And I can't comment anything there's going to be special dividends. I'm unable to comment, obviously, at this stage.

But just going back on your capital restrategizing. Are you still looking at a 55% debt-to-equity ratio, together with Encik Aziz? And basically, when do you hope to achieve this ratio? Over the next 2 to 3 years? Or do we have a time line on that?

Yes, yes. Definitely, we don't -- there is sort of like certain parameters. Obviously, under the IPR guideline, the guided level of debt is 55%. But obviously, we will need to see what is the optimal for PGB, right? So that is an ongoing process. And the time line-wise, we started last year. We do expect there will be some activities this year and maybe also into next year as well. So probably looking at overall about 3 years, 3 to 4 years, because obviously, we're a very big company so we can't quite do everything sort of like all at the same time. So it needs to be progressive.

And Encik Aziz, regarding the internal return for the upload in the pipeline, you mentioned it's going to be around RP2. So can we assume that the project or IRR we should be looking at is just around 7% kind of range?

[ I'll give ] you the exact number, but I think maybe there are some guidelines in the ST website that you can refer to as part of your forecast that you want to do. But that's something that, again, as I mentioned, a discussion that need to happen between us and ST. And we do have the numbers that has been effective for RP1 and we'll try to discuss and sustain that number, if possible.

Yes. And Alex, if I may add, obviously, for the project to be FID, again, we don't share what the actual threshold is as a matter of practice. This is like a prospect and that. That has -- it has met the FID threshold, right? And the question now is when we do go to ST, in determining the RP2, what is the absolute return that we're going to get. But in making that decision, these considerations have been taken into account. So it was the impact of RP2. Yes. So yes, if that helps -- if that helps, so the return is robust enough, I would say, compared to Encik Aziz said, what we have right now.

Our next question comes from Anshool from JPMorgan.

I have a couple of questions. Could you just remind me the adjustment made in third quarter for Gas Transportation, Processing and Regas related to the IGC component, which saw the decrease in gross profit this quarter?

Right. Thank you for the question. Basically, this IGC is a new concept under RP1. So we claim via the tariff. But in -- on the other hand, we also need to purchase the IGC consumed. Whereas previously, the shipper absorbed that. There was no purchase and charging back from PGB. What happened in quarter 3 was that because it's quite a new concept, not just to us but also to ST, we did a downward adjustment in terms of the actual IGC, which we continued. So in quarter 3, in a way, the costs were not really reflective of that particular quarter. So it was better to look at the 9 months. So in quarter 4, we are back to kind of like the normal quarter level. So I guess the best way to kind of look at this IGC cost is to look at it in -- for the year-to-date because we were still going through a period of transition in terms of recognizing these costs.

So in terms of margins for the respective segments, we could see the fourth quarter as a much cleaner number compared to third quarter?

Yes. Yes. That is correct. Yes. Yes. That is correct. Yes.

Okay. My second question is regarding the RP2. So what are the time lines? When would you begin discussions? When would the -- when will you get word back from the ST and all that?

So the effective date for RP2 will be January 23. In fact, today, we are starting to prepare for our submission. The deadline for submission to ST will be...

March 20 -- March '22.

March 2022, upon which there will be a discussion with ST, and we expect to have a decision anytime before the effective date of January 2023.

[Operator Instructions]