PETRONAS Gas Berhad (PETGAS) Earnings Call Transcript & Summary

Good day. Thank you for standing by, and welcome to the PETRONAS Gas Berhad analyst briefing for quarter ended 30 September 2021. [Operator Instructions] I must advise you that this conference is being recorded. I would now like to hand the conference over to your first speaker today, Izan Hajar Ishak. Thank you. Please go ahead.

Thank you, Rochel. [Foreign Language] And good evening, everyone. Thank you for joining our session today for PETRONAS Gas Berhad's analyst briefing for quarter ended 30th September 2021. My name is Izan from Investor Relations. We hear from PGB today, we have Abdul Aziz Othman, Managing Director and CEO; Shariza Sharis Yusof, CFO; and Hisham Maaulot, Head of Business Development and Commercial. We will start the briefing with highlights, company performance upgrades to be followed by Q&A. For reference, our financial results is available at both Bursa Malaysia and PGB website. The presentation material for today's briefing is available at our website and also at [indiscernible] web platform. Without further ado, I'll hand over to Aziz for the highlights. Aziz?

Thank you. Thank you, Izan. [Foreign Language] and good evening, everyone. Thank you for joining us today. First and foremost, there has been a lot of progress since the last analyst briefing in August. In the third quarter of 2021, Malaysia was really in Phase 1 of the national recovery plan and put under tight restriction with limited business activities. So as you were seeing that this was evident as the mix economy is contracted by 4.5% year-on-year in quarter 3 2021, with down by consumption and investment activities. The Industrial Production Index, IPI also saw contraction in July and August, again, due to weakness in the manufacturing and electricity sectors before climbing back up in September. As of November, Malaysia has now moved into Phase I of the national recovery plan, where all sectors are open and interested travel, social activities and domestic tourism begin to pick up. Fortunately, for PGB, our revenue is not affected as we are back -- again, I've mentioned quite a few times by long-term agreements with PETRONAS for the gas processing, gas transportation and regasification. And we saw some relaxation in the guidelines -- as we saw some relaxation in the guideline, there was some pickup on planned activities, as you will see in the results later. If we can move to the next slide. So as for PGB, we have had an eventful quarter. Operationally, our plants and facilities sustained high reliabilities across all our business segments, resulting in the gas processing business, achieving the agreed target incentives. Our third nitrogen generation unit, NU has begun delivering additional sales volume to the customers. On top of our business as usual, we have achieved several key milestones in the commercial and growth areas. In September, we successfully secured a new long-term agreement to supply nitrogen to PC Ethylene. PC Ethylene is a new customer to PGB as they have previously contracted their nitrogen supply from another supplier. In addition, we successfully retained our utilities customers by extending our supply agreement with Kertih Terminals, INEOS PCG Acetyls and BASF petrochemical -- Petronas Chemicals, respectively. As for growth, work on the Lateral gas pipeline to grow enough as well as the debottlenecking the Southern region pipeline are progressing as planned. We have also announced on 1st October, if you've seen on our website, the intention to build another tank at our regasification terminal facility in progress. More on this in the company updates section later. If we can move to the next slide, looking at the financials. For the quarter ended 30th September 2021, PGB recorded MYR 1.43 billion revenue higher than the same quarter last year and the preceding quarter 2 this year. And this was mainly due to the higher sales from utilities and the new revenue stream under ancillary services in the regasification segment. Gross profit rose to MYR 793 million on the back of lower operating costs, particularly the utilities and regasification segment. Profit after tax was in line with the gross profit, although we were slightly affected by unfavorable foreign exchange movement causing PAT to be 3% lower when compared to quarter 3 in 2020. Meanwhile, for the 9-month performance, revenue was 1% lower at MYR 4.15 billion, mainly due to lower product price for utilities products amidst higher sales volume. Gross profit was nevertheless 4% higher at MYR 2.11 billion on stronger margins from utilities and regasification segment as a result of higher margins and lower operating costs. PAT similarly improved by 4% to reach a MYR 1.62 billion. More details on our financials will be presented by Sharis after this. If we can go to operational performance, which is on Page 10 of the slide. The operation says our gas processing plants continue to operate as usual. The OEE or the overall equipment effectiveness remain within range for both C1 methane and C2 ethane. We achieved 99.9% sales gas reliability, which demonstrated our commitment to the customers as well as the effort that we have put up to ensure the reliability. The high level of efficiency also resulted in a MYR 72.3 million of performance incentives achieved to date. If we can move next to the Gas Transportation and Regasification segment. The pipeline network reliability was sustained at close to 100%, and we delivered an average of close to 2 billion standard cubic feet per day of sales gas to customers. For the regasification business, both RGT Sungai Udang and RGT Pengerang sustained [ H OEE ] each level at 100%. During the quarter, RGT Sungai Udang received 7 cargoes, while RGT Pengerang received 20 cargoes, making it a total of 27 cargoes received. We can now move on to Utilities. Overall, we continue to fulfill customers' demand with 100% product delivery reliability recorded across all products. For electricity, volume in quarter 3 2021 has improved, mainly contributed by sales to new customers and higher offtake from our excess capacity following the new [ NDA ] agreement which we secured effective August 2021. Team also recorded higher volume in line with demand from new customers, which is in Gebeng and no turnaround undertaken at the existing customers' plan. Meanwhile, the industrial gases saw improved uptake compared to quarter 3 2020 following no shutdown at customer side and the delivery of low-pressure gas nitrogen to new customers -- new customers from our third nitrogen generation unit in Kertih. That's all for operational performance, we will next move to the financial segment with Sharis.

Thank you, Che Aziz. [Foreign Language] And hi, everyone. Sharis here, and I'll be taking you through the financials. So if you could please refer to Page or Slide 14, we will start with the Gas Processing segmental performance. For cash processing against preceding quarter, quarter 2 of 2021, we saw comparable revenue at MYR 430 million. Gross profit was higher by 15% and at MYR 245 million as we recorded low operating costs. Against the corresponding quarter, quarter 3 of last year, segment revenue was also comparable. Segment results declined slightly by 1% as we had a marginally higher operating costs, mainly high depreciation expense, in tandem with the capital expenditure. This was offset by lower planned maintenance costs. Against the corresponding period, which is the 9 months of 2020, our revenue was comparable at MYR 1.29 billion, while segment results was lower slightly by 3% at MYR 701 million, similarly on higher operating costs again, depreciation expense in line with the capital expenditure. Moving on to Gas Transportation, which is on Page 15. Under the intensive based regulation or IBR, the RP1 tariff for the PGU pipeline network remains unchanged for 2021. So comparing against quarter 2 2021, we saw higher revenue slightly by 1%, mainly due to the higher number of operating days. Gross profit rose by 15% to MYR 205 million on lower operating costs during the quarter. Against corresponding quarter, quarter 3, 2020, segment revenue was also comparable while gross profit decreased by 9% on higher operating costs, mainly our internal gas consumption cost, which is a pass-through cost under IDR tariffs. IGC tends to correlate in line with the sales gas delivered. So obviously, in 2021, there was a higher volume in line with the recovery of the economy. And hence, the internal gas consumption for the PGU network was higher. Against corresponding period 9 months of 2020, our revenue remained comparable at MYR 875 million, although we did see lower number of operating days coupled with lower operations and maintenance services revenue. Segment results declined by 7% to MYR 581 million on higher operating costs mainly relating to IGC as well as the maintenance costs as we saw activities picking up this 9 months compared to last year. Moving on to the Regasification segment, which is on Page -- or Slide 16 Again, the RP1 tariffs remain unchanged until December 2022 for both regas terminals in Sungai Udang and Pengerang. In terms of results, against quarter 2 2021, we saw improved revenue by 1% to MYR 357 million again, due to higher operating days just calendar days. While segment results was 94% higher at MYR 269 million as we recorded lower operating costs. This was largely attributable to higher internal gas consumption cost charge in quarter 2 2021. In quarter 3, there was a refinement in terms of the method of calculating IGC for the regasification terminal. Hence, we saw lower IGC cost in quarter 3 compared to quarter 2. Moving forward, this should be normalized as we have landed on the right method or the more appropriate method in determining IGC for the regasification terminal. Against the corresponding quarter, quarter 3 2020, segment revenue improved slightly by 2% as we saw the introduction of new revenue streams from the LNG reloading at Sungai Udang as well as truck loading at Pengerang, while segment results rose by 25% as a result of lower operating costs, again, attributable to internal gas consumption and utility costs. Against the corresponding period, 9 months of 2020, we saw the segment registering slight growth by 1% at MYR 1.06 million, similarly due to the ancillary services, which is the LNG reloading and truck loading services. Segment results rose by 10% to MYR 604 million on lower operating costs. This was largely attributable to lower utilities expenses. Last but not least, moving on to Utility segment on Page 17. The segment saw changes in terms of its fuel gas cost pricing from regulated price to reference market price effective 1st November 2020. Now on the sales and utilities product pricing allows for costs to be passed through with the exception of electricity. This means that a decrease in fuel gas price in terms of cost would generally result in favorable margin impact and vice versa. So comparing against preceding quarter of quarter 2 of 2021 revenue rose by 11% to MYR 346 million, as we saw higher volumes across all products as well as higher prices for steam and industrial gases. The high sales volume was achieved on the back of higher customer demand coupled with the commencement of electricity supply under the new electricity dispatch agreement on EDA, as mentioned by Che Aziz earlier. Segment gross profit stood at [ MYR 74 million, ] higher by 5% as we had lower operating costs. Against last quarter, quarter 3 2020, segment revenue increased slightly by 3% on the back of higher contribution from electricity and steam sales as to new customers. Segment results surged by 59% as we saw favorable margin impact due to the lower fuel gas cost as well as lower depreciation expense due to fully depreciated assets which are still in use. Against 9 months, similar trends to corresponding quarter, revenue declined 6% to MYR 933 million on lower product prices amidst higher sales volume from new customers. However, segment results improved by 69% to MYR 209 million, again, due to the favorable margin impact of lower fuel gas costs as well as lower depreciation expense. So moving on to the group level, which is on Page 18. Against preceding quarter, we saw group revenue at MYR 1.43 billion, higher by 3% as we recorded high revenue from Utilities segment. Gross profit surged by 32% to MYR 793 million, driven by lower operating costs. This was largely attributable to the lower IGC, as mentioned earlier, from the regasification segment, while PAT or profit after tax was correspondingly higher by 32% at MYR 619 million. Against the corresponding quarter, group revenue improved slightly by 1% as we saw high revenue from Utilities and Regasification segment. Gross profit was higher by 8% again, with high contribution from Regasification segment mainly to do with the internal gas consumption as well as utilities. Profit after tax, however, declined by 3% as the impact of the higher gross profit was negated by unfavorable foreign exchange movement. We recorded unrealized foreign exchange loss of MYR 10.4 million relating to the translation of USD denominated assets and liabilities in quarter 3 of 2021, which contrasts to a gain of MYR 94.3 million. registered in the corresponding quarter last year. Finally, year-on-year against 9 months of 2020, we saw group revenue declining slightly by 1% to MYR 4.15 billion on lower utilities revenue. Gross profit, nevertheless, improved by 4%, with stronger utilities and regasification margins, while PAT also improved by 4% although the high gross profit was partially offset by lower share of profit from Pengerang Gas Solutions Sendirian Berhad, which is one of our joint venture company, which recorded lower sales volume. Moving on to the balance sheet on Page 19. As at 30th September 2021, our total assets remained robust at MYR [indiscernible] billion as we had higher cash and cash equivalents as well as trade and other receivables, offset by lower property, plant and equipment balances due to the depreciation. Also in terms of distribution of segmental assets, this remained similar to previous quarters. Moving on to dividends on Page 20. Today, the Board has approved a third interim dividend of MYR 0.18 per share, amounting to MYR 356.2 million, which will be payable on 20th of December. The interim dividend demonstrates our continued commitment to ensure the sustained level of returns to our shareholders despite the ongoing economic conditions. So with this, I end the financial section, and I would like to pass over the line to Che Aziz to share on some company updates.

Thank you. Thank you, Sharis. Moving on to updates, can you hear me because I saw some comments about -- okay. As some of you might already know, PGB reissued an announcement on 1st October 2021 to seek an impression of interest from the market regarding the possibility of building an additional LNG storage tank in Pengerang. The decision to pursue opportunities in the LNG storage capacity business is based on our commercial study, where we found that the recent growth of the global LNG market has led to rapid expansion of LNG reexport business especially in the emerging markets and, of course, in the traditional market of Northeast Asia. So our LNG regasification terminal in Pengerang or RGTP is strategically located within the region, which provides competitive advantage to support the growing LNG demand in Asia. Therefore, the EOI announcement is to gauge market interest in booking our tank capacity especially for storage and reload services. We expect the new LNG storage tank with a potential tank size from 160,000 meter cube to 260,000 meter cube if we can FID it upon confirmation of the EOI to be ready by 2025 or thereabout. Of course, again, subject to the date of the final investment decision. So this business, while it is located at Pengerang as part of current regulated business will be part of unregulated business, and we expect to be run still by the joint venture company of our P LNG 2. So that's all what I have for now. Let's move on to Q&A. Thank you.

[Operator Instructions] First question comes from the line of Jianyuan Tan from Affin Hwang.

I just have one question to point Sharis. On the regas, which you explained earlier, do you mind elaborating why was it an accounting adjustment again and the nature of it? And did I get it correctly that there was an overcharge in second quarter and subsequently is just a reversal in the third quarter?

Thank you for the question. There was an adjustment made in quarter 3. Obviously, this IGC is a relatively new concept under RP1. Previously, we did not have to purchase the IGC and we did not have to recover it through tariffs. So we have actually refined the method in terms of calculating the IGC for the regasification terminal. And there was an adjustment made in quarter 3. So this year, moving forward, the level should be normalized. So a good way to look at it is to look at the quarter 2 and quarter 3 and average it out as an indicator moving forward. Again, the IGC, there's 2 elements. First of all, is the direct consumption, which is relatively easy to determine. There is also an element called unaccounted for gas. I think some of you are aware, because I know some of you have read the tariff guideline. So for this unaccounted for gas, again, it's because it's something relatively new, the mechanics of the charging and the methodology was sort of like refined in quarter 3 with the -- yes, ECT who supplies the IGC. Hope that answers your question.

Right. Just regarding the unaccounted gas. So basically, that part of the unaccounted portion based on the previous method kind of fluctuate whenever there is an unusual volume in terms of the operations, am I right?

Yes. But the amount should not fluctuate too greatly moving forward because, yes, obviously, you should be able to account for most of your gas.

So Jian, the BDU system is a close system by right, yes, should be accounted for, but there's time less when we do the measurement. So we have found a better mechanism as Sharis mentioned. And with that, the fluctuation should not be that big as what we have seen before.

Your next question comes from Alex Goh from AmBank.

I have a few questions. One is regarding your additional LNG tank in Pengerang that you're looking at. What -- could you back through again, what is the actual size? And based upon that size, what would be the actual CapEx that we are looking at, given the fact that raw material prices have gone up. That's my first question. And my second question is, could you give a bit of clarity on the impact of [indiscernible] more on 2022s tax whether your -- can you offset that with some of your capital allowances from the new projects? And yes, and my second question is regarding on your utilities. Your margin improved and because of the change in your pricing mechanism, could you run through again exactly how does -- does the change in the pricing mechanism actually lead to the higher margin?

First, on the first question. First question was on the actual size. As I mentioned in my presentation, it would depend on the indication from the customers. So at this moment, if you look at the typical LNG tank size, it is between 160,000 meter cube to 260,000 meter cube. Again, we cannot disclose CapEx and the charging mechanism yet because that is something that we are still working based on the EOI terms that we have issued out. So depending on the customer feedback, then we will work on the numbers accordingly. The second one, the impact of [indiscernible]. I think you're very well aware that PGB, the revenue is consistent because of the long-term contracts governed by regulatory, whatnot. So our effective tax rate also you have known. There are some increase because of this [indiscernible], I think, but I suppose you can estimate based on the indication of [indiscernible] for your guidance going forward, yes.

Generally, how many percentage points do you think you would change your effective tax rate?

Well, without giving a very specific number, I think maybe what might help and as we have informed this in the past as well, the regasification terminal at the moment do enjoy tax incentives. So if you roughly -- I'm quite sure you can extrapolate based on that as well as on the incremental amount, yes, on the tax from the 33%.

Okay. Okay. And could you run through again overall, what would -- what is your projection for your CapEx might be?

Yes. In terms of CapEx. Yes, sure. For 2022, we are looking at just over MYR 1.3 billion. this at the moment does not include some of the projects which we are looking at. So once we have announced those projects, if become to fruition, then we will update the guidance for next year. But at the moment, roughly just over MYR 1.3 billion.

Yes. Alex, there's the third question that we have yet to answer, you asked about the Utilities margin. Again, the -- the way the utility business is structured, you have electricity and then the rest of the utilities. So the electricity is -- the price that we sell to the customer is back to [ LTMB ] tariff whereas the other utilities, there is a formula that will allow for a transfer of gas back to the customers. So again, as Sharis mentioned just now on the electricity side, the -- you cannot transfer a portion of the gas price because the tariff is fixed to TNB. So if the price -- the gas price go down, you will enjoy some margin on the electricity. Of course, if the price goes up, you will enjoy deterioration of the margin. So that's how the mechanism works for the utilities.

Okay. Just one last question is could you provide what is the stage of your progress on your Southern pipeline project as well as the Lateral gas pipeline?

I don't have a specific percentage. But what I can tell you is progressing as per schedule at this moment, both the Lateral to Pulau Indah power plant in the power plant as well as the 1,000 debottlenecking projects that you asked.

Your next question comes from Anshool Singhi from JPMorgan.