PETRONAS Gas Berhad (PETGAS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the PETRONAS Gas Berhad Analyst Briefing for Quarter Ended 31st December, 2022, Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I'd now like to hand the conference over to Ms. Izan Ishak, Head of Investor Relations. Please go ahead.

Thanks, [Amber]. Good evening, everyone. Thank you for joining our session today for PETRONAS Gas Berhad Analyst Briefing for quarter ended 31st December, '22. My name is Izan from Investor Relations. With us from PGB, we have Abdul Aziz Othman, MD/CEO; Shahrul Azham Sukaiman, CFO; and Hisham Maaulot, Head of Business Development and Commercial. We will start with briefing with key highlights, business update, financial performance and to be followed by Q&A. For reference, our financial results is available at both Bursa Malaysia and PGB website. The presentation material is available at our website and also at website platform. Without further ado, I'll hand over to Abdul Aziz for the highlights.

Thank you. Izan, [Foreign Language] and good evening, everyone. Thank you for joining us today. And as always, start with the key highlights. Then for the full year of 2022, PGB has proven to be resilient, amidst the headwinds that we faced throughout the year. Most important thing is our opportunity on running safety, reliably and efficiently to ensure product system delivery to customers. . So as a result of this higher reliability, translating into higher availability of our opportunities plus all of you know that we work on the capacity payments as long as the availability is there. We are able to collect a steady revenue from the long-term contracts that we have here our customers. On top of that term that we have provided [indiscernible] should we be able to achieve some of the levers that has been built into the contract. And because of that higher availability, we were able to achieve higher incentive, especially from our gas processing business. Headwinds that we faced, which is the higher fuel gas price and unfavorable ForEx movement then continued into quarter 4, 2022, further impacting the overall group performance Nevertheless, as we show later, the overall results for 2022 are still very robust and commendable given the challenges. And our revenue, of course, with a higher gas price has surpassed the MYR 6 billion mark on the back of the higher product price. Yes, because gas is cost to us also resulting in a higher operating costs led to lower profit. All as considered, we are able to declare an interim dividend of MYR 0.22 per share this quarter, making it a total of MYR 0.72 for the full year of 2022. Now let's look at the external environment. The market volatility has continued, and this has led to a significant increase of gas price while the global inflation has greatly affected the ForEx movement. Again, as I mentioned, despite that, due to the operational excellence, we are able to collect revenue from the capacity payments as well as able to deliver all the utilities as per the demand by our customers. So because of that, the revenue remained steady throughout the quarters. Although profit show slight fluctuation, as I mentioned, due to the higher cost from the gas that we consume, especially at the [indiscernible] and ForEx and [indiscernible] gas terminal. Overall, despite unprecedented higher gas price and [indiscernible], we still record a healthy level of profit for financial year 2022. Moving forward with RP2, which I think sometime last month, we had a briefing to all of you, both gas price and ForEx, which has impacted us in this year will be a pass-through item for our regulated business. So because of that, we expect the business to be more robust. Looking at the financial. Comparing the full year of 2022 in the same period in 2021, PGB revenue stood at MYR 6.16 billion, higher by 9%, mainly driven by higher revenue from Utilities segment on the back of the higher product price from the higher cash flows that we were able to transfer to the customer. Group profit -- gross profit, nevertheless, was lower by 14% at MYR 2.35 billion as a result of lower contribution from all segments following higher operating expenses, mainly from the two factors that I mentioned, gas as well as internal gas consumption expenses. Profit after tax was lower by 17% at MYR 1.76 billion in tandem with lower gross profit and further reduced mainly due to unfavorable foreign exchange movements. Our EBITDA correspondingly is lower at MYR 3.2 billion, 9% decrease compared to 2021. Earnings per share was lower by 17% as compared to 2021, in line with lower profit. This also reflects a lower profit attributable to shareholders of the company. Dividend per share for the quarter is MYR 0.22, making a total of MYR 0.72 as compared to MYR 0.82 distributed last year. Details on our financial performance, as always, be presented by Shahrul after this. Moving on to business update. First, starting with gas processing. The operation is at our gas processing plants continued to operate at a world-class level. We have consistently met the reservation plus requirement as stipulated in the gas processing agreement. This segment continues to operate in a steady manner, where the OEE or the overall equipment effectiveness was almost 100% for both C1 and C2, high level of efficiency more or less to less uses of ethanol gas and ability to extract more ethane from salesgas. This is translating to a higher performance incentive achieving a total of MYR 128 million for financial year 2022. On projects off-gas rerouting project from the Terengganu Crude Oil Terminal or to our Gas Processing Kerteh complex is progressing within schedule. We still plan to meet the time line by quarter 2, quarter 3 2023. Moving on to Gas Transportation. Pipeline network reliability for the quarter was sustained at 100%. And we achieved an average sales gas delivered of close to 2.2 billion standard cubic feet per day, in financial year 2022, which is a 9% increase from 2021. Project -- most of our growth projects are actually in transmission, are progressing within schedule. This includes the lateral gas pipeline to Pulau Indah is on the latest time line. We mentioned last quarter that there was a change in construction method and there's been a slight change in the time line. However, latest completion date will not have an impact on the shippers, our commitment to the shipper to deliver the gas as per their commitment to the customer. As for the gas compressor station in Kluang, and the new pipeline project to Banting, things are progressing as per schedule. Next, the Regasification segment. For Regasification business, we managed to sustain full capacity payment, on purpose by strong operational performance at post Regasification Terminal, from [indiscernible] to the shippers we received a total of 64 cargoes at both terminal which is higher than 37 cargoes received in 2021. and we were able to process this without any failure. On top of that, we also secured full capacity payment for truck loading under the ancillary services. Our LNG truck loading service completed 971 deliveries this year, slightly higher than last year of 928 deliveries indicating that gas demand remain robust lading areas not [indiscernible] to the CDU. Next, ancillary services is the GUCD or gas up cooling down, the take-up for GUCD and reloading services were lower in 2022 and this is because of the unfavorable market, which is due to the high gas price. So in the high gas price environment, GUCD normally is not a preferred method for cooling down the LNG ship. And again, this year, we expect the gas price to be lower, and it could be favorable. And as far as GUCD is concerned, in line with the sector lower LNG price as I have mentioned. The project that we are pursuing for Regasification is the 5th storage tank project at RGTP. [indiscernible] to group previously, we had to change the strategy due to the high cost that we get from the onshore tank proposal. So we are strategizing to keep storage, and this is progressing well. Soon we will share -- we will make announcement should we reach the final investment decision, which we expect soon. Let's move on to utilities. Overall, we continue to fulfill customer demand with 100% product delivery reliability for electricity and steam, and this is, of course, because of higher plant ability and reliability. Electricity in quarter 4 2022, volume was lower than the previous quarter, mainly because of lower offtake from the customers. and lower sales to the grid under the NEDA steam plus of the unfavorable pricing in the grid price during the quarter. Our steam, the offtake is at similar level across the quarters. Our industrial gases quarter 4 2022 volume was lower compared to the other 2 quarters, again, due to lower offtake associated with customers' planned shutdown. On projects, we had a new customer PCC OM, a project to connect us to the plant is finished currently pending customer readiness. And we think for the final confirmation from the customer, we expect the offtake -- full offtake to start in quarter 3 2023. Recently -- more recently -- some of you might have read in the newspaper, PGB has reached FID for a 52-megawatt power plant in Sipitang, Sabah. This power plant will be the source of energy supply to customers upcoming floating LNG project. We have awarded an EPCC contract worth MYR 230 million to KAB Energy Holdings Sdn Berhad who will also be our 10% partner in the PGB subsidiaries, who is owning the power plant as well as operating the power plant on COD. Project has just commenced and expected to be commissioned in 2026. This is an area of growth that I have been highlighting to the group, and this is one of them that we just realized. More projects update. In 2022, we have completed the southern PGU debottlenecking in May and the facility is now ready to deliver gas to the customer as per schedule. And in the analyst meeting for the RP2, we have mentioned that the usage of this pipeline is based on the separate approved service on RP2 specifically for high-value gas delivery. The introduction of this service, as we have mentioned, is access to cushion the impact of lower tariffs under RP2 for CDU. It has actually impacted -- cushioned the impact. In 2023, several projects are expected to be completed. One is the off-gas rerouting and Gas Processing Kerteh, latter part of this year. The lateral gas pipeline Pulau Indah for our customer, the power plant in Pulau Indah middle of this year. And lateral gas pipeline to Banting maybe in quarter 3 this year and the utilities connection that I mentioned just now. We are monitoring closely to ensure that the projects will be delivered timely, safely and within budget. And just now, as I mentioned, the latest addition to the portfolio is the [indiscernible] power plant project, which is expected to complete in 2026. Again, as I mentioned, within the focus area for growth, we continue to seek projects that will enhance revenue contribution not only at GPU business, but also upwards of adding up to the regulated [SSB] under GTR business. And we will announce accordingly for FID 1 we achieved the FID for these projects. So that's all for business update. I shall now pass to Shahrul for the financial update. Thank you.

Thank you, Aziz. Good evening, everyone. Shahrul taken through the financial [indiscernible] In 2022, as mentioned by Aziz earlier, key business maintained its operational performance, reporting close to 100% reliability preceding quarter 3 of 2022, revenue for the quarter remained at similar level at MYR 258 million. And gross profit was over 14% at MYR 107 million due to higher operating expenditures in line with higher level of connectivity requirement in the quarter. Again, preceding quarter of 2021, segment revenue increased by 1% following higher internal gas consumption in the [PFG] on the back of operational efficiencies as mentioned by Aziz earlier. Conversely, results declined by 16% due to higher operating expenses, mainly depreciation expense that attributable to recognition of plant [indiscernible] assets during the quarter as well as higher level of activities during the year. For full year results in 2021, our revenue improved by 2% to MYR 1.7 million and high internal gas consumption [indiscernible] of our optimization efforts. However [indiscernible] results was 5% lower at MYR 883 million due to higher operating expenses, as mentioned earlier. All right. Next, moving on to the Gas Transportation business. The group's pipeline network registered close to 100% reliability during the quarter under review. Comparing the results against the preceding quarter, quarter 3 2022, revenue was comparable at MYR 296 million. However, gross profit dropped to MYR 31 million, mainly due to high internal gas consumption expense in tandem with higher fuel gas price. This corresponding quarter, quarter 4 2021 again revenue was again comparable and gross profit fell by close to 74% due to higher operating expenditure mainly IGC expenses in tandem with higher fuel gas price and for recognition for 2022, the gas price was at its highest during the fall. Moving on to full year results compared to last year. Segment revenue was comparable at MYR 1.17 billion. Segment results declined by 9% due to higher operating expenditure related to the gas quarter earlier. In all, we can see that IGC increased significantly by more than 50% of profit for the segment, however, was only lower by 19%, moving up for -- given the high gas price. Moving on to Regasification, again quarter 3, 2022, Revenue was comparable at MYR 387 million. Segment result was 11% higher at MYR 407 million on lower operating costs. Against preceding quarter -- quarter 4 2021, [indiscernible] segment revenue and segment gross profit was comparable respectively. For the full year results against last year 2021, segment revenue was comparable at MYR 1.1 billion and gross profit decreased by 7% as a result of higher operating expenditures, mainly utilities expenses also as a result of higher gas price. Right, moving on to utilities business. Comparing this quarter against the preceding quarter 3 2022, revenue increased by 30% to MYR 132 million in line with higher product prices. And then gross profit, however, was lower by 57% with MYR 54 million mainly as because of tighter margins as a result high fuel gas costs at [indiscernible] against preceding quarter, quarter 4 2021, segment revenue grew by 31%, mainly due to higher product prices in line with the increase of the price with [indiscernible] MRP up nevertheless declined by 39% also mainly attributable to the tighter margin [indiscernible] costs. [indiscernible] against full year last year, segment revenue grew by 36% [MYR 123 ] billion on the back of high product prices. Nevertheless, gross profit declined by 38% for changes that I mentioned earlier. And Utilities we have completed contract renewals in 2022, which have allowed some more balance to pass to our customers and the [indiscernible] gas price. Overall, even with the unprecedented higher gas price that we saw last year utility segment still managed to record profit for the quarter and for the full year. Moving on to the overall PGB group result against preceding quarter, quarter 3 2022, group revenue was at MYR 1.3 million higher by 12% only contributed by higher revenue from utility segment. Gross profit was nonetheless, lower by 27% at MYR 458 million as a result of lower contribution from cash position gas processing and utility segments following higher operating expenditures, mainly internal gas consumption you will get and also a higher level of internal activity. Profit after tax, however, improved by 12% as the lower gross profit, of course, with lower share of profit from JV companies were partly cushioned by favorable products. You saw [indiscernible] strengthening in quarter 4. As well as due to high interest and added income. Against preceding quarter, quarter 4 of 2021, group revenue rose by 9%, mainly contributed by higher revenue from utility segment. Gross profit declined by 24% due to lower contribution from all segments following high operating costs mainly relating to fuel gas and internal gas consumption as well as depreciation expenses. Profit for the quarter was correspondingly lower by 5%, in line with lower gross profit and lower share of profit from JV companies. And slightly negated by stronger ringgit and high interest cost. Looking at overall full year 2022 -- 2021 Group revenue increased by 9% to MYR 6.16 billion mainly driven by revenue from utilities. Gross profit was, however, 14% lower at MYR 2.35 billion on the back of higher operating expenses. EBITDA is up by 9% [indiscernible] decreased by 17%, MYR 1.76 billion in tandem with lower gross profit. Overall, unfavorable price movement and also a lower share of profit from JV companies and this was cushioned by higher interest income from fund investments. And the lower share of profit from the JV companies, if I may explain, it is mainly due to unfavorable ForEx movement from the [indiscernible] which resulted to unrealized ForEx loss from one of our JV companies. Overall, I'm pleased to highlight that even with higher gas price and weaker ringgit that we last year, we still recorded a healthy level of profit for JV companies. Right, moving on to dividend. The Board has approved a total dividend of MYR 0.82 per share payable on 15 March, 2023. Increased dividend demonstrate our commitment to ensure certain level of returns to shareholders and the ongoing economic condition, which will give healthy level payout more than the committed dividend. With that we end the financial section. I will now pass over to Aziz to share our company update.

Thank you, Shahrul. Ladies and gentlemen, let me bring back to our focus in 2023. Especially, the market will continue to be challenged. Gas price that we use for our IGC remain high. We will continue focus on the continuous efforts to ensure safe working environment as well as deliver and maintain operational excellence at 12 plus level then to take advantage of the long-term contract capacity payment. As to reset, RP2 is now done, approved and announced. This year is about operationalizing those. As I mentioned, we have conducted a session with the market about the [indiscernible] plus the lower tariff. We had approved the introduction of new component in principle which will cushion the impact of lower tariffs. New component in principle introduced just to repeat again. One is tariff fee, the high-pressure compression tariff for the power sector. And this is in place and the new tariff in place from 1st January, partly we will get lots of revenue to lower tariff from the main GPU tariff. Revenue adjustment, as Market is aware, from previous years, we do have fluctuation in profit because of the gas price and ForEx movement. So adjustment on the recovery of ForEx and IGC is allowed under the current RP2, and this has been [indiscernible] those -- that question that was asked previously. So it's a positive decision that we have gotten from the authority on this project. Moving forward, of course, despite this decision, we will continue look at our operating actually all across in the lower tariff. So purpose to continue on improving the efficiency in order to optimize our costs. Second, we also had positive announcement from the government on the recently announced announcement to increase the [ICGT] net cash of MYR 0.20 per kilowatt hour or we believe this asset our investment customers which is expected to have a positive impact to PGB. Second term EPA is at filing in 2023. So we have shifted the discussion for system with the shipper. And I guess, as we mentioned before, is to finalize this by the end of the year. In the meantime, we believe this also at pursuing growth opportunity to diversify our business portfolio for the new power plant project to translate the result of some of the initiatives, one of the many initiatives that we have taken that there will be more once we reach FID or some of the other opportunities that we have in the suite. That's all for now. Thank you very much. I shall now move to Q&A.

[Operator Instructions] Our first question comes from the line of Anshool Singhi from JPMorgan.

Can you hear me?

Yes, we can.

Yes. So I have a few questions, but I'll start with the first two. So coming directly to the gas transportation performance this quarter, I see that the volumes have remained flat quarter-on-quarter. But then you mentioned that the IGC cost led to a margin compression. So what -- how much of that was related to the IGC cost? And is there any one-off in that item?

Again, the IGC, what we pay is based on the price for that corresponding month or for that month or quarter. So between what 1, 2, 3 and 4, the price of gas increased significantly. So that's why the volume we keep at whatever the optimum level that we have been operating in line with the consistent volume throughout the year, but the price is actually the only factor that increased the costs, thereby switching into the margin for quarter 4.

So if I remember correctly, the IGC cost, the gas cost is linked to MRP. Could you remind us how much did MRP move quarter-on-quarter?

But for quarter 4, the MRP was MYR 48.50 per mmBtu. At quarter 3, it was at MYR 40 per mmBtu. And in quarter 1, it was actually at MYR 34. So a significant increase, almost more than double -- more than 50% increase.

So if I just want to reconcile the numbers quarter-on-quarter, the gas IGC cost is up only 20%, but then the gross profit is down more than 80%. So I'm just not able to understand because is there any one-off in this? Or where do you see this in the future?

In quarter 4, normally, we do reconciliation on the term what we call unaccounted for gas. So that reconciliation has some impact. The volume remained the same, but because the price was higher. So it also has the impact for quarter 4. So we probably look at this from this year, we're probably doing it on quarter-by-quarter. So you wouldn't see a lot of fluctuation due to that moving on, yes?

Okay. I understand. My next question is for the utility segment. So you mentioned that the government has increased the ICPT surcharge. And then this year, we also saw better contract negotiations, better terms. And then we are seeing lower gas costs moving into this year. So where do you see the gross margins for the business in '23?

You're talking about utility segment, right?

Yes.

We expect, of course, with the MYR 0.20, we expect to have a better gross margin plus the tariff that we can charge before now with the MYR 0.20 higher. Now you expect to have a better margin -- gross margin.

So I'm just looking at your performance in '21 and before that. So the gross margins were around 15% to 20%. This year, it was 8%. So do we see it again in the high teens, low teens?

It should go up to low teens better than what you see in the last quarter without the ICPT.

[Operator Instructions] Our next follow-up question comes -- sorry, our next question comes from the line of Daniel Wong from Hong Leong.

Cash flow for the [indiscernible]. Can I check [indiscernible] your revenue for the 2022 [indiscernible] billion for the utility side, how much -- how many percentage -- how many percent is coming from electricity segment?

If you're okay, we can get back to you, yes?

Yes. So -- and then my [indiscernible] is there any explanation of [indiscernible] tax for this first quarter.

Prosperity tax cover the full 2022, so it could be applicable for the full year, including quarter 4.

Okay. How much is it?

The prosperity tax impact to us for 2022 is the total of our total tax expense 25% of our total tax expense during the year.

25% of your full year tax expense.

That's right.

25%, because I noticed that in the fourth quarter, you have a lot of write-backs on your deferred tax. So I'm wondering, does it actually have a write-back on this point with the tax during the fourth quarter recognition.

And basically, we do make some provisions to the deferred tax last year, but we know about to come up more early, who have done this proposal on provision and what happened in quarter 4 is the reverse of the provision once we finalize the numbers.

So there was some revision during the fourth quarter on this for [indiscernible]

Yes.

I see. Yes, this is my last question. Just now you mentioned that there is a further discussion on this RP3 -- RP3 [indiscernible] 2026. So I was just wondering what further improvement can be done under the RP3 versus RP2, are you guys trying to achieve more?

RP3 will be from 2024 is for our gas processing segment. So Gas Processing segment. So the improvement that we are looking at is certainly on the performance bonus. Of course, as you're aware, capacity-based business, normally, there are benchmarks on the retail. So we will be looking at typical industry returns which will be a negotiation. But what we are looking for is more on the performance bonus, the word deliver that is the first one to focus on. Yes, if you can see the previous EPA was for us to produce ethane so that they can deliver to the customer without sale. Now we don't know yet what will be the focus, but whatever the focus on the operation more, we will try to have a certain performance bonus to allow us to operate to their needs and collecting the bonus accordingly.

Our next question comes from the line of Jun Tan from Am Bank

I have two questions. First one is that regarding your new dividend, power plant. May I know the total CapEx, is it just the MYR 230 million, as mentioned just now? Or that could be more? And also, what is your targeted IRR for this particular power plant?