PETRONAS Gas Berhad (PETGAS) Earnings Call Transcript & Summary

[Audio Gap] Sukaiman, Chief Financial Officer; Encik Hisham Maaulot, Head of Business Development and Commercial. The PETRONAS Gas Berhad analyst briefing for quarter ended 30th September 2023 is divided into 4 segments. Firstly, Encik Aziz will present the key highlights for PETRONAS Gas Berhad for the quarter. Secondly, the business updates and financial performance will be shared by Shahrul Azham. and next, Encik Aziz will return to share PGB's focus moving forward. And finally, we will have the session for Q&A. [Operator Instructions] We will be showing the presentation throughout the briefing, and we have also shared a copy of the presentation to all of you prior to the session. [Operator Instructions] For reference, our financial results is now available at both Bursa Malaysia and PGB websites. Without further ado, we'll hand over to Encik Aziz for the key highlights. Encik Aziz?

Thank you, Suri. [Foreign Language] And good afternoon, everyone. Thank you for joining us today. I'm pleased, as always, to be with you to announce the results of PETRONAS Gas Berhad quarter 3 performance. Before we go into the results, I'd like to share with you some of the key external environment developments that has impacted and may still impact our PGB business operating environment. Plus -- then we'll go to [indiscernible]. With regard to geopolitical tensions, now the recent Middle East tension has -- which has prolonged for over a month now, and may give a potential risk such as -- first, on the supply chain disruption given that the stress can now [indiscernible] through Europe in the Middle East. So far, for us, yes, we foresee no immediate impact as current projects are progressing well within our risk mitigation bases. Secondly, the overlap with the ongoing conflict between Ukraine and Russia, which has already caused energy market disruption. We expect it will further escalate commodities prices. Of particular concern to PGB is the Brent price, which has been recording above $80 per barrel over the past few week. And due to the net impact of Brent to the MRP, we may see this trend impacting us in the first quarter of 2024. This impact to MRP and our utility business will be continuously obviously monitored. Another commodity movement, which may impact our business is the energy price, particularly coal price. We have seen the record high coal prices in 2022. And that has caused the government to increase the imbalanced cost pass-through for the ICPT surcharge to a record high of MYR 0.20 per kilowatts hour in 2023. Forex, always a subject focus the fluctuation [indiscernible]. The Malaysian Ringgit has weakened substantially, of course due to the relatively high with interest tax rate rates against other G7 countries. The relatively strong U.S. economy against other countries and, of course, with the conflict in the Middle East. So with that 2 critical areas for PGB, which we have been working on effective mitigation on the cost escalation for projects and operations. So this is currently being monitored closely. We have had potential short-term hedge when necessary. And the USD lease these liabilities -- we have announced a settlement for RGTSU, so because of that, our current exposure is small post repayment of debt. We are continuing to look for further reduction opportunities. Sustainability. We have seen heightened sustainability requirements in Malaysia. And [indiscernible] it has become an essential aspect for businesses, not only as a measure of compliance, but also as a fundamental license to operate. Our major shareholders as PNB, EPF, et cetera, have communicated their sustainability investing requirements as also indicated by the Institutional Investors Council, IIC of Malaysia. Regardless, PGB is serious about sustainability. As all of you are aware, we have published our sustainability blueprint. And this blueprint covers our sustainability journey along all essence of sustainable value creation, safeguard environment, positive social impact and responsible governance. On this front, we will continue to monitor this development and based on the blueprint, we have increased on our efforts in engaging our stakeholders of better understanding of our sustainability initiatives. Last but not least, cybersecurity. There are new cybersecurity regulations, which we expect to be established by the country. Among the objectives are to streamline coordinating activities of authorities, for example, the National Cyber Security Agency, and to respond to increasing cyber threats and to monitor of -- monitoring of emerging technologies such as AI and advanced cloud computing. PGB subscribe and support the PETRONAS digital transformation, including cybersecurity, which over the last 2 years, we have been actively embarking on various projects for [ tackle ] against this trend. So with this new expected regulation, we see a potential in enhancing our digital platform. And one such example is improving our current crisis management and recovery procedures. Now from the current development in external environment mentioned earlier, let's take a look at the impact they have on PGB's business operation. The commodity prices, as mentioned, especially Brent and energy sources, coal in particular, have been on the rise, maintaining a high level in the recent years. For the Malaysian reference price, the trend lack 3 to 4 months behind Brent price. Therefore, although MRP had dropped in the last few months to MYR 42 per MMBtu in quarter 2 2023 from almost from about MYR 48 per MMBtu in quarter 2 2023. And of course, a pick of MYR 58 per MMBtu in quarter 1, 2023. We expect MRP to climb back up in the next few months following the current trend of Brent. Malaysian Ringgit is also on an unfavorable [ upward ] trend leading to increased Service Producer Price Index, SPPI. This, of course, will affect our operational and maintenance spending. The higher cost of energy for Peninsular Malaysia in recent years have also resulted in higher ICPT surcharge, which is decided by Suruhanjaya Tenaga, required to soften the impact of energy costs borne by TNB. For PGB, the changes in ICPT has an impact to revenue and margin in the Utilities segment, specifically to the electricity that we sale -- se sell to our customers. So with this external environments dynamic, while PGB revenue remains stable throughout the year with the exception of course, of the Utilities segment, overall cost of doing business will continue to be higher in the remaining quarter and expected to continue to the next year. So ladies and gentlemen, with that, external environment perspective, I'm pleased to share with you the highlights of PETRONAS Gas Berhad quarter 3 performance. Against the backdrop of a challenging market condition, as I've articulated, we delivered a strong performance for quarter 3 2023. And maintain a sustainable dividend to our shareholders. PGB's resilience backed by our long-term contracts under all segments, supported by consistent world-class operational performance, which was close to 100% during the quarter. At the same time, we have completed the pipeline essential project to Banting, Gas-In was achieved in July 2023 and supply to the customer has commenced. We have also achieved a final investment decision for the LNG storage expansion project in Pengerang. We have mentioned about this quite a few times in few of the previous session. And finally, we have reached FID on this. The additional LNG storage capacity of 200,000 meter cube will mainly be rendered via a floating storage unit. And third term gas processing agreement, also a subject that we have highlighted a few times in the previous session. We have concluded key terms with PETRONAS, pending the finalization of the overall agreement. And it should be in place for the new term beginning 1st January 2024. On financial performance, PGB closed the first 3 quarters of 2023 with PAT of MYR 1.435 billion, which is an increase of 10.7% from the same period in 2022. The strong performance for the period was on the back of strong operational performance further supported by higher profit contribution from joint venture companies, higher interest come from fund investment and lower forex movements exposure which, of course, following the any settlement of FSU at LNG Regasification terminal in Sungai Udang Melaka. And this is further supported by lower tax expenses resulting from no imposition of prosperity tax as compared to corresponding period in 2022. So despite the changes to -- despite entering into RP2 for the Gas Transmission and Regasification business with a lower tariff, we continue to deliver resilient performance so far for the year. All financial indicators have improved from the same period last year, except for gross profit. Group gross profit declined 5% to MYR 1.78 billion as a result of higher operating expenses. However, these were cushioned by higher margin contribution from Utilities segment in tandem with the higher revenue as well as a stronger margin following favorable impact of improved terms in the contract renewal, that actually came into effect sometime early this year. EBITDA was higher by 1.1% or MYR 27.2 million, in line with a higher EBITDA. EPS, earning per share increased by 11.8%, reflecting higher profit attributable to shareholders of the company. Dividend per share for the quarter was approved at MYR 0.18, making it a total of MYR 0.50, which is similar to the same period of last year. For further details on our business and financial performance will be presented by Encik Shahrul. Over to you, Shahrul.

Thank you, Encik Aziz. Good afternoon, everyone. So I shall take you through the business performance for quarter 3, 2023, and start with the Gas Processing and the regulated business. Right. For Gas Processing, we have fulfilled our commitment to our customers by consistently meeting their reservation charge requirement as per the gas processing agreement. We achieved 99.9% OEE and also 100% reliability for both our key products C1 and also C2. As far as the project update is concerned, our TCOT Off-Gas Rerouting projects continue to progress slightly behind schedule due to disruption in the supply chain. Regardless, the slight delay has minimal impact on PGB. And as mentioned by Encik Aziz earlier on the third term Gas Processing agreement, Regasification of the key term with PETRONAS has been agreed, pending finalized receipt of the overall agreement. So the current second term GPA will expire on the 31st December this year and the new agreement will start in fact by 1st January next year. So with the Gas Processing plants continue to operate at world-class standards, we have managed to record higher performance-based incentive over and above the fixed reservation charges that we have given the availability of our assets. On Gas Transportation, our pipeline network sustained close to 100% reliability during the period under review. And for the past 9 months, our average salesgas delivered was more than 2.1 billion standard cubic feet per day. For projects, our pipeline extension to Pulau Indah is progressing with slight delay. We are facing some construction challenges, but still within our control and the completion date is within the requested delivery period of our customers. As for the Kluang compressor station project, the progress is impacted by the supply chain disruption as explained earlier. However, there have been no commercial impact as the project is fully specialized, and the completion date is still within the RP2 period. And also as highlighted by Encik Aziz earlier, the new pipeline project to Banting has completed with Gas-In achieved in July 2023. For Regasification segment, we sustained [indiscernible] capacity [ terminal ] supported by strong operational performance at both Regasification terminals. Our LNG Regasification terminals in Sungai Udang, Melaka and Pengerang, Johor sustained the stronger ability performance at close to 100% during the quarter. Both terminals continue to be operating and remote-assistant and [indiscernible] from the unified operations center in Segamat. We received a total of 43 cargoes at both terminals, which is higher than 41 cargoes received for the same period last year. As for the LNG storage as present project, yes, as mentioned by Encik Aziz earlier, we have reached FID in September. The additional energy storage capacity of current [ 100,000 ] meter cube will may be rented -- will be rendered via a floating storage unit. So we have entered a storage service agreement with PETRONAS LNG Limited for a period of 20 years. All right. Moving on to the Utilities business segment. Overall, we continue to fulfill our customers' demand with more than 99% product delivery reliability for our electricity and steam products supported by higher plant availability and reliability. For our electricity product, quarter 3 2023 volume was lower than the same period last year due to lower uptick from customers and lower sales to the grid due to unfavorable pricing during the quarter. For steam product uptick is slightly lower as per customer demand. And for industrial gases, this volume delivered was higher compared to the same period last year, in line with higher demand from our customers. The ICPT or imbalanced cost pass-through surcharge continues at the rate of MYR 0.17 per kilowatt hour for the period of 1st July until 31 December 2023. And this is lower than the first half surcharge of MYR 0.20 per kilowatt hour. On the group project for Utilities, our Sipitang Power Plant, EPCC is currently progressing within schedule. And I also would like to share with the -- this with you that another project, which is at the front end logic stage currently is the new air separation unit harnessing the cold energy that we have in Pengerang. So we expect this project to achieve its FID by the end of this year, by end of 2023. Okay, that's all the business update. Moving on to the financials. I will start with overall results at PGB Group level. In quarter 3, '23, the business continued to as usual with sustained revenues with slight higher operating costs. So against the preceding quarter, quarter 2 2023, revenue was at MYR 1.55 billion, declined by 5%, mainly attributed to lower revenue from Utilities segment on the back of lower product prices and low industrial gases sales volume recorded following the planned shutdown in Kertih, Terengganu. Gross profit was at MYR 582 million, lower by 11%, in line with lower revenue. And correspondingly, PAT was lower by 1% at MYR 491 million, in line with lower gross profit, but partially offset with low other expenses, particularly lower forex loss due to the impact of a settlement of our lease liability. Against corresponding quarter, quarter 3, 2022, for revenue margin lower by 1% due to lower revenue from Regasification and Transportation segment following lower RP2 tariff, and this was offset by higher revenue from Utilities and also Gas Processing segment on the back of higher product prices and high incentives, respectively. Gross profit decreased by 10% due to higher operating expenses, mainly depreciation expense following higher capital expenditure. Profit for the quarter, however, improved by 11% due to positive impact on early settlement of our U.S. dollar lease abilities for FSU at Sungai Udang, resulted to lower exposure of forex coupled with lower financing costs and lower tax expenses following discontinuation of prosperity taxes for the year assessment 2023. For the results, again, corresponding year-to-date 2022, our group revenue increased by 7% to MYR 4.86 billion, mainly contributed by higher revenue from Utilities segment in line with higher product prices. Gross profit was nonetheless lower by 5% as a result of lower contribution from Gas Transportation, Gas Processing and Regasification segments due to our higher operating expenses and lower revenue. And this was cushioned by high contribution from Utilities segment, mainly due to the higher ICPT as explained earlier. Despite the lower gross profit, profit before tax improved by 2% from the positive impact of lower forex loss and higher share of profit from our JVs companies. PAT was higher by 11%, in tandem with higher PBT coupled with lower tax expenses. Okay. Moving on to the financial performance of our business segments. Against preceding quarter, quarter 2 2023, all segments recorded lower gross profit, from higher operating expenses, mainly on depreciation, in line with high capital expenditure and higher level of maintenance activities. For Utilities segment, the result was lower by 24% at MYR 161 million due to lower revenue in tandem with the downturn within of ICPT surcharge for the second half of the year, was MYR 0.17 for the second half compared to MYR 0.20 per kilowatt hour during the first half of 2023. Against the corresponding quarter, quarter 3 2022, all segments reported lower gross profit from higher operational expenses, mainly depreciation and maintenance expenses as well as lower revenue due lower RP2 tariff, specifically for Gas Transportation and regas business. Result for Utilities segment, however, rose by 43% at MYR 161 million in tandem with higher revenue and stronger margins following upward revision ICPT's surcharge and lower fuel gas cost in line with lower product volume. Our 9-month results again course year-to-date 9 months last year, similar results in for corresponding year-to-date as for corresponding quarter and the result was further impacted by internal gas consumption in tandem with higher [indiscernible] gas prices. On the other hand, segment is our [indiscernible] surged by more than 100% in tandem with higher revenue and stronger margin, following upward revision of ICPT surcharge and the favorable impact of improved terms in the contract renewals, which allow a more balanced cost pass-through to customers and reduce the business exposure to gas price volatility. Moving on to our balance sheet. As at 30th September 2023, our group total assets declined by MYR 470 million at MYR 19.2 billion, mainly due to lower cash as a result of early settlement of U.S. dollar lease stabilities for the FSU and [ early lease ] [indiscernible] Udang. And this is a part of our strategy to mitigate the foreign exchange exposure. Concurrently, the group's total liabilities also reduced by MYR 790 million because of the early settlement of dollar lease liability. Nevertheless, our cash balance remain healthy with some headroom to play in ways for existing and upcoming growth projects for the company. As for the dividend, the Board has approved the interim dividend of MYR 0.18 per share, and it is payable on the 15th December 2023. And this interim dividend demonstrates our commitment to ensure a sustained level of return to shareholders despite the ongoing economic conditions. With that, we end the financial section. And in summary, to summarize our positive performance. We again, sustained world-class operational performance, our excellent operations in quarter 3 continue to be the basis of our strong business performance, again achieving close to 100% reliability in delivering product and services to all of our operating segments. Financially, despite the lower RP2 tariffs, for our regulated business, revenue for quarter 3 2023 was higher than same quarter in '22, mainly due to higher revenue from Utilities segment on the back of high product prices. And in line with a higher gross profit -- profit for the period also improved. This is also contributed by higher profit from joint venture companies, high income from fund placement, lower forex [indiscernible] exposure as well as lower tax expenses. This is all from me. I will now pass the line over to Encik Aziz to share on the company outlook moving forward.

Thank you. Thanks, Shahrul. ladies and gentlemen, so despite a challenging business environment ahead, we are optimistic in delivering another resilient performance. Our focus, as always, will be on safety, reliability and operating costs to ensure revenue with healthy margin while also looking at opportunities for growth and sustainable value creation. As we mentioned a few times, the key projects in the pipeline among others are the new Kluang compressor station, which is an ongoing project. The LNG storage expansion in Pengerang, which is a development of a floating storage facility. As I mentioned, we have FID recently and the Sipitang Power Plant, which is currently under construction. As we have mentioned before, the National Energy transition road map matter reaffirms the importance of -- and the relevancy of the natural gas business for Malaysia. Its catalyst projects and initiatives, I'm sure will provide several opportunities for PGB in its pursuit to grow our green portfolio. So we are currently exploring opportunities in solar, hydro and carbon capture and storage, which is, as highlighted in our sustainability blueprint to support our target to achieve net-zero carbon emission by 2050. For hydro, with our partner, Menteri Besar Incorporated, we are assessing a 40-megawatt mini-hydro power plant level plan. For solar, we have a potential partner exploring the ability to develop solar PV capacity up to 150 megawatts to supplement our contractual commitment today with this green solar power. And we have an ongoing cooperation with PETRONAS to access an onshore CO2 gathering hub in Kertih as part of PETRONAS decarbonization program. This effort demonstrated our commitment to build a great portfolio towards meeting our net zero carbon emission 2050 aspiration and targets. Ladies and gentlemen, that's all for now. Let's move to question and answer. Thank you.

[Operator Instructions] First question is from Daniel.

My first question is with regards to what is the expected cost of maintenance in the fourth quarter? Are we expecting these operational costs, including the maintenance into [indiscernible] your FID, [indiscernible] mean the internal -- IGC internal gas and maintenance costs to be even higher in the fourth quarter as compared to the third quarter? And my second question is with regards to this collaboration MBI, Menteri Besar Incorporation [indiscernible]. This 40 megawatts, mini-hydro and 150-megawatt hydro, is it currently -- it's more of an MoU stage? Or it's already more on a progress stage that we already can say is almost can be confirmed. This kind of capacity that can be developed. That's all for me.

Thank you. I think on the first one, as I mentioned, the OpEx we expect to be similar to quarter 3. Of course, we mentioned so gas price could go slightly higher. So -- but overall, we expect it to remain similar to quarter 3, yes. Now on the hydro -- the MoU was signed some time [indiscernible] this year. So we have now embarked on feasibility study. So of course, it depends on the result of feasibility study, before we decide whether we want to [indiscernible] both on the FID, yes. And we expect sometime middle of next year to complete the feasibility study. On the solar, we are in discussion with our potential customer because as you know, today we are selling electricity using gas generation. So it's about complementing the same molecule that we are generating with gas with this solar and there are land that we have in Kertih and [indiscernible] that we intend to explore and develop a solar farm just to complement the [ electron ] that we are selling today to be more green. Yes.

[Operator Instructions] Next, we have Anshool Singhi.

Can you hear me?

Yes, yes.

So I have a couple of questions. Let me just start with, can you share what was the average MRP between second quarter and third quarter.

If you go back to the slide -- second slide, we are going back to the second slide. So this is the trend of MRP quarter 2, quarter 3 of 2023 -- quarter 2, about MYR 48 and then quarter 3, MYR 42. Second quarter -- in quarter 1 is MYR 58.

So quarter 3 was MYR 42. Is that correct?

Yes.

So can you just talk about the trends of the IGC cost for all the gas segments?

Yes, [indiscernible].

Sir, processing and transportation and regasification.

It's comparable, quarter 2 and quarter 3, comparable. Of course, the IGC is something that the regulator has agreed for us to -- now if we spend -- if the price is higher than what has been approved under [indiscernible] we actually can recover volume also, if we say we can actually recover a portion of it, yes.

Yes. I understand. I'm just trying to understand why there was a margin compression if gas cost is lower and the IGC cost incurred also was lower, like what was the incremental maintenance expense activity that you were seeing?

You look at the utility business. Remember, we have the benefit of ICPT. First quarter, the government actually announced MYR 0.20 ICPT. Then the next 6 months -- the first half of the year and the next 6 months from July to December, it was increased MYR 0.70 from MYR 0.20.

What about the other segments, Gas Processing and also Transportation.

Gas Processing. In the -- the margin is at the lower on the back of higher operating expenditure because we're seeing higher level of maintenance activities and also high depreciation following capitalization of our projects.

Clear, Anshool?

And similar for transportation as well?

Yes. Correct. Correct.

I understand. I also wanted to get a clarification on the lower interest costs. Was this due to the closure of the lease liabilities related to the RGTSU?

Yes, you understood it very well, Anshool. And we settle lease liability that we have. So we have less cash.

And the interest costs were lower because of that as well.

Yes.

I understand. You mentioned about the conclusion of negotiations for the new gas processing agreement. Can you just provide some more details because I remember there's an existing agreement until 2033. What's the difference? And what exactly is this new agreement?

So the shipper book the capacity until 2033, but that's like 5 years interval where they will review the tariff, [ return in 1 month ] and agree for 4- or 5-years period for a 5-year period. So the current 5-years period will expire end of December. So what we have concluded is for the next 5 years, yes?

I understand. And can you share in terms of -- I'm guessing this is the volumes booked as well. Has there been any meaning changes in that?

It is the capacity reservation concept, I think, similar to the gas transmission and Regasification, where the shipper book the capacity. And the return, I can say that, then that is provided to us is based on industry benchmark that we have negotiated and agree with, yes.

So there are -- can I assume there has been no change in the capacity booked between this 5-year period, which is going to complete in December and the new 5-year period, which is going to start on 1st January?

The capacity is -- book, remain the same. Of course, the return and whatnot is negotiated. The same performance incentives are in that. So structure was the same, but of course, there's always the details of return that is a subject of negotiation every term that we discuss.

I understand. My last question is with regards to the gas cost in 4Q. What's the MRP in 4Q?

MYR 41.5.

MRP 41.5.