Interview: Oktree Capital NY convinced to keep their shares after teleconference with PGN's President Director & CEO
Monday, July 26 2004 - 04:51 AM WIB
1. In regard to government changes, will it have any impact on PGN's management?
No. The management structure has been determined through the Annual General Shareholders Meeting. PGN subsequent Annual General Shareholders Meeting is scheduled in 2005, thus changes in the management, if it needs to occur, will take place only at those events. However, the management is confident that there will be no serious impact on the management structure event when the new government appointed.
2. How often the regulator changes and would changes in the regime change the regulator as well?
The structure of the regulatory bodies have been well established and well accepted by the industry. Consequently, any feasible changes to the regulatory bodies might occur only to its personal not necessarily to the structure its self. Nevertheless, in regard to the officer's age range of the Upstream and Downstream Regulatory bodies, surely we have confidence that no changes will take place in the Upstream and Downstream regulatory bodies.
3. What are your existing turnkey projects and their status?
Two big projects, SSWJ I and II, are in development process. Preparation processes for both projects have been completed, constructions for SSWJ I are expected to take place in February 2005 and project's completion is expected by second half of 2006. In regard to SSWJ II project, when PLN fails to close the Gas Sales and Purchase Agreement (GSPA) with ConocoPhillips, PGN will take over the gas acquisition with the same price offered to PLN. We are presently in the process of negotiation and confident that the negotiation will come to an end by the end of this month or early next month.
4. What are the gas prices for PGN to supply west Java through the two transmission projects?
For SSWJ I the average price is USD 2,49 at the wellhead. For SSWJ II the price at ConocoPhillips' gate is USD 1.84 plus transmission fee.
5. Will gas demand remain if the purchase price set at USD 3.80/mmbtu?
Yes, because demand for natural gas is high and the trend is shifting the source of energy from diesel oil to natural gas. If we compare the selling price of diesel oil at USD 6.25/MMBTU and the gas price of USD 3.80/mmbtu we have no doubt that gas demand will grow very fast due to the huge gap. We are also optimist that the huge selling price gap between gas and oil will continue, due to the removal of domestic oil subsidies.
6. Does gas price link to oil price?
Our gas price is not link to crude oil price or LNG price, but we only refer to the trend in diesel oil for comparison in order to watch the demand for substitute product.
7. When will the oil subsidy be lifted?
Maybe after the election of the new government but surely it will take sometime to execute the plan. Hopefully, the oil subsidy will be lifted sometime between 2005 and 2006.
8. Would it be any risk in changes of Oil and Gas Law?
Considering that the oil and gas law has been prepared for the last 10 years, thus, we believe that changes in any part of this law will be limited. Moreover, the Indonesian government has excellent tract record in preserving investments in the oil and gas industry proven by the PSC structure that has been in existence for over twenty five years without any significant changes. Whilst, we are still waiting for the government to issue the implementing regulation of the oil and gas law that will give clear and definite guidance for the regulator and players.
9. Has the Government change it's view toward oil export because the export is falling and the government must shape up the export growth?
Demand for energy is increasing and Indonesian energy mix is still 55% dominated by oil in which 75% of those consumption consist of diesel oil. The new government strategy is to regain its status as net oil exporter. As a consequences, the government should encourage the reduction of oil-based fuel consumption and boost public natural gas consumption.
10. Does the government encourage the consumption of gas?
Yes. The key gas success factor is the completion of Gas transmission pipeline from South Sumatera to West Java then followed by East Kalimantan to Java pipeline project. Therefore, the government policy is aimed to support these project.
11. What is distribution gas sales figure for Q1 04?
Distribution: 278.6 mmscf/d
Transmission: 463.6 mmscf/d
12. What is the gas sales figure for Q2 04?
An increase of 8% from Q1 figure is expected. We do hope that the growth will go faster after 2007 after project completion. Transportation agreement also signed in Surabaya to transport as much as 150 MMSCFD starting in 2007. In Dumai we also plan to supply power plant and in Pakan Baru we will supply pulp factory for 15 mmscfd. We are right now concentrating in contracting more gas supply for our markets as well as expanding our transmission and distributions network.
13. What is the expected normal increase in salary cost?
8%
14. Why depreciation expense increased much higher than expected?
Implementation of the double declining method raised the depreciation expense but after the closing of Asset Transfer Agreement with PT. Transgasindo (PGN subsidiary), the depreciation will be reduced but we expect to have another increase in year 2007 after the completion of the new projects.
15. Does increase in the cost of raw material (steel) affect project costs?
A raise in steel price will increase the budget by 20 to 30% but we have reserved a 20% for contingency fund. Meanwhile, the steel price tends to decrease due to China policy of reducing it's economic growth. The IRR of the project is still remain at 12% level.
16. How is the weaken Rupiah affected your performance?
In the meantime, we partly hedge our income and expenditure. Hedging for interest swap is already signed and we are preparing to hedge the company's balance sheet to get ready in case the Rupiah is weakening further against USD in 2005. We have swapped the interest rate for three years period but those of balance sheet is still being studied.
17. Who is the largest stock holders?
- JP Morgan 112,140,074 shares (2,59%)
- Pictet 74,588,000 shares (1,73%)
- Aegon 3,250,500 shares (0,075%)
18. The next mile stone?
- We are now trying to minimize the ability of our competitors to compete in the market by limiting their access to gas sources;
- Audited First Half financial report due in August 2004;
- Bidding process for construction SSWJ phase I due in October 2004;
- By second half 2004 contractors and vendors will be awarded for SSWJ I & II
19. Due to an increasing interest rate, how this will affect your financing cost, especially when access to capital is becoming more difficult?
We are looking at various alternative financing such as; inter alia of issuing more bond or tendering out the pipeline procurement projects to vendors that have financing capability from export credit. Certainly, the second option is much cheaper than issuing Bond but it takes more time in the process. Other alternative we might consider is through a pure project financing scheme (BOT) which may requires more time to execute.
20. What is the company's expected cost of capital under the new bond?
We are looking at 8% coupon rate but not more than that.
At the end of the teleconference, Mr. Simandjuntak persuade Oaktree to buy more PGN's shares and in reply Mr. LaJaunie confirmed that Oaktree still holding their shares and considering to buy more shares. (end of transcript)
Source: PGN (July 26, 2004)