Komodo report - transformation at state-owned power PLN - CLSA

Our on the ground specialist Mita “the Komodo” Valina is on fire, producing her second on-the-ground report within a few days (her recent piece on the status of long anticipated land bill is worth reading, pls let me know if you want a copy).

We met with state owned power company PLN’s president director Dahlan Iskan and the primary energy director Nur Pamuji. (Interesting to note that some parts of the PLN head office was not really well lit because PLN turns off sections of the lights since they want to conserve energy. Talking about leading by example) . From our meetings, we learned about the interesting transformational changes at PLN.

It is encouragingly to learn that instead of passing the blame, PLN management is taking responsibility and actions in the case of delay of the completion of the first 10GW power plant project - a fresh wind of change.

PLN is also dealing fairly with coal producers and making decisive actions in setting the prices with their coal suppliers. At the same time, PLN also removes the 18% price caps previously enjoyed by a handful of companies (314 companies out of 10,856 in total). This will save PLN US$214mn/year and level the playing fields for PLN customers.

Another example of concrete achievement is that PLN also successfully brings online 150MW (worth US$150mn) from improving efficiency in 2010.

The improvement at PLN under the new leadership is remarkable and the company is evolving into a healthier institution.

Key points from the note today:
· PLN chairman expects 3,5000MW of additional power to come on the grid in 2011. This is revised down from 4,700MW due to project delays
· Measures in place to speed up construction: more project managers, faster design approvals, and directly involving themselves in fast track projects
· Plans reduced reliance on oil and increase usage of gas and coal for fuel
· Coal consumption expected to grow at 25% Cagr till 2014 as coal-fired power plants come on-line. It is 34m tons today
· PLN is including Jan reference prices to calculate coal reference price, which will give a fairer (higher) price, and not forcing coal producers to sell below market price
· Removal of 18% cap on price hike only affects 341 out of 10,856 companies. With cap on, avg. price was Rp680/KWh, while new price is Rp720/KWh
· We like companies with less dependence on PLN’s grid, Indocement (INTP IJ).
· Companies that are more dependent on PLN like Holcim (SMCB IJ) Semen Gresik (SMGR IJ) and Krakatau Steel (KRAS IJ) might be more impacted by price hikes