Credit Suisse PGAS

• To encourage more gas use, Perusahaan Gas Negara (PGAS) is set to cut surcharge for customers in West and East Java. Customers are currently charged 50% additional on price for the use of gas more than 100% of the contracted volumes, due to limited gas supply. They are also required to pay ‘take or pay’ of 80%, if they consume below this level.
• PGAS has the track record for reducing distribution volumes target. However, we now believe that 2009 is the major growth year as the company has secured gas contracts to PLN (Perusahaan Listrik Negara), the state-owned power company (not listed), which would take one-third of its distribution volumes.
• The gas price decline is unlikely as PGAS’ selling price remains at 40% of the subsidised diesel price. Please note that industrial customers have to pay for non-subsidised diesel. The weakening in oil price, however, provides negative sentiment on the stock which we believe should be taken as an opportunity to accumulate.
• We assume no gas price increase. PGAS’s gas pricing is set by the BOD decree. Customers are charged based on the contracted volumes and the location to reflect the distribution fee. PGAS currently has more gas supply than what it sells. Therefore, to encourage more gas use by customers, the company cut the surcharge for additional gas over the contracted volumes.
• The company also claims that very few customers use more than the contracted volume, in fact they tend to use below the contracted volume. Therefore, the lifting of surcharge would not have a significant impact on its average realised price.
  We have taken a conservative approach by assuming no gas price increase for this year and next. Since the purchase prices from the upstream oil and gas companies have increased, we have assumed that PGAS would be able to pass on the increases in gas costs to its customers, to maintain distribution margins. Increasing distribution volume. PGAS has the track record for missing its own volumes target, primarily due to the delay of the South Sumatra West Kava (SSWJ) pipeline project.
• We expect the company to have strong distribution volume growth, primarily from the gas sales contract with PLN.