According to Reuters yesterday, PGN is close to signing a GSA with PLN for 150 mmcfd over five years starting late 2008E. Gas price is reportedly US$5.6/mmbtu.

We expect PGN to increase gas prices, currently at US$5.5/mmbtu, from 2009E (see Figure 3). Assuming a worstcase scenario in which the 150 mmcfd (~15% volume) is locked at US$5.6/mmbtu from 2009E, the impact on our EPS is ~2-4% for 2009-2011E. DCF-based NAV (at Rp17100) is lower by 1.5%.

Contract details are unavailable, but we feel PGN has a better bargaining position. PLN is using diesel for power at US$25/mmbtu and is, in fact, requesting >250 mmcfd. The only positive PLN can offer is a LT base load demand, unlike its other industrial customers that are usually ST (1- to 2-year contracts).

We believe that recent market concerns on volume guidance and lack of a price hike in 2008E are overdone, and we see share price support at current levels. The current stock price implies zero gas margin improvement from hereon. Maintain OUTPERFORM.