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CEO in the news: Coal is still king for Adaro Energy's chief

Garibaldi Thohir says renewables are not ready to do the heavy lifting in Asia

Adaro Energy President Director and CEO Garibaldi Thohir speaks to Nikkei Asian Review. (Photo by Maho Obata)

JAKARTA Garibaldi Thohir may be one of Indonesia's wealthiest men, but it is his younger brother who gets all the attention.

Erick Thohir became a household name when he bought Italian soccer club Inter Milan in 2013, and he is attracting further attention with the $500 million stadium he is building in Washington for D.C. United, of which he is co-owner.

The elder Thohir also has a stake in D.C. United, but he generally shows little interest in the sports and entertainment industries that have brought his brother fame. Serving as the president director and chief executive of Adaro Energy, Garibaldi is what you could call a low-profile billionaire. He is not known to have any political affiliation, nor has he shown any political ambition. With an estimated net worth of $1.41 billion, he came 23rd on Forbes list of wealthiest Indonesians last month.

Adaro Energy is one of the world's top coal exporters, and while Thohir's business empire includes everything from restaurants to telecommunications, coal remains his primary interest -- and he is very upbeat about its future.

"Indonesia has a lot of deposits of coal," Thohir told the Nikkei Asian Review in an interview last month in Tokyo, where he also spoke at the Nikkei Global Management Forum. "Coal is still the primary source of energy, at least in this part of the world."

Despite the growing popularity of renewable energy and environmental activists' continuing protests against coal, Thohir remains confident about the prospects for Adaro, in which he owns at least a 6.18% stake. His family also has a stake in Adaro Strategic Investment, the controlling shareholder of Adaro Energy.

His optimism stems from Asia's need for more power to fuel growth, and from the fact that coal remains "the most reliable and cheapest" source of energy. Total proven reserves of coal worldwide are estimated at 1.1 trillion tons, or enough to last approximately 150 years at current rates of production, according to the World Coal Association. The figures for oil and gas reserves, the group says, are 50 and 52 years, respectively.

A truck carries coal at an Adaro mine in Tabalong, Kalimantan, Indonesia.   © Reuters

"Coal demand from Japan, [South] Korea, Vietnam recently, the Philippines and in our domestic market in Indonesia is growing," Thohir said. "We still have a very attractive market for coal."

Adaro is all too familiar with the cyclical nature and price volatility of one of Indonesia's top export commodities. Since acquiring the coal miner in 2005, Thohir and other major stakeholders have envisioned Adaro becoming an "integrated energy company" with "cost discipline" as its main motto, Thohir said.

Thohir began to act on that aspiration when he became Adaro's president in 2008. He quickly oversaw the acquisitions of logistics companies and other mining-related entities to help Adaro gain control over its supply chain and maintain cost efficiency.

During the coal industry's downturn from 2012 to the first half of 2016, hundreds of Indonesian miners collapsed, but Adaro managed to keep posting profits and paying shareholder dividends.

Its costs for producing coal are among the lowest in the sector, while its margin on operating earnings before interest, taxes, depreciation and amortization, or EBITDA, is one of the highest among Indonesia's coal and energy producers .

"[Thohir] managed to navigate the company through the storm," said Stefanus Darmagiri, an equity analyst at Danareksa Sekuritas. "Even when coal slumped, Adaro was able to reduce its debt, able to maintain its performance."

Adaro's net profit more than doubled to $334.6 million in 2016 compared with the previous year.

In 2010, Adaro entered the power plant business through the establishment of subsidiary Adaro Power.

Last year, the company and its Japanese partners secured financing for construction of a power plant in Batang, Central Java. It will be one of Southeast Asia's largest coal-fired power plants once it is completed in 2020.

Adaro currently has a portfolio of 2,260 megawatts in three power plant projects in Indonesia. Thohir said he wants to double that figure in the next five years and expand it further to 20 gigawatts over the next 20 years.

The company's entry into the power plant sector will help reduce Adaro's business volatility by creating captive demand for its coal. The move is also part of its broader diversification efforts.

"We took the risk to move downstream into power several years ago when the coal industry was booming and it was easier to sell the coal instead of building power plants," Thohir told the Nikkei forum. "I call it self-disruption. I have to disrupt the business in order for us to survive."

Andy Wibowo Gunawan, an analyst at Mirae Asset Sekuritas Indonesia, described Adaro's coal mining operations, its logistics and other mining-related services, and its power plant business as the "three engines of growth [that] will sustain the company's earnings over the longer term."

But Gunawan added that uncertainties in the coal market and potential regulatory changes in Indonesia's power sector pose "key investment risks" to Adaro.

THE ASTRA REUNION Thohir still remembers how his father criticized his plan to work for Citibank after graduating with an MBA from Northrop University, California, in 1989.

He said many of his friends at the time were joining American companies, and he wanted to do the same.

"But my father asked, 'How do you think you can pay back all the money I spent on your education on that salary?'" Thohir said in the interview.

Thohir then proposed that he work at Astra International, the company his father co-founded. It later became a conglomerate after it started distributing Japanese cars in Indonesia in the 1970s.

But his father chided him again, saying his son would have to start at the bottom and that the salary still would not be enough to pay him back.

"'OK, Dad, what do you want me to do then? To start my own business?'" Thohir recalled saying to his father. "It appears that's what he wanted. And he gave me the money for it."

Thohir's father, who died last year, not only pushed his son toward entrepreneurship, he also left him an invaluable legacy in the form of longtime family friends and business partners -- namely the three other co-founders of Astra and their children.

Theodore Rachmat, an Astra co-founder, is one of them.

Thohir first entered the coal industry in 1992, when he purchased a stake in an Australian-owned coal mine in Kalimantan, the Indonesian part of Borneo. In the early 2000s, he asked Rachmat to join him in purchasing another coal concession in Kalimantan.

The chance to acquire an even larger asset presented itself in 2005, when Australia's New Hope Corp. agreed to sell its stake in coal miner Adaro Indonesia.

Edwin Soeryadjaya, son of Astra's lead founder William Soeryadjaya, and co-founder Benny Subianto already had a combined 40% stake in Adaro. Joining hands with Thohir and Rachmat, they formed a consortium to take over the majority of the company.

Adaro became a new home for the four families after they were forced to relinquish control of what was once Indonesia's largest listed company.

The families had begun to lose their grip on Astra in the early 1990s after a failed banking venture by another son of William Soeryadjaya forced him to sell the majority of his Astra shares to pay off debts.

JAPAN TIES The Astra roots gave Adaro a particular advantage: connections in Japan.

Relations with various business partners in Japan go back to "the Astra time 30-40 years ago," Thohir said in the interview, adding that he calls Tokyo his "second home."

Nowhere is the benefit of these ties more apparent than in the 2,000MW Batang power plant, which Adaro is building with Japan's J-Power and Itochu.

The $4.2 billion project received a $2.05 billion loan from the Japan Bank for International Cooperation last year, as well as separate funding from a syndicate of commercial banks, including Bank of Tokyo-Mitsubishi UFJ, Mizuho Bank and Sumitomo Mitsui Banking Corp.

Thohir takes pride in the funding deal, calling it a testament to Adaro's strong balance sheet and credit profile.

"Apparently, it is the biggest financing ever by JBIC ... for a single coal-fired power plant project," he told a group of Indonesian journalists after the closing ceremony in Jakarta. "That's pretty cool."

But resistance to coal has been growing, leading some governments in Asia -- including China, Indonesia and Thailand, which are among Adaro's major markets -- to slowly embrace renewable energy.

Indonesia, for example, plans to increase the proportion of renewables in its energy mix from 12%, as claimed by the government, to 22.5% by 2025.

The Batang project has drawn criticism from environmental groups since its plan became public five years ago. "This one power plant would release the equivalent of Myanmar's total carbon emissions in 2009," Greenpeace said in March, following a rally at the project site.

Thohir is unfazed. He says the facility will be one of the first and largest coal power plants in Southeast Asia to employ Japan's ultra-supercritical boiler technology -- which its developers say is more efficient than conventional boilers.

Coal-fired power plants use boilers that burn coal to heat water and produce steam, which is then used to produce electricity. Ultra-supercritical boilers require less coal per megawatt-hour, which proponents say translates to greater efficiency and lower emissions.

"It's as clean as gas," an Adaro employee said.

Adaro Energy's headquarters in Jakarta. (Photo by Keiichiro Asahara)

Thohir said he is also eyeing carbon-capture technology for coal power plants being developed by one of Adaro's Japanese partners that he hopes will eventually enable near-zero carbon emissions.

Thohir said he is willing to embrace renewable energy, adding that Adaro is already planning to bid for five or six renewable energy projects that will be offered by the Indonesian government.

"I know one day all this solar power [and] wind power will come whether we like it or not," Thohir said. "So I have to be ready for the next move."

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