TRIS Rating has assigned the rating of “AA-’’ to the proposed issue of up to US$150 million in senior debentures of Banpu PLC (BANPU). At the same time, TRIS Rating has affirmed the company and issue ratings of BANPU at “AA-”. The outlook remains “stable”. The proceeds from the new debentures will be used to repay existing debt and for future investments. The ratings continue to reflect the company’s leading position in the regional coal industry, its diversified coal reserves and customer base as well as the reliable stream of dividend income the company receives from its power segment. The ratings also take into consideration its flexibility to defer some capital expenditures, ability to reduce operating costs during downturns in the coal industry, and BANPU’s financial discipline. Weak coal prices, regulatory risks in coal industry in Indonesia and Australia, and the uncertainties of worldwide economic recovery remain rating concerns. The “stable” outlook reflects the expectation that BANPU will maintain its financial discipline and liquidity. BANPU’s cost reduction plans coupled with its flexibility to defer capital expenditures would help BANPU weather the current downturn in the coal industry. A reliable stream of dividends from the power segment will provide some cushion for the company during this more challenging business environment.
BANPU is one of the major energy companies in Asia. It was established in 1983 to mine coal in Thailand. The company has continuously expanded and now has coal operations in Indonesia, Australia, China, and Mongolia. The Indonesian operation has remained the major earnings contributor. In 2012, the Indonesian operations accounted for 68% of total earnings before interest, tax, depreciation, and amortization (EBITDA). The Australian operations made up 21% of total EBITDA, while operations in Thailand comprised 8% of EBITDA. China contributed only 3% of total EBITDA in 2012. In terms of BANPU’s business segments, the contribution from the coal segment comprised 91% of total EBITDA in 2012. The remaining 9% came from the power segment.
In 2012, BANPU produced 43.1 million tonnes of coal, excluding its operations in China. The total amount of coal produced comprised 28.5 million tonnes from Indonesia and 14.6 million tonnes from Australia. At the end of December 2012, the combined total coal reserves of BANPU in Indonesia and Australia were 811 million tonnes while the reserves based on BANPU’s percentages of holdings stood at 593 million tonnes. BANPU’s current reserves of to production ratio of Australia and Indonesia mines indicate a reserve life of around 14 years.
There was an oversupply of coal in the worldwide market, which depressed coal prices in 2012. However, in the first half of 2012, BANPU was partly saved under the long-term contracts which were fixed at favorable prices. BANPU’s selling prices of coal fell gradually in the second half of 2012 while BANPU implemented some cost reduction measures to alleviate the soft price impact. The gross margin in BANPU’s coal segment weakened to 35% in the fourth quarter of 2012 from 44% in the first quarter of 2012 while the average selling price of coal in the fourth quarter of 2012 dropped by 14.0% from the first quarter of 2012. In 2012, the average gross margin in the coal segment softened to 39% from 46% in 2011.
Performance in the power segment, which contributed 9% of total EBITDA in 2012, was satisfactory. Performance in the coal-fired power plants in China improved in 2012. The gross margin of power segment improved from 10% in 2011 to 17% in 2012. The increase was mainly due to lower fuel costs as a result of falling coal prices. The power business in China contributed EBITDA of US$41.8 million in 2012, an increase of 47.7% compared with 2011. In Thailand, BANPU holds a 50% stake in BLCP Power Ltd. (BLCP), a 1,434 megawatt (MW) coal-fired power plant operating under the Independent Power Producer (IPP) scheme. BLCP contributed equity income of Bt2,361 million in 2012, compared with Bt1,952 million in 2011. The increase in equity income from BLCP was mainly due to foreign exchange gain. In addition to existing power operations, the company currently owns a 40% interest in the Hongsa project, an IPP project in Lao PDR. The Hongsa project is under construction and on schedule with about 40% of the construction complete. The first phase of the project is set to be commissioned in 2015.
Despite the weak coal market, BANPU’s total EBITDA fell modestly to Bt29,535 million in 2012, down by 8% from 2011. This was a result of favorable coal prices set under long-term contracts, higher sales volumes of coal, improvement in the power business, and gains from financial derivatives. Net profit in 2012 declined significantly, falling from Bt20,060 million in 2011 to Bt9,293 million. The drop came mainly because a sizeable after-tax gain of Bt6,307 million as it sold Daning mine in 2011. The EBITDA interest coverage ratio fell to 8.5 times in 2012 from 10.5 times in 2011.
After peaking at 51.6% as of December 2010, BANPU’s net debt to capitalization ratio improved to 42.4% at the end of 2011. As of December 2012, the net debt to capitalization ratio increased to 45.7%. In order to preserve liquidity, BANPU planned to cut its five-year capital expenditure budget to US$1,248 million. In addition, BANPU is implementing a number of cost reduction programs, including reducing the stripping ratio of its Indonesian mines. The cost reduction programs will partly help preserve operating margin while coal prices remain soft. Looking forward, BANPU has entered into coal sale contracts for amounting to 83% of its target coal sales in 2013. About 55% of the target coal sales were inked at fixed prices. Given the current benchmark price of coal, based on the Barlow Jonker Index, around US$90-US$95 per tonne and BANPU’s cost reduction plans, EBITDA is forecasted to be US$850-US$1,000 million per year. BANPU’s annual debt service will be managed at US$350-US$400 million per year during the next three years. Operating cash flow is expected to be sufficient to fund its revised capital expenditure plan, normal dividend payments, and meet it annual debt service obligations. Banpu plans to implement a share repurchase program worth approximately Bt6,000 million. The shares will be repurchased over the next six months, and would increase leverage modestly during the next few years before divestment. However, the net debt to capitalization ratio is projected to remain at an acceptable level and within the company’s target level.
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