TRIS Rating has assigned the rating of “AA-’’ to the proposed issue of up to Bt6,000 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 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 from its power segment. The ratings also take into consideration BANPU’s flexibility, to defer some capital expenditures, its ability to reduce operating costs during downturns in the coal industry, and its financial discipline. Weak coal prices, regulatory risks in the coal industry in Indonesia and Australia, and the uncertainties surrounding a worldwide economic recovery remain rating concerns. The “stable” outlook reflects the expectation that BANPU will maintain its financial discipline and sufficient liquidity. BANPU’s cost reduction plans, coupled with its flexibility to defer capital expenditures would help it 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 the operations in Thailand comprised 8% of EBITDA. Operations in 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. However, contribution from the coal segment comprised 80% of total EBITDA and 20% came from the power segment in the first quarter of 2013 as a result of falling coal price.
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. In the first quarter of 2013, BANPU produced 10.0 million tonnes. At the end of March 2013, the combined coal reserves in Indonesia and Australia were 801 million tonnes, with BANPU’s share about 580 million tonnes, based on the ownership percentages of its Australian and Indonesian subsidiaries. BANPU’s current reserves for Australia and Indonesia mines indicate a reserve life of around 18 years.
In the first quarter of 2013, BANPU’s performance continued to be depressed by lower coal prices. The selling price of coal in Indonesia remained weak at US$80.6 per tonne in the first quarter of 2013, down by 20% compared with the same period last year. The gross margin of the coal segment decreased to 29.1%, compared with 43.4% in the first quarter of 2012. The falling coal price and high production costs due to the long wall changeover at the Mandalong mine in Australia were the main factors for the weak gross margin in the coal segment during the first quarter of 2013.
The strong performance of the power segment partly supported the results in the first quarter of 2013. The performance of the coal-fired power plants in China improved noticeably in the first quarter of 2013. Total revenue of power business in China grew to US$57 million, a 12.6% increase over the same period of last year because of higher power volume. The gross margin improved from 17.6% in the first quarter of 2012 to 28.7% in the first quarter of 2013. 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$13 million in the first quarter of 2013, compared to a loss in the same period of last year. 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 US$17 million in the first quarter of 2013, compared with US$10 million in the first quarter of 2012. The increase in equity income from BLCP was mainly due to changes in the foreign exchange rates. In addition to its existing power operations, BANPU owns a 40% interest in the Hongsa project, an IPP project in Lao PDR. As of March 2013, the Hongsa project construction was 49% completed. The first phase of the project is set to be commissioned in 2015.
Despite a significant drop in coal prices, profitability was partly supported by improvements in the power segment and BANPU’s cost reduction programs. The ratio of operating income before depreciation and amortization to total sales was acceptable at 14.9%. BANPU’s total EBITDA decreased to US$176 million in the first quarter of 2013, down by 38% from the same period last year. The EBITDA interest coverage ratio fell to 6.5 times from 10.6 times in the first quarter of 2012.
Despite weaker operating performance, BANPU’s net debt to capitalization ratio was under control and remained moderate at 44.8% at the end of March 2013. BANPU cut its five-year capital expenditure budget to US$1,248 million. Looking forward, as of May 2013, BANPU has entered into coal sales contracts amounting to 90% of its target coal sales in 2013. About 70% of the target coal sales were fixed prices. Given the Barlow Jonker Index of around US$85-US$95 per tonne, and BANPU’s cost reduction plans, EBITDA is forecasted to be US$750-US$900 million per year. 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 expenditures plan, to make dividend payments, and to meet its annual debt service obligations. Banpu is implementing a share repurchase program worth approximately Bt4,000 million, starting from March 2013. The repurchase program would increase leverage modestly during the next few years. However, the net debt to capitalization ratio is expected to remain within the company’s target level.
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