TRIS Rating affirms the company and senior debenture ratings of Banpu PLC (BANPU) at “AA-”. At the same time, TRIS Rating revises BANPU’s outlook to “negative” from “stable”. The “negative” outlook reflects uncertainty surrounding a recovery in the company’s cash flow generation. Should coal prices remain weak, BANPU’s profitability and cash flow protection would be soft for an extended period. The “AA-” 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 plans to reduce operating costs, and its financial discipline. Regulatory risks in the coal industry in Indonesia and Australia, and the oversupply in coal industry remain rating concerns.
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 BANPU’s 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. In the first nine months of 2013, however, coal segment comprised 82% of total EBITDA, with 18% from the power segment.
In 2012, BANPU produced 43.1 million tonnes of coal, comprising 28.5 million tonnes mined in Indonesia and 14.6 million tonnes mined in Australia. In the first three quarters of 2013, the combined amount of coal mined from Indonesia and Australia increased by 2.4% over the same period last year to 31.6 million tonnes. At the end of September 2013, the combined coal reserves in Indonesia and Australia were 780 million tonnes while the reserves based on BANPU’s percentages of holdings stood at 572 million tonnes. BANPU’s current reserves for its Australian and Indonesian mines indicate a reserve life of around 17 years.
In 2012 through the first nine months of 2013, BANPU’s financial performance deteriorated because of lower coal prices. The selling price of coal in Indonesia fell gradually quarter by quarter to US$72.6 per tonne in the third quarter of 2013, from the peak of US$102.6 per tonne in the first quarter of 2012. The gross margin of the Indonesian coal segment decreased to 33.6% in the second quarter of 2013, compared with 48.2% in the first quarter of 2012. However, the gross margin of Indonesian coal improved to 38.2% in the third quarter of 2013, from 33.6% in the second quarter of 2013 as a result of the cost reduction programs implemented in 2013. The average cost of coal sales fell to US$45.0 per tonne in the third quarter of 2013 from an average of US$51.2 per tonne during the previous four quarters. The Australia coal segment reported weaker performance. The average selling prices fell to AU$68.9 per tonne in the first nine months of 2013, compared with A$72.4 per tonne in 2012. In addition to falling coal prices, Centennial Coal Co., Ltd. (CEY) encountered production problems, including a longer-than-expected changeover at the Mandalong mine and difficult mining conditions at the Springvale mine, in the first quarter of 2013. CEY’s gross margin was soft at 23.2% in the first nine months of 2013, compared with 30.4% in 2012.
The power segment partly supported BANPU’s earnings in the first three quarter of 2013. The performance of BANPU’s coal-fired power plants in China improved noticeably as coal prices declined. The gross margin improved from 16.0% in 2012 to 26.2% in the first nine months of 2013. The power business in China contributed EBITDA of US$36 million in the first nine months of 2013, compared with a loss in the same period 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$69 million, excluding foreign exchange gain, in the first three quarters of 2013, compared with US$70 million in the first nine months of 2012. In addition to its existing power operations, BANPU owns a 40% interest in the Hongsa project), a 1,878 MW coal-fired power plant under IPP project located in Lao PDR. As of September 2013, the construction of Hongsa project was 70% complete. The first phase of the project is set to be commissioned in 2015.
Lower coal prices caused BANPU’s operating margin before depreciation and amortization to shrink to 15.2% in the first nine months of 2013 from an average of 21.3% during 2010-2012. Total EBITDA in the first nine months of 2013 declined to US$512 million, a drop of 34.5% over the same period last year. Weaker profitability has hurt cash flow protection. The EBITDA interest coverage ratio fell to 5.9 times in the first nine months of 2013, down from an average 10.2 times during 2010 through 2012. The funds from operations (FFO) to total debt ratio declined to 7.8% (non-annualized) during the first nine months of 2013, compared with 17.0% during 2010-2012.
The continued capital expenditures and weak operating performance drove BANPU’s net debt to capitalization ratio higher to 50.7% at the end of September 2013, compared with 45.4% at the end of 2012. BANPU implemented a share repurchase program worth US$133 million during March to July 2013. Looking forward, the Newcastle Export Index (NEX), the coal price benchmark, is expected to remain soft at around US$85 per tonne in 2014. The recovery in coal prices is still uncertain, depending on the recovery of the global economy as well as the production correction of major coal producers worldwide. The company has prudently taken steps to preserve liquidity during the down cycle of coal industry including extending its debt maturities, smoothening repayment schedule, postponement of some expansion projects, and implementing company-wide cost reduction programs. As a result, BANPU’s liquidity remains healthy. As of September 2013, the company had cash on hand of US$552 million and available credit facilities of about US$587 million from financial institutions. Under the weak coal price assumption, TRIS Rating expects BANPU to generate EBITDA of US$650-US$750 million per year during 2013-2014. This amount of EBITDA, plus US$552 million in cash on hand, are adequate to fund its capital expenditure needs of about US$400 per year and scheduled repayments of about US$300 million per year. BANPU’s continuing cost reduction plans and CEY’s renewed prices of domestic coal contracts at export-parity prices would partly support the company’s operations during the challenging industry environment.
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