TRIS Rating has assigned the rating of “AA-’’ to the proposed issue of up to Bt8,000 million in senior unsecured debentures of Banpu PLC (BANPU). At the same time, TRIS Rating has affirmed the company and existing senior unsecured debenture ratings of BANPU at “AA-”. The outlook remains “negative”. The “AA-” ratings continue to reflect the company’s leading position in the coal industry within the Asia-Pacific region and its diverse customer base and the diverse locations of its coal reserves, as well as the reliable stream of dividend income in the power segment. The ratings also take into consideration BANPU’s flexibility to defer some capital expenditures, its ability to reduce operating costs during industry downturns, and its financial discipline. Regulatory risks in the coal industry in Indonesia and Australia, and the current oversupply conditions in the coal industry worldwide remain rating concerns. The “negative” outlook reflects an expectation that weak coal prices would be prolonged amidst the uncertainty of demand-supply balance. The outlook could be revised back to “stable” should coal prices rebound or the company demonstrate an ability to restore its profitability and cash flow protection close to its normal level. However, the ratings could be downgraded if BANPU requires more time to restore its financial strengths.
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 2013, the Indonesian operation accounted for 60% of BANPU’s total earnings before interest, tax, depreciation, and amortization (EBITDA). The Australian operation made up 21% of total EBITDA. The operation in Thailand comprised 15% of EBITDA while the peration in China contributed only 4% of total EBITDA in 2013. In terms of BANPU’s business segments, the contribution from the coal segment comprised 85% of total EBITDA in 2013. The remaining 15% came from the power segment. In the first three months of 2014, the coal segment comprised 82% of total EBITDA, with 18% from the power segment.
For 2013, BANPU produced 42.4 million tonnes of coal, comprising 28.6 million tonnes mined in Indonesia and 13.8 million tonnes mined in Australia. In the first three months of 2014, the combined amount of coal mined from Indonesia and Australia increased by 12.1% over the same period last year to 10.9 million tonnes. At the end of March 2014, the combined coal reserves in Indonesia and Australia were 700 million tonnes while the reserves based on BANPU’s ownership percentages stood at 525 million tonnes. BANPU’s current reserves for its Australian and Indonesian mines indicate a reserve life of around 14 years.
In 2013, BANPU’s financial performance deteriorated because of lower coal prices. The selling price of coal in Indonesia fell 17% from the average price in 2012, to US$74.8 per tonne in 2013. In response, BANPU implemented various cost reduction activities, including reducing the stripping ratio. However, the decrease in coal prices outpaced the rate at which BANPU cut cost. The gross margin of the Indonesian coal segment decreased to 35.7% in 2013, compared with 42.8% in 2012. BANPU’s Australian coal segment was less affected by the weak coal prices as exports accounted for about 38% of total coal sales. The average selling price fell to AU$69.75 per tonne in 2013, compared with A$72.78 per tonne in 2012. However, Centennial Coal Co., Ltd. (CEY), BANPU’s Australian subsidiary, faced higher costs. Costs rose by AU$2.36 per tonne due to production problems, including a longer than expected changeover at the Mandalong mine, difficult mining conditions, and a production disruption resulting from a bushfire at the Springvale mine in 2013. CEY’s gross margin ended to 23.4% in 2013, compared with 30.3% in 2012. At the same time, EBITDA in the power segment increased by more than 50% year-on-year (y-o-y) in 2013. As a result, BANPU’s total EBITDA in 2013 fell by 33.4% over the same period last year to US$654 million.
Coal prices remained weak during the first three months of 2014. However, BANPU’s earnings improved due to further cost cutting programs, and gains from financial derivatives. BANPU’s gross margin of its Indonesian coal operation rose to 37.8%, compared with 32.8% during the first quarter of 2013 even though the average selling price declined by 12.1% to US$71.06 per tonne. The rebound in the gross margin was mainly due to a lower stripping ratio and cost reduction schemes. BANPU’s Australian coal operation also improved BANPU’s profitability. CEY’s production was smooth and there were no changeovers in the major mine during the period. The gross margin of the Australian coal operation improved to 30.0% in the first quarter of 2014, compared with 25.1% in the fourth quarter of 2013. BANPU recorded gains from financial derivatives totaling $34.9 million in the first quarter of 2014. The power business reported resilient earnings as expected. EBITDA from the power business grew by 6% y-o-y. As a result, total EBITDA in the first three months of 2014 picked up to US$219 million, a rise of 20.0% over the same period last year. BANPU’s debt coverage ratios in the first quarter of 2014 improved as profitability rebounded. EBITDA interest coverage ratio increased to 7.7 times in the first three months of 2014, up from 6.7 times during the first quarter of 2013. The funds from operations (FFO) to total debt ratio rose to 5.2% (non-annualized) during the first three months of 2014, compared with 3.8% in the first quarter of 2013. BANPU’s capital structure improved modestly. BANPU’s net debt to capitalization ratio improved to 50.3% at the end of March 2014, compared with 51.7% at the end of 2013. This rise was due to the deferral of some capital spending. BANPU’s liquidity remains healthy. As of March 2014, the company had cash on hand and other liquid investments worth US$567 million plus unused credit facilities provided by several financial institutions totaling more than US$600 million.
Looking forward, the recovery in coal prices is still uncertain, depending on the recovery of the global economy as well as the ability and willingness of major coal producers worldwide to adjust their production. The Newcastle Export Index (NEX), the coal price benchmark, remains soft at around US$72-US$75 per tonne during the second quarter of 2014. BANPU has taken prudent steps to preserve its liquidity during the current industry down cycle. BANPU extended its debt maturities, smoothened its debt repayment schedule, postponed some expansion projects, and implemented company-wide cost reduction programs. TRIS Rating expects BANPU to generate EBITDA of US$650-US$750 million per year during 2014-2015. This amount of EBITDA, plus the US$567 million in cash on hand, are adequate to fund BANPU’s revised capital expenditure needs of about US$300-US$400 per year and meet the scheduled repayments of about US$200-US$300 million per year without weakening its balance sheet.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand Copyright 2014, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.