TRIS Rating has affirmed the company rating and the ratings of the existing senior unsecured debentures of Banpu PLC (BANPU) at “A+” with “stable” outlook. The ratings reflect the company’s leading position in the coal industry within the Asia-Pacific region, diverse customer base and locations of its coal reserves, good liquidity, as well as the reliable income from the power segment. The ratings also take into consideration BANPU’s plan to list its power subsidiary, BANPU Power PLC, on the Stock Exchange of Thailand (SET) and its successful efforts to cut operating costs and capital spending. A supply glut, a slowdown in demand for coal worldwide, especially in China, the world’s largest coal consuming nation, and meaningful measures and policies that many nations implement to reduce greenhouse gas emissions are rating concerns.
The “stable” outlook reflects the expectation that BANPU will maintain its leading position in the coal industry. BANPU has financial discipline and prudent cash management policy to retain strong liquidity during the current period of challenging market conditions. More dividends from power projects and ongoing cost reduction efforts would give BANPU some cushion during the current industry downturn. A proceed from BANPU Power’s initial public offering is expected to be used to lower its debt obligations and to improve its cash flow protection.
Any rating upside is unlikely as long as coal prices remain low. A rating downgrade will emerge if coal prices continue to tumble and result in weaker-than-expected operating cash flow. The deteriorated level of cash flow protection for an extended period would be another factor for a rating downgrade.
BANPU is one of the major energy companies in Asia. It was established in 1983 to mine coal in Thailand. Currently, BANPU has coal operations in Indonesia, Australia, China, and Mongolia. The Indonesian operation remains the major profit contributor. The Indonesian operation accounted for 50% of BANPU’s earnings before interest, tax, depreciation, and amortization (EBITDA) for 2014 while the Australian operation made up 30%. The operation in China comprised 11% of EBITDA while the operation in Thailand contributed 9%. In terms of business segments, the coal segment comprised 80%-85% of total EBITDA in 2013 through the first nine months of 2015. The remainder came from the power segment.
In the first three quarters of 2015, the combined amount of coal mined from Indonesia and Australia decreased to 32.1 million tonnes, a 5.2% drop over the same period last year (year-on-year (y-o-y)). At the end of September 2015, the combined coal reserves in Indonesia and Australia were 596 million tonnes. BANPU’s current reserves at its Australian and Indonesian mines indicate a reserve life of 13 years.
BANPU’s financial performance in the first nine months of 2015 was depressed by lower coal prices. The average selling price of coal in Indonesia in the first nine months of 2015 fell by 14.8% y-o-y, to US$58.85 per tonne. However, BANPU’s gross margin of coal operation in Indonesia was held up at 35.0% in the first nine months of 2015, compared with 34.0% in the same period of the prior year. BANPU continued a number of cost cutting activities, including lowering the stripping ratio. The Indonesia coal operations also benefited from a drop of more than 40% in diesel price as fuel cost accounted for 25% of production cost. At BANPU’s coal operation in Australia, the average selling price of coal fell to A$65.83, down by 4.8% y-o-y in the first nine months of 2015. The price was partly supported by the depreciation of the Australian dollar against the US dollar, which depreciated by 16.7% over the same period last year. Fixed-price sales contracts in Australia, which accounted for 60% of coal sales in Australia, helped BANPU buck the trend of falling coal price. However, the coal operation in Australia missed the production target. BANPU encountered geological problems at the Mandalong and Mayuna mines and faced a delay in getting mining permission for the Springvale mine. The gross margin of its Australian mines fell to 27.4% in the first nine months of 2015, compared with 29.1% in the same period of the prior year. Including lower royalty fee, blended gross margin of coal business was flat at 22.2% compared with 22.8% in the same period last year. Despite the relatively flat margin percentage, the lower selling price eroded the margin per tonne to US$12.60 in the first nine months of 2015, compared with US$15.50 per tonne in the first nine months of 2014.
The power segment reported lower earnings due to annual shutdown and extra expenses from unplanned outage at BLCP, BANPU’s coal-fired power plant in Thailand. BANPU incurred an equity loss of US$16 million from Hongsa, a coal-fired power project in the Lao People's Democratic Republic (Lao PDR). The loss was due to the ramping up period of the power plants and an unrealized foreign exchange loss as Thai baht depreciated against the US dollar. As a result, BANPU’s EBITDA in the first nine months of 2015 was US$336 million, a 33.3% decline y-o-y. BANPU’s cost saving efforts and the deferrals of capital expenditures kept its net debt level stable despite the drop in coal prices. Net debt stood at US$2,727 million as of September 2015, compared with US$2,771 million in 2013 and US$2,812 million in 2014. The net debt to capitalization ratio rose to 56.7% as of September 2015, from 52.5% at end of 2013 due to a decrease in shareholders’ equity as a result of currency translation losses from the depreciation of Australian dollar against US dollar. The lower EBITDA weakened cash flow protection. BANPU’s EBITDA interest coverage ratio fell to 3.6 times in the first nine months of 2015, from 5.6 times in the first nine months of 2014. The funds from operations (FFO) to total debt ratio fell to 3.9% (annualized, from the trailing 12 months) in the first nine months of 2015, compared with 11.5% in 2014.
Coal prices are expected to remain subdued in the short term, owing to insufficient coal production cutbacks by producers and a fragile economic recovery worldwide. China, which consumes 50% of coal consumption worldwide, imported 39% less coal during the first 10 months of 2015. A tepid economy, emission control policies, and government’s support for domestic production drove imports lower. The Newcastle Export Index (NEX), a coal price benchmark, slid to US$50-US$55 per tonne during the fourth quarter of 2015, compared with US$59 per tonne in the third quarter of 2015. The adoption of the Paris Agreement on climate change by 195 countries has negative implications for coal industry. The impact of the Agreement will depend on substantive efforts from participating nations to achieve emission reduction targets.
BANPU continues to focus on preserving its liquidity. As of September 2015, the company had cash on hand and other liquid investments worth US$510 million plus unused credit facilities totaling about US$600 million. BANPU prudently extended its debt maturities, smoothed its debt repayment schedule, and further cut costs and capital spending. BANPU reduced its capital spending and investment, excluding maintenance capital expenditures, to US$554 million during 2016-2020, compared with US$717 million spent during 2012-2015. The expenditures are limited to committed expenditures and essential activities, including investments in the power segment to stabilize future earnings. Despite lower coal prices, BANPU’s cash flow in 2016 is projected to hold up. The operating cash flow will be bolstered by the lower fuel cost, continued cost saving efforts, and contribution from the Hongsa project. All three units of the Hongsa project will be in commercial operation in February 2016, after two units gradually started up in 2015. The contribution from power segment is projected to increase to about US$100 million per year in 2017-2018 from US$50 million in 2015. BANPU is in the process of listing its power subsidiary, BANPU Power, on the SET in the first half of 2016. The successful listing of BANPU Power will enhance BANPU’s liquidity, improve capital structure, and reduce financial leverage, and is expected to gradually increase cash flow protection.
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