TRIS Rating has lowered the company rating and existing senior unsecured debenture ratings of Banpu PLC (BANPU) to “A+” from “AA-” with “stable” outlook. The downgrade reflects the company’s weakening operating performances due to longer-than-expected down cycle of the coal industry. The company has successfully cut its production cost and prudently deferred several capital spending programs. However, the continued drop in coal prices lowered the company’s profitability and noticeably weakened its cash flow cushion. The uncertainty in coal demand and supply rebalance will delay BANPU from normalizing its cash flow protection for an extended period.
The “A+” ratings continue to reflect the company’s leading position in the coal industry within the Asia-Pacific region, its diverse customer base and diverse locations of its coal reserves, as well as the reliable dividend income from BANPU’s power segment. Regulatory risks in the coal industry, especially in China, the world largest coal consuming nation, and the current supply glut remain rating concerns.
The “stable” outlook reflects the expectation that BANPU will maintain its leading position in the coal industry. BANPU’s financial discipline and prudent cash management will preserve sufficient liquidity during the current challenging environment. A reliable stream of dividends from the power business, falling fuel cost and improvement in operation of Centennial Coal Co., Ltd. (CEY), BANPU’s Australian subsidiary, would provide BANPU some cushion during the prolonged downturn of the coal industry.
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. The Indonesian operation accounted for 60% of BANPU’s total earnings before interest, tax, depreciation, and amortization (EBITDA) for 2013. The Australian operation made up 21% of total EBITDA. The operation in China comprised 11% of EBITDA while the operation in Thailand contributed only 8% of total EBITDA in 2013. In terms of BANPU’s business segments, the coal segment comprised 85% of total EBITDA in 2013. The remaining 15% came from the power segment. In the first three quarters of 2014, the coal segment comprised 82% of total EBITDA, with 18% from the power segment.
In 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 quarters of 2014, the combined amount of coal mined from Indonesia and Australia increased by 7.1% over the same period last year to 33.8 million tonnes. At the end of September 2014, the combined coal reserves in Indonesia and Australia were 676 million tonnes. Based on the ownership percentages in its subsidiaries, BANPU’s reserves stood at 509 million tonnes. BANPU’s current reserves at its Australian and Indonesian mines indicate a reserve life of 14 years.
In 2013 and 2014, BANPU’s financial performance deteriorated because of falling coal prices. The selling price of coal in Indonesia fell 17.6% from the average price in 2012, to US$75.8 per tonne in 2013. In response, BANPU implemented various cost reduction activities, including lowering the stripping ratio. However, the decrease in coal prices outpaced the rate at which BANPU had cut costs. In addition, CEY faced higher costs due to production problems in 2013. The gross margin of BANPU’s coal operation dropped to 32.2% in 2013, compared with 39.0% in 2012. EBITDA in the power segment, which increased by more than 50% over 2012, partly supported BANPU’s earnings. As a result, BANPU’s total EBITDA in 2013 fell to US$654 million, a 33.4% drop over the same period prior year.
Coal prices weakened further during the first three quarters of 2014. Further cost cutting programs, such as a lower stripping ratio, helped support BANPU’s gross margin. The gross margin of its Indonesian coal operation decreased to 34.0%, compared with 35.4% during the first three quarters of 2013. The margin was held up fairly well, considering the average selling price of coal declined by 10.3% to US$69.1 per tonne. The operational improvement in CEY, BANPU’s Australian mines, stable earnings from power business also provided some cushion against lower coal prices. CEY’s gross margin improved to 29.4% in the first three quarters of 2014, compared with 24.0% in the same period of 2013. CEY put its high-cost mine on care and maintenance status, and increased production at the lower cost mines to benefit from greater economies of scale. The power business reported resilient earnings as expected. EBITDA from the power segment was at US$93 million, an increase of 2.2% year-on-year (y-o-y). As a result, BANPU’s total EBITDA in the first nine months of 2014 was at US$504 million, just a 1.6% decline over the same period of last year. The cost saving efforts and the deferrals of capital expenditures maintained BANPU’s capital structure despite the drop in coal prices. BANPU’s net debt to capitalization ratio was at 52.4% at the end of September 2014, close to the level of 51.7% recorded at the end of 2013. However, weak coal prices have softened BANPU’s cash flow protection. BANPU’s EBITDA interest coverage ratio remained weak for the second consecutive period at 5.6 times in the first nine months of 2014, the same level of 2013. The funds from operation (FFO) to total debt ratio mildly improved to 11.5% (annualized, from trailing 12 months) in the first nine months of 2014, compared with 9.4% in 2013. These ratios are at the weak levels of the past 10 years. BANPU has managed its liquidity carefully. As of September 2014, the company had cash on hand and other liquid investments worth US$552 million plus unused credit facilities provided by several financial institutions totaling about US$600 million.
Looking forward, the recovery in coal prices remains unclear, depending on the recovery of the global economy as well as the ability and willingness of major coal producers worldwide to reduce their production. The Newcastle Export Index (NEX), a coal price benchmark, further slid to around US$60-US$65 per tonne during the fourth quarter of 2014, compared with an average price of US$68.53 per tonne in the third quarter of 2014. BANPU continues to focus on preserving its liquidity during the industry down cycle. The company prudentially extended its debt maturities, smoothened its debt repayment schedule, and implemented more company-wide cost reduction programs. BANPU also cut its capital spending to US$735 million during 2012-2015, from an initial budget of US$1,748 million. The spending is limited to committed expenditures and essential activities, including investments in the power business, such as the Hongsa project in Lao PDR, power projects in China and solar projects in Japan. The contribution from power segment will increase over the next few years when these projects start commercial operations.
A Civil Court ruling on 20 September 2012 ordered BANPU to pay Mr. Siva Nganthavee and his associated companies for damages arising from the misuse of information regarding the lignite-fired power plant project in Hongsa, Lao PDR. BANPU disagrees with the verdict and lodged an appeal at the Court of Appeals. On 9 September 2014, the Appeal Court dismissed the claims made by the plaintiffs. The plaintiffs have submitted the case to the Supreme Court.
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