TRIS Rating has affirmed the company rating and the ratings of the 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 geographic diversification of coal reserves, improved financial flexibility after listing a subsidiary, as well as the reliable income stream from the power segment. However, the ratings are partially offset by the cyclicality of coal prices. A slowdown in demand for coal worldwide, uncertainty in coal-related policies implemented by China, the world’s largest coal consuming nation, and the stringent 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. Dividends from the predictable power business will provide some cushion for the company. Good liquidity underpinned by BANPU’s financial discipline and prudent cash management plus financial flexibility will help BANPU weather volatile market condition.
Any rating upside is unlikely given the current financial profile. A rating downgrade will emerge if coal prices tumble and cash flow substantially weakens below expectation. Any debt-funded investments, which worsen the capital structure and deteriorate cash flow protection for an extended period, would be other factors supporting a 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 2015 while the Australian operation made up 28%. The operation in China and Thailand each comprised 11% of EBITDA. In terms of lines of business, the coal segment comprised 78%-86% of EBITDA in 2013 through 2015. The remainder came from the power segment.
In the first three quarters of 2016, the combined amount of coal mined from Indonesia and Australia decreased to 27.1 million tonnes, a 15.5% drop over the same period last year (year-on-year or y-o-y). At the end of September 2016, the coal reserves in Indonesia and Australia were 555 million tonnes in total. BANPU’s current reserves at its Australian and Indonesian mines indicate a reserve life of 13 years.
BANPU’s financial performance dropped in 2015 due mainly to a continued plunge in coal prices and higher loss from financial derivatives. Operating margin before depreciation and amortization dipped to 11% in 2015 from 15.4% in 2014. EBITDA fell to US$350 million in 2015 from US$616 million in 2014. However, earnings partially rebounded in the third quarter of 2016. Coal prices surged after China implemented some coal supply reforms in the first quarter of 2016. The Chinese government reduced the working days of coal mines in China from 330 days per annum to 276 days in the first quarter of 2016. The Chinese government targets to cut the supply of coal by 500 million tonnes during the next five years. The significant tightened coal supply in China, which produces and consumes about half of coal volume worldwide, drove coal price rises in the second half of 2016. The Newcastle Export Index (NEX), a key benchmark, jumped to an average price of US$91 per tonne in October 2016, from an average of US$51 per tonne in the first half of 2016. The average selling price of coal from BANPU’s Indonesian mines in the third quarter of 2016 improved for the first time in five years. The average selling price rose by 10.7% over the previous quarter (q-o-q), to US$51.35 per tonne. BANPU has not yet reaped all of the benefits from the rapid increases in coal prices in the third quarter. Some sale contracts carry fixed prices, set before the recent surge in coal prices. BANPU also benefited from the persistently low price of diesel fuel and ongoing cost cutting activities, including a drop in the stripping ratio. At BANPU’s coal operation in Australia, the average selling price of coal also rose, climbing to AU$67 per tonne, up by 8.4% from the second quarter of 2016. Australian mines gained benefit from the renewal of the existing low-priced contracts of a domestic customer to export-parity prices. Prices for coal exported from Australia also improved. However, the production cost in Australia rose in the third quarter of 2016 on the back ofdifficult mining conditions at the Mayuna mine and the extended longwall changeover at the Springvale mine. Including relatively healthy profitability of BANPU’s power business in China, operating margin before depreciation and amortization rose to 13.8% in the third quarter of 2016, compared with 10.9% in the second quarter of 2016. The power segment in Thailand and in the Lao People’s Democratic Republic (Lao PDR) reported lower earnings in the third quarter of 2016. BANPU recorded equity income of US$11 million from the BLCP and Hongsa power plants, compared with US$33 million in the second quarter. The decline in earnings was attributed to the planned shutdown at the BLCP power plant in Thailand and more unplanned shutdowns at the Hongsa power plant in the Lao PDR.
BANPU’s EBITDA in the third quarter of 2016 rose to US$104 million, a 20.7% increase from the second quarter of 2016. The rise was due to increase in coal prices and successful cost reduction at the Indonesian mines. However, the weak earnings for the first half of 2016 kept EBITDA in the first nine months of 2016 to be only US$290 million, flat from the same period of the prior year. The net debt to capitalization ratio declined modestly to 57.3% as of September 2016, from 58.3% at the end of 2015. BANPU received cash injection from the successful capital increase and exercised warrants, worth US$325 million, in the third quarter of 2016. The EBITDA interest coverage ratio was 3.2 times in the third quarter of 2016, compared with 1.9-3.2 times during the past five quarters and 5-6 times in 2013-2014. The funds from operations (FFO) to total debt ratio was at 7.4% (annualized, from the trailing 12 months) in the third quarter of 2016, compared with 8.6%-11.2% in 2013-2014.
The recent spikes in the prices of coal have released the pressure on BANPU’s earnings for the coming year. The higher coal price will increase BANPU’s cash flow in the fourth quarter of 2016 and in 2017 even though BANPU plans to employ higher stripping ratio for the Indonesian mines. Operating cash flow will be further enhanced by the renewals of some contracts executed by the Australian mine. New contracts with export parity prices will replace the legacy contracts. However, the expected rising coal production worldwide after high coal prices and the uncertainty surrounding the policies implemented by the Chinese government amidst the fragile demand recovery put coal prices more volatile. BANPU plans to enlarge power portfolio to earn more predictable income from the power segment. The expected smoother operation at the Hongsa power plant plus gradual commercial operation of new power projects in China and Japan will increase dividend received from power projects to about US$120 million in 2019 from around US$60 million in 2015. EBITDA, under the base case scenario, is expected to recover from US$350-US$450 million in 2015-2016 to approximately US$600-US$700 per year in 2017-2019, close to the EBITDA earned in 2013-2014.
BANPU listed a subsidiary, BANPU Power PLC, on the Stock Exchange of Thailand (SET) in November 2016. The successful listing of BANPU Power improved BANPU’s financial flexibility as the market capitalization of BANPU Power, based on 78.7% stake held by BANPU, was US$1,605 million as of 22 December 2016. BANPU’s capital structure improved because its subsidiary obtained about US$386 million from the initial public offering. Most of the funds received were used to repay debt. Net debt to capitalization is expected to decline to about 50% at year end 2016 from 57.3% as of September 2016. BANPU budgets capital expenditures of around US$200 million per year. If the investments in new power projects undertaken by BANPU Power and investments in shale gas are included, the total capital spending would rise to US$350-US$700 million per year during 2016-2017. Given the planned investments and estimated EBITDA, leverage is anticipated to stay moderate. EBITDA interest coverage ratio is expected to hover around 4-5 times and FFO to total debt will range 15%-20% in 2017-2019.