Provision slashes Panva profit
Gas supplier may face rating downgrade after $208 million hedging for interest rate swaps cuts its earnings 45 per cent
Panva Gas Holdings, a mainland piped-gas supplier, faces a possible downgrade of its credit ratings after a surprise provision of $208 million for interest rate swaps slashed its earnings 45.4 per cent to $155.77 million last year.
Standard & Poor's Ratings Agency placed its BB minus rating on Panva's US$50 million convertible bond due 2008 and US$200 million bond due 2011 on credit watch with negative implications.
A ratings downgrade could mean higher borrowing costs and weakened financial health for the company.
Panva's net profit was well below analysts' consensus of $312.87 million, according to a Thomson First Call poll.
Panva hedged interest expenses by swapping fixed for floating rates for its US$200 million bond and engaging the US$50 million bond in derivative instruments.
The moves left a deficit of $208 million in fair value based on new accounting practices and sent its finance costs rising to $116 million last year from $27 million in 2004.
S&P said that for most of last year, the effective interest rate on the US$200 million bond was much lower than its coupon rate of 8.25 per cent. However, the effective interest rate jumped to about 15 per cent on March 23.
'Depending on interest rate movements, the company's finance costs could become highly volatile over the next few years,' S&P said.
While unwinding these swap transactions could be costly, Panva would need to post more collateral under the terms of the swap if the credit ratings were lowered by two notches to BB-minus, S&P said.
'This will further weaken the company's liquidity and financial flexibility,' it added.
Panva's vice-chairman, Francis Tang Yui-man, said the finance cost represented a fraction of the group's $2.32 billion turnover and that the provision did not hurt its cash flow. The company's earnings before interest, tax, depreciation and amortisation were 61 per cent higher at $609.15 million.
With the industry expected to continue to be plagued by higher wellhead gas prices and tight gas supplies, Panva had so far managed to raise selling prices of natural gas by between 15 per cent and 40 per cent, according to managing director Wayne Chen Wei.
'Our suppliers raised prices by more than 10 per cent on average, but so far we have been able to pass on higher costs on to end-users,' he said.
Thirteen of the group's 25 piped-gas projects were allowed to raise retail prices.
Panva also runs 15 bottled liquified petroleum gas projects on the mainland.
The company's ultimate parent, mainland-based property developer Sinolink Worldwide Holdings, reported a 141.37 per cent jump in net profit to $671 million last year, thanks to strong property sales.