Issuer: PTT Public Company Limited (PTT)
FC (Foreign Currency Long-Term Senior Debts): A- (Negative)
LC (Local Currency Long-Term Senior Debts): to A (Negative) from A+ (Negative)
Issue Amount(bn) Issue Date Due Date Coupon Rating
PTT Public Company Limited
Japanese Yen Bonds -
First Series (2007) JPY36.0 Jun. 29, 2007 Jun. 29, 2017 2.71% A-

<Rationale>
JCR has downgraded its rating on the local currency long-term senior debts of PTT Public Company Limited (PTT) to A from A+ while affirming its A- ratings on the foreign currency long-term senior debts and the above-mentioned bonds. The rating outlook is negative. The downgrading and the negative outlook reflect those of the ratings on the Government of Thailand (GOT) which was announced on April 8, 2010 (10-I-003).

PTT's ratings are supported by its strategic importance in GOT's energy policy as well as their close links evident in PTT's legal status, capital sources and board members. In 2009, 71% of the power generated in Thailand used natural gas that was supplied solely by PTT. As such, PTT plays an indispensable role in securing the country's stable power supply and its importance is believed to remain unchanged in the medium to long term. The ratings also reflect PTT's resilience to short-term shocks backed by its strong cash flow and sound financial position.

Meanwhile, the ratings are constrained by PTT's operation risks and large capital investment plans associated with its exploration and production (E&P) business, as well as market risks inherent in the oil refinery, petrochemical and E&P businesses. In the latter half of 2009, an oil and gas leakage accompanied by a fire broke out in an exploration project in the Timor Sea. This once again shed light on such high operation risks, although much of the resultant loss would eventually be covered by insurance. A sharp drop in oil prices would also substantially affect PTT's earnings performance as illustrated by a net loss it posted in the fourth quarter of 2008. However, these constraints are eased by PTT's good track records and a relatively low production cost in the E&P business, government regulations on natural gas pricing, and PTT's strong cash flow and sound financial condition.

(1) Thailand's sole oil/gas state enterprise with close ties with government
PTT is an integrated oil, gas and petrochemical company, undertaking a wide range of businesses primarily in Thailand such as E&P, transmission, refinery and distribution both on its own and through its subsidiaries and associated companies. Its consolidated sales and assets totaled THB1.6 trillion and 1.1 trillion (approximately JPY4.3 trillion and 3.0 trillion), respectively, in 2009.

PTT plays a highly public policy-oriented role and is a vital entity for GOT. The Thai Ministry of Finance (MOF) directly holds 51.49% of its shares (N.B. GOT made a cabinet decision to keep its stake at 51% or more). Another 15.37% stake is held by Vayupak Fund 1 (VF1), which was established by GOT in 2003 as a 10-year, closed-end fund. GOT is obliged to keep its 30% stake in VF1 and retains a first refusal right to purchase in case VF1 decided to divest its PTT shares. Of the 14 PTT board members, 12 are either incumbent or former government officials. PTT assumes the status of a "State Enterprise" under the Budget Procedure Act BE2502 and the Public Debt Management Act BE2548. Its debt, therefore, constitutes a part of the country's public debt and its financial conditions are overseen by MOF. At the end of 2009, 7.7% of its consolidated debt was guaranteed by GOT.

(2) Solid position in exploration/production and natural gas businesses
PTT's core operations are E&P business and natural gas business, which earned 57% and 29%, respectively, of the company's EBITDA in 2009. PTT Exploration and Production Public Company Limited (PTTEP), a subsidiary of PTT in the field of E&P of oil and gas, possessed 1,099 MMBOE (barrel of oil equivalent) of proved reserves with a reserves life index of 12 years as of the end of 2009. PTTEP's reserve replacement ratio was 1.67 times and its drilling success ratio was 64% in 2009. The ratio of oil (including condensate) and gas was 31%/69% in sales volume and 20%/80% in proved reserves.

Although the natural gas industry in Thailand was liberalized in formality in 2007 when the Energy Industry Act BE2550 was enacted, PTT retains its naturally monopolistic position as the owner and operator of the country's backbone natural gas transmission pipelines. Following the Supreme Administrative Court order in December 2007, PTT transferred to GOT a small portion of its pipeline assets expropriated and constructed by the former Petroleum Authority of Thailand, and entered into a long-term lease agreement with GOT. This, however, neither changed PTT's legal status nor will substantially affect its financial performance.

In 2009, 68% of the natural gas, which was supplied solely by PTT, was consumed for power generation. Demand for natural gas constantly grew in Thailand even when real GDP contracted in 1998 and 2009. In 2009, power generated with natural gas accounted for 71% of the total power supply, which makes PTT indispensable in securing the country's stable power supply. In the "Power Development Plan 2010" announced in March 2010, GOT set forth a policy to lower the dependence on natural gas for power generation to around 39% in the long term. Even though this actually materialized, however, the importance of natural gas would remain little changed.

(3) Strong cash flow and sound financial position
PTT maintains stable and strong cash flows from its E&P and gas businesses. In 2009, its consolidated operating cash flows, EBITDA and EBITDA margin were THB95.6 billion (down 24% from 2008), THB142.7 billion (down 8.7%), and 9.0%, respectively, while its annual interest expense totaled THB13.5 billion. EBITDA margin of E&P and gas businesses were 68% and 13%, respectively. PTT has accumulated much of its profit as reserves, pulling up its capital/asset ratio from 24% at the end of 2001 to 45% at the end of 2009. PTT's consolidated interest-bearing debt stood at THB361.8 billion (including THB40.9 billion of short-term debt) at the end of 2009, increased by THB112.7 billion in the year to finance capital investment including M&As. Nevertheless, given its cash and cash equivalents totaling THB104.1 billion, PTT's ratios of net debt to capital and EBITDA, at 0.5 and 1.7, respectively, were still below its 1.0 and 2.0 targets. Thus, PTT has ample liquidity that provides strong resilience to short-term shocks.

Given the nature of its business, PTT has a large capital investment plan, which will total THB243.5 billion for PTT alone and THB280.0 billion for its subsidiary PTTEP over the next five years between 2010 and 2014. Even considering the investment plans, JCR holds that PTT's gearing ratio, which may go up temporarily, will stay below such targets over the medium-term, given its sound financial position and sufficient operational cash flows.

(4) Operation and market risks PTT faces
In the latter half of 2009, one of PTT's group companies was hit by an outbreak of oil and gas leakage accompanied by a fire in its exploration project in the Timor Sea, which resulted in incurring additional expenses of THB10.4 billion in the third and fourth quarters of 2009. It has so far had THB1.34 billion paid by insurers. Of the remaining THB9.1 billion, USD226 million (approximately THB7 billion) is expected to be paid in 2010 and 2011. The actual accounting loss in the latter half of 2009 was reduced to THB3.8 billion thanks to tax relief measures. But the incident highlighted high risks inherent in the exploration business.

In September 2009, flaws in the Thai environment legislation led to an injunction by the Central Administrative Court to suspend 76 projects in the Map Ta Phut industrial area in the eastern part of the country for not complying with the environment provisions under 2007 (BE2550) Constitution (the number has been reduced to 64 projects by the subsequent rulings by the Supreme Administrative Court, etc.). As of now, the PTT group's 18 projects (with their total investment amounting to approximately THB95 billion) are still under suspension. GOT is now working hard to rectify the flaws. Should this be delayed due to the country's political unrest, PTT might have its net profit curtailed by up to 10% in 2010.

PTT also faces possible risks from market fluctuations. In the fourth quarter of 2008 when the oil price (Dubai) plummeted to USD53/barrel from USD113/barrel in the previous quarter, PTT incurred a THB22.2 billion net loss mainly from inventory losses and a fall in gross margin. Nevertheless, PTTEP's break-even cost was USD27/BOE, including USD3.16/BOE of lifting cost and USD11.10/BOE of finding and development (F&D) cost (three-year average), which was lower than its average selling price of USD39.5/BOE in 2009, indicating it still has some resilience to further oil price falls. In the natural gas business where long-term sales contracts are usually made in advance, although PTT's gas purchase price partially reflects the fluctuation of oil prices, its impact is basically passed on to its consumers as the gas sales prices are determined by the sum of average gas purchase price, pipeline tariffs and supply margins. PTT should also be able to accommodate a possible demand fall to a certain extent by reducing new investments, putting off production timing in new projects and exercising carry-forward clauses in long-term gas sales contracts.