TEXT-Fitch affirms PTT Public Company at 'A-'/'BBB';outlook stable

Thu Nov 15, 2012 3:12am EST

Nov 15 - Fitch Ratings has affirmed Thailand-based PTT Public Company Limited's (PTT) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB' and 'A-', respectively. The Outlook is Stable.

Its other ratings have also been affirmed at Short-Term Foreign-Currency IDR 'F3', National Long-Term 'AAA(tha)' with a Stable Outlook, and National Short-Term 'F1+(tha)'. The National Long-Term rating on its senior unsecured debentures has been affirmed at 'AAA(tha)'.

The ratings reflect PTT's dominant position in Thailand's oil and gas industry, its strategic importance and function as a policy vehicle for domestic energy security and development, and a financial profile adequate for the current ratings. PTT is the sole operator of Thailand's mid-and-downstream gas operations and its key product, natural gas, is a major fuel for the country's electricity generation. PTT is also one of the country's major exploration and production (E&P) companies, and a leading refining and petrochemicals company.

PTT's financial profile benefits from stable cash flows from its gas interests; these cash flows are underpinned by stable demand and sales based on long-term supply and sales agreements with take-or-pay conditions on a cost-plus pricing structure. Gas distribution and transmission operations account for around a quarter of PTT's EBITDA. Furthermore, of the company's E&P operations which contribute nearly 60% of PTT's consolidated EBITDA, nearly 75% is natural gas production, much of which is sold domestically.

PTT has been active in overseas upstream asset acquisitions since 2010 to bolster long-term energy security and to replace depleting reserves. In 2012, PTT spent around THB85bn to acquire UK's Cove Energy plc (Cove) and increase its ownership in Sakari Resources Limited, a coal miner. These acquisitions will increase PTT's financial leverage and its debt levels. Cove and the 40% investment in Canada's Kai Kos Dehseh Oil Sands project (KKD project; USD2.3bn) in 2010 will not result in meaningful cash contributions to PTT at least until 2016. PTT's upstream company, 67% held PTT Exploration and Production (PTTEP), intends to raise equity to improve its balance sheet. While this is positive for PTT, Fitch expects two-thirds of the new equity to be raised by PTTEP to be provided by PTT in line with its current ownership.

Fitch expects PTT to generate negative free cash flows at least till 2014 due to its large investment programme over this period. After accounting for higher debt and some improvements in funds flow from operations (FFO), Fitch expects PTT's financial leverage as measured by FFO-adjusted net leverage to be 2.0x-2.2x in the medium term. This is higher relative to PTT's average leverage of around 1.5x in 2010 and 2011, but in Fitch's view acceptable for its current standalone credit profile, particularly given the strength of PTT's gas businesses.

Under its parent-subsidiary methodology, Fitch rates PTT on a bottom-up basis, and would provide a single-notch uplift on its standalone profile to reflect implicit support from the state. However, as Thailand's 'A-' Long-Term Local-Currency IDR is currently at the same level as PTT's standalone Local-Currency IDR, the one notch uplift is irrelevant. PTT's Long-Term Foreign-Currency IDR of 'BBB' is constrained by that of Thailand's, given the state's majority ownership in the company (51% directly).

What could trigger a rating action?

Positive: Future developments that may, individually or collectively, lead to negative rating action include

-upgrade of Thailand's IDRs

Negative: Future developments that may, individually or collectively, lead to negative rating action include,

-adverse changes to regulations and to gas sales contracts and pipeline tariffs

-large debt funded investments

-a sustained deterioration in financial FFO adjusted net leverage over 2.25x

-downgrade of Thailand's IDRs

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