Management Discussion and Analysis for the 9-month 2006

Management Discussion and Analysis For the Nine-month Period Operating Results Ended September 30, 2006 Note: This Management Discussion and Analysis (MD&A) was made to disclose information and the vision of the management in order to assist investors to better understand the company's financial status and operation. It also supports the "Good Corporate Governance Project" of the Securities and Exchange Commission (SEC). The objective of this MD&A is to present the information and the explanation of financial status and operating results as of the date hereof. The information provided in this MD&A may change if the aforementioned factors or situation are changed in the future; the investors are, therefore, required to have their own discretion regarding the usage of this information for any purpose. For further detail, please contact Investor Relations Section of the Electricity Generating Public Company Limited at Tel: 662-998-5131-3 or Email: ir@egco.com Management Discussion and Analysis 1. Executive Summary The Electricity Generating Public Company Limited (EGCO) is an Independent Power Producer (IPP) with 11 operating plants totaling 2,405 equity MW. For the first nine-month operating results ended September 30, 2006, EGCO's consolidated net profit was Baht 5,054 million, an increase of Baht 1,831 million or 57% compared to the same period of 2005. Excluding the impact of foreign exchange, the net profit was Baht 4,452 million, representing an increase of Baht 921 million or 26% as compared to the same period of last year. The details of net profit (before FX) are as follows: - EGCO's net profit of Baht 24 million, representing a decrease of Baht 15 million, resulted from higher adminstrative expenses. - IPP Group, consisting of Rayong Electricity Generating Co., Ltd (REGCO) and Khanom Electricity Generating Co., Ltd (KEGCO), showed a net profit for both companies of Baht 3,988 million, up Baht 742 million from higher sales of electricity. - Small Power Producer (SPP) Group, which is comprised of five companies including Gulf Electric Public Company Limited (GEC), Amata-EGCO Power Ltd. (AEP), Amata Power (Bang Pakong) Ltd. (APBP), TLP Cogeneration Co., Ltd. (TLP Cogen) and Roi-Et Green Co., Ltd. (Roi-Et Green), reported a net profit of Baht 162 million, a decrease of Baht 122 million which resulted primarily from an increase in GEC's cost of sales, administrative expenses and interest expenses. - Overseas Group refers to the Conal Holdings Corporation (Conal) and Nam Theun 2 Power Co., Ltd. (NTPC). The net profit from this group was Baht 86 million, up by Baht 287 million mainly resulting from NTPC's recording of expenses of Baht 22 million for the first nine months of 2006 whilst it reported expenses of Baht 346 million for the same period of 2005, mostly from development expenses of Baht 280 million. - Other Business Group includes two subsidiaries, EGCO Engineering & Service Co., Ltd. (ESCO) and Egcom Tara Co., Ltd. (ET) from which net profit totaled Baht 192 million, an increase of Baht 29 million due mostly to higher service income from ESCO. 2. Business Expansion Analysis EGCO is the first Independent Power Producer (IPP) in Thailand which was established in 1992. EGCO is structured as a holding company with a number of subsidiaries. Our vision is "To be the leading Thai integrated electric power company with comprehensive energy services in Thailand and in the ASEAN region, with full commitment to environment protection and social development support". Our major business is to produce electricity and supply it to Electricity Authority of Thailand (EGAT) under long-term power purchase agreement (PPA). EGCO focuses its investment on pursuing opportunities in power generation in Thailand and also seeks to expand its business in ASEAN countries by acquisitions with the aim to provide strong returns to shareholders by improving the profitability of our existing assets and acquiring new projects with acceptable returns and risks. As at the end of September 2006, Thailand's total generating capacity was reported at 26,394 MW /1, of which 9.1% was attributable to EGCO. During the year 2006, the peak demand reached 21,064 MW /1 in May, which was 2.56% higher than the peak demand in April 2005. /1 Source: EGAT Following the coup d'etat on September 19, 2006 and the establishment of a new government, the new Energy Minister, Dr. Piyasvasti Amaranand, favours more competition in IPP Biddings, including the participation of EGAT subsidiaries, in order to create the maximum benefit for consumers. This is a positive development for EGCO and we have developed strategies to utilize our expertise within the group to participate in the new Bidding program. We understand that, following the resignation of the members of the Electricity Regulatory Board in October, the Ministry of Energy is developing a new regulatory framework to monitor the IPP bidding program that is scheduled for 2007. Currently, EGCO has 11 operating plants totaling 2,405 equity MW, of which 86% is produced from two natural gas-fired IPP power plants: a 1,232 MW REGCO plant and a 824 MW KEGCO plant. In addition to our existing assets, we are developing 4 power plant projects, representing an additional 1,021 equity MW as follows: 1. The Kaeng Khoi 2 (KK2) project, a 1,468 MW natural gas-fired power plant in Saraburi Province. EGCO has a 50% stake in this project by holding 50% of shares in GEC, which owns 99.99% of Gulf Power Generation Co.,Ltd. (GPG), the KK2 project company. The commercial operation dates (COD) for unit 1 and unit 2 with the capacity of 734 megawatts each are scheduled on March 1, 2007 and March 1, 2008, respectively. Currently, the overall progress for this project is 90%. 2. The Nam Theun 2 project, a 1,070 MW hydroelectric power plant in the Lao PDR, in which EGCO has a 25% stake in the project company, NTPC. This project is targeted for COD by 16 December 2009 with the contracted capacity to EGAT of 995 MW. The balance will be sold to the Government of Laos. Up until the third quarter of 2006, the overall project progress is 27%. 3. The Gulf Yala Green Project, is a 23 MW parawood-fuel biomass power plant in Yala Province, in which EGCO holds a stake of 49% through its ownership of GEC. Due to the public security situation in the three southernmost provinces of Thailand in the past two years, the construction of this project has been delayed. The project has received an approval from EGAT to postpone the COD from April 2006 to October 2006. Currently, the project has postponed COD to the last week of November 2006. The overall project progress up until this quarter is 99%. 4. The Amata Power Bang Pakong Expansion (APBP-Expansion Project) is a 55 MW combined cycle gas turbine power plant supplying industrial users in Amata Nakorn Industrial Park. EGCO has 15% stake in this project by holding 50% of shares in EGCO Joint Ventures and Development, Co.Ltd, which owns 30% of APBP. This project has started construction since June 2005 and the COD is scheduled in February 2007. Presently, the overall project progress is 81% Apart from the above-mentioned projects, EGCO signed a Share Purchase Agreement to acquire a 50% stake in BLCP, a 1,434-Megawatt coal fired power plant situated in Map Ta Phut Industrial Estate in Rayong using imported high quality coal from Australia, from CLP Power (BLCP) Ltd., a subsidiary of CLP Holdings Limited, for the price of Baht 6,645 million which covers the Baht 2,000 million advance payment made by EGCO to CLP Power (BLCP) Ltd. for the equity injection into BLCP on 6 November 2006. In accordance with the Share Purchase Agreement, the transaction of acquiring BLCP ordinary shares will take place after all conditions precedent are fulfiled. Details of such conditions precedent are summarized as follows: - The passing at a board of director's meeting and a shareholders' meeting of EGCOMP of a resolution approving the acquisition of the BLCP shares from the CLP Group in compliance with relevant SET's notification; - Obtaining consent for the acquisition transaction from relevant government authorities such as EGAT in accordance with the PPA; - Obtaining consent for the acquistion transaction from BLCP's creditors, from BLCP's shareholders other than the CLP Group and from any person that is party to an agreement in relation to the business of power generation to which BLCP is a party. In the absence of unforeseen circumstances, the company has a policy to dividend approximately 40% of the net profit after taxation, or to increase the dividend amount in a steady manner, to the shareholders. This dividend policy may change in the light of investment opportunities that may become available to the company or as a result of other economic or financial factors or when a dividend payment may have a significant impact on the normal operation of the company. 3. Report and Analysis of the Operating Results EGCO is structured as a holding company and it invests primarily in electricity generation and energy service businesses. The main sources of its income are dividends from investments in its subsidiaries, joint ventures, and associates. The objective of the holding company structure is to provide flexibility for business expansion and to facilitate financing of new projects without recourse to existing ones. During the third quarter of 2005, NTPC has commenced the construction of the power plant in the Lao PDR and EGCO has entered into the agreement to provide credit support in the form of Standby Letters of Credit (SBLC) for its agreed equity commitments to NTPC of USD 94 million. Accordingly, investment in NTPC has been accounted for under the proportionate consolidation method in the consolidated financial statements since the third quarter of 2005 because its financial statements were material to EGCO Group. This report contains the analysis of the financial statements of EGCO and its subsidiaries as follows: 3.1 Operational Results EGCO's consolidated net profit for the first nine months of 2006, as of September 30, 2006, was Baht 5,054 million, an increase of Baht 1,831 million or 57% compared to the same period of the year 2005. Unit : Million Baht Net Profit of 9M2006 Net Profit of 9M2005 Before FX After FX Before FX After FX EGCO 24 24 39 92 IPP Group 3,988 4,482 3,246 3,012 SPP Group 162 354 283 153 Overseas 86 4 (201) (196) Others 192 192 164 164 Remarks: - IPP : REGCO, KEGCO - SPP : GEC, AEP, APBP, TLP Cogen, Roi-Et Green - Overseas : Conal, NTPC - Others : ESCO, ET The net profit for the first nine months of 2006 included foreign exchange gain of Baht 603 million whereas the Company incurred a foreign exchange loss of Baht 307 million for the first nine months of 2005. An unrealized foreign currency exchange gain in the amount of Baht 279 million is an accounting number in accordance with the Thai accounting standard. It incurs from the difference of the translation of the net debt denominated in foreign currency to the Thai Baht equivalent amount using the foreign exchange rate at the end of this accounting period (September 30, 2006) and the previous period (December 31, 2005). Excluding the effect of foreign currency exchange gain, the profit was Baht 4,452 million, representing an increase of Baht 921 million or 26% as compared to the same period of 2005. For the first nine months of 2006, excluding the effect of foreign currency exchange gain of Baht 603 million, interest expenses of Baht 1,268 million, income tax of Baht 947 million and depreciation and amortization of Baht 2,079 million, the earnings before interest, tax, depreciation and amortization (EBITDA) would be Baht 8,746 million, representing an increase of Baht 1,107 million or 14% as compared to the same period of 2005, in which the EBITDA was Baht 7,639 million, excluding the effect of foreign currency exchange loss of Baht 307 million, interest expenses of Baht 1,404 million, income tax amounting to Baht 405 million and depreciation and amortization amounting to Baht 2,300 million. Important Financial Ratios for the period were as follows; - Gross Profit Ratio was 52.36% - Net Profit Ratio (excluding the effect of foreign exchange) was 30.52% - Earnings (excluding the effect of foreign exchange) per share (EPS) was Baht 8.46 The gross profit margin of 52.36% was slightly higher than the same period of last year's margin of 50.63%. The net profit ratio (excluding the effect of foreign exchange) was reported at 30.52%, higher than the ratio in the same period of 2005 at 27.87% mainly due to an increase of REGCO and KEGCO's net profit as well as a decrease of NTPC's expenses. 3.2 Income and Expenses Analysis The total revenues of EGCO and its subsidiaries for the first nine months of 2006 as well as the share of profits from its associates and interest in joint ventures were Baht 14,585 million, an increase of Baht 1,918 million or 15% compared to the same period of 2005.And total expenses from EGCO, its subsidiaries and joint ventures in the first nine months of 2006 were Baht 9,864 million, an increase of Baht 938 million or 11% from the same period of last year. The details according to their groups of business are as follows: Total Revenues and Expenses: Unit : Million Baht EGCO IPP SPP 9M'06 9M'05 9M'06 9M'05 9M'06 9M'05 Total Revenues 344 331 8,569 7,284 4,426 3,854 Total Expenses 320 292 4,581 4,038 4,160 3,523 Overseas Others Total 9M'06 9M'05 9M'06 9M'05 9M'06 9M'05 Total Revenues 559 635 686 564 14,585 12,667 Total Expenses 338 697 465 376 9,864 8,926 1) EGCO's revenues, amounting to Baht 344 million, were comprised of dividend income from financial investment of Baht 167 million, interest income of Baht 128 million and other income of Baht 49 million. This showed an increase of Baht 13 million or 4% as comparing to the same period of last year, mainly from higher interest income amounting to Baht 52 million, or 69%, thanks to higher interest rates and higher other income of Baht 26 million. This was partially offset with a decrease of dividend income of Baht 65 million, or 28% as compared to the same period of 2005. The other income was up by Baht 26 million due to NTPC's net reimbursement of internal development cost according to Shareholders' Agreement amounting to Baht 36 million in the first nine months of 2006. EGCO's dividend income is essentially from Krung Thai Dividend Selected Flexible Portfolio Fund (KTSF) in the amount of Baht 130 million representing an increase of Baht 6 million as compared to the same period of 2005; dividends from Eastern Water Resources Development and Management Public Company Limited (EASTW) of Baht 31 million, down by Baht 61 million. Total expenses of EGCO, which were administrative expenses, totaled Baht 320 million, an increase from the same period of last year by Baht 29 million or 10% due to financing fees on the SBLCs for the equity commitments to NTPC and the release of cash from the Debt Service Reserve Accounts (DSRA) of REGCO and KEGCO as well as the company's contribution for the 60th Anniversary Celebrations of His Majesty's Accession to the Throne. 2) IPP Group consisting of two principal subsidiaries, REGCO and KEGCO, represented Baht 8,569 million in the total revenues, up by Baht 1,285 million or 18% as compared to the same period of 2005 whilst the total expenses were Baht 4,581 million, up by Baht 543 million or 13%. The details are as follows: Total Revenues and Expenses of IPP Group: Unit: Million Baht REGCO KEGCO Total 9M'06 9M'05 9M'06 9M'05 9M'06 9M'05 %Chg Revenues 4,264 3,803 4,305 3,481 8,569 7,284 18% Expenses 2,322 2,233 2,259 1,805 4,581 4,038 13% - Sales of electricity of IPP Group were Baht 8,250 million, representing an increase of Baht 1,077 million or 15% compared to the same period of last year. The increase was a result of a growth in REGCO's electricity sales of Baht 299 million to be Baht 4,063 million and KEGCO's electricity sales of Baht 778 million to be Baht 4,188 million. These increases were caused by an increase in the Capacity Rate for REGCO and the Base Availability Credit for KEGCO which was in accordance with the capacity payment formula calculated on a "Cost Plus Basis" under the PPAs and in line with the company's projection. Sales of Electricity - IPP Group: Unit : Million Baht 9M2006 9M2005 %Changes REGCO 4,063 3,763 8% KEGCO 4,188 3,410 23% Total Sales of Electricity - IPP 8,250 7,173 15% The PPAs cover the full amount of the projected fixed costs, debt financing charges and major maintenance charges, which are used in calculating the electricity tariffs for each period. Moreover, the calculation of the capacity payment is adjusted to include compensation for the exchange rate effect from debt services and expenses of major maintenance parts denominated in US Dollar. REGCO and KEGCO receive the compensation monthly for each billing period. They receive higher capacity charge than that stated in the original PPAs before the inclusion of foreign exchange indexation if the exchange rate is above Baht 28 per US Dollar and vice versa. In the first nine months of 2006, REGCO and KEGCO received compensation for the exchange rate effect of Baht 652 million. - Interest income and others amounted to Baht 318 million, an increase of Baht 208 million or 188%, mainly from REGCO's increased interest income in the amount of Baht 158 million. It resulted from higher amount of deposits at banks and financial institutions due to EGCO's equity injection in REGCO, together with higher interest rates. Moreover, KEGCO's interest income increased by Baht 45 million resulting from an increase in interest rates. REGCO and KEGCO's other revenues increased by Baht 5 million. - Cost of sales, with the total of Baht 2,546 million, an increase of Baht 97 million or 4% compared to the same period of 2005, mainly because KEGCO's cost of sales increased by Baht 199 million or 20% from major maintenance expenses as planned; whilst REGCO's cost of sales decreased by Baht 102 million or 7% as compared to the same period of last year when the replacement of the impaired steam turbine rotor took place. Cost of Sales - IPP Group: Unit :Million Baht 9M2006 9M2005 %Changes REGCO 1,345 1,447 (7%) KEGCO 1,201 1,002 20% Total Cost of Sales - IPP Group: 2,546 2,449 4% - Administrative expenses and income taxes were Baht 1,169 million, an increase of Baht 689 million or 144%, mainly from KEGCO's first corporate tax payment amounting to Baht 411 million. Although KEGCO's BOI Tax Privilege for 8 years ended on September 25, 2004, the loss carried forward was utilized up until the end of 2005. Thereafter the 50% corporate tax reduction privilege is applied. This 5-year tax reduction privilege will end on September 25, 2009. In addition, REGCO's corporate tax payment increased by Baht 100 million resulting from its increased revenues. The REGCO's 50% Corporate Tax Reduction is ending on April 19, 2008. - Interest expenses were Baht 866 million, a decrease of Baht 243 million or 22%, resulting from the decrease in interest expenses at REGCO and KEGCO of Baht 118 million and Baht 125 million, respectively, owing to lower principal amounts of loans and debentures. 3) SPP Group's total revenues were reported at Baht 4,426 million for the first nine months of 2006, an increase of Baht 572 million or 15% compared to the same period of 2005. The SPP Group incorporates five companies, GEC, AEP, APBP, TLP Cogen and Roi-Et Green. The expenses were Baht 4,160 million, an increase from the same period of last year by Baht 637 million or 18%. The details are as follows: Total Revenues and Expenses of SPP Group: Million Baht GEC TLP Cogen APBP 9M'06 9M'05 9M'06 9M'05 9M'06 9M'05 Revenues 2,394 2,201 1,494 1,274 339 237 Expenses 2,607 2,164 1,232 1,049 223 214 Roi-Et Green Total 9M'06 9M'05 9M'06 9M'05 % Chg Revenues 199 142 4,426 3,854 15% Expenses 96 96 4,160 3,523 18% - Sales of electricity of the SPP Group were Baht 4,287 million, representing an increase of Baht 514 million or 14% compared to the same period of last year. Most of the increase of SPP group's electricity sales was from TLP Cogen, GEC, APBP and Roi-Et Green in the amount of Baht 210 million, Baht 182 million, Baht 64 million and Baht 58 million, respectively. The TLP Cogen's increased electricity sales was a result of higher tariff and units of sales to EGAT and industrial users and an increase of GEC's electricity sales was due to peak-load demand calls from EGAT. The APBP's (more)