Opinion of the Independent Financial Advisor-Part 4

Part 4 The Independent Financial Advisor's Opinion Regarding the Fairness of Purchase Price BLCP Share Valuation The Independent Financial Advisor has used the following methodologies to determine the fair value of the BLCP shares as at November 1, 2006 to be purchased by EGCOMP. 1. Discounted Cash Flow (DCF) 2. Market Comparables 2.1 P/E Ratio Approach 2.2 P/BV Ratio Approach 2.3 EV/EBITDA Ratio Approach 2.4 Capacity Ratio Approach (EV/MW Ratio) Other methodologies that are commonly used for equity valuation exercises such as Adjusted Book Value Approach cannot be used to determine BLCP share value because BLCP asset base consists of project under construction that has yet to begin full commercial operations. Therefore, its book value reflects only construction costs and related expenses to date and does not represent its appropriate value as a going concern. Discounted Cash Flow Approach (DCF) Generally, discounted cash flow is the methodology used to calculate BLCP's theoretical value. It is the appropriate way to evaluate the share price of a company whose future profits and cash flows can be readily forecast. This method is more appropriate than others in that it takes into account the specific characteristics and related risks of that s pecific company that can considerably impact future business operation. Nevertheless, the estimated price accuracy depends largely on the precision and soundness of various assumptions used in the financial projection. DCF is the appropriate method for share valuation of Power Purchase Agreement (PPA) based electricity-generating companies in particular since such companies' financials can be forecasted with reasonable accuracy. Their revenues are mostly determined in the PPA capacity charges while capital investment is largely dictated by the EPC contracts and financing documents. DCF valuation can be conducted in a variety of ways. However, the most appropriate way is to apply the relevant discount rate to the project company's free cash flow to equity. The concept of free cash flow to equity can be shown in the diagram below. (Figure) To estimate BLCP's future free cash flow to equity (FCFE), the Independent Financial Advisor has developed a financial projection for the period from the Year 2006 until the expiration of the PPA in the Year 2032 that is based on investment, financial and operational assumptions deemed appropriate for the relevant market place. These assumptions include those stipulated in BLCP's business agreements received from EGCOMP e.g., Power Purchase Agreement (PPA), Coal Supply & Transportation Agreement (CSTA), and various loan agreements. Related economic, financial and industrial factors are taken into account as well. The key assumptions employed on the financial projection are summarized below. - Macroeconomic Variable Assumptions o Thai Inflation Rate (CPITHB) of 3.0% p.a. according to its historical average and policy target rate of the Bank of Thailand for the period between 2002 and 2012. o United States Inflation Rate (CPIUSD) of 2.6% p.a. according to its historical average value for the period between 1996 and 2005. o USD/THB foreign exchange rate at a constant value of Baht 38.0 to USD 1.0 from 2006 onwards. o MLR of 7.25% p.a. in 2006, 8.5% p.a. in 2007, and 9.0% p.a. from 2008 onwards. The increasing trend was estimated according to the current domestic rate trend. o 6-month USD LIBOR at 5.25% p.a. in 2006, 6.0% p.a. in 2007-2008, and 4.71% from 2009 onwards (its 10-year historical average value). - Revenue Assumptions The Independent Financial Advisor has estimated BLCP's revenues using information set out in its Power Purchase Agreement (PPA). They can be summarized as follows. 1. Availability Payment (AP) The Availability Payments are payments that EGAT makes to power producers for maintaining their readiness to produce and deliver power to EGAT's grid regardless of whether EGAT orders them to do so or not. This type of payment is designed to cover a plant's estimated fixed operating and maintenance costs, financing costs (both lenders and shareholders) as well as other relevant fixed costs. EGAT pays such Availability Payments according to the plant's declared capacity and capability to produce power on demand at any time subject to scheduled maintenance requirements. These Availability Payments stipulated in the Power Purchase Agreement (PPA) for each year of its term. The estimated fixed costs for a power plant used to calculate the Availability Payment Rate normally include: - Debt service obligation (interest payments, principal redemption, and finaning fees) - Return on equity capital - Maintenance costs (including spare parts) - Fixed operating, and administration costs - Insurance costs - Income taxes - etc. Certain portions of the Availability Payment will be adjusted periodically to take into account changes in US inflation rate, Thai inflation rate and USD/THB foreign exchange rate to reflect changes in operating, maintenance costs and debt service obligations resulting from fluctuations in these macroeconomic variables. 2. Energy Payment (EP) This type of payment is calculated to cover all variable costs resulting from operation to produce and distribute power to EGAT each month. It primarily includes fuel costs and variable operating and maintenance costs which are passed through to EGAT. This payment reflects all variable costs incurred from power production at the plant. 2.1 Fuel Costs EGAT pays fuel costs calculated from actual dispatch level in terms of hours, the system's fuel allowance and fuel rate determined in the Coal Supply & Transportation Agreement which is the CIF inclusive of freight charges and insurance costs. The fuel rate will be adjusted according to the US rate of inflation and USD/THB foreign exchange rate to reflect the true fuel costs which are denominated in USD for imported coal. 2.2 Variable Operation & Maintenance Payment (VOM) Variable Operation & Maintenance Payment is determined to cover all variable costs other than fuel costs. This type of payment will be adjusted according to the Thai CPI each year to reflect true VOM costs denominated in THB that vary from the base year. 3. Added Facility Charge (AFC) As BLCP is the party who funded and constructed the new transmission facility (NTF) from its plant to EGAT's transmission system, it will be compensated for such expenses each year over a fixed term as set forth in the PPA. - Assumptions regarding additional net revenue during the Pre-COD period EGCOMP has confirmed that BLCP would obtain additional net revenue after deduction of marginal costs related to generation and sale of electricity to EGAT during the pre-COD period. The estimated amount of this revenue is Baht 490 million. Term of payment is in accordance with the PPA entered into between BLCP and EGAT. EGAT would make a payment to BLCP for sale of electricity every month. Although both units of the BLCP Power Plant Project are expected to be capable of generating and distributing electricity prior to their respective Scheduled Commercial Operation Dates (SCODs), there would be no change in the maintenance costs or schedule related as a result. - Expense Assumptions The operating expense consists mainly of fuel cost and operating and maintenance expenses - Fuel Cost is dependent upon the contractual CIF coal rate (including freight and insurance charges), actual energy produced in MWh and production efficiency measured using the plant's heat rate. As mentioned above, this fuel cost is entirely passed through to EGAT in the form of the Energy Payment. Therefore, coal price volatility will not significantly impact BLCP's financial performance. - Operating and maintenance expenses, both fixed and variable, consist of non-fuel operating expenses, maintenance expenses, utility costs (water & electricity), land lease payments (as stipulated in the lease agreement), land taxes, property taxes, insurance premia, salaries and benefits as well as other general and administrative expenses according to BLCP's operating budget. To estimate this type of expense, the Independent Financial Advisor has followed the operating budget prepared by BLCP together with the lender engineer's estimates as of the loan closing date of August 14, 2003 adjusted by the revised budget prepared by the project advisor to reflect the changes in all relevant external and internal factors. - Depreciaiton and amortization expense: Straight line method for the whole PPA term of 25 years. - Interest expense was estimated by outstanding loan amount during each period and interest rates as set forth in the loan agreement together with MLR and LIBOR estimates as discussed above. - Income taxes: BLCP will not have to pay income tax during the first 8 years of operation as a result of its BOI privileges. After that, it has to pay at the rate of 15% p/a during Year 9-13 and 30% p/a from Year 14 onwards. - Investment Assumptions The Independent Financial Advisor has used the estimated project investment costs as specified in the EPC Contract together with information received from BLCP and EGCOMP management, certain parts of which were approved by the project lenders before the loan closing date. This investement cost has been adjusted by changes in USD/THB foreign exchange rate to reflect current economic and financial conditions. This estimated project cost consists mainly of Engineering & Procurement costs, New Tranmission Facility (NTF) costs, land and site development costs, pre-operating costs, financing charges, and contingencies. - Financing Assumptions BLCP is financed through project loans from both domestic and international financial institutions and shareholder's equity. The project loan facilities are summarized below. Loans from financial institutions BLCP entered into loan agreements with several domestic and international financial institutions with the total loan amount of approximately Baht 47.0 Billion (THB equivalent using USD/THB rates as at the actual drawdown years). On July 27, 2006, BLCP and certain lenders have agreed to revise down interest rates to reflect improvements in the country's economic conditions as well as reduced project completion risks. The Independent Financial Advisor has used all information set forth in the loan agreements following the approved loan term revisions. They can be summarized as follows: - USD denominated loans with redemption schedule from August 2007 to February 2019. Most have floating interest rates indexed with 6-month USD LIBOR. BLCP has managed this interest rate risk by entering into interest rate swap agreements to convert its dollar-denominated floating rate loans into fixed-rate ones for the entire lives of the loans. - THB denominated loans with redemption schedule from August 2007 to February 2019. All have floating interest rates based on the Thai Bank Minimum Lending Rate (MLR). Shareholder's Equity As of September 15, 2006, BLCP had total paid-up capital of Baht 1.484 Billion. BLCP shareholders are obliged to further increase capital under the terms of the loan and shareholders agreement in order to complete the construction and commissioning of the Project. The first such capital increase took place in November 2006 in the amount of Baht 4.0 billion, and EGCOMP made an advance payment amounting Baht 2.0 billion to CLP-BLCP for subscription of such newly issued BLCP shares, the amount of which conforming to the equity stake of 50 % in BLCP to be held by EGCOMP. In addition, a further capital injection in BLCP will be called within 2007 pursuant to BLCP's shareholder and credit facility agreements. The portion of the 2007 capital call that EGCOMP would be responsible for as a 50 % shareholder will be approximately $93.4 million (or roughly Baht 3.7 billion). This amount includes the remaining payment of the unpaid portion of the 50 million partly paid shares at Baht 60 a share. - Discount Rate Assumptions The cost of equity to be used to discount all forecast free cash flows to equity can be estimated using the Capital Asset Pricing Model (CAPM) as shown below. (Formula) In addition, to estimate the cost of equity of non-listed companies, one would have to adjust the calculated cost of equity using CAPM with the liquidity premium which is normally in the range of 1-2% (Source: The Liquidity Premium in a Dynamic Model with Price Impact as co-authored by Joao Pedro Pereira & Harold H.Zhang of Kenan-Flagler Business School University of North Carolina http://public.kenan-flagler.unc.edu/faculty/zhangha/ PereiraZhang.pdf#search='Liquidity%20Premium) to reflect the additional return from investment required by investors to invest in securities that have lower liquidity. Therefore, after adjusting Ke with liquidity premium of 1%, BLCP's cost of equity for use in the DCF model can be estimated to be in the range of 14%. Nevertheless, since the calculated fair price heavily relies on several key assumptions regarding revenues, expenses, and growth rates, sensitivity analysis has to be applied to this figure as well. In this regard, the Independent Financial Advisor has analyzed the valuation sensitivity to the following factors. - Foreign Exchange Rate (USD/THB) (Use the THB/$ exchange rate between Baht 36-40/$) - Thai Inflation Rate (CPITHB) (Use inflation rate between 2%-4%) - US Inflation Rate (CPIUSD) (Use inflation rate between 1.5 %-3.5%) - MLR (Use MLR between 7%-11% a year) - Net Contracted Available Hours (Net CAH) (Use the rate at 95%-100 % of Net CAH as specified in the PPA) - Operating and Maintenance Expenses (O&M) (O&M has a +/- 10% change from the budget in each year) - Cost of Equity (Use the rate between 12%-16 % a year) It is found that factors to which the BLCP share price is most sensitive include Net CAH and Cost of Equity. Taking into account the possible ranges for these factors (Use cost of equity = 13%-15% a year and Net CAH = 95%-100 % of Net CAH as specified in the PPA), the appropriate equity value for the 50% interest in BLCP common shares that EGCOMP will purchase lies in the range of Baht 6.301 - 8.618 Billion. Market Comparables Approach Based on the premise that financial ratios of similar companies should converge to the same level, this valuation approach is based on the availability of comparable companies in the stock market that have similar operation and characteristics to those of the company being valued. This easy-to-understand method is generally used to value stocks. However, it has several limitations which lead to wide deviations in resulting values including the lack of availability of directly comparable companies, different accounting policies used by comparable companies, and unique characteristics of each company that can affect its valuation. For this BLCP valuation, a number of electricity generating companies that have similar businesses to that of BLCP including EGCOMP, RATCH, and GLOW have been used. Various financial ratios have been used as indicated below. 1. P/E Ratio The following table shows P/E ratios of comparable companies as of September 11, 2006 (Source: Bloomberg) Stock P/E Ratio EGCOMP 7.40 RATCH 9.03 GLOW 8.33 Average 8.25 According to the COD schedule, BLCP will only start to generate its full operating income from both units for a full year starting in 2008. However, the Availability Payments received from EGAT as stipulated in its PPA are not constant. The Availability Payments received from EGAT are very high during the first phase of the operation consistent with the period the project company needs to shoulder the highest interest and principal repayment burdens. Later in the term, the Availability Payments significantly decline, particularly after all debt has been repaid. This earnings profile makes BLCP quite different from comparable energy companies with a flatter, steadier earnings profile. Therefore, if the 2008 net profit, which is significantly higher than the average net profit during the entire project, is used as the basis for this comparables calculation, the resulting fair value will be largely overestimated and misleading. Therefore, this approach is deemed inappropriate for assessing the fair value of BLCP equity. 2. P/BV Ratio The following table shows P/BV ratios of comparable companies as of September 11, 2006 (Source: Bloomberg) Stock P/BV Ratio EGCOMP 1.18 RATCH 1.45 GLOW 1.71 Average 1.45 The Independent Financial Advisor has used BLCP's estimated book value at the end of 2007 (present value basis) as the calculation base for this valuation method as BLCP will not be expected to fully complete its capital increase until that year. At that point, a P/BV calculation yields the full equity value of BLCP. However, as BLCP has to further increase its capital from all shareholders after this transaction, the equity injection required from EGCOMP in 2007 has to be deducted from the calculated full equity value. Purchased Equity Value = (BLCP's Book Value as at end 2007) x (P/BV) - Additional required capital from EGCO (1 + Cost of Equity)1.17 The above methodology and comparable companies' ratios yield the equity value with the 50% proportion (the percentage of equity stake in BLCP to be held by EGCOMP) on the full equity value basis (after BLCP's capital is fully paid up to Baht 12.8844 billion) and the fair value of the portion intended to purchase (the full equity value deducted by capital call of roughly Baht 7.4 billion) as shown in the ranges below. Full Equity Value (after all capital increase) Minimum: Baht 10.450 Billion Average: Baht 12.814 Billion Maximum: Baht 15.143 Billion Fair Value of the portion intended to purchase Minimum: Baht 6.806 Billion Average: Baht 9.170 Billion Maximum: Baht 11.500 Billion Note: Minimum value is determined based on the lowest comparable companies'P/BVs. Average value is determined based on the average of comparable companies'P/BVs. Maximum value is determined based on the highest comparable companies'P/BVs. Nevertheless, as mentioned above, P/BV approach is a simple approach used in equity valuation taking into account only invested capital and historical performance. By no means does it cover the revenue structure and future income generating opportunities of BLCP. Therefore, the calculated values from this approach are not appropriate to be used to assess the fairness of BLCP equity price. 3. EV/EBITDA Ratio EV/EBITDA is another popular ratio for company valuation. EV = Enterprise Value = Market value of equity + Market value of interest - bearing debts The following table shows EV/EBITDA ratios of comparable companies as of September 11, 2006 (Source: Bloomberg) Stock EV/EBITDA Ratio EGCOMP 5.75 RATCH 8.00 GLOW 6.91 Average 6.89 According to the COD schedule, BLCP will only start to generate its full operating income from both units for a full year starting in 2008. However, the Availability Payments received from EGAT as stipulated in its PPA are not constant as noted above. This makes its EBITDA profile entirely different from those of comparable companies, which have commenced their operations for a period of time and have a reasonably steady EBITDA profile. Therefore, if 2008 EBITDA, which is significantly higher than the average EBITDA during the entire project, is used as the calculation base, the resulting fair value will be largely overestimated. The Independent Financial Advisor has adjusted this approach by using average value of the resulting fair equity value for the entire life of the project. 'To calculate equity value as of Year i, Equity Valuei = (EV/EBITDA) x (EBITDAi) - (Debt Valuei) In addition, as mentioned in the P/BV approach, since EGCOMP will be required to post additional capital calls after the transaction, these amounts have to be deducted from the calculated full equity value. The calculated full equity value (50% proportion) and fair value of the portion EGCOMP intends to purchase is shown in the ranges below. Full Equity Value (after all capital increase) Minimum: Baht 9.213 Billion Average: Baht 12.937 Billion Maximum: Baht 16.662 Billion Fair Value of the portion intended to purchase Minimum: Baht 5.569 Billion Average: Baht 9.293 Billion Maximum: Baht 13.018 Billion Note: Minimum value is determined based on the lowest comparable companies'EV/EBITDAs. Average value is determined based on the average of comparable companies'EV/EBITDAs. Maximum value is determined based on the highest comparable companies'EV/EBITDAs. Nevertheless, as mentioned above, as EV/EBITDA approach has several limitations and does not take into account the unique characteristics, revenue structure and future operating performance of BLCP. As such, the resulting values are not the most appropriate to be used to assess the fairness of BLCP equity price. 4. Capacity Ratio (EV/MW Ratio) The capacity (EV/MW) approach is another methodology that is commonly used to value equity of electricity generating companies. The following table shows EV/MW ratios of the comparable companies as at September 11, 2006 [Source: SET & comparable company website] Stock EV/MW Ratio EGCOMP 20.22 RATCH 18.35 GLOW 39.48 Average 26.02 (more)