Management Discussion and Analysis 2006

Management Discussion and Analysis For the Annual Operating Results Ended December 31,2006 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 13 operating plants totaling 3,133.6 equity MW after the completion of share payment and share transfer for the acquisition of a 50% stake in BLCP, 1,434 MW coal-fired power plant, from CLP Power (BLCP) Ltd. on January 30, 2007. EGCO Group's consolidated net profit for 2006, ended December 31, 2006, was Baht 6,036 million, an increase of Baht 1,943 million or 48% compared to 2005. Excluding the impact of foreign exchange, the net profit was Baht 5,270 million, representing an increase of Baht 892 million or 20% as compared to the previous year.The details of net profit (before FX) are as follows: - EGCO's net loss of Baht 165 million, representing a decrease in net profit of Baht 169 million, resulted from a fall in income by Baht 85 million, mostly from lower dividend income and other income, plus higher administrative expenses of Baht 84 million mostly from historical development cost of Nam Theun 1. - 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 4,928 million, up Baht 720 million thanks to 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 126 million, a decrease of Baht 173 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 119 million, up by Baht 423 million mainly resulting from NTPC's recording of net loss of Baht 29 million in 2006 whilst it reported net loss of Baht 455 million in 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 262 million, an increase of Baht 91 million due mostly to higher service income from ESCO. 2) Business Expansion Analysis EGCO was the first IPP in Thailand established in 1992. EGCO is structured as a holding company with a number of subsidiaries. The company's vision is to be the leading Thai integrated electric power company with comprehensive energy services in Thailand and in the ASEAN region, and full commitment to environmental protection and social development. Our major business is to produce electricity and supply it to Electricity Generating Authority of Thailand (EGAT) under long-term power purchase agreements (PPA). EGCO focuses its investment on pursuing opportunities in power generation in Thailand and also seeks to expand its business in ASEAN countries with the aim to provide strong returns to shareholders by improving the profitability of our existing assets and acquiring new projects with acceptable risk and return profiles. As at the end of December 2006, Thailand's total generating capacity was reported at 27,107 MW /1, of which 10.24% 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. Due to the economic slowdown, higher electricity tariff and the government's successful energy-saving measures, the actual electricity demand becomes lower than the forecast that Thailand Load Forecast Subcommittee announced in 2004. Therefore, the Power Development Plan for 2007-2021 is in the process of revision. /1 Source: EGAT The next round of IPP Bidding is scheduled to be launched in 2007. EGCO has already undertaken extensive preparation works in anticipation of this opportunity. From February 1, 2007, EGCO has 13 operating plants with capacity totaling 3,133.6 equity MW, of which 66% is comprised of two natural gas-fired IPPs which are the 1,232 MW REGCO plant and the 824 MW KEGCO plant. Moreover, on January 30, 2007, EGCO completed the acquisition of 50% of the BLCP Power facility, a 1,434 MW coal-fired power plant situated in Map Ta Phut Industrial Estate in Rayong Province. The BLCP facility uses high quality imported coal from Australia. The shares in BLCP were acquired from CLP Power (BLCP) Ltd., a subsidiary of CLP Holdings Limited. As a result, EGCO has acquired 717 equity MW representing 23% of the company's total equity MW portfolio. The first unit achieved commercial operation on October 1, 2006 and the second unit on February 1, 2007. In addition to the operating assets, EGCO is a partner in three additional power plant projects that are under development. These projects represent an additional 1,010 equity MW. Each is summarized briefly below: 1. The Kaeng Khoi 2 (KK2) project, a 1,468 MW natural gas-fired power plant located 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 units 1 and 2, each with the capacity of 734 MW, are scheduled to occur in March 2007 and March 2008, respectively. Currently, the overall progress for this project is 93%. 2. The Nam Theun 2 project is a 1,070 MW hydroelectric power plant situated in the Lao PDR. EGCO holds a 25% ownership stake in the project company, NTPC. This project's COD is targeted for December 2009 with EGAT contracted to take off 995 MW and the balance to be sold to the Lao PDR. At the end of the year 2006, the overall project progress was 39% complete. 3. The Amata Power Bang Pakong Expansion (APBP-Expansion Project), a 55 MW combined cycle gas turbine power plant supplying industrial users in Amata Nakorn Industrial Park. EGCO has a 15% stake in this project by holding 50% of shares in EGCO Joint Ventures and Development Co.,Ltd. (EGCO JD), which owns 30% of APBP. EGCO's partner in EGCO JD is Chevron Bang Pakong Power Holding Ltd., which is a subsidiary of Chevron Corporation of the USA. This project has been in construction since June 2005 and the COD is scheduled for the 1st quarter of 2007. Presently, the project is 96% complete. 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 Group's consolidated net profit for 2006 ending December 31,2006 was Baht 6,036 million, an increase of Baht 1,943 million or 48% compared to 2005. The gross profit was reported at Baht 9,060 million, up Baht 1,189 million or 15% as compared to 2005 as a result of higher electricity sales of REGCO and KEGCO.The operating profit was reported at Baht 9,158 million, an increase of Baht 2,494 million or 37% as compared to 2005. This was thanks to higher electricity sales, gain on foreign exchange rates following the Baht appreciation and higher interest income that resulted from higher interest rates. Unit : Million Baht Net Profit of 2006 Net Profit of 2005 Before FX After FX Before FX After FX EGCO (165) (165) 4 57 IPP Group 4,928 5,480 4,208 3,973 SPP Group 126 563 299 199 Overseas 119 (107) (304) (304) Others 262 264 170 169 Remarks: - IPP : REGCO, KEGCO - SPP : GEC, AEP, APBP, TLP Cogen, Roi-Et Green - Overseas : Conal, NTPC - Others : ESCO, ET The EGCO Group's 2006 net profit included foreign exchange gain of Baht 766 million whereas it incurred a foreign exchange loss of Baht 285 million for 2005. An unrealized foreign currency exchange gain in the amount of Baht 691 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 (December 31, 2006) and the previous period(December 31, 2005). Excluding the effect of foreign currency exchange gain, the profit was Baht 5,270 million, representing an increase of Baht 892 million or 20% as compared to 2005. Excluding the effect of foreign currency exchange gain of Baht 766 million, interest expenses of Baht 1,557 million, income tax of Baht 1,277 million and depreciation and amortization of Baht 2,806 million, the earnings before interest, tax, depreciation and amortization (EBITDA) would be Baht 10,910 million, representing an increase of Baht 1,130 million or 12% as compared to 2005, in which the EBITDA was Baht 9,780 million, excluding the effect of foreign currency exchange loss of Baht 285 million, interest expenses of Baht 1,859 million,income tax amounting to Baht 475 million and depreciation and amortization amounting to Baht 3,067 million. Important Financial Ratios for the period were as follows; - Gross Profit Ratio was 50.28% - Operating Profit Ratio was 50.82% - Net Profit Ratio was 31.66% - Net Profit Ratio (excluding the effect of foreign exchange) was 27.64% - Earnings per share (EPS) was Baht 11.46 - Earnings (excluding the effect of foreign exchange) per share (EPS) was Baht 10.01 - Return on Equity (ROE) was 18.17% The gross profit margin of 50.28% was slightly higher than last year's margin of 49.13%. The net profit ratio (excluding the effect of foreign exchange) was reported at 27.64%, higher than the 2005 ratio of 25.98% 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 2006 total revenues of EGCO, its subsidiaries and joint ventures as well as the share of profits from its associates and interests in joint ventures (excluding the effect of foreign currency exchange rate and profit attributable to minorities) were Baht 19,067 million, an increase of Baht 2,214 million or 13% compared to 2005. The 2006 total expenses of EGCO, its subsidiaries and joint ventures were Baht 13,466 million, an increase of Baht 1,254 million or 10% from last year. The details according to their groups of business are as follows: Total Revenues and Expenses: Unit : Million Baht EGCO IPP SPP 2006 2005 2006 2005 2006 2005 Total Revenues 393 478 11,053 9,572 5,853 5,287 Total Expenses 558 474 6,125 5,364 5,597 4,917 Overseas Others Total 2006 2005 2006 2005 2006 2005 Total Revenues 765 847 1,004 669 19,067 16,854 Total Expenses 484 990 703 468 13,466 12,212 1) EGCO's 2006 total revenues, amounting to Baht 393 million, were comprised of dividend income from financial investment of Baht 168 million, interest income of Baht 163 million and other income of Baht 62 million. This showed a decrease of Baht 85 million or 18% as compared to 2005, mainly from other income being lower by Baht 79 million or 56% and dividend income falling Baht 73 million or 30%; whereas interest income reported an increase of Baht 67 million or 70% thanks to higher interest rates. The fall in other income was mainly due to lower NTPC's net reimbursement of additional internal development cost according to Shareholders' Agreement amounting to Baht 29 million in 2006 compared to Baht 110 million in 2005. EGCO's dividend income is essentially from Krung Thai Dividend Selected Flexible Portfolio Fund (KTSF) in the amount of Baht 130 million representing a decrease of Baht 1 million as compared to 2005; dividends from Eastern Water Resources Development and Management Public Company Limited (EASTW) of Baht 31 million, down by Baht 61 million and dividend from others of Baht 8 million,down by Baht 11 million. Total expenses of EGCO, which were administrative expenses, totaled Baht 558 million, an increase from 2005 by Baht 84 million or 18% due to the incurrence of Nam Theun 1's historical development cost amounting to Baht 47 million, financing fees on the SBLCs for the equity commitment to NTPC in the amount of Baht 10 million as well as the company's contribution for the 60th Anniversary Celebration of His Majesty's Accession to the Throne and the International Horticultural Exposition for His Majesty the King (Royal Floral Ratchaphruek 2006) totaling Baht 9 million. 2) IPP Group consisting of two principal subsidiaries, REGCO and KEGCO, represented Baht 11,053 million in the total revenues, up by Baht 1,480 million or 15% as compared to 2005 whilst the total expenses were Baht 6,125 million, up by Baht 760 million or 14%. The details are as follows: Total Revenues and Expenses of IPP Group: Unit: Million Baht REGCO KEGCO Total 2006 2005 2006 2005 2006 2005 %Chg Revenues 5,630 5,131 5,422 4,441 11,053 9,572 15% Expenses 2,943 2,872 3,182 2,493 6,125 5,364 14% - Sales of electricity of IPP Group were Baht 10,665 million, representing an increase of Baht 1,287 million or 14% compared to last year. The increase was a result of a growth in REGCO's electricity sales of Baht 353 million to be Baht 5,392 million and KEGCO's electricity sales of Baht 934 million to be Baht 5,273 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 2006 2005 %Changes REGCO 5,392 5,039 7% KEGCO 5,273 4,339 22% Total Sales of Electricity - IPP 10,665 9,378 14% 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 2006, REGCO and KEGCO received compensation for the exchange rate effect of Baht 810 million. - Interest income and others amounted to Baht 388 million, an increase of Baht 194 million or 100%, mainly from REGCO's increased interest income in the amount of Baht 143 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. However, the process of capital reduction of REGCO from Baht 9,220 million to Baht 4,702 million was completed in December 2006. KEGCO's interest income increased by Baht 47 million resulting from an increase in interest rates.REGCO and KEGCO's other revenues increased by Baht 4 million. - Cost of sales totaled Baht 3,548 million, an increase of Baht 280 million or 9% compared to 2005, mainly because KEGCO's cost of sales increased by Baht 378 million or 26% from major maintenance expenses as planned; whilst REGCO's cost of sales decreased by Baht 98 million or 5% as compared to 2005 when the replacement of the impaired steam turbine rotor took place. Cost of Sales - IPP Group: Unit: Million Baht 2006 2005 %Changes REGCO 1,737 1,834 (5%) KEGCO 1,811 1,434 26% Total Cost of Sales - IPP Group: 3,548 3,268 9% - Administrative expenses and income taxes were Baht 1,525 million, an increase of Baht 886 million or 139%, mainly from KEGCO's first corporate tax payment amounting to Baht 521 million. Although KEGCO's BOI tax exemption 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 188 million resulting from its increased profitability. REGCO's 50% corporate tax reduction will end on April 19, 2008. And its administrative expenses were up by Baht 209 million mainly from the make-whole premium payment of Baht 193 million. - Interest expenses were Baht 1,051 million, a decrease of Baht 406 million or 28%, resulting from the decrease in interest expenses at REGCO and KEGCO of Baht 228 million and Baht 178 million, respectively, owing to lower principal amounts of loans and debentures. 3) SPP Group's total revenues were reported at Baht 5,853 million for 2006, an increase of Baht 566 million or 11% compared to 2005. The SPP Group incorporates five companies, GEC, AEP, APBP, TLP Cogen and Roi-Et Green. The expenses were Baht 5,597 million, an increase from last year by Baht 680 million or 14%. The details are as follows: Total Revenues and Expenses of SPP Group: Unit : Million Baht GEC TLP Cogen APBP 2006 2005 2006 2005 2006 2005 Revenues 3,217 3,034 1,985 1,738 405 314 Expenses 3,498 3,032 1,648 1,436 308 310 Roi-Et Green Total 2006 2005 2006 2005 % Chg Revenues 246 202 5,853 5,287 11% Expenses 143 139 5,597 4,917 14% - Sales of electricity of the SPP Group were Baht 5,700 million, representing an increase of Baht 512 million or 10% compared to 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 235 million, Baht 151 million, Baht 81 million and Baht 45 million, respectively. The TLP Cogen's increased electricity sales were a result of higher tariff and units of sales to EGAT and industrial users.The increase of GEC's electricity sales was due to peak-load demand calls from EGAT. APBP's electricity sales showed an increase in 2006 when compared to the same period of 2005 in which a physical impairment of an electricity generating equipment happened. (more)