Management Discussion and Analysis for 3 month 2007

Management Discussion and Analysis For the Three-month Period Operating Results Ended March 31, 2007 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 15 operating plants totaling 3,509 equity MW at present. From January 2007 onwards, the 50% share of profit in BLCP Power Limited (BLCP), a 1,434 MW coal-fired power plant, has been acknowledged. The Amata Power Bang Pakong Expansion (APBP-Expansion Project), a 55 MW combined cycle gas turbine small power plant, achieved COD on April 25, 2007. In addition, unit 1 of the Kaeng Khoi 2 (KK2) combined cycle gas turbine IPP project, with capacity of 734 MW, was completed and achieved its COD on May 5, 2007. EGCO Group's consolidated net profit for the first quarter of 2007 ended March 31, was Baht 2,538 million, an increase of Baht 468 million or 23% compared to the same period of 2006. Excluding the impact of foreign exchange, the net profit was Baht 2,474 million, representing an increase of Baht 792 million or 47% as compared to the same period of the previous year. The details of net profit (before FX) are as follows: - EGCO's net loss of Baht 45 million, representing a decrease in net profit of Baht 153 million, resulted from a fall in revenue of Baht 44 million, mostly from other income and dividend income; plus higher administrative expenses of Baht 88 million mostly from project development cost; and an increase of interest expenses from short term loans in the amount of Baht 20 million. - IPP Group, consisting of Rayong Electricity Generating Co., Ltd. (REGCO), Khanom Electricity Generating Co., Ltd. (KEGCO) and BLCP, showed a net profit and share of profit from joint ventures totaling Baht 2,095 million, up Baht 632 million thanksto a share of profit from BLCP that started from January 2007 onwards. - 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 409 million, an increase of Baht 411 million that mainly resulted from GEC's higher net profit owing to a gain from foreign exchange rate and other income from KK2 Project-Unit 1's liquidated damages claimed from contractors owing to delayed COD . - Overseas Group refers to the Conal Holdings Corporation (Conal) and Nam Theun 2 Power Co., Ltd. (NTPC). The net loss from this group was Baht 68 million, down by Baht 89 million mainly resulting from NTPC's loss of Baht 79 million from a loss on foreign exchange rate. Conal's net profit was reported at Baht 10 million, down by Baht 33 million, caused by a decrease in electricity sales after transferring the Northern Mindanao Power Corporation (NMPC) to National Power Corporation (NPC) in February 2006. - Other Business Group includes two subsidiaries, EGCO Engineering & Service Co., Ltd. (ESCO) and Egcom Tara Co., Ltd. (ET) and one joint venture, Amata Power-ESCO Service Co.,Ltd. (AMESCO), that showed net profit totaling Baht 83 million, a decrease of Baht 10 million due mostly to lower service income from ESCO. 2. Business Expansion Analysis EGCO was the first IPP in Thailand established in May 12, 1992. EGCO is structured as a holding company with a number of operating 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 on 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 an acceptable risk and return profile. As at the end of April 2007, Thailand's total generating capacity was reported at 27,788.5 MW /1, of which 12.63% was attributable to EGCO. The peak demand in 2007 reached 22,586.1 MW /1. This occurred on April 24, 2007, and represented an increase of 7.23% over the peak demand in May 2006. /1 Source: EGAT The National Energy Policy Committee (NEPC) is expected to endorse a request for proposals to develop new IPP capacity in June 2007 in line with the Power Development Plan (PDP) newly approved by NEPC. It is anticipated that the request for proposals will invite private sector bidders to bid for: Phase I: 3,000 megawatts of new capacity during the period from 2012-2014, and Phase II: 4,200 megawatts of new capacity during the period from 2015 to 2017. It is expected that the private investors will be allowed to propose fuel type for the first phase of the capacity building plan. EGCO, with its 15-year experience in the power industry, is well prepared to bid in this program. Currently, EGCO has 15 operating plants with capacity totaling 3,509 equity MW, of which 59% is comprised of two natural gas-fired IPPs which are the 1,232 MW REGCO plant and the 824 MW KEGCO plant. EGCO also has another 717 equity MW representing 20% of the company's total equity MW portfolio from 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 details of two projects that achieved COD, adding 375 equity MW to EGCO's portfolio, are as follows: 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. Unit 1 with the capacity of 734 MW achieved commercial operation on May 5, 2007. 2. 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 achieved commercial operation on April 25, 2007. EGCO is a partner in two additional power plant projects that are under development. These projects represent an additional 643 equity MW. Each is summarized briefly below: 1.The Unit 2 of Kaeng Khoi 2 (KK2) project, a 734 MW natural gas-fired power plant. The COD for unit 2 is scheduled for March 2008. Currently, the overall progress for this project is 93.2%. 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, Nam Theun II Power Company Ltd. (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 March 2007, the overall project progress was 48.2% 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. The two changes in accounting policies that have been implemented from January 1, 2007 are as follows; 1. Accounting standard for investment in subsidiaries, associates and interests in joint ventures presented in the company financial statements According to the notification of Federation of Accounting Professions No. 26/2549 dated on October 11, 2006 and No. 32/2549 dated on November 3, 2006 in relation to the amendment of TAS 44 "Consolidated financial statements and accounting for investment in subsidiaries" and TAS 45 "Accounting for investments in Associates "which require the change from the equity method of accounting to cost method of accounting for the investment in subsidiaries and associates presented in the company financial statements. According to the cost method of accounting, income from the investment will be recognised when dividends are declared. The notification is mandatory from January 1, 2007. The cost method of accounting has been implemented among EGCO Group from January 1, 2007 onwards and retrospective adjustments have been made for the purpose of comparison. Accordingly, in the consolidated financial statements of the first quarter of 2007,EGCO's Group had net income of Baht 2,538 million, or Baht 4.82 per share, while a net profit of Baht 2,407 million, or Baht 4.57 per share, in the company financial statements. The difference of net income in these statements was due to the change in accounting for investment in subsidiaries and interests in joint ventures reported in the company financial statement. The performance of subsidiaries and interests in joint ventures has been proportionately recorded in the consolidated financial statements, whereas the net profit in the company financial statements is solely from the performance of the parent company. TAS 44 allows the parent company to realize gains from investment in subsidiaries and interests in joint ventures only when it receives dividends from such subsidiaries and joint ventures. In this case, the EGCO Holding Company had an operational profit of Baht 35 million and received their dividend in the amount of Baht 2,372 million. The change in such accounting policy has an impact to the company financial statements only and does not have an impact to the consolidated financial statements. 2.Accounting policy for interests in joint ventures in the consolidated financial statements From January 1, 2007, the Group has changed the accounting policy for interests in joint ventures in the consolidated financial statements from "Proportionate Consolidation" to "Equity Method". The Group is of the view that the use of equity accounting provides a better understanding among investors of the company's business and financial position since the joint venture entity, which invested in the power plant business, raised debt secured against its own assets with limited recourse to its shareholders. The group has restated the consolidated financial statements to reflect the change in this accounting policy. The consolidated balance sheet as at December 31, 2006 and the consolidated statement of income for the three-month period ended March 31, 2006 were adjusted for the purpose of comparison. Accordingly, this new accounting policy has been applied to seven joint ventures namely BLCP, GEC, APBP, AEP, Conal, NTPC and AMESCO. This report contains the analysis of the financial statements of EGCO, and its subsidiaries and interests in joint ventures as follows: 3.1 Operational Results EGCO Group's consolidated net profit for the first quarter of 2007 ending March 31, 2007 was Baht 2,538 million, an increase of Baht 468 million or 23% compared to the same period of 2006 which was caused mainly by an increase of the share of profit from joint ventures amounting to Baht 1,591 million, primarily from BLCP and GEC. The gross profit was reported at Baht 1,392 million, down by Baht 908 million or 39% as compared to the same period of last year, as a result of lower contracted electricity sales of REGCO and KEGCO. The operating profit was reported at Baht 1,400 million, a decrease of Baht 1,400 million or 50% as compared to the same period of 2006. This resulted from lower electricity sales, foreign exchange gain and interest income. Unit : Million Baht Net Profit Q1'07 Net Profit Q1'06 Before FX After FX Before FX After FX EGCO (45) (45) 108 108 IPP Group 2,095 2,130 1,463 1,779 SPP Group 409 439 (3) 71 Overseas (68) (68) 21 21 Others 83 82 93 92 Remarks: - IPP : REGCO, KEGCO, BLCP - SPP : GEC, AEP, APBP, TLP Cogen, Roi-Et Green - Overseas : Conal, NTPC - Others : ESCO, ET, AMESCO The net profit of EGCO Group in the first quarter of 2007 included foreign exchange gain of only Baht 64 million whereas it incurred a foreign exchange gain of Baht 388 million for the first quarter of 2006. An unrealized foreign currency exchange gain in the amount of Baht 64 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 (March 31, 2007) and the previous period (December 31, 2006). Excluding the effect of foreign currency exchange gain, the profit was Baht 2,474 million, representing an increase of Baht 792 million or 47% as compared to the same period of 2006. Excluding the effect of foreign currency exchange gain of Baht 64 million, interest expenses of Baht 191 million, income tax of Baht 163 million and depreciation and amortization of Baht 528 million, the earnings before interest, tax, depreciation and amortization (EBITDA) would be Baht 3,355 million, representing an increase of Baht 531 million or 19% as compared to the first quarter of 2006, in which the EBITDA was Baht 2,824 million, excluding the effect of foreign currency exchange gain of Baht 388 million, interest expenses of Baht 337 million, income tax amounting to Baht 286 million and depreciation and amortization amounting to Baht 520 million. Important Financial Ratios for the period were as follows; - Gross Profit Ratio was 50.54% - Operating Profit Ratio was 50.86% - Net Profit Ratio was 56.98% - Net Profit Ratio (excluding the effect of foreign exchange) was 55.53% - Earnings per share (EPS) was Baht 4.82 - Earnings (excluding the effect of foreign exchange) per share (EPS) was Baht 4.70 - Return on Equity (ROE) was 6.93% The gross profit margin of 50.54% was lower than the same period of last year's margin of 62.66%; whereas the net profit ratio (excluding the effect of foreign exchange) was reported at 55.53%, higher than the same period of 2006 ratio of 43.32% mainly due to the acknowledgement of BLCP's net profit as a share of profit from joint venture, plus an increase of GEC's other income, which was partially offset with a decrease of net profit of REGCO and KEGCO from lower electricity sales. 3.2 Income and Expense Analysis In the first quarter of 2007, total revenues of EGCO, its subsidiaries and the share of profits from its joint ventures (excluding the effect of foreign currency exchange rate and profit attributable to minorities) were Baht 4,455 million, an increase of Baht 574 million or 15% compared to the same period of 2006. And in the first quarter of 2007, total expenses of EGCO and its subsidiaries were Baht 1,940 million, a decrease of Baht 210 million or 10% 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 Q1'07 Q1'06 Q1'07 Q1'06 Q1'07 Q1'06 Total Revenues 113 157 3,265 2,904 888 463 Total Expenses 158 50 1,170 1,441 449 424 Overseas Others Total Q1'07 Q1'06 Q1'07 Q1'06 Q1'07 Q1'06 Total Revenues (68) 21 257 336 4,455 3,881 Total Expenses - - 163 234 1,940 2,149 1) EGCO's total revenues in the first three months of 2007, amounting to Baht 113 million, were comprised of dividend income from financial investment of Baht 82 million, interest income of Baht 23 million and other income of Baht 8 million. Compared to the same period of 2006, this showed a decrease of Baht 44 million or 28%. This mainly resulted from lower dividend income by Baht 18 million or 18%. Dividends from Krung Thai Dividend Selected Flexible Portfolio Fund (KTSF) dropped Baht 65 million, whilst dividends from Eastern Water Resources Development and Management Public Company Limited (EASTW) were up by Baht 31 million and dividend from others up by Baht 16 million. The other income was lower by Baht 16 million or 68%, owing to lower revenue recognition of Internal Development Cost of NTPC in accordance with the Shareholders' Agreement, which was Baht 2 million for the first quarter of 2007 whilst it was Baht 13 million for the same period of 2006. The interest income was down by Baht 10 million, or 29% as compared to the same period of 2006 as a result of lower interest rate and deposit amounts. Total expenses of EGCO, including administrative expenses and interest expenses, totaled Baht 158 million, an increase from the first quarter of 2006 by Baht 109 million or 220%. This resulted mainly from increased project development expenses; as well as interest expenses of Baht 20 million, incurred after the first drawdown of short term loans from two Thai commercial banks on January 29, 2007. 2) IPP Group consisting of two principal subsidiaries , REGCO, KEGCO, and one principal Joint Venture, BLCP, recorded Baht 3,265 million in total revenues and share of profit from Joint Venture, up by Baht 361 million or 12% as compared to the same period of 2006 whilst the total expenses were Baht 1,170 million, down by Baht 272 million or 19%.The details are as follows: Total Revenues and Expenses of IPP Group: Unit: Million Baht REGCO KEGCO Q1'07 Q1'06 Q1'07 Q1'06 Revenues 901 1,432 1,090 1,471 Expenses 561 709 608 733 BLCP Toal Q1'07 Q1'06 Q1'07 Q1'06 %Chg Revenues 1,274 - 3,265 2,904 12% Expenses - - 1,170 1,441 (19%) - Sales of electricity of IPP Group were Baht 1,954 million, representing a decrease of Baht 855 million or 30% compared to the same period last year. The decrease was a result of REGCO's lower electricity sales of Baht 479 million to register Baht 891 million and KEGCO's lower electricity sales of Baht 376 million to register Baht 1,063 million. These decreases were caused by a decrease 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 Q1'07 Q1'06 %Changes REGCO 891 1,370 (35%) KEGCO 1,063 1,439 (26%) Total Sales of Electricity - IPP 1,954 2,809 (30%) 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 (more)