Management Discussion and Analysis 2007

Management Discussion and Analysis For the Annual Operating Results Ended December 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: 662-998-5145-7 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 14 operating plants, totaling 3,509 equity MW at present. In 2007, EGCO's significant events are summarized as follows: - The 50% share of profit in the joint venture BLCP Power Limited (BLCP), a 1,434 MW coal-fired power plant, has been recognised since January 2007. - The Amata Power Bang Pakong Expansion (APBP-Expansion Project), a 55 MW combined cycle gas turbine power plant, achieved Commercial Operation Date (COD) on April 25, 2007. - Unit 1 of the Kaeng Khoi 2 (KK2) combined cycle gas turbine IPP project of the joint venture Gulf Power Generation Co., Ltd (GPG), with capacity of 734 MW, was completed and achieved its COD on May 5, 2007. EGCO Group's consolidated net profit for 2007 ended December 31, 2007, was Baht 8,402 million, an increase of Baht 2,386 million or 40% compared to 2006. Excluding the impact of foreign exchange on EGCO and subsidiaries, the net profit was Baht 8,281 million, representing an increase of Baht 2,982 million or 56% as compared to the previous year; the details of the change are as follows: - EGCO's net loss of Baht 394 million, representing an increase in the loss of Baht 289 million, resulted from higher administrative expenses and an increase of interest expenses from short-term loans. - IPP Group, consisting of Rayong Electricity Generating Co., Ltd. (REGCO), Khanom Electricity Generating Co., Ltd. (KEGCO), the joint venture BLCP and the joint venture GPG, showed a net profit and share of profits from joint ventures totaling Baht 7,735 million, up Baht 2,869 million thanks to the recognition of the share of profit from BLCP since January 2007 as well as the share of profit from GPG thanks to Unit 1 of KK2 which was completed and achieved its COD since May 2007. - Small Power Producer (SPP) Group, which is comprised of three joint ventures including Gulf Electric Public Company Limited (GEC) (excluding GPG), Amata-EGCO Power Ltd. (AEP), Amata Power (Bang Pakong) Ltd. (APBP); and two subsidiaries including EGCO Cogeneration Co., Ltd. (EGCO Cogen) and Roi-Et Green Co., Ltd. (Roi-Et Green), reported a net profit of Baht 882 million, an increase of Baht 446 million that mainly resulted from GEC's higher net profit owing to a gain from foreign exchange rate. - Overseas Group, which is comprised of two joint ventures including the Conal Holdings Corporation (Conal) and Nam Theun 2 Power Co., Ltd. (NTPC). The net loss from this group was Baht 197 million, an increase in the loss by Baht 40 million from 2006 mainly resulting from Conal's net profit of Baht 53 million, down by Baht 65 million, caused by a decrease in electricity sales after transferring the Northern Mindanao Power Corporation (NMPC) to National Power Corporation (NPC) in February 2006 as well as the Peso appreciation. Meanwhile, NTPC's loss decreased by Baht 25 million from lower foreign exchange loss. - 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 255 million, a decrease of Baht 4 million due mostly to the decline in ESCO's net profit by Baht 17 million from lower service income. Meanwhile, ET's net profit increased by Baht 13 million from higher water sales. 2. Business Expansion Analysis EGCO is the first IPP in Thailand established on May 12, 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 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 profile. As at the end of December 2007, Thailand's total generating capacity was reported at 28,250.25 MW /1, of which 12.42% was attributable to EGCO. During the year 2007, the peak demand reached 22,586.1 MW /1 on April 24, 2007, which was 7.23% higher than the peak demand in May 2006. /1 Source : EGAT On November 16, 2007, the Ministry of Energy resolved that 17 bids, out of 20 bids, were qualified for the initial round (Technical Proposal) of IPP bidding, and all 3 bids from EGCO passed this round. Later on, on December 7, 2007, the Ministry of Energy announced the winner in the second round of IPP Bidding (Financial Proposal). Four companies, except EGCO, have won in this round of bidding with electricity generating capacity totaling 4,400 MW (increased from 3,200 MW) and coming on line during 2012-2014. For EGCO, our business strategy will place more emphasis on expansion investment opportunities in ASEAN markets, including neighboring Mekong countries such as Lao PDR, Myanmar and Cambodia, with respect to projects that will supply electricity to Thailand, and also investment in a domestic project in Thailand relating to fuel storage and supply. As for renewable energy projects, EGCO will continue to pursue investment opportunities in prospective domestic projects using wind, waste and biomass as fuel sources. As of December 31, 2007, EGCO has 14 operating plants with capacity totaling 3,509 equity MW, of which 59% comprises two natural gas-fired IPPs which are the 1,232 MW REGCO plant and the 824 MW KEGCO plant. EGCO has another 717 equity MW representing 20% of EGCO's total equity MW portfolio from the BLCP Power facility, a 1,434 MW coal-fired power plant located in Map Ta Phut Industrial Estate in Rayong Province. The BLCP facility uses high quality imported coal from Australia. In 2007, EGCO commenced the commercial operation of the 734-MW KK2 project Unit 1 on May 5. EGCO has a 50% stake in this project, by holding 50% of shares in GEC which owns 99.99% of GPG. KK2 project is a 1,468 MW gas-fired power plant located in Saraburi province. In addition to the operating assets, EGCO is a partner in two additional power plant projects that are under development. These projects represent an additional 635 equity MW. Each is summarized briefly below: 1. The Unit 2 of KK2 project, a 734 MW gas-fired power plant. The COD for Unit 2 is scheduled to occur in March 1, 2008. Currently, the overall progress of this project is 99.5%; and on January 25, 2008, EGAT has approved the purchase of additional power prior to the COD of KK2 Unit 2 after a successful commissioning. 2. Nam Theun 2 project is a 1,070 MW hydroelectric power plant located in the Lao PDR. EGCO holds a 25% ownership 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 will be sold to the Lao PDR. At the end of December 2007, the overall project progress was 78% complete. In the absence of unforeseen circumstances, the company has a policy to dividend 40% of the consolidated 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 factor or when a dividend payment may have a significant impact on the normal operation of the company. The dividend payment shall not exceed the retained earnings of the company financial statements. 3. Accounting Policies The early adoption and two changes in accounting policies, which were implemented on January 1, 2007, are as follows: 1. The draft Thai Accounting Standard (TAS): Employee Benefits The Federation of Accounting Profession has drafted TAS regarding Employee Benefits which is in accordance with the International Accounting Standard (IAS) 19: Employee Benefits. The draft TAS is expected to become effective in 2009. Therefore, the Board of Directors considered and resolved to early adopt this standard commencing 2007 onwards which is considered to better reflect the financial position and operating results of the EGCO group and also better reflect liabilities and expenses that shall be paid in exchange for services rendered by employees. Commencing January 1, 2007, the Group has adopted the accounting policy according to the draft TAS: Employee Benefits for the post employment benefits, payable to employees under the labour laws applicable in Thailand and countries in which the Group has operations. The Group has applied retrospective adjustments for the adoption of new accounting policy which is to adjust the employee costs associated with past services against retained earnings brought forward and recognise the employee costs associated with services of the current year in the statement of income. The effects of the adoption of the new accounting policy on the consolidated balance sheet as at December 31, 2006 and the consolidated statements of income for the year ended December 31, 2006 are as follows: Consolidated balance sheet as at December 31, 2006 Unit : Million Baht Increase in retirement benefits obligation (116) Decrease in interests in joint ventures (2) Increase in net liabilities in a joint venture (3) Decrease in retained earnings as at 31 December 2006 (121) Consolidated statements of income for the year ended December 31, 2006 Unit : Million Baht Decrease in net profit (20) Decrease in basic earnings per share (Baht) (0.03) 2. Accounting standard for investment in subsidiaries, associates and interests in joint ventures presented in the company financial statements According to the notification of the Federation of Accounting Professions dated May 2, 2007 relating to amendment of TAS 44 "Consolidated financial statements and separate financial statements" and TAS 45 "Investments in associates" which require a change from the equity method of accounting to the cost method of accounting for investments in subsidiaries and associates and interests in joint ventures presented in the company financial statements, income from investments will be recorded when dividends are declared under the cost method. The notification is mandatory for financial statements on or after January 1, 2007 . The cost method of accounting was implemented within EGCO Group from January 1, 2007 onwards and retrospective adjustments have been made for the purpose of comparison. Accordingly, in 2007, EGCO's Group had net income of Baht 8,402 million, or Baht 15.96 per share in the consolidated financial statements, and a net profit of Baht 8,584 million, or Baht 16.31 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 statements. 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 and the dividends declared from subsidiaries and joint ventures. In this case, the EGCO Holding Company had an operational loss of Baht 31 million and its subsidiaries and joint ventures declared their dividends in the amount of Baht 8,615 million. Moreover, the effects of the change on the company's balance sheet as at December 31, 2006 is as follows: Unit : Million Baht Decrease in investments in subsidiaries (4,033) Decrease in net interests in joint ventures (280) Decrease in net liabilities in a joint venture (620) Decrease in other liabilities (911) Increase in translation adjustments 14 Decrease in Retained earnings as at December 31, 2006 (2,796) The change in such accounting policy has an impact on the company financial statements only and does not have any impact on the consolidated financial statements. 3. 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 the "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 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 2006 ended December 31, 2006, were adjusted for the purpose of comparison. Accordingly, this new accounting policy has been applied to the interests in seven joint ventures namely BLCP, GEC, APBP, AEP, Conal, NTPC and AMESCO. 4. 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. This report contains the analysis of the financial statements of EGCO, and its subsidiaries and interests in joint ventures as follows: 4.1 Operational Results EGCO Group's consolidated net profit for 2007 ended December 31, 2007 was Baht 8,402 million, an increase of Baht 2,386 million or 40% compared to 2006; this was caused mainly by an increase of the share of profits from joint ventures amounting to Baht 5,134 million, primarily from BLCP, GPG and GEC. The gross profit was reported at Baht 5,229 million, down by Baht 2,795 million or 35% as compared to last year, as a result of lower contracted electricity sales of REGCO and KEGCO. The operating profit was reported at Baht 4,938 million, a decrease of Baht 3,624 million or 42% as compared to 2006. The fall in electricity sales, foreign exchange gain and interest income, at EGCO and subsidiaries, was the main factor behind the drop in the gross profit and the operating profit. Unit : Million Baht Net Profit of 2007 Net Profit of 2006 Before FX After FX Before FX After FX EGCO (394) (394) (104) (104) IPP Group 7,735 7,804 4,866 5,418 SPP Group 882 939 436 598 Overseas (197) (197) (157) (157) Others 255 250 258 261 Total 8,281 8,402 5,299 6,016 Remarks: - Net profit consolidated under the equity method does not separate out foreign exchange impact from joint ventures. - IPP : REGCO, KEGCO, BLCP, GPG - SPP : GEC (excluding GPG), AEP, APBP, EGCO Cogen, Roi-Et Green - Overseas : Conal, NTPC - Others : ESCO, ET, AMESCO The net profit of EGCO Group in 2007 included foreign exchange gains from EGCO and subsidiaries of only Baht 121 million whereas it incurred a foreign exchange gain of Baht 716 million in 2006. An unrealized foreign currency exchange gain in the amount of Baht 70 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, 2007) and the previous period (December 31, 2006). Excluding the effect of foreign currency exchange gain from EGCO and subsidiaries, the profit was Baht 8,281 million, representing an increase of Baht 2,982 million or 56% as compared to 2006. Excluding the effect of foreign currency exchange gain from EGCO and subsidiaries of Baht 121 million, interest expenses of Baht 819 million, income tax of Baht 634 million and depreciation and amortization of Baht 2,190 million, the earnings before interest, tax, depreciation and amortization (EBITDA) would be Baht 11,924 million /1, representing an increase of Baht 2,187 million or 22% as compared to 2006, in which the EBITDA was Baht 9,737 million, excluding the effect of foreign currency exchange gain of Baht 716 million, interest expenses of Baht 1,166 million, income tax amounting to Baht 1,130 million and depreciation and amortization amounting to Baht 2,142 million. /1 Excluding the effect of foreign currency exchange, interest expenses, income tax,depreciation and amortization of joint ventures, EBITDA was Baht 14,934 million Important Financial Ratios for the period were as follows: - Gross Profit Ratio was 47.80% - Operating Profit Ratio was 45.14% - Net Profit Ratio was 50.48% - Net Profit Ratio (excluding the effect of foreign exchange from EGCO and subsidiaries) was 49.75% - Earnings per share (EPS) was Baht 15.96 - Earnings (excluding the effect of foreign exchange from EGCO and subsidiaries) per share (EPS) was Baht 15.73 - Return on Equity (ROE) was 21.89% The gross profit margin of 47.80% was lower than last year's margin of 57.98% due to a decrease in net profit of REGCO and KEGCO from lower electricity sales; whereas the net profit ratio (excluding the effect of foreign exchange from EGCO and subsidiaries) was reported at 49.75%, higher than 2006 ratio of 36.29% mainly due to the recognition of BLCP and GPG's net profit as share of profit from joint ventures. 4.2 Income, Expense and Share of profits from Joint Ventures Analysis In 2007, operating results of EGCO and subsidiaries (Subs), excluding the effect of foreign currency exchange rate (Fx) and profit attributable to minorities (MI), are as follows: - Total revenues were Baht 11,594 million, a decrease of Baht 3,092 million or 21% compared to 2006. - Total expenses were Baht 8,230 million, a decrease of Baht 906 million or 10% from last year. The share of profits from joint ventures for 2007 were Baht 5,051 million (including a gain from foreign exchange of Baht 890 million), an increase of Baht 5,134 million compared to last year which showed the share of loss totaling Baht 83 million. The details according to their groups of business are as follows: Total Revenues, Total Expenses and Share of Profits (Loss) from JVEs: Unit : Million Baht EGCO IPP SPP 2007 2006 2007 2006 2007 2006 Total Revenues 497 400 7,910 11,053 2,186 2,231 Total Expenses 891 504 4,813 6,134 1,822 1,791 Profits bf Share of Profits (Loss) from JVEs (394) (104) 3,097 4,919 364 440 Share of Profits (Loss) from JVEs - - 4,638 (52) 608 125 Net Profit bf Subs's Fx and MI (394) (104) 7,735 4,866 972 565 Overseas Others Total 2007 2006 2007 2006 2007 2006 Total Revenues - - 1,000 1,002 11,594 14,686 Total Expenses - - 703 706 8,230 9,135 Profits bf Share of Profits (Loss) from JVEs - - 297 296 3,364 5,551 Share of Profits (Loss) from JVEs (197) (157) 2.29 1.5 5,051 (83) Net Profit bf Subs's Fx and MI (197) (157) 300 298 8,416 5,468 1) EGCO's total revenues in 2007, amounting to Baht 497 million, were comprised of dividend income from financial investment of (more)