Management Discussion and Analysis for 3 Month 2008

Management Discussion and Analysis For the Three-month Period Operating Results Ended March 31, 2008 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 3,876 equity MW at present. EGCO's significant event during the three-month period of 2008 is as follows: - The Kaeng Khoi 2 (KK2) Unit 2, combined cycle gas turbine IPP project of the joint venture Gulf Power Generation Co., Ltd (GPG) with the capacity of 734 MW achieved its pre-Commercial Operating Date (COD) on February 27, 2008. EGCO Group's consolidated net profit, attributable to equity holders of the parent, for the three-month period ended March 31, 2008, was Baht 2,817 million, an increase of Baht 286 million or 11% compared to the same period of 2007. Excluding the impact of foreign exchange on EGCO and subsidiaries, the net profit was Baht 2,769 million, representing an increase of Baht 302 million or 12% as compared to the same period of last year; the details of the change are as follows: - EGCO's net loss of Baht 43 million, representing a decrease in the loss of Baht 7 million, resulted from lower administrative expenses, which was mostly due to the decrease in project development cost. - IPP Group, consisting of Rayong Electricity Generating Co., Ltd. (REGCO), Khanom Electricity Generating Co., Ltd. (KEGCO), the joint venture BLCP Power Limited (BLCP) and the joint venture GPG, showed a net profit and share of profits from joint ventures totaling Baht 2,648 million, up Baht 305 million mostly thanks to an increase in the share of profit from GPG, with its KK2 Unit 1 and 2 achieving COD in May 2007 and February 2008,respectively. - 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 312 million, an increase of Baht 154 million that mainly resulted from GEC's higher share of profit owing to a gain from foreign exchange rate. - Overseas Group, which is comprised of two joint ventures including Conal Holdings Corporation (Conal) and Nam Theun 2 Power Co., Ltd. (NTPC). The net loss from this group was Baht 237 million, an increase in the loss by Baht 168 million compared to the same period of 2007 mainly resulting from NTPC's increased share of loss by Baht 172 million from a loss on foreign exchange. - 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 88 million, rising Baht 4 million from an increase in service income of ESCO. 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 March 2008, Thailand's total generating capacity was reported at 29,964.25 MW /1. During the first quarter of 2008, the peak demand reached 22,112 MW /1 on March 19, 2008, which was 2.10% lower than the peak demand in April 2007. /1 Source : EGAT 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 March 31, 2008, EGCO has 14 operating plants with capacity totaling 3,876 equity MW, of which 53% comprises two natural gas-fired IPPs which are the 1,232 MW REGCO plant and the 824 MW KEGCO plant. Moreover, EGCO has 50% stake in BLCP Power facility or 717 equity MW which represents 18% of EGCO's total equity MW portfolio. BLCP Power facility is a 1,434 MW coal-fired power plant, using high quality imported coal from Australia, located in Map Ta Phut Industrial Estate in Rayong Province. EGCO also has 50% stake in KK2 project (by holding 50% of shares in GEC which holds 99.99% in GPG, the project owner) or 734 equity MW which represents 19% of EGCO's total equity MW portfolio. KK2 project is a 1,468 MW natural gas-fired power plant located in Saraburi province comprising two combine cycle units, 734 MW each. The COD for KK2 project unit 1 was on May 5, 2007 and the pre-COD for Unit 2 was on February 27, 2008. In addition, KK2 power plant, using environment friendly technology to reduce its environmental impact, has been recognized as one of the " World's Best Power Plants" by Diesel & Gas Turbine Worldwide magazine (Jan - Feb 2008 issue). EGCO is also a partner in Nam Thuen 2 project which is currently under development. This project represents an additional 267.5 equity MW as summarized briefly below: 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 March, 2008, the overall project progress was 85% 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 factors 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. 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: 3.1 Operational Results EGCO Group's consolidated net profit, attributable to equity holders of the parent, for the three-month period of 2008 ended March 31, 2008 was Baht 2,817 million, an increase of Baht 286 million or 11% compared to the same period of 2007; this was caused mainly by an increase of the share of profits from joint ventures amounting to Baht 345 million, primarily from GPG and BLCP. The gross profit was reported at Baht 1,339 million, down by Baht 50 million or 4% as compared to the same period of last year, as a result of lower contracted electricity sales of KEGCO. The operating profit was reported at Baht 1,322 million, a decrease of Baht 75 million or 5% as compared to the same period of 2007. The fall in electricity sales, foreign exchange gain and interest income, at EGCO and subsidiaries, was the main factor behind the drop in the operating profit. . Unit : Million Baht Net Profit of 3M08 Net Profit of 3M07 Before FX After FX Before FX After FX EGCO (43) (43) (50) (50) IPP Group 2,648 2,678 2,343 2,378 SPP Group 312 341 158 188 Overseas Group (237) (237) (68) (68) Other Business Group 88 78 84 83 Total 2,769 2,817 2,467 2,531 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 for the three-month period of 2008 included foreign exchange gains from EGCO and subsidiaries of only Baht 48 million whereas it incurred a foreign exchange gain of Baht 64 million in the same period of 2007. An unrealized foreign currency exchange gain in the amount of Baht 30 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, 2008) and the previous period (December 31, 2007). Excluding the effect of foreign currency exchange gain from EGCO and subsidiaries, the profit was Baht 2,769 million, representing an increase of Baht 302 million or 12% as compared to the same period of 2007. Excluding the effect of foreign currency exchange gain from EGCO and subsidiaries of Baht 48 million, interest expenses of Baht 165 million, income tax of Baht 176 million and depreciation and amortization of Baht 551 million, the earnings before interest, tax, depreciation and amortization (EBITDA) would be Baht 3,660 million /1, representing an increase of Baht 310 million or 9% as compared to the same period of 2007, in which the EBITDA was Baht 3,350 million, excluding the effect of foreign currency exchange gain of Baht 64 million, interest expenses of Baht 192 million, income tax amounting to Baht 163 million and depreciation and amortization amounting to Baht 528 million. /1 Excluding the effect of foreign currency exchange, interest expenses, income tax, depreciation and amortization of joint ventures, EBITDA was Baht 4,137 million. Important Financial Ratios for the period were as follows: - Gross Profit Ratio was 48.75% - Operating Profit Ratio was 48.12% - Net Profit Ratio was 59.23% - Net Profit Ratio (excluding the effect of foreign exchange from EGCO and subsidiaries) was 58.21% - Earnings per share (EPS) was Baht 5.35 - Earnings (excluding the effect of foreign exchange from EGCO and subsidiaries) per share (EPS) was Baht 5.26 - Return on Equity (ROE) was 6.58% The gross profit margin of 48.75% was lower than the same period of last year's margin of 50.48% due to a decrease in gross profit of KEGCO from lower electricity sales; whereas the net profit ratio (excluding the effect of foreign exchange from EGCO and subsidiaries) was reported at 58.21%, higher than the same period of 2007 ratio of 55.40% mainly due to an increase of share of profits from GPG and BLCP. 3.2 Income, Expense and Share of profits from Joint Ventures Analysis For the three-month period of 2008, 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 2,881 million, a decrease of Baht 41 million or 1.42% compared to the same period of 2007. - Total expenses were Baht 1,948 million, an increase of Baht 3 million or 0.16% from the same period of last year. The share of profits from joint ventures for the three-month period of 2008 were Baht 1,875 million (including a gain from foreign exchange of Baht 625 million), an increase of Baht 345 million or 23% compared to the same period of last year which showed the share of profits totaling Baht 1,530 million (including a gain from foreign exchange of Baht 383 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 3M08 3M07 3M08 3M07 3M08 3M07 Total Revenues 111 113 1,901 1,990 556 563 Total Expenses 154 163 1,127 1,172 452 448 Profits bf Share of Profits (Loss) from JVEs (43) (50) 774 818 104 115 Share of Profits (Loss) from JVEs - - 1,875 1,525 235 73 Net Profit bf Subs's Fx and MI (43) (50) 2,648 2,343 339 188 Overseas Others Total 3M08 3M07 3M08 3M07 3M08 3M07 Total Revenues - - 313 256 2,881 2,922 Total Expenses - - 215 161 1,948 1,945 Profits bf Share of Profits (Loss) from JVEs - 98 95 933 977 Share of Profits (Loss) from JVEs (237) (68) 2.41 0.99 1,875 1,530 Net Profit bf Subs's Fx and MI (237) (68) 101 96 2,809 2,508 1) EGCO's total revenues for the three-month period of 2008, amounting to Baht 111 million, were comprised of dividend income from financial investment of Baht 78 million, interest income of Baht 19 million and other income of Baht 14 million. Compared to the same period of 2007, this showed a decrease of Baht 2 million or 2%, which mainly resulted from lower interest income of Baht 4 million or 18% owing to lower interest rate and deposit amounts. Moreover, dividend income also decreased by Baht 5 million or 6% mainly a result of the drop in dividends from open-end funds of Baht 21 million, meanwhile, dividends from Eastern Water Resources Development and Management Public Company Limited (EASTW) were up by Baht 16 million. Total expenses of EGCO were Baht 154 million, a decrease from the same period of 2007 by Baht 9 million or 6%. This resulted mainly from the decrease in project development expenses which included consulting fees. 2) IPP Group consisting of two principal subsidiaries, REGCO and KEGCO; and two principal joint ventures, BLCP and GPG. Total revenues were Baht 1,901 million, a decrease of Baht 89 million or 4% as compared to the same period of last year,meanwhile the total expenses were Baht 1,127 million, down by Baht 45 million or 4%.The share of profits from joint ventures were reported at Baht 1,875 million (including a gain from foreign exchange of Baht 713 million), up by Baht 350 million or 23% as compared to the same period of 2007 which showed the share of profits totaling Baht 1,525 million (including a gain from foreign exchange of Baht 440 million). The details are as follows: Total Revenues, Total Expenses and Share of Profits (Loss) from JVEs of IPP Group: Unit :Million Baht REGCO KEGCO BLCP 3M08 3M07 3M08 3M07 3M08 3M07 Total revenues 967 901 934 1,090 - - Total expenses 565 563 562 610 - - Profits bf Share of Profits (Loss) from JVEs 403 338 371 480 - - Share of Profits (Loss) from JVEs - - - - 1,378 1,273 Net Profit bf Subs's Fx and MI 403 338 371 480 1,378 1,273 GPG Total 3M08 3M07 3M08 3M07 %Chg Total revenues - - 1,901 1,990 (4%) Total expenses - - 1,127 1,172 (4%) Profits bf Share of Profits (Loss) from JVEs - - 774 818 (5%) Share of Profits (Loss) from JVEs 497 253 1,875 1,525 23% Net Profit bf Subs's Fx and MI 497 253 2,648 2,343 13% - Sales of electricity of IPP Group were Baht 1,888 million, representing a decrease of Baht 66 million or 3% compared to the same period of last year. The decrease was a result of KEGCO's lower electricity sales by Baht 137 million to register Baht 927 million caused by a decrease in the Base Availability Credit for KEGCO. Meanwhile, REGCO's electricity sales increased by Baht 71 million to register Baht 961 million from an increase in the Capacity Rate. These changes were in accordance with the capacity payment formula calculated on a "Cost Plus Basis" under the PPAs and in line with the company's projection. Moreover, to minimize exchange rate risk, on November 8, 2007, REGCO entered into a revenue swap contract with a financial institution to fix the exchange rate to be used in the conversion of part of the USD-linked revenue provided in the PPA. As at March 31, 2008, the electricity revenue under the foreign currency forward contract of USD 41.88 million were fixed at Baht 33.80 per US Dollar. The contract is effective from November 8, 2007 to January 5, 2010. Sales of Electricity - IPP Group: Unit : Million Baht 3M08 3M07 %Changes REGC 961 891 8% KEGCO 927 1,063 (13%) Total Sales of Electricity - IPP Group 1,888 1,954 (3%) 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 tariff 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.For the three-month period of 2008, REGCO and KEGCO received compensation for the exchange rate effect of Baht 65 million. - Interest income and others amounted to Baht 13 million, a decrease of Baht 23 million or 63%, mainly from the decrease of KEGCO's and REGCO's interest income by Baht 19 and 6 million, respectively, owing to lower interest rates. - Cost of sales totaled Baht 800 million, a decrease of Baht 17 million or 2% compared to the same period of 2007, mainly because REGCO's cost of sales decreased by Baht 51 million or 11%, from high maintenance cost in 2007. Meanwhile, KEGCO's cost of sales in the first three-month of 2008 increased by Baht 34 million or 10% mostly from higher fuel oil cost due to power plant operating following EGAT's order. However, this cost can be included in the tariff formula which is in accordance with the PPA. Cost of Sales - IPP Group: Unit : Million Baht 3M08 3M07 %Changes REGCO 433 485 (11%) KEGCO 367 333 10% Total Cost of Sales - IPP Group 800 817 (2%) - Administrative expenses and income taxes were Baht 228 million, an increase of Baht 21 million or 10%, mainly from higher tax payment at REGCO that amounted to Baht 41 million or 78% due to higher revenues. Meanwhile, tax payment at KEGCO decreased by Baht 26 million or 27% due to lower revenues. REGCO and KEGCO currently enjoy 50% corporate tax reduction privilege on profits from power generation, ending on April 19, 2008 and September 25, 2009, respectively. - Interest expenses were Baht 100 million, a decrease of Baht 48 million or 33%, resulting from KEGCO's lower principal amounts of loans and debentures. (more)