Management Discussion and Analysis for the 1H 2008

Management Discussion and Analysis For the First-Half Operating Results Ended June 30, 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 12 operating plants,totaling 3,826.5 equity MW at present. EGCO Group's significant events during the first half of 2008 are 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. - The sale of shares in EGCO Joint Ventures & Development,Co.,Ltd. (EGCO JD), which holds shares in Amata-EGCO Power Ltd. (AEP) and Amata Power (Bangpakong) Ltd. (APBP) as well as the sale of shares in Amata Power-ESCO Service Co.,Ltd. (AMESCO) held by EGCO Engineering and Service Co.,Ltd. (ESCO), EGCO's wholly-owned subsidiary. Both transactions were sold to Amata Power Ltd. in May 2008. EGCO Group's consolidated net profit, attributable to equity holders of the parent, for the first half ended June 30, 2008, was Baht 4,257 million, a decrease of Baht 754 million or 15% compared to the same period of 2007. Excluding the impact of foreign exchange on EGCO and subsidiaries, the net profit was Baht 4,226 million, representing a decrease of Baht 682 million or 14% as compared to the same period of last year; the details of the change are as follows: * EGCO's net loss of Baht 198 million, representing an increase in the loss of Baht 51 million, resulted from lower dividend income and other income. * 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 3,945 million, down Baht 562 million mostly due to the lower in BLCP's share of profit, which was caused by a decrease in electricity sales and a lower gain from foreign exchange rate. * Small Power Producer (SPP) Group, which is comprised of three joint ventures including Gulf Electric Public Company Limited (GEC)(excluding GPG), AEP, 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 380 million, which included the share of profits from AEP and APBP until May 15, 2008, a decrease of Baht 205 million that mainly resulted from GEC's lower share of profit owing to a decrease in the 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 64 million, a decrease in the loss by Baht 82 million compared to the same period of 2007 mainly resulting from NTPC's decreased share of loss by Baht 70 million from a lower loss on foreign exchange rate. Moreover, Conal's share of profit increased by Baht 12 million from a higher gain on foreign exchange rate. * Other Business Group includes two subsidiaries, EGCO Engineering & Service Co., Ltd. (ESCO) and Egcom Tara Co., Ltd. (ET) and one joint venture AMESCO, that showed net profit totaling Baht 163 million, which included the share of profit from AMESCO until May 15, 2008, rising Baht 53 million from an increase in service income of ESCO. 2. Business Expansion Analysis EGCO is the first large 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 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 profile. As at the end of June 2008, Thailand's total generating capacity was reported at 30,664.25 MW /1. During the first half of the year 2008, the peak demand reached 22,568 MW /1 in April 2008, which was 0.08% slightly lower than the peak demand in April 2007. /1 Source: EGAT The higher inflation rates and the rising costs of construction of hydro power plants have affected the economic feasibility of the four hydro power plants in Lao PDR based on the previously proposed tariff. The government of Lao PDR has requested for a delay in the construction of the projects by at least one year. There will be further negotiation on the new tariff and Lao PDR may change the detail of the projects. As for the four short-listed IPPs after the bidding last year, if any of the projects do not win environmental impact assessment (EIA) approval by September 1, 2008 or not being able to proceed with their planned construction of the power plants, the projects may be cancelled. However, the cancellation of one or two power plants may not affect the power development plan of the country since the trend of demand for electricity is still lower than the target and the power reserve margin is higher than 15%. 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 June 30, 2008, EGCO has 12 operating plants /1 with capacity totaling 3,826.5 equity MW, of which 53.7% comprises two natural gas-fired IPPs which are the 1,232 MW REGCO plant and the 824 MW KEGCO plant. /1 EGCO sold off its entire 50% stake in EGCO Joint Ventures & Development Co.,Ltd. (including 2 power plants: AEP and APBP) to Amata Power Ltd. in May, 2008 which contributes to 41.3 equity MW. Moreover, EGCO has 50% stake in BLCP Power facility or 717 equity MW which represents 18.7% 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 19.3% 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 combined 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, respectively. EGCO is also a partner in Nam Theun 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 June, 2008, the overall project progress was 87% 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 3.1 Operational Results EGCO Group's consolidated net profit, attributable to equity holders of the parent, for the first half of 2008 ended June 30, 2008 was Baht 4,257 million, a decrease of Baht 754 million or 15% compared to the same period of 2007; this was caused mainly by a decrease of the share of profits from joint ventures amounting to Baht 522 million, primarily from BLCP. The gross profit was reported at Baht 2,478 million, down by Baht 91 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 2,284 million, a decrease of Baht 252 million or 10% as compared to the same period of 2007. The rise in cost of sales and services, and the fall in foreign exchange gain and interest income, at EGCO and subsidiaries, were the main factors behind the drop in the operating profit. Unit : Million Baht Net Profit of 1H08 Net Profit of1H07 Before FX After FX Before FX After FX EGCO (198) (198) (147) (147) IPP Group 3,945 3,983 4,507 4,558 SPP Group 380 371 585 641 Overseas Group (64) (64) (146) (146) Other Business Group 163 166 109 105 Total 4,226 4,257 4,908 5,011 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 first half of 2008 included foreign exchange gains from EGCO and subsidiaries of only Baht 31 million whereas it incurred a foreign exchange gain of Baht 103 million in the same period of 2007. An unrealized foreign currency exchange loss in the amount of Baht 10 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 (June 30, 2008) and the previous period (December 31, 2007). Excluding the effect of foreign currency exchange gain from EGCO and subsidiaries, the profit was Baht 4,226 million, representing a decrease of Baht 682 million or 14% as compared to the same period of 2007. Excluding the effect of foreign currency exchange gain from EGCO and subsidiaries of Baht 31 million, interest expenses of Baht 327 million, income tax of Baht 356 million and depreciation and amortization of Baht 1,101 million, the earnings before interest, tax, depreciation and amortization (EBITDA) would be Baht 6,010 million /1, representing a decrease of Baht 652 million or 10% as compared to the same period of 2007, in which the EBITDA was Baht 6,662 million, excluding the effect of foreign currency exchange gain of Baht 103 million, interest expenses of Baht 415 million, income tax amounting to Baht 273 million and depreciation and amortization amounting to Baht 1,065 million. /1 Excluding the effect of foreign currency exchange, interest expenses, income tax, depreciation and amortization of joint ventures, EBITDA was Baht 8,241 million. Important Financial Ratios for the period were as follows: - Gross Profit Ratio was 46.55% - Operating Profit Ratio was 42.91% - Net Profit Ratio was 51.63% - Net Profit Ratio (excluding the effect of foreign exchange from EGCO and subsidiaries) was 51.25% - Earnings per share (EPS) was Baht 8.09 - Earnings (excluding the effect of foreign exchange from EGCO and subsidiaries) per share (EPS) was Baht 8.03 - Return on Equity (ROE) was 9.93% The gross profit margin of 46.55% was lower than the same period of last year's margin of 48.37% 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 51.25%, lower than the same period of 2007 ratio of 55.37% mainly due to a decrease of share of profits from BLCP. 3.2 Income, Expense and Share of profits from Joint Ventures Analysis For the first half of 2008, the 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 5,539 million, a decrease of Baht 83 million or 1% compared to the same period of 2007. - Total expenses were Baht 3,970 million, an increase of Baht 92 million or 2% from the same period of last year. The share of profits from joint ventures for the first half of 2008 were Baht 2,720 million (including a loss from foreign exchange rate of Baht 31 million), a decrease of Baht 522 million or 16% compared to the same period of last year which showed the share of profits totaling Baht 3,242 million (including a gain from foreign exchange rate of Baht 619 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 1H08 1H07 1H08 1H07 1H08 1H07 Total Revenues 152 218 3,718 3,911 1,099 1,087 Total Expenses 350 365 2,318 2,351 915 884 Profits bf Share of Profits (Loss) from JVEs (198) (147) 1,400 1,560 184 203 Share of Profits (Loss) from JVEs - - 2,545 2,947 236 438 Net Profit bf Subs's Fx and MI (198) (147) 3,945 4,507 420 641 Overseas Others Total 1H08 1H07 1H08 1H07 1H08 1H07 Total Revenues - - 570 407 5,539 5,622 Total Expenses - - 387 278 3,970 3,878 Profits bf Share of Profits (Loss) from JVEs - - 183 129 1,569 1,744 Share of Profits (Loss) from JVEs (64) (146) 4 3 2,720 3,242 Net Profit bf Subs's Fx and MI (64) (146) 187 132 4,289 4,986 1) EGCO's total revenues for the first half of 2008, amounting to Baht 152 million, were comprised of dividend income from financial investment of Baht 78 million, interest income of Baht 45 million and other income of Baht 29 million. Compared to the same period of 2007, this showed a decrease of Baht 66 million or 30%, which mainly resulted from lower other income of Baht 40 million or 57% lower due to the gain from selling open-ended funds in 2007 as well as lower dividend income during the first half of 2008 of Baht 31 million or 28% due to Eastern Water Resources Development and Management Public Company Limited (EASTW) being the only source of dividend of Baht 78 million. Total expenses of EGCO were Baht 350 million, a decrease from the same period of 2007 by Baht 15 million or 4%. This resulted mainly from the decrease in advertising expenses and 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 3,718 million, a decrease of Baht 192 million or 5% as compared to the same period of last year, meanwhile the total expenses were Baht 2,318 million, down by Baht 33 million or 1%. The share of profits from joint ventures were reported at Baht 2,545 million (including a loss from foreign exchange rate of Baht 11 million), down by Baht 402 million or 14% as compared to the same period of 2007 which showed the share of profits totaling Baht 2,947 million (including a gain from foreign exchange rate of Baht 490 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 1H08 1H07 1H08 1H07 1H08 1H07 Total revenues 1,941 1,804 1,778 2,107 - - Total expenses 1,184 1,065 1,134 1,286 - - Profits bf Share of Profits (Loss) from JVEs 757 739 644 820 - - Share of Profits (Loss) from JVEs - - - - 1,894 2,525 Net Profit bf Subs's Fx and MI 757 739 644 820 1,894 2,525 GPG Total 1H08 1H07 1H08 1H07 %Chg Total revenues - - 3,718 3,911 (5%) Total expenses - - 2,318 2,351 (1%) Profits bf Share of Profits (Loss) from JVEs - - 1,400 1,560 (10%) Share of Profits (Loss) from JVEs 651 422 2,545 2,947 (14%) Net Profit bf Subs's Fx and MI 651 422 3,945 4,507 (12%) * Sales of electricity of IPP Group were Baht 3,686 million, representing a decrease of Baht 161 million or 4% compared to the same period of last year. The decrease was a result of KEGCO's lower electricity sales by Baht 300 million to register Baht 1,760 million caused by a decrease in the Base Availability Credit for KEGCO. Meanwhile, REGCO's electricity sales increased by Baht 139 million to register Baht 1,927 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 June 30, 2008, the electricity revenue under the foreign currency forward contract of USD 36 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 1H08 1H07 %Changes REGCO 1,927 1,788 8% KEGCO 1,760 2,059 (15%) Total Sales of Electricity - IPP Group 3,686 3,847 (4%) 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 six-month period of 2008, REGCO and KEGCO received compensation for the exchange rate effect of Baht 136 million. * Interest income and others amounted to Baht 32 million, a decrease of Baht 31 million or 49%, mainly from the decrease of KEGCO's and REGCO's (more)