Management Discussion and Analysis for Q3-2008

Management Discussion and Analysis For the Nine-month Period Operating Results Ended September 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 nine months 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 nine months ended September 30, 2008, was Baht 6,268 million, a decrease of Baht 1,100 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 6,258 million, representing a decrease of Baht 1,012 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 314 million, representing an increase in the loss of Baht 146 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 5,896 million, down Baht 806 million mostly due to the lower in BLCP's share of profit, which was caused by a decrease in electricity sales, a lower gain from foreign exchange rate and a higher maintenance cost. * 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 484 million, which included the share of profits from AEP and APBP until May 15, 2008, a decrease of Baht 276 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 31 million, a decrease in the loss by Baht 178 million compared to the same period of 2007 mainly resulting from NTPC's decreased share of loss by Baht 146 million from a lower loss on foreign exchange rate. Moreover, Conal's share of profit increased by Baht 33 million from a decrease in interest expenses, owing to the pretermination of long term loans, and 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 223 million, which included the share of profit from AMESCO until May 15, 2008, rising Baht 38 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 September 2008, Thailand's total generating capacity was reported at 29,891.65 MW/1. During the first three quarters 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 Following the decline in demand for electricity, EGAT's power reserve margin has increased to 28% this year. As a result, EGAT is adjusting its power development plan to better serve market demand to match the economic downturn. Moreover, five projects in Lao PDR under negotiation for tariff were postponed due to the higher cost of construction materials. For EGCO, our business strategy will place more emphasis on expanding investment opportunities in ASEAN markets. 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 September 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 September, 2008, the overall project progress was 90.5% 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 first nine months of 2008 ended September 30, 2008 was Baht 6,268 million, a decrease of Baht 1,100 million or 15% compared to the same period of 2007; this was caused mainly by a decrease of total revenue by Baht 569 million, owing to a high drop in KEGCO's electricity sales and the share of profits from joint ventures amounting to Baht 435 million, primarily from BLCP. The gross profit was reported at Baht 3,590 million, down by Baht 462 million or 11% 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 3,229 million, a decrease of Baht 773 million or 19% as compared to the same period of 2007. The fall in electricity sales, interest income and foreign exchange gain at EGCO and subsidiaries, were the main factors behind the drop in the operating profit. Unit : Million Baht Net Profit of 9M08 Net Profit of 9M07 Before FX After FX Before FX After FX EGCO (314) (314) (169) (169) IPP Group 5,896 5,934 6,702 6,761 SPP Group 484 455 760 806 Overseas Group (31) (31) (209) (209) Other Business Group 223 224 185 179 Total 6,258 6,268 7,270 7,369 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 nine months of 2008 included a foreign exchange gain from EGCO and subsidiaries of only Baht 11 million whereas it incurred a foreign exchange gain of Baht 99 million in the same period of 2007. An unrealized foreign currency exchange loss in the amount of Baht 29 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 (September 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 6,258 million, representing a decrease of Baht 1,012 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 11 million, interest expenses of Baht 468 million, income tax of Baht 521 million and depreciation and amortization of Baht 1,666 million, the earnings before interest, tax,depreciation and amortization (EBITDA) for the fisrt nine months of 2008 would be Baht 8,914 million, representing a decrease of Baht 1,045 million or 10% as compared to the same period of 2007, in which the EBITDA was Baht 9,958 million, excluding the effect of foreign currency exchange gain of Baht 99 million, interest expenses of Baht 619 million,income tax amounting to Baht 456 million and depreciation and amortization amounting to Baht 1,613 million. /1 /1 Excluding the effect of foreign currency exchange, interest expenses, income tax, depreciation and amortization of joint ventures, EBITDA was Baht 12,370 million for the first nine months of 2008 and Baht 12,078 million for the first nine months of 2007. Important Financial Ratios for the period were as follows: - Gross Profit Ratio was 45.03% - Operating Profit Ratio was 40.50% - Net Profit Ratio was 50.75% - Net Profit Ratio (excluding the effect of foreign exchange from EGCO and subsidiaries) was 50.66% - Earnings per share (EPS) was Baht 11.91 - Earnings (excluding the effect of foreign exchange from EGCO and subsidiaries) per share (EPS) was Baht 11.89 - Return on Equity (ROE) was 14.55% The gross profit margin of 45.03% was lower than the same period of last year's margin of 48.72% 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 50.66%, lower than the same period of 2007 ratio of 54.38% 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 nine months 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 8,252 million, a decrease of Baht 569 million or 6% compared to the same period of 2007. - Total expenses were Baht 6,023 million, an increase of Baht 31 million or 1% from the same period of last year. The share of profits from joint ventures for the first nine months of 2008 were Baht 4,114 million (including a loss from foreign exchange rate of Baht 195 million), a decrease of Baht 435 million or 10% compared to the same period of last year which showed the share of profits totaling Baht 4,549 million (including a gain from foreign exchange rate of Baht 667 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 9M08 9M07 9M08 9M07 9M08 9M07 Total Revenues 194 380 5,526 6,079 1,670 1,623 Total Expenses 509 549 3,486 3,589 1,422 1,331 Profits bf Share of Profits (Loss) from JVEs (314) (169) 2,040 2,490 248 292 Share of Profits (Loss) from JVEs - - 3,856 4,212 285 541 Net Profit bf Subs's Fx and MI (314) (169) 5,896 6,702 533 833 Overseas Others Total 9M08 9M07 9M08 9M07 9M08 9M07 Total Revenues - - 861 739 8,252 8,821 Total Expenses - - 606 524 6,023 5,993 Profits bf Share of Profits (Loss) from JVEs - - 255 215 2,229 2,828 Share of Profits (Loss) from JVEs (31) (209) 4 5 4,114 4,549 Net Profit bf Subs's Fx and MI (31) (209) 259 219 6,343 7,377 1) EGCO's total revenues for the first nine months of 2008, amounting to Baht 194 million, were comprised of dividend income from financial investment of Baht 78 million,interest income of Baht 74 million and other income of Baht 42 million. Compared to the same period of 2007, this showed a decrease of Baht 186 million or 49%, which mainly resulted from lower other income of Baht 154 million or 79% lower due to the gain from selling open-end funds in 2007 as well as lower dividend income during the first nine months of 2008 of Baht 56 million or 42% 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 509 million, a decrease from the same period of 2007 by Baht 40 million or 7%. 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 5,526 million, a decrease of Baht 553 million or 9% as compared to the same period of last year, meanwhile the total expenses were Baht 3,486 million, down by Baht 103 million or 3%. The share of profits from joint ventures was reported at Baht 3,856 million (including a loss from foreign exchange rate of Baht 185 million), down by Baht 357 million or 8% as compared to the same period of 2007 which showed the share of profits totaling Baht 4,212 million (including a gain from foreign exchange rate of Baht 569 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 9M08 9M07 9M08 9M07 9M08 9M07 Total revenues 2,921 2,705 2,605 3,374 - - Total expenses 1,815 1,600 1,671 1,988 - - Profits bf Share of Profits (Loss) from JVEs 1,106 1,104 934 1,386 - - Share of Profits (Loss) from JVEs - - - - 2,790 3,632 Net Profit bf Subs's Fx and MI 1,106 1,104 934 1,386 2,790 3,632 GPG Total 9M08 9M07 9M08 9M07 %Chg Total revenues - - 5,526 6,079 (9%) Total expenses - - 3,486 3,589 (3%) Profits bf Share of Profits (Loss) from JVEs - - 2,040 2,490 (18%) Share of Profits (Loss) from JVEs 1,066 581 3,856 4,212 (8%) Net Profit bf Subs's Fx and MI 1,066 581 5,896 6,702 (12%) * Sales of electricity of IPP Group were Baht 5,485 million, representing a decrease of Baht 517 million or 9% compared to the same period of last year. The decrease was a result of KEGCO's lower electricity sales by Baht 737 million to register Baht 2,581 million caused by a decrease in the Base Availability Credit for KEGCO. Meanwhile, REGCO's electricity sales increased by Baht 220 million to register Baht 2,903 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 September 30,2008, the electricity revenue under the foreign currency forward contract of USD 30 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 9M08 9M07 %Changes REGCO 2,903 2,684 8% KEGCO 2,581 3,318 (22%) Total Sales of Electricity - IPP Group 5,485 6,002 (9%) 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 nine-month period of 2008, REGCO and KEGCO received compensation for the exchange rate effect of Baht 223 million. * Interest income and others amounted to Baht 41 million, a decrease of Baht 36 million or 46%, mainly from the decrease of KEGCO's and REGCO's interest income by Baht 32 and 9 million, respectively, owing to lower interest rates. * Cost of sales totaled Baht 2,539 million, a decrease of Baht 37 million (more)