Management Discussion and Analysis year 2008

Management Discussion and Analysis For the Annual Operating Results Ended December 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 structured as a holding company which invests in subsidiaries, associates and interests in joint ventures, totaling 15 companies. All of EGCO's subsidiaries, associates and interests in joint ventures can be categorized into four investment groups as follows: 1. Independent Power Producer (IPP) consists of Rayong Electricity Generating Co., Ltd. (REGCO), Khanom Electricity Generating Co., Ltd. (KEGCO), BLCP Power Limited (BLCP) and Gulf Power Generation Co., Ltd (GPG). 2. Small Power Producer (SPP) consists of Gulf Electric Public Company Limited (GEC)(excluding GPG), EGCO Cogeneration Co., Ltd. (EGCO Cogen), Roi-Et Green Co., Ltd. (Roi-Et Green), Amata-EGCO Power Ltd. (AEP) and Amata Power (Bangpakong) Ltd. (APBP). 3. Overseas consists of Conal Holdings Corporation (Conal), Nam Theun 2 Power Co., Ltd. (NTPC) and Quezon Power (Philippines) Limited Co. (Quezon). 4. Other Business consists of EGCO Engineering & Service Co., Ltd. (ESCO), Egcom Tara Co., Ltd. (ET) and Amata Power-ESCO Service Co.,Ltd. (AMESCO). EGCO, Subsidiaries, Associates and Interests in Joint Ventures entities hereinafter collectively referred to as EGCO Group /1 possesses 13 operating plants, totaling 3,967.6 equity MW at present. In 2008, EGCO Group's significant events, which increased revenues and equity MW, are summarized as follows: - Combined cycle gas turbine IPP project of GPG, the Kaeng Khoi 2 (KK2) unit 2, with the installed capacity of 755 MW achieved its Commercial Operating Date (COD) on February 27, 2008. - The sale of shares in AEP, APBP and AMESCO to Amata Power Ltd. (Amata Power) in May 2008. - The purchase of 23.4% stake in Quezon which owns, operates and maintains a 502.50 MW (installed capacity) coal-fired power plant on November 29, 2008. /1 Subsidiaries: REGCO, KEGCO, EGCO Cogen, Roi-Et Green, ESCO and ET Associate: AEP Interests in joint ventures: BLCP, GPG, APBP, GEC (excluding GPG), Conal, NTPC, Quezon and AMESCO The decrease in the demand for electricity of Thailand caused by the economic slowdown has an influence on the future growth, financial position and operating results of EGCO Group. Therefore, to sustain EGCO Group's market share and strength in the energy sector, EGCO's business strategy will place more emphasis on expanding investment opportunities in (i) ASEAN markets, (ii) fuel-related projects, and (iii) prospective domestic projects using renewable energy as fuel sources. EGCO Group's consolidated net profit for 2008 ended December 31, 2008 was Baht 6,927 million, a decrease of Baht 1,475 million or 18% compared to 2007. Excluding the loss on foreign exchange rate due to the Baht depreciation, which was mostly an accounting number to be shown in accordance with the Thai Accounting Standard, EGCO Group's profit was Baht 7,491 million, an increase of Baht 99 million or 1.34% mainly resulting from GPG's recognition of the KK2 unit 2's operating result, which achieved COD on February 27, 2008. Meanwhile, the decrease in KEGCO's electricity sales was from a decrease in the Base Availability Credit. 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, associates and joint ventures. 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 (PPAs). 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. At the end of the year 2008, Thailand's total generating capacity was reported at 29,891.65 MW /2. During the year 2008, the peak demand reached 22,568 MW /2 in April 2008, which was 0.08% slightly lower than the peak demand in April 2007. /2 Source: EGAT During the year 2008, the declining economy has lowered the demand for electricity, which has urged EGAT to postpone the COD in many projects, including the three independent power producers who won 2007 IPP bidding, for another year. EGAT would also delay a number of coal fired and nuclear power plants, as well as an agreement with neighboring countries to push back supplying power to EGAT by another year. In the meantime, the Ministry of Energy is revising the SPP plan in order to stimulate private investment after EGAT agreed to delay the operation date of its power plants and the three IPPs. The PDP2007 is now in the process of being revised. To sustain EGCO Group's market share and strength in energy sector, EGCO's business strategy will place more emphasis on expanding investment opportunities in ASEAN markets, fuel-related projects, and prospective domestic projects using renewable energy as fuel sources. As of December 31, 2008, EGCO Group has 13 operating plants /3 with capacity totaling 3,967.6 equity MW representing 13.27% of Thailand's total generating capacity, of which 3,589.5 equity MW is contracted for sale to EGAT under long-term PPAs. Out of EGCO's total equity MW portfolio, 51.82% comprises two natural gas-fired IPPs which are the 1,232 MW REGCO plant and the 824 MW KEGCO plant. /3 EGCO sold off its entire 50% stake in two power plants: AEP and APBP to Amata Power in May 2008. This represents a disposal of 41.3 equity MW. Moreover, EGCO Group has 50% stake in BLCP Power facility or 717 equity MW which represents 18.07% 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 Group also has 50% stake in KK2 project (by holding 50% of shares in GEC which holds 99.99% in GPG, the project owner) or 755 equity MW which represents 19.03% of EGCO's total equity MW portfolio. KK2 project is a 1,510 MW natural gas-fired power plant located in Saraburi province comprising two combined cycle units, 755 MW each. The COD for KK2 project unit 1 was on May 5, 2007 and the COD for unit 2 was on February 27, 2008. On November 29, 2008, EGCO International (B.V.I.) Ltd. (EGCO BVI), a wholly owned subsidiary of EGCO, purchased 90% of the outstanding shares of GPI Quezon Ltd. (GPIQ). This purchase provided EGCO BVI with a 23.4% indirect ownership interest in Quezon which owns, operates and maintains 502.50 MW (installed capacity) coal-fired electric generation or 117.60 equity MW. EGCO is also a shareholder in Nam Theun 2 project which is currently under development with the project's COD targeted for December 2009. This project represents an additional 271.70 equity MW. The project is a 1,086.80 MW (installed capacity) hydroelectric power plant located in the Lao PDR. EGCO holds a 25% ownership in the project company, NTPC. EGAT is contracted to take off 995 MW and the balance will be sold to the Lao PDR. At the end of December 2008, the overall project progress was 95.1% 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. Interim dividend for the first-half operating results of 2008 was paid at the rate of Baht 2.50 per share. 3. Report and Analysis of the Operating Results This report contains the analysis of the financial statements of EGCO, subsidiaries, associates and interests in joint ventures as follows: 3.1 Operational Results Unit : Million Baht Profit of 2008 Profit of 2007 Before FX After FX Before FX After FX EGCO (598) (565) (393) (393) IPP 7,195 6,707 6,965 7,795 SPP 599 452 564 947 Overseas 21 57 1.32 (197) Other Business 274 275 255 250 Total 7,491 6,927 7,392 8,402 Remarks: - Profits before FX separate out foreign exchange impact from EGCO, subsidiaries and joint ventures. - IPP : REGCO, KEGCO, BLCP, GPG - SPP : GEC (excluding GPG), AEP, APBP, EGCO Cogen, Roi-Et Green - Overseas : Conal, NTPC, Quezon - Others : ESCO, ET, AMESCO EGCO Group's profit before the effect of foreign exchange rate of EGCO Group for 2008 ended December 31, 2008 was Baht 7,491 million, representing an increase of Baht 99 million or 1.34% as compared to 2007 thanks to the increase in the share of profit from KK2 unit 2 (which achieved COD on February 27, 2008) that was greater than the decline in KEGCO's profit caused by a decrease in the Base Availability Credit. Taking the loss on foreign exchange rate caused by the Baht depreciation into account, EGCO Group's profit for 2008 was Baht 6,927 million, a decrease of Baht 1,475 million or 18% compared to the previous year. In 2008, EGCO Group's loss on foreign exchange rate totaled Baht 564 million while in 2007 it registered a foreign exchange gain of Baht 1,011 million. This creates a difference caused by foreign exchange rate of Baht 1,575 million between 2007 and 2008. The gain (loss) on foreign exchange rate is mostly an accounting number to be shown in accordance with the Thai Accounting Standard. It incurs from the difference of the translation of the net debt denominated in foreign currency into the Thai Baht equivalent amount using the foreign exchange rate at the end of this accounting period (December 31, 2008) and the previous period (December 31, 2007). The loss on foreign exchange rate of 2008 are as follows: - The loss on foreign exchange rate of EGCO and subsidiaries of Baht 25 million, an increase in the loss of Baht 146 million compared to the previous year, which recorded the gain from foreign exchange rate of Baht 121 million. - The loss on foreign exchange rate of joint ventures of Baht 539 million, an increase in the loss of Baht 1,428 million compared to the previous year, which showed the gain from foreign exchange rate of Baht 890 million. Gain (Loss) on FX from Joint Ventures: Unit : Million Baht 2008 2007 BLCP (231) 591 GPG (287) 170 GEC (excluding GPG) (61) 316 APBP and AEP 6 11 Conal 53 11 NTPC (8) (210) Quezon (10) - Total Gain (Loss) from FX (539) 890 The gross profit of EGCO and subsidiaries was reported at Baht 4,430 million, down by Baht 799 million or 15% as compared to the previous year, as a result of lower contracted electricity sales of KEGCO and EGCO Cogen's higher cost of sales due to maintenance cost under planned outage. The operating profit of EGCO and subsidiaries was reported at Baht 3,735 million, a decrease of Baht 1,223 million or 25% as compared to 2007. The additional reason for the lower operating profit in 2008 is the gain from the disposal of open-ended funds in 2007 while there was no such gain in 2008. As for EGCO Group, excluding the effect of foreign exchange loss of Baht 564 million, finance costs of Baht 2,618 million, income tax of Baht 913 million and depreciation and amortization of Baht 4,410 million, the earnings before finance costs, tax, depreciation and amortization (EBITDA) for 2008 would be Baht 15,432 million, representing an increase of Baht 479 million or 3% as compared to 2007, in which the EBITDA was Baht 14,953 million, excluding the effect of foreign exchange gain of Baht 1,011 million, finance costs of Baht 2,663 million, income tax amounting to Baht 753 million and depreciation and amortization amounting to Baht 4,146 million. Important Financial Ratios for the period were as follows: - Gross Profit Ratio was 42.93% - Operating Profit Ratio was 36.19% - Net Profit Ratio was 45.22% - Net Profit Ratio (excluding the effect of foreign exchange of EGCO and subsidiaries) was 45.39% - Earnings per share (EPS) was Baht 13.16 - Earnings (excluding the effect of foreign exchange of EGCO and subsidiaries) per share (EPS) was Baht 13.21 - Return on Equity (ROE) was 16.01% The gross profit margin of 42.93% was lower than the previous year's margin of 47.80% due to a decrease in gross profit of KEGCO from lower electricity sales; whereas the net profit ratio (excluding the effect of foreign exchange of EGCO and subsidiaries) was reported at 45.39%, lower than 2007 ratio of 49.75% mainly due to a decrease of share of profits from BLCP. 3.2 Income, Expense and Share of profits from Joint Ventures Analysis The 2008 annual operating results, excluding FX of EGCO Group and profit attributable to minorities (MI), are as follows: - Total revenues were Baht 10,712 million, a decrease of Baht 882 million or 8% compared to 2007. - Total expenses were Baht 8,293 million, an increase of Baht 63 million or 1% from the previous year. - The share of profits from joint ventures for 2008 was Baht 5,157 million, an increase of Baht 995 million or 24% compared to the previous year. 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 2008 2007 2008 2007 2008 2007 Total Revenues 249 498 7,195 7,910 2,234 2,186 Total Expenses 847 891 4,767 4,813 1,961 1,822 Profits bf Share of Profits (Loss) from JVEs (598) (393) 2,428 3,097 273 364 Share of Profits (Loss) from JVEs - - 4,767 3,868 365 290 Net Profit bf FX and MI (598) (393) 7,195 6,965 638 654 Overseas Others Total 2008 2007 2008 2007 2008 2007 Total Revenues - - 1,034 1,000 10,712 11,594 Total Expenses - - 717 703 8,293 8,230 Profits bf Share of Profits (Loss) from JVEs - - 317 297 2,419 3,364 Share of Profits (Loss) from JVEs 21 1.32 3.68 2.29 5,157 4,162 Net Profit bf FX and MI 21 1.32 320 300 7,576 7,526 1) EGCO's total revenues in 2008, amounting to Baht 249 million decreased by Baht 248 million or 50%, which mainly resulted from other income of Baht 61 million, down by Baht 240 million or 80% lower because there was a gain from the disposal of open-ended funds in 2007 while there was no such gain in 2008; in addition, dividend income in 2008 decreased by 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. Meanwhile, interest income of Baht 110 million increased by Baht 47 million or 75% from a higher deposit amount. Total expenses of EGCO were Baht 847 million, a decrease from 2007 by Baht 44 million or 5%. This resulted mainly from the decrease in advertising expenses and project development expenses which included consulting fees. 2) IPP's total revenues were Baht 7,195 million, a decrease of Baht 715 million or 9% as compared to previous year, meanwhile the total expenses were Baht 4,767 million, down by Baht 46 million or 1%. The share of profits from joint ventures was reported at Baht 4,767 million, an increase by Baht 899 million or 23% as compared to 2007. The details are as follows: Total Revenues, Total Expenses and Share of Profits (Loss) from JVEs of IPP: Unit : Million Baht REGCO KEGCO BLCP 2008 2007 2008 2007 2008 2007 Total revenues 3,952 3,600 3,243 4,311 - - Total expenses 2,448 2,183 2,319 2,630 - - Profits bf Share of Profits (Loss) from JVEs 1,505 1,416 923 1,681 - - Share of Profits (Loss) from JVEs - - - - 3,200 3,315 Net Profit bf FX and MI 1,505 1,416 923 1,681 3,200 3,315 GPG Total 2008 2007 2008 2007 %Chg Total revenues - - 7,195 7,910 (9%) Total expenses - - 4,767 4,813 (1%) Profits bf Share of Profits (Loss) from JVEs - - 2,428 3,097 (22%) Share of Profits (Loss) from JVEs 1,567 553 4,767 3,868 23% Net Profit bf FX and MI 1,567 553 7,195 6,965 3% * Sales of electricity of IPP were Baht 7,105 million, representing a decrease of Baht 704 million or 9% compared to the previous year. The decrease was a result of KEGCO's lower electricity sales by Baht 1,024 million to register Baht 3,211 million caused by a decrease in the Base Availability Credit for KEGCO. Meanwhile, REGCO's electricity sales increased by Baht 320 million to register Baht 3,894 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 December 31, 2008, the electricity revenues under the foreign currency forward contract of USD 24.29 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: Unit : Million Baht 2008 2007 %Changes REGCO 3,894 3,574 9% KEGCO 3,211 4,235 (24%) Total Sales of Electricity - IPP 7,105 7,809 (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. In 2008, REGCO and KEGCO received compensation for the exchange rate effect of Baht 320 million. * Interest income and others amounted to Baht 90 million, a decrease of Baht 11 million or 11%, mainly from the decrease of KEGCO's and REGCO's interest income by Baht 42 million and Baht 8 million, respectively, owing to lower interest rates. Meanwhile, other income of REGCO increased by Baht 41 million mainly from environmental management fee. (more)