Management Discussion and Analysis for Q1-2009

Management Discussion and Analysis For the Three-month Operating Results Ended March 31, 2009 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, However, the information provided in this MD&A may vary if any 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 and interests in joint ventures. After the sale of shares in Amata-EGCO Power Ltd. (AEP), Amata Power (Bangpakong) Ltd. (APBP) and Amata Power-ESCO Service Co., Ltd. (AMESCO) as well as the purchase of shares in Quezon Power (Philippines) Limited Co. (Quezon) in 2008, EGCO's subsidiaries 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) and Roi-Et Green Co., Ltd. (Roi-Et Green). 3. Overseas consists of Conal Holdings Corporation (Conal), Nam Theun 2 Power Co., Ltd. (NTPC) and Quezon. 4. Other Business consists of EGCO Engineering & Service Co., Ltd. (ESCO) and Egcom Tara Co., Ltd. (ET). EGCO, Subsidiaries and Interests in Joint Ventures entities hereinafter collectively referred to as EGCO Group/1 possesses 13 operating plants, totaling 3,980.7 equity MW at present, an increase of 13.1 MW compared to the total equity MW at the end of 2008. This was caused by the additional purchase of 2.6% stake in Quezon (26% in total) which owns, operates and maintains a 502.5 MW (installed capacity) coal-fired power plant on March 30, 2009. /1 Subsidiaries: REGCO, KEGCO, EGCO Cogen, Roi-Et Green, ESCO and ET Interests in joint ventures: BLCP, GPG, GEC (excluding GPG), Conal,NTPC and Quezon EGCO Group's consolidated net profit for the three-month period ended March 31, 2009 was Baht 2,239 million, a decrease of Baht 578 million or 21% compared to the same period of last year. 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 2,360 million, an increase of Baht 217 million or 10% mainly resulting from the increase in GPG's electricity sales due to the Kaeng Khoi 2 (KK2) unit 2 which achieved its Commercial Operating Date (COD) on February 27, 2008 as well as the recognition of Quezon's operating result since December 2008, which both increases were more than the decrease in KEGCO's electricity sales due to 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 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, with full commitment to environment protection and social development support. 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. As of March 31, 2009, Thailand's total installed capacity was reported at 28,479 MW/2. During the first quarter of the year 2009, the peak demand reached 21,318 MW/2 on March 13, 2009, which was 5.54% lower than the peak demand in April 2008. /2 Source: EGAT The National Energy Policy Council has approved the revised National Power Development Plan or PDP 2007 (2nd revision) on March 9, 2009, which has been in line with declining economic growth. The significant adjustments are: delaying the purchase of power from two independent power producers who won the previous IPP bidding by another year, identifying the new power plant in Khanom District, located in Southern Thailand, to replace Khanom Power Plant which will expire in 2016, accelerating the purchase of power from small power producers earlier than planned, reducing the power purchase from neigboring countries, and adjusting the capacity of nuclear power plants to 1,000 MW in 2020 and 1,000 MW in 2021. 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 at the end of March, 2009, EGCO Group has 13 operating plants with capacity totaling 3,980.7 equity MW, of which 3,589.5 equity MW, representing 12.60% of Thailand's total installed capacity, is contracted for sale to EGAT under long-term PPAs. Out of EGCO's total equity MW portfolio, 51.65% comprises two natural gas-fired IPPs which are the 1,232-MW REGCO plant and the 824-MW KEGCO plant. Moreover, EGCO Group has 50% stake in BLCP Power facility or 717 equity MW which represents 18.01% 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 18.97% 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. On March 30, 2009, EGCO International (B.V.I.) Ltd. (EGCO BVI), a wholly-owned subsidiary of EGCO, purchased 100% shares of GPI-I Ltd. (GPI-I) from GPSF Cayman I LDC. GPI-I indirectly holds 2.6% stake in Quezon, which owns, operates and maintains a 502.5 MW (installed capacity) coal-fired electric generation and connecting transmission facility in Quezon city, the Republic of the Philippines.This transaction increases EGCO's aggregate ownership in Quezon from 23.4% to 26%,representing a capacity of 130.7 equity MW. EGCO is also a shareholder in Nam Theun 2 project which is currently under construction with the project's COD targeted for December 2009. This project represents an additional 271.7 equity MW in EGCO's portfolio. The project is a 1,086.8-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 March, 2009, the overall project progress was 97% 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 This report contains the analysis of the financial statements of EGCO, subsidiaries and interests in joint ventures as follows: 3.1 Operational Results Unit : Million Baht Profit of 3M2009 Profit of 3M2008 Before FX After FX Before FX After FX EGCO (24) (24) (43) (43) IPP 2,059 1,884 1,935 2,678 SPP 163 137 168 341 Overseas 105 185 (6) (237) Other Business 57 58 88 78 Total 2,360 /3 2,239 2,143 /3 2,817 /3 Profit before FX shown in the table is different from profit before FX calculated from the consolidated financial statements because the consolidated financial statements show currency exchange gains (losses) of EGCO and Subsidiaries, but not those of joint ventures. The share of profit (loss) from interests in joint ventures is a figure net of currency exchange gains (losses). Remarks: - Profits before FX separate out foreign exchange impact from EGCO, subsidiaries and joint ventures. - IPP : REGCO, KEGCO, BLCP, GPG - SPP : GEC (excluding GPG), EGCO Cogen, Roi-Et Green, APBP, AEP - Overseas : Conal, NTPC, Quezon - Others : ESCO, ET, AMESCO - APBP, AEP and AMESCO were sold in May 2008 and Quezon was acquired in November 2008. EGCO Group's profit before the effect of foreign exchange rate of EGCO Group for the three-month period ended March 31, 2009 was Baht 2,360 million, representing an increase of Baht 217 million or 10% as compared to the same period of last year thanks to an increase in GPG's electricity sales from the KK2 unit 2 which achieved its COD on February 27, 2008 and the recognition of Quezon's operating result since December 2008, that were greater than the decline in KEGCO's electricity sales 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 the three-month period of 2009 was Baht 2,239 million,a decrease of Baht 578 million or 21% compared to the same period of the previous year. For the three-month period of 2009, EGCO Group's loss on foreign exchange rate totaled Baht 121 million while in the same period of 2008 it registered a foreign exchange gain of Baht 674 million. This creates a difference caused by foreign exchange rate of Baht 795 million. 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 (March 31, 2009) and the previous period (December 31, 2008). The loss on foreign exchange rate of the three-month period of 2009 in the amount of Baht 121 million are as follows: - The loss on foreign exchange rate of EGCO and subsidiaries of Baht 0.24 million, an increase in the loss of Baht 49 million compared to the same period of the previous year, which recorded the gain from foreign exchange rate of Baht 49 million. - The loss on foreign exchange rate of joint ventures of Baht 121 million, an increase in the loss of Baht 746 million compared to the same period of the previous year, which showed the gain from foreign exchange rate of Baht 625 million. Gain (Loss) on FX from Joint Ventures:Unit : Million Baht 3M09 3M08 BLCP (93) 504 GPG (73) 209 GEC (excluding GPG) (34) 134 APBP and AEP * - 10 Conal 7 4 NTPC 72 (235) Quezon 1 - Total Gain (Loss) from FX (121) 625 * APBP and AEP were sold in May 2008 As for EGCO Group, excluding the effect of foreign exchange loss of Baht 121 million,finance costs of Baht 692 million, income tax of Baht 276 million and depreciation and amortization of Baht 1,190 million, the earnings before finance costs, tax, depreciation and amortization (EBITDA) for the three-month period of 2009 would be Baht 4,519 million, representing an increase of Baht 382 million or 9% as compared to the same period of 2008, in which the EBITDA was Baht 4,137 million, excluding the effect of foreign exchange gain of Baht 674 million, finance costs of Baht 640 million, income tax amounting to Baht 240 million and depreciation and amortization amounting to Baht 1,115 million. The gross profit of EGCO and subsidiaries was reported at Baht 1,019 million, down by Baht 325 million or 24% as compared to the same period of the previous year, as a result of lower contracted electricity sales of KEGCO. The same reason, as well as the loss on foreign exchange rate, caused the operating profit of EGCO andsubsidiaries to fall to Baht 990 million, a decrease of Baht 332 million or 25% as compared to the same period of 2008. Important Financial Ratios for the period were as follows: - Gross Profit Ratio was 43.02% - Operating Profit Ratio was 41.77% - Net Profit Ratio was 54.12% - Net Profit Ratio (excluding the effect of foreign exchange of EGCO and subsidiaries) was 54.13% - Earnings per share (EPS) was Baht 4.25 - Earnings (excluding the effect of foreign exchange of EGCO and subsidiaries) per share (EPS) was Baht 4.25 - Return on Equity (ROE) was 4.85% The gross profit margin of 43.02% was lower than the same period of the previous year's margin of 48.91% 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 54.13%, lower than the same period of 2008 ratio of 58.21% mainly due to a decrease of BLCP's share of profits from the loss on foreign exchange. 3.2 Income, Expense and Share of profits from Joint Ventures Analysis The three-month operating results of 2009, excluding FX of EGCO Group and profit attributable to minorities (MI), are as follows: - Total revenues were Baht 2,521 million, a decrease of Baht 360 million or 12% compared to the same period of 2008. - Total expenses were Baht 1,864 million, a decrease of Baht 84 million or 4% from the same period of 2008. - The share of profits from joint ventures was Baht 1,737 million, an increase of Baht 487 million or 39% compared to the same period of 2008. The details according to their groups of business are as follows: Total Revenues, Total Expenses and Share of Profits (Losses) from JVEs: Unit : Million Baht EGCO IPP SPP 3M09 3M08 3M09 3M08 3M09 3M08 Total Revenues 124 112 1,590 1,901 581 556 Total Expenses 148 154 1,060 1,127 498 452 Profits bf Share of Profits (Losses) from JVEs (24) (42) 530 774 83 104 Share of Profits (Losses) from JVEs - - 1,529 1,162 103 91 Net Profit bf FX and MI (24) (42) 2,059 1,936 186 195 Overseas Others Total 3M09 3M08 3M09 3M08 3M09 3M08 Total Revenues - - 226 313 2,521 2,881 Total Expenses - - 157 215 1,864 1,948 Profits bf Share of Profits (Losses) from JVEs - - 69 98 658 933 Share of Profits (Losses) from JVEs 105 (6) - 2.41 1,737 1,249 Net Profit bf FX and MI 105 (6) 69 100 2,395 2,182 1) EGCO's total revenues for the three-month period of 2009, amounting to Baht 124 million increased by Baht 13 million or 12%, which mainly resulted from interest income of Baht 31 million, an increase by Baht 12 million or 64% from a higher deposit amount. Total expenses of EGCO were Baht 148 million, a decrease of Baht 6 million or 4%. This resulted mainly from the decrease in administrative expenses amounting to Baht 27 million, meanwhile, finance costs increased by Baht 21 million from the interest on the disbursement of revolving loan of Baht 3,500 million in November 2008. 2) IPP's total revenues were Baht 1,590 million, a decrease of Baht 311 million or 16% as compared to the same period of the previous year. The total expenses were Baht 1,060 million, down by Baht 67 million or 6%. The share of profits from joint ventures was reported at Baht 1,529 million, an increase by Baht 367 million or 32% as compared to the same period of 2008. The details are as follows: Total Revenues,Total Expenses and Share of Profits (Losses) from JVEs of IPP: Unit : Million Baht REGCO KEGCO BLCP 3M09 3M08 3M09 3M08 3M09 3M08 Total revenues 950 967 639 934 - - Total expenses 602 565 458 562 - - Profits bf Share of Profits (Losses) from JVEs 349 402 181 372 - - Share of Profits (Losses) from JVEs - - - - 971 873 Net Profit bf FX and MI 349 402 181 372 971 873 GPG Total 3M09 3M08 3M09 3M08 %Chg Total revenues - - 1,590 1,901 (16%) Total expenses - - 1,060 1,127 (6%) Profits bf Share of Profits (Losses) from JVEs - - 530 774 (32%) Share of Profits (Losses) from JVEs 558 288 1,529 1,162 32% Net Profit bf FX and MI 558 288 2,059 1,935 6% - Sales of electricity of IPP were Baht 1,570 million, representing a decrease of Baht 318 million or 17% compared to the same period of the previous year. The decrease was a result of KEGCO's lower electricity sales by Baht 292 million to register Baht 635 million caused by a decrease in the Base Availability Credit for KEGCO. Moreover, REGCO's electricity sales decreased by Baht 26 million to register Baht 935 million from a decrease 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. Sales of Electricity - IPP: Unit : Million Baht 3M09 3M08 %Changes REGCO 935 961 (3%) KEGCO 635 927 (32%) Total Sales of Electricity - IPP 1,570 1,888 (17%) 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 2009, REGCO and KEGCO received compensation for the exchange rate effect of Baht 61 million. - Interest income and others amounted to Baht 20 million, an increase of Baht 7 million or 53%, mainly from an increase of other income of REGCO by Baht 9 million due to an environmental management fee. Meanwhile, KEGCO's interest income decreased by Baht 3 million from lower deposit amount. - Cost of sales totaled Baht 756 million, a decrease of Baht 40 million or 5% from a decrease of KEGCO's cost of sales totaling Baht 39 million due to higher maintenance and heavy oil costs in the same period of last year. Cost of Sales - IPP: Unit : Million Baht 3M09 3M08 %Changes REGCO 431 431 0% KEGCO 325 364 (11%) Total Cost of Sales - IPP 756 796 (5%) - Administrative expenses and income taxes were Baht 241 million, an increase of Baht 9 million or 4%, mainly from higher tax payment at REGCO that amounted to Baht 43 million or 45% higher due to the end of corporate tax (more)