Management Discussion and Analysis Q3/2009

Management Discussion and Analysis For the Nine-month Period Operating Results Ended September 30, 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. In addition to 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, additional purchase of 2.6% stake in Quezon was made in March 2009 and Natural Energy Development Co.,Ltd. (NED) was acquired with the total stake of 33.33% in July 2009. Therefore, 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) Egcom Tara Co., Ltd. (ET) and NED. EGCO, Subsidiaries and Interests in Joint Ventures entities, hereinafter collectively referred to as EGCO Group /1, owns 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 (leading to a total stake of 26%) 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, Quezon and NED EGCO Group's consolidated net profit for the nine-month period ended September 30, 2009 was Baht 6,655 million, an increase of Baht 387 million or 6% compared to the same period of last year. Excluding the gain on foreign exchange rate, which was mostly a translation transaction to be shown in accordance with the Thai Accounting Standard, EGCO Group's profit was Baht 6,310 million, a decrease of Baht 144 million or 2%. This is mainly due to the decreases in electricity sales of KEGCO and REGCO caused by lower in the Base Availability Credit, lower service income of ESCO and higher EGCO Cogen's cost of sales due to schedule outage , which were more than offset by the increases of GPG's electricity sales due to the Kaeng Khoi 2 (KK2) unit 2 which achieved its Commercial Operating Date (COD) on February 27, 2008 and the recognition of revenues from Quezon's operating result,since December 2008. 2. Business Expansion Analysis EGCO group is the first IPP in Thailand established on May 12, 1992, structured as a holding company with a number of subsidiaries and joint ventures. Our 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 core business is to produce and supply electricity 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 optimum returns to shareholders by improving the profitability of our existing assets and acquiring new projects with acceptable risk and reasonable return profile. As of September 30, 2009, Thailand's total installed capacity was reported at 29,191 MW /1. During the third quarter of the year 2009, the peak demand reached 21,318 MW /1 on March 13, 2009, which was 5.54% lower than the peak demand in April 2008. /1 Source: EGAT On September 16, 2009, Energy Policy and Planning Office (EPPO) has set up the commiittee to prepare the new Power Development Plan or PDP 2009. The PDP 2009 requires the public hearing on the guideline to revise the current PDP to meet the changing in economic curcumstances and will be a long term plan (20 years) from 2010 onwards. The PDP 2009 will emphasize on 1) the stability of the country's power system by exploiting the variety sources and 2) using renewable energy to be Green PDP and in line with the 15-year alternative energy plan of the Ministry of Energy as well as 3) to support the efficient power generation system using Cogeneration. To maintain EGCO Group's market share and strength in the energy sector, EGCO's business strategy will place more emphasis on expanding investment opportunities in the ASEAN market, fuel-related projects, and prospective domestic projects using renewable energy. As at the end of September 2009, EGCO Group has 13 operating plants with 3,980.7 equity MW, of which 3,589.5 equity MW of the total capacity, representing 12.30% of Thailand's total installed capacity, is contracted for sale to EGAT under long-term PPAs. EGCO is also a shareholder in Nam Theun 2 project which is currently under construction and set to commence Commercial Operation in early 2010, postponed from the previous COD targeted in mid 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 remaining MW will be sold to the Lao PDR. At the end of September 2009, the overall project progress was 99.54% complete. 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 declaration 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 9M2009 Profit of 9M2008 Before FX After FX Before FX After FX EGCO (279) (279) (314) (314) IPP 5,760 6,186 6,081 5,934 SPP 384 481 490 455 Overseas 341 170 (27) (31) Other Business 104 96 223 224 Total 6,310 /1 6,655 6,453 /1 6,268 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, NED and AMESCO - APBP, AEP and AMESCO were sold in May 2008; Quezon and NED was acquired in November 2008 and July 2009, respectively. /1 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). EGCO Group's profit before the effect of foreign exchange rate for the nine-month period ended September 30, 2009 was Baht 6,310 million, representing a decrease of Baht 144 million or 2% compared to the same period of last year thanks to the decrease in electricity sales of KEGCO and REGCO caused by lower in the Base Availability Credit; lower service income of ESCO; and higher EGCO Cogen's cost of sale due to schedule outage. The total decreases were more than offset by the increases of GPG's electricity sales due to the Kaeng Khoi 2 (KK2) unit 2 which achieved its Commercial Operating Date (COD) on February 27, 2008 and the recognition of revenues from Quezon's operating result since December 2008. If including the gain on foreign exchange rate, EGCO Group's profit for the nine-month period of 2009 was Baht 6,655 million, an increase of Baht 387 million or 6%. EGCO Group's gain on foreign exchange rate totaled Baht 346 million while in the same period of 2008 it recorded a foreign exchange loss of Baht 185 million. This creates a difference caused by foreign exchange rate of Baht 530 million. The gain (loss) on foreign exchange rate is mostly a translation transaction 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 using the foreign exchange rate at the end of this accounting period (September 30, 2009) and the previous period (December 31, 2008). The gain on foreign exchange rate of the nine-month period of 2009 in the amount of Baht 346 million can be explained as follows: - The gain on foreign exchange rate of EGCO and subsidiaries of Baht 13 million, an increase of Baht 2 million compared to the same period of the previous year which recorded the gain from foreign exchange rate of Baht 11 million. - The gain on foreign exchange rate of joint ventures of Baht 333 million,an increase of Baht 528 million compared to the same period of the previous year which showed the loss from foreign exchange rate of Baht 195 million. Gain (Loss) on FX from Joint Ventures: Unit : Million Baht 9M09 9M08 BLCP 265 (25) GPG 173 (161) GEC (excluding GPG) 65 (12) APBP and AEP * - 6 Conal 2 39 NTPC (173) (42) Quezon 1 - Total Gain (Loss) from FX 333 (195) * APBP and AEP were sold in May 2008 The earnings before finance costs, tax, depreciation and amortization (EBITDA) for the nine-month period of 2009 was Baht 12,625 million, representing an increase of Baht 247 million or 2% as compared to the same period of 2008, in which the EBITDA was Baht 12,378 million. The gross profit of EGCO and subsidiaries was reported at Baht 2,741 million, down by Baht 858 million or 24%, as a result of lower contracted electricity sales of KEGCO and lower service income of ESCO from a decrease of maintenance service income and spare parts sale to overseas power plants. The same reason caused the operating profit of EGCO and subsidiaries to fall to Baht 2,313 million, a decrease of Baht 924 million or 29%. Important Financial Ratios for the nine-month period of 2009 were as follows: - Gross Profit Ratio was 40.22% - Operating Profit Ratio was 33.95% - Net Profit Ratio was 53.48% - Net Profit Ratio (excluding the effect of foreign exchange of EGCO and subsidiaries) was 53.37% - Earnings per share (EPS) was Baht 12.64 - Earnings (excluding the effect of foreign exchange of EGCO and subsidiaries) per share (EPS) was Baht 12.62 - Return on Equity (ROE) was 14.14% The gross profit margin of 40.22% was lower than the same period of the previous year's margin of 45.14% due to lower electricity sales of KEGCO and lower service income of ESCO; whereas the net profit ratio (excluding the effect of foreign exchange of EGCO and subsidiaries) was reported at 53.37%, higher than the same period of 2008 ratio of 50.66% mainly due to an increase in the share of profit from GPG and the recognition of the share of profit from Quezon. 3.2 Income, Expense and Share of Profits from Joint Ventures Analysis The nine-month operating results of 2009, excluding FX of EGCO Group and profit attributable to minorities (MI), are as follows: - Total revenues were Baht 7,109 million, a decrease of Baht 1,143 million or 14%. - Total expenses were Baht 5,719 million, a decrease of Baht 304 million or 5%. - The share of profits from joint ventures was Baht 5,003 million, an increase of Baht 693 million or 16%. 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 9M09 9M08 9M09 9M08 9M09 9M08 Total Revenues 215 194 4,622 5,526 1,682 1,670 Total Expenses 495 509 3,279 3,486 1,495 1,422 Profits bf Share of Profits (Losses) from JVEs (279) (314) 1,343 2,040 187 248 Share of Profits (Losses) from JVEs - - 4,418 4,041 251 292 Net Profit bf FX and MI (279) (314) 5,760 6,081 438 540 Overseas Others Total 9M09 9M08 9M09 9M08 9M09 9M08 Total Revenues - - 590 861 7,109 8,252 Total Expenses - - 450 606 5,719 6,023 Profits bf Share of Profits (Losses) from JVEs - - 140 255 1,390 2,229 Share of Profits (Losses) from JVEs 341 (27) (6) 4 5,003 4,310 Net Profit bf FX and MI 341 (27) 134 259 6,393 6,539 1) EGCO's total revenues for the nine-month period of 2009, amounting to Baht 215 million increased by Baht 21 million or 11% mostly from the increase of dividend income from Eastern Water Resources Development and Management Public Company Limited (EASTW) totaling Baht 31 million. Meanwhile, interest income decreased by Baht 19 million from lower interest rate. Total expenses of EGCO were Baht 495 million, a decrease of Baht 14 million or 3%. This resulted mainly from a decrease in administrative expenses amounting to Baht 49 million due to lower development expenses and advertising expenses, meanwhile, finance costs increased by Baht 35 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 4,622 million, a decrease of Baht 905 million or 16%. The total expenses were Baht 3,279 million, down by Baht 207 million or 6%. The share of profits from joint ventures was reported at Baht 4,418 million, an increase by Baht 377 million or 9%. The details are as follows: Total Revenues, Total Expenses and Share of Profits (Losses) from JVEs of IPP: Unit : Million Baht REGCO KEGCO BLCP 9M09 9M08 9M09 9M08 9M09 9M08 Total revenues 2,846 2,921 1,776 2,605 - - Total expenses 1,842 1,815 1,438 1,671 - - Profits bf Share of Profits (Losses) from JVEs 1,004 1,106 338 934 - - Share of Profits (Losses) from JVEs - - - - 2,835 2,814 Net Profit bf FX and MI 1,004 1,106 338 934 2,835 2,814 GPG Total 9M09 9M08 9M09 9M08 %Chg Total revenues - - 4,622 5,526 (16%) Total expenses - - 3,279 3,486 (6%) Profits bf Share of Profits (Losses) from JVEs - - 1,343 2,040 (34%) Share of Profits (Losses) from JVEs 1,584 1,227 4,418 4,041 9% Net Profit bf FX and MI 1,584 1,227 5,760 6,081 (5%) * Sales of electricity of IPP were Baht 4,559 million, representing a decrease of Baht 925 million or 17%. The decrease was a result of KEGCO's lower electricity sales by Baht 815 million to register Baht 1,766 million, caused by a decrease in the Base Availability Credit for KEGCO. Moreover, REGCO's electricity sales decreased by Baht 110 million to register Baht 2,793 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 9M09 9M08 %Changes REGCO 2,793 2,903 (4%) KEGCO 1,766 2,581 (32%) Total Sales of Electricity - IPP 4,559 5,485 (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 nine-month period of 2009, REGCO and KEGCO received compensation for the exchange rate effect of Baht 168 million. * Interest income and others amounted to Baht 62 million, an increase of Baht 21 million or 50%, mainly from an increase of other income of REGCO by Baht 38 million due to an environmental management fee. Meanwhile, KEGCO's interest income decreased by Baht 15 million from lower deposit amount and interest rate. * Cost of sales totaled Baht 2,335 million, a decrease of Baht 194 million or 8% from a decrease of REGCO's cost of sales totaling Baht 131 million due to lower major maintenance expenses and KEGCO's cost of sales totaling Baht 63 million due to lower major maintenance expenses and heavy oil cost. Cost of Sales - IPP: Unit : Million Baht 9M09 9M08 %Changes REGCO 1,269 1,400 (9%) KEGCO 1,066 1,129 (6%) Total Cost of Sales - IPP 2,335 2,530 (8%) * Administrative expenses and income taxes were Baht 766 million, an increase of Baht 79 million or 11%, mainly from the increases of provision for devaluation inventory of REGCO and KEGCO by Baht 98 million as well as an increase of REGCO's tax payment by Baht 90 million or 30% due to the end of corporate tax reduction BOI privilege on April 19, 2008. Meanwhile, tax payment at KEGCO decreased by Baht 109 million or 65% due to lower revenues. KEGCO's 50% corporate tax reduction BOI privilege on profits from power generation already ended on September 25, 2009. * Finance costs were Baht 178 million, a decrease of Baht 91 million or 34%, resulting from KEGCO's lower principal amounts of debentures and KEGCO's completion of overseas loan repayment in June 2008. * Share of profits from joint ventures, BLCP and GPG, was recognised in the amount of Baht 4,418 million, an increase by Baht 377 million or 9% that resulted from an increase of GPG's and BLCP's electricity sales. 3) SPP's total revenues were reported at Baht 1,682 million, an increase of Baht 12 million or 1%. The total expenses were Baht 1,495 million, an increase by Baht 73 million or 5%. The share of profits from joint ventures was reported at Baht 251 million, down by Baht 41 million or 14%. The details are as follows: (more)