Management Discussion and Analysis for 9 month 2007

Management Discussion and Analysis For the Nine-month Period Operating Results Ended September 30, 2007 Note: This Management Discussion and Analysis (MD&A) was made to disclose information and the vision ofthe 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 theaforementioned 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 14 operating plants totaling 3,509 equity MW at present. Since January 2007,the 50% share of profit in the joint venture BLCP Power Limited (BLCP), a 1,434 MW coal-fire dpower plant, has been recognised. The Amata Power Bang Pakong Expansion (APBP-Expansion Project), a 55 MW combined cycle gas turbine power plant, achieved Commercial Operation Date (COD) on April 25, 2007. In addition, Unit 1 of the Kaeng Khoi 2 (KK2) combined cycle gas turbine IPP project of the joint venture Gulf Power Generation Co., Ltd (GPG), with capacity of 734 MW, was completed and achieved its COD in May 5, 2007. EGCO Group's consolidated net profit for the first nine months of 2007 ended September 30, was Baht 7,390 million, an increase of Baht 2,335 million or 46% compared to the same period of 2006. Excluding the impact of foreign exchange on EGCO and subsidiaries, the net profit was Baht 7,291 million, representing an increase of Baht 2,846 million or 64% as compared to the same period of the previous year; the details of the change are as follows: - EGCO's net loss of Baht 165 million, representing a decrease in net profit of Baht 240 million, resulted from higher administrative expenses of Baht 121 million mostly from advertising expenses and project development cost; and an increase of interest expenses from short-term loans in the amount of Baht 129 million. - IPP Group, consisting of Rayong Electricity Generating Co., Ltd. (REGCO), Khanom Electricity Generating Co., Ltd. (KEGCO), the joint venture BLCP and the joint venture GPG,showed a net profit and share of profit from joint ventures totaling Baht 6,716 million, up Baht 2,906 million thanks to the recognition of the share of profit from BLCP since January 2007 as well as the share of profit from GPG thanks to Unit 1 of KK2 which was completed and achieved its COD since May 2007. - Small Power Producer (SPP) Group, which is comprised of three joint ventures including Gulf Electric Public Company Limited (GEC)(excluding GPG), Amata-EGCO Power Ltd. (AEP),Amata Power (Bang Pakong) Ltd. (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 760 million, an increase of Baht 355 million that mainly resulted from GEC's higher net profit owing to a gain from foreign exchange rate. - Overseas Group, which is comprised of two joint ventures including the Conal Holdings Corporation (Conal) and Nam Theun 2 Power Co., Ltd. (NTPC). The net loss from this group was Baht 208 million, an increase in the loss by Baht 170 million from the same period of 2006 mainly resulting from NTPC's loss of Baht 242 million from a loss on foreign exchange rate. Conal's net profit was reported at Baht 34 million, down by Baht 50 million, caused by a decrease in electricity sales after transferring the Northern Mindanao Power Corporation (NMPC) to National Power Corporation (NPC) in February 2006 as well as the Peso appreciation. - Other Business Group includes two subsidiaries, EGCO Engineering & Service Co., Ltd. (ESCO) and Egcom Tara Co., Ltd. (ET) and one joint venture, Amata Power-ESCO Service Co.,Ltd. (AMESCO), that showed net profit totaling Baht 188 million, a decrease of Baht 5 million due mostly to higher cost of service from ESCO. 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. 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 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 2007, Thailand's total generating capacity was reported at 28,230.25 MW /1, of which 12.43% was attributable to EGCO. During the first three quarters of 2007, the peak demand reached 22,586.1 MW/1 on April 24, 2007, which was 7.23% higher than the peak demand in May 2006. /1 Source : EGAT On October 19, 2007, 15 companies have submitted 20 proposals in the second round of IPP Bidding. The proposals represent electricity generating capacity totaling 17,000 MW and the bidders will be competing to supply a total of 3,200 MW to EGAT and coming on line during 2012-2014. The proposal will be evaluated on technical and financial criteria with the process expected to be completed and result announced to the public by December 2007. Importantly,the winning project must receive approval on the project's environmental impact assessment (EIA) before the signing of the power purchase agreements. The deadline for the submission of the EIA proposals to the National Environmental Policy and Planning Office is November 19, 2007 and approval must be received by September 2008. In this IPP Bidding round, EGCO has proposed 2,800 MW using natural gas as fuel. As of September 30, 2007, EGCO has 14 operating plants with capacity totaling 3,509 equity MW, of which 59% is comprised of two natural gas-fired IPPs which are the 1,232 MW REGCO plant and the 824 MW KEGCO plant. EGCO also has another 717 equity MW representing 20% of EGCO's total equity MW portfolio from the BLCP Power facility, a 1,434 MW coal-fired power plant situated in Map Ta Phut Industrial Estate in Rayong Province. The BLCP facility uses high quality imported coal from Australia. Recently, EGCO has gained another 367 equity MW from the KK2 project Unit 1, with a total capacity of 734 MW, which achieved its COD on May 5, 2007. EGCO has a 50% stake in this project, by holding 50% of shares in GEC which owns 99.99% of GPG. KK2 project is a 1,468 MW natural gas-fired power plant located in Saraburi province. In addition to the operating assets, EGCO is a partner in two additional power plant projects that are under development. These projects represent an additional 635 equity MW. Each is summarized briefly below: 1. The Unit 2 of KK2 project, a 734 MW natural gas-fired power plant. The COD for Unit 2 is scheduled to occur in March 2008. Currently, the overall progress of this project is 99.4% and it is now under negotiation with EGAT for early operation before the contracted COD which is expected to occur in late January 2008. 2. The Nam Theun 2 project is a 1,070 MW hydroelectric power plant situated in the Lao PDR. EGCO holds a 25% ownership stake 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 2007, the overall project progress was 67.9% complete. In the absence of unforeseen circumstances, the company has a policy to dividend approximately 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. The two changes in accounting policies that have been implemented from January 1, 2007 are as follows: 1. Accounting standard for investment in subsidiaries, associates and interests in joint ventures presented in the company financial statements According to the notification of Federation of Accounting Professions No. 26/2549 dated October 11, 2006 and No. 32/2549 dated November 3, 2006 in relation to the amendment of TAS 44 "Consolidated financial statements and accounting for investment in subsidiaries" and TAS 45 "Accounting for investments in associates" which require the change from the equity method of accounting to cost method of accounting for the investment in subsidiaries and associates presented in the company financial statements. According to the cost method of accounting, income from investment will be recognised when dividends are declared. The notification is mandatory from January 1, 2007. The cost method of accounting has been implemented within EGCO Group from January 1, 2007 onwards and retroactively adjustments have been made for the purpose of comparison. Accordingly, in the first nine months of 2007, EGCO's Group had net income of Baht 7,390 million, or Baht 14.04 per share in the consolidated financial statements, and a net profit of Baht 6,347 million, or Baht 12.06 per share, in the company financial statements. The difference of net income in these statements was due to the change in accounting for investment in subsidiaries and interests in joint ventures reported in the company financial statements. The performance of subsidiaries and interests in joint ventures has been proportionately recorded in the consolidated financial statements, whereas the net profit in the company financial statements is solely from the performance of the parent company and the dividends declared from subsidiaries and joint ventures. In this case, the EGCO Holding Company had an operational profit of Baht 63 million and its subsidiaries and joint ventures declared their dividends in the amount of Baht 6,284 million. Moreover, the net effect to the company's balance sheet as at December 31, 2006 is as follows: Unit : Million Baht Investment in subsidiaries decreased (5,036) Net interest in joint venture increased 723 Net liabilities in joint venture decreased (620) Net other liabilities decreased (911) Translation adjustment increased 14 Retained earnings as at December 31, 2006 decreased (2,796) The change in such accounting policy has an impact on the company financial statements only and does not have any impact on the consolidated financial statements. 2. Accounting policy for interests in joint ventures in the consolidated financial statements From January 1, 2007, the Group has changed the accounting policy for interests in joint ventures in the consolidated financial statements from "Proportionate Consolidation" to "Equity Method". The Group is of the view that the use of equity accounting provides a better understanding among investors of the company's business and financial position since the joint venture entity, which invested in the power plant business, raised debt secured against its own assets with limited recourse to its shareholders. The group has restated the consolidated financial statements to reflect the change in this accounting policy. The consolidated balance sheet as at December 31, 2006 and the consolidated statement of income for the nine-month period ended September 30, 2006 were adjusted for the purpose of comparison. Accordingly, this new accounting policy has been applied to seven joint ventures namely BLCP, GEC, APBP, AEP, Conal, NTPC and AMESCO. 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 for the first nine months of 2007 ended September 30, 2007 was Baht 7,390 million, an increase of Baht 2,335 million or 46% compared to the same period of 2006; this was caused mainly by an increase of the share of profit from joint ventures amounting to Baht 4,623 million, primarily from BLCP and GPG. The gross profit was reported at Baht 4,057 million, down by Baht 2,335 million or 37% as compared to the same period of last year, as a result of lower contracted electricity sales of REGCO and KEGCO. The operating profit was reported at Baht 4,012 million, a decrease of Baht 3,027 million or 43% as compared to the same period of 2006. This resulted from lower electricity sales, foreign exchange gain and interest income. Unit : Million Baht Net Profit 9M'07 Net Profit 9M'06 Before FX After FX Before FX After FX EGCO (165) (165) 76 76 IPP Group 6,716 6,774 3,809 4,303 SPP Group 760 807 406 522 Overseas (208) (208) (38) (38) Others 188 182 192 192 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 in the first nine months of 2007 included foreign exchange gains from EGCO and subsidiaries of only Baht 99 million whereas it incurred a foreign exchange gain of Baht 609 million for the first nine months of 2006. An unrealized foreign currency exchange gain in the amount of Baht 75 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, 2007) and the previous period (December 31, 2006). Excluding the effect of foreign currency exchange gain from EGCO and subsidiaries, the profit was Baht 7,291 million, representing an increase of Baht 2,846 million or 64% as compared to the same period of 2006. Excluding the effect of foreign currency exchange gain from EGCO and subsidiaries of Baht 99 million, interest expenses of Baht 614 million, income tax of Baht 456 million and depreciation and amortization of Baht 1,613 million, the earnings before interest, tax, depreciation and amortization (EBITDA) would be Baht 9,974 million, representing an increase of Baht 2,164 million or 28% as compared to the first nine months of 2006, in which the EBITDA was Baht 7,810 million, excluding the effect of foreign currency exchange gain of Baht 609 million, interest expenses of Baht 949 million, income tax amounting to Baht 835 million and depreciation and amortization amounting to Baht 1,581 million. Important Financial Ratios for the period were as follows: - Gross Profit Ratio was 48.79% - Operating Profit Ratio was 48.24% - Net Profit Ratio was 55.20% - Net Profit Ratio (excluding the effect of foreign exchange from EGCO and subsidiaries) was 54.46% - Earnings per share (EPS) was Baht 14.04 - Earnings (excluding the effect of foreign exchange from EGCO and subsidiaries) per share (EPS) was Baht 13.85 - Return on Equity (ROE) was 19.43% The gross profit margin of 48.79% was lower than the same period of last year's margin of 60.42% due to a decrease in net profit of REGCO and KEGCO from lower electricity sales; whereas the net profit ratio (excluding the effect of foreign exchange from EGCO and subsidiaries) was reported at 54.46%, higher than the same period of 2006 ratio of 39.63% mainly due to the recognition of BLCP and GPG's net profit as share of profit from joint ventures. 3.2 Income, Expense and Share of profit from Joint Ventures Analysis For the first nine months of 2007, operating results of EGCO and subsidiaries (excluding the effect of foreign currency exchange rate and profit attributable to minorities) are as follows: - Total revenues were Baht 8,821 million, a decrease of Baht 2,494 million or 22% compared to the same period of 2006. - Total expenses were Baht 5,978 million, a decrease of Baht 691 million or 10% from the same period of last year. The share of profits from joint ventures for the first nine months of 2007 were Baht 4,556 million, an increase of Baht 4,623 million compared to the same period of last year which showed the share of loss totaling Baht 67 million. The details according to their groups of business are as follows: Total Revenues, Total Expenses and Share of Profits: Unit : Million Baht EGCO IPP SPP 9M'07 9M'06 9M'07 9M'06 9M'07 9M'06 Total Revenues 380 371 6,079 8,569 1,623 1,693 Total Expenses 545 295 3,581 4,581 1,331 1,329 Share of profits - - 4,218 (178) 541 146 Overseas Others Total 9M'07 9M'06 9M'07 9M'06 9M'07 9M'06 Total Revenues - - 739 684 8,821 11,315 Total Expenses - - 522 465 5,978 6,669 Share of profits (208) (38) 5 3 4,556 (67) 1) EGCO's total revenues in the first nine months of 2007, amounting to Baht 380 million,were comprised of dividend income from financial investment of Baht 134 million, interest income of Baht 50 million and other income of Baht 196 million. Compared to the same period of 2006,this showed an increase of Baht 10 million or 3%. This mainly resulted from higher other income of Baht 126 million due to gain from the redemption of Krung Thai Dividend Selected Flexible Portfolio Fund (KTSF). However, the interest income was down by Baht 83 million, or 62% as a result of lower interest rate and deposit amounts. Dividend income also decreased by Baht 34 million or 20% mainly a result of the drop in dividends from KTSF by Baht 78 million. Meanwhile, dividends from Eastern Water Resources Development and Management Public Company Limited (EASTW) were up by Baht 31 million and dividend from other open-end funds up by Baht 14 million. Total expenses of EGCO, including administrative expenses and interest expenses, were Baht 545 million, an increase from the first nine months of 2006 by Baht 250 million or 85%. This resulted mainly from the increase of interest expenses totaling Baht 129 million, incurred from the short-term loans of Baht 4,350 million after the first drawdown of the short-term loans from two Thai commercial banks on January 29, 2007; as well as the increase of advertising expenses for the re-branding project 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 6,079 million, a decrease of Baht 2,490 million or 29% as compared to the same period of last year, meanwhile the total expenses were Baht 3,581 million, down by Baht 1,000 million or 22%. The share of profits from joint ventures were reported at Baht 4,218 million, up by Baht 4,396 million as compared to the same period of 2006 which showed the share of loss totaling Baht 178 million. The details are as follows: Total Revenues, Total Expenses and Share of Profits of IPP Group: Unit: Million Baht REGCO KEGCO BLCP 9M'07 9M'06 9M'07 9M'06 9M'07 9M'06 Revenues 2,705 4,264 3,374 4,305 - - Expenses 1,597 2,322 1,983 2,259 - - Share of Profits - - - - 3,637 - GPG Total (more)