Management Discussion and Analysis for First-Half 2009

Management Discussion and Analysis For the First-Half Operating Results Ended June 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. 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, 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 and Quezon EGCO Group's consolidated net profit for the first-half period ended June 30, 2009 was Baht 4,642 million, an increase of Baht 385 million or 9% compared to the same period of last year. Excluding the gain on foreign exchange rate, which was mostly an accounting number to be shown in accordance with the Thai Accounting Standard, EGCO Group's profit was Baht 4,384 million, an increase of Baht 127 million or 3%. This is mainly 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; both increases were more than the decrease in KEGCO's electricity sales caused by a decrease in the Base Availability Credit. 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 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 June 30, 2009, Thailand's total installed capacity was reported at 28,481.50 MW /2. During the first half 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 recent economic recession during the first half of the year 2009 caused the country's GDP to an estimated growth rate of negative 3-4%. This leads to the fall in the demand for electricity for the first half of the year 2009 by 3.4% from the previous year. In the second revision of the 2007 Power Development Plan, an agreement has been reached with three winning IPP bidders to push back their schedules for the sale of electricity to EGAT by one year from their original dates, while the prices of the electricity from these IPP's will remain unchanged. Currently, the Energy Policy and Planning Office (EPPO) is drawing up the 2009 Power Development Plan for the implementation between 2010 - 2024 to replace the current version of the revised 2007 plan. It is likely that the new plan will delay the schedule of the new power plants if the economy and electricity demand still do not pick up in the near future. 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 June 2009, EGCO Group has 13 operating plants with 3,980.7 equity MW. 3,589.5 equity MW of the total capacity, representing 12.60% 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 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 June 2009, the overall project progress was 98.5% 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 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 1H2009 Profit of 1H2008 Before FX After FX Before FX After FX EGCO (166) (166) (198) (198) IPP 4,068 4,346 3,957 3,983 SPP 221 301 357 371 Overseas 167 75 (21) (64) Other Business 93 85 163 165 Total 4,384 /3 4,642 4,257 /3 4,257 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. /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). EGCO Group's profit before the effect of foreign exchange rate of EGCO Group for the first-half period ended June 30, 2009 was Baht 4,384 million, representing an increase of Baht 127 million or 3% 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. If including the gain on foreign exchange rate, EGCO Group's profit for the first-half period of 2009 was Baht 4,642 million, an increase of Baht 385 million or 9% compared to the same period of the previous year. For the first-half period of 2009, EGCO Group's gain on foreign exchange rate totaled Baht 258 million while in the same period of 2008 it registered a foreign exchange gain of Baht 0.12 million. This creates a difference caused by foreign exchange rate of Baht 258 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 (June 30, 2009) and the previous period (December 31, 2008). The gain on foreign exchange rate of the first-half period of 2009 in the amount of Baht 258 million can be explained as follows: - The gain on foreign exchange rate of EGCO and subsidiaries of Baht 18 million, a decrease of Baht 13 million compared to the same period of the previous year which recorded the gain from foreign exchange rate of Baht 31 million. - The gain on foreign exchange rate of joint ventures of Baht 240 million, an increase of Baht 271 million compared to the same period of the previous year which showed the loss from foreign exchange rate of Baht 31 million. Gain (Loss) on FX from Joint Ventures: Unit : Million Baht 1H09 1H08 BLCP 175 76 GPG 115 (88) GEC (excluding GPG) 42 18 APBP and AEP * - 6 Conal 9 32 NTPC (100) (75) Quezon (2) - Total Gain (Loss) from FX 240 (31) * APBP and AEP were sold in May 2008 As for EGCO Group, excluding the effect of foreign exchange gain of Baht 258 million, finance costs of Baht 1,322 million, income tax of Baht 529 million and depreciation and amortization of Baht 2,353 million, the earnings before finance costs, tax, depreciation and amortization (EBITDA) for the first-half period of 2009 would be Baht 8,588 million, representing an increase of Baht 337 million or 4% as compared to the same period of 2008, in which the EBITDA was Baht 8,250 million, excluding the effect of foreign exchange gain of Baht 0.12 million, finance costs of Baht 1,323 million, income tax amounting to Baht 449 million and depreciation and amortization amounting to Baht 2,221 million. The gross profit of EGCO and subsidiaries was reported at Baht 1,898 million, down by Baht 588 million or 24% as compared to the same period of the previous year, 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 1,733 million, a decrease of Baht 560 million or 24% as compared to the same period of 2008. Important Financial Ratios for the first-half period of 2009 were as follows: - Gross Profit Ratio was 41.98% - Operating Profit Ratio was 38.33% - Net Profit Ratio was 55.85% - Net Profit Ratio (excluding the effect of foreign exchange of EGCO and subsidiaries) was 55.63% - Earnings per share (EPS) was Baht 8.82 - Earnings (excluding the effect of foreign exchange of EGCO and subsidiaries) per share (EPS) was Baht 8.78 - Return on Equity (ROE) was 9.93% The gross profit margin of 41.98% was lower than the same period of the previous year's margin of 46.71% 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 55.63%, higher than the same period of 2008 ratio of 51.25% 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 first-half operating results of 2009, excluding FX of EGCO Group and profit attributable to minorities (MI), are as follows: - Total revenues were Baht 4,735 million, a decrease of Baht 804 million or 15% compared to the same period of 2008. - Total expenses were Baht 3,632 million, a decrease of Baht 338 million or 9% from the same period of 2008. - The share of profits from joint ventures was Baht 3,336 million, an increase of Baht 585 million or 21% 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 1H09 1H08 1H09 1H08 1H09 1H08 Total Revenues 156 152 3,122 3,718 1,089 1,099 Total Expenses 321 350 2,060 2,318 996 915 Profits bf Share of Profits (Losses) from JVEs (165) (198) 1,062 1,401 92 184 Share of Profits (Losses) from JVEs - - 3,006 2,556 163 212 Net Profit bf FX and MI (165) (198) 4,068 3,957 255 396 Overseas Others Total 1H09 1H08 1H09 1H08 1H09 1H08 Total Revenues - - 369 570 4,735 5,539 Total Expenses - - 254 387 3,632 3,970 Profits bf Share of Profits (Losses) from JVEs - - 114 183 1,103 1,569 Share of Profits (Losses) from JVEs 167 (21) - 4 3,336 2,751 Net Profit bf FX and MI 167 (21) 114 187 4,439 4,320 1) EGCO's total revenues for the first-half period of 2009, amounting to Baht 156 million increased by Baht 4 million or 2%. Total expenses of EGCO were Baht 321 million, a decrease of Baht 29 million or 8%. This resulted mainly from a decrease in administrative expenses amounting to Baht 58 million due to lower development expenses and advertising expenses, meanwhile,finance costs increased by Baht 29 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 3,122 million, a decrease of Baht 596 million or 16% as compared to the same period of the previous year. The total expenses were Baht 2,060 million, down by Baht 258 million or 11%. The share of profits from joint ventures was reported at Baht 3,006 million, an increase by Baht 450 million or 18% 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 1H09 1H08 1H09 1H08 1H09 1H08 Total revenues 1,905 1,941 1,217 1,778 - - Total expenses 1,130 1,184 930 1,134 - - Profits bf Share of Profits (Losses) from JVEs 775 757 287 644 - - Share of Profits (Losses) from JVEs - - - - 1,913 1,817 Net Profit bf FX and MI 775 757 287 644 1,913 1,817 GPG Total 1H09 1H08 1H09 1H08 %Chg Total revenues - - 3,122 3,718 (16%) Total expenses - - 2,060 2,318 (11%) Profits bf Share of Profits (Losses) from JVEs - - 1,062 1,401 (24%) Share of Profits (Losses) from JVEs 1,093 739 3,006 2,556 18% Net Profit bf FX and MI 1,093 739 4,068 3,957 3% * Sales of electricity of IPP were Baht 3,075 million, representing a decrease of Baht 611 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 550 million to register Baht 1,210 million, caused by a decrease in the Base Availability Credit for KEGCO. Moreover, REGCO's electricity sales decreased by Baht 61 million to register Baht 1,866 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 1H09 1H08 %Changes REGCO 1,866 1,927 (3%) KEGCO 1,210 1,760 (31%) Total Sales of Electricity - IPP 3,075 3,686 (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 first-half period of 2009, REGCO and KEGCO received compensation for the exchange rate effect of Baht 120 million. * Interest income and others amounted to Baht 47 million, an increase of Baht 15 million or 46%, mainly from an increase of other income of REGCO by Baht 27 million due to an environmental management fee. Meanwhile, KEGCO's interest income decreased by Baht 11 million from lower deposit amount. * Cost of sales totaled Baht 1,489 million, a decrease of Baht 174 million or 10% from a decrease of REGCO's cost of sales totaling Baht 95 million due to lower major maintenace expenses and KEGCO's cost of sales totaling Baht 79 million due to lower major maintenance expenses and heavy oil cost. Cost of Sales - IPP: Unit : Million Baht 1H09 1H08 %Changes REGCO 814 909 (11%) KEGCO 675 754 (10%) Total Cost of Sales - IPP 1,489 1,663 (10%) * Administrative expenses and income taxes were Baht 446 million, a decrease of Baht 12 million or 3%, mainly from the decrease of tax payment at KEGCO by Baht 69 million or 59% due to lower revenues. KEGCO currently enjoys 50% corporate tax reduction BOI privilege on profits from power generation, ending on September 25, 2009. Meanwhile, tax payment at REGCO increased by Baht 45 million or 23% due to the end of corporate tax reduction BOI privilege on April 19, 2008. * Finance costs were Baht 125 million, a decrease of Baht 71 million or 36%, 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 3,006 million, an increase by Baht 450 million or 18% that resulted from an increase of GPG's and BLCP's electricity sales. (more)