Management Discussion and Analysis for Year 2009

Management Discussion and Analysis For the Annual Operating Results Ended December 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. In 2008, 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) were made. In 2009, EGCO's significant events are summarized as follows: - The additional purchase of 2.60% stake in Quezon, which owns, operates and maintain a 502.50 MW (installed capacity) coal-fired power plant, was made in March 2009. - The investment in Natural Energy Development Co., Ltd. (NED), with the total stake of 33.33%, was made in July 2009. NED is the renewable energy developing company which is currently studying solar and wind power projects in Thailand. - The acquisition of entire business of Rayong Electricity Generating Co., Ltd. (REGCO) occurred in October 2009. This created two periods of operating results: 1) January-September 2009 operating results was included in REGCO's financial statements. 2) October-December 2009 operating results was included in EGCO's financial statements. Both periods of the operating results were included in the consolidated financial statements, which hereinafter referred to Rayong power plant. - The purchase of the ordinary shares of Power Generation Services Co., Ltd. (PGS), which provides operation and maintenance services to BLCP Power Limited (BLCP), with the total stake of 50% was made in December 2009. EGCO businesses can be categorized into four investment groups as follows: 1. Independent Power Producer (IPP) consists of Rayong power plant, Khanom Electricity Generating Co., Ltd. (KEGCO), BLCP Power Limited (BLCP) and Gulf Power Generation Co., Ltd (GPG), which is a subsidiary of Gulf Electric Public Company Limited (GEC). 2. Small Power Producer (SPP) consists of EGCO Cogeneration Co., Ltd. (EGCO Cogen) and Roi-Et Green Co., Ltd. (Roi-Et Green) and four subsidiaries of GEC, which are Gulf Cogeneration Co.,Ltd.(GCC),Nong Khae Cogeneration Co. Ltd., (NKCC), Samutprakarn Cogeneration Co., Ltd. (SCC) and Gulf Yala Green Co., Ltd. (GYG). 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 3,980.70 equity MW at present, an increase of 13.10 MW compared to the total equity MW at the end of 2008. This was caused by the additional purchase of 2.60% stake in Quezon (leading to a total stake of 26%). /1 Subsidiaries: REGCO, KEGCO, EGCO Cogen, Roi-Et Green, ESCO and ET Interests in joint ventures: BLCP, GPG, GCC, NKCC, SCC, GYG, Conal, NTPC, Quezon and NED EGCO Group's consolidated net profit for 2009 ended December 31, 2009 was Baht 7,936 million, an increase of Baht 1,009 million or 15% compared to 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 7,505 million, an increase of Baht 14 million or 0.19%. This is mainly due to the higher share of profit from Quezon's operating result and the increase of GPG's electricity sales as well as the increase in other income of NTPC. Meanwhile, electricity sales of Rayong power plant, KEGCO and BLCP decreased. 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 December 31, 2009, Thailand's total installed capacity was reported at 29,212 MW /2. During the year 2009, the peak demand reached 22,045 MW /2 on April 24, 2009, which was 2.32% lower than the peak demand in April 2008. /2 Source: EGAT Due to the economic crisis during the year 2009, the demand for electricity dropped continuously, especially during the beginning of the year. The Energy Policy and Planning Office (EPPO) has to adjust the Power Development Plan (PDP) in order to reflect the current situation and it is expected to be completed by January 2010 and to implement in April 2010. The new PDP will be an improvement of PDP 2007 (2nd revision). After the new PDP is completed, EPPO will organize a public hearing before submitting to the National Energy Policy Council. Currently, the four new IPPs with the total capacity of 4,200 MW are having the problem of construction delay caused by the requirement of conducting the Health Impact Assessment (HIA) to comply with the constitution. Such delay would not impact the national power supply over a short term as the power consumption growth in the year 2010 is projected at 4% while the reserve margin is higher than 20%. 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 of December 31, 2009, EGCO Group has 13 operating plants with capacity totaling 3,980.70 equity MW, of which 3,599.60 equity MW is dispatched to EGAT under long-term PPAs representing 12.32% of Thailand's total installed capacity, 29,212 MW. EGCO also invests 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 271.70 equity MW in EGCO's portfolio. 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 remaining MW will be sold to the Lao PDR. At the end of December 2009, the overall project progress was 99.87% 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 2009 2008 Before FX After FX Before FX After FX EGCO (550) (550) (598) (565) IPP 6,680 7,169 7,195 6,707 SPP 516 634 599 452 Overseas 693 523 21 57 Other Business 166 160 274 275 Total 7,505 /3 7,936 7,491 /3 6,927 Remarks: - Profits before FX separate out foreign exchange impact from EGCO, subsidiaries and joint ventures. - IPP : Rayong power plant, KEGCO, BLCP, GPG - SPP : EGCO Cogen, Roi-Et Green, GCC, NKCC, SCC, GYG, 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. /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 for 2009 ended December 31, 2009 was Baht 7,505 million, representing an increase of Baht 14 million or 0.19% compared to last year. This is mainly due to the higher share of profit from Quezon's operating result and the increase 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, as well as the increase in other income of NTPC from the liquidated damages charged to the head contractor due to the project delay. Meanwhile, electricity sales of Rayong power plant, KEGCO and BLCP decreased due to lower in the capacity rate. If including the gain on foreign exchange rate from Baht appreciation of Baht 430 million, EGCO Group's profit for 2009 was Baht 7,936 million, an increase of Baht 1,009 million or 15%, while in 2008 it recorded a foreign exchange loss of Baht 564 million. This creates a difference caused by foreign exchange rate of Baht 994 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 (December 31, 2009) and the previous period (December 31, 2008). The gain on foreign exchange rate of 2009 in the amount of Baht 430 million can be explained as follows: - The gain on foreign exchange rate of EGCO and subsidiaries of Baht 33 million, an increase of Baht 58 million compared to the previous year which recorded the loss from foreign exchange rate of Baht 25 million. - The gain on foreign exchange rate of joint ventures of Baht 398 million, an increase of Baht 936 million compared to the previous year which showed the loss from foreign exchange rate of Baht 539 million. Gain (Loss) on FX from Joint Ventures: Unit : Million Baht 2009 2008 BLCP 296 (231) GPG 197 (287) GCC, NKCC, SCC and GYG 75 (61) APBP and AEP * - 6 Conal 0.38 53 NTPC (180) (8) Quezon 9 (10) Total Gain (Loss) from FX 398 (539) * APBP and AEP were sold in May 2008 The earnings before finance costs, tax, depreciation and amortization (EBITDA) for 2009 was Baht 15,864 million, representing an increase of Baht 432 million or 3% as compared to 2008, in which the EBITDA was Baht 15,432 million. The gross profit of EGCO and subsidiaries was reported at Baht 3,734 million, down by Baht 714 million or 16%, as a result of lower contracted electricity sales of KEGCO and Rayong power plant. The same reason caused the operating profit of EGCO and subsidiaries to fall to Baht 2,965 million, a decrease of Baht 770 million or 21%. Important Profitability Ratios for 2009 operating results were as follows: - Gross Profit Ratio was 40.83% - Operating Profit Ratio was 32.42% - Net Profit Ratio was 50.33% - Net Profit Ratio (excluding the effect of foreign exchange of EGCO and subsidiaries) was 50.12% - Earnings per share (EPS) was Baht 15.07 - Earnings (excluding the effect of foreign exchange of EGCO and subsidiaries) per share (EPS) was Baht 15.01 - Return on Equity (ROE) was 16.60% The gross profit margin (excluding the share of profit from joint ventures) of 40.83% was lower than the previous year's margin of 43.10% due to lower electricity sales of KEGCO and Rayong power plant; whereas the net profit ratio (excluding the effect of foreign exchange of EGCO and subsidiaries) was reported at 50.12%, higher than 2008 ratio of 45.39% 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 2009 operating results, excluding FX of EGCO Group and profit attributable to minorities (MI), are as follows: - Total revenues were Baht 9,495 million, a decrease of Baht 1,218 million or 11%. - Total expenses were Baht 7,751 million, a decrease of Baht 542 million or 7%. - The share of profits from joint ventures before FX was Baht 5,876 million, an increase of Baht 718 million or 14%. The details according to their groups of business are as follows: Total Revenues, Total Expenses and Share of Profits (Losses) from JVEs before FX: Unit : Million Baht EGCO IPP SPP 2009 2008 2009 2008 2009 2008 Total Revenues 242 249 6,124 7,195 2,237 2,234 Total Expenses 792 847 4,312 4,767 1,972 1,961 Profits bf Share of Profits (Losses) from JVEs (550) (598) 1,812 2,428 265 273 Share of Profits (Losses) from JVEs bf FX - - 4,869 4,767 325 365 Net Profit bf FX and MI (550) (598) 6,681 7,195 590 638 Overseas Others Total 2009 2008 2009 2008 2009 2008 Total Revenues - - 891 1,034 9,495 10,712 Total Expenses - - 674 717 7,751 8,293 Profits bf Share of Profits (Losses) from JVEs - - 217 317 1,744 2,419 Share of Profits (Losses) from JVEs bf FX 693 21 (11) 4 5,876 5,157 Net Profit bf FX and MI 693 21 206 321 7,620 7,576 1) EGCO's total revenues for 2009, amounting to Baht 242 million decreased by Baht 7 million or 3% mostly from a decrease of interest income by Baht 44 million due to lower interest rate. Meanwhile, dividend income from Eastern Water Resources Development and Management Public Company Limited (EASTW) increased by Baht 31 million. Total expenses of EGCO were Baht 792 million, a decrease of Baht 56 million or 7%. This resulted mainly from a decrease in administrative expenses amounting to Baht 128 million due to lower development expenses and advertising expenses, meanwhile, finance costs increased by Baht 52 million from the interest on the disbursement of revolving loan of Baht 3,500 million in November 2008 and of long-term loan totaling Baht 4,000 million in September 2009. 2) IPP's total revenues were Baht 6,124 million, a decrease of Baht 1,071 million or 15%. The total expenses were Baht 4,312 million, down by Baht 455 million or 10%. The share of profits from joint ventures before FX was reported at Baht 4,869 million, an increase by Baht 101 million or 2%. The details are as follows: Total Revenues, Total Expenses and Share of Profits (Losses) from JVEs before FX of IPP: Unit : Million Baht Rayong power plant KEGCO BLCP 2009 2008 2009 2008 2009 2008 Total revenues 3,787 3,952 2,337 3,243 - - Total expenses 2,406 2,448 1,906 2,319 - - Profits bf Share of Profits (Losses) from JVEs 1,380 1,504 431 924 - - Share of Profits (Losses) from JVEs bf FX - - - - 2,930 3,200 Net Profit bf FX and MI 1,380 1,504 431 924 2,930 3,200 GPG Total 2009 2008 2009 2008 %Chg Total revenues - - 6,124 7,195 (15%) Total expenses - - 4,312 4,767 (10%) Profits bf Share of Profits (Losses) from JVEs - - 1,812 2,428 (25%) Share of Profits (Losses) from JVEs bf FX 1,939 1,567 4,869 4,767 2% Net Profit bf FX and MI 1,939 1,567 6,681 7,195 (7%) * Sales of electricity of IPP were Baht 6,040 million, representing a decrease of Baht 1,065 million or 15%. The decrease was a result of KEGCO's lower electricity sales by Baht 893 million to register Baht 2,318 million, caused by a decrease in the Base Availability Credit for KEGCO. Moreover, Rayong power plant's electricity sales decreased by Baht 172 million to register Baht 3,722 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 2009 2008 %Changes Rayong power plant 3,722 3,894 (4%) KEGCO 2,318 3,211 (28%) Total Sales of Electricity - IPP 6,040 7,105 (15%) 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. Rayong power plant 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 2009, Rayong power plant and KEGCO received compensation for the exchange rate effect of Baht 214 million. * Interest income and others amounted to Baht 84 million, a decrease of Baht 6 million or 7%, mainly from a decrease of KEGCO's interest income by Baht 21 million due to lower deposit amount and interest rate. Meanwhile, other income of Rayong power plant increased by Baht 13 million due to an environmental management fee. * Cost of sales totaled Baht 3,052 million, a decrease of Baht 382 million or 11% from a decrease of KEGCO's cost of sales totaling Baht 238 million due to lower major maintenance expenses and heavy oil cost caused by EGAT's dispatch order and Rayong power plant's cost of sales totaling Baht 145 million due to lower major maintenance expenses. Cost of Sales -IPP: Unit : Million Baht 2009 2008 %Changes Rayong power plant 1,690 1,835 (8%) KEGCO 1,361 1,599 (15%) Total Cost of Sales - IPP 3,052 3,434 (11%) * Administrative expenses and income taxes were Baht 1,032 million, an increase of Baht 41 million or 4%, mainly from the increase of provision for devaluation inventory of Rayong power plant by Baht 133 million. Meanwhile, Rayong power plant's tax payment decreased by Baht 50 million due to lower (more)