Management Discussion and Analysis for Q1-2010

Management Discussion and Analysis For the Three-month Operating Results Ended March 31, 2010 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 For the three-month period of 2010, the Electricity Generating Public Company Limited (EGCO)'s significant event is summarized as follows: - EGCO Engineering & Service Co., Ltd. (ESCO) purchased additional ordinary shares in Egcom Tara Co., Ltd. (ET) on January 6, 2010, which increased the investment portion from 70.07% to 74.19%. - Power Generation Services Co., Ltd. (PGS) was transferred its entire business to BLCP Power Limited (BLCP) and registered its liquidation with the Ministry of Commerce on January 19, 2010. - On March 4, 2010, Natural Energy Development Co., Ltd. (NED) has signed the Non-Firm Power Purchase Agreement with Electricity Generating Authority of Thailand (EGAT) for purchasing 55 MW from solar power plant for a period of 5 years from the Commercial Operation Date (COD) which is scheduled to be on November 1, 2011. 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 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), Roi-Et Green Co., Ltd. (Roi-Et Green), NED 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 Power (Philippines) Limited Co. (Quezon). 4. Other Business consists of ESCO and ET. EGCO, Rayong power plant, 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. /1 Subsidiaries: 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 the three-month period ended March 31, 2010 was Baht 2,071 million, a decrease of Baht 168 million or 8% 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 Accounting Standard, EGCO Group's profit was Baht 1,873 million, a decrease of Baht 487 million or 21%. This is mainly due to the decline in electricity sales of Rayong power plant, GPG and BLCP. 2. Business Expansion Analysis EGCO Group is the first IPP in Thailand established on May 12, 1992 and invest in 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 EGAT under long-term power purchase agreements (PPAs). EGCO Group 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 March 31, 2010, Thailand's total installed capacity was reported at 29,212 MW /2. During the first quarter of the year 2010, the peak demand reached 23,304 MW /2 on March 25, 2010, which was 5.71 % higher than the peak demand in April 2009. EGAT predicts that this year's highest peak would be about 23,600 MW. For the whole year, the electricity consumption is expected to grow more than 5% in line with GDP growth. /2 Source: EGAT EGAT under the guidance of Ministry of Energy has formulated the Power Development Plan 2010 (PDP 2010). The PDP 2010 has taken into account the concern on the existing high reliance on natural gas, initiatives to reduce CO2 emission, and security of power system. It emphasizes on the stability of the country's power system by exploiting the variety sources of fuel, using renewable energy to be Green PDP in line with the alternative energy plan of the Ministry of Energy, and the efficient power generation using the cogeneration system. The Energy Policy and Planning Office (EPPO) has organized two public hearing on the PDP 2010 on February 17, 2010 and March 8, 2010 before submitting to the National Energy Policy Council (NEPC). On March 12, 2010, NEPC has approved the PDP 2010 which covered the period of 2010-2030. The installed capacity by 2030 is expected to be 65,547 MW from 29,212 MW at the end of 2009. While the combined 17,671 MW of old capacity would be retired from the system. The new capacity would be 54,005 MW /3 comprising 4,617 MW from renewable energy, 7,137 MW from cogeneration plants, 16,670 MW from combined cycle plants, 512 MW from hydro power plants, 11,669 MW from cross border projects, 5,000 MW from nuclear power plants and 8,400 MW from coal fired power plants. /3 Source: Energy Policy and Planning Office, Ministry of Energy 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 March 31, 2010, 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 set to commence Commercial Operation in April 2010, postponed from the previous COD targeted in 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 government of Lao PDR. 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 3M2010 3M2009 Before FX After FX Before FX After FX EGCO (75) (75) (24) (24) IPP 1,491 1,782 2,059 1,884 SPP 131 200 163 137 Overseas 283 130 105 185 Other Business 43 34 57 58 Total 1,873 /4 2,071 2,360 /4 2,239 /4 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 : Rayong power plant, KEGCO, BLCP, GPG - SPP : GCC, NKCC, SCC, GYG, EGCO Cogen, Roi-Et Green and NED - Overseas : Conal, NTPC, Quezon - Others : ESCO, ET EGCO Group's profit before the effect of foreign exchange rate for the three-month period ended March 31, 2010 was Baht 1,873 million, representing a decrease of Baht 487 million or 21% compared to the same period of last year. This is mainly due to the decreases in electricity sales of Rayong power plant and BLCP due to the lower capacity rate as well as the decrease in electricity sales of GPG caused by schedule maintenance as planned. If including the gain on foreign exchange rate from Baht appreciation of Baht 198 million, EGCO Group's profit was Baht 2,071 million, a decrease of Baht 168 million or 8%, while in the same period of last year it recorded a foreign exchange loss of Baht 121 million. The gain (loss) on foreign exchange rate is mostly a translation transaction to be shown in accordance with the 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 (March 31, 2010) and the previous period (December 31, 2009). The gain on foreign exchange rate of this period in the amount of Baht 198 million can be explained as follows: - The gain on foreign exchange rate of EGCO and subsidiaries of Baht 16 million, compared to the same period of last year which recorded the loss from foreign exchange rate of Baht 0.24 million. - The gain on foreign exchange rate of joint ventures of Baht 182 million, compared to the same period of last year which showed the loss from foreign exchange rate of Baht 121 million. Gain (Loss) on FX from Joint Ventures: Unit : Million Baht 3M10 3M09 BLCP 172 (93) GPG 119 (73) GCC, NKCC, SCC and GYG 44 (34) Conal (11) 7 NTPC (142) 72 Quezon (1) 1 Total Gain (Loss) from FX 182 (121) The earnings before finance costs, tax, depreciation and amortization (EBITDA) for the three-month period of 2010 was Baht 3,773 million, representing a decrease of Baht 746 million or 17% as compared to the same period of 2009, in which the EBITDA was Baht 4,519 million. The gross profit of EGCO and subsidiaries was reported at Baht 861 million, down by Baht 158 million or 15%, as a result of lower contracted electricity sales of Rayong power plant. The same reason caused the operating profit of EGCO and subsidiaries to fall to Baht 741 million, a decrease of Baht 249 million or 25%. Important Profitability Ratios for the three-month period of 2010 operating results were as follows: - Gross Profit Ratio was 39.78% - Operating Profit Ratio was 34.20% - Net Profit Ratio was 53.49% - Net Profit Ratio (excluding the effect of foreign exchange of EGCO and subsidiaries) was 53.08% - Earnings per share (EPS) was Baht 3.93 - Earnings (excluding the effect of foreign exchange of EGCO and subsidiaries) per share (EPS) was Baht 3.90 - Return on Equity (ROE) was 4.02% The gross profit margin (excluding the share of profit from joint ventures) of 39.78% was lower than the previous year's margin of 43.02% due to lower electricity sales of Rayong power plant; whereas the net profit ratio (excluding the effect of foreign exchange of EGCO and subsidiaries) was reported at 53.08%, lower than the same period of 2009 ratio of 54.13% mainly due to the decreases in the share of profit from GPG and BLCP. 3.2 Income, Expense and Share of Profits from Joint Ventures Analysis The three-month operating results of 2010, excluding FX of EGCO Group and profit attributable to minorities (MI), are as follows: - Total revenues were Baht 2,292 million, a decrease of Baht 229 million or 9%. - Total expenses were Baht 1,782 million, a decrease of Baht 82 million or 4%. - The share of profits from joint ventures before FX was Baht 1,398 million, a decrease of Baht 339 million or 20%. 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 3M10 3M09 3M10 3M09 3M10 3M09 Total Revenues 108 124 1,426 1,590 573 581 Total Expenses 183 148 985 1,060 480 498 Profits bf Share of Profits (Losses) from JVEs (75) (24) 441 530 93 83 Share of Profits (Losses) from JVEs bf FX - - 1,049 1,529 65 103 Net Profit bf FX and MI (75) (24) 1,491 2,059 158 186 Overseas Others Total 3M10 3M09 3M10 3M09 3M10 3M09 Total Revenues - - 185 226 2,292 2,521 Total Expenses - - 134 157 1,782 1,864 Profits bf Share of Profits (Losses) from JVEs - - 51 69 510 657 Share of Profits (Losses) from JVEs bf FX 283 105 - - 1,398 1,737 Net Profit bf FX and MI 283 105 51 69 1,908 2,394 1) EGCO's total revenues amounting to Baht 108 million decreased by Baht 16 million or 13% mostly from a decrease of interest income by Baht 19 million due to lower interest rate. Total expenses of EGCO were Baht 183 million, an increase of Baht 35 million or 23%. This resulted mainly from an increase in finance costs by Baht 24 million from the interest of long-term loan totaling Baht 4,000 million in September 2009. 2) IPP's total revenues were Baht 1,426 million, a decrease of Baht 164 million or 10%. The total expenses were Baht 985 million, down by Baht 75 million or 7%. The share of profits from joint ventures before FX was reported at Baht 1,049 million, a decrease by Baht 479 million or 31%. 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 3M10 3M09 3M10 3M09 3M10 3M09 Total revenues 644 950 782 639 - - Total expenses 466 602 519 458 - - Profits bf Share of Profits (Losses) from JVEs 178 348 263 181 - - Share of Profits (Losses) from JVEs bf FX - - - - 774 971 Net Profit bf FX and MI 178 348 263 181 774 971 GPG Total 3M10 3M09 3M10 3M09 %Chg Total revenues - - 1,426 1,590 (10%) Total expenses - - 985 1,060 (7%) Profits bf Share of Profits (Losses) from JVEs - - 441 530 (17%) Share of Profits (Losses) from JVEs bf FX 275 558 1,049 1,529 (31%) Net Profit bf FX and MI 275 558 1,491 2,059 (28%) * Sales of electricity of IPP were Baht 1,411 million, representing a decrease of Baht 158 million or 10%. The decrease was a result of Rayong power plant's lower electricity sales by Baht 304 million to register Baht 631 million, caused by a decrease in the Capacity Rate. Meanwhile, KEGCO's electricity sales increased by Baht 146 million to register Baht 780 million from an increase in the Base Availability Credit. 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 3M10 3M09 %Changes Rayong power plant 631 935 (33%) KEGCO 780 635 23% Total Sales of Electricity - IPP 1,411 1,570 (10%) 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 the three-month period of 2010, Rayong power plant and KEGCO received compensation for the exchange rate effect of Baht 31 million. * Interest income and others amounted to Baht 15 million, a decrease of Baht 5 million or 27%, mainly from a decrease of KEGCO and Rayong power plant's interest income due to lower deposit amount and interest rate. * Cost of sales totaled Baht 752 million, a decrease of Baht 4 million or 0.48% from a decrease of Rayong power plant's cost of sales totaling Baht 58 million due to lower major maintenance. Meanwhile, KEGCO's cost of sales increased by Baht 55 million due to major maintenance as planned. Cost of Sales - IPP: Unit : Million Baht 3M10 3M09 %Changes Rayong power plant 372 431 (14%) KEGCO 380 325 17% Total Cost of Sales - IPP 752 756 (0.48%) * Administrative expenses and income taxes were Baht 193 million, a decrease of Baht 48 million or 20%, mainly from the decrease in Rayong power plant's tax payment by Baht 122 million due to the lower revenues. Meanwhile, administrative expenses of Rayong power plant and KEGCO increased from the higher provision for devaluation inventory. * Finance costs were Baht 40 million, a decrease of Baht 23 million or 37%, resulting from KEGCO's lower principal amounts of debentures. * Share of profits from joint ventures before FX, BLCP and GPG, was recognised in the amount of Baht 1,049 million, a decrease by Baht 479 million or 31% that resulted from a decrease of GPG's electricity sales caused by the schedule maintenance as planned and a decrease of BLCP's electricity sales due to a lower Base Availability Credit. 3) SPP's total revenues were reported at Baht 573 million, a decrease of Baht 8 million or 1%. The total expenses were Baht 480 million, a decrease of Baht 18 million or 4%. The share of profits from joint ventures before FX was reported at Baht 65 million, down by Baht 38 million or 37%. The details are as follows: Total Revenues, Total Expenses and Share of Profits (Losses) from JVEs before FX of SPP: Unit : Million Baht EGCO Cogen Roi-Et Green GCC, NKCC, SCC, GYG 3M10 3M09 3M10 3M09 3M10 3M09 Total revenues 494 502 79 79 - - Total expenses 437 461 43 37 - - Profits bf Share of Profits (Losses) from JVEs 57 41 36 42 - - Share of Profits (Losses) from JVEs bf FX - - - - 70 103 Net Profit bf FX and MI 57 41 36 42 70 103 NED Total 3M10 3M09 3M10 3M09 % Chg Total revenues - - 573 581 (1%) Total expenses - - 480 498 (4%) Profits bf Share of Profits (more)