MD&A_6M10_E

Management Discussion and Analysis For the First-Half Operating Results Ended June 30, 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 first-half 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)'s entire business was transferred to BLCP Power Limited (BLCP) and its liquidation was registered 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 (PPA) with Electricity Generating Authority of Thailand (EGAT) for purchasing all energy generated by its planned solar power plant facility which will have a total installed capacity of 73 MW (DC)/55 MW (AC), for a period of 5 years from the Commercial Operation Date (COD) which is scheduled to be in November of 2011. - Nam Theun 2 project, hydroelectric power plant with installed capacity of 1,086.80 MW (948 MW of which is contracted to EGAT) located in the Lao PDR, achieved its COD on April 30, 2010. EGCO holds a 25% stake in Nam Theun 2 Power Co., Ltd. (NTPC), the project owner. EGCO businesses can be categorized into four investment groups as follows: 1.Independent Power Producer (IPP) consisting of Rayong power plant, Khanom Electricity Generating Co., Ltd. (KEGCO), BLCP and Gulf Power Generation Co., Ltd (GPG), a subsidiary of Gulf Electric Public Company Limited (GEC). 2.Small Power Producer (SPP) consisting 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), 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 14 operating plants, totaling 4,252.40 MW (Equity owned) at present, 271.70 MW or 7% higher when compared to the same period of last year due to Nam Theun 2's COD on April 30, 2010. EGCO Group has a 12.72% Thai market share, compared to Thailand's total installed capacity of 30,160 MW/2 as of June 30, 2010, with 3,836.60 MW of its plants contracted to EGAT under long-term PPAs. /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 first-half period ended June 30, 2010 was Baht 4,346 million, a decrease of Baht 297 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 Accounting Standard, EGCO Group's profit was Baht 4,170 million, a decrease of Baht 214 million or 5%. This is mainly due to the decline in electricity sales of Rayong power plant, BLCP and GPG, which were in accordance with PPAs. 2.Business Expansion Analysis EGCO Group was the first IPP in Thailand established on May 12, 1992 and has invested in a number of subsidiaries and joint ventures in the power generation sector. 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 environmental protection and social development". Our core business is to produce and supply electricity to EGAT under long-term 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 June 30, 2010, Thailand's total installed capacity was reported at 30,160 MW/2 . During the first half of the year 2010, the peak demand reached 24,010 MW/2 on May 10, 2010, which was 8.91% higher than the peak demand in April 2009. For the whole year, the electricity consumption is expected to grow more than 5% in line with GDP growth. /2 :Source: EGAT EGAT revised up the load forecast for 2010 from the growth rate of 4 - 5% to 11% given that the power consumption during the first half of the year expanded by 15% from the same period last year due to economic recovery and high temperature. Together with the delays of 3 IPPs from the 2007 solicitation, Thailand's power supply might be at risk especially if there is any gas supply disruption. In this regard, the Ministry of Energy had asked EGAT to prepare contingency plan for 2010-2015. The short term solution to cope with potential power shortage is to extend the usage life of EGAT's existing power plants. EGAT would also expedite power purchase from SPP projects, ensure the LNG import, and purchase more power from cross border projects. In the long term, the Ministry of Energy is considering fuel diversification into coal, nuclear, LNG and renewables as indigenous natural gas reserves slowly decline. 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. The company has a policy to dividend 40% of the consolidated net profit after tax, 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 1H2010 1H2009 Before FX After FX Before FX After FX EGCO (240) (240) (166) (166) IPP 3,221 3,504 4,068 4,346 SPP 267 322 221 301 Overseas 829 687 167 75 Other Business 94 73 93 85 Total 4,170/3 4,346 4,384/3 4,642 /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). 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, NED - Overseas : Conal, NTPC, Quezon - Others : ESCO, ET EGCO Group's profit before the effect of foreign exchange rate for the first-half period ended June 30, 2010 was Baht 4,170 million, representing a decrease of Baht 214 million or 5% 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 176 million, EGCO Group's profit was Baht 4,346 million, a decrease of Baht 297 million or 6%, while in the same period of last year it recorded a foreign exchange gain of Baht 258 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 (June 30, 2010) and the previous period (December 31, 2009). The gain on foreign exchange rate of this period in the amount of Baht 176 million can be explained as follows: - The loss on foreign exchange rate of EGCO and subsidiaries of Baht 8 million, compared to the same period of last year which recorded the gain on foreign exchange rate of Baht 18 million. - The gain on foreign exchange rate of joint ventures of Baht 184 million, compared to the same period of last year which showed the gain on foreign exchange rate of Baht 240 million. Gain (Loss) on FX from Joint Ventures: Unit : Million Baht 1H10 1H09 BLCP 168 175 GPG 115 115 GCC, NKCC, SCC and GYG 43 42 Conal (8) 9 NTPC (133) (100) Quezon (1) (2) Total Gain (Loss) from FX 184 240 The earnings before finance costs, tax, depreciation and amortization (EBITDA) for the first-half period of 2010 was Baht 8,107 million,representing a decrease of Baht 481 million or 6% as compared to the same period of 2009, in which the EBITDA was Baht 8,588 million. The gross profit of EGCO and subsidiaries was reported at Baht 1,694 million, down by Baht 203 million or 11%, 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 1,342 million, a decrease of Baht 391 million or 23%. Important Profitability Ratios for the first-half period of 2010 operating results were as follows: - Gross Profit Ratio (excluding the share of profit from joint ventures) was 39.05% - Operating Profit Ratio was 30.93% - Net Profit Ratio was 53.91% - Net Profit Ratio (excluding the effect of foreign exchange of EGCO and subsidiaries) was 54.01% - Earnings per share (EPS) was Baht 8.25 - Earnings (excluding the effect of foreign exchange of EGCO and subsidiaries) per share (EPS bf FX) was Baht 8.27 - Return on Equity (ROE) was 8.35% The gross profit ratio (excluding the share of profit from joint ventures) of 39.05% was lower than the previous year's margin of 41.98% 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 54.01%, lower than the same period of 2009 ratio of 55.63% mainly due to the decreases in the share of profit from GPG and BLCP. 3.2 Revenue, Expense and Share of Profits from Joint Ventures Analysis The first-half operating results of 2010, excluding FX of EGCO Group and profit attributable to minorities (MI), are as follows: - Total revenues were Baht 4,531 million, a decrease of Baht 204 million or 4%. - Total expenses were Baht 3,648 million, an increase of Baht 16 million or 0.44%. - The share of profits from joint ventures before FX was Baht 3,346 million, an increase of Baht 10 million or 0.30%. 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 Overseas Others Total 1H10 1H09 1H10 1H09 1H10 1H09 1H10 1H09 1H10 1H09 1H10 1H09 Total Revenues 150 156 2,827 3,122 1,159 1,089 - - 396 369 4,531 4,735 Total Expenses 390 321 1,997 2,060 974 996 - - 287 254 3,648 3,632 Profits bf Share of Profits (Losses) from JVEs (240) (166) 830 1,062 185 93 - - 109 115 883 1,103 Share of Profits (Losses) from JVEs bf FX - - 2,391 3,006 127 163 829 167 - - 3,346 3,336 Net Profit bf FX and MI (240) (166) 3,221 4,068 312 256 829 167 109 115 4,229 4,439 1) EGCO's total revenues amounting to Baht 150 million decreased by Baht 6 million or 4% mostly from a decrease of interest income by Baht 17 million due to lower interest rate. Total expenses of EGCO were Baht 390 million, an increase of Baht 69 million or 21%. This resulted mainly from an increase in finance costs by Baht 54 million from the interest of long-term loan totaling Baht 4,000 million in September 2009. 2) IPP's total revenues were Baht 2,827 million, a decrease of Baht 295 million or 9%. The total expenses were Baht 1,997 million, down by Baht 63 million or 3%. The share of profits from joint ventures before FX was reported at Baht 2,391 million, a decrease by Baht 615 million or 20%. 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 GPG Total 1H10 1H09 1H10 1H09 1H10 1H09 1H10 1H09 1H10 1H09 %Chg Total revenues 1,298 1,905 1,529 1,217 - - - - 2,827 3,122 (9%) Total expenses 945 1,130 1,051 930 - - - - 1,997 2,060 (3%) Profits bf Share of Profits (Losses) from JVEs 353 775 478 287 - - - - 830 1,062 (22%) Share of Profits (Losses) from JVEs bf FX - - - - 1,543 1,913 848 1,093 2,391 3,006 (20%) Net Profit bf FX and MI 353 775 478 287 1,543 1,913 848 1,093 3,221 4,068 (21%) * Sales of electricity of IPP were Baht 2,794 million, representing a decrease of Baht 281 million or 9%. The decrease was a result of Rayong power plant's lower electricity sales by Baht 596 million to register Baht 1,270 million, caused by a decrease in the Capacity Rate. Meanwhile, KEGCO's electricity sales increased by Baht 314 million to register Baht 1,524 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 1H10 1H09 %Changes Rayong power plant 1,270 1,866 (32%) KEGCO 1,524 1,210 26% Total Sales of Electricity - IPP 2,794 3,075 (9%) 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 first-half period of 2010, Rayong power plant and KEGCO received compensation for the exchange rate effect of Baht 60 million. * Interest income and others amounted to Baht 33 million, a decrease of Baht 14 million or 30%, mainly from a decrease in other income of Rayong power plant due to the sales of power plant's component parts in 2009 and from a decrease of KEGCO and Rayong power plant's interest income in 2010. * Cost of sales totaled Baht 1,498 million, an increase of Baht 9 million or 1% from a increase of KEGCO's cost of sales by Baht 80 million due to major maintenance as planned. Meanwhile, Rayong power plant's cost of sales decreased by Baht 71 million due to lower major maintenance. Cost of Sales - IPP: Unit : Million Baht 1H10 1H09 %Changes Rayong power plant 743 814 (9%) KEGCO 756 675 12% Total Cost of Sales - IPP 1,498 1,489 1% * Administrative expenses and income taxes were Baht 420 million, a decrease of Baht 26 million or 6%, mainly from the decrease in Rayong power plant's tax payment by Baht 191 million due to the lower revenues. Meanwhile, administrative expenses of Rayong power plant and KEGCO increased totaling Baht 123 million mainly from the higher provision for devaluation inventory. * Finance costs were Baht 78 million, a decrease of Baht 47 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 2,391 million, a decrease by Baht 615 million or 20% that resulted from a decrease of BLCP's electricity sales due to a lower Base Availability Credit and a decrease of GPG's electricity sales caused by the schedule maintenance as planned. 3) SPP's total revenues were reported at Baht 1,159 million, an increase of Baht 70 million or 6%. The total expenses were Baht 974 million, a decrease of Baht 22 million or 2%. The share of profits from joint ventures before FX was reported at Baht 127 million, down by Baht 36 million or 22%. 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 NED Total 1H10 1H09 1H10 1H09 1H10 1H09 1H10 1H09 1H10 1H09 %Chg Total revenues 1,002 940 156 148 - - - - 1,159 1,089 6% Total expenses 892 923 82 73 - - - - 974 996 (2%) Profits bf Share of Profits (Losses) from JVEs 110 17 74 75 - - - - 185 93 99% Share of Profits (Losses) from JVEs bf FX - - - - 138 163 (11) - 127 163 (22%) Net Profit bf FX and MI 110 17 74 75 138 163 (11) - 312 256 22% * Sales of electricity of SPP were Baht 1,154 million, an increase of Baht 71 million or 7%, mainly from an increase in EGCO Cogen's electricity sales to EGAT and industial users. Sales of Electricity - SPP: Unit : Million Baht 1H10 1H09 %Changes EGCO Cogen 1,000 937 7% Roi-Et Green 154 146 6% Total Sales of Electricity - SPP 1,154 1,083 7% * Interest income and others amounted to Baht 4 million, a decrease of Baht 1 million or 23%, mainly from the lower interest income. * Cost of Sales of SPP was reported at Baht 918 million, a decrease of Baht 19 million or 2%. This was substantially driven by a decrease in cost of sales of EGCO Cogen by Baht 28 million compared to the same period of last year which recorded higher maintenance cost. Meanwhile, Roi-Et Green's cost of sales increased by Baht 9 million from a higher price of rice husk. Cost of Sales - SPP : Unit : Million Baht (more)