Information Memorandum : TTW

- Information Memorandum - Thai Tap Water Supply Public Company Limited (TTW) Head Office: 30/10 Moo 12, Phutthamonthon 5 Road, Raikhing Sub-district, Sampran District, Nakornpathom Province 73210 Telephone: (662) 811-7526, (662) 811-7528, (662) 811-8369 Fax: (662) 420-6064 Website: www.thaitap.com Plant Office: 68 Moo 9, Bangrakam Sub-district, Banglane District, Nakornpathom Province Telephone: (6634) 276-805 Fax: (6634) 277-113 Listing Date 22 May 2008 (Commencement Date of Trading: 22 May 2008) Listing Securities 3,990,000,000 ordinary shares with a par value of Baht 1 per share, totalling Baht 3,990,000,000 Company's Capital As at 22 May 2008 (Commencement Date of Trading) Registered capital Ordinary shares : Baht 3,990,000,000 Paid-up capital Ordinary shares : Baht 3,990,000,000 Secondary Market Stock Exchange of Thailand (the SET) Offering Price Baht 4.20 per share No. of Share Offering 1,000 million shares, divided into two tranches as follows: 1. 700 million new ordinary shares; and 2. 300 million existing ordinary shares offered by: - CH. Karnchang Public Company Limited: 143,062,000 shares - Mitsui Water Holdings (Thailand) Limited: 105,000,000 shares - Bangkok Expressway Public Company Limited: 37,500,000 shares - Bangkok Bank Public Company Limited: 7,515,000 shares - TMB Bank Public Company Limited: 6,923,000 shares Offering Period 12-13 May 2008 for general investors and patrons 14-16 May 2008 for institutional investors Objectives and plans for utilizing the capital increase The Company intends to use the net proceeds from this public offering after deduction of all costs and expenses relating to the offering to repay the short-term loans owed by it to the financial institutions. Greenshoe Option - None - Type of Business and Nature of Operation Thai Tap Water Supply Public Company Limited (The Company) The Company operates a tap water business and is the largest private producer and distributor which supplies tap water to the Provincial Waterworks Authority (PWA) in five districts of two provinces, i.e. the districts of Nakorn Chaisri, Sampran and Phutthamonthon in Nakornpathom Province and the districts of Kratoomban and Muang Samutsakorn in Samutsakorn Province. The Company's business is in line with government policy, which (i) encourages the public to use tap water instead of groundwater in an effort to solve the problem of land subsidence and intrusion of saline water in the underground aquifers and (ii) aims at expanding the tap water service area to meet the demand of consumers. On 21 September 2000, the Company and PWA entered into a 30-year Water Purchase and Sale Agreement, which is to end on 20 July 2034. The Agreement is a Build-Own-Operate ("BOO") contract, under which the Company would build and own water production and distribution systems without having to transfer them to PWA. The Company also obtained a waterworks business concession from the Ministry of Natural Resources and Environment, from 11 March 2005 to 10 March 2030, allowing the Company to produce tap water for distribution in the five districts of the two provinces described above for 25 years. As at 27 February 2008, the Company's water production plant had the maximum installed production capacity of 320,000 cubic metres per day. The Company pumps raw water from the Tha Chin River for its production of tap water, which is then transmitted from Banglane Production Plant in Banglane District, Nakornpathom Province through the bulk transmission main (BTM) to the Company's two water distribution stations, i.e. Phutthamonthon Water Distribution Station and Mahachai Water Distribution Station. The water is then distributed to the service area of 3 waterworks branch offices, namely Sampran Waterworks Branch Office, Om-Noi Waterworks Branch Office and Samutsakorn Waterworks Branch Office through the local distribution network (LDN), which is connected to the Company's two water distribution stations. The quantity of water sold and purchased each month is measured by the head metres at the Company's two water distribution stations. The Agreement specifies the minimum quantity of water that PWA must purchase from the Company or Minimum Off-take Quantity (MOQ), which is subject to increase as agreed throughout the 30-year term of the Agreement, as detailed as follows: Beginning date End date MOQ (cubic metres per day) 21 July 2004 20 July 2006 200,000 21 July 2006 20 July 2008 250,000 21 July 2008 20 July 2034 300,000 In addition to the terms regarding the MOQ as detailed above, the Agreement provides that the Company shall maintain its production capacity at a level that ensures sufficient supply of tap water to PWA at the MOQ rate applicable at any time, plus the lesser of (i) 7% of the applicable MOQ and (ii) 20,000 cubic metres per day of tap water quantity. The water charge rate used in calculating the monthly charge is fixed in the Agreement and is subject to adjustment according to the consumer price index for the Bangkok Metropolitan Area and a constant value (K) on 1 January each year throughout the term of the Agreement. The following table illustrates water charge rates previously given to PWA. Period Water charge rate (Baht per cubic metre) 5 January 2004 to 31 December 2004 17.437898 1 January 2005 to 31 December 2005 18.609628 1 January 2006 to 31 December 2006 20.259647 1 January 2007 to 31 December 2007 21.481579 1 January 2008 to 31 December 2008 22.751945 The Company has had Waterflow Company Limited (its wholly owned subsidiary) serve as part of the operating unit responsible for producing and distributing tap water. Pathum Thani Water Company Limited (Pathum Thani Water). Pathum Thani Water is another subsidiary of the Company. On 29 June 2007, the Company purchased 10,698,283 ordinary shares of Pathum Thani Water, or 89.15% of its total paid-up capital. Subsequently, on 18 December 2007, the Company acquired another 1,061,452 ordinary shares, which was equal to 8.85% of the total paid-up capital in Pathum Thani Water. Ever since, the Company has held a total of 11,759,735 ordinary shares in Pathum Thani Water, which is equal to 98% of its total paid-up capital. Like the Company, Pathum Thani Water, as the second largest private operator of tap water business in Thailand, produces and distributes tap water to PWA. On 31 August 1995, Pathum Thani Water and PWA entered into a Water Production and Distribution Licence Agreement to produce a maximum of 288,000 cubic metres of water per day to PWA for a term of 25 years ending on 14 October 2023. This Agreement was a Build-Own-Operate-Transfer (BOOT) contract whereby Pathum Thani Water would build the water production and distribution systems and must transfer the water distribution system to PWA on the Commencement Date. However, ownership of the water production system will be vested in PWA at the end of the 25-year period. PWA agreed to purchase tap water from Pathum Thani Water to distribute it to the consumers in the Pathumthani-Rangsit service area of the Pathumthani Province. On 15 September 2006, Pathum Thani Water entered into a Water Purchase and Sale Agreement with PWA to expand its production capacity, enabling Pathum Thani Water to distribute additional 70,000 cubic metres of water per day for use in the area under the responsibility of Rangsit Waterworks Branch Office. The term of this Agreement will end on 14 October 2023. The Agreement is a Build-Own-Operate-Transfer ("BOOT") contract like the Water Production and Distribution Licence Agreement. In addition to the Water Production and Distribution Licence Agreement with PWA, Pathum Thani Water was granted a waterworks business concession by the Ministry of Interior on 13 January 2000, allowing it to produce and distribute tap water in the Pathumthani-Rangsit service area of the Pathumthani Province for a period of 25 years. Production of tap water by Pathum Thani Water begins with its raw water intake from the Chao Phraya River for use at its water production facility in Pathumthani's Samkoke District. As at 27 February 2008, this water production plant had the maximum production capacity of 308,000 cubic metres per day. Once produced, the water will be sent through a bulk transmission main to Pathum Thani Water's three water distribution stations, i.e. Rangsit, Thammasat and Pathumthani Water Distribution Stations for their distribution via the local distribution network (LDN), which is PWA's property, into the servicing mains for end-users in areas under the responsibility of Pathumthani and Rangsit Waterworks Branch Offices. The Agreement specifies the minimum quantity of water that PWA must purchase from Pathum Thani Water or Minimum Off-take Quantity (MOQ). The quantity of water sold and purchased each month is measured by the head metres at the three water distribution stations. The water charge is calculated using the rate specified in the Agreement, which is subject to adjustment according to the consumer price index on 1 January each year. The MOQ which PWA agreed to purchase additional water under the Water Purchase and Sale Agreement dated 15 September 2006 is detailed as follows: MOQ No. Commencement Period (cubic metres per day) 1. The day Pathum Thani Water has the capacity to produce and supply 50,000 70,000 cubic metres per day of water 2. The day following the end of the 12-month period from the 1st applicable 60,000 MOQ 3. The day following the end of the 12-month period from the 2nd 70,000 applicable MOQ The following table illustrates the water charge rates previously given to Pathum Thani Water. Period Water charge rate (Baht per cubic metre) 11 September 1998 to 31 December 1998 7.89 1 January 1999 to 31 December 1999 8.68 1 January 2000 to 31 December 2000 8.59 1 January 2001 to 31 December 2001 8.76 1 January 2002 to 31 December 2002 8.95 1 January 2003 to 31 December 2003 8.96 1 January 2004 to 31 December 2004 9.12 1 January 2005 to 31 December 2005 9.40 1 January 2006 to 31 December 2006 9.90 1 January 2007 to 31 December 2007 10.34 1 January 2008 to 31 December 2008 10.52 Since 26 January 2007, Pathum Thani Water has been engaging in the waterworks business in conjunction with its wholly owned subsidiary, BJT Water Company Limited (BJT), which functions as a production and distribution unit for sales to PWA. Production process The production process of the Company and Pathum Thani Water begins with the raw water intake to the raw water pump station. First, water goes through the bar screen, followed by the fine screen before going to the rapid mixing tank where aluminium potassium sulphate, calcium hydroxide, potassium permanganate and polymer are mixed with the raw water for coagulation. The water then goes through a clarification process in a flat bottom clarifier before entering a gravity filter. The filtered water will then be mixed with chlorine to disinfect and transmitted to a treated water storage tank for transmission to the distribution station. The distribution station is where water pumps are installed to distribute water to water distribution stations in the area. The floc that forms in the flat bottom clarifier and the gravity filter is eliminated through the removal of water from the floc. For this process, the Company uses a Belt Press which is similar to an assembly line, while Pathum Thani Water uses a centrifuge dewatering machine, which separates the floc through centrifugation. By both of the above methods, the residue is removed from the production process and the water that has been separated is transmitted back to the production process. As a consequence, there is no discharge of water back into the raw water source (Zero Discharge) throughout the production process Revenue Structure The Company and its subsidiaries' main source of revenue is from the production and distribution of tap water to PWA exclusively. The Company began to generate earnings from its waterworks operations during the pre-sale period from 5 January to 20 July 2004 which produced pre-sale earnings of Baht 316.57 million. The Company's earnings from its operations under the Water Purchase and Sale Agreement began from 21 July 2004 onward. As regards Pathum Thani Water, its pre-sale period started on 11 September 1998. It began to generate income from its sale of tap water under the Water Production and Distribution Licence Agreement, on 15 October 1998. Moreover, BJT, Pathum Thani Water's subsidiary, generates a portion of its revenue through the provision of maintenance services on the water production and waste water treatment systems of Amata City Industrial Group and Amata Nakorn Industrial Estate. Revenue Structure of the Company and its Subsidiaries(1) (Unit: Baht Million) The Company The Company and its subsidiaries 2004 2005 2006 2007 Income Percentage Income Percentage Income Percentage Income Percentage Revenue from waterworks 571.96 64.27 1,356.03 99.69 1,697.80 98.58 2,567.03 97.86 Pre-sale revenue(2) 316.58 35.57 - - - - - - Revenue from services(3) - - - - - - 23.04 0.88 Other revenue(4) 1.37 0.15 4.22 0.31 24.39 1.42 33.16 1.26 TOTAL revenue 889.91 100.00 1,360.25 100.00 1,722.19 100.00 2,623.23 100.00 Notes: (1) The information in the table is derived from the audited financial statements of the Company and its subsidiaries. The financial information of 2004 and 2005 is derived from the Company's separated financial statements for 2004 and 2005. The financial information of 2006 comes from the consolidated financial statements of the Company and Waterflow, a subsidiary. The source of information of 2007 and Q1 of 2008 is the consolidated financial statements of the Company and its subsidiaries, i.e. Waterflow Pathum Thani Water and BJT (2) The Company's revenue generated from tap water operations from 5 January - 20 July 2004. (3) Revenue generated from tap water production services of BJT (a subsidiary of Pathum Thani Water) provided for Amata Nakorn. (4) Mostly income from interest receivables. Customer characteristics and distribution channels At present, the Company's sole customer is PWA, which purchases the Company's tap water at the water distribution stations of the Company and Pathum Thani Water. PWA then distributes the water purchased to consumers through the local distribution network and its service pipes. The monthly water charge in respect of the water sold by the Company to PWA is calculated based on the quantity of water sold at each water distribution station. For this purpose, the Company and PWA have installed two head metres at each water distribution station. At the end of each month, PWA's and the Company's recording officers will record the reading on the metres at each water distribution station and calculate the difference by comparing them with last month's figures. Then an average value of water usage calculated from the two head metres at each water distribution station will be used to calculate the water quantity supplied to PWA in that month. The quantity of water distributed at each water distribution station is then added up to find the monthly sale and purchase value as specified in the Water Purchase and Sale Agreement. The Company will monthly calculate the amount of charge for water actually sold to PWA. Where there is a difference between the average quantity of water actually supplied and the MOQ during such period, PWA will pay an extra amount to the Company, which will be calculated by multiplying the water charge rate with the above difference. This extra amount must be paid in 6-month instalments in January and July each year. For Pathum Thani Water, the quantity of water sold by it to PWA each month must be the average water quantity read by the two head metres installed at each water distribution station. The monthly water charge is calculated from that water quantity multiplied by the water charge rate, which is adjusted on 1 January each year. Raw materials and suppliers The important raw materials used in the tap water production process are as follows: (1) Raw water The Company and Pathum Thani Water use water from the central part of the Tha Chin River and the Chao Phraya River, respectively, by pumping water into their water production plants. The Company is permitted to pump water from the Tha Chin River free of charge, except for the waterworks concession fee payable to the Ministry of Natural Resources and Environment as the concession grantor at the annual rate of Baht 200 for each concession. The Company must also pay the inspector's fee in advance at the annual rate of Baht 200 for each concession. As the Company has been granted two concessions, it is obliged to prepay the inspector's fee in the total of Baht 400 per annum. Pathum Thani Water has to pay the waterworks concession fee to the Ministry of Interior as the concession grantor at the annual rate of Baht 200 for each concession (It appeared later that the Ministry of Interior assigned its rights and obligations relating to waterworks business to the Ministry of Natural Resources and Environment). Pathum Thani Water must also pay the inspector's fee in advance at the annual rate of Baht 200 for each concession. In March 2000, Pathum Thani Water advanced the payment of the inspector's expenses to be incurred throughout the 25-year term of the Concession for a total of Baht 5,000. (2) Chemicals The main chemicals used in the Company's tap water production are as follows: - Liquid aluminium potassium sulphate - Potassium permanganate - Liquid chlorine - Calcium hydroxide - Polyelectrolyte The proportion of chemicals used in the production process varies depending on the quality of the raw water at any one time. The water quality is tested by the system called Jar Test and the proportion of chemicals required is then calculated based on the quality of raw water. The data regarding the amount of chemicals is fed into the SCADA System, which controls the injection of chemicals into the production system to ensure that the appropriate amount is injected into the water according to the flow rate of the water pumped into the production process. Pathum Thani Water does not use potassium permanganate in its water production because the quality of water from the Chao Phraya River is different from the quality of water from the Tha Chin River. Raw water from the Tha Chin River contains certain chemicals which cause colouration that can be eliminated by potassium permanganate. The Company purchases raw materials from several suppliers by selecting suppliers whose products meet the accepted standards and the Company's lab quality requirements, and who have the ability to supply products promptly, adequately and at the lowest price. Environmental Impacts The Company and Pathum Thani Water place great importance on conserving the environment. However, the tap water production process produces sludge, which is sent to the dewatering process where polyelectrolyte is added to cause the sludge to stick together before it is deposited in the designated disposal area. As for the water removed from the sludge, it will be transmitted back into the production (more)