Related Party Transaction

(Translation) Information Memorandum on Related Party Transaction of Thai Tap Water Supply Public Company Limited The Board of Directors' Meeting of Thai Tap Water Supply Public Company Limited (the "Company") No. 8/2551 held on 22 October 2008 passed a resolution for the Company to enter into the civil work construction contract with CH. Karnchang Public Company Limited ("CH. Karnchang"), with the details as follows: 1. Transaction Date and the Parties The Company expects to sign the contract with CH. Karnchang within December 2008 upon having receive Provincial Waterworks Authority PWA approval for the Company to enter into a new Water Purchase and Sale Agreement for additional purchase with the Provincial Waterworks Authority (the "PWA") which is expected to be concluded by the year 2008. 2. Names of the Parties and Relationship with the Listed Company Employer: Thai Tap Water Supply Public Company Limited Contractor: CH. Karnchang Public Company Limited which operates the large scale infrastructure construction business requiring use of advanced construction technology and invests in large-sized basic infrastructure projects of government agencies, such as, construction of the Mae Fah Luang University, the Second Stage Expressway, the Rama IX Bridge, etc. 3. Details of Assets to be Constructed The Company would engage CH. Karnchang to carry out the civil work construction of the project for expansion of the tap water production capacity from 320,000 cubic meters/day to 440,000 cubic meters/day in the amount of not exceeding Baht 640 million (excluding value added tax), with the details as follows: 1. Civil work of the expansion of the existing water treatment plant in the production process Location: Moo 9 Tambon Bang Rakam, Amphoe Bang Len, Nakhon Pathom Province 73130 2. Civil work construction of Salaya Pumping Station Location: Bangphasi-Salaya Road, Tambon Khlong Yong, Amphoe Phutthamonthon, Nakhon Pathom Province 73170 3. Civil work construction of Krathum Baen Pumping Station Location: Krathum Baen Cooperatives, Amphoe Krathum Baen, Samut Sakhon Province 74110 4. Total Value and Basis for Calculation of the Total Transaction Value Total value of : Not exceeding Baht 640 million (excluding value added tax) consideration Payment method : Payment by cheque based on work installments during 60 - 430 days Conditions : The engagement contract with CH. Karnchang would be executed upon having receive approval by the Provincial Waterworks Authority to enter into the Water Purchase and Sale Agreement for additional purchase with the new Provincial Waterworks Authority. Basis for calculation : The Company has engaged Thai MM Limited, as a Project of value Manager to calculate and manage the Construction Cost. The Company has determined the basis for calculation of value of consideration by various approaches based on the financial position as of 30 September 2008 of the Company, whereby the independent financial advisor (ACL Securities Company Limited) would assess the suitability of the execution of the transaction on the basis of transparency and justification. The independent financial advisor has used the following information: - Information and projections received from the Company and related companies; - Report on tap water demand; - Market price for the execution of this transaction; Such information has been considered by the independent financial advisor as reliable and reasonable. In this regard, the volume of the connected transactions within the past six months represented 12.36 percent of the net tangible asset value under the consolidated financial statements of the Company and its subsidiaries ending 30 June 2008, with the value of Baht 5,179 million under the calculation of acquisition or disposal of assets as follows: (Unit: Thousand Baht) 30 June 2008 Total assets 18,374,016 Net right to produce and distribute tap water 2,982,413 Total liabilities 10,188,860 Minority shareholders' equity 24,145 Percentage of volume of transaction = (connected transaction value / (total assets - net right to produce and distribute tap water - total liabilities - minority shareholders' equity)) *100 = 640,000 / (18,374,016 - 2,982,413 - 10,188,860 - 24,145)) * 100 = 12.36% 5. Details of Connected Persons 5.1 CH. Karnchang Public Company Llimited It is a major shareholder of the Company as per the information in the Thai Tap Water Supply Public Company Limited share register book as of 30 September 2008, holding 1,408,777,400 shares, representing 35.3 percent of the registered capital. 5.2 List of the Board of Directors holding positions in CH. Karnchang is as follows: Names of Connected Persons Positions Positions in the Company in CH. Karnchang Mr. Plew Trivisvavet Chairman of the Board of President and CEO Director Mr. Narong Sangsuriya Director and Chairman of Director and Senior the Executive Committee Executive Vice President Mr. Prasert Director Director and Senior Marittanaporn Executive Vice President Mr. Sombat Kitjalaksana Director Director and Senior Executive Vice President (Business Development) 6. Nature and Scope of Interest of the Connected Persons in the Execution of the Transaction CH. Karnchang is the Company's shareholder as per the information in the Company's share register book as of 30 September 2008, holding 1,408,777,400 shares, representing 35.3 percent of the registered capital. 7. Conditions which may affect the Shareholders' Rights -None- 8. The Company's Directors who are Interests Persons The Company's directors who have interest and are connected persons under Clause 5 did not attend and vote at the Board of Directors' Meeting on the agenda for consideration of this related party transaction. 9. Opinion of the Board of Directors and Members of the Audit Committee Attending the Meeting Having considered the matter, the Board of Directors, together with all members of the Audit Committee attending the Meeting, is of the view that the execution of this transaction is considered reasonable to the Company's business operations and for the optimum benefits to the Company, since the contractor has the expertise and experience in the construction of public utilities systems and carried out the Company's construction work when starting the project in 2001, therefore, it has potentials for the work and is ready to start work immediately, as well as the cost of construction is reasonable and lower than the price appraised by the consulting engineer. In addition, information disclosure of the contractor is accurate and complete in accordance with the Notification of the Board of Governors of the Stock Exchange of Thailand, Re: Disclosure of Information and Acts of Listed Companies Concerning Connected Transactions. Moreover, should the operation of the project be completed, it would strengthen the Company's business operations, competitiveness and profitability in the future. 10. Opinion of the Board of Directors and/or the Audit Committee which is different from the Board of Directors' Opinion under Clause 9 -None- 11. Summary Information of the Company and Operations of Business The Company produces and distributes tap water to the Provincial Waterworks Authority (PWA) in the areas of Amphoe Nakhon Chaisri, Amphoe Sam Phran and Amphoe Phutthamonthon in Nakhon Pathom Province and in Amphoe Mueang Samut Sakhon and Amphoe Krathum Baen in Samut Sakhon Province. The tap water is intended to replace the groundwater used in the private sector and the PWA's production of tap water from groundwater wells. In addition, the Company aims to increase tap water production capacity to meet the constantly growing demand, thereby solving the problem of land subsidence and the intrusion of saline water into the underground aquifers in line with the Government's policy. The Company was incorporated on 11 September 2000 and has a current registered and paid up capital of Baht 3,990 million. On 21 September 2000, the Company and the PWA entered into a Water Purchase and Sale Agreement, which is a Build-Own-Operate ("BOO") contract with a term of 30 years, namely, the Company carries out construction of the tap water production and distribution systems to consumers with the maximum installed production capacity as of 320,000 cubic meters/day, which is the second highest capacity after Pathum Thani Water, the Company's subsidiary. The Company is the owner of the tap water production and distribution systems to consumers and is under no obligation to transfer them to the PWA. The Water Purchase and Sale Agreement also specifies the (MOQ) that the PWA must purchase from the Company throughout the 30-year term of the Agreement, which can be summarized as follows. Commencement date End date MOQ that the PWA must purchase (cubic meters/day) July 21, 2004 July 20, 2006 200,000 July 21, 2006 July 20, 2008 250,000 July 21, 2008 July 20, 2034 300,000 (End of the Agreement) 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 central region and a constant value (K) every year throughout the term of the Water Purchase and Sale Agreement. In addition to the Water Purchase and Sale Agreement, the Company also obtained a waterworks business concession from the Ministry of Natural Resources and Environment on 11 March 2005, allowing the Company to produce tap water for distribution in five districts of the two provinces described above for 25 years. In operating its waterworks business, the Company has WaterFlow Co., Ltd. ("WaterFlow"), the Company's wholly owned subsidiary with a registered and paid-up capital of Baht 10 million, serving the Company as part of an operating unit, which is responsible for producing and distributing tap water to the PWA. Although the Company has been active in this industry for just over four years from the day it began producing tap water for distribution to the PWA on 5 January 2004, the Company's revenues and operating results have grown steadily with the growth rate of average annual sales in 2005, 2006, 2007 and until the third quarter of 2008 of 61.5%, 23.8%, 11.8% and 18.8%, respectively. From these figures, it can be seen that sales of tap water grew significantly in the first year and subsequently declined. That was because, before the Company began distributing tap water, consumers in Samut Sakhon and Nakhon Pathom Provinces were using groundwater as the source of water for their consumption. Consequently, when tap water, which is a cleaner source of water, became available, a large number of consumers switched to tap water immediately. The Company's growth rate of sales in the following years will depend on the switching of the remaining groundwater users to tap water users, economic condition, and growth of population in the areas. Samut Sakhon and Nakhon Pathom Provinces are economic areas with a high concentration of factories. The quantity of water usage in the industrial sector accounts for 54.1% of the total sale volume. These are also areas of high population density, which commercial and household users consume 22.2% and 23.7% of all tap water sold, respectively. In June 2006, the Company engaged Thai DCI to survey the demand for tap water in its service areas. The survey revealed that the total water demand in the service areas was 967,234 cubic meters/day, of which only 19% was for tap water while 81% was for groundwater. Thai DCI forecasted that industrial use of groundwater in the Company's service areas will end in 2015. On 29 June 2007, the Company purchased 10,698,283 ordinary shares in Pathum Thani Water at the price of Baht 340 per share, or 89.15% of Pathum Thani Water's total shares. Subsequently, on 18 December 2007, the Company acquired additional ordinary shares in Pathum Thani Water representing another 8.85% of the total shares in Pathum Thani Water at the price of Baht 340 per share, representing a total investment cost of Baht 3,998.3 million. The price of those shares in Pathum Thani Water was in the price range appraised by two independent appraisers, namely, SCMB Co., Ltd. and Seamico Securities Public Company Limited, using the discounted cash flow method. The fair price has been valued at Baht 314.6-378.3 per share (based on the weighted average cost of capital of 8.32%-12.44%) and Baht 389.8-466.3 per share (based on the weighted average cost of capital of 7.93%-9.93%), respectively. The calculation based on a total production capacity of 358,000 cubic meters/day (comes from the previous production capacity 288,000 cubic meters/day and the MOQ of 70,000 cubic meters/day from plant expansion). As a result, Pathum Thani Water became a subsidiary of the Company and the Company recorded the difference between the purchase price and the fair value of Pathum Thani Water of Baht 3,169.1 million. Similar to the Company's business, Pathum Thani Water produces and distributes tap water to the PWA. On 31 August 1995, Pathum Thani Water and the PWA entered into a Water Production and Distribution License Agreement with a term of 25 years commencing 15 October 1998 and ending 14 October 2023. This Agreement is 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 the PWA on the Commencement Date. However, ownership of the water production system will be vested in the PWA at the end of the 25-year period. In this Agreement, the PWA agreed to purchase tap water from Pathum Thani Water for distributing the water to consumers in Pathum Thani-Rangsit areas in Pathum Thani Province. As of 1 August 2008, the maximum production capacity was 388,000 cubic meters/day (comprising installed production capacity at 288,000 cubic meters/day and expanded production capacity including reserve production capacity at 100,000 cubic meters/day). This is the maximum production capacity as compared to that of all private sector operators of waterworks business in the country. In addition, the MOQ for Pathum Thani Water is subject to annual adjustment under the condition that the MOQ in each year shall not be less than the MOQ in the previous year. From 2007 until 31 July 2008, the MOQ for Pathum Thani Water was 260,000 cubic meters/day and from 1 August 2008 until present, the MOQ for Pathum Thani Water is 310,000 cubic meters/day. The water charge rate that Pathum Thani Water receives from the PWA is adjusted every year according to the consumer price index. In addition to the Water Production and Distribution License Agreement with the 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 Pathum Thani-Rangsit service areas in Pathum Thani Province for a period of 25 years. Since 26 January 2007, Pathum Thani Water has been engaging in the waterworks business in conjunction with BJT Water Co., Ltd. ("BJT"), which functions as a tap water production and distribution unit for sales to the PWA. BJT is a 100% wholly owned subsidiary of the Company and has a registered and paid-up capital of Baht 50 million. From 1998 to 2000, Pathum Thani Water's growth rate of sales was quite low, i.e., at an average of 9.7%. That was because the Government's policy of closing groundwater wells was not stringent at that time, and as a result, many water users continued using groundwater even though the tap water services were in place. Subsequently, the Department of Groundwater Resources enforced stricter measures to close groundwater wells by ceasing to issue new licenses to new applicants or renew existing licenses to the licensees and raising groundwater charges. As a result of such policy, Pathum Thani Water's sales increased between 2000 and 2004 with the average growth rate of sales of 21.13%. Nevertheless, after 2004, the growth rate of sales of quantity of water dropped to 12.4%, 7.2% and 6.8% in 2005, 2006 and 2007, respectively. In August 2004, ASDECON Corporation Co., Ltd. conducted a study of tap water demand in the Pathum Thani-Rangsit areas and forecasted the quantity of water sold until year 2033 by using assumption based on significant factors, i.e., the number of the population, the proportion of service, the water usage rate, and the existence of alternative water sources, e.g., groundwater. The study revealed a continuous increase in demand for tap water. It is predicted that the demand for tap water will grow up to 470,594 cubic meters/day in 2013, or at the Cumulative Annual Growth Rate (CAGR) from 2008 to 2013 of 4.8%. As regards the long-term tendency, demand is expected to rise to 783,848 cubic meters/day, namely, the CAGR from 2008 to 2033 representing 3.0%. 12. Lists of Executives and Top Ten Shareholders as of the Latest Record Date of the Share Register Book for Suspension of Share Transfer as of 20 November 2008 would be entitled to attend the Shareholders Meeting. No. Directors Position 1 Mr. Plew Trivisvavet Chairman of the Board of Directors 2 Mr. Narong Sangsuriya Director / Chairman of the Executive Committee 3 Mr. Prasert Marittanaporn Director / Member of the Nomination and Remuneration Committee / Member of the Risk Management Committee 4 Dr. Sombat Kitjalaksana Director / Executive Director 5 Mr. Sompodh Sripoom Director / Executive Director / Member of the Corporate Governance Committee / Member of the Risk Management Committee 6 Mr. Yoshio Kometani Director / Member of the Nomination and Remuneration Committee 7 Mr. Tomoaki Matsumoto Director / Executive Director / Member of the Risk Management Committee 8 Mr. Phairuch Mekarporn Director / Chairman of the Nomination and Remuneration Committee / Member of the Audit Committee / Member of the Corporate Governance Committee 9 Mr. Techapit Sangsingkeo Director / Chairman of the Audit Committee / Chairman of the Risk Management Committee / Member of the Corporate Governance Committee 10 Mr. Somnuk Chaidejsuriya Director / Chairman of the Corporate Governance Committee / Member of the Audit Committee 11 Mr. Suvich Pungchareon Director / Executive Director List of top ten shareholders as of 20 November 2008 (more)