Opinion of IFA on the Connected Transections

(Transalation) November 14, 2008 Subject Opinion of Independent Financial Advisor Concerning the Disposition of Assets and the Connected Transactions To Shareholders of Thai Tap Water Supply Public Company Limted According to the Board of Directors Meeting of Thai Tap Water Supply Plc. (the "Company" or"TTW") No. 8/2008 which held on 22nd November 2008, passed the resolutions to propose that the Extra Ordinary General Meeting of Shareholders No. 1/2008 to consider and approve the engagement with CH.Karnchang Plc. ("CK") to carry out the construction for plant enhancement in order to increase the Company's existing production capacity from 320,000 m3/day to 440,000 m3/day, in the amount not exceeding Baht 640 million (excluding VAT). The above engagement of CK, as a major shareholder of the Company, holding 35.31 of paid-up capital as of September 30, 2008, is considered a connected transaction relating to assets or services in accordance with Section 89/12 of the Securities and Exchange Act B.E. 2552 (the "Securities Act") and the Notification of the Board of Governors of the Stock Exchange of Thailand regarding Disclosure of Information and Others Acts of Listed Companies concerning the Connected Transaction B.E. 2546 (as amended) and the Amendment as per the Notification of the Capital Market Supervisory Board Tor. Jor.21/2551, Re : Connected Transactions Rules. The total volume of such transaction is 12.36 per cent of net tangible assets according to the consolidated financial statements of the Company and its subsidiary companies ending June 30, 2008 (there were connected transaction between the Company and CK during six months in the amount of Baht 18.15 million or equivalent to 0.48 of net tangible asset. In case of, cluding this trascation, the accumulated trascations it will be Baht 658.14 million or equivalent to 12.84 of net tangible asset). In this regard, the Company is required to seek approval for the transaction from its shareholders' meeting with no less than three-fourths of the total votes of the shareholders or their proxies (if any) present at the meeting and having voting rights, excluding shareholders with vested interests. In view of the above, the Board of Directors resolved for the appointment of us, ACL Securities Co., Ltd., as the Independent Financial Advisor ("Financial Advisor") to give the opinions concerning the price fairness and transaction reasonableness and also to opine to the Audit Committee and/or the shareholders related to the connected transaction. ACL Securities Co., Ltd., as a Financial Advisor approved by the Office of the Securities and Exchange Commission (the "SEC") and also independent from the Company, has studied the information related to this transactions including the Board of Directors' resolutions, Information Memorandum concerning the Transactions which has been disclosed to the Stock Exchange of Thailand (the "SET"), financial statements and management accounts, list of shareholders, Certificate of Incorporation, Memorandum of Association, operation agreements, budget, financial projections and assumptions, interviews with executives and related persons, visits TTW's site and assessment to the industry overview and other economic factors. Our opinions expressed herein have been based on the assumptions that the information and documents obtained from the Company and the information has been disclosed to the SET. The opinion of the Financial Advisor presented is based on the assumption that information and documents provided are true and correct, while the analysis is done based on the economic condition and the information at the time of the study. Should there be any future significant changes that may have material adverse impacts on this opinion, the Financial Advisor may not be able to substantiate the impacts of such significant changes on the Company and its shareholders. Besides, the Financial Advisor provides its opinion on the engagement of CK to carry out the construction for plant enhancement in order to increase the Company's existing production capacity transaction only, and therefore, all other connected transactions incurred before this transaction are excluded from this opinion. Executive Summary Thai Tap Water Supply Plc. ("The Company") will enter into a connected transaction with CH. Karnchang Plc. ("CK"), its major shareholder with 35.31% stake and having common directors, namely 1. Mr. Plew Trivisvavet, 2. Mr. Narong Sangsuriya, 3. Mr. Prasert Marittanaporn, and 4. Mr. Sombat Kitjalaksana.According to the latest Information Memorandum submitted to the Stock Exchange of Thailand ("SET") on October 31, 2008, the Company is under negotiations to enter into a new Water Purchase and Sale Agreement ("PSA") with the Provincial Waterworks Authority ("PWA"), the conclusion of which is expected by the end of 2008. Thus, the Company has to make preparation by implementing a plant enhancement and construction project to increase its production capacity from the existing 320,000 cu.m./day to 440,000 cu.m./day at a total investment cost of up to Bt. 1.3 billion. The investment cost breakdown is 1. civil construction cost of up to Bt. 640 million, 2. mechanical & electrical cost of up to Bt. 422 million, and 3. other relevant costs. The Company will engage CK to handle the civil construction works, and such engagement is regarded as a connected transaction. Thus, the Company has appointed the Independent Financial Advisor ("IFA") to give opinions on the transaction, and will hold a shareholders' meeting to request the shareholders' approval of the transaction. Opinion of the IFA After studying all the documents and information relevant to the transaction, we, the IFA, view that the shareholders should approve this connected transaction. This is based on the grounds that at present the Company's distribution of tap water to PWA has almost met its full production capacity of 320,000 cu.m./day. Meanwhile, the Company and PWA are going to conclude a new PSA for a minimum offtake quantity of up to 100,000 cu.m./day by the end of 2008. The construction of a plant to serve the expansion of the production capacity will take around 18 months before completion, counting from the signing date of the PSA and the contractor engagement agreement. In view of this, the Company has to make all the preparations to ensure that it will meet the timeframe to accommodate the new PSA. Thai MM, the project manager, has forecasted a total project budget of Bt. 663.42 million. With negotiations undertaken all along with CK, CK eventually proposed a final contract price of Bt. 638.93 million. We consider such proposed final price reasonable in line with normal course of business transactions. Tentative project management structure is as follows: PWA TTW | | | | Independent Engineer <-----------> Project Manager Thai MM ________|__________ | | | | M&E Contractor Civil Contractor However, we have conducted cash flow projection for the new project that features the expansion of water production capacity by up to 100,000 cu.m./day (compared with the capacity expansion by 120,000 cu.m./day, i.e. from 320,000 cu.m./day to 440,000 cu.m./day, as disclosed in the Information Memorandum, coming from expanded capacity of 100,000 cu.m./day plus a required reserve of 7% of the minimum offtake quantity by PWA, which is equal to 20,000 cu.m./day) throughout the projection period covering January 2009 - 2034 when the existing PSA with PWA will expire. The internal rate of return calculated by us has come out in a range of 9.95-11.73% and net present value Bt. 275.08 million - Bt. 572.90 million. However, it is noted that the cash flow projection has been undertaken on a conservative basis. Future tap water distribution rate of the Company should actually be higher than the assumption in the projection taking into account the following: 1. The quality of groundwater has been deteriorating due to penetration of saltwater from the sea, the closure of groundwater wells not in accord with the standard procedure, and excessive groundwater pumping until that there is only low quality groundwater remaining in the wells, as groundwater comes from both good and bad quality water from various sources. To get quality groundwater, one needs to dig a well with at least 400 m. in depth, which would cost around Bt. 1.5 million. Thus, most households cannot afford to dig their own groundwater wells for individual household use as it would not be worthwhile. 2. There has been increasing requirement for the Company's tap water distribution every year,averaging over 40,000 cu.m./day over the past five years. Moreover, there are certain large water consumers in the service areas that have not yet used tap water, namely 1. Mahidol University,around 3,000 cu.m./day, 2. Samut Sakhon Municipality, and 3. Krathum Baen Municipality. At least 20,000 cu.m./day groundwater is expected to be consumed by households in the two municipalities at present. 3. Tap water is one of the life essentials. If there are water users and consumers in the service areas,they will definitely use the Company's tap water as the Company is the sole tap water provider in such areas and no transportation of tap water from other sources is allowed according to the prescribed regulations. In view of the above, although the rate of return of the project is not so high based on the cash flow projection under the assumption that the projected water distribution rate in the first years of production and operations may be lower than the actual demand for water consumption over the same period. Also, the estimated water tariff under the expansion project is anticipated to be lower than that under the existing PSA due to the cost of construction of the expanded plant being lower than that of the construction in the water production plant start-up a few years ago. We view that the Company has the capabilities to distribute tap water in the volume close to that from the expanded capacity expansion, i.e. 100,000 cu.m./day in the initial period of the production under the expansion project. In such case, the rate of return should level up later on. In conclusion, with due consideration of all the factors involved, we view that the Company has the capabilities to implement this tap water expansion project due to the above-nil net present value of the project, the rate of return higher than cost of capital, and a rather short payback period. Therefore, the shareholders should approve this connected transaction. 1. Characteristics and details of connected transactions 1.1. Types and sizes of transactions 1.1.1 The connected transaction The engagement of CK to carry out the construction of for plant enhancement in order to increase the Company's existing production capacity from 320,000 m3/day to 440,000 m3/day, in the amount not exceeding Baht 640 million (excluding VAT), if calculated in accordance with Section 89/12 of the Securities Act and pursuant to the SET Notification,Re: Rules, Procedures and Disclosure on Connected Transactions of Listed Companies and and the Amendment as per the Notification of the Capital Market Supervisory Board Tor. Jor. 21/2551, Re : Connected Transactions Rules, would be 12.36 per cent of the value of net tangible assets according to the consolidated financial statements of the Company and its subsidiary companies ending June 30, 2008 ((there were connected transaction between the Company and CK during six months in the amount of Baht 18.15 million or equivalent to 0.48 of net tangible asset. In case of, cluding this trascation, the accumulated trascations it will be Baht 658.14 million or equivalent to 12.84 of net tangible asset). The calculation of trasaction size is as follows: = Total value of consideration * 100 __________________________________ Net tangible assets = 640 * 100 _________ 5,179 = 12.36 In this regard, the transaction size exceeds 3% of the Company's net tangible assets. Therefore, before entering into transaction between the Company and CK, the Company is required to seek approval from its shareholders' meeting with no less than three-fourths of the total votes of the shareholders or their proxies (if any) present at the meeting and having voting rights, excluding shareholders with vested interests. 1.1.2 The acquisition and disposition of assets The engagement of CK to carry out the civil work for plant enhancement, if calculated pursuant to the SET Notification, Re: Rules, Procedures and Disclosure on Acquisition or Disposition of Assets of Listed Companies, according to the transaction value basis, would represent 7.07 per cent. of the value of remuneration compared with total assets of the Company according to the consolidated financial statements of the Company and its subsidiary companies ending June 30, 2008. The calculation of trasaction size is as follows: = Total value of consideration paid * 100 _______________________________________ Total assets of TTW = 1,300 * 100 ___________ 18,374 = 7.07 The size of transaction represents 7.07% of consolidated total assets of the Company based on the latest reviewed financial statement as of June 30, 2008 which is less than 15%. Therefore, the Company does not require disclosing this transaction to the SET and/or the SEC. 1.2 Value of remuneration The Company will make any payment for the construction works in the amount not exceeding Baht 640 million to CK by cheque upon compleation of installment of works. The funds will come from issuance of debentures and/or borrowing from financial institutions and/or the Company's working capital. 1.3 Connected persons 1.3.1 CK is a major shareholder of the Company holding 1,408,777,400 shares, or 35.31 per cent of paid-up capital according to the Company's share register book as of September 30, 2008. 1.3.2 List of common directors between the Company and CK are as follows: Connected Persons Position in the Company Position in CK 1. Mr. Plew Trivisvavet Chairman of the BOD President and CEO 2. Mr. Narong Sangsuriya Director and Chairman of Director and Senior the Executive Committee Executive Vice President 3. Mr. Prasert Director Director and Senior Marittanaporn Executive Vice President 4. Mr. Sombat Kitjalaksana Director Director and Senior Executive Vice President (Business Development) 1.4 Details of the civil construction under the expansion project The engagement of CK as the civil contractor at the contract price of up to Bt. 640 million (exclusive of VAT) is in a manner that CK will be a turnkey contractor, covering engineering, procurement and construction (EPC) works. The portion other than civil works, i.e. mechanical and electrical works, would be contracted to S. Napa (Thailand) Co., Ltd., which is not a related party to the Company, at the contract price of up to Bt. 422 million (exclusive of VAT).Coupled with other relevant expenses, the total project cost would be Bt. 1.3 billion. There will be some constraints in the Company's plant enhancement through the improvement of and addition of equipment to the existing infrastructures at the Banglen production plant in that,implementation of each work system will be made concurrently within an 18 months period,hence a constaint as the Company would have to proceed with the production and distribution of water in parallel with the new project implementation so that tap water distribution to the public would not be disrupted. Therefore, the following guidelines would be adopted for the expansion project: 1. Water Treatment Process 1.1 Modification of the raw water sump pit and installation of a new raw water pump 1.2 Construction of a new Rapid Mixing Tank for the enhanced system 1.3 Construction of a new Sludge Blanket Clarifier Tank and enhancement of the existing sludge drainage channels 1.4 Construction of two new Rapid Gravity Filter Tanks for spare capacity in the backwash process 1.5 Modification and enhancement of the chlorination and chemical feeding system 1.6 Modification and enhancement of the aeration system 1.7 Modification and enhancement of the electrical and instrument systems 1.8 Modification and enhancement of the electrical power backup system 1.9 Installation of an additional Treated Water Pump 1.10 Provision of additions and enhancements to the Surge Protection Systems 1.11 Modification of the SCADA System 1.12 Relocation and modification of related buildings 1.13 Removal and modification of related infrastructure such as retaining walls, service roads and foot paths 2. Construction of Salaya Booster Pumping station (BP1).The site is 17 kilometres from the Water Treatment Plant. The area is 10 rai 2 ngan 54 sq.w. (4,254 sq.w.) and it is located at Tambon Klong Yong, Budthamonthol District, Nakorn Pathom Province. The concept of this station to increase the water delivery system from Banglen Water Treatment Plant to Buthamonthol Pumping Station up to 450 MLD (from existing 320 - 340 MLD), maximum delivery capacity. The construction works are as follows; 2.1 Construction of a water storage tank with a size of 36,000 cu.m. 2.2 Construction of a machinery house with details as follows; - Pump Room - Staff Office - SCADA Room - Control Panel Room 2.3 Construction of a Surge Protection System 2.4 Construction of a 115 kv power supply substation and Ring Main Unit 2.5 Construction of infrastructure such as site drainage, overflow system, service road, retaining wall and fence, street light and fire protection system 2.6 Installation of a pumping system (by the M&E contractor) 2.7 Installation of a SCADA System 3. Construction of Kratumban Booster Pumping station (BP2).The site is 12 kilometers from Buthamonthol Pumping Station. The area is 14 rai 3 ngan 64 sq.w. (5,964 sq.w.) 14.91 Rai and is located at Tambon Klong Ma Deua, Kratumban District, Samut Sakorn Province. The concept of this station to increase the water delivery system from Buthamonthol Pumping Station to Mahachai Pumping Station up to 200 MLD (from existing 140 - 160 MLD), maximum delivery capacity. The construction works are as follows; 3.1 Construction of a water storage tank with a size of 20,000 cu.m. 3.2 Construction of a machinery house with details as follows; - Pump Room - Staff Office - SCADA Room - Control Panel Room 3.3 Construction of a Surge Protection System 3.4 Construction of a Ring Main Unit and power supply system 3.5 Construction of infrastructure such as site drainage, overflow system, service road, retaining wall and fence, street light and fire protection system. 3.6 Installation of a pumping system (by the M&E contractor) 3.7 Installation of a SCADA System 2. Profiles of Thai Tap Water Supply Plc. and CH. Karnchang Plc. 2.1 Background - Thai Tap Water Supply Plc. ("the Company") The Company operates a public service business engaging in production and distribution of tap water to the Provincial Waterworks Authority ("PWA") in the service areas of the districts of Nakhon Chaisi, Sam Phran and Buddhamonthon in Nakhon Pathom province, and the districts of Muang Samut Sakhon and Kathum Baen in Samut Sakhon province to replace groundwater consumption of the public and tap water production from PWA's groundwater wells, and also to increase tap water production volume to sufficiently serve the consistently increasing consumer demand, which would subsequently solve land subsidence and saltwater penetration problems in accordance with the government policy. The Company was established on September 11, 2000 with an initial registered and paid capital of Bt. 3.99 billion (par value of Bt. 1 per share). On September 21, 2000, the Company entered into a Water Purchase and Sale Agreement ("PSA") with PWA for a contract term of 30 years and on a Build-Own-Operate ("BOO") basis. That is, the Company carries out construction of the tap water production and distribution systems to serve consumers with a maximum production capacity of 320,000 cu.m./day as of February 27, 2008, which is the highest capacity compared with other private tap water business operators in Thailand. The Company maintains the ownership of the tap water production and distribution systems to serve consumers and no transfers of which to PWA are required. The minimum offtake quantity ("MOQ") by PWA under the PSA will increase during the contract term of 30 years as follows: Beginning Ending MOQ (cu.m./day) July 21, 2004 July 20, 2006 200,000 July 21, 2006 July 20, 2008 250,000 (more)