) Opinion of IFA on the Connected Transections

2007 244,448 2012 503,028 2008 288,665 2013 567,074 2009 336,843 2014 636,178 2010 388,851 2015 710,671 Source : Thai DCI Engineering Consultant Co., Ltd. and Thai Tap Water Supply Plc. The Company's water distribution volume in 2008 is in line with that in the finding by Thai DCI as in the above table. Although its average distribution volume is still lower than its full capacity, to be aligned with its business operation plan, the Company has submitted a request to expand its production capacity by another 100,000 cu.m./day for PWA's consideration since 2006 in order that it would be able to produce tap water to adequately serve the consumers' demand in the future. To accommodate the production capacity expansion, beside using the existing infrastructures, the Company needs construction of water pressure enhancement stations to solve water distribution problems. Tap water production under the expansion project is anticipated to start around 2010. 3.2 Advantages and disadvantages between making and not making the transaction which will have impacts on the Company Advantages of making the transaction 1. The Company's earning of income from water sales under the expansion project in the volume up to 100,000 cu.m./day amounting to Bt. 12,669.40 million - Bt. 13,564.75 million According to the Company's Information Memorandum on a connected transaction submitted to the SET on October 24, 2008, the Company is now under negotiation on the conditions of the PSA with PWA and is awaiting the PWA Board's consideration result of relevant issues to the PSA. Under the PSA, PWA will purchase tap water supply from the Company by an additional volume of up to 100,000 cu.m./day. On October 30, 2008, the IFA had a meeting with the Company's top executives thereby it was informed that the PSA for the expansion project to raise the production capacity was under the drafting process of PWA. The draft PSA is expected to be available to the Company around December 2008. The Company's executives said that the new PSA would have salient points similar to those of the existing one (as detailed in summary of salient points of the existing PSA in the annual disclosure form: form 56-1 for 2007 in section 2 page 211). In view of the above, if the PSA is made between the Company and PWA, the Company will be able to earn income of a total of Bt. 12,669.40 million - Bt. 13,564.75 million from distributing tap water throughout the contract term of around 24 years (under assumption that the PSA will expire on July 20, 2034) as detailed in 4.1.2. This source of income will help boost the Company's cash flows, net profit and earning per share. Thus, this production capacity expansion will be a benefit to the Company and its shareholders. 2. The Company's maintaining of its leadership status being the largest private provider of water service in Thailand The expanded production capacity up to 100,000 cu.m./day when combined the existing production capacity of 320,000 cu.m./day (in practice, the Company can raise production capacity to 340,000 cu.m./day as maximum) and plus PTW's production capacity of 388,000 cu.m./day (former production capacity of 288,000 cu.m./day plus expanded capacity of 100,000 cu.m./day) will make the Company have a total production capacity of 808,000 cu.m./day, which would be far higher than that of Universal Utilities Co., Ltd., the second largest private provider of water service with total capacity of 186,000 cu.m./day and Ekcomtara Co., Ltd., the third largest with capacity of 36,000 cu.m./day. Hence, if the Company does not raise its production capacity this time, there may be new entrants to produce and distribute tap water supply to meet the increasing demand the Company is unable to fulfil. 3. The Company employing efficient and modern technology In the construction for the expansion of capacity, the contractor will be engaged to use the standard agreement of the International Federation of Consulting Engineering ("FIDIC") in respect of both civil construction and electrical and mechanical works. Thai MM Co., Ltd. ("Thai MM") will be engaged as the engineer in the project management and construction supervision handling all the project management including engineering design using the updated technology. Such technology includes the under drain filtration system which is a state-of-the-art offering the highest filtering speed among its kind in Thailand. The Company is the country's first tap water producer using such technology. In addition, under the expansion project, the Company will have the SCADA (Supervisory Control and Data Acquisition), which is a water distribution control system, moved to be installed at the bulk transmission main enhancement plant 1 (BP1), which will allow for higher efficiency in water distribution management. Earlier, the water distribution system was integrated to the water production system. The SCADA will calculate water volume in the water tank in each station and control the water transmission and distribution to all the stations with better precision and punctuality. Thus, the Company will be able to maintain its cost in the implementation with maximum efficiency and with the minimum fluctuations, especially as compared with the existing tap water production and distribution system. Disadvantages of making the transaction 1. Liquidity and sources of funds From interviews with the Company's executives, for the expansion project, the Company has planned to make borrowing from financial institutions and use its own working capital from the operations. However, borrowing from financial institutions, either at home or overseas, would be accompanied by strict provisions and commitments under the current circumstances, hence the Company may not get sufficient credit lines for its project implementation and/or it may have to pay higher interest rates than before. Also, it would be harder for the Company to achieve its target of relief of financial burden by reduction of interest payment by at least 0.5%. If the Company borrows Bt. 650 million (about 50% of total project cost), the total liabilities to equity ratio of the Company will go up from 1.16 times as of September 30, 2008 to 1.24 times. In this regard, if the Company has to rely on its own working capital for the construction under the expansion project (in case borrowing from financial institutions is inadequate for the project implementation), the Company may be exposed to liquidity and financial problems. It may risk failing to pay dividend to the shareholders in the future. This would be the case despite the fact that the Company just raised funds through the capital market by initial public offering in May 2008. 2. Water consumption volume in the service areas may not come out as projected when the Company becomes operational, hence possible lower-than-expected rate of return. Advantages of not making the transaction The Company will be able to pursue for the achievement of its financial burden relief target through reduction of interest payment at least 0.5% and to pay dividend to the shareholders due to no borrowing of loans from financial institutions. Disadvantages of not making the transaction 1. Cost of project study and cost of land for the construction of two bulk transmission main enhancement plants Although the engagement of CK to carry out the civil construction will take place only when the Company has been approved by PWA to enter into a PSA, as this production capacity expansion project requires high investment cost of Bt. 1,300 million, there must be preparations in various respects starting from 2006, such as engagement of a consultant in the work preparation, engagement of consulting engineer in project management, purchase of land for construction of water pressure enhancement stations and deployment of part of the personnel in project coordination and implementation. The initial expenditure for such preparation as informed by the Company is expected to be in a total of Bt. 238 million, which would be a waste if the Company is eventually unable to enter into the transaction. 3.3 Advantages and disadvantages of making the transaction with a related party compared with making the transaction with an outside party Advantages of making transaction with a related party Thai MM as the project manager has considered various construction circumstances and timelines for the whole project. It has recommended engaging two turnkey contractors, one in civil construction and the other in mechanical and electrical works. Both contractors are EPC contractors responsible for engineering, procurement and construction until the project completion according to the agreement. At the same time, to inspect and ensure compliance with the agreement, the Company may have to engage an independent engineer under the comment by PWA. The preliminary structure of the project management is as below: Preliminary structure of project management PWA TTW | | | | Independent Engineer <-----------> Project Manager Thai MM ________|__________ | | | | M&E Contractor Civil Contractor In July 2008, the Company invited potential contractors with expertise in mechanical, electrical and civil works and standard work credentials to join in the proposal of services for the contract works. There were altogether nine prospective parties. In September 2008, two out of three final prospective parties (comprising two mechanical and electrical contractors and one civil contractor) submitted their proposals. The result of the proposal consideration has come out that the winner for mechanical and engineering works is S.Napa (Thailand) Co., Ltd., which is not a connected party as stated in the Information Memorandum submitted to the SET. CK is the civil contractor. Despite CK being a related party, there are advantages engaging CK as the civil contractor as follows: 1. CK is the country's leading contractor for large infrastructures with dependable experience both domestically and overseas CK has engaged in contractor business in Thailand for over 35 years. It is one of the few local contractors that can handle sophisticated construction projects with the use of high technology, such as large scale infrastructure projects. Besides, CK has all along developed its engineering and management capabilities. It has thus been able to handle projects on a turnkey basis for concession projects, which are in the nature of Build, Transfer and Operate (BTO), Build, Operate and Transfer (BOT), Build, Own and Operate (BOO) and Acquire, Operate and Transfer (AOT) concession for large, medium and large projects. CK's past credentials are, for example, Bangna-Chonburi expressway, Bangkok International Airport development project, construction of building and parking for Bangkok Metro Co., Ltd. ("BMCL"), Bangphon-Suksawat (Bangphli-Bang Khun Thian) project, MRTA Chaloem Ratchamongkhon metro line by BMCL, power generation for EGAT, Nam Ngum 2 hydro-power plant in Lao People's Democratic Republic, etc. 2. CK undertook the construction of the extension of tap water production and distribution plant in the volume of 100,000 cu.m./day for PTW and the existing water production plant of the Company CK started its construction of the extension of tap water production and distribution plant in the volume of 100,000 cu.m./day for PTW in February 2006 (total construction value was Baht 693.1 million, information from the Company's prospectus). The new plant started water distribution to PWA on August 1, 2008. PTW's water production capacity has then become 388,000 cu.m./day. In addition, CK was the contractor for the Company's existing water production and distribution plant in its business start-up year in 2000. In view of this, CK can be regarded as a contractor with knowledge in the Company's existing water production plant infrastructures. This can ensure its capabilities to handle and complete the construction work according to the contract timeframe. 3. CK has firm financial standing and sound past operational performance, hence low risk of late construction work completion and delivery The Company will make payment for the civil construction in an amount up to Bt. 640 million (excluding VAT) to CK. Payment will be in installments by work progress starting from the contract date designated by December 2008 or after the approval of the shareholders' meeting. Construction period is around 18 months (January 2009-June 2010). Such payment amount is considered rather high. However, there is low risk of CK's failure to complete the construction according to the agreement. This is because CK has firm financial status and its operating results during 2007-quarter 3 of 2008 were favorable compared with other contractor companies listed on the SET. CK recorded total revenues in 2007 and quarter 3 of 2008 of Bt. 14,918 million and Bt. 10,568 million, with net profit of Bt. 33 million and Bt. 570 million respectively. Under the current circumstances, it is rathe difficult to seek to engage any other contractor with firm financial condition and high expertise in the construction in this field like CK. Disadvantages of making transaction with a related party Making a transaction with a related party may raise doubt whether negotiations on prices andconditions as well as payment method have been made at artm's length. Necessity for making the transaction with related party and reasons form not making with outside party In making this transaction, when taking into account the past experience and top-rank expertise of CK in the construction of large infrastructure projects. Moreover, the two major shareholders, i.e. CK with 35.1% stake and Mitsui Water Holdings (Thailand) Co., Ltd. with 25.88% stake have shareholding in the Company in a similar proportion, hence ensuring check and balance. In addition, if Mitsui Water still holds shares more than 25%, it is entitled to vote on any key issues of the Company. It is in this regard difficult to transfer any vested interest to any related party. Moreover, we have been informed from the Company's management that in the construction contract business that for such kind of contractor work for the Company, no other contractors in the industry will join in the bidding in competition with CK for the contract from the Company because they do not want to disclose their bidding price to competitor. 4. Fairness of Price and Conditions of Transaction After reviewing the information and documents obtained as well as other relevant information, our opinion is as follows: 4.1 Appropriateness of the price 4.1.1 Price and budget control by specialized team Since January 2007, the Company has hired Expert Technologies Limited and Sullivan Associates Company Limited as consultant to conduct survey, review and prepare terms of reference, as well as preparation for recruiting the project manager. In January 2008, the Company engaged Thai MM, which is a member company in Mott MacDonald group which owns such website: www.mottmac.com and having over USD 1.5 billion worth of transactions in 120 countries worldwide as well as 14,000 manpower, to handle management, engineering and development as well as provision of consultancy in respect of several industrial sectors, e.g. transportation, energy, construction, water resource and environmental study and conservation, and industry and telecommunication, as the project manager. It has been tasked with the study, set strategy, review engineering requirements, and prepare documents and criteria in selection of contractors. There are procedures set for invitation of prospective contractors to submit proposals (only those related to civil construction to be mentioned herein by the IFA as it is associated with the connected transaction), selection, negotiation in details, and conclusion of the final price, as follows: Date Salient points of bidding for civil construction work between the Company and CK 29 July 08 The Company issued a letter inviting CK to undertake civil construction considering that CK has experience in the civil construction of the tap water production and distribution plant in Nakhon Pathom and Samut Sakhon provinces before, and has expertise in infrastructure projects. 30 July 08 Thai MM worked out and concluded civil construction budget for the Company in an amount of Bt. 663,419,480 (excluding VAT). 8 Sept 08 CK submitted civil construction proposal to the Company with total contract value of Bt.675,004,000.00 (excluding VAT). 3 Oct 08 The Company together with Thai MM issued a letter to CK requesting its additional explanation on certain technical issues under the proposal submitted on 8 Sept 08. 7 Oct 08 The Company issued a letter to CK indicating that the price proposed by CK on 8 Sept 08 was still higher than the civil construction budget worked out by Thai MM, and requesting it to review the price and resubmitting it to the Company by 10 Oct 08. 8 Oct 08 CK resubmitted the contract price at Bt. 655,000,000.00 (excluding VAT) after the adjustment. 10 Oct 08 The Company issued a letter to CK informing it that the proposed price of Bt. 655 million was still higher than the Company's internal budget. However, to enable the construction to be undertaken in line with the timeframe set, the Company in collaboration with Thai MM made changes to the project specifications in some areas, but with production efficiency still maintained, such as downsizing the construction work of water tank at the bulk transmission plant, adjustment of civil works at Buddhamonthon water distribution station, etc. CK was requested to consider such changes and resubmit the price to the Company by 13 Oct 08. 15 Oct 08 CK proposed the final price to the Company with total contract value of Bt. 638,926,000.00 (excluding VAT). 17 Oct 08 CK issued a letter confirming the proposed price and informing the Company of the installment payment method. From the developments briefed above, and with meetings with the Company's executives, we would like to clarify the roles and responsibilities of Thai MM for this expansion project. Thai MM has no duty like a price appraiser of assets, such as property, which will appraise the existing assets, e.g. land, building, plant and machinery and equipment, to figure out the market price or the replacement price of that asset item. Thai MM has the duty as project manager or a coach for the Company from the date of the project study, design, budget planning, selection of contractor until conclusion of construction and contractor price. It has to coordinate with the Company staff in inspection of the construction work for each payment installment until the plant is ready for production of tap water. For the above reasons, we believe that, in respect of consideration for the construction work payable by the Company to CK, the management has made negotiations under the hiring practice and in the normal course of business operations (we consider from correspondence between the Company and CK and the confirmation from the Company's engineers that the production efficiency still maintained even thought there are some changes to the project specifications in some areas), as well as with due consideration of the price reasonableness and project efficiency. The final price is lower than the price first proposed by CK by Bt. 36,078,000 or 5.34% of the first price proposed. The final price is also lower than the budget worked out by Thai MM by Bt. 24,493,480 or 3.69% of the budget. 4.1.2 Analysis of the rate of return The discounted cash flows (DCF) approach will be proper to apply only when: 1) The financial projection takes into account the economic profit to be generated by such business activity, and 2) The valuation is on the going concern basis, with the factors influencing the business profitability being projectable on definite and reasonable gounds. The assessment of the net present value of the future cash flows of the water business expansion project will reflect the present value of the project under the policy of normal business operations and management as in the past. Thus, most assumptions are set based on the financial ratios and data actually occurred in the past together with the operational plan and/or future policy of the Company. The principles used in the assessment of the net present value of the future cash flows of the project adopted by the IFA for the calculation are as below: 1) Projected cash inflows during January 1, 2009 until 2034 which is the expiry year of the PSA between the Company and PWA (existing PSA). The assumption for such period does not take into account the right to purchase of the water business when the concessionaire has operated until the middle of the concession term. (more)