) Opinion of IFA on the Connected Transections

2) The IFA has worked out projected cash inflows and outflows for the period indicated in subclause 1 above only on the expansion of the water production by 100,000 cu.m./day, 3) Projection based on this module involves the increase in income from water sales and cost of water sold, using constant inflation rate of 3% p.a. (source: Bank of Thailand, latest updated November 11, 2008 regarding macro-economic indicators, inflation and basic CPI for the previous 30 years at around 3.2%), and 4) There is no calculation of terminal value of the project as well as the value of the land on the last date of the financial projection when the PSA term comes to an end. Key assumptions in the assessment of the production capacity expansion project 1. Customer The Company's main business is tap water production and distribution in the service areas of the districts of Buddhamonthon, Sam Phran and Nakhon Chaisi in Nakhon Pathom province, and the districts of Krathum Baen and Muang Samut Sakhon in Samut Sakhon province, under the PSA between the Company and PWA and with PWA being its sole customer. 2. Income from water sales We have projected for the water tariff to increase in line with the inflation rate (we project the inflation rate on a constant basis at 3% per year from 2009 until 2034 which is the end of the PSA). The water tariff will be charged from the date of water purchase whereby water distribution to PWA is expected to start after 18 months counting from January 2009-June 2010 and full completion of construction work by August 2010 (projected from the preliminary data brief between the Company's management and PWA and the Company's board of diretor minutes dated October 22, 2008). The water tariff of Bt. 10.52 per cu.m. (exclusive of VAT) is used as the base rate in calculation, which is adjustable yearly on January 1 of each year. In this projection, it will increase in line with the inflation rate. Year Water tariff Remark (Bt. per cu.m.) 1* 10.52 Calculation base 2** 10.84 Increase from year 1 in line with inflation 3** 11.16 Increase from year 2 in line with inflation 4** 11.50 Increase from year 3 in line with inflation 5 - 26** 11.84 - 22.03 Increase from year 4-25 in line with inflation Note : *Year 1 is the base in calculation in this projection beginning 2009 under assumption that the Company and PWA can reach conclusion by the end of 2008 and then construction of the expansion project will start in early 2009. **Year 2 to year 26 refers to 2010-2034, the year the PSA will expire. This will conform with water tariff calculation in the past (details in 2.1 background) with the fixed value (K) being 1 from interviews with the Company's executives. We do not take the actual average water tariff of Bt. 22.75 per cu.m. in 2008 (actual during January-October 2008) into calculation because the water tariff determination is cost based, and the water tariff under the expansion project will be lower than that under the existing PSA, due to the lower cost of construction for the expansion project than that in the past. In this regard, we have projected tap water distribution volume from the start of production in 2010 until 2034 in two alternatives as tabulated below: Projected water production and distribution used in the assumptions for the expansion project (Unit : cu.m./day) Period Projection by Company management Projection based on (month / year) on conservative basis* Minimum Offtake Quantity by PWA** July 2010 25,000 9,000 Jan - June 2011 35,000 18,000 Jul - Dec 2011 45,000 Jan - June 2012 55,000 27,000 Jul - Dec 2012 65,000 Jan - June 2013 75,000 36,000 Jul - Dec 2013 85,000 Jan - June 2014 95,000 45,000 Jul - Dec 2014 100,000 Jan - Dec 2015 100,000 54,000 2016 - 2034 100,000 100,000 Notes : * Financial projection by the Company adjusted as deemed proper by IFA, resulting in the following average values: - Year 2011: average 40,041 cu.m./day - Year 2012: average 60,041 cu.m./day - Year 2013: average 80,041 cu.m./day - Year 2014: average 97,521 cu.m./day - Year 2015: average 100,000 cu.m./day (From 2015 onward, the projected water production and distribution volume will be equal to the MOQ by PWA at 100,000 cu.m./day) ** Data on financial projection from the Company for discussion with PWA, the final conclusion of which has not been made on the date of this projection by the IFA. 3. Cost of water sales We have projected cost of water sales based on actual cost incurred in the past for the existing production capacity and aligned with the past calculatin practice. Cost of water sales was mainly composed of depreciation of assets in the water production and water production contracting charge payable to WaterFlow, covering cost of electricity, chemicals, labor and supplies. In 2006, the Company integrated WaterFlow as its subsidiary and amended the operation and maintenance agreement or O&M made with WaterFlow in April 2006 (as detailed in the annual disclosure form or Form 56-1), clause 13, subclause 13.1.3) thereby water tariff was cut down from Bt. 3.56 per cu.m., which included expenses as mentioned above (detailed in subclause 3.2). In this regard, in the projection for the expansion project, cost of water sales is composed of the following: 3.1 Depreciation of assets in the water production For this projection, the assets that have to be recorded at cost during the time of recognition comprise asset price and other direct costs related to asset acquisition to ensure the assets are in conditions ready for operations in line with the accounting standard no. 32 regarding land, building and equipment. Under this clause, we do not mention about land as it is not included in the calculation of depreciation of assets in water production. However, in the projection, land is incorporated in the total asset used in water production. Total assets used in the water production based on the projection for the expansion project Asset item Cost of assets % of cost of asset (Bt. million) 1/ 1. Civil construction 2/ Up to 640 49.23 2. Mechanical and electrical engineering construction, procurement, construction work and connections 3/ Up to 422 32.46 3. Engagement of consulting engineer for project management (Thai MM) 4/ 2.88 37.50 4. Engagement of consultant for the preparation stage (Expert Technologies Limited & Sullivan Associates Company Limited)4/ 21.59 1.67 5. Title deed no. 10457 on area of 10 rai 2 ngan 54 sq.w. as well as land improvement (BP1) 5/ 34.73 2.67 6. Title deed no. 5324 on area of 14 rai 3 ngan 64 sq.w. as well as land improvemet (BP2) 5/ 61.65 4.74 7. Other direct cost related to asset acquisition 4/ 82.53 6.35 Total assets in water production 1,300.00 100.00 Notes : 1/ This investment of up to Bt. 1,300 million (excluding VAT) according to the Information Memorandum disclosed to the SET on October 24 and 31, 2008. 2/ Opeated by CK. 3/ Undertaken by S. Napa 4/ Based on actual accounting data and financial projection by the Company, adjusted as deemed proper by IFA on such items as consulting charge, which has to be gradually paid by the Company in the future according to the contract, etc. 5/ The Company's accounting items as of September 30, 2008 For calculation of depreciation of assets in the water production, we have projected based on the calculation formula for depreciation as in the Company's past practice, i.e. production output method, as shown below: Depreciation for the period = Net cost of assets in water production as of beginning of period X Water production rate fro the period Whereas Water production rate fro the period is equal to Actual water production output for the period / (Actual water production output for the period + Projected water production output in future until the end of PSA) The above method is in accordance with the matching principle as the calculated depreciation varies to the actual production output in each period. The Company's management considers it a method suited to the Company's nature of business operations. 3.2 Water production contracting charge Due to the Company's acquisition of the shares of WaterFlow and amendment of the O&M agreement in 2006, the contracting charge in 2007 was Bt. 0.258613 per cu.m. (actual data from invoice/billing document) and in 2008 Bt. 0.267226 per cu.m. The charge covered only labor cost and cost of supplies in the water production. The Company itself is responsible for electricity bills and cost of chemicals. We have projected such cost for the expansion project to be in line with WaterFlow's collection of water production contracting charge. According to the invoice in September 2008, the contracting charge was Bt.0.267226 per cu.m., which is assumed to increase in line with the inflation on a constant basis, i.e. 3% per year from 2009 until 2034. 3.3 Electricity charge For the projection, we use the actually incurred cost as the base in calculation. In 2006-2007 and January-September 2008, average electricity charge was Bt. 1.22, Bt. 1.51 and Bt. 1.51 per cu.m. respectively. We project electricity charge in 2008 entire-year averagely at Bt. 1.50 per cu.m., which is close to the actual figure for the 9-month period, as the base in consideration of expense items for the company-only financial statements and assume that it increases at a constant rate of 3% per year from 2009-2034. 3.4 Cost of chemicals For the projection, we use the actually incurred cost as the base in calculation. In 2006-2007 and January-September 2008, average cost of chemicals was Bt. 0.57, Bt. 0.62 and Bt. 0.49 per cu.m. respectively. We project cost of chemicals in 2008 entire-year averagely at Bt. 0.50 per cu.m., which is close to the actual figure for the 9-month period, as the base in consideration of expense items for the company-only financial statements and assume that it increases at a constant rate of 3% per year from 2009-2034. 3.5 Spare parts and components, repairment expense of water treatment plant, water distribution network and station, and miscellaneous expenses related to production Average overall costs were around Bt. 10.00 million, Bt. 14.81 million and Bt. 31.89 million respectively for 2006-2007 and January-September 2008 respectively. They were actually incurred expenses according to the bank-only financial statements and used as the base in consideration. We also remark about the overall cost in the first nine months of 2008, thereby the overall cost surged significantly. From the examination, we have found that only in September 2008, the overall cost was Bt. 19.71 million. Thus, to be conservative in the assumptions, the use only the figures of January-August 2008 as the base, which was Bt. 11.20 million. In this regard, the average overall cost for 2 years and eight months was around Bt. 13.49 million. This would cover only the expansion project. We accordingly project the overall cost comprising spare parts and components, repairment expense of water treatment plant, water distribution network and station, and miscellaneous expenses related to production at Bt. 4.50 million in 2010 (first year of water production and distribution). We assume that the overall costs increase in line with the inflation which is constant at 3% per year from 2010 until 2034. 4. Selling and administrative expenses We project selling and administrative expenses for 2010 using the actually incurred expenses during 2006-2007 and January-September 2008. Personnel expense is expected to increase at a constant rate of 7% per year (projected based on the inflation rate and with rising cost of living taken into account) during 2010-2034 which will be the end of the PSA (consideration guideline according to clause 3.5). We do not make any additional projection for other expenses as in the expansion project the Company will be able to use the existing resources with higher efficiency, hence there is no impact on other expenses. 5. Financial expenses Financial expenses correlate with interest rates of long-term loans from shareholders and long-term loans from financial institutions as well as O/D. For the interest rate under the financial model, we use historical data of the Company's loan agreements with financial institutions, i.e. MLR-0.5% (additional information from notes to financial statements no. 16 loans from financial institutions for 2007 fiscal year). In preparing this projection, MLR is 7.25%, which was the average of MLR of two large commercial banks that have daily transactions with the Company according to the announcement of lending interest rates of commercial banks dated November 7, 2008 of the Bank of Thailand. As enquired with its executives, about 50% of financial expenses are expected from loans from financial institutions, and this proportion has been used for the assumptions. 6. Corporate income tax We have projected that the Company has to pay corporate income tax in full at the rate of 30% on a conservative basis (despite tax privilege with corporate income tax reduction to 25% during 2009-2011 due to its listing on the SET, there is no effect as its operations under the expansion project for such period will still record loss) from 2010 until 2034 which is the end of the PSA. At present, the Company is still under negotiations and conclusion with PWA regarding the conditions of the PSA for the expansion project and also is awaiting approval by the PWA Board for the entering into PSA with the Company. According to such PSA, PWA shall additionally purchase tap water from the Company by up to 100,000 cu.m./day under the condition that if the approval of the entering into the PSA has been given, the Company will request tax privileges from the Board of Investment ("BOI"). With investment promotion by the BOI, the Company will pay less tax during the promoted period. 7. Capital expenditure We have made assumption that there is no additional investment in core assets, particularly those related to machinery and equipment throughout the projected period ending 2034. 8. Water Supply Purchase and Sale Agreement ("PSA") The Company earlier entered into a PSA with PWA for a contract term of 30 years, starting water distribution on July 21, 2000, 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 November 23, 2007. The Company maintains the ownership of the tap water production and distribution systems to serve consumers. The minimum offtake quantity ("MOQ") by PWA under the PSA will increase during the contract term of 30 years. Besides the PSA, the Company obtained a concession from Ministry of Natural Resource and Environment on March 11, 2005 for a concession term of 25 years to produce tap water to serve the above five districts in two provinces. However, during preparation of this projection, negotiations on contract conditions are still underway. The Company is also awaiting the approval from the PWA Board for its entering into the PSA for an additional volume of up to 100,000 cu.m./day. To prepare for the additional production capacity, the Company has to undertake the construction of the facilities to accommodate the additional production capacity to ensure efficiency enhancement, but under the condition that the PSA must first have been executed with the authority. Discount Rate The Financial Advisor has applied the Capital Asset Pricing Model (CAPM) in determining the discount rate to figure out future free cash flow. This is a widely used method of working out the risk adjusted rate of return or the cost of equity (Ke). The discount rate calculated by the CAPM is as below Ke = Rf + ? (Rm - Rf) Rf : Risk free rate of investment based on the 26-year government bond yields as of November 7, 2008, which is around 4.81% (data from Thai Bond Dealing Center). Rm : Rate of return of the SET, which is 16.509% (data from Bloomberg as of November 7, 2008). ? : Factor used to measure systematic risk, which is the variance between the return of the SET and the share price of EASTW (same businees as TTW which listed on the SET and insufficient data of TTW's trading days), which is 0.599. From the above variables, we have worked out the cost of equity as shown here: Ke: 4.81 + 0.599 x (16.509 - 4.81) = 11.82% The discount rate used in the calculation of the present value of future free cash flow is calculated from the weighted average cost of capital (WACC) of the Company which can be derived (based on proportion of borrowing from financial institutions and workind capital in the ratio of 50 : 50) as follows: WACC = D / V (Kd) + E / V (Ke) Whereas E = Total equity D = Total debt V = D+E D/V = Total debt to cost = 50.00% E/V = Total equity to cost = 50.00% Ke = Cost of equity by the CAPM = 11.82% Kd = TTW's weighted average interest rate x (1-tax rate) = 5.0960% Thus, WACC = 8.46% The WACC worked out by the CAPM will be 8.46% which will be used as the discount rate for the calculation of return for plant enhancement in order to increase the Company's production capacity of not exceeding 100,000 m3/day. Assessment of the rate of return Under the assumption that the business is a going concern within the existing operational and management framework together with all the assumptions mentioned above, we have worked out the rate of return from the projected cash inflows and outflows expected to arise from the construction for the expansion of production capacity and additional water purchase by PWA up to 100,000 cu.m./day under the condition that the Company has entered into the PSA with PWA, which is in line with the assumption on the Company's income from water sales (as mentioned earlier), as can be concluded here: Assessment of expansion of tap water production capacity by up to 100,000 cu.m./day Assessment method Assessed by Company Assessed based on Minimum executives on Offtake Quantity by PWA** conservative basis* 1. Payback period 11 years 13 years 2. Net present value Bt. 572.90 million Bt. 275.08 million 3. Internal rate of return 11.73% 9.95% Viewing the rate of return based on the above assumptions for the expansion project to raise production capacity by 100,000 cu.m./day, net present value will range from Bt. 275.08 million to Bt. 572.90 million, internal rate of return from 9.95% to 11.73%, and payback period from between 11 - 13 years. From the project analysis, the Company should invest in project with net present value of over nil, internal rate of return of over cost of capital and shortest payback period, as it would take lowest risk. We thus view that the Company's water production capacity investment project is worth investing, taking into account such project assessment. The rate of return has come out not so high based on the projected cash inflows and outflows of the project on grounds that the projected average water distribution rates in the first few years after start of operations may be lower than the actual demand for water for the same period in the future. Also, water tariff for the expansion project is expected to be lower than that in the existing PSA as the cost of construction for the expansion project will be lower than the cost of the plant at the time the Company just started up its water business. We view that it is possible for the Company to distribute water in the volume close to the expanded capacity by another 100,000 cu.m./day even in the first few years of operations under the expansion project. In such case, the rate of return to the Company will definitely be higher in the future. 4.2 Appropriateness of construction payment conditions The Company will engage CK to undertake civil construction for its expansion project which features increase in production capacity of tap water (more)