7 May Attachment: 1) Company Information of Demco Public Company 2) Company Information of Wind Energy Holding Company Limited

Transcription

1 Independent Financial Advisor s Opinion regarding the Asset Acquisition and Connected Transaction of for the purchase of Wind Energy Holding Company Limited new ordinary shares 7 May 2013 Subject: Independent Financial Advisor s Opinion regarding the Asset Acquisition and Connected Transaction of To: Audit Committee and Shareholders of ) Attachment: 1) Company Information of Demco Public Company 2) Company Information of Wind Energy Holding Company Limited Reference: 1) Resolution of the Board of Directors of No.3/2013 dated 29 March ) Disclosure of Information Memorandum concerning the acquisition of assets and connected transactions of dated 1 March ) Form 56-1 of ended 31 December ) Audited Financial Statement of and Wind Energy Holding Company Limited and its subsidiaries year and management financial statements of Wind Energy Holding Company Limited and its subsidiaries 5) Certificate of Registration, Memorandum of Association, and other documents including interviewing with the managements of and Wind Energy Holding Company Limited 6) Financial Projection of wind farm project Watabak, Korat02/01, Korat02/02, Korat02/03 7) Power Purchase Agreements (PPAs) between First Korat Wind Co., Ltd. and Electricity Generating Authority of Thailand and between K.R.2 and Electricity Generating Authority of Thailand dated 3 December ) Service Agreement between Wind Energy Holding Company Limited and its 10 subsidiaries which are: (1) East Huaybong Company Limited dated 1 July 2012, (2) Infinite Wind Company Limited dated 1 July 2012, (3) KR1 Company Limited dated 1 July 2012, (4) KRS3 Company Limited dated 1 July 2012, (5) Roi-Et Wind Power Company Limited dated 1 July 2012, (6) Romklao Wind Power Company Limited dated 1 July 2012, (7) Tropical Wind Company Limited dated 1 January 2012, (8) Theparak Wind Company Limited dated 1 January 201, (9) Watabak Wind Company Limited dated 1 October 2012, (10) Krissana Wind Power Company Limited dated 1 May 2013 Silom Advisory Company Limited Page 1/48

2 9) Mezzanine Loan and Equity agreement between Wind Energy Holding Company Limited and Partner Group Access 395 L.P. and Partner Group (Guernsey) Limited dated 9 October ) Loan agreement between Wind Energy Holding Company Limited and Energy Sino Investments Limited dated 27 July ) Loan Agreement between First Korat Wind Company Limited and Kasikorn Bank Public Company Limited and Siam Commercial Bank Public Company Limited dated 26 July ) Loan Agreement between KR2 Company Limited and Kasikorn Bank Public Company Limited and Siam Commercial Bank Public Company Limited dated 26 July ) Shareholders Agreement between Wind Energy Holding Co., Ltd. and Demco Public Company Limited dated 30 April ) Annual Energy Production from technical advisor for project Korat02/01, Korat02/02, Korat02/03 15) PPA acceptant letter from EGAT to (1) Watabak Wind Company Limited dated 1 March 2012 (2) Tropical Wind Company Limited dated 28 December 2011 (3) Theparak Wind Company Limited dated 28 December 2011 (4) KRS3 Company Limited dated 28 December 2011 (5) Krissana Wind Power Company Limited dated 17 April ) Other document and Agreements Disclaimers: 1) The study results of Silom Advisory Company Limited ( Silom Advisory or Independent Financial Advisor or IFA ) in this report are based on information and assumptions provided by the management of and Wind Energy Holding Company Limited and the information of the Company disclosed to the public on the websites of the Securities and Exchange Commission ( SEC ) ( and the Stock Exchange of Thailand ( SET ) ( 2) Silom Advisory shall not be responsible for the profits or the losses and any impacts resulting from this transaction. 3) Silom Advisory conducted the study with knowledge, skills, and cautiousness on the basis of the professional ethics. 4) Silom Advisory considers and provides opinion based on the situation and information at the present time. If such situation and information has been changed significantly, the study results in this report may be affected. The meeting of Board of Directors of ( the Company or Demco ) No. 3/2013 held on 29 March 2013 (the directors having interest did not attend and vote for this agenda) approved the investment in Wind Energy Holding Company Limited ( WEH ) by subscribing for 5,263,158 new ordinary shares (par value of baht 10), representing 5% of its registered capital after the capital increase, to be issued by WEH at baht 190 per share, totalling baht million 1,000 ( Transaction ). Silom Advisory Company Limited Page 2/48

3 This Transaction is considered an acquisition of assets to the Notification of the Capital Market Supervisory Board No. Tor. Jor. 20/2551 Re: Rules for Entering into Substantial Transactions within the Definition of an Acquisition or Disposal of Assets dated 31 August 2008 (as amended) and the SET Notification Re: Disclosure and Compliance by Listed Companies relating to Acquisition or Disposal of Assets B.E dated 29 October 2004 (Acquisition or Disposal Notification), with the transaction size of 22.53% based on total consideration compared to total assets as of 31 December 2012, which is more than 15% and less than 50% and considered class 2 according to Acquisition or Disposal of Assets. The Company is required to notify its shareholder within 21 days from the date of Disclosure of Information Memorandum to the Stock Exchange of Thailand ( SET ) Moreover, one of WEH s directors and shareholders (Mr. Pradej Kitti-Itsaranon) is the director and shareholder of the Company. This transaction is therefore considered a connected transaction pursuant to the Notification of the Capital Market Supervisory Board No. Tor. Jor. 21/2551 Re: Connected Party Transactions Rules dated 31 August 2008 (as amended) and the SET Notification Re: Disclosure and Compliance by Listed Companies relating to Connected Party Transactions B.E dated 19 November 2003 (Connected Transaction Notification), with the transaction size of 57.40% based on Net Tangible Assets ( NTA ) from consolidated financial statements as of 31 December 2012 (NTA is baht million 1,742.11) which is more than baht million 20 or more than 3% of the Company s NTA. The Company must obtain approval from the Board of Director s Meeting where the directors having interest must not attend and vote for this agenda and disclose the information relating to the Transaction to the Stock Exchange of Thailand (SET). The Company must also seek for approval from the Shareholders Meeting of the Company with the votes of not less than three fourths of the total votes of shareholders present at the meeting and having the right to vote, excluding shareholders having an interest. Therefore the Board of Director s Meeting of the Company no. 3/2013 held on 29 March 2013 has approved the Extraordinary General Meeting ( EGM ) no. 1/2013 dated 30 May 2013 to approve the asset acquisition and connected transaction with the votes of not less than three fourths of the total votes of shareholders present at the meeting and having the right to vote, excluding shareholders having an interest by Disclosure of Information Memorandum related to the Transaction. The Company therefore, appointed Silom Advisory Company Limited to act as an Independent Financial Advisor ( Silom Advisory, IFA ) to provide the opinion to the minority shareholders regarding fairness and appropriateness of the Transaction. In rendering the opinion, IFA has relied on information received from the Company, Wind Energy Holding Co., Ltd. ( WEH ) and its managements to be reliable. Silom Advisory also considers such information thoroughly and reasonably according to the professional standards. After studying all information and documents of the Company together with all other relevant information, Silom Advisory would like to summarize our opinions on the disposition of assets as follows: Silom Advisory Company Limited Page 3/48

4 Page Executive Summary 5 1. Characteristics and details of the Transaction 1.1 Objective and reason of entering the Transaction Transaction Date Parties and Relationships Type and size of the Transaction Asset Information Details of assets to be acquired Criteria used in determining the price of new ordinary Shares Terms of the Transaction Summary of major agreements Source of Funds for WEH s new ordinary shares acquisition information Attachment 1 3. Wind Energy Holding Company Limited information Attachment 2 4. Rationale, Advantages, Disadvantages, and Benefits of the Transaction 4.1 Rationale of the Transaction Advantage and Disadvantage of entering into thetransaction Advantage and Disadvantage of not entering into the Transaction Advantage and Disadvantage of entering into the Transaction with the connected 29 person comparing to non-connected person 5. Opinion of the Independent Financial Advisor on the Appropriateness of the Value of the Acquisition of Assets 5.1 Book Value Approach Adjusted Book Value Approach Price to Book Value Ratio Approach: P/BV Ratio Price to Earnings per Share Ratio Approach: P/E Ratio Discounted Cash Flow Approach: DCF 34 Conclusion of the Opinion of the Independent Financial Advisor 46 Silom Advisory Company Limited Page 4/48

5 Executive Summary IFA has an opinion that the acquisition of WEH s new ordinary shares at 5% of its registered capital after the capital increase, which is considered a connected transaction due to WEH s the director and shareholder, is a good investment and align with the Company policy. WEH has stable income despite of its one customer, the Electricity Generating Authority of Thailand ( EGAT ), because EGAT is a state own enterprise. Moreover WEH is the major customer of the Company for the balance of plant subcontractor ( BOP ), electrical substation, transmission line, and fundamental structure of Wind Turbine. Therefore, WEH will have the business for the Company in the long-run. However, the Company will be the minority shareholder of WEH (5% of the paid-up capital after the capital increase) therefore the voting right of the Company will have no effect on decisions in the shareholder meeting and If WEH will not be listed on SET, the Company may have to sell its shares in WEH outside the market, which has less liquidity. WEH is also facing project development risks due to its 5 projects, recently approved by EGAT, still under the development. The risks are: 1) not able to lease the land from Agricultural Land Reform Office ( ALRO ), 2) not able to sign Power Purchase Agreement ( PPA ) with EGAT for its 5 projects with in 2017, 3) not able to finish all projects due to lacking of equity investment, 4) not able to renew the PPA, 5) the projection of wind speeds is not accurate, 6) not able to find source of debts for the projects Based on the Company s Board of Directors meeting no. 3/2013 held on 29 March 2013 and Audit Committee s meeting no. 3/2013 held on 29 March 2013, the Company believes the risks above have lower possibility due to the successes of 2 previous project development, First Korat Wind Company Limited ( FKW ) and KR2 Company Limited ( KR2 ). Both projects together have the production capacity of 207 MW, considered the biggest wind farm project in South East Asia. Moreover based on the WEH s share purchase agreement, the conditions benefit DEMCO comparing to its holding percentage (5%) (The Company will have 1 representative on WEH s Board of Directors and the right to veto if WEH issues and sell its new ordinary shares lower price than that price that offered to the Company). However, IFA s opinion is that the Transaction is not reasonable even though the terms of the Transaction are reasonable since, the investment still have the risks. For the price of WEH s new ordinary shares at baht 190, IFA is considering the discounted cash flow approach ( DCF ) at probability of 90% ( P90 ) (conservative approach) as the most appropriated approach to reflect the value of WEH. For the appropriateness of the price, IFA has opinion that the acquisition price of baht 190 per share is not appropriate due to the value of WEH s share (after the capital increase) at P90 is between baht per share, which is less than the price stated on the draft shareholder agreement (the value of WEH s shares is coming from the annual energy production ( AEP ), provided by WEH and its technical advisor. AEP is specific to the model of wind turbine model Siemens SWT MW at the height of 100 meters for project West Huaybong 3 under First Korat Wind Company Limited ( FKW ) and West Huaybong 2 under KR2 Company Limited ( KR2 ), wind turbine model Vestas MW at the Silom Advisory Company Limited Page 5/48

6 height of 120 meters at project Watabak under Watabak Wind Company Limited ( Watabak ) and win turbine GE at the height of 120 meters for project Korat02/01 under Theparak Wind Company Limited ( Theparak ), project Kora02/02 under Tropical Wind Company Limited ( Tropical ), project Korat02/03 under KRS3 Company Limited ( KRS3 ) and project North Krissana under Krisana Wind Power Company Limited ( KWP ) (for KWP the AEP is still under the process of the technical advisor to verify. Therefore, KWP s AEP is considered coming from WEH. However, if the Company considers the valuation based on P75 and P50, the WEH s share is between baht per share and baht per share accordingly). The AEP is subject to change when the height and type of wind turbines are changed.) Based on the previous reason, Silom Advisory as IFA has an opinion that the shareholder shall not approve the Transaction to acquire WEH s new ordinary shares (5% of the paid-up capital after the capital increase), which considered an asset acquisition and connected transaction However, the final decision shall be at own discretionary of the shareholders. The shareholders should consider the information in the invitation to the Extraordinary General Meeting No.1/2013 and its attachments before making the decision. Silom Advisory Company Limited Page 6/48

7 Details of the opinion of the IFA are as follows: 1. General Characteristics of the Transaction 1.1 Objective and Reason of Entering the Transaction The meeting of Board of Directors of ( the Company or Demco ) No. 4/2011 held on 13 May 2011 approved the investment by the Company in Aeolus Power Company Limited ( Aeolus ), which is WEH s subsidiary and at the time, WEH owned 100% share of Aeolus, by subscribing for 35,135,135 new ordinary shares (par value of baht 10), representing 27% of its registered capital, to be issued by Aeolus at baht 37 per share, totalling baht million 1, Currently, the Company has 32,278,920 shares of Aeolus representing 25.56% of paid-up shares of Aeolus and WEH owns the rest of 74.44% of Aeolus paid-up shares. During the time the Company invested in Aeolus, Aeolus has invested in 2 Wind Farm Projects ( Wind Farm ), which are West Huaybong 3 under First Korat Wind Company Limited ( FKW ) and West Huaybong 2 under KR2 Company Limited ( KR2 ) (both projects together calls Huaybong Project ). Aeolus holds 60% of FKW and KR2 paid-up capital for each company. At the time, Huaybong Project was not developed yet and only has PPA with EGAT dated on 3 December Currently both projects are completed and already started the commercial operation date ( COD ). FKW and KR2 started the COD in November 2012 and February 2013 respectively and both companies are running the operation according to the plan provided to the Company. Moreover, WEH is planning to list on SET in Therefore, the meeting of Board of Directors of ( the Company or Demco ) No. 3/2013 held on 29 March 2013 (the directors having interest did not attend and vote for this agenda) approved the investment in Wind Energy Holding Company Limited ( WEH ) by subscribing for 5,263,158 new ordinary shares (par value of baht 10), representing 5% of its registered capital after the capital increase, to be issued by WEH at baht 190 per share, totaling of baht million 1,000 ( Transaction ) in order to get return from the wind farm in the future. Due to the familiarity of the previous projects (FKW and KR2), the Company is expecting to get benefits from the investment such as constant cash flow, dividend and the future capital gain. The investment in WEH, a holding company for wind farms, is similar to direct investment in the wind farm projects. The Company is expecting to get the source of funds from its right offering not more than 125,807,186 shares (par value baht 1) at baht 10 in order for the Company to pay for WEH s new ordinary shares. The Company is expecting to get approval from the Extraordinary General Meeting no. 1/2013 dated 30 May 2013 in 2 agendas: 1) Approval of the Transaction to acquire 5,263,158 of WEH s new ordinary shares at baht 190 per share, totaling baht million 1,000. 2) Approval of the right offering not more than 125,807,186 shares (par value baht 1) at baht 10 However, if the Company does not get approval in these 2 agendas, the Company will not process its right offering and will not enter into the Transaction to acquire WEH s new ordinary shares. Silom Advisory Company Limited Page 7/48

8 1.2 Transaction Date The Company will acquire WEH s new ordinary share after getting the shareholder s approval on EGM no 1/2013 dated 30 May The Transaction is expected to occur in the 2 nd quarter of Parties and Relationships Vendor : ( DEMCO ) Purchaser : Wind Energy Holding Company Limited ( WEH ) (1) Relationship and connected person Relationship : Mr. Pradej Kitti-Itsaranon Director and major shareholder of WEH (total related persons are the children who reach the age of maturity Mr. Kamtorn Kitti-Itsaranon and Miss Jenejira Kitti-Itsaranon and DD Mart Company Limited ( DDMART ) (owns 31.09% of WEH s paid-up capital shares before the capital increase) Director and shareholder of the Company owns 4.64% of paid-up shares of the Company*, when include such related person including a wife (Mrs. Busya Kitti- Itsaranon), children (Mr. Mr. Kamtorn Kitti-Itsaranon and Miss Jenejira Kitti-Itsaranon), and DDMART*, the group owns 12.69% of the Company paid-up shares. Note: Paid-up share (including share buyback) according to the shareholder list dated on 18 March 2013 * DDMART s shareholders dated on 25 December 2012 Shareholder Total Shares (Shares) (%) 1. Mr. Pradej Kitti-Itsaranon 6,716, % 2. Mrs. Busya Kitti-Itsaranon 5,000, % 3. Miss Nantida Kitti-Itsaranon * 5,000, % 4. Miss Jenejira Kitti-Itsaranon * 5,000, % 5. Mr. Kamtorn Kitti-Itsaranon* 5,000, % 6. Renewable Energy Corporation Company Limited 4,000, % 7. Mr. Pairoj Sirirat 1,418, % 8. Miss Wilailuck Ekniyom 759, % 9. Mr. Eng Mir Laik Ali 510, % 10. Other shareholders 2,596, % Total 36,000, % Note: * Director of the company signed by the second in three co-sign and seal of the company (2) The Company s shareholder who has no vote Based on the shareholder lists dated on 18 March 2013, the latest book closing date by Thailand Securities Depository Company Limited ( TSD ) there are shareholders having an interest who has no right to vote for the Transaction as listed below Silom Advisory Company Limited Page 8/48

9 Relationship DEMCO s shares (%) of paid-up shares (%) of voting rights* 1. Mr. Pradej Kitti-Itsaranon Director and shareholder 29,054, % 4.67% 2. Mrs. Busya Kitti-Itsaranon Mr. Pradej wife and shareholder 1,826, % 0.29% 3. Kamtorn Kitti-Itsaranon Mr. Pradej s son and shareholder 14,093, % 2.26% 4. Miss Jenejira Kitti-Itsaranon Mr. Pradej s doughter and shareholder 8,696, % 1.40% 5. Miss Nantida Kitti-Itsaranon Mr. Pradej s doughter and shareholder 4,809, % 0.77% 6. DDMART Major shareholder and related person of 20,528, % 3.30% Mr. Prajej based on Section 258 Total 79,009, % 12.69% Note: * excluding share buyback of 3,629,000 shares 1.4 Type and size of the Transaction The Transaction is for the Company to invest in WEH by acquiring 5,263,158 new ordinary shares (par value baht 10) at 5% of the total paid-up shares after the capital increase at baht 190 per share so the total totaling of baht million 1,000. Asset acquisitions The Transaction is considered an acquisition of assets to the Notification of the Capital Market Supervisory Board No. Tor. Jor. 20/2551 Re: Rules for Entering into Substantial Transactions within the Definition of an Acquisition or Disposal of Assets dated 31 August 2008 (as amended) and the SET Notification Re: Disclosure and Compliance by Listed Companies relating to Acquisition or Disposal of Assets B.E dated 29 October 2004 (Acquisition or Disposal Notification), with the transaction size of 22.53% based on total consideration compared to total assets as of 31 December 2012, which is more than 15% and less than 50% and considered class 2 according to Acquisition or Disposal of Assets. The Company is required to notify its shareholder within 21 days from the date of Disclosure of Information Memorandum to the Stock Exchange of Thailand ( SET ). The size of the Transaction is calculated below: Financial Information (Audited financial statement of DEMCO and WEH dated on 31 December 2012) (Unite: baht million) DEMCO WEH Total Assets 4, , Intangible Assets Total Liabilities 2, , Non Control Interest , Net Tangible Assets (NTA) 1, Net Profit of the company (4 quarters) (230.33) Silom Advisory Company Limited Page 9/48

10 The Transaction size calculation Calculation (%) 1. Total Assets NTA of WEH proportionally owed by 0.84 DEMCO / NTA of DEMCO 2. Net Operating Profit (4 quarters) Net Profit 4 quarter WEH / Net Profit 4 quarters DEMCO N.A. (WEH has no net profit) 3. Total Value of Consideration Paid Cash of WEH s shares / total Assets of DEMCO 22.53% 4. Total Value of Issued Securities DEMCO s share for WEH s shares / total DEMCO paid-up capital N.A. Connected Transactions Moreover the Transaction is considered connected transactions pursuant to the Notification of the Capital Market and have the size of baht million 1,000 or 57.40% of NTA of the Company based on the Company financial statement dated 31 December 2012 ( NTA is equal to baht million 1,704.35) which is higher than baht million 20 and more than 3% of the NTA of the Company. Therefore the Company must obtain approval from the Board of Director s Meeting where the directors having interest must not attend and vote for this agenda and disclose the information relating to the Transaction to the Stock Exchange of Thailand (SET). The Company must also seek for approval from the Shareholders Meeting of the Company with the votes of not less than three fourths of the total votes of shareholders present at the meeting and having the right to vote, excluding shareholders having an interest. Board of Director s Meeting of the Company no. 3/2013 held on 29 March 2013 has approved the Extraordinary General Meeting ( EGM ) no 1/2013 dated 30 May 2013 to approve the asset acquisition and connected transaction with the votes of not less than three fourths of the total votes of shareholders present at the meeting and having the right to vote, excluding shareholders having an interest by Disclosure of Information Memorandum related to the Transaction 1.5 Asset Information The information in this part is the preliminary information. The detail information of WEH is in attachment 2 of the IFA report 1.5.1) Name of the company Wind Energy Holding Company Limited ( WEH ) 1.5.2) Business of WEH Investment in the wind farm development through its subsidiaries and its associates 1.5.3) WEH s Group Structure Silom Advisory Company Limited Page 10/48

11 Currently, WEH as subsidiaries and associates ( WEH Group ) total of 14 companies (12 subsidiaries and 2 associates) all of WEH Group is developing the wind farm projects. The details are listed below. Note: (1) DEMCO owns of Aeolus (2) Chubu Electric Power Korat Company Limited owns 40% of FKW and KR2, Ratchaburi Electrical Holding Company Limited owns 20% of FKW and KR2. (3) RATCH and DEMCO owns Sustainable 55.18% and 10.43% of the total shares of Sustainable repectively (4) 25% of Watabak s shares owned by individual investor (5) 25% of Roi-Et s share owned by foreign entity (6) Based on the side letter of draft share purchase agreement between WEH and DEMCO, at the success of the capital increase REC will sell its 99,997 shares in KWP (99.99% KWP) at total of baht million to WEH. WEH group wind farm projects: Project Company PPA (MW) Production Capacity COD Progress of the Project (MW) 1. West Huaybong 2 Aeolus/ KR February 2013 COD 2. West Huaybong 3 Aeolus/ FKW November Khao Kor* Sustainable/Khao Kor PPA Signed 4. Watabak Watabak Korat 02/01 Theparak Korat 02/02 Tropical Received PPA acceptant 7. Korat 02/03 KRS North Krissana KWP Silom Advisory Company Limited Page 11/48

12 Project Company PPA (MW) Production Capacity COD Progress of the Project (MW) 9. Korat 02/04 KR ST1 Infinite Roi-Et Roi-Et Waiting for PPA acceptant 12. Mukdahan Romklao East Huaybong East Huaybong wind N/A N/A N/A Rejected for PPA Source: Wind Energy Holding Company Limited * Khao Kor project by Sustainable Energy Company Limited ( Sustainable ) WEH owns 34.16% therefore the information of Khao Kor is the information received from Sustainable which WEH has no control over 1.5.4) Detail of Assets and future projects Project details of FKW and KR2, which are in the commercial production Project West Huaybong 2 West Huaybong 3 Company KR2 FKW Investment (baht million) 6, , Install Capacity (MW) Offer Capacity to EGAT (MW) Turbine Location Huaybong sub-district, Dan Khun Thot district, Nakorn Ratchasima Land Size (Rai) 8,954 14,928 Turbine Manufacturing Siemens Wind Power A/S และ Siemens Limited Thailand ( Siemens ) Useful life of asset* 22 years COD 8 February November 2555 Source: Wind Energy Holding Company Limited *Useful life of asset starts counting on COD date. Additional detail for 5 future projects (expected to COD within 2017, which WEH is the major shareholder and already received PPA acceptant Project Watabak Korat 02/01 Korat 02/02 Korat 02/03 North Krissana Company Watabak Theparak Tropical KRS3 KWP Silom Advisory Company Limited Page 12/48

13 Investment (baht million) 4, , , , Install Capacity (MW) Offer Capacity to EGAT (MW) Turbine Location Chaipoom Nakorn Ratchasima Nakorn Ratchasima Nakorn Ratchasima and Chaipoom Nakorn Ratchasima Turbine Manufacturing** Vestas GE GE GE GE COD September 2014 February 2016 July 2016 July 2016 May 2017 Source: Wind Energy Holding Company Limited *Investment estimated from KR2 and adjusted by Vestas and GE turbines ** Not confirmed Project (1) : Watabak Company : Watabak Investment* : baht million 4, (estimate) Install Capability (MW) : 68 Offer Capacity to EGAT (PPA) (MW) : 60 Number of Turbine* : 34 (estimate) Turbine Model** : Vestas V110-(125) (2 MW/WTG) Turbine Manufacturing : Vestas Limited Annual Energy Production (GW) *** : (P90-P50) COD : September 2014 Useful life of asset : 25 years Location : Watabak Sub-district, Thepsatit district, Chaipoom Note: *estimate ** not confirm *** AEP from technical advisor at the height 120 meters using Vestas V110-(125) turbine Silom Advisory Company Limited Page 13/48

14 Project (2) : Korat 02/01 Company : Theparak Investment* : baht million 6, (estimate) Install Capability (MW) : 100 Offer Capacity to EGAT (PPA) (MW) : 90 Number of Turbine* : 40 (estimate) Turbine Model** : GE (2.5 MW/WTG) Turbine Manufacturing : General Electric Company Limited Annual Energy Production (GW) *** : (P90-P50) COD : December 2016 Useful life of asset : 25 years Location : Bueng Pler and Sumnak Takro Sub-district, Theparak district, Nakorn Ratchasima. Note: *estimated ** not confirmed *** AEP from technical advisor at the height 120 meters using GE turbine Project (3) : Korat 02/02 Company : Tropical Investment* : baht million 6, (estimate) Install Capability (MW) : 100 Offer Capacity to EGAT (PPA) (MW) : 90 Number of Turbine* : 40 (estimate) Turbine Model** : GE (2.5 MW/WTG) Turbine Manufacturing : General Electric Company Limited Annual Energy Production (GW) *** : (P90-P50) COD : July 2016 Useful life of asset : 25 years Location : Bueng Pler and Wongyaytong Takro Sub-district, Theparak district, Nakorn Ratchasima. Note: *estimate ** not confirm *** AEP from technical advisor at the height 120 meters using GE turbine Silom Advisory Company Limited Page 14/48

15 Project (4) : Korat 02/03 Company : KRS3 Investment* : baht million 6, (estimate) Install Capability (MW) : 100 Offer Capacity to EGAT (PPA) (MW) : 90 Number of Turbine* : 40 (estimate) Turbine Model** : GE (2.5 MW/WTG) Turbine Manufacturing : General Electric Company Limited Annual Energy Production (GW) *** : (P90-P50) COD : July 2016 Useful life of asset : 25 years Location : Wongyaytong Takro Sub-district, Theparak district, Nakorn Ratchasima and Watabak Sub-district, Tepsatit district, Chaipoom Note: *estimate ** not confirm *** AEP from technical advisor at the height 120 meters using GE turbine Project (5) : North Krisana Company : KWP Investment* : baht million 6, (estimate) Install Capability (MW) : 100 Offer Capacity to EGAT (PPA) (MW) : 90 Number of Turbine* : 40 (estimate) Turbine Model** : GE (2.5 MW/WTG) Turbine Manufacturing : General Electric Company Limited Annual Energy Production (GW) *** : (P90-P50) COD : May 2017 Useful life of asset : 25 years Location : Krissana Sub-district, Sricuse district, Nakorn Ratchasima Note: *estimate ** not confirm *** AEP from WEH at the height 120 meters using GE turbine Silom Advisory Company Limited Page 15/48

16 1.5.5) Wind Turbine Principle The principle process of wind power is similar to any power generation process that uses magnetic field to rotate around the coils. Wind power generation is simply using the wind to rotate magnetic around the coils (picture no1). After the power is generated, it is simply connected to the electrical grid. The most important thing for wind farm is to use the right turbine to match with wind speed and the PPA contract (picture no2). The turbine installation will be designed by engineers to be at the optimum distant. WEH estimates the use 11,300 Rai of land for 90 MW wind farm. Moreover, the development of wind farm is not only to develop the wind turbine but also needs to develop roads, bridges to connect all the turbines to get the optimum energy output. The design of turbine locations is depending on the landscape and wind map, which has to fit the location. 1.6 Detail of assets to be acquire 5,263,158 shares of WEH s new ordinary shares (par value of baht 10), representing 5% of its registered capital after the capital increase, to be issued by WEH at baht 190 per share, totaling baht million 1,000 ( Transaction ). There are 2 payments as shown below. - 1 st payment of baht 200,000,000 at the share subscription signing date (30 April 2013) Silom Advisory Company Limited Page 16/48

17 - 2 nd payment baht 800,000,000 at both parties agreed dated and the when condition precedents are met. Based on WEH financial statement dated 31 December 2012, company has a book value of baht 6.52 per share (before the capital increase) 1.7 Criteria used in determining the price of new ordinary Shares Acquisition price is baht 190 per share. The offering price is set by WEH based on the projection of return on investment in the wind farm projects (2 existing projects and 5 future projects (excluding Khao Kor project due to its status as an associated company) 1.8 Terms of the Transaction The Transaction is considered an acquisition of assets to the Notification of the Capital Market Rules for Entering into Substantial Transactions within the Definition of an Acquisition or Disposal of Assets and a connected transaction pursuant to the Notification of the Capital Market Supervisory Board. Therefore the Company must seek for approval from the Shareholders meeting To enter the Transaction with the votes of not less than three fourths of the total votes of shareholders present at the meeting and having the right to vote, excluding shareholders having an interest. To approve the capital increase and allocation of shares with the Right Offering not more than 125,807,186 shares (par value baht 1) at baht 10 in order for the Company to pay for WEH s new ordinary shares. 1.9 Summary of major agreements (1) Share Subscription Agreement ( SSA ) (Dated 30 April 2013) and its side letters No Subject Detail 1 Parties DEMCO and WEH 2 Type of Agreement Share Subscription Agreement 3 Condition Precedent -WEH having obtained all necessary creditor and third party consents, waivers or approvals which are required in relation to the Transaction in a form satisfactory to the Company -WEH undertaking all necessary corporate actions and obtaining all required shareholder approvals in connection with the implementation of the Transaction under the rules and regulations of the SEC - DEMCO undertaking all necessary corporate actions and obtaining all required shareholder approvals in connection with the implementation of the Transaction under the rules and regulations of the SEC and SET Silom Advisory Company Limited Page 17/48

18 No Subject Detail - WEH shall carry on it business as a going concern, not declare or pay dividend and not issue any share except 36,842 to REC - Mr. Nopporn Suppipat shall sell 1 WEH shares to DEMCO at baht 10. 3/ - WEH s shareholders have given consent to issue the new ordinary shares and waived their rights to subscribe for any of the shares 3/ 4 Price and Payment DEMCO agree to subscribe 5,263,158 of WEH s new ordinary shares at baht million 1,000 with 2 payments Payment 1 baht 200,000,000 shall be paid on the date of this Agreement ( 30 April 2013) Payment 2 baht 800,000,000 shall be paid on or before the Completion Date WEH shall repay the 1st payment to DEMCO if DEMCO s shareholders meeting does not approve the Transaction and if WEH is not able to repay the Company DDMART 1/ will repay. 5 Post-Completion -WEH shall subscribe 99,997 of KWP shares from REC at baht million DEMCO shall sell 1 WEH shares to Mr. Nopporn Suppipat at baht 10. 3/ 6 Board of Directors 2/ DEMCO will have 1 position on WEH s board of directors 7 Shareholder Reserved Matters WEH shall not, without consent of the Subscriber, issue any new Share to any party at a price per Share that is lower than the Subscription Price offered to DEMCO. This undertaking shall not apply to any issuance of new Shares in connection with a public offering of Shares or listing of the Company on any stock exchange Note: 1/ DDMART is currently holding 19.60% of WEH. 2/ Board of Director Position is not part of the Share Subscription Agreement but it is the side letter between REC (owns 67.49% of WEH) and DEMCO. 3/ Company Limited regulations, only existing shareholders can subscribe newly issued shares. Silom Advisory Company Limited Page 18/48

19 1.10 Source of Funds for WEH s new ordinary share acquisition The Company will enter into the Transaction with cash flow from operation and capital increase. The Company cash and cash equivalent from its audited financial statement dated 31 March 2013 and 31 December bahtmillion2012 are baht million and respectively. The Company is planning the capital increase of 125,807,186 shares (par value baht 1) at baht 10 as total of baht million 1, The Company must seek approval of the capital increase at the EGM no.1/2013 dated 30 May 2013 and if the EGM does not approve the Transaction, the Company will not enter into the Transaction. 2. Information Attachment 1 of the opinion of independent financial advisor 3. Wind Energy Holding Limited Information Attachment 2 of the opinion of independent financial advisor 4. Rationale, Advantages, Disadvantages, and Benefits of the Transaction 4.1 Rationale of the Transaction The Company would like to subscribe WEH s new ordinary shares of 5% of its registered capital (after the capital increase) in order to get the return in the future. WEH owns 74.44% of Aeolus paid-up share. The Company owns 25.56% of Aeolus paid-up shares before FKW and KR2 were fully developed. Currently, both projects are completed and started selling electrical power to EGAT. As WEH has proven to deliver such complicated projects on time and has additional 9 subsidiaries and 1 associated company (total WEH group has 14 companies details in 1.5), 6 of them are planning to COD in 2017 and 4 of them are planning to COD during The Company believes investing in WEH will generate good returns in the future. 4.2 Advantage and Disadvantage of entering into the Transaction Advantage of entering into the Transaction 1) WEH has the wind farm project, which are stable and considered a good business with the stable income in the future Current WEH owns 74.44% of Aeolus paid-up shares and Aeolus owns 60% of FKW and KR2 paid-up capital. FKW and KR2 have started selling electricity to EGAT since February 2013 and November 2012 respectively. Based on current information, WEH has a concrete business and able to develop such projects according to the plan when the Company invested in Aeolus. The PPA contract is stable revenue of 5-year agreement period and automatically extended on a continuous basis, each time for another period of 5 years. WEH has a tendency to continue extending PPA due to the fact that EGAT always renew contact for all the power plants if the power plant operates consistently in accordance with the contract. Based on the interview of EGAT executives and Non-Firm purchasing regulations for SPP, it is the policy to manage efficient energy Silom Advisory Company Limited Page 19/48

20 therefore if any SPP is able to produce electricity, EGAT has no policy not to renew its SPP contract. Moreover, after the Adder contract expired, EGAT will purchase electricity from WEH at lower price. Moreover, WEH also has 10 additional wind farm projects and 6 of them will COD within The list of the companies is: Khao Kor (WEH owns through Sustainable), Watabak, Theparak, Tropical, KRS3, and KWP, which already received PPA acceptant. Therefore, the Company that own 5% of WEH will get the return on investment in both dividend (currently, WEH and Aeolus have net operating loss) and the increase of WEH share value in the future and/or the opportunity to sell WEH s shares at a higher price than its original investment when WEH is listed on SET or to other investor. Moreover, wind energy is an alternative energy source that is supported by the government. The government plans to produce 25% of the electricity from alternative energy in 2021 and plans to produce electricity from wind at 1,200 MW. Therefore bahtthe Adder of baht 3.50 / unit support wind farm for the first 10 years and additional tax benefits from Board of Investment ( BOI ) through exemption of corporate income tax for 8 years and 50% reduction for year ) WEH is the major customer of the Company and has the business that could benefit the Company in the long-run. WEH is the developer of wind farm that develop electrical substations, transmission line, and fundamental structure of Wind Turbine, which relates to the Company s business. The Transaction will also be under the condition that the Company will be the BOP. In , WEH is planning to develop 6 additional wind farms (including Khao Kor which is developed by associated company). The installed capacity of each wind farm is between MW (detail is in the table in section WEH s group structure). The total investment is more than baht million 25,000, which directly benefits the Company due to the BOP contracts. As the wind farms are located in the remote area, the Company therefore has a possibility to have higher operating profit margin. With WEH projects, the Company also has more opportunities to develop similar project for other wind farm developers due to its experiences with the biggest wind farm in South East Asia. (Wind farm is not popular in South East Asia countries unlike in Europe due to the needs of technology and expertise. However, there are wind farm in South East Asia such as: the Philippines, Indonesia and Malaysia) 3) The Company may benefit from the Holding Company in future projects. WEH is the Holding Company (invest in the wind farm projects). Currently, WEH has 2 operating projects and 6 projects with PPA acceptance (including the projects of its associated company (Khao Kor)). However, the acquisition price for WEH s shares based on 7 projects from its subsidiaries. Additional projects, waiting for PPA acceptance, are not included in the projection therefore it could increase an upside gain for Demco. 4) The Company will benefit from investing in the first commercial wind farm project in Thailand. Silom Advisory Company Limited Page 20/48

21 Thailand never had a commercial wind farm project even though there are cases that the companies received the PPA acceptance. There is only WEH who is able to sell electricity to EGAT due to the complication of techniques and project development process. The turbines are imported therefore the selection and installation process require experiences. WEH has experience in management, which is a major difference from other companies. Moreover WEH has proven that FKW and KR2 (first 2 projects) are already commercialized operation ( COD ) in November 2012 and February 2013 respectively Disadvantage of Entering into the Transaction 1) The Company is the minority shareholder (hold 5% of the shares after capital increase) therefore the Company has no control in any approval As the Company hold 5% of WEH shares (after capital increase), which is less than 10%, the minimum percentage to veto any shareholder approval therefore, the Company will have no veto right especially the capital increase right. According to SSA, the Company can have 1 representative on WEH Board of Directors, however such director may not be able to control the decision of WEH. However the Company has the veto right, for WEH to sell its new ordinary shares lower than the price selling to DEMCO excluding the 36,842 new ordinary shares and initial public offering ( IPO ) since IPO price is depending on demand and supply of the market. 2) The investment in limited company has less liquidity than listed company. As WEH is not listed on SET and still under development of wind farms project. It also has net operating loss in year at baht million and baht million accordingly. Accumulated Retain lost are baht million and baht million accordingly. WEH is therefore subjected to the risk of delay for the listed plan and the Company may have to sell its investment outside the market. According to WEH, it is planning to go IPO in 2015 and is still under the Financial Advisor appointing process. Currently, WEH has already met the requirement according to SET as shown below: Subject Requirement WEH s current status Paid up capital > baht million 300 > baht million 300 Track Records Must have been in operation > 3 year with the same management > 1 year prior to application date Combined minimum net profits from operation > baht million 50 over the past 2 to 3 years Minimum net profits from operation > baht million 30 for the Have been in operation > 3 year with the same management > 1 year prior to application date Expecting to have profit from operation > baht million 50 in 2014 Silom Advisory Company Limited Page 21/48

22 Subject Requirement WEH s current status latest full year Financial Position and Liquidity Shareholder equity > baht million 300 Corporate Governance Must demonstrate good corporate governance practice and have a qualified audit committee as specified by SET. Must maintain effective auditing and internal control systems as specified by the SEC Conflict of Interest Must have no existing or potential conflicts of interest as defined by the SEC Financial Statement and Auditor Provident Funds Source: Wind Energy Holding Must ensure that financial statements have been prepared in accordance with SEC rules and regulations*. Must have an auditor approved by the SEC*. (list of qualified auditors can be obtained from ) Must ensure that, by the date the listing application is filed, the applicant has established a provident fund Based on audited financial statement dated 31 December 2012 equal baht million 652 In the process of appointing Audit Committee Currently searching for Internal Auditor It is WEH policy On the process KPMC is the company s current auditor who is approved by SEC In process If WEH can be listed on SET, WEH s share will have more liquidity. However, based on the qualification to be listed on market of alternative investment ( mai ), WEH is qualified (market capitalization more than baht million 500) for alternative energy 3) The delay of publicly listed on SET According to the notification of the capital market supervisory board No. Tor Jor 28/2551 Re: Application for and Approval of Offer for Sale of Newly Issue Shares: 12-2 There is no person who may have Silom Advisory Company Limited Page 22/48

23 conflict of interest of the applicant holding shares in its subsidiary company or associate company exceeding ten percent of the total shares with voting rights of that subsidiary company or associate company, except where the applicant is able to demonstrate that such shareholding structure of the subsidiary company or associate company is intended for the best interest of the applicant. WEH may have to clarify its shareholder structure, intended for the best interest of the applicant. 4) Investing in the Holding Company is preventing the Company from claiming assets at the project level WEH is a Holding Company, which invest in the wind farm project through its subsidiaries and its associates. Assets of the power plants belongs to the company that owns the project therefore, DEMCO is only a shareholder of WEH and not a shareholder of the company that owns the project and thus will not have the right to claim assets from WEH s subsidiaries or associates incase those companies are bankrupted. Silom Advisory Company Limited Page 23/48

24 4.2.3 The Risk of entering into the Transaction 1) The risk of doing the wind farm business 1.1) The risk of not getting the land lease agreement contract with ALRO WEH needs to lease the land from ALGO. Most of the land related to WEH s project is under ALRO. The land is not transferable and to develop the projects WEH needs to get consent from the farmers. The land needed for installing a wind turbine is roughly ,000 square meters and the farmer is able to use the land for other agricultural products (the crops shall not be more than 5 meter in height). Most of the land is used for accessing the turbines therefore the farmers will also gain benefits from easier access to their lands through roads built by WEH. Even though, WEH has not yet got all the land lease agreements signed with ALRO but with 1) the consents of the farmers who have the right to use the land 1 and 2) ALRO policy 2 to support wind farm project, the Projects with the PPA acceptance should have a very low risk of land lease issue. 1.2) The risk of not getting the PPA signed with its 5 future development projects. 1 According to the resolution of the renewable energy promotion and management committee no. 3/2011 ( Increase the requirement for PPA acceptant. SPP shall have the proof of the land for its wind farm project such as certificate of ownership permission letters from persons or related agencies ). The additional requirement process is shown below 2 Additional requirement according to the announcement the requirements of wind farm dated 1 June 2010, referring to board resolution of agricultural land reform office no 1/2010 ( concept approval of the payment for wind farm project at baht 35,000 / Rai / year and adjusted every 5 years ) Silom Advisory Company Limited Page 24/48

25 Currently, WEH has 2 projects (FKW and KR2), which have already sold electricity to EGAT and 1 project have already signed PPA (associated company s project: Khao Kor). WEH has a plan to develop 5 additional projects within 2017 (Watabak, Tropical, Theparak, KRS3 and KWP). Currently, all the future projects, has received the PPA acceptance with the condition of investment requirement and electrical usage study to connect to EGAT s electrical grid. Moreover the company needs to have 4 basic requirements (1) location (2) source of fund (3) technology and (4) all licenses and permits. Currently, WEH is on the process of getting the land lease agreement (1) (even though WEH has the farmers consent, WEH needs to sign a lease agreement with ALGO) (2) technology selection (3) WEH is waiting for the investment confirmation. Normally, the investment of the project will be needed when the construction process begins, which will be at the end of year 2013 for Watabak. The construction process of other 4 projects will begin in WEH will normally start seeking for the source of fund 6 months prior to start of construction. Therefore WEH is not able to identify the source of funds based on (2). Therefore, when WEH is at the needs of funds for its 5 projects, there is an uncertainty that WEH may not get enough funds on time and/or not able to sign the PPA contract according to (4). However, WEH has successfully developed first 2 project (FKW and KR2) therefore it is likely that WEH will be able to develop all projects in its pipeline. 1.3) The Risk of WEH not able to develop all wind farm according to the plan Wind farm project is a high investment project and currently WEH has no clear capital investment in both equities and debts therefore it is risky that WEH will not be able to develop the project according to the plan. WEH have successfully developed 2 previous projects, therefore it is highly possible for WEH to be able to develop all its projects in the pipeline. 1.4) The risk of not getting PPA renewal Based on the financial projection of 7 projects (excluding Khao Kor since it is an associated company) IFA assumes useful life of asset to be years based on WEH assumptions and after the PPA expired WEH will be able to extend 3 times with the length of 5 years each. However, if this assumption is not correct, it could change the estimation value of WEH. In the past, EGAT never cancel any PPA if the power plant is able to produce stable electricity and with experience management of WEH. It is likely that the wind farm will be able to produce stable electricity until its useful life. 1.5) The risk of wind speed WEH and its subsidiaries are all in wind farm business, which is highly dependent of nature and thus it is uncontrollable. There is a risk that the wind speed is not according to the plan. However, WEH has been studying the wind in the area for more than 3 years and also hire technical consultants Garrad Hassan Pacific Pty Ltd ( GH ). GH is the wind energy technical advisor, which is a subsidiary of Garrad Hassan Group Limited England and K2 Management Ltd. ( K2. Both companies are technical advisors for wind and able to calculate the possibility of wind speed for more than 25 years. Silom Advisory Company Limited Page 25/48

26 GH company information: GL Garrad Hassan is the world s largest renewable energy consultancy. It offers independent technical and engineering services, products, and training courses to the onshore and offshore wind, wave, tidal and solar sectors. Although the GL Garrad Hassan name is new, the company has a rich heritage. It is borne of the integration of specialist companies that, united under a single brand, form the renewable energy consulting division of the GL Group. GL Garrad Hassan is a consulting company; it has no equity stake in any device or project. This rule of operation is central to its philosophy, something that sets it apart from many other players and underlines its independence is that GH has more than 20 branches around the world. source: K2 company information: K2 Management was founded in 2007 by Per Melgaard and Lars Hammershoj to provide practical consultancy and project management services based on knowledge gained through hands-on experience. Market demand for services has enabled the organization to grow through the recruitment of specialists in all Silom Advisory Company Limited Page 26/48

27 areas of project planning and implementation. To enhance its services in the key UK and German markets K2 Management established local K2 Management offices at the beginning of 2010, working in partnership with Mike Prowse (UK) and Peter Steinfeld (Germany). In 2011 the K2 Management group was further expanded with the opening of a USA office headed up by Carsten Ploug Jensen. Source: 2) Financial Risks 2.1) Risk of equity investment for 5 future projects According to capital expenditure of 5 future projects. WEH and its subsidiaries may need estimated of baht million 4, for 60 MW and baht million 6, , for 90 MW. WEH needs to provide equity investment at 30% for each project (based on letter of interest from a domestic financial institution), which is the same percentage as the previous 2 projects. Currently, WEH has not enough cash for equity investment for its future projects. With Additional baht million 1,000 from the issuance of new ordinary share of 5% to DEMCO (if DEMCO s EGM approves the Transaction), which is not enough. The estimated equity investment for future project is more than baht million 8,000. WEH has a few potential investors but in practical the equity investment will start 6 months before the construction of the project. Watabak will start the construction at the end of 2013 and the other 4 projects will Silom Advisory Company Limited Page 27/48