MANAGEMENT DISCUSSION AND ANALYSIS QUARTER 2

Management Discussion and Analysis For the Six-Month Period Operating Results Ended 30 June 2002 Note: This Management Discussion and Analysis (MD&A) was made with the management's confidence that the information was accurate and completed and shown the vision of the management in order to assist investors to better understand the company's financial status and operation. It also supports the "Good Corporate Governance Project" of the Securities Exchange Commission (SEC). However, the information on the MD&A relied on the existing factors in the present time. Therefore, the forward-looking information on this MD&A may not occur in the future if the aforementioned factors or situati on are changed. The investors should have discretion for consideration on the use of the information. For further detail, please contact Investor Relations Section, Finance Division of the Electricity Generating Public Company Limited at Tel: 662-998-5157-8 or Email: ir@egco.com. Management Discussion and Analysis 1. Report and analysis of the Operating Results On May 12, 2002, it was the 10th Anniversary of the Electricity Generating Public Company Limited (EGCO). It was established in accordance with the government's policy to allow private investors to participate in the electricity-generating business in order to decrease the government's financial burden due to the fact that the electricity-generating business requires huge capital investment. With limited budget, the government also had to allocate for other industries and economic sectors. Moreover, the economy was growing rapidly; thus, the demand for the electricity was high. It was likely that the installed capacity at the time was not sufficient for the future demand as forecasted. EGCO is structured as a holding company for the purpose of owning shares in the companies, which generate and sell the electricity, including operate in other related energy businesses. Source of its income is the dividend received from the company's business group in the form of the shares of profits from investments in its subsidiaries, joint ventures, and associates. The objective of the structure is to enable the flexibility to expand its businesses and provide an ability or a quality to manage its subsidiaries' each project as well as an ability to finance the new projects with nonrecourse to the existing ones. 1.1 Income Analysis In the six-month period of the year 2002, the total revenue of the group was Baht 6,891 million, increasing by Baht 1,038 million or 17.73%, compared to the same period of the year 2001. The details are as follows; 1) Sales of electricity from the principal subsidiaries, REGCO and KEGCO, amounted to Baht 4,693 million, representing an increase of Baht 292 million or 6.63% from the first half of last year. The sales from KEGCO rose by Baht 464 million while the sales from REGCO decreased by Baht 172 million. The sales were received as determined in the capacity payment formula, which was calculated on a "Cost-Plus Basis" under Power Purchase Agreement (PPA), and were in line with the company's projection. In each year, the tariff was determined in the PPA to cover main expenses, i.e. debt financing charge and major maintenance charge, and was used to calculate the electricity sales in each period. For REGCO, its monthly electricity sales are quite equal in each year, but it may be slightly different depending on the bonus it may receive. For KEGCO, its monthly electricity sales depend on the dispatching hours; however, KEGCO will receive the sales at least in the amount calculated by the contracted hours for each particular year. Besides, it will receive the bonus when the dispatching hours exceed the contracted hours as determined in the PPA. However, in some periods, the electricity sales may not relate in the same direction as the expenses shown on the financial statement because the expense has to be recorded when it incurs in accordance with the Thai Accounting Standard. In addition, the maintenance schedule may be adjusted if appropriate. 2) Shares of electricity sales from joint ventures were from GEC, CONAL, and APB in the amount of Baht 1,000 million, increasing by Baht 144 million, mostly because in this year EGCO first recorded the share of electricity sales from APB, a new joint venture of EGCO JD from the joint investment with UNOCAL last year. 3) Sales of water from a subsidiary, EGCOM TARA, was Baht 61 million, up Baht 34 million because the sales were recognized for full six months while last year EGCOM TARA first sold the water in February. 4) Service income totaled Baht 138 million, rising by Baht 76 million due to ESCO's increased Operating and Maintenance (O&M) service to the companies outside the group. 5) Interest income and other income amounting Baht 394 million decreased by Baht 127 million or 24.35%. The decrease in the interest income totaling Baht 142 million was because of the decrease in cash, which was spent for investment and debt repayment, while there was the increase in the dividend incomes in the amount of Baht 34 million from EASTW and Krung Thai Selected Flexible Portfolio Fund. 6) Shares of profits from associates, i.e. AEP and AMESCO, were Baht 48 million, up Baht 86 million from the same period in the previous year because there were shares of losses from associates totaling Baht 38 million, due to the effect of the foreign exchange. 7) Effect of the foreign exchange resulted in a foreign exchange gain of Baht 557 million, (Baht appreciated approximately Baht 2.69 per 1 US dollar, compared to last accounting period) while EGCO had a loss of Baht 461 million in the same period of last year (Baht depreciated approximately 1.92 Baht per 1 US dollar). Thus, the effect of the foreign exchange caused a difference in the amount of Baht 1,018 million. The currency exchange gain or loss is an accounting number in accordance with the Thai Accounting Standard. It incurs from the difference of the translation of the net debt denominated in foreign currency to Thai Baht using the foreign exchange rate at the end of this accounting period (30 June 2002) comparing with the rate at the end of the previous period (31 December 2002). However, the calculation of the capacity payment is adjusted to receive the compensation of the exchange rate effect, which incurs from debt financing charge denominated in US dollar and Major Maintenance Parts Charge. REGCO and KEGCO receive the compensation monthly for each billing period. They receive higher capacity charge if the exchange rate is above Baht 28 per US Dollar, and lower capacity charge if the rate is below Baht 28 per US Dollar. The compensation for the 6-months period ended June 30, 2002 amounted to Baht 608 million. 1.2 Expense Analysis Total expenses of the group were Baht 4,459 million, up only Baht 92 million due to the following main factors; 1) Cost of sales amounting to Baht 2,204 million rose by Baht 332 million or 17.74%, mainly owing to the increase in the cost of sales from REGCO and KEGCO in the amount of Baht 207 million, which was mostly from the Major Maintenance Cost. In addition, the cost of sale of Baht 86 million from APB was first recognized in this year, and the cost of sale from EGCOM TARA was recognized for 6 full months. In 2002, REGCO and KEGCO are scheduled to have Major Maintenance Expenses higher than last year. The power plant normally shuts down for the maintenance in the second half of the year in longer period than the first half. The demand for the electricity, which relates to the temperature, in the second half of the year is usually lower than the first six months. The major maintenance expense will be recorded when it incurs; therefore, the cost of sales, including the major maintenance expense, is likely to be higher than the first 6 months. 2) Cost of services was Baht 63 million, up Baht 27 million in line with the increase of the service income from ESCO. 3) Administrative expenses and other expenses were Baht 452 million, up Baht 7 million or 1.58%, mostly from the increase in the administrative expenses of EGCO. The main reason was the loss on the forward contract of the foreign currency in the amount of Baht 38 million whereas the expenses of other companies in the group decreased by Baht 31 million. EGCO had the forward contract to prepare for the payment of the share purchase under its investment plan to increase its stakes in GEC, which invests in Bo Nok Power Plant. At the time, the economy was not recovered as forecasted, and the situation of the electricity industry was not favorable to pursue the plan. EGCO highly concerned about higher risks, which were used to compare with the project return from the particular project, and the importance to sustain its shareholder value; therefore, it decided not to increase its stakes in the project. Furthermore, there was a fluctuation of the currency exchange market. To minimize the loss, EGCO decided to close the position of the forward contract. However, EGCO thinks that the loss was not significantly material. Presently, EGCO is working on the improvement of its risk management process for the whole group. 4) Impairment Charge amounted Baht 342 million from the Bo Nok Power Plant Project, which was recognized as expense on the Profit and Loss Statement due to the uncertainty and the risk of the development of the Bo Nok Power Plant. In the case that EGAT cancels the project, the project owner is able to ask for the compensation, but it would require some period of time to receive it. EGCO has reviewed the impact of the problem and planed to implement the project with careful and conservative approach as well as realized the importance of the shareholder value. The company considerably recognized the impairment charge of the particular project after it has assessed the recoverability of its investment in this project. As at 30 June 2002, the impairment provision is approximately Baht 222 million, which has been recognized in the second quarter of 2002. Furthermore, a provision for impairment of the goodwill arising from the acquisition of Bo Nok Project amounting to Baht 120 million has been also recognized as expenses in this quarter. 5) Interest Expenses totaled Baht 1,398 million, down Baht 339 million or 19.52% because of the decrease in interest expenses of EGCO's debenture, REGCO, KEGCO, GEC, and Conal, in the amount of Baht 93 million, Baht 118 million, Baht 64 million, Baht 24 million, and Baht 52 million, respectively. The main reasons were lower interest rate of EGCO's debenture, lower debt principal amount, and stronger Baht than last accountin g period. However, the interest expense from EGCOM TARA increased because it recognized the expense for the full 6 months, and the interest expense from APB was first recognized in this year. Regarding the EGCO's debenture, EGCO first entered into an interest rate swap agreement to convert a fixed interest at the rate of 8% to a floating interest rate on six-month THBFIX plus a certain margin; thus, the interest expense in October 2001 decreased to 6%. Later, EGCO entered to a new interest rate swap agreement in 2002 to convert the floating interest rate on six-months THBFIX plus a certain margin to a fixed interest rate at 6.95%, which was effective since 21 April 2002. 1.3 Operational Results and Conclusion Net profit for the first 6 months of 2002 was Baht 2,272 million, increasing by Baht 1,043 million or 84.90% from the same period in the previous year owing to the aforementioned reasons. If excluding the effect of the foreign exchange of Baht 557 million (unrealized foreign currency gain was Baht 566 million), the net profit was Baht 1,715 million, Baht 25 million or 1.48% higher than last year. When considering only on the net profit, it may conclude that EGCO had a better operating result than last year. However, EGCO's most revenues are from REGCO and KEGCO. Their revenues are determined under the secured long-term agreement with EGAT to cover all the cost and return on equity at the rate of 20% and 19% over the life of the projects for REGCO and KEGCO, respectively. Therefore, the analysis of the whole company's operating result should consider the forecast of the subsidiaries, joint ventures, and associates as a supplement. Excluding REGCO and KEGCO, it may simply be concluded that the company's operating result was under the forecast. Moreover, the return from the investment in new projects, which are under construction, has not been generated. Therefore, EGCO necessarily has to adjust its strategy to better select and manage the future investment. Nevertheless, excluding the impairment charge from the Bo Nok Power Plant Project, the net profit for the 6-months period of the year 2002 was slightly higher than the budget due to the lower major maintenance expenses than forecasted. The dividend received from EGCO's subsidiaries, joint ventures, and associates will be managed and invested to increase its returns. In the future, the proportion of the revenues from REGCO and KEGCO, comparing to the total revenues, tends to decrease after EGCO starts recognize the revenues from the treasury management and return on investment from the new projects. Important Financial Ratios for the period are as follows; - Net Profit (excluding the effect of foreign exchange) margin was 27.28%. - Return (excluding the effect of foreign exchange) on shareholders' equity was 8.25%. - Return (excluding the effect of foreign exchange) on assets was 3.27%. - Earning (excluding the effect of foreign exchange) per share (EPS) was Baht 3.26. 1.4 Business Expansion Analysis With the company's policy to address the importance to increase its shareholder value, it has a conservative business expansion strategy as well as a concern to maintain its strong credit standing. Therefore, EGCO did not invest in any new project in the first quarter of 2002, and waits for the opportunity to generate satisfactory return with low risk from high quality projects, such as the participation in EGAT's privatized assets including the Repowering projects. Even though the government had a resolution to instruct EGAT to negotiate with the project owners to postpone the coal-fired power plants in Prachuab Kirikhan. The Bo Nok Power Plant, which EGCO has 30% stakes through GEC, is one of the projects. The delay of the project would affect the company's cash flow projection with the assumption that the Commercial Operation Date (COD) of the Bo Nok Power Plant will be in October 2004, and it also would increase the risk of the uncertainties to continue the project. However, EGCO will follow the situation closely and will carefully implement the project. In case of the economic revival, the demand for the electricity will increase, and EGCO also sees the opportunity to expand the capacity at its existing projects or develop new green-field project in the future. Moreover, EGCO aims to complete all the developing projects. In 2003, EGCO will start recognizing the revenues from TLP Cogen and Roi-Et Green, which have COD in January and April, respectively. For the case of REGCO and KEGCO, which are EGCO's principal subsidiaries and provides most of the total revenues, in some years, their electricity sales may not go in the same direction. It may occur when the capacity rate was determined to cover the expense for major overhaul while the actual expense may not incur. With their efficient management of the maintenance schedule, the expenses that are recorded on the financial statement in accordance with the Thai Accounting Standard may be lower than the amount determined in the PPA or the electricity sales. As at the end of the second quarter of 2002, EGCO still has the committed equity installed capacity of 2,785 MW, equal to the MW at the end of last year. The company remains its objective to increase its installed capacity to 5,000 MW by 2005. The company has a policy to maintain its cash flow to pay the dividend not lower than Baht 2 per share. However, it must not have any impact on the capital expenditure required for the existing projects and treasury stock program with the objective to manage its available cash efficiently and reflect the real value of the company. 2. Report and Analysis of Financial Position 2.1 Asset Analysis As at 30 June 2002, total assets of the group in the amount of Baht 52,384 million, decreased by Baht 581 million or 1.10% from last period ended December 31, 2001. The important details are as follows; 1) Cash, deposit at banks and financial institution, and marketable securities in short term and long term were Baht 6,650 million or accounted for 12.70% of the total assets, which increased by Baht 283 million or 4.45% due to - cash receipt from the operation - financing activities, mostly from the loan drawdown of TLP Cogen amounting Baht 620 million - dividends received from EASTW and KTSF, and sales of the securities totaling Baht 221 million - debt repayment in the amount of Baht 1,980 million - cash spent for investment activities, mostly for the construction of the TLP Cogen's power plant and the increase in the investment of Nam Theun 2 Project in the amount of Baht 111 million. 2) Short-term and long-term investments used as collateral were Baht 9,630 million or accounted for 18.38% of the total assets. They decreased by Baht 648 million or 6.30% for the cash reserve of the debt repayment. Some of the investments were denominated in US Dollar. 3) Investment in associates and other companies was Baht 872 million or accounted for 1.66% of the total asset, which was Baht 159 million or 22.30% higher than last year owing to the increase of investment in Nam Theun II project amounting to Baht 111 million and received the shares of profits from AEP and AMESCO totaling Baht 48 million. 4) Property, plant, and equipment amounted to Baht 28,563 million or was accounted for 54.53% of the total assets, which decreased by Baht 436 million or 1.50% mainly because the amortization and the depreciation totaling Baht 1,056 million although there were increases in the assets from the construction of the TLP Cogen Power Plant totaling Baht 737 million and from APB, a joint investment with UNOCAL through EGCO JD. 5) Other assets were Baht 6,669 million or accounted for 12.73% of the total assets. It increased by Baht 61 million or 0.92% mainly owing to the expenses during the construction belonged to TLP COGEN and Roi-ET Green as well as the increase of trade account receivable and the tax receivable of EGCO. However, there were the amortization of the goodwill, the advances to the Bo Nok project, and the development costs of the Bo Nok project. 2.2 Liability Analysis As at 30 June 2002, total liabilities were Baht 31,607 million, down Baht 2,173 million or 6.43% as a result of the repayment of the long-term debt and debenture. The liabilities consisted of 1) Long-term debt and debenture totaling Baht 30,337 million, and the details are as follows; - USD debt in the amount of 382 million USD - Yen debt in the amount of 69 million Yen - Peso debt in the amount of 139 million Peso - Baht debt in amount of 1,953 million Baht - Debenture in the amount of 10,522 million Baht 2) Other liabilities were Baht 1,269 million, i.e. interest payable, bank overdrafts, trade account receivable, value added tax payable, dividend payable, and others. As a credible, high-quality company, the company is committed to administering its obligation in compliance with good corporate government. It has, accordingly, set up a reserve fund of 25% of total obligations to its subsidiaries and associates; thus, reducing the risk of default and providing extra return in the form of interest income and increased financial stability. As at 30 June 2002, the reserve fund balance amounted to Baht 197 million. 2.3 Shareholder's Equity Analysis As at 30 June 2002, the shareholder's equity (excluding minority interest and net of treasury stock), amounting to Baht 20,169 million, rose by Baht 1,625 million. The main factor were the net profit for the 6 month of the year 2002 and unrealized gains on investment in marketable securities even though there was a translation adjustment in the amount of Baht 68 million. To analyze the assets and liabilities, the capital structure was as follows; Shareholders' equity was Baht 20,777 million or accounted for 40%. Liabilities were Baht 31,607 million or accounted for 60%. Important financial ratios are as follows; - Debt to equity ratio was 1.52 times, lower than the end of last year at 1.76 times - Net debt to equity ratio was 0.74 times, lower than the end of last year at 0.89 times - Book value per share was 38.41 Baht per share, higher than the end of last year at 35.26 Baht per share 3. Report and Analysis of Cash Flows Position Cash Flows Statement shows the change in cash flows from operating activities, investing activities, and financing activities at the end of account period, and it indicates the ending balance of cash and cash equivalents. As at 30 June 2002, the ending balance of the cash and cash equivalent was Baht 3,869 million, increasing by Baht 231 million from the beginning period. The details of source of funds and use of funds are as follows; - Net cash receipt from operating activities was Baht 3,291 million from the net profit for the period and was adjusted with the non-cash items and not related to the operating activities, such as depreciation, unrealized foreign currency exchange gain, gain on disposal of marketable securities, minority interest, etc., and changes in operating assets and liabilities. - Net cash payment for investing activities was Baht 932 million. It was spent on the purchase of property, plant, and equipment of the subsidiaries, which mostly were spent for the construction of TLP Cogen, and the increase in the investment of the Nam Theun 2 project. - Net cash payment for financing activities was Baht 2,128 million. The main reason were the short-term and long-term debt repayments of Baht 1,980 million, treasury stock of Baht 52 million, and dividend payment of Baht 771 million while TLP Cogen had a debt drawdown in the amount of Baht 620 million. In conclusion, as at 30 June 2002, EGCO had net cash receipt from operating activities higher than the cash payment for the investment and financing activities. Therefore, the ending balance increased from the beginning period. Moreover, EGCO has an ability to effectively manage its available cash and fund to be sufficient for the investment in the existing projects, treasury stock, debt repayment, and dividend payment to its shareholders. The dividend payout has to be complied with its policy on the dividend payment, policy on conservative investment, and policy on maintaining its cash flows enough to pay the dividend at least 2 Baht per share if the financial statement shows the net profits for the year 2002.