Management Discussion and Analysis Quarter 2

Management Discussion and Analysis For the Six-month Period Operating Results Ended June 30, 2003 Note: This Management Discussion and Analysis (MD&A) was made to disclose information and 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 and Exchange Commission (SEC). The objectives of this MD&A is to present the information and the explanation of financial status and operating results as of the date hereof. The information provided in this MD&A may change if the aforementioned factors or situation are changed in the future the investors are therefore required to have their own discretion regarding the usage of this information for any purpose. For further detail please contact Investor Relations Section Corporate and Investor Relations Division of the Electricity Generating Public Company Limited at Tel: 662-998-5131-2 or Email: ir@egco.com Management Discussion and Analysis 1. Business Expansion Analysis EGCO's corporate vision is to be the leading power company in the Asean region offering comprehensive energy services with full commitment to environmental protection and social developmentsupport. Our corporate strategies have therefore focused on our core business especially in our Independent Power Producer (IPP) projects that have attractive and sustainable stream of revenues from the secured tariffs under long term Power Purchase Agreements (PPA) with the Electricity Generating Authority of Thailand (EGAT). We can extract incremental profitability with minimal additional cost from these assets where we can achieve economies of scale. Besides we are also rationalising our Small Power Producer (SPP) portfolio to improve their efficiency and to pursue synergies across their business units to drive operational improvement. By reviewing our assets we have decided to divest our non-core business which includes the water project EGCOM TARA Co. Ltd. (ET). Our expansion strategies are to seek opportunities to grow our market share in both Thailand and neighbouring countries with cross border electricity sale to EGAT. We have concentrated on developing or acquiring high quality IPP projects in which our selection will be based on project economies with acceptable project risk and return. Currently our electricity operating capacity is approximately 2,426 MW excluding 3 big projects that are still under development as follows: 1. KEGCO Expansion. Recently included in PDP 2003 as a capacity increase of 385 MW this project will involve a gas-fired power plant which is expected to have commercial startup in January 2007. 2. Bo Nok power plant project of Gulf Power Generation Co. Ltd. This project which has a 25-year PPA and in which EGCO has a 30% stake through Gulf Electric Public Co. Ltd. (GEC) has been changed to a gas-fired power plant. The company is in the process of selecting a new site. The project will commence operation in March 2008. 3. Nam Theun 2 Power Co. Ltd. (NTPC). This project is a 1,070 MW hydroelectricity power plant (25% EGCO stake). Its 25-year PPA was initially scheduled to be signed on July 18 2003 however due to the press release of the decision to withdraw by Electricite de France International (EDFI) who holds 35% stake in the project (the decision to withdraw is in line with EDFI strategy to consolidate its assets and to refocus its priority in Europe). The ongoing sponsors of this project are currently to seek other suitable alternatives. Regarding our dividend policy we continue to follow the policy of paying dividends twice a year at approximately 40% of net profit or not less than the previous year's amount of Baht 2.50 Baht per share. Dividend will be paid regularly while the long-term value-creating investment plan of the company will be observed. 2. Report and Analysis of the Operating Results EGCO is structured as a holding company that invests in integrated electricity generation business as well as energy service business. The main sources of its income are dividends and the share of revenues and profits from investments in its subsidiaries joint ventures and associates. The objective of the structure is to provide flexibility to expand its businesses and to raise the ability to efficiently manage its subsidiaries' projects as well as the ability to finance new projects with non-recourse to existing ones. This report contains the analysis of the financial statements of EGCO and its subsidiaries as follows: 2.1 Operational Results EGCO's consolidated net profit for the first half of 2003 as of June 30, 2003 was Baht 3,075 million an increase of Baht 803 million or 35% compared to the same period of 2002. Unit : M Baht Net Profit - 1H03 Net Profit - 1 H02 Before FX After FX Before FX After FX EGCO (136) (136) (455) (455) IPP Group 2,609 2,771 1,938 2,357 SPP Group 179 272 78 191 Overseas 125 123 77 102 Others 45 45 77 77 Remark - IPP : REGCO , KEGCO - SPP: GEC , APB , TLP Cogen , Roi-Et Green - Overseas : Conal - Others : ESCO , EGCOM TARA The net profit for the first half of 2003 included an unrealized foreign exchange gain of Baht 251 million whereas the company incurred a foreign exchange gain of Baht 557 million in the same period of last year.A foreign 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 equivalent amount using the foreign exchange rate at the end of this accounting period (June 30, 2003) and the previous period (December 31, 2002).Excluding the effect of foreign currency exchange gain the net profit was Baht 2,823 million an increase of Baht 1,108 million or 65% over the same period last year.Important Financial Ratios for the period were as follows; - Gross Profit Ratio was 59%. - Net Profit Ratio (excluding the effect of foreign exchange) was 35%. - Earnings (excluding the effect of foreign exchange) per share (EPS) was Baht 5.36 The net profit (excluding the effect of foreign exchange) margin of 35% was higher than last year's margin of 27% primarily as a result of the higher rate of increase in revenues which increased by 27% compared to expenses which increased by 13%. 2.2 Income Analysis In the first half of 2003 the total revenues of EGCO its subsidiaries as well as the share of profits from its associates and interest in joint ventures were Baht 8,043 million an increase of Baht 1,708 million or 27% compared to the same period in 2002. The details are as follows: Total Revenues: Unit : Million Baht 1H03 1H02 %Changes EGCO 122 199 (38%) IPP Group 5,097 4,854 5% SPP Group 2,053 566 263% Overseas 531 511 4% Others 239 205 17% 1)EGCO's Revenues amounting to Baht 122 million represented a decrease of Baht 76 million or 38% from the same period last year which was a result of a decrease in return on financial investment with less depositsand lower interest rate as well as the share of development expenses of Nam Thuen 2 Project (Nam Thuen 2 Electicity Consortium or NTEC) which amounted to Baht 17 million. 2) Revenues from the IPP Group consisting of two principal subsidiaries the Rayong Electricity Generating Co.,Ltd. (REGCO) and the Khanom Electricity Generating Co., Ltd. (KEGCO) were Baht 5,097 Baht. The details are as follows: * Sales of electricity was Baht 4,972 million representing an increase of Baht 279 million or 6% compared to the same period of last year. The increase was derived from the sales from REGCO of Baht 728 million while the sales from KEGCO decreased by Baht 449 million in accordance with the capacity payment formula calculated on a Cost Plus Basis under the PPAs and was in line with the company's projection. Sales of Electricity - IPP Group: Unit : Million Baht 1H03 1H02 %Changes REGCO 3,013 2,285 32% KEGCO 1,959 2,408 (19%) The PPAs cover the full amount of the projected fixed costs debt financing charges and major maintenance charges which are used in calculating the electricity tariffs for each period. Moreover the calculation of the capacity payment is adjusted to include compensation of the exchange rate effect from debt service and expenses of major maintenance parts denominated in US Dollar. 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 vice versa. In the first half of 2003 REGCO and KEGCO received compensation for the exchange rate effect of Baht 421 million. * Interest income and others amounted to Baht 124 million decreasing by Baht 36 million or 23% mainly from REGCO's reduction in interest rate and less deposits at banks and financial institutions as funds were used to pay down loans. 3) Revenues from the SPP Group were Baht 2,053 million an increase of Baht 1,488 million or 263%. The SPP Group incorporates four companies Gulf Electric Public Co.,Ltd. (GEC) and the Amata Power Bangpakong Co.,Ltd. (APB) TLP Cogeneration Co., Ltd.(TLP Cogen) and Roi-Et Green Co.,Ltd. (Roi-Et Green). The details are as follows: * Sales of electricity of the SPP Group were Baht 2,007 million representing an increase of Baht 1,492 million or 290% compared to the same period of last year. Sales of Electricity - SPP Group: Unit : Million Baht 1H03 1H02 %Changes GEC 1,299 397 227% TLP Cogen 567 - - APB 136 117 16% Roi-Et Green 5 - - The major factors which led to this sharp increase were the electricity sales of NKCC and SCC the subsidiaries of GEC since the revenues from these two companies were firstly realized in November 2002 as well as the electricity sales from TLP Cogen and Roi-Et Green which were firstly realized after the completion of their construction in January and April of this year respectively. * Interest income and others amounted to Baht 12 million increasing by Baht 7 million mainly from GEC's interest income. * Share of profit of associates and joint ventures totaled Baht 36 million down Baht 12 million or 25% mainly from AEP. 4) Revenues from the Overseas Group were Baht 531 million an increase of Baht 20 million or 4% compared to the same period of 2002. The overseas group refers to the CONAL Holdings Corporation (CONAL). The details are as follows: * Sales of electricity of the overseas group were Baht 508 million an increase of Baht 23 million or 5% compared to the same period last year according to an increase of electricity production. * Interest income and others amounted to Baht 23 Baht decreasing by Baht 3 million or 12%. 5) Revenues from the Other Business Group were Baht 239 million increasing by Baht 34 million or 17%. The other business group includes two subsidiaries the EGCO Engineering and Services Co., Ltd. (ESCO) and EGCO M TARA Co., Ltd. (EGCOM TARA). The details are as follows: Revenues from group of other business - Others: Unit : Million Baht 1H03 1H02 % Changes Service Income - ESCO 168 138 22% Sales of Water - EGCOM TARA 68 61 12% * Service income from ESCO amounted to Baht 168 million an increase of Baht 30 million or 22% resulting from an increase of operation and maintenance (O&M) services. * Sales of water from a subsidiary EGCOM TARA was Baht 68 million up by Baht 7 million due to an increase of water price under the Water Purchase Agreement and were in line with the company's projection. * Interest income and others amounted to Baht 3 million decreasing by Baht 1 million or 20%. 2.3 Expenses Analysis Total expenses from EGCO its subsidiaries and joint ventures in the first half of year 2003 was Baht 5,042 million an increase of Baht 582 million or 13% from the same period of last year. The details are as follows. Total Expenses: Unit : Million Baht 1H03 1H02 % Change EGCO 258 654 (61%) IPP Group 2,488 2,916 (15%) SPP Group 1,860 487 282% Overseas 251 281 (10%) Others 185 123 51% 1) Total expenses of EGCO were Baht 258 million a significant decrease from last year by Baht 362 million mainly due to a large decrease in administration expenses. The administrationexpenses were Baht 188 million a reduction of Baht 367 million since in the same period of last year there were a write-off of expenses Baht 342 million from the Bo Nok project investment and the loss of Baht 38 million on foreign exchange exposure in a forward transaction. Other expenses of Baht 70 million were interest expenses a decrease of Baht 28 million or 29% as a result of the interest swap on EGCO debenture. 2) The IPP Group's expenses were Baht 2,488 million a decrease of Baht 429 million or 15% due to the following reasons; * Cost of sales with the total of Baht 1,316 million decreased by Baht 319 million or 20% compared to the same period of 2002. This was mainly due to the decrease at REGCO and KEGCO with the amount of Baht 165 million and Baht 155 million respectively. Cost of Sales - IPP Group: Unit : Million Baht 1H03 1H02 %Changes REGCO 727 892 (18%) KEGCO 589 744 (21%) * Administration expenses and other expenses were Baht 102 million an increase of Baht 2 million or 2% * Interest expenses were Baht 1,070 million a decrease of Baht 111 million or 9% resulting from the decrease in interest expenses at REGCO and KEGCO of Baht 67 million and Baht 44 respectively due to lower principal amounts. 3) The SPP Group's expenses were Baht 1,860 million an increase of Baht 1,373 million or 282% according to the following reasons; * Cost of Sales were Baht 1,601 million an increase of Baht 1,200 million or 299% mainly driven by an increase of cost of sales at GEC. An increase of Baht 708 million was from NKCC SCC which was consistent with their increased sales of electricity. Moreover the cost of sales from TLP Cogen APB and Roi-Et Green increased by Baht 473 million Baht 12 million and Baht 8 million respectively. Cost of Sales - SPP: Unit : Million Baht 1H03 1H02 %Changes GEC 1,023 315 224% TLP Cogen 473 - - APB 98 86 13% Roi-Et Green 8 - - * Administration expenses and other expenses were 82 million an increase of Baht 42 million or 102% mainly from GEC administration expenses of Baht 40 million. * Interest expenses were Baht 177 million an increase of Baht 132 million or 292% mainly driven by the increase in interest expenses at GEC of Baht 89 million resulting from the increase of investment in NKCC an d SCC projects. For TLP Cogen and Roi-et Greeen due to the increase of loan drawndown their interest expenses increased Baht 43 million and Baht 1 million respectively. The interest expenses of APB decreased Baht 2 million due to lower principal amount. 4) The Overseas Group's expenses were Baht 251 million a decrease of Baht 29 million or 10% compared to the same period of 2002 due to the following reasons; * Cost of Sales were Baht 107 million a decrease of Baht 27 million or 20% as compared to the same period last year. This was resulted from a leverage of Northern Mindanoa Power Corporation (NMPC)'s depreciation cost according to an increase of electricity production. * Administration expenses and other expenses were Baht 100 million an increase of Baht 16 million or 19%. * Interest expenses were Baht 44 million a decrease of Baht 18 million or 29% due to lower principal amount. 5) The Other Business Group's expenses were Baht 185 million an increase of Baht 62 million or 51% due to the following reasons; * Service costs were Baht 118 million an increase of Baht 55 million or 86% resulting from an increase in operation and maintenance (O&M) services of ESCO to customers which was consistent with the increase in ESCO revenue. * Cost of water sales of EGCOM Tara was Baht 28 million an increase of Baht 1 million or 4% * Administration expenses and other expenses were Baht 30 million an increase of Baht 10 million or 51% driven by the increase of Baht 11 million at ESCO offset by the decrease of Baht 1 million at EGCOM Tara. * Interest expenses were Baht 9 million a decrease of Baht 4 million or 28% resulting from the lower principal amount as well as the lower interest rate at EGCOM Tara. 3. Report and Analysis of Financial Position 3.1 Asset Analysis As at June 30, 2003 total assets of EGCO its subsidiaries associates and joint ventures amounted to Baht 56 837 million increasing by Baht 964 million or 2% from December 31, 2002. The important details are as follows: 1) Cash deposit at banks and financial institutions and short term and long term marketable securities were Baht 6,314 million or 11% of the total assets an increase of Baht 812 million or 15%. The increase was mainly from operation in the amount of Baht 2,971 million and the financing activities from the drawdown of loans of TLP Cogen and Roi-Et Green and from refinancing the loans of NKCC and SCC totaling Baht 3,074 million. On the other hand there were loans and debentures repayment and dividend payment totaling Baht 5,082 million. 2) Short-term and long-term investments used as collateral were Baht 10 015 million or 18% of the total assets. The investments were down Baht 396 million or 4% due to the debt repayment at REGCO and KEGCO partly with the cash reserve of debt repayment in US Dollars in the amount of USD 123 million. 3) Investment in subsidiaries and associates and interests in joint ventures amounted to Baht 884 million or 2% of the total assets up by Baht 62 million or 8%. The reasons of such increase were the increase of i nvestment in Nam Theun II of Baht 42 million and the share of profits from AEP and AMESCO of Baht 37 million whereas the share of development expense of Nam Thuen 2 Project (Nam Thuen 2 Electicity Consortium or NTEC) which amounted to Baht 17 million. 4) Property plant and equipment totaled Baht 31,435 million or 55% of total assets. They were down Baht 598 million or 2% because of the depreciation of assets of EGCO and group companies for the 6-month period of Baht 1,128 million and the translation adjustments of Baht 52 million. On the other hand assets were up from the construction of TLP Cogen and Roi-Et Green by Baht 378 million and Baht 148 million respectively. 5) Other assets were Baht 8,188 million or 14% of the total assets up Baht 1,084 million or 15% mainly from the increase of trade accounts receivable of Baht 54 million trade accounts receivable from related companies (mainly from EGAT) of Baht 632 million and spare parts and supplies of Baht 257 million. 3.1 Liability Analysis As at June 30, 2003 the company's total liabilities were Baht 33 190 million down Baht 1,735 million or 5% as a result of the loans and debentures repayment at EGCO REGCO and KEGCO. The liabilities consisted of the following: 1) Long-term loans and debentures totaled Baht 30,831 million or 93% of total liabilities down Baht 1,613 million or 54%. The details are as follows; - USD loans in the amount of USD 415 million - Yen loans in the amount of Yen 873 million - Philippine Peso loans in the amount of Peso 119 million - Baht loans in amount of Baht 4,085 million - Debentures in the amount of Baht 8,911 million During the first half of 2003 the repayment at EGCO REGCO and KEGCO in the amount of Baht 1,680 million resulted in lower Baht loans and USD loans compared to the end of last year. On the other hand the amount of loans denominated in Yen were up Baht 74 million which was due to the loan drawdown for the construction of Roi-Et Green. 2) Other liabilities amounted to Baht 2,359 million mostly resulted from interest payable bank overdrafts and short-term loans trade accounts payable value added tax payable dividend payable and long-term loans from another shareholder of GEC. The company is committed to administering its obligation in compliance with good corporate governance. 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 June 30, 2003 the company had a reserve fund of Baht 400 million and an additional allocation of Baht 104 million is in the process. 3.4 Shareholders' Equity Analysis As at June 30, 2003 Shareholders' Equity (excluding minority interest and treasury stock) amounted to Baht 22,970 million which was Baht 2,694 million higher than the amount as at December 31, 2002. This was due mainly to the profits from operation during the first half of 2003. The analysis of the company's capital structure as at June 30, 2003 is summarized as follows: Shareholders' equity was Baht 23,647 million or 42%. Liabilities were Baht 33,190 million or 58%. Important financial ratios were as follows; - Debt to equity ratio was 1.40 times lower than 1.67 times at the end of last year. - Book value per share was Baht 45.02 higher than Baht 39.89 at the end of last year. 4. Report and Analysis of Cash Flow Position Cash Flow Statement shows the change in cash flows from operating activities investing activities and financing activities at the end of the accounting period and indicates the ending balance of the cash and the cash equivalents. As at June 30, 2003 the ending balance of the cash and the cash equivalent was Baht 2,753 million up by Baht 479 million from the end of 2002. The details of the sources and uses of funds are as follows; -Net cash received from operating activities totaled Baht 2,971 million from the net profit for the first half of 2003 adjusted with non-cash items and other non-relating operatingactivities. Cash flows from operation were Baht 4,066 million before the change in operating assets and liabilities of Baht 1 095 million. Most of the changes was due to trade accounts receivable and trade receivable from a related party of Baht 677 million (from electricity sales of REGCO KEGCO TLP Cogen and Roi-Et Green whose major customer was EGAT). Spare parts and supplies increased in the amount of Baht 267 million. -Net cash payment for investing activities was Baht 326 million. Baht 80 million was for the net purchase of short-term and long-term investments. Some was spent on the construction of TLP Cogen and Roi-Et Green of Baht 172 million and Baht 107 million respectively. The company also received dividends from Eastern Water Resources Development and Management Public Co. Ltd. (EASTW) and the Krung Thai Dividend Selected Flexible Portfolio Fund (KTSF) of Baht 36 million and Baht 65 million respectively. - Net cash payment for financing activities was Baht 2,162 million mainly due to the long-term loans and debentures repayment of EGCO REGCO KEGCO in the amount of Baht 635 million Baht 767 million and Baht 591 million respectively. Moreover EGCO also paid dividend of Baht 832 million. Meanwhile loan drawdown from TLP Cogen and Roi-Et Green increased by Baht 322 million and Baht 82 million respectively whereas therefinancing of loans from GEC for NKCC and SCC led to the net increase in loans of Baht 469 million. 9