Management Discussion and Analysis Quarter 3

Management Discussion and Analysis For the Nine-month Period Operating Results Ended September 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 A marked upgrade in Thai economic growth forecasts over the past few months has raised expectations of greater demand for energy in Thailand. The Electricity Generating Public Company Limited (EGCO), the first independent private power producer, is in a prime position to benefit from this projected surge in demand. EGCO's corporate vision is to be the leading Thai integrated electric power company with comprehensive energy services in Thailand and in the ASEAN region, fully committed to environmental protection and social development support. Our strategy is to focus on investment expansion in Thailand where there is high energy demand. Moreover, EGCO searches for business opportunities in Thailand's neighboring countries with cross border electricity sales to the Electricity Generating Authority of Thailand (EGAT) under long-term Power Purchase Agreements (PPA). We intend to expand our market by developing or acquiring Independent Power Producers (IPP) that present greater opportunities for economies of scale and are our traditional area of expertise. Our current plan with respect to Small Power Producers (SPP) is to realign our ownership structure to improve operational synergies across business units. This will help reduce costs by sharing resources in terms of spare parts, maintenance, and management. Discussions are underway to reach agreement on a new alignment with EGCO's partners in these ventures. We have classified some of our assets, including our stake in a water company, EGCOM Tara Co., Ltd. (EGCOM TARA), as non-core businesses that fall outside EGCO's core competencies. We plan to divest these assets provided appropriate prices can be obtained. Although Thailand's regulatory regime for allocating new capacity beyond 2010 is not yet clear, it is expected that EGCO will continue to play a strong role in the Thai electricity industry, given its 11 years of experience in the business and its close relationship with EGAT, the major shareholder of EGCO. Currently, our electricity operating capacity is about 2,426 MW of which 62.4% is produced from two gas-fired power plants: the 1,232 MW Rayong Electricity Generating Co., Ltd. (REGCO) plant and the 824 MW Khanom Electricity Generating Co., Ltd. (KEGCO) plant. Apart from existing assets, our growth will come from three major projects under development as follows: 1) The expansion project at KEGCO, which is wholly owned by EGCO, has already been included in EGAT's 2003 Power Development Plan. This 385 MW natural gas-fired power plant is scheduled to have commercial start up in January 2007. EGCO is currently negotiating a PPA with EGAT and hopes to conclude negotiations by the first quarter of 2004. 2) The Khaeng Khoi 2 Project. This project used to be named "The Bo Nok Project. "The 700 MW natural gas plant in which EGCO's stake amounts to 30% will be subject to a 25-year PPA and will commence operation in March 2008. The company is in the process of selecting a new site. The PPA has to be renegotiated to include relocation costs and the construction cost of a gas-fired power plant instead of a coal-fired power plant. 3) The Nam Theun 2 Project. This project is a 1,070 MW hydroelectric power plant, in which EGCO has a 25% stake. Owing to the announced intention of Electricite de France International (EDFI), one of the project partners holding 35% equity stake, to withdraw, the 25 year PPA signing for this project was delayed for 4 months from its original signing date on July 18, 2003. However, EDFI has recently reversed its decision to withdraw from Nam Theun 2 Project and the PPA has been signed on November 8, 2003. It is targeted for commercial operation date in the second half of 2009 with the contracted capacity to EGAT of 995 MW. Regarding our dividend policy, EGCO is committed to pay dividends twice a year at approximately 40% of net profit or not less than the previous year's amount of Baht 2.50 per share. The company intends to pay dividends regularly while achieving its long-term value-creating investment plan. 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 nine months period of 2003, as of September 30, 2003, was Baht 4,831 million, an increase of Baht 2,029 million or 72% compared to the same period of 2002. Net Profit - 9M03 Net Profit - 9M02 Before FX After FX Before FX After FX EGCO 45 45 (588) (588) IPP Group 3,653 4,062 2,863 2,997 SPP Group 259 521 118 152 Overseas 160 127 121 112 Others 76 76 99 99 Remark - IPP : REGCO , KEGCO - SPP : GEC , AEP , APB , TLP Cogen , Roi-Et Green - Overseas : Conal , Nam Theun 2 - Others : ESCO , EGCOM TARA The net profit for the first nine months of 2003 included an unrealized foreign exchange gain of Baht 639 million whereas the company incurred a foreign exchange gain of Baht 158 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 (September 30, 2003) and the previous period (December 31, 2002).Excluding the effect of foreign currency exchange gain, the net profit was Baht 4,192 million, an increase of Baht 1,548 million or 59% over the same period last year. Important Financial Ratios for the period were as follows; - Gross Profit Ratio was 56%. - Net Profit Ratio (excluding the effect of foreign exchange) was 34%. - Earnings (excluding the effect of foreign exchange) per share (EPS) was Baht 7.98. The net profit (excluding the effect of foreign exchange) margin of 34% was higher than last year's margin of 28%, primarily as a result of the higher rate of increase in revenues, which increased by 32%, compared to expenses, which increased by 21%. 2.2 Income Analysis In the first nine months of 2003, the total revenues of EGCO and its subsidiaries as well as the share of profits from its associates and interest in joint ventures were Baht 12,276 million, an increase of Baht 2,974 million or 32% compared to the same period in 2002. The details are as follows: Total Revenues: Unit : Million Baht 9M03 9M02 %Changes EGCO 411 231 78% IPP Group 7,628 7,200 6% SPP Group 3,231 824 292% Overseas 721 753 (4%) Others 285 294 (3%) 1) EGCO's Revenues, amounting to Baht 411 million, represented an increase of Baht 180 million or 78% from the same period last year, substantially driven by dividends received from Krung Thai Dividend Selected Flexible Portfolio Fund (KTSF). 2) Revenues from the IPP Group, consisting of two principal subsidiaries, REGCO and KEGCO, were Baht 7,628 million. The details are as follows: * Sales of electricity was Baht 7,453 million, representing an increase of Baht 476 million or 7% compared to the same period of last year. The increase was derived from the sales from REGCO of Baht 1,060 million while the sales from KEGCO decreased by Baht 584 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 9M03 9M02 %Changes Unit : Million Baht REGCO 4,503 3,442 31% KEGCO 2,950 3,534 (17%) 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 services 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 nine months of 2003, REGCO and KEGCO received compensation for the exchange rate effect of Baht 799 million. * Interest income and others amounted to Baht 174 million, decreasing by Baht 50 million or 22%, 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 3,231 million, an increase of Baht 2,407 million or 292% compared to the same period in 2002. The SPP Group incorporates five companies, Gulf Electric Public Co.,Ltd. (GEC), Amata-EGCO Power Co.,Ltd. (AEP), 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 3,171 million, representing an increase of Baht 2,394 million or 308% compared to the same period of last year. Sales of Electricity - SPP Group: Unit : Million Baht 9M03 9M02 %Changes GEC 1,973 597 230% TLP Cogen 944 - n/a APB 208 180 16% Roi-Et Green 46 - n/a The major factors which led to this sharp increase were the electricity sales of Nongkhae Cogeneration Co.,Ltd (NKCC) and Samutprakarn Cogeneration Co.,Ltd (SCC), the subsidiaries of GEC, were firstly realized in November 2002, as well as the electricity sales from TLP Cogen and Roi-Et Green were firstly realized after the completion of their construction in January and April of this year, respectively. Moreover, APB received an increase of electricity sales from customers in the industrial park. * Interest income and others amounted to Baht 16 million, increasing by Baht 9 million, mainly from GEC's interest income of Baht 11 Million while the interest income and others from APB TLP Cogen and Roi-Et Green were decreased by Baht 2 Million. * Share of profit of associates and joint ventures totaled Baht 44 million, up Baht 3 million or 7%, mainly from AEP. 4) Revenues from the Overseas Group were Baht 721 million, a decrease of Baht 32 million or 4% compared to the same period of 2002. The overseas group refers to the CONAL Holdings Corporation (CONAL) and Nam Theun 2 Electricity Consortium (NTEC). The details are as follows: * Sales of electricity of the overseas group were Baht 712 million, a decline of Baht 5 million or 1% compared to the same period last year, resulting from a decrease in electricity production. * Interest income and others amounted to Baht 32 million, decreasing by Baht 4 million or 12%. * Share of expenses of associates and joint ventures totaled Baht 23 million, up Baht 23 million, wholly from the share of development expenses of Nam Theun 2 Project (Nam Theun 2 Electricity Consortium or NTEC). 5) Revenues from the Other Business Group were Baht 285 million, decreasing by Baht 8 million or 3%. The other business group includes two subsidiaries, the EGCO Engineering and Service Co.,Ltd. (ESCO) and EGCOM TARA. The details are as follows: Revenues from group of other business - Others: Unit : Million Baht 9M03 9M02 %Changes Service Income - ESCO 173 191 (10%) Sales of Water - EGCOM TARA 105 92 14% * Service income from ESCO amounted to Baht 173 million, a decline by Baht 18 million or 10% resulting from a reduction of operation and maintenance (O&M) services. * Sales of water from a subsidiary, EGCOM TARA, was Baht 105 million, up by Baht 13 million, or 14%, thanks to an increase of both water tariff and sales quantity under the Water Purchase Agreement, which were in line with the company's projection. * Interest income and others amounted to Baht 6 million, decreasing by Baht 1 million or 15%. * Share of profit of associates and joint ventures totaled Baht 1 million, dropped by Baht 2 million or 65%, mainly from Amata Power-Esco Service Co.,Ltd. (AMESCO) and Agro Energy Co.,Ltd.(AE). 2.3 Expenses Analysis Total expenses from EGCO, its subsidiaries and joint ventures in the first nine months of 2003 was Baht 7,822 million, an increase of Baht 1,346 million or 21% from the same period of last year. The details are as follows. Total Expenses: Unit : Million Baht 9M03 9M02 %Changes EGCO 366 788 (54%) IPP Group 3,975 4,337 (8%) SPP Group 2,936 713 312% Overseas 351 451 (21%) Others 195 186 5% 1) Total expenses of EGCO were Baht 366 million, a significant decrease from last year by Baht 423 million, mainly due to a large decrease in administration expenses. The administration expenses were Baht 268 million, a reduction of Baht 364 million, since in the same period of last year, there was a write-off of expenses of Baht 342 million from the Bo Nok project investment, and the loss of Baht 38 million on foreign exchange exposure in a forward transaction. The other expense of Baht 97 million was interest expense which showed a decrease of Baht 60 million or 38% as a result of interest rate swap and a reduction of the principal of EGCO debenture. 2) The IPP Group's expenses were Baht 3,975 million, a decrease of Baht 363 million or 8% due to the following reasons: * Cost of sales, with the total of Baht 2,265 million, decreased by Baht 150 million or 6% compared to the same period of 2002, mainly from reduced maintenance schedule of KEGCO. Whereas REGCO increased by Baht 111 million from a major overhaul this year. Cost of Sales - IPP Group: Unit : Million Baht 9M03 9M02 %Changes REGCO 1,366 1,255 9% KEGCO 899 1,160 (23%) * Administration expenses and other expenses were Baht 138 million, a decrease of Baht 2 million or 2% * Interest expenses were Baht 1,572 million, a decrease of Baht 211 million or 12%, resulting from the decrease in interest expenses at REGCO and KEGCO of Baht 119 million and Baht 92 million, respectively, owing to lower principal amounts. 3) The SPP Group's expenses were Baht 2,936 million, an increase of Baht 2,223 million or 312%, according to the following reasons: * Cost of Sales were Baht 2,554 million, an increase of Baht 1,964 million or 333%, mainly driven by an increase of cost of sales at GEC. An increase of Baht 1,144 million was from NKCC and SCC, which was consistent with their increased sales of electricity. Moreover, the cost of sales from TLP Cogen, Roi-Et Green and APB increased by Baht 767 million, Baht 33 million and Baht 20 million, respectively. Cost of Sales - SPP: Unit : Million Baht 9M03 9M02 %Changes GEC 1,604 460 249% TLP Cogen 767 - n/a APB 150 130 16% Roi-Et Green 33 - n/a * Administration expenses and other expenses were 118 million, an increase of Baht 58 million or 97%, mainly from GEC administration expenses of Baht 53 million. * Interest expenses were Baht 265 million, an increase of Baht 201 million or 315%, mainly driven by the increase in interest expenses at GEC of Baht 131 million, resulting from the increase of investment in NKCC and SCC projects. For TLP Cogen and Roi-et Greeen, owing to the increase of loan drawndown, their interest expenses increased Baht 69 million and Baht 4 million, respectively. The interest expenses of APB decreased Baht 3 million owing to lower principal amount. 4) The Overseas Group's expenses were Baht 351 million, a decrease of Baht 100 million or 22% compared to the same period of 2002, owing to the following reasons: * Cost of Sales were Baht 141 million, a decrease of Baht 106 million or 43% as compared to the same period last year. This resulted from a decrease of Northern Mindanao Power Corporation (NMPC)'s depreciation cost, caused by a lower forecasted electricity production. * Administration expenses and other expenses were Baht 145 million, an increase of Baht 30 million or 26%. * Interest expenses were Baht 65 million, a decrease of Baht 24 million or 27% owing to lower principal amount. 5) The Other Business Group's expenses were Baht 195 million, an increase of Baht 9 million or 5%, owing to the following reasons: * Service costs were Baht 94 million, a decrease of Baht 5 million or 5%, resulting from less operation and maintenance (O&M) services of ESCO to customers which was consistent with the decline in ESCO revenue. * Cost of water sales of EGCOM Tara was Baht 42 million, an increase of Baht 2 million or 5% which was in line with an increase of EGCOM TARA revenue. * Administration expenses and other expenses were Baht 46 million, an increase of Baht 18 million or 65%, mostly from ESCO's first corporate income tax payment amounting to Baht 20 million, and offset by the decrease of Baht 1 million at EGCOM Tara. * Interest expenses were Baht 12 million, a decrease of Baht 6 million or 32%, 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 September 30, 2003, total assets of EGCO, its subsidiaries, associates and joint ventures amounted to Baht 58,139 million, increasing by Baht 2,266 million or 4% from December 31, 2002. The important deta ils are as follows: 1) Cash, deposit at banks and financial institutions, and short term and long term marketable securities were Baht 6,823 million or 12% of the total assets, up Baht 1,321 million or 24%. The increase mainly result ed from Operating Activities in the amount of Baht 3,662 million, offset by a decrease in Investing Activities, amounting to Baht 674 million, caused by EGCO's investment in Financial Instruments, construction in TLP Cogen, Roi-Et Green and GEC. And the Financing Activities brought down an amount of Baht 2,419 million, as a result of loans and debentures repayment and dividend payment, offset by the drawdown of loans of TLP Cogen, and Roi-Et Green and from refinancing the loans of NKCC and SCC. 2) Short-term and long-term investments used as collateral were Baht 11,308 million or 19% of the total assets. The investments were up Baht 897 million or 9% with the cash reserve of debt repayment in US Dollars in the amount of USD 136 million. 3) Investment in subsidiaries and associates and interests in joint ventures amounted to Baht 916 million or 2% of the total assets, up by Baht 94 million or 11%. This resulted from an increase of investment in Nam Theun 2, which amounted to Baht 70 million and the share of profits from AEP and AMESCO, which amounted to Baht 45 million while the share of expenses of Nam Theun 2 amounted to Baht 23 million. 4) Property, plant and equipment totaled Baht 30,953 million or 53% of total assets. They were down Baht 1,081 million or 3% because of the depreciation of assets of EGCO and group companies for the nine months period of Baht 1,699 million and the translation adjustments of Baht 155 million. On the other hand, assets were up from the construction of TLP Cogen, Roi-Et Green and GEC by Baht 379 million, Baht 174 million, and Baht 145 Million, respectively. 5) Other assets were Baht 8,139 million or 14% of the total assets, up Baht 1,050 million or 15% mainly from the increase of trade accounts receivable of Baht 39 million, trade accounts receivable from related companies (mainly from EGAT) of Baht 686 million and spare parts and supplies of Baht 195 million. 3.1 Liability Analysis As at September 30, 2003, the company's total liabilities were Baht 33,166 million, down Baht 1,759 million or 5% as a result of loans and debentures repayment at EGCO, REGCO and KEGCO. The liabilities consisted of the following: 1) Long-term loans and debentures totaled Baht 30,026 million, or 91% of total liabilities, down Baht 2,418 million or 7%. The details are as follows: - USD loans in the amount of USD 413 million - Yen loans in the amount of Yen 893 million - Philippine Peso loans in the amount of Peso 116 million - Baht loans in the amount of Baht 4,167 million - Debentures in the amount of Baht 8,911 million During the first nine months of 2003, the repayment at EGCO, REGCO and KEGCO in the amount of Baht 2,418 million resulted in lower Baht loans and USD loans outstanding compared to the end of last year. On the other hand, the amount of loans denominated in Yen were up Baht 89 million, which was due to the loan drawdown for the construction of Roi-Et Green and loan drawdown of TLP Cogen. 2) Other liabilities amounted to Baht 3,140 million or 9%, mostly resulted from interest payable, bank overdrafts and short-term loans of Baht 842 million, trade accounts payable of Baht 512 million, interest payable of Baht 679 million, value added tax payable of Baht 160 million, dividend payable of Baht 25 million, and others of Baht 433 million. 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 September 30, 2003, the company had a reserve fund of Baht 400 million and an additional allocation of Baht 105 million is in the process. 3.4 Shareholders' Equity Analysis As at September 30, 2003, Shareholders' Equity (excluding minority interest and treasury stock) amounted to Baht 24,972 million, which was Baht 4,025 million higher than the amount as at December 31, 2002. This was due mainly to the profits from operation during the first nine months of 2003. The analysis of the company's capital structure as at September 30, 2003 is summarized as follows: Shareholders' equity was Baht 24,972 million or 43%. Liabilities were Baht 33,166 million or 57%. Important financial ratios were as follows; - Debt to equity ratio was 1.33 times, lower than 1.67 times at the end of last year. - Book value per share was Baht 47.55, 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 September 30, 2003, the ending balance of the cash and the cash equivalent was Baht 2,834 million, up by Baht 559 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 3,662 million from the net profit for the first nine months of 2003 adjusted with non-cash items and other non-operating activities. Cash flows from operation were Baht 5,866 million before the change in operating assets and liabilities of Baht 2,204 million. Most of the changes was due to reserve of cash for debt repayment in US Dollars for REGCO, KEGCO and GEC amounting of Baht 1,324 million and the increase in trade accounts receivable and trade receivable from a related party of Baht 736 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 209 million. -Net cash payment for investing activities was Baht 674 million. Baht 324 million was for the net purchase of short-term and long-term investments. The amount spent on the construction of TLP Cogen and Roi-Et Green was Baht 310 million and Baht 111 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 324 million, respectively. - Net cash payment for financing activities was Baht 2,419 million, mainly owing to long-term loans and debentures repayment by EGCO, REGCO, KEGCO in the amount of Baht 635 million, Baht 788 million and Baht 591 million, respectively. Moreover, EGCO also paid dividends of Baht 1,284 million. Meanwhile, EGCO obtained a loan to lend as sponsor loan to GEC for repayment of GEC's short-term loan amounting to Baht 434 million. ESCO's capital reduction amounted to Baht 100 million. Loan drawdown from TLP Cogen and Roi-Et Green increased by Baht 406 million and Baht 89 million, respectively, while GEC's refinancing of loans for NKCC and SCC led to the net increase in loans of Baht 367 million.