Management Discussion and Analysis Annual

Management Discussion and Analysis For the Annual Operating Results Ended December 31, 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 The Electricity Generating Public Company Limited (EGCO), the first Independent Power Producer (IPP) in Thailand, was established in 1992. Our vision is to be the leading Thai integrated electric power company offering comprehensive energy services in Thailand and in the Asean region, with full commitment to environmental protection and social development support. EGCO focuses on growing market share in Thailand and neighbouring countries by developing or acquiring IPPs that provide economies of scale with acceptable risk and return. At the same time, we proactively track, manage, and identify operational improvement opportunities in our Small Power Producers (SPP) in order to create greater operational efficiency across business units. We plan to divest our non-core businesses at appropriate prices under our investment policy. Thailand's new Electricity Supply Industry (ESI) framework proposed by the Ministry of Energy with the aim of enhancing efficiency in the country's electricity system received cabinet approval in December 2003. The new ESI framework, known as Enhanced Single Buyer (ESB) model, still has the Electricity Generating Authority of Thailand (EGAT) as the generator of electricity and controller of the electricity transmission system. Meanwhile, the Electricity Regulatory Commission (ERC) will be set up by the Ministry of Energy to be in charge of forecasting demand and supply of electricity, planning future investments, ensuring the security and reliability of power supply, and determining the optimal pricing of electricity. Therefore, we believe that the ERC will ensure fairness for future capacity approval based on competitive bidding process. Thailand's electricity demand in 2003 reported 8.6% growth over that of last year, which was higher than the projected demand growth of 6.9% according to EGAT's Power Development Plan (PDP) 2003. It is anticipated that the revised PDP 2003 will indicate lower minimum reserve margin, higher long-term energy demand and a need for more new capacity through 2015. As a result, the new ESI framework coupled with the expectation of higher electricity demand for the whole kingdom will provide opportunities for IPP companies, including EGCO, to expand in the future. Given our operational efficiency with over 11 years of experience in the electricity business, we are confident that we will be able to expand our market share in the new competitive bidding framework. Currently, EGCO has 12 operating plants totaling 2,426 equity MW, of which 84.7% is produced from two gas-fired IPP 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 our existing assets, our growth priorities will come from 3 major projects under development, representing an additional 1,003 equity MW as follows: 1) The expansion project at KEGCO, 385 MW natural gas-fired power plant, will be wholly owned by EGCO. This plant is scheduled to have commercial start up in January 2007 to meet some of the electricity shortfall in southern Thailand. EGCO is presently negotiating a Power Purchase Agreement (PPA) with EGAT and expects to conclude negotiation by 2004. 2) The Khaeng Khoi 2 (KK2) project, 700 MW natural gas-fired power plant in Saraburi province, was previously known as "the Bo Nok project". In December 2003, Gulf Electric Public Company Limited (GEC), 50% owned by EGCO, increased the stake in Gulf Power Generation Co.,Ltd (GPG), which is the developer of KK2, from 60% to 100%. This results in EGCO holding 50% stake in GPG. The project is scheduled to commence commercial operation in March 2008. Due to the expected shortfall in power supply in the northeast of Thailand, there is a possibility that this project will commence commercial operation earlier than the current schedule. 3) The Nam Theun 2 project, 1,070 MW hydroelectric power plant, in which EGCO has 25% stake. This project is targeted for commercial operation in the second half of 2009 with the contracted capacity to EGAT of 995 MW. In the absence of unforeseen circumstances, the Company intends to distribute approximately 40% of the available profits of the Company by way of dividend. This dividend policy may change in the light of investment opportunities that may become available to the Company or as a result of other economic or financial factors or when a dividend payment may have a significant impact on the normal operation of the company. 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 holding company structure is to provide flexibility for business expansion and to raise the ability to efficiently manage subsidiaries' projects as well as to finance new projects with non-recourse to existing ones. The Board of Directors has approved changing two principal accounting policies and the details are as follows: * Specific Spare Parts Policy: To follow Thailand's Energy Industry general practices, EGCO's Group has changed the accounting policy in respect of major repair and maintenance to record capital spare parts whose estimated useful life is more than 1 year on the replacement basis. Capital spare parts are capitalized and depreciated on the straight-line method over the estimated useful life when used in major repair and maintenance processes.Previously, capital spare parts used in major repair and maintenance processes were expensed when incurred. * Recording of Development Expense Policy: EGCO's group has adopted the provisions of Thai Accounting Standard (TAS) no.51: Intangible Assets, previously certain items recognized as separate assets in the Balance Sheet. With concrete practice specified in TAS 51, the recording of development expense is required to enhance the standardized report. These items mainly relate to development expenditure of Nam Theun 2 project and Bo Nok Project. Commencing in 2003, the new accounting policies will be adopted for EGCO's financial statements. The company has not restated the consolidated financial statements as at January 1,2003 as the net effect is not material. Therefore, the aforesaid expenses were adjusted in the 2003 financial statements as the details below; Unit: Million Baht Development Expenses Specific Spare Parts Net Effect NT2 Bo nok REGCO KEGCO GEC Upto 2003 (506) (273) 529 444 19 213 2003 (74) (45) 240 (47) 35 109 Total (580) (318) 769 397 54 322 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 2003, as of December 31, 2003, was Baht 5,994 million, an increase of Baht 3,035 million or 103% compared to 2002. Unit: Million Baht Net Profit of 2003 Net Profit of 2002 Before FX After FX Before FX After FX EGCO (50) (50) (692) (692) IPP Group 5,350 5,805 3,187 3,347 SPP Group 296 579 158 199 Overseas (416) (447) 44 18 Others 108 108 88 88 Remarks: - 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 2003 included an unrealized foreign exchange gain of Baht 707 million whereas the company incurred a foreign exchange gain of Baht 174 million in 2002. 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 (December 31, 2003) and the previous period (December 31, 2002). Excluding the effect of foreign currency exchange gain, the net profit was Baht 5,287 million, an increase of Baht 2,502 million or 90% over 2002. Important Financial Ratios for the period were as follows; - Gross Profit Ratio was 61%. - Net Profit Ratio (excluding the effect of foreign exchange) was 34%. - Earnings (excluding the effect of foreign exchange) per share (EPS) was Baht 10.07 The net profit (excluding the effect of foreign exchange) margin of 34% was higher than last year's margin of 23%, primarily as a result of the higher rate of increase in revenues, which increased by 30%, compared to expenses, which increased by 12%. 2.2 Income Analysis In 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 15,731 million, an increase of Baht 3,671 million or 30% compared to 2002. The details are as follows: Total Revenues: Unit: Million Baht 2003 2002 % Change EGCO 548 286 92% IPP Group 9,972 9,276 8% SPP Group 4,443 1,243 258% Overseas 334 880 (62%) others 434 375 16% 1) EGCO's Revenues, amounting to Baht 548 million, represented an increase of Baht 262 million or 92% from 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 9,972 million. The details are as follows: * Sales of electricity was Baht 9,742 million, representing an increase of Baht 779 million or 9% compared to last year. The increase was derived from the sales from REGCO of Baht 1,341 million while the sales from KEGCO decreased by Baht 562 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 2003 2002 % Change REGCO 5,947 4,605 29% KEGCO 3,796 4,358 (13%) 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 2003, REGCO and KEGCO received compensation for the exchange rate effect of Baht 1,012 million. * Interest income and others amounted to Baht 230 million, decreasing by Baht 84 million or 27%, mainly from REGCO and KEGCO's reduction in interest rate and less deposits at banks and financial institutions as funds were used to pay down loans, amounting to Baht 69 million. 3) Revenues from the SPP Group were Baht 4,443 million, an increase of Baht 3,200 million or 258% compared to 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 4,318 million, representing an increase of Baht 3,137 million or 266% compared to the same period of last year. Sales of Electricity - SPP Group: Unit: Million Baht 2003 2002 % Change GEC 2,622 937 180% TLP Cogen 1,335 - n/a APB 277 244 13% Roi-Et Green 84 - 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 May 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 67 million, increasing by Baht 56 million, mainly from GEC's other income and interest income increasing by Baht 55 million. * Share of profit of associates and joint ventures totaled Baht 58 million, up Baht 7 million or 15%, mainly from AEP. 4) Revenues from the Overseas Group were Baht 334 million, a decrease of Baht 546 million or 62% compared to 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 892 million, a decline of Baht 66 million or 7% compared to last year, resulting from transferring Northern Mindanao Power Corporation (NMPC), 58 MW, to National Power Corporation (NPC) in July 2003. * Interest income and others amounted to Baht 45 million, decreasing by Baht 3 million or 6%. * Share of expenses of associates and joint ventures totaled Baht 603 million, an increase of Baht 477 million or 380% as comparing to 2002. This resulted from the new accounting policy adjustment impacting the share of development expenses of Nam Theun 2 Project (Nam Theun 2 Electricity Consortium or NTEC) whereas the 2002 development cost was Baht 126 million. 5) Revenues from the Other Business Group were Baht 434 million, increasing by Baht 59 million or 16%. The other business group includes two subsidiaries, the EGCO Engineering and Service Co.,Ltd. (ESCO) and the EGCOM TARA Co., Ltd (EGCOM TARA). The details are as follows: Revenues from group of other business - Others: Unit: Million Baht 2003 2002 % Change Service Income - ESCO 283 237 19% Service of Water - EGCOM TARA 142 123 16% * Service income from ESCO amounted to Baht 283 million, up by Baht 46 million or 19% resulting from an increase of operation and maintenance (O&M) services with customers. * Sales of water from a subsidiary, EGCOM TARA, was Baht 142 million, up by Baht 19 million, or 16%, 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 9 million, decreasing by Baht 3 million or 27%, mainly from the decrease in ESCO's deposit and interest rate. * Share of expense of associates and joint ventures totaled Baht 1 million, increased by Baht 3 million or 129%, mainly from Agro Energy Co., Ltd.(AE). 2.3 Expenses Analysis Total expenses from EGCO, its subsidiaries and joint ventures in 2003 was Baht 10,141 million, an increase of Baht 1,102 million or 12% from last year. The details are as follows. Total Expenses: Unit: Million Baht 2003 2002 % Change EGCO 599 978 (39%) IPP Group 4,622 6,089 (24%) SPP Group 4,093 1,093 275% Overseas 520 603 (14%) others 306 276 11% 1) Total expenses of EGCO were Baht 599 million, a significant decrease from last year by Baht 379 million. The total expenses of EGCO included administration expenses, amounted to Baht 413 million, Bo Nok's written-off development expense of Baht 66 million (written-off development expense amounted to Baht 342 million in 2002) and interest expenses of Baht 120 million. Compared to 2002, the general administration expenses, excluding development expenses, were down by Baht 23 million or 6% and interest expenses decreased by Baht 80 million or 40% as a result of interest rate swap and a reduction of the principal of EGCO debenture. 2) The IPP Group's expenses were Baht 4,622 million, a decrease of Baht 1,467 million or 24% due to the following reasons: * Cost of sales, with the total of Baht 2,218 million, decreased by Baht 1,279 million or 37% compared to 2002, mainly from an impact of new Accounting Policy to KEGCO and REGCO bringing down the cost of sales of KEGCO and REGCO by Baht 777 and 501 million respectively. Cost of Sales - IPP Group: Unit: Million Baht 2003 2002 % Change REGCO 1,312 1,813 (28%) KEGCO 907 1,684 (46%) * Administration expenses and other expenses were Baht 340 million, an increase of Baht 112 million or 49%, mainly from REGCO's first corporate tax payment amounting to Baht 133 million. Since the REGCO's BOI Tax Privilege ended on April 19, 2003, the 50% Corporate Tax Reduction will be applied for the next 5 years, ended April 19, 2008. * Interest expenses were Baht 2,064 million, a decrease of Baht 300 million or 13%, resulting from the decrease in interest expenses at REGCO and KEGCO of Baht 166 million and Baht 135 million respectively, owing to lower principal amounts. 3) The SPP Group's expenses were Baht 4,093 million, an increase of Baht 3,001 million or 275%, according to the following reasons: * Cost of Sales were Baht 3,335 million, an increase of Baht 2,432 million or 269%, mainly driven by an increase of cost of sales at GEC, amounting to Baht 1,294 million. An increase of Baht 1,294 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 1,056 million, Baht 59 million and Baht 23 million respectively. Cost of Sales - SPP: Unit: Million Baht 2003 2002 % Change GEC 2,022 728 178% TLP Cogen 1,056 - n/a APB 199 175 13% Roi-Et Green 59 - n/a * Administration expenses and other expenses were 410 million, an increase of Baht 325 million or 378%, mainly from Bo Nok's written-off development cost amounting to Baht 147 million, impairment expenses of Bo Nok's land amounted to Baht 104 million and expenses of GEC, owing to NKCC and SCC, amounted to Baht 65 million. * Interest expenses were Baht 348 million, an increase of Baht 244 million or 237%, mainly driven by the increase in interest expenses at GEC of Baht 147 million, resulting from the increase of investment in NKCC and SCC projects. For TLP Cogen and Roi-et Green, owing to an increase of loan drawndown, their interest expenses increased Baht 94 million and Baht 7 million respectively. The interest expenses of APB decreased Baht 4 million owing to lower principal amount. 4) The Overseas Group's expenses were Baht 520 million, a decrease of Baht 83 million or 14% compared to 2002, owing to the following reasons: * Cost of Sales were Baht 236 million, a decrease of Baht 93 million or 28% a compared to last year. This resulted from a decrease of Northern Mindanao Power Corporation (NMPC)'s depreciation cost caused by a lower forecasted electricity production and transferring NMPC, 58 MW, to NPC. * Administration expenses and other expenses were Baht 200 million, an increase of Baht 42 million or 27%. * Interest expenses were Baht 84 million, a decrease of Baht 32 million or 27% owing to lower principal amount. 5) The Other Business Group's expenses were Baht 306 million, an increase of Baht 30 million or 11%, owing to the following reasons: * Service costs were Baht 171 million, an increase of Baht 29 million or 20%, resulting from an increase of ESCO's operation and maintenance (O&M) services to customers which was consistent with its revenue. * Cost of water sales of EGCOM Tara was Baht 56 million, an increase of Baht 1 million or 2% which was in line with an increase of EGCOM TARA revenue. * Administration expenses and other expenses were Baht 64 million, an increase of Baht 8 million or 15%, mostly from ESCO's corporate income tax payment amounted to Baht 26 million, and offset by the decrease of Baht 2 million, or 13%, at EGCOM Tara. * Interest expenses were Baht 16 million, a decrease of Baht 8 million or 34%, 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 December 31, 2003, total assets of EGCO, its subsidiaries, associates and joint ventures amounted to Baht 56,437 million, increasing by Baht 613 million or 1% 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 7,815 million or 14% of the total assets, up Baht 2,314 million or 42%, resulting mostly from Operating Activities. This was categorized by an increase of Baht 1,373 million in Deposit at banks and financial institutions, an increase of Baht 1,083 million in long-term investments in marketable securities and others, an increase of Baht 402 million in short-term marketable securities whereas the cash and cash equivalent were down by Baht 544 million. 2) Short-term and long-term investments used as collateral were Baht 9,954 million or 18% of the total assets. The investments were down Baht 458 million or 4% due to REGCO and KEGCO's loans repayment with the partial cash reserve of debt repayment in US Dollars in the amount of USD 71 million. 3) Investment in subsidiaries and associates and interests in joint ventures amounted to Baht 369 million or 0.66% of the total assets, down by Baht 453 million or 55%. This resulted from the acknowledgement of written-down investment in Nam Theun 2 owing to the new accounting policy which amounted to Baht 603 million whereas the new investment in Nam Theun 2 of Baht 91 million was injected this year. Another is AEP, up by Baht 58 million from shares of profit of subsidiaries. 4) Property, plant and equipment totaled Baht 31,543 million or 56% of total assets. They were down Baht 491 million or 2% because of the depreciation of assets of EGCO and group companies of Baht 2,960 million,the disposals and transfer of Baht 144 million and and the translation adjustments of Baht 180 million whereas an increase amounted to Baht 1,804 million was primarily from capitalisation of capital spare parts owing to new accounting policy. Moreover, an increase of Baht 990 million was mainly from newly purchased land totaling Baht 132 million (GEC - Baht 107 million, TLP Cogen - Baht 19 million, Roi-Et Green - Baht 5 million), the construction of TLP Cogen,Roi-Et Green and GEC totaling Baht 376 million, Baht 174 million and Baht 183 million respectively and the construction of ESCO's workshop totaling Baht 47 million and others of Baht 77 million. 5) Other assets were Baht 6,755 million or 12% of the total assets, down Baht 300 million or 4% mainly from the decrease of trade accounts receivable from related companies (mainly from EGAT) of Baht 366 million and other non-current assets of Baht 100 million. 3.1 Liability Analysis As at December 31, 2003, the company's total liabilities were Baht 29,736 million, down Baht 5,141 million or 15% 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 27,913 million, or 94% of total liabilities, down Baht 5,008 million or 15%. The details are as follows: - USD loans in the amount of USD 388 million - Yen loans in the amount of Yen 1,028 million - Philippine Peso loans in the amount of Peso 106 million - Baht loans in the amount of Baht 4,115 million - Debentures in the amount of Baht 8,005 million In 2003, the amount of loans denominated in USD, Baht and Peso, including Debenture decreased by Baht 5,132 million compared to 2002. This resulted from principal repayment by EGCO, REGCO, KEGCO, Conal, EGCOM TARA, and APB as well as GEC's refinancing. On the other hand, the amount of loan denominated in Yen was up Baht 150 million, which was due to the loan for the construction of Roi-Et Green. 2) Other liabilities amounted to Baht 1,823 million or 6% of total liabilities, mostly resulted from bank overdrafts and short-term loans of Baht 320 million, trade accounts payable of Baht 617 million, interest payable of Baht 161 million, value added tax payable of Baht 154 million and others of Baht 571 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 December 31, 2003, the company had a reserve fund of Baht 500 million and an additional allocation of Baht 83 million is in the process. 3.4 Shareholders' Equity Analysis As at December 31, 2003, Shareholders' Equity (excluding treasury stock) amounted (more)