Management Discussion and Analysis Quarter 3

Management Discussion and Analysis For the Nine-month Period Operating Results Ended September 30, 2004 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 objective 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 in the form of a holding company. Our vision statement is to be the leading Thai integrated electric power company providing comprehensive energy services in Thailand and in the ASEAN region, with full commitment to environment protection and social development support. EGCO seeks to expand our market share through developing or acquiring IPP projects in Thailand and in the Asean region. We invest in well-structured projects taking into consideration our area of expertise, projects' economies of scale with acceptable return and risk profile. EGCO focuses on achieving sustainable long-term growth for the company while having strong management and good corporate governance. As at the end of October 2004, Thailand's total generating capacity was reported at 26,040 MW /1, of which 9.1% of the total capacity was generated by EGCO. In 2004 the peak demand reached 19,326 MW /2 in March, which was 6.65% higher than the peak demand in May 2003. According to the Electricity Generating Authority of Thailand (EGAT)'s Power Development Plan (PDP 2004), Thailand will require 18 units of new power stations together with renewble energy or Renewable Portfolio Standard (RPS) of 5% of the future additional capacity (approximately 13,230 MW in total generating capacity /2) to be on line during 2011-2015. Therefore, we expect the new capacity bidding to occur in the near future; this will create a good opportunity for EGCO to expand our capacity. Currently, EGCO has 12 operating plants totaling 2,414 equity MW, of which 85% is produced from two natural 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. In addition to our existing assets, we are developing 3 projects, representing an additional 1,012 equity MW as follows: 1. The Kaeng Khoi 2 (KK2) project, 1,468 MW natural gas-fired power plant in Saraburi Province, previously 700 MW and former known as "Bo Nok project." EGCO holds 50% stake in this project. Gulf Power Generation Co., Ltd. (GPG), the project developer, recently signed the 25-year Power Purchase Agreement (PPA) with EGAT on October 28, 2004. The commercial operation dates (COD) for unit 1 and unit 2 with the capacity of 734 megawatts each are scheduled on March 1, 2007 and March 1, 2008, respectively. 2. The Nam Theun 2 project, 1,070 MW hydroelectric power plant in Laos PDR, in which EGCO has 25% stake. The PPA was signed in November 2003. This project is targeted for COD in the second half of 2009 with the contracted capacity to EGAT of 995 MW. Presently, this project is in the stage of acquiring financial support from Thai and international banks as well as multilateral agencies. 3. The Gulf Yala Green Project (EGCO holds shares through Gulf Electric Public Co.Ltd. in the percentage of 47.5%), 23 MW parawood-fuel biomass power plant in Yala Province. EGCO holds shares through Gulf Electric Public Co., Ltd. in the percentage of 47.5%. The project has already started construction with the targeted COD in August 2005. 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. /1 Source: Electricity Generating Authority of Thailand (EGAT). /2 Source: EGAT's Power Development Plan 2004-2015 (PDP 2004) 2. Report and Analysis of the Operating Results EGCO is structured as a holding company investing 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. During 2003, the Group has adopted Thai Accounting Standard No. 51: "Intangible Assets" and has changed two principal accounting policies, Specific Spare Parts Policy and Recording of Development Expense Policy. For the purpose of presenting the interim consolidated and company financial statements for the nine-month period ended September 30, 2003, retrospective adjustments, including the cumulative effect, have been accounted for in the interim consolidated and company financial statements for the nine-month period ended September 30, 2003. The effect of these changes on the consolidated and company balance sheets as at September 30, 2003 and the related consolidated and company statements of income for the nine-month period ended September 30, 2003 are as follows: September 30, 2003 Consolidated Company Baht'000 Baht'000 Balance sheets Increase in investments in subsidiaries - 1,105,644 Decrease in interests in joint ventures, net (558,710) (846,782) Increase in spare parts and supplies, net 2,831 - Increase in property, plant and equipment, net 1,102,813 - Decrease in other non-current assets, net (288,072) - Increase in retained earnings as at September 30, 2003 258,862 258,862 Statements of income Decrease in cost of sales 1,105,644 - Increase in administrative expenses (117,590) - Increase in impairment charge (170,482) (66,133) Increase (decrease) in share of profit of subsidiaries and joint ventures(588,710) 324,995 Increase in net profit 258,862 258,862 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-month, as of September 30, 2004, was Baht 3,801 million, a decrease of Baht 1,290 million or 25% compared to the same period of the year 2003. Unit: Million Baht Net Profit 9M04 Net Profit 9M03 Before FX After FX Before FX After FX EGCO 157 171 45 45 IPP Group 3,571 3,391 4,703 5,112 SPP Group 256 96 26 289 Overseas72 64 (399) (431) Others 80 80 76 76 Remarks: - IPP : REGCO, KEGCO - SPP : GEC, AEP, APBP, TLP Cogen, Roi-Et Green - Overseas : Conal, Nam Theun 2 - Others : ESCO, EGCOM TARA The net profit for first nine-month of 2004 included an unrealized foreign exchange loss of Baht 335 million whereas the company incurred a foreign exchange gain of Baht 639 million in the same period of 2003. 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, 2004) and the previous period (December 31, 2003). Excluding the effect of foreign currency exchange, the net profit was Baht 4,136 million, representing a decrease of Baht 315 million or 7% as compared to the same period of 2003. Without the impact of the new accounting policy amounting to Baht 213 million, foreign currency exchange and tax amounting to Baht 382 million, the net profit of EGCO Group for the first nine-month of 2004 was Baht 4,518 million, an increase of Baht 221 million or 5% compared to the same period of 2003. Important Financial Ratios for the period were as follows; - Gross Profit Ratio was 55%. - Net Profit Ratio (excluding the effect of foreign exchange) was 33%. - Earnings (excluding the effect of foreign exchange) per share (EPS) was Baht 7.88 The net profit margin (excluding the effect of foreign exchange) of 33% was lower than last year's margin of 38%, primarily resulted from the change in the accounting policy in 2003. If excluded the impact of accounting policy, the net profit margin was 35% 2.2 Income Analysis In 2004, the total revenues of EGCO and its subsidiaries for the first nine-month as well as the share of profits from its associates and interest in joint ventures were Baht 12,604 million, an increase of Baht 887 million or 8% compared to same period of 2003. The details are as follows: Total Revenues: Unit: Million Baht 9M2004 9M2003 %Changes EGCO 439 411 7% IPP Group 7,664 7,628 0.48% SPP Group 3,539 3,231 10% Overseas 573 162 253% Others 388 285 36% 1) EGCO's Revenues, amounting to Baht 439 million, represented an increase of Baht 29 million or 7% from last year, driven mostly by an increase of interest income Baht 30 million, an increase of dividend income from financial investments Baht 10 million whereas other income dropped by Baht 12 million. EGCO's revenues are essentially from dividend from Krung Thai Dividend Selected Flexible Portfolio Fund (KTSF), amounted to Baht 334 million representing an increase of Baht 5 million as comparing to the same period of 2003; dividends from marketable securities of Baht 40 million, up by Baht 4 million; and interest income of Baht 58 million, up by Baht 30 million as a result of interest received from shareholder loans to GEC and Nam Theun 2 amounted to Baht 14 million and Baht 11 million, respectively; in addition bank deposits earned an interest of Baht 33 million. Other revenue amounted to Baht 7 million, a decrease by Baht 12 million. 2) Revenues from the IPP Group, consisting of two principal subsidiaries, REGCO and KEGCO, were Baht 7,664 million. The details are as follows: * Sales of electricity was Baht 7,537 million, representing a decrease of Baht 84 million or 1% compared to last year. The decrease was a net effect from a fall in REGCO's electricity sales of Baht 421 million caused by a decrease of the Capacity Rate, which was partially offset by an increase of Baht 505 million in KEGCO's electricity sales due to an increased Base Availability Credit. This was in accordance with the capacity payment formula calculated on a "Cost Plus Basis" under the PPAs and in line with the company's projection. Sales of Electricity - IPP Group: Unit: Million Baht 9M2004 9M2003 %Changes REGCO 4,082 4,503 (9%) KEGCO 3,455 2,950 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-month of 2004, REGCO and KEGCO received compensation for the exchange rate effect of Baht 791 million. * Interest income and others amounted to Baht 127 million, a decrease by Baht 47 million or 27%, mainly from REGCO and KEGCO's lower interest rates and less deposits at banks and financial institutions as funds were used to pay down loans, which caused a drop in return of Baht 39 million. 3) Revenues from the SPP Group were Baht 3,539 million, an increase of Baht 308 million or 10% compared to 2003. The SPP Group incorporates five companies, Gulf Electric Public Co.,Ltd. (GEC), Amata-EGCO Power Ltd. (AEP), Amata Power Bangpakong Ltd. (APBP), 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 3,499 million, representing an increase of Baht 328 million or 10% compared to the same period of last year. Sales of Electricity - SPP Group: Unit: Million Baht 9M2004 9M2003 %Changes GEC 1,971 1,973 (0.10%) TLP Cogen 1,216 944 29% APBP 212 208 2% Roi-Et Green 101 46 117% The major factor, which led to an increase of sales in the SPP group was an increase of electricity sales at TLP Cogen and Roi-Et Green, whose revenues were firstly realized after the completion of their construction in January 28 and May 29, 2003, respectively. TLP Cogen and Roi-Et Green's revenues increased by Baht 272 million and Baht 54 million, respectively. * Interest income and others amounted to Baht 21 million, increased by Baht 5 million. * Share of profit of associates and joint ventures was from AEP totaling Baht 19 million, which decreased by Baht 25 million as compared to the same period of 2003 due to scheduled major maintenance. 4) Revenues from the Overseas Group were Baht 573 million, an increase of Baht 411 million compared to the same period of 2003. The overseas group refers to the CONAL Holdings Corporation (CONAL) and Nam Theun 2 Power Co., Ltd (NTPC). The details are as follows: * Sales of electricity of the overseas group were Baht 560 million, a decline of Baht 152 million or 21% compared to the same period of last year, resulting from the transfer of 58 MW at Northern Mindanao Power Corporation (NMPC) to National Power Corporation (NPC) in July 2003. * Interest income and others amounted to Baht 37 million, an increase of Baht 5 million or 16%. * Share of expenses of associates and joint ventures totaled Baht 24 million, a decrease of Baht 558 million as compared to the same period of 2003. This resulted from the new accounting policy adjustment which had an impact of Baht 506 million on the share of development expenses of Nam Theun 2 Project prior to 2003. 5) Revenues from the Other Business Group were Baht 388 million, an increase by Baht 102 million or 36%. 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 9M2004 9M2003 % Changes Service Income - ESCO 260 173 50% Sales of Water - EGCOM TARA 118 105 12% * Service income from ESCO amounted to Baht 260 million, up by Baht 87 million or 50%, resulting mostly from an increase of operation and maintenance (O&M) services to Elgali 2 Power Plant in Sudan. * Sales of water from a subsidiary, EGCOM TARA, was Baht 118 million, up by Baht 13million, or 12%, 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 8 million, an increase by Baht 1 million or 23%, mainly from ESCO's other revenues. * Share of profit of associates and joint ventures totaled Baht 3 million, an increase by Baht 2 million, mainly from Amata Power Esco Service Co.,Ltd (Amesco) whereas the Agro Energy Co.,Ltd (AE)'s share of loss amounted to Baht 0.49 million causing the investment in AE to be zero . 2.3 Expenses Analysis Total expenses from EGCO, its subsidiaries and joint ventures in the first nine-month of 2004 were Baht 8,292 million, an increase of Baht 1,287 million or 18% from the same period of last year. The details are as follows. Total Expenses: Unit: Million Baht 9M2004 9M2003 % Changes EGCO 282 366 (23%) IPP Group 4,094 2,925 40% SPP Group 3,243 3,169 2% Overseas384 351 9% Others 289 195 48% 1) Total expenses of EGCO were Baht 282 million, a decrease from the same period of last year by Baht 83 million, as a result of lower interest expenses from a reduction in the principal of EGCO debenture. The total expenses of EGCO included administration expenses totaling Baht 239 million and interest expenses of Baht 43 million. The administrative expense was down Baht 29 million or 11%. 2) The IPP Group's expenses were Baht 4,094 million, an increase of Baht 1,169 million, mainly a result of the new accounting policy. The details are as follows: * Cost of sales, with the total of Baht 2,251 million, an increase by Baht 1,036 million or 85% compared to 2003, mainly from the impact prior to 2003 of the new accounting policy on REGCO and KEGCO bringing up the cost of sales of REGCO and KEGCO by Baht 549 million and Baht 487 million, respectively. Excluding the impact of the new accounting policy prior to 2003, the cost of sales of REGCO and KEGCO increased by Baht 20 million and Baht 44 million due to major maintenance. Cost of Sales - IPP Group: Unit: Million Baht 9M2004 9M2003 %Changes REGCO 1,268 719 76% KEGCO 983 496 98% * Administration expenses and other expenses were Baht 459 million, an increase of Baht 321 million or 232%, mainly from REGCO's corporate tax payment amounting to Baht 300 million. From April 20, 2003 onwards, the 50% Corporate Tax Reduction has become effective for the next 5 years, ending on April 19, 2008. The REGCO's BOI Tax Privilege had been effective for 8 years, from the date of the receipt of operating revenues to April 19, 2003. * Interest expenses were Baht 1,384 million, a decrease of Baht 188 million or 12%, resulting from the decrease in interest expenses at REGCO and KEGCO of Baht 104 million and Baht 84 million, respectively, owing to lower principal amounts. 3) The SPP Group's expenses were Baht 3,243 million, an increase of Baht 75 million or 2%, according to the following reasons: * Cost of Sales were Baht 2,787 million, an increase of Baht 289 million or 12%, substantially driven by an increase in cost of sales of TLP Cogen amounting to Baht 138 million, which was consistent with their increased sales of electricity and an increase of GEC amounting to Baht 125 million, resulted from major maintenance and the impact of new accounting policies. An increase of Roi-Et Green and APBP's cost of sales amounted to Baht 22 million and Baht 3million, respectively, which was consistent with their increased sales of electricity. Cost of Sales - SPP: Unit: Million Baht 9M2004 9M2003 %Changes GEC 1,674 1,548 8% TLP Cogen 904 767 18% APBP 153 150 2% Roi-Et Green 56 33 66% * Administration expenses and other expenses were 240 million, a decrease of Baht 166 million or 41%, substantially from GEC that was down by Baht 188 million. The new accounting policy caused an expense write-off prior to 2003 at Bo Nok that amounted to Baht 103 million and there were impairment expenses of Bo Nok's land and goodwill that amounted to Baht 170 million. Excluding the impact of the new accounting policy, GEC's administration and other expenses increased by Baht 85 million. TLP Cogen's administration and other expenses were up Baht 21 million, in line with an increase in electricity sales firstly recognised from January 28, 2003 onwards. * Interest expenses were Baht 217 million, a decrease of Baht 48 million or 18%, mainly driven by the decrease in interest expenses at GEC of Baht 49 million, resulting from lower principal and interest rates thanks to the refinancing of certain loans. For Roi-et Green, owing to an increase of loan drawndown, its interest expenses increased by Baht 6 million whereas the interest expenses of APBP decreased by Baht 1 million owing to lower principal amount. 4) The Overseas Group's expenses were Baht 384 million, an increase of Baht 33 million or 9% compared to 2003, owing to the following reasons: * Cost of Sales were Baht 127 million, a decrease of Baht 14 million or 10% as compared to last year. This resulted from a decrease of Northern Mindanao Power (more)