REPORT to our stockholders

from your Chairman

Dear shareholders and friends,

Your company continues to perform credibly amid challenging times. Over the last three years, it has registered an annual compounded growth rate of 22%. This respectable growth is a testament to your company’s commitment to stay focused on its core competencies and more importantly to keep alive its corporate culture of excellence, integrity, trust and fairness to all stakeholders.

Good business strategy and a passion to execute have time and again proven to be the cornerstone of world-class companies that have succeeded in fine-tuning the delicate balance between growth and stability. Since AEV went public 10 years ago, your company has never ceased to be passionate about strengthening its foundation.

For AEV, the years 2001 and 2002 were marked by high growth. In 2003, your company introduced initiatives to strengthen its foundation for long-term sustainable growth. Your President and COO will share details of these strategic initiatives in the succeeding pages and how these have made an impact on your company’s performance, and how these will affect our future. You will find highlights of the same in the Features section of this report.

We have reason to be proud. Your company was again ranked by Asiamoney Magazine as among the best managed companies in the Philippines for 2003. AEV was named the 2nd best small cap company, keeping the same position it occupied in the 2002 poll. An equally significant recognition was the higher average share price in 2003 compared to previous years.

I salute and thank all our team members for making AEV what it is today. To our customers and business partners, and to you, our valued shareholders, thank you for your continued trust and confidence.

Luis A. Aboitiz Jr.

Chairman of the Board

REPORT to our stockholders

from your CEO & COO

In 2003, the Philippine eco n o my experienced decent yet unspectacular growth, with a GDP increase of about 4. 5%, led by the service and agriculture sectors. Both inflation and interest rates stayed at relatively low levels but a growing public sector budget deficit and a higher unemployment rate are still causes for concern.

Amid challenging conditions and following two years of high growth, your company performed credibly in 2003 where the overriding strategy was stability in preparation for future growth.

In 2003, our efforts to create long-term value focused on strengthening the foundations for our long-term growth. Several strategic initiatives were introduced across AEV’s core businesses of power, banking, transport and food.

POWER

Aboitiz Power Repositioning. Our power companies underwent structural changes in 2003 to further strengthen their competitive position as the industry is ushered into an exciting period of deregulation. Given this outlook, Aboitiz Power Corporation was repositioned to hold purely generation assets, which are classified as the unregulated part of the business.

Meanwhile, distribution investments, considered the regulated side, were moved back to AEV, including consulting service company Aboitiz PowerSolutions. With this set-up, Aboitiz Power will have greater flexibility to raise capital as a separate business unit and to partner with investors interested in power generation. We anticipate that the potentially large investments in the future, which may require partnerships or other affiliations, will be in power generation.

A key initiative was the conclusion of a Memorandum of Agreement for a supplemental water project that would increase Luzon Hydro Corporation’s (LHC) power production by about 25%. Since LHC will continue to rely on its existing contract with National Power Corporation, there will be no market risk involved. The project is expected to be operational in the third quarter of 2005. LHC likewise completed a rigorous IPP contract review and renegotiations initiated by the Philippine Government and ended up largely unscathed.

Hedcor’s initiative, on the other hand, was working at and earning two more ISO certifications, and making continuous improvements in plant availability and turbine efficiency. This augurs well for Hedcor as it strengthens its ‘Cleanergy’ brand to conform to world-class standards for quality and ecological harmony.

Better Margin Management with Rate Unbundling. Looking forward, we hope to be able to effect our unbundled rates for all our distribution utilities in 2004, and we expect the finalization of the rate unbundling cases to have a positive effect on our distribution utilities as a whole. It would likewise put to rest a lot of regulatory uncertainty that was created because of delayed decisions.

Towards the end of 2003, the power distribution group received the rate unbundling decisions for Davao Light and Power Company (DLPC) and San Fernando Electric Light and Power Company (SFELAPCO). DLPC was granted its rate increase of 19 centavos per kwhr while SFELAPCO’s rates on average will remain the same. The unbundling of Visayan Electric Company’s (VECO) rates happened earlier but implementation has been deferred due to certain issues that need refinements and clarifications. Cotabato Light and Power Company’s (CLPC) rate unbundling will complete the process for the distribution group. Decisions for both VECO and CLPC are expected soon.

Maximized Sub-Transmission Assets and Systems Efficiency. In 2003, DLPC started to enjoy returns on the use of sub-transmission assets. It also completed a state-of-the-art customer management system that bolstered productivity. SFELAPCO is in the process of acquiring sub-transmission assets from Transco, and an adjacent franchise to expand its distribution system. The power plants of DLPC and CLPC provide us some relief in case of power shortages in the future.

VECO will have to improve its cost structure and reduce systems losses to improve earnings. It faces the most challenges in terms of improvements, along with external power supply problems. With a Shareholders Cooperation Agreement in place between the two major shareholders that allows increased AEV participation in both policy making and management, we are confident that VECO will overcome its current problems and gradually move towards improved efficiency and profitability. Our vision is to make this Cebuano company a world-class utility.

Trailblazer in the Privatization of Select Distribution Utilities. The power distribution group also pursued several opportunities to respond to Government’s invitation to privatize its many distribution assets. Their efforts were immediately met with success when an AEV and DLPC joint venture won the bid in May 2003 to manage the power distribution system of the Subic Bay Metropolitan Authority (SBMA) to rehabilitate, operate and transfer it over a 25-year period. SFELAPCO and Mirant Philippines are also our partners in the Subic EnerZone consortium.

BANKING

UBP’s key initiative in 2003 was to move into open systems to reduce its dependence on vendor support, and increase its ability to integrate different aspects of frontline service. The challenge for UnionBank now is how to top 2003Õs exceptional performance. For the bank, it is just another step towards focus 2010, its strategic objective of becoming a top 3 universal bank by the year

2010. It has revamped its marketing effort and correspondingly realigned its manpower complement. The bank will pursue what it calls a high-tech, high-touch customer strategy.

It will continue to manage costs as well as it has done in the past. We are very confident UnionBank will exceed its own 2003 performance. City Savings Bank (CSB) will continue to improve its profitability and expand its subsidiary CSB Finance as a low-cost growth vehicle.

TRANSPORT GROUP

Key initiatives were implemented in 2003 to prepare for future growth, in line with the goal of Aboitiz Transport System Corporation, formerly WG&A, Inc., to become a full e-business company. The first initiative was to continue undertaking e-investments in various application systems both for its front line systems and back-room support. The passage division forged an alliance with the Abacus network allowing on-line access for international passenger bookings for SuperFerry. It also expanded its Short Messaging System (SMS) ticketing capability to more retail outlets. This is projected to increase operation efficiency and help ATSC be the low-cost producer of quality services and products.

The second initiative was modernization. All ATSC vessels are being upgraded to luxurious, cruise-class standards to provide customers with the highest level of comfort, convenience, safety and reliability while creating an atmosphere of fun, hospitality and warmth.

The third initiative was expansion. Two more vessels, the SuperFerry 15 and 16, were added to the fleet of new generation ships in 2003. In January 2004, SuperFerry 19 was launched and SuperFerry 17 and 18 are scheduled to be operational by the second quarter of this year.

ATSC also aims to be a world-class freight transport enterprise. Taking the lead was the ISO 9001:2001 accreditation of the company’s terminal operations with a Certificate on Quality Management System. All theses initiatives are expected to improve both the freight and passage business and translate to a bigger share of the market and better margin, thus sustaining ATSC’s position of leadership and strength.

FOOD

Pilmico pursued four strategic initiatives in 2003 that will sustain its future growth. The first key initiative was the construction of three new silos effectively adding 28,000 metric tons (MT) of capacity, bringing total capacity to 65,000 MT for wheat storage. This new capacity gives Pilmico more flexibility to bring in larger vessels and store more wheat.

Second is the upgrading of Pilmico’s oldest mill to improve extraction rates. The third was the completion of the pier dredging, to accommodate larger Handymax vessels, enabling bigger wheat shipments, thus resulting in freight savings. The fourth initiative is the ISO-HACCP Registration, which began in the second quarter of 2003, with target certification by third quarter 2004.

CORPORATE SOCIAL RESPONSIBILITY

Through the Aboitiz Group Foundation, AEV and its subsidiaries, along with other Aboitiz companies, have been discharging this responsibility in the many communities where we do business. Our focus has been on education and livelihood projects where we try to provide opportunities rather than dole outs. Our programs aim to build strong partnerships with different local government units of our host communities, augment their limited resources and uplift the quality of education in areas where we operate. This is a testament of our commitment to good corporate citizenship, to help people who help themselves and to be the neighbor of choice.

OUTLOOK

As the challenges and uncertainty grow in complexity each year, we can only respond with even greater passion to continue to build on our core competencies with an aim of creating long-term value for all our stakeholders. The core strategies we pursued since AEV went public 10 years ago have remained the same Ð focus on customers, people and systems. The year 2003 was filled with initiatives to strengthen these strategies in order to secure our future growth.

We will continue to focus on our organization and empower our people to achieve our mission of being the preferred supplier of goods and services, and leading the industries we are involved in to world-class standards. We will continue to maintain a prudent stance in managing our debt, cash flow and future investments. And with this direct ion, we are confident we will continue to be recognized as one of Asia’s best companies. To our team members, we ascribe to you this honor and distinction. To our stockholders, partners and customers, thank you for your trust, confidence and support.

Jon Ramon Aboitiz

President / CEO

Erramon I. Aboitiz

EVP / COO