[GRAPHIC OMITTED]
HUANENG POWER INTERNATIONAL, INC.
[GRAPHIC OMITTED]
Annual Report On Form 20-F
2004
As filed with the Securities and Exchange Commission on April 15, 2005
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission file number: 1-13314
[GRAPHIC OMITTED]
HUANENG POWER INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
----------------------------------
PEOPLE'S REPUBLIC OF CHINA
(Jurisdiction of incorporation or organization)
----------------------------------
WEST WING, BUILDING C, TIANYIN MANSION,
2C, FUXINGMENNAN STREET, BEIJING, PEOPLE'S REPUBLIC OF CHINA
(Address of principal executive offices)
----------------------------------
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Name of each exchange
Title of Each Class on which registered
------------------- -------------------
Ordinary American Depositary Shares.................. New York Stock Exchange
Overseas Listed Foreign Shares of RMB1.00 each....... New York Stock Exchange*
----------------------------------
Securities registered or to be registered pursuant to Section 12(g) of the Act.
NONE
(Title of Class)
----------------------------------
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
NONE
(Title of Class)
----------------------------------
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
Domestic Shares of RMB1.00 each............................ 9,000,000,000
Overseas Listed Foreign Shares of RMB1.00 each............. 3,055,383,440
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes |X| No [ ]
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 |X| Item 18 [ ]
_______________
* Not for trading, but only in connection with the registration of American
Depositary Shares.
===============================================================================
TABLE OF CONTENTS
Page
PART I.......................................................................................................1
ITEM 1 Identity of Directors, Senior Management and Advisers.........................................1
ITEM 2 Offer Statistics and Expected Timetable.......................................................1
ITEM 3 Key Information...............................................................................1
A. Selected Financial Data.........................................................................1
B. Capitalization and Indebtedness.................................................................4
C. Reasons for the offer and use of proceeds.......................................................4
D. Risk factors....................................................................................4
ITEM 4 Information on the Company....................................................................9
A. History and development of the Company..........................................................9
B. Business overview...............................................................................9
C. Organizational Structure.......................................................................16
D. Property, plants and equipment.................................................................18
ITEM 5 Operating and Financial Review and Prospects.................................................31
A. Operating results..............................................................................34
B. Liquidity and cash resources...................................................................53
C. Trend information..............................................................................57
D. Performance of significant investments and their prospects.....................................59
E. Employee benefits..............................................................................59
F. Related party transactions.....................................................................60
G. Guarantees on loans............................................................................60
H. Off-balance Sheet Arrangements.................................................................60
I. Tabular Disclosure of Contractual Obligations and Commercial Commitments.......................60
ITEM 6 Directors, Senior Management and Employees...................................................62
A. Directors, members of the supervisory committee and senior management..........................62
B. Compensation of Directors and Officers.........................................................65
C. Board Practice.................................................................................65
D. Employees......................................................................................66
E. Share Ownership................................................................................67
ITEM 7 Major Shareholders and Related Party Transactions............................................68
A. Major shareholders...............................................................................
B. Related party transactions.....................................................................69
C. Interests of experts and counsel...............................................................72
ITEM 8 Financial Information........................................................................73
A. Consolidated Statements and Other Financial Information........................................73
B. Significant Changes............................................................................73
ITEM 9 The Offer and Listing........................................................................74
ITEM 10 Additional Information.......................................................................75
A. Share Capital..................................................................................75
B. Memorandum and articles of association.........................................................75
C. Material Contracts.............................................................................75
D. Exchange controls..............................................................................75
E. Taxation.......................................................................................76
F. Dividends and paying agents....................................................................81
G. Statement by experts...........................................................................81
H. Documents on display...........................................................................81
I. Subsidiary Information.........................................................................81
i
J. Comparison of New York Stock Exchange Corporate Governance Rules and China Corporate Governance Rules For Listed
Companies......................................................................................81
ITEM 11 Quantitative and Qualitative Disclosures About Market Risk...................................84
ITEM 12 Description of Securities Other than Equity Securities.......................................85
PART II.....................................................................................................86
ITEM 13 Defaults, Dividend Arrearages and Delinquencies..............................................86
ITEM 14 Material Modifications to the Rights of Security Holders and Use of Proceeds.................86
ITEM 15 Controls and Procedures......................................................................86
ITEM 16 [Reserved]...................................................................................86
ITEM 17 Financial Statements.........................................................................88
ITEM 18 Financial Statements.........................................................................88
ITEM 19 Exhibits.....................................................................................88
ii
INTRODUCTION
We maintain our accounts in Renminbi yuan ("Renminbi" or "RMB"), the
lawful currency of the People's Republic of China (the "PRC" or "China").
References herein to "US$" or "US dollars" are to United States dollars, and
references to "HK$" are to Hong Kong dollars. References to ADRs and ADSs are
to American Depositary Receipts and American Depositary Shares, respectively.
Translations of amounts from Renminbi to US dollars are solely for the
convenience of the reader. Unless otherwise indicated, any translations from
Renminbi to US dollars or from US dollars to Renminbi were translated at the
average rate announced by the People's Bank of China (the "PBOC Rate") on
December 31, 2004 of US$1.00 to RMB8.2765. No representation is made that the
Renminbi or US dollar amounts referred to herein could have been or could be
converted into US dollars or Renminbi, as the case may be, at the PBOC Rate or
at all.
References to "A Shares" are to common shares issued to domestic
shareholders.
References to the "Company" include, unless the context requires
otherwise, Huaneng Power International, Inc. and the operations of our power
plants and our proposed projects.
References to "HIPDC" are to Huaneng International Power Development
Corporation and, unless the context requires otherwise, include the operations
of the Company prior to the formation of the Company on June 30, 1994.
References to the "central government" refer to the national government
of the PRC and its various ministries, agencies and commissions.
References to "Huaneng Group" are to China Huaneng Group Corporation.
References to the "key contracts" refer to coal purchase contracts
entered into between the Company and coal suppliers at the annual national
coal purchase conferences attended by, among others, representatives of power
companies, coal suppliers and railway authorities. These conferences were
coordinated and sponsored by NDRC. The Company enjoys priority railway
transportation services with respect to coal purchased under such contracts.
References to "local governments" in the PRC are to governments at all
administrative levels below the central government, including provincial
governments, governments of municipalities directly under the central
government, municipal and city governments, county governments and township
governments.
References to "power plants" or "our power plants" are to the power
plants that are wholly-owned by the Company or to the power plants in which
the Company owns majority equity interests.
References to the "PRC Government" include the central government and
local governments.
References to "provinces" include provinces, autonomous regions and
municipalities directly under the central government.
References to the "State Plan" refer to the plans devised and implemented
by the PRC Government in relation to the economic and social development of
the PRC.
References to "tons" are to metric tons.
Previously, the Overseas Listed Foreign Shares were also referred to as
the "Class N Ordinary Shares" or "N Shares". Since January 21, 1998, the date
on which the Overseas Listed Foreign Shares were listed on The Stock Exchange
of Hong Kong Limited by way of introduction, the Overseas Listed Foreign
Shares have been also referred to as "H Shares".
iii
GLOSSARY
actual generation The total amount of electricity
generated by a power plant over a given
period of time.
auxiliary power Electricity consumed by a power plant
in the course of generation.
availability factor For any period, the ratio (expressed as
a percentage) of a power plant's
available hours to the total number of
hours in such period.
available hours For a power plant for any period, the
total number of hours in such period
less the total number of hours
attributable to scheduled maintenance
and planned overhauls as well as to
forced outages, adjusted for partial
capacity outage hours.
capacity factor The ratio (expressed as a percentage)
of the gross amount of electricity
generated by a power plant in a given
period to the product of (i) the number
of hours in the given period multiplied
by (ii) the power plant's installed
capacity.
demand For an integrated power system, the
amount of power demanded by consumers
of energy at any point in time.
dispatch The schedule of production for all the
generating units on a power system,
generally varying from moment to moment
to match production with power
requirements. As a verb, to dispatch a
plant means to direct the plant to
operate.
excess output The amount by which the total output of
a power plant in a particular year
exceeds its planned output for such
year.
GW Gigawatt. One million kilowatts.
GWh Gigawatt-hour. One million
kilowatt-hours. GWh is typically used
as a measure for the annual energy
production of large power plants.
installed capacity The manufacturers' rated power output
of a generating unit or a power plant,
usually denominated in MW.
kV Kilovolt. One thousand volts.
kW Kilowatt. One thousand watts.
kWh Kilowatt-hour. The standard unit of
energy used in the electric power
industry. One kilowatt-hour is the
amount of energy that would be produced
by a generator producing one thousand
watts for one hour.
MVA Million volt-amperes. A unit of measure
used to express the capacity of
electrical transmission equipment such
as transformers.
iv
MW Megawatt. One million watts. The
installed capacity of power plants is
generally expressed in MW.
MWh Megawatt-hour. One thousand
kilowatt-hours.
Net Fixed Assets The annual average of the book value of
our fixed assets (less accumulated
depreciation) and construction work in
progress, each as determined in
accordance with PRC statutory
accounting principles.
peak load The maximum demand on a power plant or
power system during a specific period
of time.
planned generation An annually determined target gross
generation level for each of our
operating power plants used as the
basis for determining planned output.
total output The actual amount of electricity sold
by a power plant in a particular year,
which equals total generation less
auxiliary power.
transmission losses Electric energy that is lost in
transmission lines and therefore is
unavailable for use.
v
PART I
ITEM 1 Identity of Directors, Senior Management and Advisers
Not applicable.
ITEM 2 Offer Statistics and Expected Timetable
Not applicable.
ITEM 3 Key Information
A. Selected Financial Data
Our consolidated balance sheet data as of December 31, 2004 and 2003 and
the consolidated income statement and cash flow data for each of the years in
the three-year period ended December 31, 2004 are derived from the historical
financial statements included herein. Our consolidated balance sheet data as
of December 31, 2002, and balance sheet data of the Company as of December 31,
2001 and 2000 and income statement and cash flow data for each of the years in
the two-year period ended December 31, 2001, are derived from the historical
financial statements not included herein. The Selected Financial Data should
be read in conjunction with the consolidated financial statements and "Item 5
- Operating and Financial Review and Prospects". The financial statements have
been prepared in accordance with International Financial Reporting Standards
("IFRS") which differ from the generally accepted accounting principles in the
United States of America ("US GAAP").
In accordance with IFRS, we have adopted the acquisition method to
account for our acquisitions of power plants in 2003 and 2004. Accordingly,
the consolidated financial statements and, except as otherwise noted, all
other IFRS financial information presented in this Annual Report, include the
results of these power plants, only from the respective dates of acquisition.
In contrast, under US GAAP, our acquisitions of these power plants, except as
otherwise noted as stated in Note 42 to the Financial Statements, are
considered as combination of entities under common control and the acquired
assets and liabilities are accounted for at historical cost in a manner
similar to pooling of interests method. Accordingly, the consolidated
financial statements for all periods presented have been retroactively
restated as if the current structure and operations had been in existence
since inception. The differences between IFRS and US GAAP that would have
significant impact on the net income for each of the years in the three-year
period ended December 31, 2004 and the equity as of December 31, 2004 and 2003
are set forth in Note 42 to the Financial Statements. The Selected Financial
Data may not be indicative of future earnings, cash flows or financial
position.
1
Year Ended December 31,
--------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2004
--------------------------------------------------------------------------------
RMB and US dollars in thousands (RMB) (RMB) (RMB) (RMB) (RMB) (US$)(1)
except per share data
Income Statement Data
IFRS
Operating revenue, net............. 12,553,254 15,791,362 18,474,469 23,388,237 30,118,278 3,639,011
Operating expenses................. (8,646,356) (10,777,328) (12,896,455) (16,315,075) (23,200,088) (2,803,128)
----------- ------------ ------------ ------------ ------------ -----------
Profit from operations............. 3,906,898 5,014,034 5,578,014 7,073,162 6,918,190 835,883
Total financial expenses........... (979,866) (796,215) (510,265) (544,285) (739,784) (89,384)
Investment income -- -- -- -- 22,542 2,724
Gain / (Loss) from disposal of
investments..................... -- 24,671 1,288 10,705 (1,988) (240)
Share of (loss) / profit of
associates...................... -- (5,381) (11,145) 212,091 377,565 45,619
Other income, net.................. -- -- -- 12,070 18,666 2,255
----------- ------------ ------------ ------------ ------------ -----------
Profit before tax.................. 2,927,032 4,237,109 5,057,892 6,763,743 6,595,191 796,857
Income tax expenses................ (411,202) (715,220) (980,854) (1,149,441) (1,014,262) (122,547)
Minority interests................. -- (71,231) (156,034) (183,894) (257,053) (31,058)
----------- ------------ ------------ ------------ ------------ -----------
Net profit......................... 2,515,830 3,450,658 3,921,004 5,430,408 5,323,876 643,252
=========== ============ ============ ============ ============ ===========
Basic earnings per share........... 0.23 0.31 0.33 0.45 0.44 0.05
Fully diluted earnings per share... 0.22 0.30 0.33 0.45 0.44 0.05
US GAAP(2)
Operating revenue, net............. 24,448,015 28,569,478 32,546,043 3,932,344
Net profit......................... 3,900,715 5,736,109 5,740,320 693,569
Basic earnings per share........... 0.33 0.48 0.48 0.06
Fully diluted earnings per share... 0.32 0.48 0.48 0.06
2
As of December 31,
------------------------------------------------------------------------
2000 2001 2002 2003 2004 2004
------------------------------------------------------------------------
RMB and US dollars in thousands (RMB) (RMB) (RMB) (RMB) (RMB) (US$)(1)
except per share data
Balance Sheet Data
IFRS
Current assets...................... 10,061,689 10,763,919 7,685,441 8,303,195 9,653,653 1,166,393
Property, plant and equipment, net.. 31,643,530 37,557,114 41,103,468 42,658,365 57,780,410 6,981,261
Available-for-sale investment....... -- -- 254,990 254,990 254,990 30,809
Investments in associates........... -- 226,488 200,960 2,766,031 4,328,307 522,963
Land use rights and other
non-current assets............... 761,729 970,759 1,067,838 1,037,859 1,771,916 214,090
Deferred income tax assets.......... -- -- -- 21,311 97,539 11,785
Goodwill............................ -- -- 126,560 298,876 376,726 45,518
Less: Negative goodwill............. -- (2,225,505) (1,978,227) (1,730,949) (1,483,670) (179,263)
---------- ----------- ----------- ----------- ----------- ----------
Total assets........................ 42,466,948 47,292,775 48,461,030 53,609,678 72,779,871 8,793,556
========== =========== =========== =========== =========== ==========
Current liabilities................. 7,070,603 8,922,347 7,652,216 9,242,408 16,732,953 2,021,741
Non-current liabilities............. 11,616,610 9,590,637 9,482,050 9,256,718 16,515,006 1,995,410
Minority interests.................. -- 486,261 910,704 1,155,197 3,266,393 394,659
Shareholders' equity................ 23,779,735 28,293,530 30,416,060 33,955,355 36,265,519 4,381,746
---------- ----------- ----------- ----------- ----------- ----------
Total liabilities and equity........ 42,466,948 47,292,775 48,461,030 53,609,678 72,779,871 8,793,556
========== =========== =========== =========== =========== ==========
US GAAP (2)
Total assets........................ 62,668,092 69,469,597 8,393,596
Total liabilities................... (26,160,956)(32,843,927) 3,968,334
Minority interests.................. (1,694,609) (2,597,561) 313,848
Shareholders' equity................ ---------- ----------- ---------
34,812,527 34,028,109 4,111,414
3
Year Ended December 31,
---------------------------------------------------------------------------
2000 2001 2002 2003 2004 2004
---------------------------------------------------------------------------
(RMB) (RMB) (RMB) (RMB) (RMB) (US$)(1)
Cash Flow Data
IFRS
Purchase of property, plant
and equipment............... (351,966) (2,870,858) (1,594,210) (3,606,704) (9,877,553) (1,193,446)
Net cash provided by operating
activities.................. 5,643,361 5,918,896 7,079,718 9,533,289 8,162,701 986,250
Net cash (used in) / provided
by investing activities..... (5,317,519) (4,564,536) 1,074,101 (5,225,080) (13,650,285) (1,649,282)
Net cash (used in) / provided
by financing activities..... (830,667) (1,169,597) (7,324,354) (3,182,162) 3,654,467 441,547
US GAAP (2)
Purchase of property, plant
and equipment.............. (2,655,461) (5,292,642) (10,524,671) (1,271,633)
Net cash provided by operating
activities.................. 8,863,012 11,028,736 9,465,952 1,143,714
Net cash provided by / (used
in) investing activities.... 1,689,723 (6,297,349) (11,825,975) (1,428,862)
Net cash (used in) / provided
by financing activities.... (10,078,444) (4,008,934) 355,621 42,968
Other Financial Data
IFRS and US GAAP
Dividend declared per share.... 0.11 0.15 0.17 0.25 0.25 0.03
Number of ordinary shares
('000)...................... 11,300,000 12,000,000 12,000,548 12,055,342 12,055,383 12,055,383
----------------
(1) The US dollar data has been translated from RMB solely for
convenience at the PBOC Rate on December 31, 2004 of US$1.00 to
RMB8.2765. See Item 10. Additional Information - Exchange control for
more information on exchange rates between RMB and US dollars.
(2) The amounts as of December 31, 2004 and 2003 and for each of the
years in the three-year period ended December 31, 2004 are presented
to reflect the acquisitions of the power plants in a manner similar
to pooling of interests method as well as the effects of other
differences between IFRS and US GAAP.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the offer and use of proceeds
Not applicable.
D. Risk factors
Risks relating to our business and the PRC's power industry
Government regulation of power rates and other aspects of the power industry
may adversely affect our business
Similar to electric power companies in other countries, we are subject to
governmental and electric power grid regulations in virtually all aspects of
our operations, including the amount and timing of electricity generation,
power rates setting, performance of scheduled maintenance and compliance with
power grid control and dispatch directives. There can be no assurance that
these regulations will not change in the future in a manner which could
adversely affect our operations. Since 1995, we have charged and collected
power rates that were designed to enable us to recover all operating and debt
service costs and to earn a fixed return on our Net Fixed Assets for certain
of our power plants. However, there can be no assurance that there will not be
any change in the implementation of the power rate setting principles that
could materially adversely affect our
4
operations. In addition, the PRC government started in 1999 to experiment with
a program to effect power sales through a bidding process in some of the
provinces where we operate our power plants. The power rates for power sold by
this bidding process are generally lower than the approved power rates for
planned output. Although the power sales through the bidding process in the
last 6 years constituted only a small fraction of our total output, it is
expected that the government will expand the program in the future. On July 3,
2003, the State Council approved an electricity pricing reform plan and made
it clear that the long-term objective of electric power pricing reform is to
establish a standardized and transparent power price setting mechanism. At
present, a detailed rule for the implementation of this pricing reform plan is
in the process of being formulated. In 2004, NDRC proposed and the State
Council approved a coal-electricity price linkage mechanism to allow power
generation companies to adjust their power rates based on the prevailing
market prices for coal. But the detailed rules for the implementation of this
mechanism are still being formulated. There is no assurance that the power
rates and the revenues of our power plants will not be adversely affected. See
"Item 4 Information of the Company-B Business Overview - Pricing Policy."
If our power plants receive less dispatching than Planned Generation, the
power plants will sell less electricity than planned
Our profitability depends, in part, upon each of our power plants
generating electricity at a level sufficient to meet or exceed the Planned
Generation, which in turn will be subject to local demand for electric power
and dispatching to the grids by the dispatch Centres of the local grid
companies.
The dispatch of electric power generated by a power plant is controlled
by the Dispatch Centre of the applicable grid companies pursuant to a dispatch
agreement with us and to governmental dispatch regulations. In each of the
markets we operate, we compete against other power plants for power sales. No
assurance can be given that the Dispatch Centres will dispatch the full amount
of the Planned Generation of our power plants. A reduction by the Dispatch
Centre in the amount of electric power dispatched relative to a power plant's
Planned Generation could have an adverse effect on the profitability of our
operations. However, we have not encountered any such bias in the past.
The power industry reform may negatively affect our business
PRC government in 2002 announced and started to implement measures to
further reform the power industry, with the ultimate goal to create a more
open and fair power market. As part of the reform, five power generation
companies, including Huaneng Group, were created or restructured to take over
all the power generation assets originally belonging to the State Power
Corporation of China. In addition, two grid companies were created to take
over the power transmission and distribution assets originally belonging to
the State Power Corporation of China. An independent power supervisory
commission, the State Electricity Regulatory Commission ("SERC'), was created
to regulate the power industry. It is uncertain how these reform measures and
any further reforms are going to be implemented and how they will impact our
business. We may face enhanced competition as the reform is being carried out.
We are effectively controlled by HIPDC, whose interest may differ from those
of our other shareholders
HIPDC, as our controlling shareholder, together with other local
government investment companies, is able to elect the entire board of
directors of the company. HIPDC's interests may sometimes conflict with those
of our other minority shareholders. There is no assurance that HIPDC will
always vote its shares, or direct the directors nominated by it to act in a
way that will benefit our other minority shareholders.
Disruption in Fuel supply and its transportation may negatively affect the
normal operation of our power plants
We have obtained our coal and oil supplies for our power plants through a
combination of purchases pursuant to the key contracts and purchases on the
open market. Although we have received sufficient and timely fuel supply and
transportation services for our operations and have not experienced shutdowns
or reduced electricity generation caused by inadequate fuel supply or
transportation services, there can be no assurance that, in the event of
national coal supply shortfalls, our operations will not be adversely
affected.
5
Power plant development, acquisition and construction are a complex and
time-consuming process, the delay of which may negatively affect the
implementation of our growth strategy
We develop, construct, manage and operate large power plants; success
depends upon our ability to secure all required PRC Government approvals,
power sales and dispatch agreements, construction contracts, fuel supply and
transportation and electricity transmission arrangements. Delay or failure to
secure any of these could increase cost or delay or prevent commercial
operation of the affected power plant. Although each of our power plants in
operation and the power plants under construction received all required PRC
Government approvals in a timely fashion, no assurances can be given that all
the future projects will receive approvals in a timely fashion or at all.
We have generally acted as, and intend to continue to act as, the general
contractor for the construction of our power plants. As with any major
infrastructure construction effort, the construction of a power plant involves
many risks, including shortages of equipment, material and labor, labor
disturbances, accidents, inclement weather, unforeseen engineering,
environmental, geological, delays and other problems and unanticipated cost
increases, any of which could give rise to delays or cost overruns.
Construction delays may result in loss of revenues. Failure to complete
construction according to specifications may result in liabilities, decrease
power plant efficiency, increase operating costs and reduce earnings. Although
the construction of each of our power plants was completed on or ahead of
schedule and within its budget, no assurance can be given that construction of
future projects will be completed on schedule or within budget.
In addition, from time to time, we may acquire existing power plants from
HIPDC, Huaneng Group or other parties. The timing and the likelihood of the
consummation of any such acquisition will depend, among other things, on our
ability to obtain financing and relevant PRC Government approvals and to
negotiate relevant agreements for terms acceptable to us.
Substantial capital is required for investing in or acquiring new power plants
and failure to obtain capital on reasonable commercial terms will increase our
financing cost and cause delay in our expansion plans
An important component of our growth strategy is to develop new power
plants and acquire operating power plants and related development rights from
HIPDC, Huaneng Group or other companies on commercially reasonable terms. Our
ability to arrange financing and the cost of such financing depend on numerous
factors, including general economic and capital market conditions, credit
availability from banks or other lenders, investor confidence in us and the
continued success of our power plants. Although we have historically been able
to obtain financing on terms acceptable to us, there can be no assurance that
financing for future power plant developments and acquisitions will be
available on terms acceptable to us or, in the event of an equity offering,
that such offering will not result in substantial dilution to existing
shareholders.
Operation of power plants involves many risks and we may not have enough
insurance to cover the economic losses if any of our power plants' ordinary
operation is interrupted
The operation of power plants involves many risks and hazards, including
breakdown, failure or substandard performance of equipment, improper
installation or operation of equipment, labor disturbances, natural disasters,
environmental hazards and industrial accidents. The occurrence of material
operational problems, including but not limited to the above events, may
adversely affect the profitability of a power plant. We maintain insurance
typical in the electric power industry in China and in amounts that we believe
to be adequate. Such insurance, however, may not provide adequate coverage in
certain circumstances. In particular, in accordance with industry practice in
the PRC, we do not currently carry any business interruption insurance or,
except for third party liability insurance coverage for accidents during
capital construction and equipment installation and other types of assets
insurances, any third party liability insurance to cover claims in respect of
bodily injury or property or environmental damage arising from accidents on
our property or relating to our operation except for one of our power plants.
Although each of our power plants has a good record of safe operation, there
is no assurance that the afore-mentioned accidents will not occur in the
future.
If the PRC government adopts new and stricter environmental laws and
additional capital expenditure is required for complying with such laws, the
operation of our power plants may be adversely affected and we may be required
to make more investment in compliance with these environmental laws
Our power plants, like all coal- and oil-fired power plants, discharge
pollutants into the environment. We are subject to central and local
government environmental protection laws and regulations, which currently
6
impose base-level discharge fees for various polluting substances and
graduated schedules of fees for the discharge of waste substances. These laws
and regulations impose fines for violations of laws, regulations or decrees
and provide for the possible closure by the central government or local
government of any power plant which fails to comply with orders requiring it
to cease or cure certain activities causing environmental damage.
We attach great importance to the environmental related matters of our
existing power plants and our power plants under construction. We have
implemented a system that is designed to control pollution caused by our power
plants, including the establishment of an environmental protection office at
each power plant, adoption of relevant control and evaluation procedures and
the installation of certain pollution control equipment. We believe our
environmental protection systems and facilities for the power plants are
adequate for us to comply with applicable central government and local
government environmental protection laws and regulations. The PRC Government
may impose new, stricter laws and regulations which would require additional
expenditure on environmental protection.
The PRC is a party to the Framework Convention on Climate Change
("Climate Change Convention"), which is intended to limit or capture emissions
of "greenhouse" gases, such as carbon dioxide. Ceilings on such emissions
could limit the production of electricity from fossil fuels, particularly
coal, or increase the costs of such production. At present, ceilings on the
emissions of "greenhouse" gases have not been assigned to developing countries
under the Climate Change Convention. Therefore, the Climate Change Convention
would not have a major effect on the Company in the short-term because the PRC
as a developing country is not obligated to reduce its emissions of
"greenhouse" gases at present, and the PRC government has not adopted relevant
control standards and policies. If the PRC were to agree to such ceilings, or
otherwise reduce its reliance on coal-fired power plants, our business
prospects could be adversely affected.
If there is a devaluation of Renminbi, our debt burden will increase and the
dividend return to our overseas shareholders may decrease
As a power producer operating only in China, we collect our revenues in
Renminbi and have to convert Renminbi into foreign currencies to (i) repay
some of our borrowings which are denominated in foreign currencies, (ii)
purchase foreign made equipment and parts for repair and maintenance, and
(iii) pay out dividend to our overseas shareholders. Although China has had a
stable foreign exchange rate for Renminbi for the last several years, there is
no assurance that there will not be a significant devaluation of Renminbi in
the future. And if there is such a devaluation, our debt servicing cost will
increase and the return to our overseas investors may decrease.
Forward-looking information may prove inaccurate
This document contains certain forward-looking statements and information
relating to us that are based on the beliefs of our management as well as
assumptions made by and information currently available to our management.
When used in this document, the words "anticipate," "believe," "estimate,"
"expect," "going forward" and similar expressions, as they relate to us or our
management, are intended to identify forward-looking statement. Such
statements reflect the current views of our management with respect to future
events and are subject to certain risks, uncertainties and assumptions,
including the risk factors described in this document. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those described
herein as anticipated, believed, estimated or expected. We do not intend to
update these forward-looking statements.
Risks relating to the PRC
PRC economic, political and social conditions as well as government policies
could significantly affect our business
All of our business, assets and operations are located in China. The
economy of China differs from the economies of most developed countries in
many respects, including government involvement, level of development, economy
growth rate, control of foreign exchange, and allocation of resources.
The economy of China has been transitioning from a planned economy to a
more market oriented economy. Although the majority of productive assets in
China are still owned by the PRC government at various levels, in recent years
the PRC government has implemented economic reform measures emphasizing
utilization of market forces in the development of the economy of China and a
high level of management autonomy. Some of
7
these measures will benefit the overall economy of China, but may have a
negative effect on us. For example, our operating results and financial
condition may be adversely affected by changes in taxation, changes in power
rates for our power plants, changes in the usage and costs of state controlled
transportation services, and state policies affecting the power industry.
Interpretation of PRC laws and regulations involves significant uncertainties
The PRC legal system is based on written statutes and their
interpretation by the Supreme People's Court. Prior court decisions may be
cited for reference but have limited value as precedents. Since 1979, the PRC
government has been developing a comprehensive system of commercial laws, and
considerable progress has been made in introducing laws and regulations
dealing with economic matters such as foreign investment, corporate
organization and governance, commerce, taxation and trade. However, because
these laws and regulations are relatively new, and because of the limited
volume of published cases and judicial interpretation and their lack of force
as precedents, interpretation and enforcement of these laws and regulations
involve significant uncertainties. In addition, as the PRC legal system
develops, we cannot assure that changes in such laws and regulations, and
their interpretation or their enforcement will not have a material adverse
effect on our business operations.
We are subject to certain PRC regulations governing PRC companies that
are listed overseas. These regulations contain certain provisions that are
required to be included in the articles of association of these PRC companies
and are intended to regulate the internal affairs of these companies. The PRC
Company Law and these regulations, in general, and the provisions for
protection of shareholders' rights and access to information, in particular,
are less developed than those applicable to companies incorporated in Hong
Kong, the US, the UK and other developed countries or regions. Such limited
investor protections are compensated for, to a certain extent, by the
Mandatory Provisions for the Articles of Association of Companies to be Listed
Overseas and certain additional requirements that are imposed by the Listing
Rules of The Hong Kong Stock Exchange with a view to reduce the magnitude of
differences between the Hong Kong Company Law and PRC Company Law. The
articles of association of all PRC companies listed in Hong Kong must
incorporate such Mandatory Provisions and these additional requirements.
Although our Articles of Association have incorporated such provisions and
requirements, there can be no assurance that our shareholders will enjoy
protections to which they may be entitled in other jurisdictions.
8
ITEM 4 Information on the Company
A. History and development of the Company
Our legal and commercial name is Huaneng Power International, Inc. Our
head office is at West Wing, Building C, Tianyin Mansion, 2C, Fuxingmennan
Street, Beijing, People's Republic of China and our telephone number is
(8610)66491999. We were established in June 1994 as a company limited by
shares organized under the laws of the People's Republic of China.
In 2004, we made the following acquisitions, all of which were financed
by our own funds. Please see "Item 4 Information of the Company -- Property,
plants and equipment" for a detailed description of these newly acquired power
plants:
o 90% equity interest of Jinggangshan Huaneng Power Generation Limited
Liability Company ("Jinggangshan Power Plant"), 40% equity interest
of Hebei Hanfeng Power Generation Limited Liability Company ("Hanfeng
Power Plant") from the Huaneng Group;
o the entire assets and liabilities in Yingkou Power Plant, 60% equity
interest of Huaneng Chongqing Luohuang Power Generation Limited
Liability Company ("Luohuang Power Plant") and 55% equity interest of
Huaneng Hunan Yueyang Power Generation Limited Liability Company
("Yueyang Power Plant") from HIPDC; and
o 10% equity interest of Jinggangshan Power Plant from Jiangxi
Provincial Investment Corporation.
The above acquisitions were completed on July 1, 2004. These acquisitions
increased our attributable generation capacity by 3,096 MW and attributable
generation capacity under construction by 1,050 MW. The total consideration
for these acquisitions was RMB4.575 billion.
In January, 2005, we acquired 60% equity interest of Sichuan Huaneng
Hydropower Development Corporation, Ltd. ("Sichuan Hydropower") and 65% equity
interest of Gansu Huaneng Pingliang Power Generation Limited Liability Company
("Pingliang Power Plant") from the Huaneng Group. These acquisitions increased
our attributable generation capacity by 1,146 MW and attributable capacity
under construction by 389 MW. The total consideration for these acquisitions
was RMB2.0256 billion.
See "Item 5 Operating and Financial Review and Prospects -- Liquidity and
Cash Resources" for a description of the Company's principal capital
expenditures since the beginning of its last three financial years.
B. Business overview
We are one of China's largest independent power producers based on the
total attributable generation capacity of 21,418 MW as of March 31, 2005. We
wholly own 16 operating power plants and have controlling interests in 10
operating power companies and minority interests in 4 operating power
companies. Our power plants are in 13 of China's provinces: Liaoning, Hebei,
Shanxi, Shandong, Henan, Fujian, Jiangsu, Zhejiang, Guangdong, Jiangxi, Gansu,
Hunan, Sichuan, and in Shanghai and Chongqing Municipalities. In 2004, our
power plants had an average availability factor of 93.84% and an average
capacity factor of 72.92%. We also have 6,383 MW total generation capacity
under construction in the same areas. We believe that these areas where our
power plants are located present greater potential for increasing demand for
electricity and enjoy the most favorable conditions for running power plants.
To maintain our leadership position among independent power producers and to
enhance shareholders' value, we will focus on more efficient operation of our
current power plants and aggressively pursue our development strategy. Our
development strategy is to place equal emphasis on acquisition and
development, on greenfield and expansion plants, on coal-fuel and other
feasible fuel sources, and on domestic and foreign funds and equipment.
We will also continue to leverage our relationship with HIPDC, our
controlling shareholder, as well as with Huaneng Group, the controlling
shareholder of HIPDC, in respect of acquisition and development of power
projects. We have a preferential right to purchase interest in existing power
plants owned by Huaneng Group and HIPDC and the preferential right on all of
their respective future power development projects that we may realistically
develop. In 2002, the restructured Huaneng Group reiterated its support policy
to us. Furthermore, we entered into an Entrusted Management Agreement with
Huaneng Group and HIPDC in relation to the management of their respective
coal-fired power plants. By entering into the Entrusted Management
9
Agreement, we will further accumulate management experience as a result of the
expansion of our operation scale and set a precedent for large-scale and
multi-entities entrusted management in the PRC. Some of these coal-fired power
plants could be our potential acquisition targets. In addition, we may also
entrust to Huaneng Group the management of our power plants under certain
circumstances. For instance, on April 11, 2005, we entered into an Entrusted
Management Agreement with Huaneng Group, pursuant to which we have entrusted
Huaneng Group to manage certain matters of Sichuan Hydropower. Please see
"Item 7 -- Major Shareholders and Related Party Transactions" for detailed
description of the Entrusted Management Agreement.
We believe our significant capability in the development and construction
of power projects, as exemplified in the completion of our projects under
construction ahead of schedule, and our experience gained in the successful
acquisitions of power assets in recent years will enable us to take full
advantage of the opportunities presented in China's power market and made
available to us through our relationship with HIPDC and Huaneng Group.
With respect to the acquisition or development of any project, we will
consider, among other factors, changes in power market conditions, and adhere
to prudent commercial principles in the evaluation of the feasibility of the
project. In addition to business development strategies, we will continue to
work on our profit enhancement through relentlessly strengthening cost
control, especially in respect of fuel costs and construction costs, so as to
hedge against fluctuations in fuel price and increase competitiveness in the
power market.
In 2004, our business operations were adversely affected by the rising
price and poor quality of coal supplies caused by coal shortages on a
nationwide basis. Although we took various cost-control measures, we were not
able to fully offset the adverse effect that the rising coal prices had on the
cost of our operations.
Development of power plants
The process of identifying potential sites for power plants, obtaining
government approvals, completing construction and commencing commercial
operations is usually lengthy. However, because of our significant experience
in developing and constructing power plants, we have been able to identify
promising power plant projects and to obtain all required PRC Government
approvals in a timely manner.
Opportunity Identification and Feasibility Study
We initially identify an area in which additional electric power is
needed by determining its existing installed capacity and projected demand for
electric power. The initial assessment of a proposed power plant involves a
preliminary feasibility study. The feasibility study examines the proposed
power plant's land use requirements, access to a power grid, fuel supply
arrangements, availability of water, local requirements for permits and
licenses and the ability of potential customers to afford the proposed power
rates. To determine projected demand, factors such as economic growth,
population growth and industrial expansion are used. To gauge the expected
supply of electricity, the capacities of existing plants and plants under
construction or development are studied.
Approval Process
In 2003, National Development and Reform Commission ("NDRC") was created
to replace the former State Development Planning Commission. Prior to July,
2004, any project proposal and supporting documents for new power plants must
first be submitted to the NDRC for approval and then be submitted to the State
Council. In July, 2004, the State Council of the PRC reformed the fixed asset
investment regulatory system in China. Under the new system, new projects in
the electric power industry that do not use government funds will no longer be
subject to the examination and approval procedure. Instead, they will only be
subject to a confirmation and registration process. Coal-fired projects will
be confirmed by and registered with the relevant department of the central
government while non-coal fired power plants will be subject to confirmation
and registration by the relevant local government departments. Under a
circular issued by NDRC in September 2004, coal-fired power plants with
installed capacity of 1,200 MW or more will be subject to confirmation by the
NDRC and the State Council.
Joint venture power projects are subject to additional governmental
approvals. Approval by Ministry of Commerce (the former Ministry of Foreign
Trade and Economic Cooperation) is also required when foreign investment is
involved.
10
Permits and Contracts
In developing a new power plant, we and third parties are required to
obtain permits before commencement of the project. Such permits include
operating licenses and similar approvals related to plant site, land use,
construction, and the environment. To encourage the cooperation and support of
the local governments of the localities of the power plants, it has been and
will be our policy to seek investment in such power plants by the relevant
local governments.
Power Plant Construction
We have generally acted as the general contractor for the construction of
our power plants. Equipment procurement and installation, site preparation and
civil works are subcontracted to domestic and foreign subcontractors through a
competitive bidding process. All of our power plants were completed on or
ahead of schedule, enabling certain units to enter service and begin
generating income earlier than the estimated in-service date.
Import Duties
On April 1, 1996, the central government reduced the "general level" of
China's import duties to 23%. Along with the change in import duties,
preferential import duty treatment, including exemptions and reductions, for
equipment and raw materials imported by foreign-invested enterprises ("FIEs")
were eliminated. As a FIE, we had enjoyed duty-free treatment of equipment
imported for the power plants wholly owned by us. Under the new regulations
implemented after 1996, equipment and raw materials imported by FIEs may
continue to enjoy duty-free treatment if the relevant project was approved
before April 1, 1996. In October, 1997 the central government further lowered
the general level of China's import duties to 17%. Any import duties will be
reflected in adjustments to our power rates under the Pricing Policy and the
Electric Power Law. In addition, the central government in 1998 reinstated the
import-duty exemption policy for equipment imported by FIEs that invested in
projects encouraged by the central government under the Catalogue for the
Guidance of Foreign Investment Industries that is amended by the PRC
government from time to time ("the Catalogue"). Pursuant to the current
Catalogue issued on March 11, 2002, construction and operation of coal-fired
power plants with 300 MW or larger generating units or of power plants with
clean-burning coal technologies belong to the category of encouraged projects.
Under the relevant Chinese laws, FIEs will continue to be entitled to import
duty exemption with respect to imported equipment and raw materials for
investment projects that fall into the encouraged category under the current
Catalogue. As a FIE, we are eligible for import-duty exemption for imported
generating units, as all our planned power plants or power plants under
construction meet the conditions for encouraged projects under the current
Catalogue. In 2004, we started applying for import-duty exemption for imported
generating equipments in the amount of RMB100 million for the Yuhuan project.
In addition, China's general import-tariff level has been declining
annually since China acceded to the WTO in November, 2001. China's average
import-tariff rate for 2003 is 11.3%, which was reduced to 10.4% in 2004.
Starting from January 1, 2005, the average import-tariff rate has been further
reduced to 9.9%. In general, China's entry to WTO will bring its import-tariff
to a level consistent with the average level of all other WTO members.
Plant Start-up and Operation
We have historically operated and intended to continue to operate our
power plants. Our power plants have established management structures based on
modern management techniques. We select the superintendent for a new power
plant from the senior management of our operating plants early in the
construction phase of the new plant, invest in the training of operational
personnel, adopt various rational management techniques and structure its
plant bonus program to reward efficient and cost-effective operation of the
plant in order to ensure the safety, stability and high level of availability
of each power plant. Our senior management meets several times a year with the
superintendents of the power plants as a group, fostering a team approach to
operations, and conducts annual plant performance reviews with the appropriate
superintendent, during which opportunities to enhance the power plant's
performance and profitability are evaluated.
After a generating unit is constructed, the contractor tests its
installation and systems. Following such tests, the contractor puts the unit
through a continuous 168-hour trial run at full load. After successfully
passing the continuous 168-hour test, the unit may enter into commercial
operation.
11
Pricing policy
Because we were established to develop power plants using advanced
equipment and technology financed with foreign and domestic loans, our power
rates, under the authority of State Council Document 72, were initially
designed to ensure recovery of all production and financing costs and yield a
profit of RMB40 to RMB50 per MWh during the period when such loans were
outstanding.
On June 6, 1994, the former Ministry of Electric Power ("MEP") announced
the pricing policy (the "Pricing Policy") applicable to us. The Pricing Policy
specifies that our power rates should be determined with reference to
international principles and methods for setting power rates based upon the
return on net fixed assets methodology to which international investors are
accustomed.
While we anticipate that we will consistently generate a profitable
return and recover our costs under the existing Pricing Policy, there is no
assurance that the government agencies will approve our proposed power rates
in accordance with the Pricing Policy. We have received power rates that
delivered a return below the permitted 15% return on the Net Fixed Assets in
the last several years. The Electric Power Law, which came into effect in
1997, has provided for the general principles for determining power rates in
the future. The power rate granted to a power producer shall be formulated to
provide reasonable compensation for costs as well as a reasonable return, to
share expenses fairly and to promote the construction of power projects.
On July 3, 2003, the State Council approved a power pricing reform plan
and made it clear that the long-term objective of power pricing reform is to
establish a standardized and transparent power price setting mechanism. At
present, the detailed rules for the implementation of this reform plan are
being formulated.
In 2003, coal prices increased and certain parts of China experienced
severe power shortage due to increased demand for power caused by various
factors including the rapid expansion of the Chinese economy. To adjust the
demand and supply for electric power and also to address the adverse effect
that the increase of coal prices had on the power industry, NDRC issued the
"Circular on Adjusting Power Rate" with the approval of the State Council in
December 2003. Pursuant to such circular, effective as of January 1, 2004,
on-grid power rate of coal-fired power plants that supply power to the grids
at provincial or higher level increased (except for our power plants in
Shandong Province) by RMB7/MWh (inclusive of taxes) to offset their higher
cost of operation due to increase in coal prices in 2003 and 2004. Effective
as of January 1, 2004, newly operated power plants, which have not yet
received on-grid power rate, are allowed to sell power at rates equal to the
previous year's average on-grid power rates of their service areas. The
existing power plants are allowed to sell output (actual output in that
financial year minus 2003 actual output) based on the previous year's average
on grid power rates of their service area.
In the second half of 2004, the NDRC took further steps to address the
adverse effect that rising coal prices had on the power industry by issuing
circulars permitting power generation companies to adjust power rates sold to
Northern China Power Grids, Central China Power Grids, Eastern China Power
Grids and Northeast China Power Grids, respectively. In accordance with the
spirit of these circulars, we have increased the power rates of most of our
power plants located in these areas to the permitted level. New rates for our
power plants supplying power to the Northern China Power Grids, Central China
Power Grids and Eastern China Power Grids became effective on June 15, 2004,
and the new rate for our power plants supplying power to the Northeast China
Power Grids became effective on June 25, 2004. In addition to the above, we
have also increased the rates applicable to the excess output of our power
plants located in Shanghai Municipality, Jiangsu Province and Zhejiang
Province to RMB0.28 (previously RMB0.26), RMB0.30 (previously RMB0.28) and
RMB0.338 (previously RMB0.328), per kWh, respectively. These new rates became
effective on June 15, 2004. Furthermore, with the approval of the relevant
government authorities, we have increased the approved rate applicable to the
planned on-grid output of Shidongkou I Power Plant for 2004 by RMB0.0169 per
kWh, to mitigate the adverse effect on such plant caused by the rising coal
prices.
To more effectively address the problem of rising coal prices, in
December, 2004, NDRC proposed and the State Council approved a pricing
mechanism that would establish a link between power and coal prices, allowing
power generation companies to increase their rates to account for coal price
increases. At present, the detailed rules for the implementation of this
mechanism are being formulated. See "Item 5 Operating and Financial Review and
Prospects -- Trend Information" for a detailed discussion of this new pricing
mechanism.
12
Power sales
Each of our power plants has entered into a written agreement with the
local grid companies for the sales of its power output. Generally, the
agreement has a fixed term of multiple years and provides that the annual
utilization hours of the power plant will be determined with reference to the
average annual utilization hours of the similar generating units connected to
the same grid.
In 2003, SERC and the State Administration of Commerce and Industry
jointly promulgated a model contract form (the "Model Contract Form") for use
by power grid companies and power generation companies in connection with
electricity sale and purchase transactions. The Model Contract Form contains
provisions on the parties' rights and obligations, amount of electricity
subject to purchase, payment method and liabilities for breach of contract,
etc. We believe that the publication of the Model Contract Form has
facilitated the negotiation and execution of electricity purchase contracts
between power grid companies and power generation companies in a fair,
transparent and efficient manner, thereby reducing transaction costs and
improving performance rate of both power grid companies and power generation
companies. In 2004, all of the agreements entered into between our power
plants and the local grid companies are based on the Model Contract Form.
In 2004, a small percentage of power output of Dalian, Dandong,
Shidongkou II, Shidongkou I, Yushe, Yingkou and Fuzhou Power Plants has been
sold through the power bidding process. This practice was suspended in the
second half of 2004 to facilitate the transition to the regional power market
in both the Northeast and Eastern China, which was started as a pilot program
by NDRC in June 2003.
The power market of the Northeast region commenced operation on January
15, 2004 by adopting a "dual pricing with full competition" mode. The market
has been in trial operation since the end of 2004 after several simulated
operations and has held its annual price bidding.
The trial operation has been suspended for the purpose of amending and
improving the rules of the operation. In the meantime, all the power plants
are following the settlement methods used in 2004. At present, partial
amendment of such rules of operation has been completed and an opinion on
perfecting the trial operation of the power market in the Northeast region has
been formulated by SERC. On April 4, 2005, SERC and NDRC jointly issued a
circular requiring the power market of the Northeast region to start holding
monthly price bidding on a trial basis in April 2005.
The Company has 3 power plants in the Northeast region, namely Dalian
Power Plant, Dandong Power Plant and Yingkou Power Plant with a total of 8
generating units and an aggregate generation capacity of 2,740 MW. All of them
are located in the loading centre in Liaoning.
To ensure a fair market environment for the three power plants in
Liaoning, the Company will keep itself updated on the changes of the relevant
rules and will actively support and participate in the establishment of the
power market of the Northeast region. The Company believes that it can
optimize its competitive strengths under a fair, reasonable and open market
environment.
According to the "Pilot Scheme for the Power Market of the Eastern
Region" (the "Pilot Scheme"), 85% of the power sales will be carried out in
the form of annual contracts during the first stage and 15% will be carried
out by way of price bidding.
The power market of the Eastern region commenced a simulated operation on
May 18, 2004. The results revealed that the relevant rules shall be subject to
further amendments and modifications.
Currently, the Company has 8 power plants or 22 power generating units
with an aggregate generation capacity of 7,140 MW, representing 15% of the
aggregate capacity of all bidding units in the Eastern region. Most of the
power plants are located in regions short of power supply such as Jiangsu,
Shanghai and Fujian and most of them are located in regional loading centres.
Most of the power plants consist of individual units with large-capacity and
high-performance, together with small number of employees and high-standard
management. Under the centralized management of the Company, these power
plants will remain highly competitive in their markets.
Due to the fact that the power market in the Eastern region is partly
competitive on power sale and the power demand will increase rapidly, this
region is estimated to remain in short power supply in the coming two
13
years. Therefore, even in the case of the regional market entering into
official operation, there will not be any material impact on the Company.
Usually the power rate determined under the bidding practice is lower
than the power rate for planned generation, primarily because the competitive
bidding drives down the prices. We believe, however, that the output subject
to the bidding practice represents only a small portion of our total output
and power rate applicable to this portion is calculated to enable the power
plants to at least recover variable costs, part of fixed costs and also
produce some profit. For our planned generation, the power rate is still
determined on a basis which permits us to recover all the operating costs plus
a margin of profit. Establishing regional power markets and increasing the use
of the bidding method are the general trend in China's power market reform,
which is conducive to creating a competition environment that is fair,
transparent and equitable. We believe that this reform will benefit the
Company in the long-term. We will adopt different bidding strategies and fully
take advantage of the large scales of our power plants in accordance with the
specific circumstances of different power grids and different power plants,
thereby maximizing our profits in the power bidding process. We also believe
that our large and highly efficient generating units are competitive in a more
open, orderly and fair market.
The following table sets forth the average power rates (RMB/MWh) of
electric power sold by our power plants, for each of the five years ended
December 31, 2004 and the approved power rates for 2004 and 2005.
2000 2001 2002 2003 2004 2005
-------- -------- -------- -------- ------- ------- -------
Average Average Average Average Average Approved Approved
Rate (1) Rate (1) Rate (1) Rate (1) Rate(1) Rate(1) Rate(1)
-------- -------- -------- -------- ------- ------- -------
Dalian Power Plant........... -- 291.38 280.53 272.69 283.62 323.00(2) 323.00
Phase I.................. 316.53 -- -- -- -- -- --
Phase II................. 305.42 -- -- -- -- -- --
Fuzhou Power Plant.......... -- -- 327.80 331.82 365.00 372.50(3) 372.50
Phase I.................. 353.40 357.50 -- -- -- -- --
Phase II................. 405.35 349.18 -- -- -- -- --
Nantong Power Plant......... -- 318.38 309.54 312.52 325.18 338.00(4) 338.00
Phase I.................. 323.71 -- -- -- -- -- --
Phase II................. 323.71 -- -- -- -- -- --
Shangan Power Plant......... -- 315.65 307.94 303.25 324.00(4) 324.00
Phase I.................. 283.30 292.71 -- -- -- -- --
Phase II................. 379.50 371.73 -- -- -- -- --
Shantou Oil-Fired Plant..... 669.77 618.24 621.02 672.41 604.08 594.39 594.39
Shantou Power Plant......... 473.85 473.85 455.95 435.17 446.86 449.41(5) 449.41
Shidongkou II............... 362.44 356.76 345.90 332.85 342.56 374.00(6) 374.00
Dandong Power Plant......... 306.27 298.93 273.70 276.95 289.05 332.00(7) 332.00
Nanjing Power Plant......... 325.68 318.60 304.07 307.31 321.67 338.00(8) 338.00
Dezhou Power Plant
(Phase I, II & III)...... -- 340.33 339.64 333.34 332.58 336.97(9) 336.97
Jining Power Plant
Phase I, II.............. -- 267.31 275.15 274.66 299.89 282.26(10) 282.26
Phase III................ -- -- -- -- 299.89 321.50(11) 321.50
Weihai Power Plant.......... -- 390.72 393.74 386.50 394.06 397.00(12) 397.00
Shidongkou I................ -- -- 252.97 256.64 285.43 281.00(13) 281.00
Taicang..................... -- -- 317.52 321.80 341.10 365.00(14) 365.00
Huaiyin Power Plant
Phase I.................. -- -- 314.79 317.21 330.88 344.00(15) 344.00
Phase II................. -- -- -- -- -- 344.00 370.00
Changxing................... -- -- 362.70 320.57 351.94 371.00(16) 371.00
Yushe Power Plant
Phase I.................. -- -- -- 200.63 282.10 308.00(17) 308.00
Phase II................. -- -- -- -- 282.10 250.00(17) 250.00(
Qinbei...................... -- -- -- -- -- 290.00 290.00
Xindian..................... -- -- -- 342.41 320.83 321.50(18) 321.50
Luohuang Power Plant........ -- -- -- -- 286.74 290.00(19) 290.00
Yueyang Power Plant......... -- -- -- -- 316.52 345.00(20) 345.00
Yingkou Power Plant......... -- -- -- -- 315.48 355.00(21) 355.00
Jinggangshan Power Plant.... -- -- -- -- 325.67 348.00(22) 348.00
14
_______________
Notes:
(1) Includes value-added tax.
(2) 321 before the change on June 25, 2004.
(3) 372 before the change on June 15, 2004.
(4) 341 before the change on June 15, 2004.
(5) 443.41 before the change on June 15, 2004.
(6) 375.80 before the change on June 15, 2004.
(7) 330 before the change on June 25, 2004.
(8) 341 before the change on June 15, 2004.
(9) 354 for Phase I and Phase II and 321.5 for
Phase III before the change on November 1, 2004.
(10) 280.76 for Phase I and II before the change on June 15, 2004.
(11) 320 before the change on June 15, 2004.
(12) 395.5 before the change on June 15, 2004.
(13) 266.51 before the change on June 15, 2004.
(14) 372 before the change on June 15, 2004.
(15) 350 for Phase I before the change on June 15, 2004.
(16) 339.16 before the change on June 15, 2004.
(17) the rate became effective as of January 1, 2004.
(18) 320 before the change on June 15, 2004.
(19) 288.71 before the change on June 15, 2004.
(20) 351 before the change on June 15, 2004.
(21) 353 before the change on June 15, 2004.
(22) 362 before the change on June 15, 2004.
Fuel supply arrangements
In 2004, twenty-two of our twenty-three power plants are fueled by coal,
and only Shantou Oil-Fired Power Plant is a combined-cycle facility fueled by
oil.
Coal
Most of the coal supply for the twenty-two coal-fired power plants is
obtained from numerous coal producers in Shanxi Province.
In recent years, as part of its efforts to make a transition from a
comprehensive planned economy to a "socialist market economy," the PRC has
experimented with a variety of methods of setting coal prices. In 1996, the
government allowed coal prices to fluctuate within a range around a reference
price for coal allocated under the State Plan to be used in electricity
generation, and set maximum allowable prices in various coal-producing areas
for coal used in electricity generation.
From 2002 to 2003, there was no longer official State Plan for coal
supplies, but the government continues to coordinate the coal prices at the
annual national coal purchase conferences attended by, among others,
representatives of each of power companies, coal suppliers, and the railway
authorities and sponsored and coordinated by NDRC. Starting from 2004,
although such annual coal purchase conferences continue to be held, only key
contracts are negotiated and executed at such conferences.
In 2004, we consumed a total of 52.68 million tons of coal, 42.3% of
which was purchased under the key contracts, and the remainder was purchased
from the open market.
Coal prices for our company, including transportation costs and
miscellaneous expenses, averaged approximately RMB307.92 per ton in 2004. We
strive to reduce the fuel costs in a number of ways, including seeking to
purchase high quality coal at competitive prices directly from coal mines or
coal shipment terminals,
15
improving coal storage management and inspection and demanding compensation
from suppliers for failure to deliver coal of the specified quantity and
quality in accordance with the relevant purchase arrangements. We have also
started to experiment in some of our power plants with the method of mixing
different types of coal as a measure of cost reduction. Although we took
various cost-control measures, we were not able to fully offset the adverse
effect that the rising coal prices had on the cost of our operations in 2004.
In order to address the shortage of coal supplies, we have entered into 7
medium to long-term agreements with major coal suppliers to secure stable
prices for our coal supplies from 2005 to 2009. At the same time, we also
signed coal supply contracts with coal suppliers at the annual national coal
purchase conference for 2005. Through these measures, we seek to further
strengthen the stable coal supplies for our power plants.
We have entered into purchase agreements with coal suppliers to purchase
52.05 million tons of coal for 2005, which is about 85% of the coal required
for the total planned generation of the Company. This amount includes both the
amount covered by the medium and long term coal supply agreements we have
entered into with coal suppliers and the amount settled at annual coal
purchase conferences sponsored and coordinated by NDRC.
Oil
The crude oil of Shantou Oil-Fired Plant is transported by pipeline to
Huangdao in Eastern Shandong Province, loaded onto ships, shipped along the
coast to the Zhanjiang port in Western Guangdong, trans-shipped to the Shantou
port, unloaded into storage tanks in Shantou and finally transported to the
Shantou Oil-Fired Power Plant by pipeline.
In 2004, the crude oil from the Shengli Oil Field to Shantou was
RMB2,352.6 per ton (CIF Price).
Repair and maintenance
Each of our power plants has a timetable for routine maintenance, regular
inspections and repairs. Such timetables and the procedures for the repair and
maintenance of generating units comply with the relevant regulations
promulgated by the former MEP.
Pursuant to our procedures, generating units with a capacity of 350 MW or
more are currently operating on a cycle of four to six years. At the end of
each operating cycle, an overhaul is carried out. In each cycle, there are
four different levels of maintenance:
(i) regular checks and routine maintenance are carried out throughout
the period during which a generating unit is in operation;
(ii) a small-scale servicing is performed every year, which takes
approximately 20 days;
(iii) a medium-scale check-up is carried out between the two overhauls,
the length of which depends on the actual condition of the
generating unit at the time of the check-up; and
(iv) a full-scale overhaul is conducted at the end of each operating
cycle, which takes approximately 60 days.
With respect to the Shantou Oil-Fired Power Plant, repair and maintenance
are scheduled according to cumulative operating hours. A small-scale servicing
takes approximately seven days. A full-scale maintenance takes approximately
30 days.
C. Organizational Structure
We are 43.12% owned by HIPDC, which in turn is a subsidiary of Huaneng
Group. Huaneng Group was established in 1988 with the approval of the State
Council. In 2002, Huaneng Group was restructured as one of the five
independent power generation group companies to take over the power generation
assets originally belonging to the State Power Corporation of China. Huaneng
Group has a registered capital of RMB20 billion and is controlled and managed
by the central government. Huaneng Group is principally engaged in the
development, investment, construction, management and operation of energy
related projects as well as the production and sale of electric (thermal)
power. In addition to this core business, Huaneng Group also engages in the
development, investment, construction, products and sale of projects and
products in the information, transportation, new energy source and
environmental industries.
16
HIPDC was established in 1985 as a joint venture with 51.98% of its
interest currently owned by Huaneng Group. HIPDC is engaged in developing
power plants using foreign capital. Some of the power plants currently owned
and operated by us were originally built and later transferred to us by HIPDC.
Both Huaneng Group and HIPDC have agreed to give us preferential rights in the
power development business and power assets transfers.
The following organizational chart sets forth the organizational
structure of us and HIPDC as of December 31, 2004:
--------------- ---------------- -------------- ------------------- -------------- ---------------------
| China Huaneng | | Guohua Power | | China Group | | China Resources | | China Cinda | | China International |
| Group | | Investment | | Development | | Power Investments | | Trust | | Water & Electric |
| Corporation | | Limited | | Limited | | Company Limited | | Company | | Corporation |
| | | Company | | | | | | | | |
--------------- ---------------- -------------- ------------------- -------------- ---------------------
| | | | | |
| 51.98% | 15.77% | 15.0% | 10.0% | 5.8% | 1.45%
| | | | | |
|--------------------------------------------------------------------------------------------------------
|
|
| Hebei Provincial Jiangsu Province Dalian Municipal Shantou Power Shantou Electric
------------- Construction International Trust Construction Development Joint Power
| | Investment & Investment Investment Company Stock Company Development
| HIPDC | Company Company Limited Company*
| |
-------------
|
| | Fujian | | | |
| | International | Liaoning Energy | | |
Listed | Existing H | Trust & | Investment | Nantong Investment | Dandong Energy |
A | Shares | Investment | (Group) Co., Ltd. | Management Centre | Investment |
Shares | | Company | | | Development Centre |
| | | | | |
| | | | | | | | | | | |
| 4.15% | 43.12% | 25.34% | 7.5% | 5.56% | 5.18% | 3.81% | 3.75% | 1.13% | 0.32% | 0.11% | 0.4%
| | | | | | | | | | | |
| | | | | |
-----------------------------------------------------------|--------------------------------------------------------------------
|
-------------
| |
| Company |
| |
-------------
Note: *On May 12, 2004, Shantou Electric Power Development Company ("SEPDC")
transferred to HIPDC 30,000,000 legal person shares of the Company held by
SEPDC. Thereafter, on December 21, 2004, SEPDC further transferred to HIPDC
additional 28,000,000 legal person shares of the Company held by it in
consideration for HIPDC's payment of certain debt obligations owed by SEPDC
to Bank of Communications Shantou Branch as part of a court-ordered debt
settlement plan.
17
D. Property, plants and equipment
The following table presents certain summary information on our power
plants, projects under construction and proposed projects.
Summary Information on the Company's Power Plants and Proposed Projects (as of March 31, 2005)
Current Type
Province/ Actual/Estimated Total Actual Installed Attributable of
Plant or Expansion Municipality In-service Date (1) Cost (2) Capacity Ownership Capacity Fuel
--------------------------- ------------- --------------------- ------------- ------------ ----------- ------------- -------
(Names as defined below) (Millions (MW) % MW
RMB/
Millions
US$)
Power Plants
----------------------------------------------------------------------------------------------------------------------------
Shantou Oil-Fired(5) Guangdong Units I & II: 215/24.7 2 x 34.1 100% 103 Oil
Jan. 1987
Unit III: April 1988 1 x 34.95
Dalian Phase I Liaoning Unit I: Sep. 1988 1,569/180 2 x 350 100% 700 Coal
Unit II: Dec. 1988
Phase II Unit III: Jan. 1999 3,554/408 2 x 350 100% 700 Coal
Unit IV: Jan. 1999
Fuzhou Phase I Fujian Unit I: Sep. 1988 1,713/197 2 x 350 100% 700 Coal
Unit II: Dec. 1988
Phase II Unit III: Oct. 1999 3,535/406 2 x 350 100% 700 Coal
Unit IV: Oct. 1999
Nantong(5) Phase I Jiangsu Unit I: Sep. 1989 1,682/193 2 x 352 100% 704 Coal
Unit II: March 1990
Phase II Unit III: Jul. 1999 3,573/410 2 x 350 100% 700 Coal
Unit IV: Oct. 1999
Shangan Phase I Hebei Unit I: Aug. 1990 1,959/225 2 x 350 100% 700 Coal
Unit II: Dec. 1990
Phase II Unit III: Oct. 1997 2,804/322 2 x 300 100% 600 Coal
(3)
Unit IV: Oct. 1997
Shantou Guangdong Unit I: Jan. 1997 4,942/568 2 x 300 100% 600 Coal
Unit II: Jan. 1997
Shidongkou II Shanghai Unit I: Jun. 1992 4,395/505 2 x 600 100% 1,200 Coal
Unit II: Dec. 1992
Dandong Liaoning Unit I: Jan. 1999 4,798/551 2 x 350 100% 700 Coal
Unit II: Jan. 1999
Nanjing(4) Jiangsu Unit I: March 1994 3,212/369 2 x 320 100% 640 Coal
Unit II: Oct. 1994
Dezhou Shandong Units I & II: 1992 1,313 2 x 300 100% 600 Coal
Units III & IV: 1,760 2 x 300 100% 600 Coal
Jun. 1994, May 1995
Unit V & VI: Jun. 5,111 2 x 660 100% 1,320 Coal
2002; Oct. 2002
Jining (4) Shandong Units I & II: 1973 43 2 x 50 100% 100 Coal
Units III & IV: 69 1 x 115 100% 225 Coal
1976 & 1978 1 x 110
Unit V & Unit VI: 760 2 x 135 100% 270 Coal
July 2003 & August
2003
Weihai Shandong Units I & II: May 1,110 2 x 125 60% 150 Coal
1994, Jan. 1995
Units III & IV: 2,834 2 x 300 60% 360 Coal
Mar. Nov. 1998
Shidongkou I Shanghai Unit I: Feb. 1988 N/A 4 x 300 100% 1,200 Coal
Unit II: Dec. 1988
Unit III: Sep. 1989
Unit IV: May 1990
Changxing Zhejiang Unit I: Jan. 1992 N/A 2 x 125 100% 250 Coal
Unit II: Aug. 1992
Taicang Jiangsu Unit I: Dec. 1999 N/A 2 x 300 75% 450 Coal
Unit II: April 2000
Huaiyin Jiangsu Unit I: Nov. 1993 N/A 2 x 200 63.64% 255 Coal
Unit II: Aug. 1994
Yushe Phase I Shanxi Unit I: June 1994 N/A 2 x 100 60% 120 Coal
Unit II: Dec 1994
Phase II Unit I: Nov. 2004 N/A 2 x 300 60% 360 Coal
Unit II: Dec. 2004
18
Xindian Shandong Unit III: Jan 2002 N/A 2 x 225(6) 100% 450 Coal
Unit IV: Dec 2001
Qinbei Phase I Henan Unit I & II: Dec. N/A 2 x 600 55% 660 Coal
2004
Jinggangshan Jiangxi Unit I: Dec. 2000 N/A 2 x 300 100% 600 Coal
Unit II: Aug. 2001
Yueyang Hunan Unit I: Sep. 1991 N/A 2 x 362.5 55% 398.75 Coal
Unit II: Dec. 1991
Luohuang Phase I Chongqing Unit I: Sep. 1991 N/A 2 x 360 60% 432 Coal
Unit II: Feb. 1992
Phase II Unit I & II: Dec. N/A 2 x 360 60% 432 Coal
1998
Jiangbei Chongqing Unit I: Jan. 1991 N/A 1 x 108 60% 64.8 Gas
Gas-fired
Yingkou Liaoning Unit I: Jan. 1996 N/A 2 x 320 100% 640 Coal
Unit II: Dec. 1996
Pingliang Gansu Unit I: 2000 N/A 4 x 300 65% 780 Coal
Unit II: 2001
Unit III: June. 2003
Unit IV: Nov. 2003
----------------------------------------------------------------------------------------------------------------------------
Project under Construction
----------------------------------------------------------------------------------------------------------------------------
Shantou Phase II Guangdong 1 x 600 100% Coal
Yueyang Phase II Hunan 2 x 300 55% Coal
Taicang Phase II Jiangsu 2 x 600 75% Coal
Luohuang Phase III Chongqing 2 x 600 60% Coal
Yuhuan Phase I Zhejiang 2 x 1,000 100% Coal
Sichuan Hydropower 783 60% Hydro
----------------------------------------------------------------------------------------------------------------------------
Subtotal 6,383
Proposed Projects
----------------------------------------------------------------------------------------------------------------------------
Shanghai Gas Turbine
project Shanghai 3 x 350 Gas
Jinling Gas Turbine Nanjing 3 x 350 Gas
project
Shangan Phase III Hebei 2 x 600 Coal
Xindian Phase III Shandong 2 x 300 Coal
Qinbei Phase II Henan 2 x 600 Coal
Yingkou Phase II Liaoning 2 x 600 Coal
Huaiyin Phase III Jiangsu 2 x 330 Coal
Yuhuan Phase II Zhejiang 2 x 1,000 Coal
Sichuan Hydropower 1,439 Hydro
----------------------------------------------------------------------------------------------------------------------------
Subtotal 10,399
----------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Commencement of commercial operations. See "Development of Power
Plants -- Plant Start-up and Operation."
(2) Including start-up costs and interest expense during construction. At
the exchange rate of US$1.00 to RMB8.7.
(3) Assumes a current construction cost of US$322 million. The final
construction costs have not been determined as of the date of filing.
(4) After the technical renovation, the generation capacity of the units
III and IV of Jining power plant have been increased from 100MW to
115MW and 110MW, respectively; and the generation capacity of Nanjing
power plant has increased from 600MW to 640MW.
(5) The generation capacity of Shantou oil-fired power plant and Nantong
power plant were adjusted from 100MW and 1,400MW to 103MW and
1,404MW, respectively, according to the nameplate capacity of the
generating units.
(6) Two 100MW oil-fired generating units of Xindian power plant were shut
down with the consideration of rising oil prices and the need of
reducing operating costs at the end of 2003.
19
The following table presents the availability factors and the capacity
factors for the years, 2001, 2002, 2003 and 2004 for the power plants which we
operate.
Availability factor (%) Capacity factor (%)
----------------------------------------------------------------------------------
2001 2002 2003 2004 2001 2002 2003 2004
----------------------------------------------------------------------------------
Dalian
Phase I.................... 96.79 93.58 90.66 95.08 53.66 56.59 64.32 78.80
Phase II................... 90.33 94.71 96.77 49.25 58.46 73.79
Fuzhou
Phase I.................... 90.99 95.57 91.08 92.47 51.30 54.61 72.03 83.13
Phase II................... 95.42 92.19 93.58 41.35 62.82 72.43
Shangan
Phase I.................... 90.01 86.72 89.15 93.02 64.46 64.85 69.76 74.95
Phase II................... 94.52 94.16 91.72 65.60 69.44 71.18
Nantong
Phase I.................... 93.45 96.73 89.69 92.52 58.95 59.84 62.61 76.47
Phase II................... 88.28 97.28 99.72 60.34 67.03 73.80
Dandong....................... 88.35 96.07 97.74 94.95 45.37 57.37 68.84 77.94
Shantou Oil-Fired............. 91.69 82.09 91.05 98.24 22.15 23.66 33.93 35.10
Shantou....................... 90.39 96.88 94.23 92.40 73.08 79.53 84.71 88.57
Shidongkou II................. 93.33 93.43 91.47 96.51 69.98 71.71 78.87 80.64
Nanjing....................... 89.16 91.77 94.16 94.47 60.73 67.76 72.55 77.92
Dezhou........................ 92.33 91.25 90.47 94.49 64.97 49.92 54.05 59.27
Jining........................ 95.33 96.49 94.32 93.58 72.36 69.30 51.28 53.67
Weihai........................ 95.89 95.88 94.87 94.29 58.46 60.28 58.53 63.82
Shidongkou I.................. -- 91.33 81.86 94.43 -- 70.70 74.58 77.55
Taicang....................... -- 90.21 95.31 94.74 -- 70.65 80.71 86.18
Huaiyin....................... -- 88.72 94.44 94.35 -- 60.84 67.98 76.70
Changxing..................... -- 90.21 86.56 95.46 -- 70.65 81.65 88.56
Yushe......................... -- -- 94.69 95.84 -- -- 80.20 85.43
Xindian....................... -- -- 95.52 92.11 -- -- 44.99 61.77
Luohuang...................... -- -- -- 90.71 -- -- -- 64.48
Yueyang....................... -- -- -- 89.25 -- -- -- 71.90
Yingkou....................... -- -- -- 94.07 -- -- -- 80.74
Jinggangshan.................. -- -- -- 92.40 -- -- -- 69.12
------------------------------------------------------------------------------------------------------------------
Our power plants, their respective operations and proposed projects as of
March 31, 2005 are described below.
Power Plants in Liaoning Province
Huaneng Dalian Power Plant ("Dalian Power Plant") Dalian Power Plant is
located on the outskirts of Dalian, on the coast of Bohai Bay. Dalian Power
Plant, including Phase I and Phase II, has an installed capacity of 1,400 MW
and consists of four 350 MW coal-fired units which commenced commercial
operations in 1988 and 1999 respectively.
The coal supply for Dalian Power Plant is obtained from several coal
producers located mostly in Northern Shanxi Province. The coal is transported
by rail from the mines to Qinhuangdao port and shipped by special 27,000 ton
automatic unloading ships to the wharf at the Dalian Power Plant. The wharf is
owned and maintained by the Dalian Port Authority and is capable of handling
30,000 ton vessels. Dalian Power Plant typically stores 140,000 to 150,000
tons of coal on site.
Dalian Power Plant consumes 14,000 tons of coal per day when operating at
maximum generating capacity. In 2004, Dalian Power Plant obtained 53.4% of its
total consumption of coal pursuant to the key contracts and the remainder on
the open market. The weighted average cost of coal for Dalian Power Plant was
RMB344.79 (2003: RMB260.48) per ton in 2004.
Dalian Power Plant sells all its electricity through the Liaoning
Electric Power Co., Ltd. Electricity generated by Dalian Power Plant is
delivered to the Liaoning Provincial Power Grid.
Huaneng Dandong Power Plant ("Dandong Power Plant") Dandong Power Plant
is located on the outskirts of the city of Dandong in Liaoning. Dandong Power
Plant had originally been developed by HIPDC which, pursuant to the
Reorganization Agreement, transferred all its rights and interests therein to
us effective
20
December 31, 1994. In March 1997, we began construction of Dandong Power
Plant, which comprises two 350 MW coal-fired units supplied by an
international consortium including Westinghouse Electric Corporation, Mitsui
Babcock Energy Limited and Sargent & Lundy L.L.C.
Dandong Power Plant consumes 6,200 tons of coal per day when operating at
maximum generating capacity. In 2004, Dandong Power Plant obtained 43.8% of
its total consumption of coal pursuant to the key contracts and the remainder
on the open market. The weighted average cost of coal for Dandong Power Plant
was RMB289.67 (2003: RMB227.64) per ton in 2004.
All the electricity generated by Dandong Power Plant is delivered to the
Liaoning Provincial Power Grid and was sold through the Liaoning Electric
Power Co., Ltd. The coal supply is obtained from several coal producers in
Northern Shanxi Province. The coal is transported by rail from the mines to
Qinhuangdao port and shipped by barge to the Dandong port in Dandong, where it
is unloaded and transported to Dandong Power Plant using special coal handling
facilities. The wharf is owned and maintained by Dandong Power Plant and is
capable of handling 28,000 ton vessels. Dandong Power Plant typically stores
200,000 tons of coal on site.
Huaneng Yingkou Power Plant ("Yingkou Power Plant") Yingkou Power Plant
is located in Yingkou City in Liaoning Province. Yingkou Power Plant Phase I
has an installed capacity of 640 MW and consists of 2 x 320 MW supercritical
coal-fired generating units which commenced commercial operations in January
and December 1996 respectively.
The coal supply for Yingkou Power Plant is mainly obtained from Shanxi
Province. Yingkou Power Plant consumes 6,600 tons of coal per day when
operating at maximum generating capacity. In 2004, Yingkou Power Plant
obtained 60.3% of its total consumption of coal pursuant to the key contracts
and the remainder on the open market. The weighted average cost of coal for
Yingkou Power Plant was RMB301.62 per ton in 2004.
Yingkou Power Plant sells all its electricity through Liaoning Electric
Power Co., Ltd. Electricity generated by Yingkou Power Plant is delivered to
the Liaoning Provincial Power Grid.
Proposed Project in Liaoning Province
Huaneng Yingkou Power Plant Phase II ("Yingkou Phase II") Yingkou Phase
II is planned to consist of two 600 MW coal-fired generating units. The
estimated total investment will be approximately RMB4.5 billion. We will own
100% equity interest in this project. This project has been confirmed by and
registered with NDRC and the State Council.
Power Plant in Fujian Province
Huaneng Fuzhou Power Plant ("Fuzhou Power Plant") Fuzhou Power Plant is
located on the south bank of the Min River, southeast of the city of Fuzhou.
Fuzhou Power Plant, including Phase I and Phase II, has an installed capacity
of 1,400 MW and consists of four 350 MW coal-fired units which commenced
commercial operations in 1988 and 1999 respectively. The units of Phase I and
Phase II were respectively supplied by the Mitsubishi Consortium and an
international consortium including Siemens Aktiengesellschaft and Mitsui
Babcock Energy Limited.
The coal supply for Fuzhou Power Plant is obtained from several coal
producers located mostly in Northern Shanxi Province. The coal is transported
by rail from the mines to Qinhuangdao port and by ship down the east coast of
China and up the Min River to a wharf located at Fuzhou Power Plant. We own
and maintain the wharf, which is capable of handling vessels of up to 20,000
tons and of unloading 10,000 tons to 15,000 tons of coal per day. Fuzhou Power
Plant typically stores 170,000 to 180,000 tons of coal on site.
Fuzhou Power Plant consumes up to 14,000 tons of coal per day when
operating at maximum generating capacity. In 2004, the Fuzhou Power Plant
obtained 54.3% of its total consumption of coal pursuant to the key contracts
and the remainder was obtained on the open market. The weighted average cost
of coal for Fuzhou Power Plant in 2004 was RMB393.15 (2003: RMB274.01) per
ton.
All the electricity sales of Fuzhou Power Plant are made through the
Fujian Electric Power Company, Ltd. Electricity generated by Fuzhou Power
Plant is delivered to the Fujian Provincial Power Grid.
21
Power Plant in Hebei Province
Huaneng Shangan Power Plant ("Shangan Power Plant") Shangan Power Plant
is located on the outskirts of Shijiazhuang. Shangan Power Plant has been
developed in two separate expansion phases. The Shangan Power Plant Phase I
has an installed capacity of 700 MW and consists of two 350 MW coal-fired
units which commenced commercial operations in 1990. The units were supplied
by the General Electric Consortium. Shangan Power Plant Phase II shares with
the Shangan Power Plant Phase I certain facilities, such as coal storage
facilities and effluence pipes, which have been built to accommodate the
requirements of plant expansions. The Shangan Power Plant Phase II utilizes
two 300 MW coal-fired units supplied by China Dongfang Group using technology
licensed for boilers from Foster Wheeler Energy Corporation. The two
generating units commenced commercial operation in 1997.
The coal supply for Shangan Power Plant is obtained from numerous coal
producers in Central Shanxi Province, which is approximately 64 kilometers
from Shangan Power Plant. The coal is transported by rail from the mines to
the Shangan Power Plant. We own and maintain the coal unloading facilities
which are capable of unloading 10,000 tons of coal per day. Shangan Power
Plant typically stores 80,000 to 120,000 tons of coal on site.
Shangan Power Plant consumes 9,000 tons of coal per day when operating at
maximum generating capacity. In 2004, Shangan Power Plant obtained 56% of its
total consumption of coal pursuant to the key contracts and the remainder was
obtained on the open market. The weighted average cost of coal for Shangan
Power Plant in 2004 was RMB212.20 (2003: RMB178.26) per ton.
Shangan Power Plant sells all its electricity through the Hebei Electric
Power Corporation. Electricity generated by Shangan Power Plant is delivered
to the Hebei Provincial Power Grid.
Proposed Project in Hebei Province
Huaneng Shangan Power Plant Phase III ("Shangan Phase III Expansion") The
Shangan Phase III Expansion is expected to be adjacent to the Shangan Power
Plant Phase I and the Shangan Power Plant Phase II. The Shangan Phase III
Expansion is expected to consist of two 600 MW coal-fired units. The project
proposal has been submitted to NDRC.
Power Plants in Jiangsu Province
Huaneng Nantong Power Plant ("Nantong Power Plant") Nantong Power Plant
is located in the city of Nantong. Nantong Power Plant, including Phase I and
Phase II, has an installed capacity of 1,404 MW and consists of two 352 MW and
two 350 MW coal-fired units which commenced commercial operations in 1989,
1990 and 1999, respectively. The units were supplied by the General Electric
Consortium.
The coal supply for Nantong Power Plant is obtained from several coal
producers located mostly in Northern Shanxi Province. The coal is transported
by rail from the mines to Qinhuangdao port and by ship to Yaogang, 7.5
kilometers from the Nantong Power Plant, where it is transshipped onto Company
barges for the last stage of the journey up the Yangtze River to the wharf
located adjacent to the Nantong Power Plant. The Company owns and maintains
the wharf which is capable of handling 5,000 ton barges and of unloading
15,000 tons of coal per day. Nantong Power Plant typically stores 120,000 to
150,000 tons of coal on site.
Nantong Power Plant consumes up to 14,000 tons of coal per day when
operated at maximum generating capacity. In 2004, Nantong Power Plant obtained
56.4% of its total consumption of coal pursuant to the key contracts and the
remainder was obtained on the open market. The weighted average cost of coal
for Nantong Power Plant in 2004 was RMB332.41 (2003: RMB257.38) per ton.
Nantong Power Plant sells all its electricity through the Jiangsu
Electric Power Company. Electricity generated by Nantong Power Plant is
delivered to the Jiangsu Provincial Power Grid.
Huaneng Nanjing Power Plant ("Nanjing Power Plant") Nanjing Power Plant
has an installed capacity of 640 MW consisting of two 320 MW coal-fired units
which commenced commercial operations in March and October 1994, respectively.
22
The coal supply for the Nanjing Power Plant is obtained from several coal
producers located in the Shanxi and Anhui Provinces. The coal is transported
by rail from the mines to Yuxikou Port and Pukou Port and shipped to the
plant's own wharf facilities. The wharf is capable of handling 6,000 ton
vessels. Nanjing Power Plant typically stores 100,000 tons of coal on site and
consumes 5,000 tons of coal per day when operating at maximum generating
capacity.
In 2004, Nanjing Power Plant obtained approximately 51.9% of its total
consumption of coal pursuant to the key contracts and the remainder was
obtained on the open market. The weighted average cost of coal for Nanjing
Power Plant in 2004 was RMB348.95 (2003: RMB256.44) per ton.
Nanjing Power Plant sells all its electricity through the Jiangsu
Electric Power Company. Electricity generated by Nanjing Power Plant is
delivered to the Jiangsu Provincial Power Grid.
Jiangsu Taicang Power Plant ("Taicang Power Plant") Taicang Power Plant
was constructed in the late 1990's. It is located in the vicinity of Suzhou,
Wuxi and Changzhou, which is the most affluent area in Jiangsu Province.
Taicang Power Plant is an ancillary facility of the China-Singapore Suzhou
Industrial Park and has a total planned capacity of 1,200 MW. Taicang Power
Plant now comprises 2 x 300 MW PRC-built coal-fired generating units, which
commenced operation in December, 1999 and April, 2000 respectively.
The coal supply for Taicang Power Plant is primarily from Shenhua in
Inner Mongolia and Datong in Shanxi Province. Taicang Power Plant consumes up
to 6,000 tons of coal per day when operating at maximum generating capacity.
In 2004, Taicang Power Plant obtained approximately 51.9% of its total
consumption of coal pursuant to the key contracts and the remainder was
obtained on the open market. The weighted average cost of coal for Taicang
Power Plant in 2004 was RMB339.94 (2003: RMB262.95) per ton.
Taicang Power Plant sells all its electricity through the Jiangsu
Electric Power Company. Electricity generated by Taicang Power Plant is
delivered to the Jiangsu Provincial Power Grid.
Jiangsu Huaiyin Power Plant ("Huaiyin Power Plant") Huaiyin Power Plant
was constructed in the early 1990's. It is located in the Centre of the
Northern Jiangsu Power Grid. The plant's 2 x 200 MW PRC-built coal-fired
generating units commenced operation in November, 1993 and August, 1994
respectively. In order to reduce energy consumption and increase capacity, one
generating unit of Huaiyin Power Plant was upgraded in October 2001, which
increased the maximum generation capacity of that unit to 220 MW. In 2002,
upgrading of the second generating unit was completed, and the actual
generation capacity of Huaiyin Power Plant is 400 MW. The other two 330 MW
coal-fired generating units of Huaiyin Power Plant Phase II Expansion have
commenced commercial operations in January and March 2005, respectively.
In 2004, Huaiyin Power Plant obtained approximately 70.1% of its total
consumption of coal pursuant to the key contracts and the remainder was
obtained on the open market. The weighted average cost of coal for Huaiyin
Power Plant in 2004 was RMB358.62 (2003: RMB256.21) per ton.
The coal supply for the Huaiyin Power Plant is primarily from Anhui
Province, Shaanxi Province, Henan Province and Shanxi Province. Huaiyin Power
Plant consumes up to 4,600 tons of coal per day when operating at maximum
generating capacity.
Huaiyin Power Plant sells its electricity to Jiangsu Electric Power
Company and delivers its electricity to the Jiangsu Provincial Power Grid.
Project Under Construction in Jiangsu Province
Huaneng Taicang Power Plant Phase II Expansion ("Taicang Phase II
Expansion") Taicang Phase II Expansion consists of two 600 MW coal-fired
generating units and is currently under construction. The estimated total
investment for this project is approximately RMB4.64 billion. This project is
expected to be put into commercial operation in 2006.
23
Proposed Projects in Jiangsu Province
Huaneng Huaiyin Power Plant Phase III Expansion ("Huaiyin Phase III
Expansion") The project is planned to consist of 2 x 330 MW coal-fired
generating units. The estimated total investment is approximately RMB2.49
billion. We expect to own 63.64% equity interest in this project. The project
proposal has been submitted to NDRC.
Huaneng Jinling Combined-cycle Gas turbine Project ("Jinling Gas Turbine
Project") The project is expected to be located on the outskirts of Nanjing.
Three 350 MW-class combined-cycle-gas-turbine generating units will be
constructed and the project investment is estimated to be approximately RMB3.6
billion, of which 25% will be financed by equity capital and 75% by bank
borrowing. The Jinling Gas Turbine Project will be jointly developed by us,
Jiangsu Provincial Investment Management Company, Ltd. and Nanjing Municipal
Investment Corporation. The project proposal for Jinling Gas Turbine Project
has been approved by the State Council. We have signed a letter of intent with
PetroChina Company Limited with regards to the purchase and transportation of
natural gas for Jinling Gas turbine Project.
Power Plants in Shanghai Municipality
Huaneng Shanghai Shidongkou Second Power Plant ("Shidongkou II")
Shidongkou II is located in the northern suburbs of Shanghai. Shidongkou II
has an installed capacity of 1,200 MW and consists of two 600 MW coal-fired
super-critical units which commenced commercial operations in June and
December 1992, respectively. The units supplied by a consortium of
international suppliers led by Sargent & Lundy L.L.C.
The coal supply for Shidongkou II is obtained from several coal producers
located mostly in Northern Shanxi Province. The coal is transported by rail
from the mines to Qinhuangdao port or Tianjin port and shipped to the plant's
own wharf facilities. The wharf is capable of handling 35,000 ton vessels.
Shidongkou II typically stores 140,000 to 180,000 tons of coal on site and
consumes 11,450 tons of coal per day when operating at maximum generating
capacity.
In 2004, Shidongkou II obtained 45% of its total consumption of coal
pursuant to the key contracts and the remainder was obtained on the open
market. The weighted average cost of coal for Shidongkou II in 2004 was
RMB342.30 (2003: RMB250.81) per ton.
Shidongkou II sells all its electricity through Shanghai Municipal
Electric Power Company. Electricity generated by Shidongkou II is delivered to
the Shanghai Municipal Power Grid.
Shanghai Shidongkou First Power Plant ("Shidongkou I") Shidongkou I was
constructed in the 1980's and is located in the northern region of the
Shanghai Power Grid. The plant comprises 4 X 300 MW PRC-built coal-fired
generating units, which commenced operation in February, 1988, December, 1988,
September, 1989 and May, 1990 respectively, and has a total installed capacity
of 1,200 MW.
The coal supply for Shidongkou I is primarily from Shanxi Province, Anhui
Province and Henan Province.
In 2004, Shidongkou I obtained approximately 65.5% of its total
consumption of coal pursuant to the key contracts and the remainder was
obtained on the open market. The weighted average cost of coal for Shidongkou
I in 2004 was RMB359.93 (2003: RMB262.69) per ton.
Shidongkou I sells its electricity through Shanghai Municipal Electric
Power Company. Electricity generated by Shidongkou I is delivered to the
Shanghai Municipal Power Grid.
Proposed Projects in Shanghai Municipality
Shanghai Combined-cycle Gas Turbine Power Plant ("Shanghai Gas Turbine
Project") Three 350MW combined-cycle-gas-turbine generating units will be
constructed, and the project investment is estimated to be approximately
RMB3.6 billion, of which 25% will be financed by equity capital and 75% by
bank borrowing. Shanghai Gas Turbine Project will be jointly developed by us
and Shenergy Company, Ltd. according to the expected ownership of 70% and 30%
respectively. The Shanghai Gas Turbine Project has been confirmed by and
registered with the State Council. We have signed a letter of intent with
Shanghai Natural Gas Pipeline Company with regard to the purchase and
transportation of natural gas for Shanghai Gas Turbine Project.
24
Power Plants in Guangdong Province
Huaneng Shantou Oil-Fired Power Plant ("Shantou Oil-Fired Power Plant")
Shantou Oil-Fired Power Plant is located on the outskirts of the city of
Shantou. Shantou Oil-Fired Power Plant has an installed capacity of 103 MW and
consists of two gas turbine units and a single steam turbine unit. The two gas
turbine units commenced commercial operations in January, 1987, and Shantou
Oil-Fired Power Plant commenced full-scale commercial operations in April,
1988. The units were supplied by Alsthom.
Prior to 1995, each year NDRC allocated 120,000 tons of crude oil
produced by the Shengli Oil Field to Shantou Oil-Fired Power Plant. This
allocation is currently made in accordance with our planned generation. The
crude oil purchased by Shantou Oil-Fired Power Plant is transported from the
Shengli Oil Field to the Huangdao port in Shandong Province and shipped by the
Guangzhou Ocean Shipping (Group) Company by tanker to storage facilities at
the Maoming Petrochemical Facility in Zhanjiang. The crude oil is then
transported twice a month by 5,000 ton barge loads to the port in Shantou
where the oil is stored in a 30,000 cubic meter storage tank. From the Shantou
port, the crude oil is pumped once a week through a 14-kilometer pipeline to
Shantou Oil-Fired Power Plant. Shantou Oil-Fired Power Plant typically stores
2,500 tons of oil on site and consumes 200 tons of oil per day.
The average price for crude oil from the Shengli Oil Field to Shantou
during 2004 was RMB2,352.6 (2003: RMB1,880.03) per ton.
The electricity sales of Shantou Oil-Fired Power Plant were made through
the Shantou Power Supply Branch of Guangdian Group Company. Electricity
generated by Shantou Oil-Fired Power Plant is delivered to the Guangdong
Shantou Municipal Power Grid.
Huaneng Shantou Coal-Fired Power Plant ("Shantou Power Plant") Shantou
Power Plant had originally been developed and constructed by HIPDC which,
transferred all its rights and interests therein to us effective December 31,
1994. See "Item 7. Major Shareholders and Related Party Transactions." Located
on the outskirts of the city of Shantou near Shantou Oil-Fired Power Plant,
Shantou Power Plant was set up with the support of the Shantou municipal
government and the Guangdong provincial government. Shantou Power Plant
consists of two 300 MW coal-fired units with boilers supplied by Dongfang
Group using technology from Foster Wheeler Energy Corporation and Russian-made
turbines and generators. The two units commenced commercial operation on
January 1, 1997.
The coal supply for Shantou Power Plant is obtained from several coal
producers located mostly in the northern area of Shanxi Province. The coal is
transported by rail from the mines to Qinhuangdao port and by ship down the
east coast of China to the wharf located at Shantou Power Plant, which is
maintained by the Shantou Port Authority and is capable of handling 35,000 ton
vessels. The Shantou Power Plant typically stores 140,000 to 150,000 tons of
coal on site.
Shantou Power Plant will consume up to 5,000 tons of coal per day when
operated at maximum generating capacity. In 2004, the Shantou Power Plant
obtained 65.7% of its total consumption of coal pursuant to the key contracts
and the remainder was purchased on the open market. The weighted average costs
of coal for Shantou Power Plant in 2004 was RMB371.30 (2003: RMB293.60) per
ton.
The electricity sales of Shantou Power Plant are made to the Shantou
Municipal Power Corporation and the Guangdong Guangdian Power Grid Group Co.,
Ltd. Electricity generated by Shantou Power Plant is delivered to the
Guangdong Provincial Power Grid.
Project Under Construction in Guangdong Province
Huaneng Shantou Coal-Fired Power Plant Phase II ("Shantou Phase II
Expansion") Shantou Phase II Expansion is expected to be adjacent to the
Shantou Power Plant. We expect that the Shantou Phase II Expansion will share
with the Shantou Power Plant certain facilities, such as coal unloading and
storage facilities and effluence pipes, which have been built to accommodate
the requirements of plant expansions. The Shantou Phase II Expansion is
expected to consist of one 600 MW coal-fired generating unit, with total
investment of RMB2.26 billion, of which 25% will be financed by equity capital
and 75% by bank borrowing. We will own 100% equity interest in this project.
The project has commenced construction and is expected to be put into
operation in 2005.
25
Power Plants in Shandong Province
Dezhou Power Plant ("Dezhou Power Plant") Dezhou Power Plant, is located
in Dezhou City, near the border between Shandong and Hebei Provinces, close to
an industrial zone that is an important user of electric power for industrial
and commercial purposes.
Dezhou Power Plant comprises of three Phases, with Phases I and II each
consisting of two 300 MW coal-fired generating units, and Phase III consisting
of two 660 MW coal-fired generating units. Phase III was completed in 2002,
which is ahead of plan schedule by one year.
Dezhou Power Plant is approximately 200 km from Taiyuan, Shanxi Province,
the source of the plant's coal supply. The plant is located on the
Taiyuan-Shijiazhuang-Dezhou rail line, giving it access to transportation
facilities for coal. Dezhou Power Plant consumes up to 27,000 tons of coal per
day when operating at maximum generating capacity. In 2004, Dezhou Power Plant
obtained approximately 67.6% of its total consumption of coal pursuant to the
key contracts and the remainder was obtained on the open market. The weighted
average cost of coal for Dezhou Power Plant in 2004 was RMB217.03 (2003:
RMB182.60) per ton. The plant is connected to the main trunk rail line at
Dezhou by a dedicated 3.5 km spur line owned by us.
Dezhou Power Plant sells its electricity through Shandong Electric Power
Corporation. Electricity generated by Dezhou Power Plant is delivered to the
Shandong Provincial Power Grid.
Jining Power Plant ("Jining Power Plant") Jining Power Plant is located
in Jining City, near the Jining load Centre and near numerous coal mines.
Yanzhou coal mine, which is adjacent to the plant, alone has annual production
of approximately 20 million tons.
Jining Power Plant facilities have undergone replacement, renovation and
construction as necessary. Jining Power Plant has higher rates of auxiliary
power and coal consumption than many larger and newer plants. Generating units
V and VI of Jining Power Plant (using cycled fluidized bed combustion boiler)
with capacity of 270 MW have been put into commercial operation in July and
August 2003, respectively. Jining Power Plant currently comprises six
coal-fired generating units, with an aggregate installed capacity of 595 MW.
Jining Power Plant consumes up to 7,000 tons of coal per day when
operating at maximum generating capacity. In 2004, Jining Power Plant obtained
approximately 2.8% of its total consumption of coal pursuant to the key
contracts and the remainder was obtained on the open market. The weighted
average cost of coal for Jining Power Plant in 2004 was RMB274.63 (2003:
RMB195.55) per ton.
Jining Power Plant sells its electricity through the Shandong Electric
Power Corporation and delivers its electricity to Shandong Provincial Power
Grid.
Weihai Power Plant ("Weihai Power Plant") We hold a 60% interest in
Weihai Power Plant, the remaining 40% interest of which is owned by Weihai
Power Development Bureau ("WPDB"). The facility is situated approximately 16
km southeast of Weihai City, on the shore of the Bohai Gulf. Its location
provides access to cooling water for operations and transportation of coal as
well as ash and slag disposal facilities.
Weihai Power Plant, developed in two phases, consists of four coal-fired
generating units with an aggregate design capacity of 850 MW. Phase I consists
of two 125 MW generating units (Units I and II), and Phase II consists of two
300 MW generating units (Units III and IV). Unit I began commercial operation
in May, 1994, and Unit II began commercial operation in January, 1995.
Unit III commenced commercial operation in March, 1998. Unit IV commenced
commercial operation in November, 1998.
Weihai Power Plant consumes up to 9,000 tons of coal per day when
operating at maximum generating capacity. In 2004, Weihai Power Plant obtained
approximately 97.2% of its total consumption of coal pursuant to the key
contracts and the remainder was obtained on the open market. The weighted
average cost of coal for Weihai Power Plant in 2004 was RMB318.83 (2003:
RMB250.16) per ton. The coal supply for Weihai Power Plant is obtained from
Shanxi Province and Inner Mongolia.
Weihai Power Plant sells its electricity through Shandong Electric Power
Corporation and delivers its electricity to Shandong Provincial Power Grid.
26
Huaneng Xindian Power Plant ("Xindian Power Plant") Xindian Power Plant
is located in Zibo Municipality of Shandong Province. Xindian Power Plant
currently has an installed capacity of 450 MW and consists of two 225 MW
coal-fired generating units which commenced commercial operations in December
31, 2001 and January 22, 2002, respectively.
Two 100 MW oil-fired generating units of Xindian Power Plant were shut
down with the consideration of rising oil prices and the need of reducing
operating costs.
The coal supply for Xindian Power Plant is obtained from several coal
producers located mostly in Shanxi Province. Xindian Power Plant consumes up
to 5,000 tons of coal per day when operating at maximum generating capacity.
In 2004, Xindian Power Plant obtained 72.2% of its total consumption of coal
pursuant to the key contracts and the remainder on the open market. The
weighted average cost of coal for Xindian Power Plant was RMB292.76 (2003:
RMB235.94) per ton in 2004.
Xindian Power Plant sells all its electricity through the Shandong
Electric Power Corporation. Electricity generated by Xindian Power Plant is
delivered to the Shandong Provincial Power Grid.
Proposed Project in Shandong Province
Xindian Power Plant Phase III Expansion ("Xindian Phase III Expansion")
This project is planned to consist of two 300 MW coal-fired generating units
with an estimated total investment of approximately RMB2.55 billion. The
project proposal has been submitted to NDRC.
Power Plants in Zhejiang Province
Zhejiang Changxing Power Plant ("Changxing Power Plant") Changxing Power
Plant was constructed in the early 1990's. It is located at the intersection
of Zhejiang Province, Jiangsu Province and Anhui Province. Changxing Power
Plant is a key power plant in northern Zhejiang area. It has 2 x 125 MW
PRC-built coal-fired generating units which commence operation in January,
1992 and August, 1992, respectively.
The coal supply for Changxing Power Plant is primarily from Jungar in
Inner Mongolia and Xuzhou in Jiangsu Province. Changxing Power Plant consumes
up to 3,000 tons of coal per day when operating at maximum generating
capacity. In 2004, Changxing Power Plant obtained approximately 66% of its
total consumption of coal pursuant to the key contracts and the remainder was
obtained on the open market. The weighted average cost of coal for Changxing
Power Plant in 2004 was RMB360.82 per ton (2003: RMB263.96).
Changxing Power Plant sells its electricity to Zhejiang Provincial
Electric Power Company. Changxing Power Plant delivers its electricity to
Zhejiang Provincial Power Grid.
Project Under Construction in Zhejiang Province
Yuhuan Power Plant ("Yuhuan Phase I"). This project is expected to
consist two 1000 MW ultra-super critical coal-fired generating units, with an
estimated total investment of RMB9.72 billion, of which 25% will be financed
by equity capital and 75% by bank borrowing. We own 100% interests of this
project. This project has commenced construction and the two generating units
are expected to be put into commercial operation in 2007 and 2008
respectively.
Proposed Project in Zhejiang Province
Huaneng Yuhuan Power Plant Phase II ("Yuhuan Phase II") Yuhuan Phase II
is planned to consist of two 1000 MW super-critical generating units, with an
estimated total investment of RMB9 billion. We expect to own 100% equity
interest in this project.
Power Plant in Shanxi Province
Huaneng Yushe Power Plant ("Yushe Power Plant") Yushe Power Plant is
located in Yushe County of Shanxi Province, currently has an installed
capacity of 200 MW and consists of two 100 MW coal-fired generating units
which commenced commercial operations in August and December 1994,
respectively.
Another two 300 MW coal-fired generating units of Yushe Power Plant Phase
II which commenced commercial operations in November and December 2004
respectively.
27
The coal supply for Yushe Power Plant is obtained from several coal
producers located mostly in Shanxi Province. Yushe Power Plant consumes up to
9,100 tons of coal per day when operating at maximum generating capacity. In
2004, Yushe Power Plant obtained all of its coal through purchases in the
local market. The weighted average cost of coal for Yushe Power Plant was
RMB181.96 per ton in 2004.
Yushe Power Plant sells all its electricity through the Shanxi Electric
Power Corporation. Electricity generated by Yushe Power Plant is delivered to
the Shanxi Provincial Power Grid.
Power Plant in Henan Province
Huaneng Qinbei Power Plant ("Qinbei Power Plant") Qinbei Power Plant is
located in Jiyuan Municipality of Henan Province. Its installed capacity is
1,200 MW which consists of two 600 MW supercritical coal-fired generating
units and commenced commercial operations in November and December 2004,
respectively. The coal supply for Qinbei Power Plant is obtained from Shanxi
Province. Qinbei Power Plant consumes up to 11,000 tons of coal per day when
operating at maximum generation capacity.
Proposed Project in Henan Province
Qinbei Power Plant Phase II Expansion ("Qinbei Phase II Expansion") This
project is planned to consist of two 600 MW coal-fired generating units with
an estimated total investment of approximately RMB4.5 billion. We expect to
own 60% equity interest in this project. The project proposal has been
approved by NDRC.
Power Plant in Jiangxi Province
Huaneng Jinggangshan Power Plant ("Jinggangshan Power Plant")
Jinggangshan Power Plant is located in Jian City of Jiangxi Province, has an
installed capacity of 600 MW and consists of two 300 MW coal-fired generating
units which commenced commercial operation in December, 2000 and August, 2001
respectively.
The coal supply for Jinggangshan Power Plant is obtained from Henan
Province, Anhui Province and Jiangxi Province. Jinggangshan Power Plant
consumes up to 6,500 tons of coal per day when operating at maximum generating
capacity. In 2004, Jinggangshan Power Plant obtained 76.7% of its total coal
consumption pursuant to the key contracts and the remainder on the open
market. In 2004, the weighted average cost of coal for Jinggangshan Power
Plant was RMB360.90 per ton.
Jinggangshan Power Plant sells its electricity through the Jiangxi
Electric Power Corporation. Electricity generated by it is delivered to the
Jiangxi Provincial Power Grid.
Power Plant in Hunan Province
Huaneng Yueyang Power Plant ("Yueyang Power Plant") Yueyang Power Plant
is located in Yueyang City of Hunan Province. It has an installed capacity of
725 MW and consists of two 362.5 MW sub-critical coal-fired generating units
which commenced commercial operation in September and December 1991
respectively.
The coal supply for Yueyang Power Plant is obtained from Datong in Shanxi
Province. Yueyang Power Plant consumes up to 7,400 tons of coal per day when
operating at maximum generating capacity. In 2004, Yueyang Power Plant
obtained 47.5% of its total consumption of coal pursuant to the key contracts
and the remainder on the open market. In 2004, the weighted average cost of
coal for Yueyang Power Plant was RMB315.30 per ton.
Yueyang Power Plant sells its electricity through the Hunan Electric
Power Corporation. Electricity generated by Yueyang Power Plant is delivered
to the Hunan Provincial Power Grid.
Project Under Construction in Hunan Province
Huaneng Yueyang Power Plant Phase II ("Yueyang Phase II") The project is
under construction. It consists of two 300 MW coal-fired generating units with
an estimated total investment of approximately RMB2.47 billion. The two
generating units are expected to be put into commercial operation in 2006. We
will own 55% equity interest in this project.
28
Power Plant in Chongqing Municipality
Huaneng Luohuang Power Plant ("Luohuang Power Plant") Luohuang Power
Plant is located in Chongqing Municipality. It consists of two operating
plants: Jiangjin Luohuang Power Plant and Jiangbei Combined-cycle Power Plant.
Each of Phase I and Phase II of Jiangjin Luohuang Power Plant has an installed
capacity of 720 MW and consists of two 360 MW coal-fired generating units. The
two units in Phase I commenced commercial operation in September, 1991 and
February, 1992 respectively, and the two units in Phase II commenced
commercial operation in December, 1998. Jiangbei Combined-cycle Power Plant
has an installed capacity of 108 MW and consists of one 108 MW Combined-cycle
generating unit that commenced commercial operation in 1991.
The coal supply for Luohuang Power Plant is obtained from Chongqing
Municipality. Luohuang Power Plant consumes up to 15,000 tons of coal per day
when operating at maximum generating capacity. In 2004, Luohuang Power Plant
obtained all of its coal supplies through purchases in the local market. In
2004, the weighted average cost of coal for Luohuang Power Plant was RMB184.89
per ton.
Luohuang Power Plant sells its electricity through the Chongqing
Municipal Power Corporation. Electricity generated by such plant is delivered
to the Chongqing Municipal Power Grid.
Project Under Construction in Chongqing Municipality
Huaneng Luohuang Power Plant Phase III ("Luohuang Phase III") Luohuang
Phase III is currently under construction. It is planned to have an installed
capacity of 1,200 MW and consists of two 600 MW coal-fired generating units
with an estimated total investment of approximately RMB4.57 billion. The two
generating units are expected to be put into commercial operation in 2006 and
2007 respectively. We will own 60% equity interest in this project.
Power Plant in Gansu Province
Huaneng Pingliang Power Plant ("Pingliang Power Plant") Pingliang Power
Plant is located in Pingliang City of Gansu Province. It has an installed
capacity of 1,200 MW and consists of four 300 MW coal-fired generating units
which commenced commercial operation in 2000, 2001, June and November 2003
respectively.
The coal supply for Pingliang Power Plant is obtained from local coal
mines. Pingliang Power Plant consumes up to 13,000 tons of coal per day when
operating at maximum generating capacity. In 2004, Pingliang Power Plant
obtained all of its coal supplies through purchases in the local market.
Pingliang Power Plant sells its electricity through the Gansu Electric
Power Corporation. Electricity generated by the plant is delivered to the
Gansu Provincial Power Grid.
Competition and dispatch
All power plants in China are subject to dispatch conducted by various
dispatch Centres. A dispatch Centre is required to dispatch electricity
pursuant to the Regulations on the Administration of Electric Power Dispatch
Networks and Grids, issued by the State Council with effect from November 1,
1993, and in accordance with its agreements with power plants subject to its
dispatch. Power generation companies are also required to enter into on-grid
dispatch agreements with power grid companies. As a result, there is
competition for favorable dispatch treatment in the PRC electric power
industry, especially during the off-peak load periods. More efficient power
plants usually operate at higher output than less efficient power plants. We
believe that in order to increase system stability, large and efficient power
plants such as ours will be preferred as base load plants to generate power
for the grids to which they connect. We believe that our dispatch arrangements
with the local power corporations and dispatch Centres, superior quality
equipment, lower coal consumption rate, higher efficiency of plant operation,
lower emission levels and larger capacity represent competitive advantages in
the markets in which we operate.
Since 1985, a number of foreign power developers and foreign companies
(including Hong Kong companies), have been pursuing investment opportunities
in the PRC electric power industry, which opportunities include the
development of power plants (through joint ventures with PRC partners) or the
purchase of interests in existing power plants. While we believe that we
currently possess advantages over such foreign developers because of our
extensive experience in the electric power industry of China and our close
29
relationships with the central and local governments, there can be no
assurance that we will not experience increased competition in the future.
In addition to competing with other foreign-invested power generation
companies for favorable dispatch arrangements, since 2002, we have also been
facing competition from four other major power generating groups: China Power
Investment Corporation, China Huadian Power Corporation, China Guodian Power
Corporation and China Datang Power Corporation, which were created following
the break-up of the former State Electric Corporation in 2002. Although we
were not affected by this reform measure as we have developed good working
relationship with the dispatch Centres and the relevant government departments
in the areas where our power plants are located, there can be no assurance
that such good working relationship will not be adversely affected as more
power generation companies compete for favorable dispatch treatment.
Environmental regulation
We are subject to the PRC Environmental Protection Law, the regulations
of the State Council issued thereunder, the PRC Law on the Prevention and
Treatment of Water Pollution, the PRC Law on the Prevention and Treatment of
Air Pollution, the Emission Standard of Air Pollutants for Thermal Power
Plants (the "New Emission Standards") thereunder and the PRC Law on Ocean
Environment Protection (collectively the "National Environmental Laws") and
the environmental rules promulgated by the Local Governments in whose
jurisdictions our various power plants are located (the "Local Environmental
Rules"). According to the National Environmental Laws, the State Environmental
Protection Bureau sets national environmental protection standards and local
environmental protection bureaus may set stricter local standards. Enterprises
are required to comply with the stricter of the two standards.
According to the New Emission Standards, promulgated by the State
Environmental Protection Agency and State Technology Supervision
Administration with effect from January 1, 2004, more restrictive standards to
control sulfur dioxide and nitrous oxide emissions are applicable to all
thermal power plant projects for which environmental impact study reports are
yet to be approved. These restrictive standards govern both the total sulfur
dioxide emissions from the power plant and the emission density of each
chimney.
We have adopted measures to control different emissions into the
atmosphere. In order to reduce fly ash, we use very high-efficiency
electrostatic precipitators. Sulfur emissions are reduced by burning
low-sulfur content coal, which is reflected in the design of the coal-fired
power plants.
Each power plant has a waste water treatment facility to treat water used
by the power plant before it is released into the river or the sea. We pay
discharge fees on the basis of measurements made at discharge points of each
plant where waste is released. The PRC currently does not have any regulations
regarding thermal pollution of the cooling water used by the electric power
industry.
Approximately 70% of the ash remaining after the combustion of coal is
used in the manufacture of bricks and other construction materials in 2004.
In 2002 and 2003, we paid discharge fees to local governments of
approximately RMB38.9 million and RMB72.68 million respectively. The increase
in 2002 was primarily due to the fact that some local governments started to
implement the sulfur dioxide discharge regulation in accordance with the PRC
Law of the Prevention and Treatment of Air Pollution, as a result of which the
discharge fees were collected for the actual amount of discharge, rather than
only for the amount in excess of certain threshold as in the past. The
increase in 2003 was due to the implementation of a new regulation and the
implementing Rules on the Administration of the Levy Standards of Emmission
Fees which became effective on July 1, 2003. Effective July 1, 2003, all power
plants in China became subject to the pollutant discharge levy system,
pursuant to which discharge fees are levied based on the actual amount of
pollutants discharged. As a result, all of our power plants are now required
to pay discharge fees in such manner. Under this new regulation, the discharge
fees for sulphur dioxide will increase annually by RMB0.21 per kilogram form
RMB0.21 in 2003 to RMB0.63 in 2005. Discharge fees for nitrous dioxide were
increased to RMB0.63 per kilogram starting from July 1, 2004. The discharge
fees for the dust are RMB0.28 per kilogram from July 1, 2003. In 2004, we paid
to the local governments a total discharge fee of approximately RMB170.32
million.
We believe that we have implemented systems that are adequate to control
environmental pollution caused by our facilities. In addition to the measures
identified above, each power plant has its own environment protection office
and staff responsible for monitoring and operating the environmental
protection equipment.
30
The environmental protection departments of the local governments monitor the
level of emissions and base their fee assessments on the results of their
tests.
We believe our environmental protection systems and facilities for the
power plants are adequate for us to comply with applicable national and local
environmental protection regulations. However, the PRC Government may impose
additional, stricter regulations similar to the New Emission Regulations which
would require additional expenditure on compliance with environmental
regulations.
Insurance
We currently maintain with the PICC Property and Casualty Company Ltd.,
China Pacific Property Insurance Co., Ltd., Ping An Property and Casualty
Insurance Company of China, Ltd. and Yongcheng Property and Casualty Insurance
Company approximately RMB105.9 billion of coverage on our property, plant and
equipment (including construction insurance). We do not carry business
interruption insurance, which is not customarily carried by power companies in
the PRC.
We believe that our insurance coverage is adequate and is standard for
the power industry in China.
ITEM 5 Operating and Financial Review and Prospects
Our core business is to invest, construct and operate power plants and
provide sustainable and stable electricity supply to users through local grid
companies.
Huaneng Power International, Inc. is one of the largest independent power
generation enterprises in China. As of December 31, 2004, the Company wholly
owned 16 operating power plants, had controlling interests in 7 operating
coal-fired power companies and minority interests in 4 power companies. These
power plants and power companies are widely located covering the Northeast
grid (Liaoning), the Northern China grid (Hebei, Shanxi and Shandong), the
Central China grid (Henan, Hunan and Chongqing), the Eastern China grid
(Shanghai, Jiangsu, Zhejiang and Fujian) and the Southern China grid
(Guangdong).
In January, 2005, the Company obtained a controlling interest in a hydro
power generation company covered by the Sichuan grid located in Southwest
China (60% equity interest of Sichuan Huaneng Hydropower Development
Corporation, Ltd. (the "Sichuan Hydropower")) and one coal-fired power company
covered by the Northwest grid (65% equity interest of Gansu Huaneng Pingliang
Power Generation Limited Liability Company (the "Pingliang Power Company"))
located in Northwest China through acquisitions.
Critical accounting policies
The Company and its subsidiaries have identified the policies below as
critical to our business operations and the understanding of our results of
operations. The impact of and any associated risks related to these policies
on the business operations are discussed throughout the Operating and
Financial Review and Prospects where such policies affect our reported and
expected financial results. For a detailed discussion on the application of
these and other accounting policies, see Note 2 to the Financial Statements in
Item 17 of this Annual Report on Form 20-F, beginning on page F-8. Note that
our preparation of this Annual Report on Form 20-F requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
our financial statements, and the reported amount of revenue and expenses
during the reported period. There can be no assurance that actual results will
not differ from those estimates.
Depreciation of property, plant and equipment. Depreciation is calculated
on the straight-line method to write off the cost of each asset to their
estimated residual values over their estimated useful lives as follows:
Buildings 8-35 years
Electric utility plant in service 4-30 years
Transportation facilities 6-27 years
Others 2.5-18 years
The useful lives and depreciation method are reviewed periodically to
ensure that the method and period of depreciation are consistent with the
expected pattern of economic benefits from items of property, plant and
equipment.
31
Impairment of long-lived assets. The long-lived assets include property,
plant and equipment, investments in associates and other non-current assets.
As of December 31, 2004, we and our subsidiaries had approximately RMB57,580
million of property, plant and equipment, approximately RMB4,328 million of
investments in associates and approximately RMB1,772 million of other
non-current assets, accounting for approximately 87% of our total assets.
Assets that have indefinite useful lives are not subject to amortization
and are tested annually for impairment. Assets that are subject to
amortization are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. An
impairment loss is recognized for the amount by which the asset's carrying
amount exceeds its recoverable amount. The recoverable amount is the higher of
an asset's fair value less costs to sell and value in use. Recoverable amounts
are estimated for individual assets or for the cash-generating unit to which
the asset belongs.
Deferred income taxes. As part of the process of preparing our
consolidated financial statements, we are required to exercise considerable
judgment to estimate the deferred income tax in each individual power plant
and the headquarters. This process involves us estimating future income tax
effects of temporary differences between the tax bases of assets and
liabilities and amounts reported in the accompanying consolidated balance
sheets. The Company and its subsidiaries use currently enacted income tax
rates to determine deferred income taxes. If these rates change, the Company
and its subsidiaries would have to adjust the deferred income tax in the
period these changes happen through the income statement. Deferred income tax
assets on unused tax losses carried forward are recognised to the extent that
it is probable that future taxable income will be available against which the
unused tax losses can be utilised. As of December 31, 2004, we and our
subsidiaries had approximately RMB98 million and approximately RMB547 million
of deferred income tax assets and deferred income tax liabilities,
respectively.
New Accounting Pronouncements
Please refer to Note 42 to the Financial Statements for details of
discussion of new accounting pronouncements.
32
Certain Operating and Financial Data
The following table sets forth certain unaudited operating and financial data
for each of our operating power plants for the fiscal year ended December 31,
2004.
Renminbi in millions, except as otherwise stated
Shantou
Dalian Fuzhou Nantong Shang'an Oil-Fired Dandong Shantou
--------- ---------- --------- --------- --------- --------- ---------
Operating Data
----------------
Actual 9,689,99 10,223.23 9,430.36 8,558.18 318.04 4,792.56 4,668.18
generation
(million kWh)
Coal
consumption
rate
(grams/kWh) 308.85 307.3 312.93 327.44 322.80 309.92 311.25
Financial Data
----------------
Operating 2,224.85 3,047.25 2,507.16 2,106.66 155.25 1,117.14 1,631.00
revenue, net
Fuel (1,353.18) (1,528.85) (1,316.35) (807.00) (143.85) (622.68) (681.70)
Maintenance (43.53) (73.79) (52.19) (66.24) (1.78) (32.73) (34.49)
Depreciation (403.57) (389.84) (356.15) (343.64) (23.24) (280.50) (304.91)
Labor (87.83) (107.00) (112.75) (102.45) (12.98) (42.28) (88.07)
Service fees to
HIPDC - (2.06) - (63.03) - - (84.00)
Other
operating
expenses (46.40) (63.06) (51.80) (84.91) (5.93) (34.51) (38.53)
--------- ---------- --------- --------- --------- --------- ---------
Profit / (Loss)
from
operations 290.34 882.65 617.92 639.39 (32.53) 104.44 399.30
Financial
(expenses) /
income, net (62.42) (76.80) (84.01) (3.86) 0.03 (75.46) 22.95
Share of profit of
an associate - - - - - - -
Loss from
disposal
of investments - (1.99) - - - - -
--------- ---------- --------- --------- --------- --------- ---------
Profit / (loss)
before tax 227.92 803.86 533.91 635.53 (32.50) 28.98 422.25
Income tax
expense/(credit) (25.94) (92.69) (43.38) (102.37) - - (38.19)
--------- ---------- --------- --------- --------- --------- ---------
Net profit /
(loss) 201.98 711.17 490.53 533.16 (32.50) 28.98 384.06
========= ========== ========= ========= ========= ========= =========
[table continued 1]
Shidongkou
II Nanjing Dezhou Jining Changxing Shidongkou I Xindian
---------- ---------- ---------- ---------- ---------- ------------ ----------
Operating Data
----------------
Actual 8,500.22 4,380.41 13,120.59 2,804.94 2,022.55 8,310.12 2,441.55
generation
(million kWh)
Coal
consumption
rate
(grams/kWh) 296.14 310.86 319.76 340.88 334.30 348.20 336.84
Financial Data
----------------
Operating 2,367.38 1,146.03 3,519.47 647.96 564.55 1,906.67 608.65
revenue, net
Fuel (1,099.73) (606.35) (1,257.65) (385.24) (356.11) (1,377.62) (331.26)
Maintenance (19.21) (39.79) (87.36) (24.97) (25.02) (85.31) (18.22)
Depreciation (403.00) (160.52) (508.38) (82.04) (52.71) (192.74) (86.70)
Labor (103.34) (78.13) (213.59) (121.92) (64.33) (152.65) (96.82)
Service fees to
HIPDC 15.48 - - - - - -
Other
operating
expenses (19.23) (24.55) (180.16) (32.90) (25.80) (68.17) (26.34)
---------- ---------- ---------- ---------- ---------- ------------ ----------
Profit / (Loss)
from
operations 738.35 236.69 1,272.33 0.89 40.58 30.18 49.31
Financial
(expenses) /
income, net 1.10 0.12 (44.28) 0.08 0.31 (32.53) (25.81)
Share of profit of
an associate - - - - - - -
Loss from
disposal
of investments - - - - - - -
---------- ---------- ---------- ---------- ---------- ------------ ----------
Profit / (loss)
before tax 739.45 236.81 1,228.05 0.97 40.89 (2.35) 23.50
Income tax
expense/(credit) (126.56) (23.59) (209.17) (0.76) (7.01) 0.47 (6.34)
---------- ---------- ---------- ---------- ---------- ------------ ----------
Net profit /
(loss) 612.89 213.22 1,018.88 0.21 33.88 (1.88) 17.16
========== ========== ========== ========== =========== ============ ==========
[table continued 2]
Jinggang
Yingkou* shan* Weihai Taicang Huaiyin Qinbei Yushe Yueyang* Luohuang*
---------- ---------- --------- ---------- ---------- ---------- ---------- ----------- ----------
Operating Data
----------------
Actual 2,286.33 2,015.35 4,764.71 4,541.92 2,964.46 134.61 2,017.80 2,398.23 3,879.80
generation
(million kWh)
Coal
consumption
rate
(grams/kWh) 319.68 318.86 328.84 313.04 329.27 293.28 361.20 329.17 317.88
Financial Data
----------------
Operating 583.59 530.72 1,493.75 1,255.59 771.81 29.22 444.50 588.12 870.96
revenue, net
Fuel (301.86) (328.07) (671.41) (613.87) (433.55) (18.65) (180.14) (344.14) (308.95)
Maintenance (10.27) (3.92) (52.59) (23.69) (29.94) - (10.74) (17.36) (53.66)
Depreciation (126.68) (82.63) (214.45) (173.58) (112.58) - (70.37) (92.33) (206.61)
Labor (30.22) (14.46) (127.38) (48.18) (57.90) (0.25) (35.34) (52.84) (35.76)
Service fees to
HIPDC - - - - - - - - -
Other
operating
expenses (15.50) (15.67) (60.31) (27.00) (19.50) (2.25) (35.93) (19.82) (13.62)
---------- ---------- --------- ---------- ---------- ---------- ---------- ----------- ----------
Profit / (Loss)
from
operations 99.06 85.97 367.61 369.27 118.34 8.07 111.98 61.63 252.36
Financial
(expenses) /
income, net (0.32) (37.21) (54.99) (61.36) (2.83) (12.44) (31.12) (11.27) (136.92)
Share of profit of
an associate - - - - - - - - 1.13
Loss from
disposal
of investments - - - - - - - - -
---------- ---------- --------- ---------- ---------- ---------- ---------- ----------- ----------
Profit / (loss)
before tax 98.74 48.76 312.62 307.91 115.51 (4.37) 80.86 50.36 116.57
Income tax
expense/(credit) - 15.78 (103.51) (105.08) (37.49) 0.64 (27.67) (10.86) 26.35
---------- ---------- --------- ---------- ---------- ---------- ---------- ----------- ----------
Net profit /
(loss) 98.74 64.54 209.11 202.83 78.02 (3.73) 53.19 39.50 142.92
========== ========== ========= ========== ========== ========== ========== =========== ==========
Note*: Since the beginning of July, 2004, we had more than 50% equity interests in these four operating power plants.
33
A. Operating results
Our financial statements are prepared under IFRS. The audited financial
statements are accompanied with notes setting out the differences between IFRS
and US GAAP. The following management's discussion and analysis is based on
the financial information prepared under IFRS. For material differences
between IFRS and US GAAP, please refer to Note 42 to the Financial Statements.
Year Ended December 31, 2004 compared to Year Ended December 31, 2003
For the year ended December 31,
------------------------------------------------
2004 2003 Increase /
(decrease) (%)
------------------------ --------------------- ------------------
Operating revenue, net 30,118,278 23,388,237 28.78%
------------------------ ---------------------
Operating expenses
Fuel (15,068,188) (9,025,013) 66.96%
Maintenance (807,689) (921,561) (12.36%)
Depreciation (4,706,992) (4,117,478) 14.32%
Labor (1,877,264) (1,439,673) 30.40%
Service fees to HIPDC (133,609) (214,723) (37.78%)
Others (606,346) (596,627) 1.63%
------------------------ ---------------------
Total operating expenses (23,200,088) (16,315,075) 42.20%
------------------------ ---------------------
Profit from operations 6,918,190 7,073,162 (2.19%)
------------------------ ---------------------
Interest income 43,092 53,044 (18.76%)
Interest expense (663,424) (569,148) 16.56%
Bank charges and exchange losses, net (119,452) (28,181) 323.87%
------------------------ ---------------------
Total financial expenses (739,784) (544,285) 35.92%
------------------------ ---------------------
Share of profit of associates 377,565 212,091 78.02%
Investment income 22,542 - N/A
(Loss) / Gain from disposal
of investments (1,988) 10,705 (118.57%)
Other income, net 18,666 12,070 54.65%
------------------------ ---------------------
Profit before tax 6,595,191 6,763,743 (2.49%)
Income tax expense (1,014,262) (1,149,441) (11.76%)
------------------------ ---------------------
Profit before minority
interests 5,580,929 5,614,302 (0.59%)
Minority interests (257,053) (183,894) 39.78%
------------------------ ---------------------
Net profit attributable to shareholders 5,323,876 5,430,408 (1.96%)
======================== =====================
Dividends paid and proposed 6,019,432 5,063,244 18.88%
======================== =====================
Proposed dividend 3,013,846 3,013,836 -
======================== =====================
Proposed dividend per share (RMB) 0.25 0.25 -
======================== =====================
Basic earnings per share (RMB) 0.44 0.45 (2.22%)
======================== =====================
Diluted earnings per share (RMB) 0.44 0.45 (2.22%)
======================== =====================
34
1. In 2004, the Company has achieved expected operating results and the
board of directors was satisfied with such operating results.
Comparing 2004 against prior year, the increase in average power
generation hours, the overall expansion of the Company and its subsidiaries
and the stable increase in average tariff rates contributed to the significant
increase in output and revenue. However, the high level of coal prices, which
in turn led to the increase in unit fuel costs, has offset the increase in
revenue and the decrease in other costs.
Overcoming difficulties, Seizing opportunities and Achieving good operating
results
In 2004, the rapid development of the national economy has resulted in a
strong demand for electricity. The growth rate of the production and
consumption of electricity exceeded that of the GDP in the PRC. All of these
events provided favorable external factors for the Company and its
subsidiaries to generate more power.
Because of the rapid development of the national economy and the strong
demand for electricity, there was a shortage in coal supply and in railway,
marine and river transportation. These have led to an insufficient coal
storage, an increase in coal price and a lowering of the quality of coal
acquired, which in turn created a tremendous challenge for the Company and its
subsidiaries to ensure an adequate coal supply for the stable generation of
electricity and to maintain cost control and achieve targeted profit.
All of our staff worked hard to strengthen our management over coal
supply. Through various means, we were able to secure an adequate supply of
coal to avoid a shut down of any of our plants due to a shortage of coal.
Taking advantage of our advanced technological facilities, we increased our
output, maintained our market share and created marginal profit that partially
offset the increase in coal cost.
For the year ended December 31, 2004, the total power generation of our
operating power plants has increased by 23.37 billion kWh or 25.70% from 90.91
billion kWh in the prior year to 114.28 billion kWh, of which 10.58 billion
kWh was attributable to newly acquired power plants, 1.41 billion kWh was
attributable to new generators that were put into commercial operation this
year and 11.38 billion kWh was attributable to increased utilization rate.
The increase in utilization rate is due primarily to the following
factors:
1) The rapid growth of the national economy in 2004, which resulted in a
significant increase in the demand for electricity and caused, in
general, a proportionate increase in the generation of our power
plants;
2) Arrangement of the overhaul programs. The power plants planned their
overhaul programs, to the extent possible, around the off-peak period
and without compromising on the quality of performance, reduced the
duration period of the overhaul program to increase the utilization
rate on the generators; and
3) Technological improvements in our skill sets and facilities have
ensured an increase in our generation.
Striving hard and exceeding planned construction projects
In 2004, the Company focused on large-scale construction projects and its
mission was to ensure commencement of commercial operations of many new
generators. The Company strengthened its construction management through
improving the coordination of equipment delivery, design, construction work
and generator inspection. Through the hard work of all staff and the
cooperation of other participating parties, the Company has met its two
targets of commencing commercial operation at both the Yushe Phase II and the
Qinbei power plants, achieving an additional production capacity of 1.8
million kW which surpassed the annual plan of achieving an additional
production capacity of 1.2 million kW. Currently, all the Company's projects
are proceeding smoothly. There are 8 projects underway with an expected
production capacity of up to 8.06 million kW. The progress, quality and
investments of all these projects were well managed.
35
Breakthrough in acquisitions
In July, 2004, the Company acquired all the assets and liabilities of the
Yingkou Power Plant (in Liaoning Province) and the Jinggangshan Power Plant
(in Jiangxi Province), 55% equity interest in Huaneng Hunan Yueyang Power
Generation Limited Liability Company (the "Yueyang Power Company" in Hunan
Province), 60% equity interest in Huaneng Chongqing Luohuang Power Generation
Limited Liability Company (the "Luohuang Power Company" in Chongqing) and 40%
equity interest in Hebei Hanfeng Power Generation Limited Liability Company
(the "Hanfeng Power Company in Hebei Province) and paid a total consideration
of RMB4.575 billion. These acquisitions were in line with our market
development strategy to consolidate our positions in the coastal regions and
to expand into central China.
Prospects for 2005 - the Company and its subsidiaries' missions of
achieving better results and maintaining strong development will face
difficulties. There will be both opportunities and challenges.
Electricity demand in the PRC power market is expected to grow throughout
2005 providing more market capacity for the stable power generation of the
Company and its subsidiaries. The acquired power plants and the new generators
that were put into commercial operations in 2004 will provide a positive
contribution. However, the large-scale increase in power generation
construction and operation in the PRC during the last two years presents
certain difficulties to the Company and its subsidiaries in achieving a higher
growth rate in power generation.
The set-up of the "coal-electricity price linkage mechanism" will benefit
the Company and its subsidiaries with an increase in tariff rates. However,
shortage of coal supply may continue and coal price may remain at high level
which will bring challenges for the coal purchase and cost control of the
Company and its subsidiaries in 2005.
The continuous rapid growth in China's national economy and living
standards will provide great opportunity for the expansion of PRC power
market. Macroeconomic control and restraints on illegal construction projects
will enhance the development of the power industry, which will provide
opportunity for the Company and its subsidiaries to develop properly. These
favorable external environments will help the Company and its subsidiaries in
developing new projects and enlarging the scales of their operations. However,
large scale power construction projects will also bring challenges to project
management and financing.
We are confident in seizing opportunities and facing the challenges. In
terms of cost control, the Company and its subsidiaries will seek to achieve a
stable long-term coal supply and to effectively control the level of increase
in unit fuel costs. In terms of construction of power plants, the Company and
its subsidiaries will increase the pace of lower-costs power generation
construction projects while maintaining high quality. In terms of power
generation, the Company and its subsidiaries will ensure more power generated
in a safe and stable manner. In order to minimize fuel and geographical risks,
the Company and its subsidiaries will adjust the structure of power generation
location and the energy resources structures through construction and
acquisitions. The Company and its subsidiaries will also aim for greater
competitive advantage through the use of advanced, efficient and
environmentally friendly power generation facilities and technologies, proper
corporate governance, experienced management and high quality staff,
sufficient funding and strong reputation. The Company and its subsidiaries are
confident of maintaining their leading status as an independent power
generation enterprise in the PRC.
36
2. Comparative analysis of operating results
2.1 Net Operating Revenue
The output of our operating power plants are as follows:
Total output (million kWh)
Operating power plants --------------------------------------------------------------
2004 2003 Increase (%)
-------------------------------------------------------------------------------------------
Dalian 9,299.52 8,145.09 14.17%
Fuzhou 9,788.56 8,464.43 15.64%
Nantong 9,097.53 8,078.32 12.62%
Shang'an 8,136.24 7,587.44 7.23%
Shantou Oil-Fired 307.19 295.66 3.90%
Shantou 4,331.18 4,125.11 5.00%
Dandong 4,600.60 4,046.36 13.70%
Shidongkou II 8,236.24 8,023.99 2.65%
Nanjing 4,164.98 3,866.66 7.72%
Dezhou 12,381.30 11,252.03 10.04%
Weihai 4,483.01 4,107.21 9.15%
Jining 2,529.93 1,928.34 31.20%
Shidongkou I 7,812.68 7,395.39 5.64%
Taicang 4,347.01 4,062.43 7.01%
Changxing 1,876.80 1,657.19 13.25%
Huaiyin 2,757.29 2,435.14 13.23%
Xindian1 2,219.65 512.45 333.15%
Yushe1 1,859.63 258.70 618.84%
Yingkou2 2,164.36 N/A N/A
Jinggangshan2 1,906.73 N/A N/A
Luohuang2 3,470.03 N/A N/A
Yueyang2 2,197.14 N/A N/A
Qinbei3 125.20 N/A N/A
------------ -----------
Total 108,092.80 86,241.94 25.34%
============ ===========
Note1: Since November, 2003, we have held a more than 50% equity interest in
the Xindian Power Plant and the Yushe Power Company.
Note2: Since July, 2004, we have held a more than 50% equity interest in the
Yingkou Power Plant, the Jinggangshan Power Plant, the Luohuang Power
Company and the Yueyang Power Company.
Note3: The two generators of the Qinbei Power Company commenced production
in November and December 2004 respectively.
37
The increase in output is attributable to the following reasons:
a. increased overall generation capacity as a result of the acquisition
of new power plants in 2003 and 2004 (please refer to Note1 and Note2
above);
b. the commencement of commercial operation of the new generators (Yushe
and Qinbei power plants); and
c. the strong market demand for electric power during the year which
enable the Company and its subsidiaries to increase the utilization
rate of their power plants.
Accordingly, our output increased significantly from 2003.
As a result of shortage of power supply in the PRC, the bidding output of
the Company and its subsidiaries is slightly lower than that of 2003.
The average tariff rate (inclusive of VAT) and the net operating revenue
of our power plants are as follows:
Average tariff rate Net operating
(inclusive of VAT) revenue
(RMB/MWh) (RMB million)
--------------------------------- --------------------------------
Increase / Increase /
(decrease) (decrease)
Operating power plants 2004 2003 (%) 2004 2003 (%)
----------------------------------------------------------------------------- --------------------------------
Dalian 283.62 272.69 4.01% 2,225 1,900 17.11%
Fuzhou 365.00 331.82 10.00% 3,047 2,390 27.49%
Nantong 325.18 312.52 4.05% 2,507 2,147 16.77%
Shang'an 303.25 307.94 (1.52%) 2,107 2,008 4.93%
Shantou Oil-Fired 604.08 672.14 (10.13%) 155 178 (12.92%)
Shantou 446.86 435.17 2.69% 1,631 1,522 7.16%
Dandong 289.05 276.95 4.37% 1,117 927 20.50%
Shidongkou II 342.56 332.85 2.92% 2,367 2,250 5.20%
Nanjing 321.67 307.31 4.67% 1,146 1,027 11.59%
Dezhou 332.58 333.34 (0.23%) 3,519 3,206 9.76%
Weihai 394.06 386.50 1.96% 1,494 1,340 11.49%
Jining 299.89 274.66 9.19% 648 453 43.05%
Shidongkou I 285.43 256.64 11.22% 1,907 1,623 17.50%
Taicang 341.10 321.80 6.00% 1,256 1,105 13.67%
Changxing 351.94 320.57 9.79% 565 454 24.45%
Huaiyin 330.88 317.21 4.31% 772 652 18.40%
Xindian1 320.83 342.41 (6.30%) 609 150 306.00%
Yushe1 282.10 200.63 40.61% 444 57 678.95%
Yingkou2 315.48 N/A N/A 584 N/A N/A
Jinggangshan2 325.67 N/A N/A 531 N/A N/A
Luohuang2 286.74 N/A N/A 871 N/A N/A
Yueyang2 316.52 N/A N/A 588 N/A N/A
Qinbei3 273.11 N/A N/A 29 N/A N/A
-------- -------- -------- --------
Total 327.88 318.68 2.89% 30,118 23,388 28.78%
======== ======== ======== ========
Note1: Since November, 2003, we have held a more than 50% equity interest in
the Xindian Power Plant and the Yushe Power Company.
Note2: Since July, 2004, we have held a more than 50% equity interest in the
Yingkou Power Plant, the Jinggangshan Power Plant, the Luohuang Power
Company and the Yueyang Power Company.
Note3: The two generators of the Qinbei Power Company commenced production
in November and December 2004 respectively.
38
The average tariff rate of the Company and its subsidiaries increased by
approximately 2.89% from RMB318.68 per MWh in 2003 to RMB327.88 per MWh. The
major reason was the implementation of an adjustment on the tariff for
electricity sold and the related operating hours of the power plants in
accordance with instructions from National Development and Reform Commission
("NDRC").
Net operating revenue represents operating revenue net of value-added
tax. For the year ended December 31, 2004, the consolidated net operating
revenue of the Company and its subsidiaries amounted to RMB30.118 billion,
representing an increase of approximately 28.78% over the RMB23.388 billion in
the prior year. The increase of the net operating revenue is mainly due to the
increase of generation capacity, operating hours of the power plants and the
average tariff rates. The increase of generation capacity was mainly
attributable to the acquired power plants in the current year which
contributed approximately RMB2.573 billion net operating revenue to the
Company and its subsidiaries. Excluding the impact of acquisitions, the
increase in the utilization rate and average tariff rates contributed
approximately RMB3.392 billion and RMB765 million net operating revenue to the
Company and its subsidiaries in the current year respectively.
2.2 Operating expenses
The total operating expenses of the Company and its subsidiaries
increased by 42.20% from approximately RMB16.315 billion in 2003 to
approximately RMB23.2 billion in 2004. Such an increase was attributable to
the expansion of the scale of operations and the increase in fuel costs. The
power plants acquired in 2004 accounted for RMB2.074 billion of the operating
expenses. Excluding the impact from the power plants acquired in 2004, the
increase in operating expenses amounted to approximately RMB4.811 billion.
The growth of operating expenses outweighed both the growth of power
generation and net operating revenue. The significant increase in fuel costs
is considered to be the primary reason for such an increase. The economies of
scale as a result of enhancing utilization rates brought about a slower
increase in fixed costs (such as depreciation) when compared with that of
power generation, however, could not fully offset the impact of higher rate of
increase in fuel costs. Hence, the rate of growth of operating expenses of the
Company and its subsidiaries was greater than that of power generation. As net
operating revenue is determined by power generation and tariff rates and given
the limited increase in average tariff rate, the growth of operating expenses
was also higher than that of net operating revenue.
2.2.1 Fuel
Fuel costs represented the major operating expenses of the Company and
its subsidiaries, which has increased by approximately 67% from prior year.
The increase in coal consumption as a result of increasing power generation of
the Company and its subsidiaries and the increase in fuel price contributed to
an increase in fuel costs. There was an increase of approximately 32.97% of
unit fuel cost from prior year in 2004.
2.2.2 Maintenance
The maintenance expense of the Company and its subsidiaries amounted to
approximately RMB808 million in 2004, representing a decrease of approximately
12.36% from approximately RMB922 million in the prior year. The decrease in
the maintenance expense was mainly due to two factors: 1) enhanced utilization
rate of equipment and minimized duration of maintenance projects through the
careful scheduling of maintenance programs; and 2) the improvement of the
operating condition of the equipment as a result of continuous technological
improvements.
2.2.3 Depreciation
Depreciation expenses of the Company and its subsidiaries have increased
by approximately 14.32% from prior year. Newly acquired power plants in 2004
contributed to an increase of approximately 12.34%.
2.2.4 Labor
Labor costs of the Company and its subsidiaries amounted to approximately
RMB1.877 billion in 2004, representing an increase of approximately 30.40%
from approximately RMB1.440 billion in 2003. The labor cost of the original
power plants increased to approximately RMB1.744 billion, representing an
increase of approximately 21.14% compared to prior year, among which, the full
year impact from the Xindian Power Plant and the Yushe Power Company acquired
in October, 2003 contributed approximately RMB112 million. The
39
newly acquired Yingkou Power Plant, the Jinggangshan Power Plant, the Yueyang
Power Company and the Luohuang Power Company contributed additional labor
costs of approximately RMB133 million in 2004.
2.2.5 Service Fees to HIPDC
The service fees paid to HIDPC refer to fees paid for use of its grid
connection and transmission facilities based on reimbursement of cost plus a
profit.
The service fees paid to HIPDC amounted to approximately RMB134 million
in 2004, representing a decrease of 37.78% compared to approximately RMB215
million in 2003. The decrease of service fee rate upon the conclusion of a
supplementary agreement with HIPDC represented the primary reason for this
decrease.
2.2.6 Enterprise income tax ("EIT")
Pursuant to the relevant tax regulations, the Company is treated as a
Sino-foreign equity joint venture that enjoys a preferential income tax
treatment. This allows the power plants of the Company to be exempted from EIT
for two years starting from the first profit-making year after covering the
accumulated deficits. This is followed by a 50% reduction of the applicable
tax rate for the next three years. In addition, as confirmed by the State Tax
Bureau, the wholly-owned power plants pay their respective EIT to local tax
authorities, even though they are not separate legal entities. The
consolidated EIT of the Company and its subsidiaries amounted to approximately
RMB1.014 billion in 2004 which represented a decrease of approximately 11.76%
from approximately RMB1.149 billion in prior year. The main reason for such a
decrease was the decreased net profit and the increasing ratio of the profit
from the power plants with lower applicable tax rates. This contributed to the
effective tax rate decreasing from approximately 16.99% in 2003 to
approximately 15.38% in 2004.
2.2.7 Other Operating Expenses
Other operating expenses of the Company and its subsidiaries amounted to
approximately RMB606 million in 2004, representing an increase of
approximately 1.63% from approximately RMB597 million in 2003. The major
reason for this increase was the full year impact from the Xindian Power
Plant, the Yushe Power Company and the Qinbei Power Company acquired in
October, 2003 and the six-month contribution from the Yingkou Power Plant, the
Jinggangshan Power Plant, the Yueyang Power Company and the Luohuang Power
Company acquired in July, 2004. The other operating expenses of the original
power plants accounted for approximately RMB542 million, representing a
decrease of approximately 9.20% from approximately RMB597 million in prior
year.
2.2.8 Net Profit Before Financial Expenses
The increasing fuel costs contributed to a decrease of net profit before
financial expenses of approximately 2.19% from approximately RMB7.073 billion
in 2003 to approximately RMB6.918 billion in 2004.
2.2.9 Financial Expenses
The net financial expenses of the Company and its subsidiaries totaled
approximately RMB740 million for the year 2004 which represented an increase
of approximately 35.92% from approximately RMB544 million. The original power
plants accounted for approximately RMB554 million, representing an increase of
approximately 1.80% from the prior year. The financial expenses of the Yingkou
Power Plant, the Jinggangshan Power Plant, the Yueyang Power Company and the
Luohuang Power Company acquired in 2004 accounted for approximately RMB186
million.
2.3 Net Profit
The 2004 consolidated net profit of the Company and its subsidiaries was
RMB5.324 billion, which represented a decrease of approximately 1.96% from
approximately RMB5.430 billion in the prior year. This decrease was primarily
due to the increased operating expenses of the Company and its subsidiaries in
2004. A significant increase in power output, the average tariff rates and the
respective full year and half year profit impacts from the acquisition of the
Xindian Power Plant and the Yushe Power Company in October, 2003 and the
acquisition of the Yingkou Power Plant, the Jinggangshan Power Plant, the
Yueyang Power Company, the Luohuang Power Company and the Hanfeng Power
Company in July, 2004 have brought about increases in the
40
net operating revenue and net profit respectively. However, all the factors
described above could not fully offset the increased operating expenses caused
by the increase in fuel costs. Hence, the consolidated net profit of the
Company and its subsidiaries has decreased slightly when compared with the
prior year. The consolidated net profit of the Company and its subsidiaries,
excluding the impact of newly acquired power plants in the current year was
approximately RMB4.927 billion in current year, which represented a decrease
of 9.28% compared to RMB5.430 billion in 2003.
In 2005, the Company and its subsidiaries are confident in maintaining a
comparatively high level of the utilization rate. With the growth of the
operating scale of the Company and its subsidiaries, we expect there will be a
continuous increase in power sales. However, the growth of the output is
subject to the uncertainties of market conditions. The Company also expects
that the supply and demand of coal to remain intense in 2005 and the
implementation of the coal-electricity price linkage mechanism pursuant to the
circular issued by the government may not be able to fully offset such a
negative impact, the Company and its subsidiaries believe that the net profit
of 2005 remains uncertain.
2.4 Impact of Differences between IFRS and US GAAP
In addition to the above management discussion and analysis of our
results of the operations under IFRS between the years ended December 31, 2004
and 2003, the following provides a summary of the significant accounting
differences between IFRS and US GAAP that would have a significant impact on
our management discussion and analysis of the results of our operations
between the years ended December 31, 2004 and 2003 under US GAAP. See also
Note 42 to the Financial Statements for a complete summary of all significant
accounting differences between IFRS and US GAAP that are relevant to us.
Under IFRS, we have adopted the acquisition method to account for our
acquisitions of the Shidongkou I Power Plant, the Taicang Power Company and
the Changxing Power Plant in 2002; the acquisitions of the 55% equity interest
in the Qinbei Power Company, 60% equity interest in the Yushe Power Company
and all of the assets and liabilities of the Xindian Power Plant in 2003; and
the acquisitions of the 55% equity interest in the Yueyang Power Company, 60%
equity interest in the Luohuang Power Company, 90% equity interest in the
Jinggangshan Power Plant and all of the assets and liabilities of the Yingkou
Power Plant in 2004. Accordingly, our results of operations under IFRS include
the results of these power plants only from the respective dates of
acquisition. In contrast, under US GAAP, our acquisition of these power plants
are considered as combinations of entities under common control which are
accounted for at historical cost and reflected retroactively to include the
results of operations for each of the years ended December 31, 2004 as if the
acquisitions of these power plants had taken place since the beginning of the
earliest period presented.
In accordance with IFRS, we capitalized interest on general borrowings
used for the purpose of obtaining a qualifying asset in addition to the
capitalization of interest on specific borrowings. Under US regulatory
accounting requirements, interest on funds borrowed generally but used for the
purpose of obtaining a qualifying asset was not capitalized because such
interest would not be taken into consideration when determining the
recoverable rate base for tariff setting purposes.
In 2004, in accordance with IFRS 3, goodwill arising from acquisitions
for which the agreement date was before March 31, 2004 is amortized using the
straight-line method over its estimated useful life and recognized in the
income statement as other operating expenses and subject to an impairment
review whenever events or changes in circumstances indicate their carrying
value may not be recoverable, and annually if the estimated useful life
exceeds 20 years. Under US GAAP, in accordance with Statement of Financial
Accounting Standard Number 142 "Goodwill and Other Intangible Assets",
goodwill arising from acquisition is not amortized but tested for impairment
on an annual basis and between annual tests in certain circumstances.
Other than the above, there was no material difference between IFRS and
US GAAP that would have a significant impact on our management discussion and
analysis of the results of our operation between the years ended December 31,
2004 and 2003.
41
2.5 Comparison of financial positions
2.5.1 General
As of December 31, 2004, total assets of the Company and its subsidiaries
amounted to approximately RMB72.780 billion, which represented an increase of
approximately 35.76% from approximately RMB53.610 billion in the prior year.
Non-current assets increased by approximately 39.33% to approximately
RMB63.126 billion while current assets increased by approximately 16.26% to
approximately RMB9.654 billion. Acquisitions and capital expenditure on
construction projects primarily accounted for these increases with the total
assets being obtained through acquisitions in the current year amounting to
approximately RMB13.251 billion, including non-current assets of approximately
RMB10.735 billion as of December 31, 2004.
Total capital expenditure (primarily spending on construction projects),
amounted to approximately RMB10.036 billion, with its main source of financing
being from bank borrowings.
In accordance with the schedule of development plans, the capital
expenditure of the Company and its subsidiaries will remain at a high level in
2005 and the Company expects there will be continued increases in both total
assets and liabilities. Other so far unplanned acquisitions will also have a
certain impact on the financial position of the Company and its subsidiaries.
As of December 31, 2004, total liabilities of the Company and its
subsidiaries amounted to approximately RMB33.248 billion, representing an
increase of approximately 79.73% from approximately RMB18.499 billion in the
prior year. Non-current liabilities were increased by approximately 78.41% to
approximately RMB16.515 billion while current liabilities were increased by
approximately 81.05% to approximately RMB16.733 billion. The increase in
liabilities is mainly caused by the increase in bank borrowings as a result of
acquisitions and capital expenditure on construction projects.
42
2.5.2 Analysis of selected consolidated balance sheet items
As of December 31,
-----------------------------------------
2004 2003 Increase /
(decrease) (%)
-------------------- ------------------ ---------------------
ASSETS
Non-current assets
Property, plant and equipment, net 57,780,410 42,658,365 35.45%
Investments in associates 4,328,307 2,766,031 56.48%
Available-for-sale investment 254,990 254,990 0.00%
Land use rights 1,546,026 831,026 86.04%
Other non-current assets 225,890 206,833 9.21%
Deferred income tax assets 97,539 21,311 357.69%
Goodwill 376,726 298,876 26.05%
Less: Negative goodwill (1,483,670) (1,730,949) (14.29%)
-------------------- ------------------
Total non-current assets 63,126,218 45,306,483 39.33%
-------------------- ------------------
Current assets
Inventories, net 1,431,404 800,281 78.86%
Other receivables and assets, net 723,316 259,421 178.82%
Accounts receivable 4,973,103 2,804,026 77.36%
Due from other related parties 14,970 5,862 155.37%
Restricted cash 202,688 159,961 26.71%
Temporary cash investments 12,641 144,996 (91.28%)
Cash and cash equivalents 2,295,531 4,128,648 (44.40%)
-------------------- ------------------
Total current assets 9,653,653 8,303,195 16.26%
-------------------- ------------------
Total assets 72,779,871 53,609,678 35.76%
==================== ==================
43
As of December 31,
----------------------------------------
Increase /
(decrease)
2004 2003 (%)
-------------------- ------------------- ---------------
EQUITY AND LIABILITIES
Shareholders' equity 36,265,519 33,955,355 6.80%
-------------------- -------------------
Minority interests 3,266,393 1,155,197 182.76%
-------------------- -------------------
Non-current liabilities
Long-term loans from shareholders, N/A
unsecured 800,000 -
Long-term bank loans, unsecured 14,854,471 8,305,320 78.85%
Other long-term loans, unsecured 300,818 848,284 (64.54%)
Deferred income tax liabilities 546,717 103,114 430.21%
Other non-current liability 13,000 - N/A
-------------------- -------------------
Total non-current liabilities 16,515,006 9,256,718 78.41%
-------------------- -------------------
Current liabilities
Accounts payable and other liabilities 4,551,158 3,342,517 36.16%
Dividends payable to shareholders of N/A
the Company 8,250 -
Taxes payable 999,792 917,362 8.99%
Due to HIPDC 1,258,799 87,508 1338.50%
Due to other related parties 13,426 27,338 (50.89%)
Staff welfare and bonus payables 259,291 220,896 17.38%
Short-term loans, unsecured 8,099,000 1,600,000 406.19%
Current portion of long-term loans from (100%)
shareholders, unsecured - 420,380
Current portion of long-term bank loans, (47.81%)
unsecured 1,257,476 2,409,240
Current portion of other long-term 34.87%
loans, unsecured 285,761 211,881
Liability component of convertible notes - 935 (100%)
Other financial liabilities - 4,351 (100%)
-------------------- -------------------
Total current liabilities 16,732,953 9,242,408 81.05%
-------------------- -------------------
Total equity and liabilities 72,779,871 53,609,678 35.76%
==================== ===================
44
2.5.2.1 Property, Plant and Equipment, net
As of December, 2004, property, plant and equipment, net of the Company
and its subsidiaries amounted to approximately RMB57.780 billion, representing
a growth of approximately RMB15.122 billion from approximately RMB42.658
billion in 2003. Please refer to Note 10 to the Financial Statements for a
detailed analysis of such a growth.
2.5.2.2 Land Use Rights
Land use rights of the Company and its subsidiaries increased by
approximately RMB0.715 billion from RMB0.831 billion in 2003 to RMB1.546
billion in 2004. This increase was attributable to the acquisitions in 2004.
2.5.2.3 Deferred Income Tax Assets
As of December, 2004, deferred income tax assets of the Company and its
subsidiaries amounted to RMB98 million, representing an increase of RMB77
million compared with RMB21 million in 2003. Please refer to Note 29 to the
Financial Statements for a detailed analysis of such an increase.
2.5.2.4 Inventories, net
As of December, 2004, the net amount of the inventories of the Company
and its subsidiaries totaled approximately RMB1.431 billion representing a
growth of approximately RMB0.631 billion from approximately RMB0.8 billion in
2003. The acquisition and commencement of commercial operations of new
generators in the current year contributed to such an increase, within which
RMB212 million came from acquisition.
2.5.2.5 Other Receivables and Assets, net
As of December, 2004, other receivables and assets, net of the Company
and its subsidiaries totaled approximately RMB0.723 billion, representing an
increase of approximately RMB0.464 billion from approximately RMB0.259 billion
in 2003. The increase is due mainly to the acquisitions which accounted for
RMB0.187 billion and an increase in the prepayments of coal.
2.5.2.6 Accounts Receivable
Accounts receivable of the Company and its subsidiaries increased by
RMB2.169 billion from RMB2.804 billion in 2003 to RMB4.973 billion in 2004.
The increase is due to the acquisitions which accounted for RMB1.552 billion,
and the increase in the net operating revenue of the Company and its
subsidiaries.
2.5.2.7 Temporary Cash Investments
As of December, 2004, temporary cash investments of the Company and its
subsidiaries totaled approximately RMB13 million, representing a decrease of
RMB132 million form RMB145 million in 2003. The main reasons for the drop is
due to cash used to fund the acquisitions as well as to fund the increase in
capital expenditure.
2.5.2.8 Minority Interests
As of December, 2004, minority interests of the Company and its
subsidiaries amounted to RMB3.266 billion representing an increase of
approximately RMB2.111 billion from RMB1.155 billion in 2003. Please refer to
Note 33 to the Financial Statements for a detailed analysis of the increase.
2.5.2.9 Accounts Payable and Other Liabilities
As of December, 2004, accounts payable and other liabilities of the
Company and its subsidiaries amounted to approximately RMB4.551 billion,
representing a growth of approximately RMB1.208 billion from RMB3.343 billion
in 2003. The increase was brought about by the payables from acquisitions of
RMB0.422 billion and an increase in construction payables of RMB0.699 billion.
45
2.5.2.10 Due to HIPDC
As of December, 2004, due to HIPDC amounted to approximately RMB1.259
billion, representing an increase of approximately RMB1.171 billion from
approximately RMB88 million in 2003. The increase is due to the consideration
payable for the acquisition of the Yingkou Power Plant.
2.5.2.11 Deferred Income Tax Liabilities
As of December, 2004, deferred income tax liabilities of the Company and
its subsidiaries amounted to approximately RMB0.547 billion, representing an
increase of approximately RMB0.444 billion from approximately RMB0.103 billion
in 2003. Please refer to Note 29 to the Financial Statements for a detailed
analysis of such an increase.
Primary financial ratios
2004 2003
Current ratio 0.58 0.90
Quick ratio 0.49 0.81
Ratio of liabilities and shareholders' equity 0.92 0.54
Multiples of interest earned 7.29 12.03
Calculation formula of the financial ratios:
Current ratio = balance of current assets at the end of the year / balance of
current liabilities at the end of the year
Quick ratio = (balance of current assets at the end of the year - net amount of
inventories at the end of the year) / balance of current
liabilities at the end of the year
Ratio of liabilities and = balance of liabilities at the end of the year / balance of
shareholders' equity shareholders' equity at the end of the year
Multiples of interest earned = (profit before tax + interest expense) / interest expenditure
(including capitalized interest)
The current ratio and quick ratio of the Company and its subsidiaries
decreased significantly compared to the prior year, which was mainly due to
increased capital expenditure and the cash consideration paid during
acquisitions. These factors contributed to a significant increase in
short-term borrowings as of the year end.
Similarly, the significant increases in short-term and long-term
borrowings, arising from the reasons discussed above, contributed to the
significant increase in the ratio of liabilities and shareholders' equity.
The multiples of interest earned of the Company and its subsidiaries
decreased from that of the prior year mainly due to the lower interest
expenses (including capitalized interest) on loans borrowed to finance
construction and acquisitions.
During 2004, a significant portion of the Company and its subsidiaries'
funding requirements for capital expenditure was met by short-term borrowings.
This was due partly to the use of low-interest short-term borrowings rather
than the high-interest long-term borrowings in order to minimize interest
expense. Consequently, as of December 31, 2004, the Company and its
subsidiaries had a negative working capital balance of approximately RMB7.1
billion. Based on the successful financing history of the Company and its
subsidiaries, the significant amount of undrawn banking facilities (See Note B
2.2) available to the Company and the stable operating results, the Company
and its subsidiaries believe that they are able to meet their liabilities as
and when they fall due and meet the capital required for operations.
46
3. Year Ended December 31, 2003 compared to Year Ended December 31, 2002
For the year ended December 31,
----------------------------------------
Increase /
2003 2002 (decrease) (%)
-------------------- ------------------ ------------------
Operating revenue, net 23,388,237 18,474,469 26.60%
-------------------- ------------------
Operating expenses
Fuel (9,025,013) (6,916,038) 30.49%
Maintenance (921,561) (607,951) 51.58%
Depreciation (4,117,478) (3,533,609) 16.52%
Labor (1,439,673) (1,035,740) 39.00%
Service fees to HIPDC (214,723) (263,716) (18.58%)
Others (596,627) (539,401) 10.61%
-------------------- ------------------
Total operating expenses (16,315,075) (12,896,455) 26.51%
-------------------- ------------------
Profit from operations 7,073,162 5,578,014 26.80%
-------------------- ------------------
Interest income 53,044 83,015 (36.10%)
Interest expense (569,148) (561,875) 1.29%
Bank charges and exchange losses, net (28,181) (31,405) (10.27%)
-------------------- ------------------
Total financial expenses (544,285) (510,265) 6.67%
-------------------- ------------------
Share of profit / (loss) of associates 212,091 (11,145) 2,003.01%
(Loss) / Gain from disposal of
investments 10,705 1,288 731.13%
Other income, net 12,070 - N/A
-------------------- ------------------
Profit before tax 6,763,743 5,057,892 33.73%
Income tax expense (1,149,441) (980,854) 17.19%
-------------------- ------------------
Profit before minority interests 5,614,302 4,077,038 37.71%
Minority interests (183,894) (156,034) 17.86%
-------------------- ------------------
Net profit attributable to shareholders 5,430,408 3,921,004 38.50%
==================== ==================
Dividends paid and proposed 5,063,244 3,849,408 31.53%
==================== ==================
Proposed dividend 3,013,836 2,049,408 47.06%
==================== ==================
Proposed dividend per share (RMB) 0.25 0.17 47.06%
==================== ==================
Basic earnings per share (RMB) 0.45 0.33 36.36%
==================== ==================
Diluted earnings per share (RMB) 0.45 0.33 36.36%
==================== ==================
47
3.1 Net Operating Revenue
The output and bidding output of our operating power plants are as
follows:
Total output (million kWh) Including: Bidding output (million kWh)
-------------------------------------------- -------------------------------------------
Increase / Increase /
Operating power (decrease) (decrease)
plants 2003 2002 (%) 2003 2002 (%)
--------------------- ----------- ----------- --------- ---------- ----------- -----------
Dalian 8,145.09 6,763.24 20.43% 1,582.48 1,068.24 48.14%
Fuzhou 8,464.43 6,874.24 23.13% 181.35 222.10 (18.35%)
Nantong 8,078.32 7,504.23 7.65% 379.20 1,028.59 (63.13%)
Shang'an 7,587.44 7,202.98 5.34% - - -
Shantou Oil-Fired 295.66 203.69 45.15% - - -
Shantou 4,125.11 3,871.44 6.55% - - -
Dandong 4,046.36 3,365.41 20.23% 921.38 853.41 7.96%
Shidongkou II 8,023.99 7,268.10 10.40% 664.65 637.89 4.19%
Nanjing 3,866.66 3,608.33 7.16% 255.90 558.80 (54.21%)
Dezhou 11,252.03 7,873.33 42.91% - - -
Weihai 4,107.21 4,225.47 (2.80%) - - -
Jining 1,928.35 1,805.19 6.82% - - -
Shidongkou I1 7,395.39 3,792.96 94.98% 587.71 316.73 85.56%
Taicang1 4,062.43 2,109.49 92.58% 363.46 282.22 28.79%
Changxing1 1,657.19 863.47 91.92% - - -
Huaiyin2 2,435.14 N/A N/A 222.75 N/A N/A
Xindian3 512.44 N/A N/A - N/A N/A
Yushe3 258.70 N/A N/A - N/A N/A
------------ ------------ ----------- -----------
Total 86,241.94 67,331.57 28.09% 5,158.88 4,967.98 3.84%
============ ============ =========== ===========
Note1: Since July, 2002, we have held a more than 50% equity interest in the
Shidongkou I Power Plant, the Taicang Power Company and the Changxing
Power Plant.
Note2: Since the end of December, 2002, we have held a more than 50% equity
interest in the Huaiyin Power Company.
Note3: Since the end of October, 2003, we have held a more than 50% equity
interest in the Xindian Power Plant and the Yushe Power Company.
Our output increased significantly from the previous year. The increase
is attributed to firstly, our increased overall generation capacity as a
result of the acquisition of new power plants (please refer to Note1, Note2
and Note3 above) and the commencement of operations of the new generators
(Dezhou Phase III Expansion Project and Jining Expansion Project) and
secondly, the strong market demand for electric power during the year.
The output of the Weihai Power Plant decreased because of an equilibrium
in the supply and demand within the Shandong Power Grid. There was no
additional capacity added to the Weihai Power Plant in 2003.
Our total output in 2003 increased significantly, but there was no
significant change in the bidding output.
48
The average tariff rate (inclusive of VAT) and the net operating revenue
of our operating power plants are as follows:
Average tariff rate Net operating revenue
------------------------------------------------- ------------------------------------------
(inclusive of VAT) (RMB / MWh) (RMB million)
Increase / Increase /
Operating power (decrease) (decrease)
plants 2003 2002 (%) 2003 2002 (%)
--------------- -------------- --------- ----------- -------- -------- ------------
Dalian 272.69 280.53 (2.79%) 1,900 1,587 19.72%
Fuzhou 331.82 327.80 1.23% 2,390 1,889 26.52%
Nantong 312.52 309.54 0.96% 2,147 1,955 9.82%
Shang'an 307.94 315.65 (2.44%) 2,008 1,924 4.37%
Shantou Oil-Fired 672.41 621.02 8.28% 178 114 56.14%
Shantou 435.17 455.95 (4.56%) 1,522 1,487 2.35%
Dandong 276.95 273.70 1.19% 927 754 22.94%
Shidongkou II 332.85 345.90 (3.77%) 2,250 2,106 6.84%
Nanjing 307.31 304.07 1.07% 1,027 933 10.08%
Dezhou 333.34 339.64 (1.85%) 3,206 2,286 40.24%
Weihai 386.50 393.74 (1.84%) 1,340 1,405 (4.63%)
Jining 274.66 275.15 (0.18%) 453 422 7.35%
Shidongkou I1 256.64 252.97 1.45% 1,623 813 99.63%
Taicang1 321.80 317.52 1.35% 1,105 566 95.09%
Changxing1 320.57 316.93 1.15% 454 233 94.43%
Huaiyin2 317.21 N/A N/A 652 N/A N/A
Xindian3 342.41 N/A N/A 149 N/A N/A
Yushe3 200.63 N/A N/A 57 N/A N/A
----------- --------- --------- ---------
Total 318.68 325.38 (2.06%) 23,388 18,474 26.60%
=========== ========= ========= =========
Note1: Since July, 2002, we have held a more than 50% equity interest in the
Shidongkou I Power Plant, the Taicang Power Company and the Changxing
Power Plant.
Note2: Since the end of December, 2002, we have held a more than 50% equity
interest in the Huaiyin Power Company.
Note3: Since the end of October, 2003, we have held a more than 50% equity
interest in the Xindian Power Plant and the Yushe Power Company.
Our average tariff rate decreased by 2.06% from RMB325.38 per MWh to
RMB318.68 per MWh. The principal reason was the higher relative increase of
excess generation, which had a lower tariff rate. Although the tariff rate for
excess generation was lower than the tariff rate applicable to base load
generation, it was higher than our variable cost and would, therefore, result
in a positive contribution margin.
Net operating revenue represents operating revenue net of the value-added
tax and amounts received in advance. For the year ended December 31, 2003, our
consolidated net operating revenue was RMB23.388 billion, representing an
increase of 26.60% over the RMB18.474 billion of prior year. The significant
increase of net operating revenue was primarily because of the 28.08% increase
of power output compared to prior year. Excluding the power plants acquired in
July, 2002 and the Shantou Oil-Fired Power Plant which is immaterial, the
operating revenue of the Dezhou Power Plant, the Fuzhou Power Plant, the
Dalian Power Plant and the Dandong Power Plant had increased significantly.
The output of the Dezhou Power Plant had increased 42.91% compared to prior
year. The main reason for the increase was that the Phase III project of the
Dezhou Power Plant was put into commercial operation in the second half of
2002. The increase of output of the Fuzhou Power Plant was due to the
significant reduction of hydropower generation in the Fujian Province which
provided an opportunity to our plant in Fuzhou to increase its generation. The
operating revenue of the Dalian Power Plant and the Dandong Power Plant
increased because of the continuous expansion of the power market
49
in the Liaoning Province. Due to the decrease of the average tariff rate in
2003, the growth rate of net operating revenue is lower than that of our power
output.
3.2 Operating Expenses
Our total operating expenses increased by 26.51% to RMB16.315 billion in
2003 from RMB12.896 billion in 2002. The rate of increase of operating
expenses was lower than that of power output at 28.09%. This is due to
economies of scale resulting from higher utilization of the Company's power
plants and some fixed expenses, such as depreciation, which do not increase
proportionally with the power output.
In 2003, the rate of increase of operating expenses was in line with rate
of increase in net operating revenue of 26.60%.
3.2.1 Fuel
Our primary operating expense was fuel cost. Fuel cost increased by
30.49% to RMB9.025 billion in 2003, when compared to RMB6.916 billion in 2002.
The weighted average unit price of natural coal increased by 2.89% to
RMB239.06 per ton in 2003 from RMB232.34 per ton in 2002. Accordingly the unit
fuel cost of power output increased by 2.28% to RMB105.05 per MWh. Xindian
Power Plant and Yushe Power Company's unit fuel cost of power was RMB103.48
per MWh, which was lower than the average unit fuel cost of the original power
plants.
3.2.2 Maintenance
Our maintenance expense was RMB922 million in 2003, representing an
increase of 51.64% when compared to RMB608 million of prior year. The increase
of the maintenance expense was mainly due to two factors: 1) The plants
acquired in 2002, including the Changxing Power Plant, the Shidongkou I Power
Plant, the Taicang Power Company and the Huaiyin Power Company, were
consolidated in 2003 on a full-year basis. 2) The original power plants such
as the Dezhou Power Plant, the Dalian Power Plant and the Fuzhou Power Plant,
carried out major overhaul according to the annual plan and incurred more
maintenance expense.
3.2.3 Depreciation
Our depreciation was RMB4.117 billion in 2003, representing an increase
of 16.50% from RMB3.534 billion in 2002. The depreciation of the original
power plants and our headquarters was RMB4.093 billion, representing an
increase of 15.82% compared to prior year. The newly acquired Xindian Power
Plant and the Yushe Power Company incurred RMB24 million of depreciation
expenses in 2003. The increase in depreciation was also attributable to the
fact that the Phase III project of the Dezhou Power Plant was put into
commercial operation in late 2002, and that the plants acquired in 2002,
including the Changxing Power Plant, the Shidongkou I Power Plant, the Taicang
Power Company and the Huaiyin Power Company, were consolidated in 2003 on a
full-year basis.
3.2.4 Labor
Our labor cost was RMB1.439 billion in 2003, representing an increase of
38.90% from RMB1.036 billion in 2002. The increase in labor cost was mainly
due to the plants acquired in the second half of 2002, including the Changxing
Power Plant, the Shidongkou I Power Plant, the Taicang Power Company and the
Huaiyin Power Company, that were consolidated in 2003 on a full-year basis.
3.2.5 Service Fees paid to HIPDC
The service fees paid to HIPDC refer to fees for the use of HIPDC's grid
connection and transmission facilities based on reimbursement of cost plus a
profit.
In 2003, we incurred service fees in relation to the grid connection and
transmission facilities for the Shang'an Power Plant and the Shantou Power
Plant (HIPDC had transferred the ownership of transmission and transformation
facilities of the Fuzhou Power Plant Phase I and the Shidongkou II Power Plant
to the Fujian Electric Power Company and the Shanghai Power Corporation,
respectively, on July 1, 2002. We were no longer required to pay the service
fees for the two plants after the transfer). The service fees paid to HIPDC
were RMB215 million in 2003, representing a decrease of 18.56% when compared
with RMB264 million in 2002.
50
3.2.6 EIT
Pursuant to the relevant tax regulations, we are treated as a
Sino-foreign equity joint venture that enjoys a preferential income tax
policy. Each of our plants is exempted from PRC income tax for two years
starting from the first profit-making year after covering the accumulated
deficits followed by a 50% reduction of the applicable tax rate for the next
three years. In addition, as confirmed by the State Tax Bureau, our
wholly-owned power plants pay their respective income tax to local tax
authorities, even though they are not separate legal entities. Our income tax
expenses in 2003 were RMB1.149 billion, an increase of 17.13% compared to
RMB981 million in 2002. The income tax expenses of the original power plants
and our headquarters (excluding the newly acquired power plants in 2003) were
RMB1.138 billion, an increase of 16.00% from that of 2002. The consolidated
income tax of the newly acquired Xindian Power Plant and the Yushe Power
Company was RMB11 million. The effective income tax rate decreased from 19.39%
in 2002 to 16.99% in 2003, which was mainly due to the increasing ratio of the
profit from the power plants with lower applicable tax rates.
3.2.7 Other Operating Expenses
With the rapid growth of the power output, our other operating expenses
increased by 10.76% to RMB597 million in 2003 from RMB539 million in 2002.
Another factor that caused the increase of other operating expenses was the
consolidation of the other operating expenses of the newly acquired power
plants, including the Xindian Power Plant, the Yushe Power Company and the
Qinbei Power Company. The consolidated other operating expenses of the
original power plants and our headquarters, excluding the newly acquired power
plants were RMB581 million in 2003, an increase of 7.79% compared to RMB539
million in 2002.
3.2.8 Net Profit Before Financial Expenses
Our net profit before financial expenses in 2003 was RMB7.073 billion, an
increase of 26.80% compared to RMB5.578 billion in 2002.
3.2.9 Financial Expenses
Our financial expenses were RMB544 million in 2003, an increase of 6.67%
compared to the RMB510 million in 2002 due to the decrease of interest income.
3.3 Net Profit
Our net profit was RMB5.430 billion in 2003, an increase of 38.50%
compared to RMB3.921 billion in 2002. The significant increase of net profit
was primarily due to the increase of power output, the full year contribution
from the plants acquired in 2002 (including the Changxing Power Plant, the
Shidongkou I Power Plant, the Taicang Power Company and the Huaiyin Power
Company), the full year contribution from the Dezhou Power Plant Phase III
project, the commercial operation of the expansion project of the Jining Power
Plant and the attributable income from SEG. Net profit and earnings per share
increased by 38.50% in 2003, compared to 2002. This was higher than the
increase in net operating revenue, at 26.60%. The higher rate of increase in
net profit than operating revenue is attributable to the growth in
non-operating income, specifically:
o Increase in share of profit of associates as a result of the
acquisition of 25% of the enlarged share capital of Shenzhen Energy
Group at a consideration of RMB2.39 billion in 2003. The share of
profit from associates increased from a loss of RMB11 million in year
2002 to a gain of RMB212 million in year 2003.
o Decrease in effective tax rate from 19.39% in 2002 to 16.99% in 2003
because of the higher level of increase in the profit of the power
plants that had a relatively lower rate of taxation.
3.4 Impact of Differences between IFRS and US GAAP
In addition to the above management discussion and analysis of our
results of the operations under IFRS between the years ended December 31, 2003
and 2002, the following provides a summary of the significant accounting
differences between IFRS and US GAAP that would have a significant impact on
our management discussion and analysis of the results of our operations
between the years ended December 31, 2003 and 2002
51
under US GAAP. See also Note 42 to the Financial Statements for a complete
summary of all significant accounting differences between IFRS and US GAAP
that are relevant to us.
Under IFRS, we have adopted the acquisition method to account for our
acquisitions of the Shidongkou I Power Plant, the Taicang Power Company and
the Changxing Power Plant in 2002 and the acquisitions of the 55% equity
interest in the Qinbei Power Company, 60% equity interest in the Yushe Power
Company and all of the assets and liabilities of the Xindian Power Plant in
2003. Accordingly, our results of operations under IFRS include the results of
these power plants only from the respective dates of acquisition. In contrast,
under US GAAP, our acquisition of these power plants are considered as
combinations of entities under common control which are accounted for at
historical cost and reflected retroactively to include the results of
operations for each of the years ended December 31, 2003 as if the
acquisitions of these power plants had taken place since the beginning of the
earliest period presented.
In accordance with IFRS, we capitalized interest on general borrowings
used for the purpose of obtaining a qualifying asset in addition to the
capitalization of interest on specific borrowings. Under US regulatory
accounting requirements, interest on funds borrowed generally but used for the
purpose of obtaining a qualifying asset was not capitalized because such
interest would not be taken into consideration when determining the
recoverable rate base for tariff setting purposes.
Under IFRS, goodwill is amortised using the straight-line method over its
estimated useful life and recognized in the income statement as other
operating expenses. Under US GAAP, in accordance with Statement of Financial
Accounting Standard Number 142 "Goodwill and Other Intangible Assets",
goodwill is not amortised but tested for impairment on an annual basis and
between annual tests in certain circumstances.
Other than the above, there was no material difference between IFRS and
US GAAP that would have a significant impact on our management discussion and
analysis of the results of our operations between the years ended December 31,
2003 and 2002.
3.5 Comparison of key financial ratios
2003 2002
Current ratio 0.90 1.00
Quick ratio 0.81 0.88
Ratio of liabilities and shareholders' equity 0.54 0.56
Multiples of interest earned 12.03 8.28
Calculation formula of the financial ratio:
Current ratio = balance of current assets at the end of the year / balance of
current liabilities at the end of the year
Quick ratio = (balance of current assets at the end of the year - net amount
of inventory at the end of the year) / balance of current
liabilities at the end of the year
Ratio of liabilities and shareholders' = balance of liabilities at the end of the year / balance of
equity shareholders' equity at the end of the year
Multiples of interest earned = (profit before taxation + interest expenses) / interest
expenditure (including capitalized interest)
Due to the investment in SEG and the acquisitions of the Xindian Power
Plant, the Yushe Power Company and the Qinbei Power Company, our current ratio
and quick ratio decreased slightly when compared with those at the beginning
of 2003.
Multiples of interest earned increased when compared with that of prior
year was mainly due to the increase in our net profit.
52
B. Liquidity and cash resources
1. Liquidity
1.1 Cash flows provided by operating activities
2004 2003 2002
--------------- --------------- ----------------
RMB million RMB million RMB million
Cash received from sales of goods or rendering of
services 34,871 27,129 21,401
Other cash received relating to operating activities 453 148 282
Cash paid for goods and services (17,861) (9,942) (7,893)
Cash paid to and on behalf of employees (1,351) (1,079) (931)
Tax paid (4,733) (3,856) (3,327)
Interest paid (975) (632) (750)
Other cash paid relating to operating activities (2,241) (2,235) (1,702)
--------------- --------------- ----------------
Net cash provided by operating activities 8,163 9,533 7,080
--------------- --------------- ----------------
Net cash provided by operating activities is the main source of cash for
the Company and its subsidiaries. The net cash provided by operating
activities amounted to RMB8,163 million in 2004 which was lower than the of
2003. The significant increase in the fuel costs primarily contributed to the
lower level of cash from operations.
Our expansion and the increase in profit enabled us to realize an
increase in net cash inflow from operating activities from RMB7,080 million in
2002 to RMB9,533 million in 2003.
The Company and its subsidiaries expect that our operating activities
will continue to provide sufficient and sustained cash flows for our
operations and expansion in the future.
1.2 Cash flows (used in) / provided by investing activities
2004 2003 2002
----------------- ---------------- -----------------
RMB million RMB million RMB million
Purchase of property, plant and equipment (9,878) (3,607) (1,594)
Proceeds from disposals of property, plant and equipment 28 8 42
(Increase) / Decrease in other non-current assets (158) (29) 3
Decrease in temporary cash investments 132 1,066 5,082
Proceeds from disposal of investments 1 81 2
Cash consideration paid for available-for-sale investment - - (255)
Cash dividend received 173 - -
Cash consideration paid for acquisitions (4,575) (2,940) (2,759)
Direct costs paid for acquisitions (32) (20) (17)
Cash inflow from the acquired power plants 659 216 570
----------------- ---------------- -----------------
Net cash (used in) / provided by investing activities (13,650) (5,225) 1,074
----------------- ---------------- -----------------
Net cash used in investing activities mainly consisted of capital
expenditures for the purchase of property, plant and equipment and cash paid
for acquisitions of power plants.
53
1.3 Cash flows provided by / (used in) financing activities
2004 2003 2002
--------------- ---------------- ----------------
RMB million RMB million RMB million
Drawdown of short-term loans, unsecured 8,724 769 120
Repayments of short-term loans, unsecured (2,940) (450) (190)
Drawdown of long-term loans from shareholders,
unsecured 800 - -
Repayments of long-term loans from shareholders,
unsecured (1,505) (389) (16)
Drawdown of long-term bank loans, unsecured 4,944 1,016 174
Repayments of long-term bank loans, unsecured (3,193) (2,322) (2,955)
Drawdown of other long-term loans, unsecured - 350 -
Repayments of other long-term loans, unsecured (679) (37) (283)
Capital injection from minority shareholders of the
subsidiaries 677 78 -
Dividend paid to shareholders of the Company (3,006) (2,049) (1,800)
Dividend paid to minority shareholders of the
subsidiaries (167) (148) (139)
Redemption of convertible notes (1) - (2,235)
--------------- ---------------- ----------------
Net cash provided by / (used in) financing activities 3,654 (3,182) (7,324)
--------------- ---------------- ----------------
Net cash flows from financing activities consisted mainly of drawdown of
loans less repayments of loans and dividend payments.
In 2002, the Company and its subsidiaries repaid loans of approximately
RMB3,444 million, paid dividends of approximately RMB1,939 million and
borrowed loans of approximately RMB294 million.
In 2003, the Company and its subsidiaries repaid loans of approximately
RMB3,198 million, paid dividends of approximately RMB2,197 million and took
out new loans of approximately RMB2,135 million.
In 2004, the Company and its subsidiaries repaid loans of approximately
RMB8,317 million, paid dividends of approximately RMB3,173 million and took
out new loans of approximately RMB14,468 million.
In 2005, the Company and its subsidiaries will enter into a comparatively
concentrated period of capital expenditure for construction projects. In order
to minimize the cost of capital, the newly developed projects will be financed
by borrowings. The Company and its subsidiaries are confident in managing the
scale of liabilities and financial risks.
As of December 31, 2004, the interest-bearing liabilities of the Company
and its subsidiaries totaled approximately RMB25.6 billion, including both
long-term borrowings (inclusive of current portion) and short-term borrowings.
Within which, approximately RMB7.6 billion was from foreign borrowings.
2. Capital expenditure and cash resources
2.1 Capital expenditure
2.1.1 Capital expenditure on acquisitions
Cash payments for acquisitions during 2004 amounted to approximately
RMB4.575 billion when the Company acquired all the assets and liabilities of
the Yingkou Power Plant and the Jinggangshan Power Plant, 55% equity interest
in the Yueyang Power Company, 60% equity interest in the Luohuang Power
Company and 40% equity interest in the Hanfeng Power Company.
54
Cash payments for acquisitions during 2003 amounted to RMB2.940 billion.
Cash payments for acquisitions during 2002 amounted to RMB2.759 billion.
In January, 2005, the Company paid a cash consideration of RMB2.025
billion to acquire a 65% equity interest in the Pingliang Power Company and a
60% equity interest in Sichuan Hydropower. These power plants are located in
Gansu and Sichuan Provinces in Western China. The acquisition enabled the
Company to enter a fast growing power market in Western China, achieving the
marketing development strategy of "consolidating our positions in the coastal
regions, expanding into Central China and entering into Western China". This
is also one of the milestones of the Company in realizing the development
strategy of "combining hydro and coal-fired power", and represents a
continuation of the established strategy of a balance between development and
acquisitions. While considering scale, geography or energy type, the
acquisition undoubtedly enabled the Company to be the largest Asian integrated
power generation enterprise. Given strong demand for electricity in the PRC
and intense coal supply, improving the energy mix through acquiring a
hydropower generation company and lowering fuel costs through acquiring power
plants close to coal mines (the Pingliang Power Company) should enable the
Company and its subsidiaries to improve profitability and effectively control
fuel costs.
The Company and its subsidiaries will continue to follow the construction
and acquisition strategy by proactively seeking new acquisition opportunities
to ensure the sustainable growth of profitability and shareholders' value.
Since there are uncertainties associated with acquisition projects, the amount
of capital expenditure required is also uncertain. However, the significant
cash flows from operating activities and the available undrawn borrowing
facilities should provide the Company with a sufficient level of cash to
support acquisition projects.
2.1.2 Capital expenditure on construction and renovation
The capital expenditure for construction and renovation in 2004 amounted
to approximately RMB10.036 billion, including approximately RMB1.632 billion
for the Qinbei Phase I project, approximately RMB1.219 billion for the Yushe
Phase II project, approximately RMB1.566 billion for the Taicang Phase II
project, approximately RMB1.199 billion for the Yuhuan Phase I project,
approximately RMB228 million for the Shantou Phase II project, approximately
RMB1.216 billion for the Huaiyin Phase II project, approximately RMB126
million for the Shidongkou II Phase II project, approximately RMB281 million
for the Xindian project, approximately RMB451 million for the Luohuang Phase
III project, approximately RMB446 million for the Yueyang Phase II project,
approximately RMB2 million for the Jinggangshan project. Other expenditure
consists mainly of approximately RMB24 million of prepaid construction,
approximately RMB361 million for the settlement of a construction payable in
respect of the Dezhou Phase III and approximately RMB364 million for the
acquisition of property, plant and equipment and routine renovation
expenditure.
Capital expenditure for construction and renovation in 2003 amounted to
approximately RMB3,607 million, including approximately RMB355 million for the
Jining Phase III expansion construction, approximately RMB439 million for the
Yuhuan Phase I project, approximately RMB215 million for the Shantou Phase II
project, approximately RMB497 million for the Huaiyin Phase II project,
approximately RMB240 million for the Qinbei Phase I project, approximately
RMB177 million for the Yushe Phase II project, approximately RMB80 million for
the Xindian expansion construction, approximately RMB144 million for the
renovation of the Shidongkou I Power Plant and approximately RMB459 million
for the renovation of the Taicang Power Plant. Other items mainly consist of
approximately RMB349 million for the settlement of a construction payable of
the Dezhou Phase Power Plant III and approximately RMB214 million of
construction payable for the Nantong Phase II.
Capital expenditure for construction and renovation in 2002 amounted to
RMB1,594 million, primarily for the construction of the Dezhou Power Plant
Phase III.
The above capital expenditure items were mainly financed by long-term
borrowings and cash from operations.
The Company and its subsidiaries will continue to incur significant
capital expenditure in 2005. The construction projects of the Company in 2005
include two 1,000MW ultra super critical coal-fired generator units for the
Yuhuan Power Plant Phase I project, two 300 MW coal-fired generator units for
the Yueyang Phase II project, two 600 MW coal-fired generator units of the
Taicang Power Plant Phase II, two 600 MW
55
coal-fired generator units for the Luohuang Phase III project and one 600 MW
coal-fired generator unit for the Shantou Phase II project. Planned
construction items mainly include two 1,000 ultra super critical coal-fired
generator units for the Yuhuan Power Plant Phase II project; two 600MW
coal-fired generator units for the Yingkou Power Plant Phase II project, two
600 MW coal-fired generator units for the Qinbei Phase II project, two 600 MW
coal-fired generator units for the Shang'an Phase III project, three 350 MW
gas-fueled generator units for the Shanghai Ranji and three 350 MW gas-fueled
generator units for the Jinling Power Plant. The Company and its subsidiaries
will also proactively promote the construction of disulphuric facilities. The
Company and its subsidiaries will actively monitor the progress of the above
projects based on commercial feasibility principles and engage in new project
developments for the long-term. The Company expects to finance such projects
through internal funding, available undrawn borrowing facilities and cash
flows provided by operating activities.
2.2 Cash resources and anticipated financing cost
The Company and its subsidiaries expect the cash resources for capital
expenditure for construction and acquisitions to be principally generated from
internal funds, cash flows from operating activities and future debt and
equity financing.
Through years of successful operations, the market image and "brand" of
the Company and its subsidiaries have continuously enhanced. Standard & Poors
upgraded the credit rating on the Company to BBB+, outlook of the rating was
stable in February, 2004. Good operating results and good credit status give
the Company strong financing capabilities. As of December 31, 2004, the
Company and its subsidiaries had available unsecured borrowing facilities from
banks of approximately RMB30 billion (included in these undrawn borrowing
facilities are medium to long-term loan facilities of RMB20 billion with the
drawdown subject to application and approval procedures). These unsecured
borrowing facilities from PRC banks provide the Company and its subsidiaries
with a sufficient level of available cash and raise the level of liquidity and
repayment capabilities of the Company and its subsidiaries effectively.
Despite the acquisitions of the Yingkou Power Plant, the Jinggangshan
Power Plant, the 55% equity interest of the Yueyang Power Company, the 60%
equity interest of the Luohuang Power Company, the 40% equity interest in the
Hanfeng Power Company in July, 2004 and the 65% equity interest in the
Pingliang Power Company and the 60% equity interest in the Sichuan Hydropower
in January, 2005, the Company and its subsidiaries have maintained a strong
level of ability to service their debts.
As of December 31, 2004, short-term borrowings of the Company and its
subsidiaries amounted to approximately RMB8.099 billion with interest charged
between 4.30% and 5.02% per annum (2003: approximately RMB1.6 billion with
interest charged between 4.54% and 5.05% per annum).
As of December 31, 2004, the total long-term bank borrowings of the
Company and its subsidiaries amounted to approximately RMB16.112 billion
(2003: approximately RMB10.715 billion). These loans include bank borrowings
denominated in Renminbi of approximately RMB8.805 billion (2003: approximately
RMB4.064 billion); US dollar of approximately US$778 million (2003:
approximately US$803 million) and Euro of approximately (euro)77 million
(2003: N/A). Included in these borrowings were approximately US$67 million of
floating-rate borrowings. For the year ended December 31, 2004, these
borrowings bore interest that ranged from 1.225% to 6.97% (2003: from 1.18% to
6.60%) per annum. The Company and its subsidiaries have entered into interest
rate swap contracts with PRC banks to reduce the floating interest rate risk.
As of December 31, 2004, current portion of these long-term bank loans, bank
loans between 1 to 2 years, between 2 to 5 years and over 5 years amounted to
RMB1,257 million, RMB1,363 million, RMB7,639 million and RMB5,853 million,
respectively.
As of December 31, 2004, the total long-term shareholders' loan to the
Company and its subsidiaries amounted to RMB800 million (2003: approximately
RMB420 million). The loans are denominated in Renminbi (2003: denominated in
Renminbi of approximately RMB32 million and US dollar of approximately US$47
million). Included in these borrowings were approximately RMB200 million of
floating-rate borrowings. For the year ended December 31, 2004, these
borrowings bore interest that ranged from 3.60% to 5.76% (2003: 3.62% to
5.76%) per annum. All these borrowings from a shareholder will mature 5 years
later.
As of December 31, 2004, the total other long-term loans of the Company
and its subsidiaries amounted to approximately RMB587 million (2003:
approximately RMB1.06 billion). These loans include borrowings denominated in
Renminbi of approximately RMB310 million (2003: approximately RMB745 million),
US dollar of approximately US$19 million (2003: approximately US$21 million)
and Japanese Yen of
56
approximately (Y)1.548 billion (2003: approximately (Y)1.786 billion). All
these foreign currency borrowings were at floating rates. For the year ended
December 31, 2004, these borrowings bore interest that ranged from 1.70% to
5.93% (2003: from 4.94% to 6.21%) per annum. The Company will closely monitor
the foreign exchange market and cautiously assess the exchange rate and
interest rate risks. As of December 31, 2004, current portion of these other
long-term loans, other long-term loans between 1 to 2 years, between 2 to 5
years and over 5 years amounted to RMB286 million, RMB109 million, RMB128
million and RMB64 million, respectively.
Combining the current development of the power industry and the growth of
the Company and its subsidiaries, the Company and its subsidiaries will make
continuous efforts to not only meet cash requirements of daily operations,
construction and acquisition, but also establish an optimal capital structure
to minimize the cost of capital and manage financial risk through effective
financial management activities thereby maintaining stable returns to the
shareholders.
2.3 Other financing requirements
The objective of the Company and its subsidiaries is to bring long-term,
stable and growing returns to the shareholders. In line with this objective,
the Company follows a proactive, stable and balanced dividend policy. In 2005,
in accordance with the income appropriation plan of the board of directors of
the Company (subject to the approval of the shareholders' meeting), the
Company expects to pay a cash dividend of approximately RMB3.014 billion.
C. Trend information
1. Impact of demand and supply
Restrictions on power supply and demand in 2005 are expected to be
somewhat relaxed but the overall power supply and demand will still be tense
with some restrictions on power consumption during peak season in certain
regions. In 2006, the power supply and demand in the PRC will hopefully be
balanced. As a result of good functionality of the generators of the Company
and its subsidiaries, whilst there maybe some short-term decline in
utilization hours, the Company and its subsidiaries are confident in
maintaining high utilization hours in the long-term.
2. Impact of the electricity pricing policy
2.1 The Electricity Pricing Reform Scheme
The State Council approved the Electricity Pricing Reform Scheme on July
3, 2003, which defined the short-term and long-term objectives of the power
pricing reform. The specific implementation methods are still being
established.
The short-term objectives for the electricity pricing reform are to
establish an appropriate on-grid price setting mechanism to accommodate a
reasonable level of competition in power generation; to establish a
preliminary pricing mechanism for transmission and distribution to facilitate
the healthy development of the power grids; to link the retail prices with the
on-grid prices; to optimize the structure of the retail price; and to
pilot-run the practice for high voltage users to directly make purchases from
the power generation companies based on a reasonable price for transmission
and distribution.
The long-term objective for the electricity pricing reform is to
establish a standardized and transparent tariff setting mechanism, classifying
the electricity prices into the on-grid price, the transmission price, the
distribution price and the end-user retail price, and to allow the on-grid
prices and retail prices to be determined through market competition. The
transmission and distribution prices are to be regulated by the government.
The tariff rate level will be comparatively stable at the initial stage
of reform in order to ensure the smooth transition between the old and new
tariff setting system.
2.2 Coal-electricity price linkage mechanism
In December, 2004, the NDRC established a coal-electricity price linkage
mechanism through issuing a circular, "Notice related to opinion on setting up
coal-electricity price linkage mechanism". Truck-loading price in late May,
2004 was being used as the base price upon its first application whereby this
base price is compared
57
against the average truck-loading prices between June
and November, 2004 before applying the pricing formula to adjust respective
tariffs for electricity generation plants and the retail tariffs. The power
generation enterprises have to absorb the first 30% of the increase of coal
prices. The tariff rate of hydro power plants will also adjust accordingly
upon the pricing adjustments being applied to the coal-fired power plants
while tariff rates of other power generation enterprises shall remain
unchanged. A period of 6 months is being set as a single cycle in applying
coal-electricity price linkage mechanism. Should the average coal prices
within a cycle is 5% higher than that of last cycle, pricing adjustment will
be made accordingly; should the change is within 5%, this change will be
brought forward to the next cycle until the accumulated change be equaled to
or is above 5%. At which point, a pricing adjustment will be made. The State
Council has authorized NDRC to take price intervening measures when there is a
significant fluctuation in coal prices. The formal implementation plan
proposed by NDRC is in the progress of approval by the State Council and is
expected to be issued in the second quarter of 2005.
Upon the formal issuance of the coal-electricity price linkage mechanism
plan, the tariff rates of the power plants of the Company is expected to
adjust accordingly.
3. Impact of the environmental protection policies
2004 is the second implementation year of both the "Regulations on the
Administration of the Levy and Usage of Emission Fee" and the "Rules on the
Administration of the Levy Standards of Emission Fees". Pursuant to the
relevant regulations, emission fee charged on discharging sulphur dioxide
increased from RMB0.21/kg to RMB0.42/kg while a new charge was created on
nitric oxides materials discharge at RMB0.63/kg from July 1, 2004 onwards. The
Company paid a total of approximately RMB170.32 million of emission fees to
local governments in 2004.
The government has continuously strengthened the enforcement of
environmental protection regulations and issued stricter benchmarks on
pollutants emitted by the coal-fired power plants. These policies benefit the
society and nation as a whole, but have created pressure on the operations of
the Company.
The Company and its subsidiaries are determined to support the
strengthened government policies and steadily implement the theory of balanced
and sustainable development. It is confident in both satisfying the
environmental protection requirements of the government through implementing
measures for enhancing the environmental protection standards and through
effectively controlling the operating costs of newly setup power plants. Given
its competitive advantage as a result of the new generators, advanced
equipment and effective control over pollution discharge, the Company and its
subsidiaries will step up the installation of desulphuric facilities and NOx
emission reduction facilities, proactively lobby for discharge fee refund for
renovation item and the enactment of a pollution discharging fee-electricity
price linkage mechanism.
4. Impact of power market pilot
In June, 2003, NDRC started a pilot program to establish a regional power
market in both the Northeast China and the Eastern China.
On January 15, 2004, the power market formally commenced in Northeast
China and after several rounds of simulated operations, the market was
formally established on December 13, 2004 and has initiated the bidding
practice for the year 2005.
From the results of simulated operations and trial runs, the "Transaction
Regulations for the Northeast China power market" was not yet mature and
currently its monthly bidding practice has been suspended while opinions are
being gathered from each participant in order to amend and improve the
regulation. During this period, all the tariff rates for individual power
plants will follow those in effect in 2004. The trial operations of monthly
bidding practice has been commenced since April, 2005. In this region, the
Company owns three power plants, namely, the Dalian Power Plant, the Dandong
Power Plant and the Yingkou Power Plant with eight 300 MW generators, total
operating capacity of 2,740 MW and all are located in the demanding areas
within Liaoning Province.
The Company and its subsidiaries will pay attention to the amendments of
the regulation, proactively support and take part in the construction of a
power market in Northeast China and ensure that all three of the Company's
power plants in Liaoning Province can compete in a "fair" market environment.
The Company is confident in maintaining its competitive advantage in this fair
market.
58
Pursuant to the regulation, "Proposal of pilot activities in Eastern
China power market", approximately 85% and 15% of power transactions will be
confirmed through agreements and the bidding practice respectively in the
first stage of this power market. The bidding practice is on a monthly basis
with price setting at a day before spot market.
The Eastern China power market started the simulated operations on May
18, 2004 and there were eight monthly simulated bidding rounds to date. From
the results of these simulations, there is room for improvement. Simulated
operations using price setting at a day before spot market should be ready by
the second half of 2005.
The Company currently owns eight power plants, including 22 generators
with operating capacity totaling 7,140 MW which accounted for approximately
15% of total operating capacity in Eastern China. These power plants are
mainly located in Jiangsu, Shanghai and Fujian where demand for electricity is
relatively high and most of them are within the high loading Centre. With high
individual operating capacity, good functionalities, smaller head count and
high quality management, these power plants will be more competitive under the
centralized management and coordination of the Company.
Given that the bidding practice will only be partially implemented in
Eastern China power market and because of the fast growing electricity
consumption in the region which is expected to continue to have a power
shortage within the next two years according to a forecast, there should be no
material impact on the Company upon the full implementation of a competitive
bidding market.
5. Importance of both construction and acquisitions
In 2005, one of the focuses is to continuously and proactively work on
construction projects to establish a strong foundation for the long-term
development of the Company. The Company will also proactively seek new
acquisition opportunities to ensure the sustainable growth of profitability
and shareholders' value.
D. Performance of significant investments and their prospects
On April 22, 2003, the Company acquired a 25% equity interest in SEG with
a cash consideration of approximately RMB2.39 billion. This investment brought
the Company and its subsidiaries a net profit of approximately RMB209 million
in 2004 under IFRS. SEG is the largest power generation supplier in Shenzhen
and its power plants are located in one of the prosperous provinces -
Guangdong Province. With strong demand for electricity in that region, such an
investment will bring stable returns to the Company and its subsidiaries in
the future.
In July, 2004, the Company acquired 40% equity interest in the Hanfeng
Power Company with a cash consideration of approximately RMB1.375 billion.
This investment brought the Company and its subsidiaries a net profit of
approximately RMB126 million in 2004 under IFRS. The Hanfeng Power Company is
located in Hebei Province in Northern China and there is strong demand for
electricity in that region. Through this acquisition, the Company and its
subsidiaries increased the equity share of production capacity in Hebei
Province from 1,300 MW to 1,828 MW or approximately 40.6%. The Company and its
subsidiaries expect this investment will contribute stable returns in the
future.
E. Employee benefits
As of December 31, 2004, the Company and its subsidiaries had 22,129
employees. For the year ended December 31, 2004, total staff costs incurred
amounted to approximately RMB1.88 billion. The Company and its subsidiaries
provided the employees competitive remuneration and pegged such remuneration
to operating results as working incentives for the employees. Currently, the
Company and its subsidiaries do not have any non-cash remuneration packages.
Based on the development plans of the Company and its subsidiaries and
the requirements of individual positions, together with consideration of
specific characteristic of individual employees, the Company and its
subsidiaries tailor made various training programs on management skills,
technical skills and promotion skills. These programs enhanced both the
knowledge of the employees and the standards of operations.
59
F. Related party transactions
The Company and its subsidiaries entered into various transactions with
Huaneng Group, HIPDC and their group companies during daily operations,
including operating leases on land use rights and property, electricity
transmission and fuel purchases. Such transactions were for daily operations
at prices no different from transactions conducted with other third parties.
Huaneng Group, HIPDC and the minority shareholders of subsidiaries of the
Company have also committed or agreed through contracts to provide guarantees
on loans of the Company and its subsidiaries. In addition, pursuant to
relevant agreements, the Company rendered management services to those power
plants owned by Huaneng Group and HIPDC at a standard fee covering its costs
and a reasonable profit. For the year ended December 31, 2004, such
transactions amounted to approximately RMB57.54 million which was below 1% of
net operating revenue.
Please refer to Note 7 to the Financial Statements prepared under IFRS
for details of related party transactions.
G. Guarantees on loans
As of December 31, 2004, the Company provided guarantees on long-term
bank borrowing of certain subsidiaries and an associated company totaling
approximately RMB1.735 billion. These included guarantees granted to the
Weihai Power Company, the Qinbei Power Company, the Yushe Power Company and
the Rizhao Power Company amounting to RMB30 million, RMB740 million, RMB660
million and RMB305 million respectively. The Company had no contingent
liabilities other than those described above.
As of December 31, 2003, the Company succeeded the original loan
guarantee granted by Shandong Huaneng Power Development Company Limited
("Shandong Huaneng") on the Weihai Power Company and the Rizhao Power Company
and the original million granted by Huaneng Group on the Taicang Power Company
amounting to approximately RMB330 million, RMB339 million and RMB1.114 billion
respectively. The Company also provided guarantees on long-term borrowings of
the Huaiyin Power Company, the Qinbei Power Company and the Yushe Power
Company amounting to approximately RMB10 million, RMB905 million and RMB101
million respectively. The Company had no contingent liabilities other than
those described above.
The decrease of guaranteed amounts from 2003 to 2004 was mainly due to
the repayments of loans during the year.
H. Off-balance Sheet Arrangements
Our off-balance sheet arrangements consisted of the following
arrangements:
o Operating lease commitments;
o Purchase and construction commitments;
o Guarantees for an associate's long-term loans.
There are no off-balance sheet arrangement that have or are reasonably
likely to have an effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
Except for guarantees granted in relation to an associate's long-term
loans, we have discussed these arrangements in I. Tabular Disclosure of
Contractual Obligations and Commercial Commitments and disclosed details in
Notes 36 and 37 to the Financial Statements.
I. Tabular Disclosure of Contractual Obligations and Commercial Commitments
A summary of payments due by periods of our contractual obligations and
commercial commitments as of December 31, 2004 is shown in the tables below. A
more complete description of these obligations and commitments is included in
the Notes to the Financial Statements as referenced below.
60
Contractual Cash Obligations
(RMB millions)
2005 2006-2007 2008-2009 Thereafter Total
-------- --------- --------- ---------- ------
Long-term Loans from Shareholders(1) - - - 800 800
Long-term Bank Loans(1) 1,257 4,603 6,256 6,147 18,263
Other Long-term Loans(1) 286 152 85 64 587
Interest Payments 1,329 1,805 1,122 1,364 5,620
Operating Lease - Nanjing
Power Plant(2) 1 3 3 52 59
Operating Lease - Dezhou Power Plant(2) 30 60 60 432 582
-------- --------- --------- ---------- ------
2,903 6,623 7,526 8,859 25,911
======== ========= ========= ========== ======
Other Commercial Commitments
(RMB millions)
2005 2006-2007 2008-2009 Thereafter Total
-------- --------- --------- ---------- ------
Long-term coal purchase contracts(2) 5,769 12,062 5,603 - 23,434
Other commitments(2) 11,483 - - - 11,483
-------- --------- --------- ---------- ------
17,252 12,062 5,603 - 34,917
======== ========= ========= ========== ======
---------------
(1) See Notes 23, 24 and 25 to the Financial Statements, "Long-term Loans
from Shareholders, unsecured", "Long-term Bank Loans, unsecured" and
"Other Long-term Loans, unsecured", respectively.
(2) See Note 36 to the Financial Statements, "Commitments".
The Company and its subsidiaries have various defined contribution plans
in accordance with the local conditions and practices in the provinces in
which they operate. The Company and its subsidiaries pay fixed contributions
into separate entities (funds) and will have no further payment obligations if
the funds do not hold sufficient assets to pay all employee benefits relating
to employee service in the current and prior periods. Disclosures of the
pension plans including the contribution amounts are currently in Note 8 to
the Financial Statements.
61
ITEM 6
Directors, Senior Management and Employees
A. Directors, members of the supervisory committee and senior management
As required by the Company Law, the Special Regulations of the State
Council for Overseas Stock Offerings and Listings by Joint Stock Limited
Companies and other implementing regulations (collectively, the "Company Law")
and the Articles of Association, we have formed the Supervisory Committee,
whose primary duty is the supervision of our senior management, including the
Chairman of the Board of Directors, the Board of Directors, the President and
other senior officers. The function of the Supervisory Committee is to ensure
that our senior management acts in the interest of us, our shareholders and
employees and does not abuse its power. The Supervisory Committee reports to
the shareholders in general meeting. The Articles of Association provide the
Supervisory Committee with the right to investigate the business and the
financial affairs of us and to request shareholders' meetings from time to
time.
The table below sets forth certain information concerning the Directors
and executive officers and members of the supervisory committee of us (the
"Supervisory Committee") as of March 31, 2005. All Directors will serve a term
of three years or until the election of their respective successors. The term
of the current board will expire in May, 2005.
Name Age Position with us
---------------------------------------------------------- ------- ----------------------------------------
Li Xiaopeng............................................... 46 Chairman
Huang Yongda.............................................. 48 Director and President
Wang Xiaosong............................................. 59 Vice Chairman
Ye Daji................................................... 60 Vice Chairman
Huang Jinkai.............................................. 63 Director
Liu Jinlong............................................... 64 Director
Na Xizhi.................................................. 52 Vice President
Zhang Hong................................................ 59 Vice President
Huang Long................................................ 52 Vice President and Company Secretary
Liu Guoyue................................................ 42 Vice President
Liu Shuyuan............................................... 55 Director
Li Shiqi.................................................. 49 Vice President
Huang Jian................................................ 43 Chief Accountant
Shan Qunying.............................................. 52 Director
Yang Shengming............................................ 62 Director
Xu Zujian................................................. 51 Director
Gao Zongze................................................ 66 Independent Director
Zheng Jianchao............................................ 66 Independent Director
Qian Zhongwei............................................. 67 Independent Director
Xia Donglin............................................... 44 Independent Director
Liu Jipeng................................................ 49 Independent Director
Wei Yunpeng............................................... 63 Chairman of the Supervisory Committee
Zhao Xisheng.............................................. 62 Member of the Supervisory Committee
Pan Jianmin............................................... 50 Member of the Supervisory Committee
Li Yonglin................................................ 60 Vice Chairman of the Supervisory Committee
Shen Weibing.............................................. 38 Member of the Supervisory Committee
Shen Zongmin.............................................. 51 Member of the Supervisory Committee
Li Xiaopeng Mr. Li is the Chairman of the Company, Chairman and President
of HIPDC, as well as President of Huaneng Group. He graduated from the North
China Institute of Electric Power specializing in power plants and power
systems and is a senior engineer. Mr. Li was Vice President, President and
Vice Chairman of the Company as well as Vice President, President and Vice
Chairman of HIPDC, Chairman of Huaneng Group and Vice President of State Power
Corporation. Before joining HIPDC, he had successively served as Engineer of
the Power System Research Division, as Deputy Division Chief of the Planning
and Operations Division, and as General Manager of the Power Technology and
Economic Research Division, Electric Power Research Institute.
Huang Yongda Mr. Huang is the President and Director of the Company and
the Vice President of Huaneng Group. He graduated from China Renmin
University, specializing in industrial financial accounting and is a senior
accountant. He was the Deputy Director of the Economic Moderation and State
Asset
62
Supervision Office of Ministry of Power Industry, Deputy Director of the
General Office of the Ministry of Power Industry, Deputy Officer of the
Finance and Asset Management Department of State Power Corporation, Deputy
Director of the Power Department of the State Economic and Trade Commission,
President of Jiangxi Province Power Corporation and Vice President of HIPDC.
Wang Xiaosong Mr. Wang is Vice Chairman of the Company, Vice President of
HIPDC, and Vice President of Huaneng Group. He graduated from Beijing
Institute of Electric Power specializing in thermal power engineering and is a
senior engineer. He was Vice President of the Company, Vice President of HIPDC
and Director of Huaneng Group before. Before joining the Company, he had
served as Deputy General Manager of Fushun Power Plant, General Manager of
Yuanbaoshan Power Plant and Chief of the Labor and Wages Division of Northeast
Power Administration.
Ye Daji Mr. Ye is Vice Chairman of the Company and Chief Engineer of
Huaneng Group. He graduated from Department of Mechanical Engineering Shanghai
Jiao Tong University and is a senior engineer. After joining in the Company,
Mr. Ye served as Deputy Manager of Shanghai branch company of Huaneng Power
International Inc., President of Huaneng Shanghai Shidongkou Second Power
Plant. Mr. Ye served as Vice President and President of the Company, Vice
President of HIPDC and Director of Huaneng Group. Before joining the Company,
Mr. Ye served as Deputy Chief Engineer of Shanghai Shidongkou Power Plant.
Huang Jinkai Mr. Huang is the Director of the Company. He graduated from
Shenyang Agricultural Institute, specializing in agricultural electrization
and is a senior engineer. He served as Director (General Manager) of the
Northeast Power Administration Group Company, Chairman of the Company,
Chairman of HIPDC, General Manager (Director) of North China Power Group
Corporation (Power Administration) and Vice Chairman of Huaneng Group.
Liu Jinlong Mr. Liu is the Director of the Company. He graduated from
Wuhan Hydroelectric Institute, specializing in power generation and is a
senior engineer. He served as General Manager of Central China Power Group
Corporation and Director of Central China Power Administration, Chairman,
General Manager, and Vice Chairman of Huaneng Group.
Shan Qunying Mr. Shan is the Director of the Company. He is also the Vice
President of Hebei Provincial Construction Investment Company. He graduated
from Beijing Steel Institute specializing in automation and is a senior
engineer. He had been the Division Chief of Hebei Provincial Construction
Investment Company.
Yang Shengming Mr. Yang is Director of the Company. He is the Vice
President of Fujian International Trust & Investment Company, Executive
Director of Hong Kong Minxin Group Limited Company, Director of Yongcheng
Property Insurance Joint Stock Company and Executive Director of Xiamen
International Bank. He graduated from Beijing Light Industries Institute and
is a senior economist.
Xu Zujian Mr. Xu is Director of the Company. He is Director and Vice
President of Jiangsu Province Guoxin Asset Management Group Limited Company,
and Chairman of Jiangsu Investment Management Co., Ltd. He graduated from
Liaoning Finance Institute majoring in infrastructure finance and is a senior
economist. He was Vice President of Jiangsu International Trust and Investment
Company Limited, President of Jiangsu Province Investment Management Co.,
Ltd..
Liu Shuyuan Mr. Liu is Director of the Company. He is Director and
President of Liaoning Energy Investment (Group) Co. Ltd. He is a postgraduate
specializing in economic management and is a senior economist. He has been the
General Manager of Liaoning Tieling Steel Plant, Director of Tieling Municipal
Construction Commission and Assistant to the Mayor and Vice Chairman of the
Supervisory Committee of the Company.
Gao Zongze Mr. Gao is an Independent Director of the Company. He is the
Senior Partner at C&I Partners and an approved arbitrator of China
International Economic and Trade Arbitration Commission and China Marine
Affairs Arbitration Commission and President of All China Lawyers Association.
He graduated from Dalian Marine Institute and received a master's degree in
law from the Law Department of the Graduate School of the Institute of China
Academy of Social Sciences.
Zheng Jianchao Mr. Zheng is an Independent Director of the Company. He is
Honorary President of China Electric Power Research Institute in China and
Vice Chairman of its Academic Committee. He is Vice President of China
Electrical Engineering Institute, editor-in-chief of the Journal of Chinese
Electrical Engineering and chief of the Science and Technology Committee of
China Guangdong Nuclear Power Group Corporation. He
63
graduated from Qinghua University majoring in electrical engineering and
graduated from its Graduate School. He was elected Fellow of Chinese Academy
of Engineering in 1995.
Qian Zhongwei Mr. Qian is an Independent Director of the Company. He
graduated from the electrical engineering department of Qinghua University and
is a senior engineer. He has been the Deputy Chief Engineer, Chief Engineer
and Deputy Director of the Eastern China Power Industry Management Bureau,
Director of Shanghai Electricity Bureau, Director of Eastern China Power
Administration Bureau, and President of Eastern China Power Group Company.
Xia Donglin Mr. Xia is an Independent Director of the Company. He is a
professor and Ph.D. tutor of the Economic and Management School of Qinghua
University. He is also the Advisory Specialist of the Accounting Standard
Committee of the PRC Ministry of Finance, General Secretary of China
Accounting Society, and Independent Director of Zhejiang Zhongda companies and
other companies. He graduated from the Finance and Administration Science
Research Institute of Ministry of Finance, specialising in accounting and was
awarded a Ph.D. degree of Economics. He is a certified public accountant (non
practising member). He was the head of Accounting Department of Economic and
Management School of Qinghua University.
Liu Jipeng Mr. Liu is an Independent Director of the Company. He is the
chairman of Beijing Standard Consulting Company, professor of Capital Economic
and Trade University. He is also a professor of the Graduate School of China
Academy of Social Science, mentor of graduate students of the Centre for
Financial Studies of the Ministry of Finance, senior consultant of China Power
Enterprises Union, China Securities Market Research and Design Centre and
consultant of State Power Corporation. He graduated from the Industrial
Economic Department of the Graduate School of China Academy of Social Science
with a master's degree in economics. He is titled as professor and is a
certified public accountant.
Wei Yunpeng Mr. Wei is Chairman of the Supervisory Committee of the
Company. He graduated from Hunan Institute of Electric Power, specialising in
Finance and Accounting and is a senior accountant. He was Chief Accountant of
Huaneng Group, Chief Accountant of HIPDC and Chairman of China Huaneng Finance
Limited Liability Company. He served as Chief Accountant of the Company.
Li Yonglin Mr. Li is Vice Chairman of the Supervisory Committee. He is
Director of the Power Department of Dalian Municipal Construction Investment
Company. He graduated from Changchun Hydro-electric School of Ministry of
Water Resources and Electric Power, specializing in power plants, power grids
and power system. He was a researcher of the Energy and Transportation
Department of Dalian Municipal Planning Committee.
Pan Jianmin Mr. Pan is a member of the Supervisory Committee of the
Company. He is Deputy Chief Auditor and General Manager of the Auditing
Department of Huaneng Group. He graduated from Liaoning Economic and Finance
Institute specializing in infrastructure finance and credit and is a senior
accountant. He has served as General Manager of the Finance Department and
Deputy General Manager of the Supervising and Auditing Department of Huaneng
Group, and Deputy General Manager of Beijing Huaneng Real Estate Development
Company.
Shen Weibing Mr. Shen is Supervisor of the Company. He is Deputy Director
of Nantong Investment Management Centre. He graduated from Material Management
Department of Beijing Material Institute with a bachelor of science degree. He
is a senior economist. In 2003, he studied at Nanjing University and received
a master degree in business administration. He served as Vice President and
President of Nantong Municipal Oil Company, Vice President and Legal
Representative of Nantong Municipal Construction Investment Company, and
Deputy Chief Officer and Chief Officer of Nantong Investment Management
Centre.
Shen Zongmin Mr. Shen is Supervisor of the Company. He is Manager of
Shantou Electric Power Development Corporation. He was President of Shantou
Light Industry Mechanical Group, Deputy Manager, and Manager of Shantou Power
Development Corporation and Chairman of Shantou Power Development Joint Stock
Company.
Zhao Xisheng Mr. Zhao is Supervisor and Senior Consultant of the Company.
He graduated from China Renmin University specializing in industrial economics
and is a senior accountant. He has served as Deputy General Manager of the
Finance Department, General Manager of the Management Department of the
Company and the General Manager of the Company's Supervising and Auditing
Department. Before joining the Company,
64
he served as Section Chief, Deputy Chief Accountant and Deputy General Manager
of Beijing Shijingshan Power Plant.
Na Xizhi Mr. Na is Vice President of the Company. He is Deputy Chief
Engineer of Huaneng Group. He graduated from Wuhan Hydro-electric University,
specializing in thermal power with a master degree in engineering and is a
senior engineer. He served in Huaneng Group as Deputy Manager of the Power
Generation Department, General Manager of the Operation Department, General
Manager of the Power Safety and Production Department. Previously, Mr. Na was
the Vice General Manager of Fuxin Power Plant, Deputy Officer of the Planning
Department of Suizhong Power Plant, Deputy Chief and Chief of the
Bio-technology Department of Northeast Shenhai Thermal Power Plant.
Zhang Hong Mr. Zhang is the Vice President of the Company. He is Deputy
Chief Engineer of Huaneng Group. He graduated from Northeast Power Institute
specializing in Management Engineering and is a senior engineer. Mr. Zhang
served as the General Manager of Dandong Branch of the Company, General
Manager of Yingkou Branch of HIPDC, General Manager of Power Construction
Department and Planning Department of Huaneng Group. Previously, Mr. Zhang was
the Manager of the Fourth Engineering Company of Northeast Power
Administration Group.
Huang Long Mr. Huang is Vice President of the Company as well as
Secretary of the Board of Directors. He graduated with a M.S. degree from
North Carolina State University in the U.S. specializing in communications and
auto-control and is a senor engineer. He served as Deputy General Manager and
General Manager of the International Co-operation Department of the Company.
Liu Guoyue Mr. Liu is Vice President of the Company. He graduated from
Northern China Electric Power University with a bachelor degree in engineering
and a bachelor degree in business management and is a senior engineer. He
served as the Deputy General Manager (Vice President) and General Manager
(President) of Shijiazhuang branch (power plant) of the Company as well as the
President of Huaneng Dezhou Power Plant.
Li Shiqi Mr. Li is the Vice President of the Company. He graduated form
Renmin University of China, specializing in finance and is a senior
accountant. He served as Chief Accountant of Beijing Branch Company of HIPDC,
Deputy General Manager and General Manager of the Finance Department of the
Company, and General Manager of the Marketing Department of Huaneng Group.
Before these, Mr. Li worked in Power Science Institute as Chief and Deputy
Chief Accountant, and in Beijing Power Research and Hi-Tech Business
Corporation as Chief Accountant.
Huang Jian Mr. Huang is the Chief Accountant of the Company. He graduated
from Finance and Administration Research Institute of the Ministry of Finance,
specializing in accounting, with a master degree in economics and is a senior
accountant. He served as Chief of the Finance Department of the Company, Chief
Accountant of the Beijing Branch Company of HIPDC, Deputy General Manager of
the Finance Department of the Company and Deputy Chief Accountant of the
Company.
B. Compensation of Directors and Officers
We paid RMB8.48 million to our Directors, Supervisors and senior
management as aggregate cash compensation (including salaries, bonuses and
allowances (inclusive of taxes)) for the year ended December 31, 2004 for
services performed as Directors, Supervisors and officers or employees of us.
A total of RMB1.79 million were paid to the three highest paid directors and a
total of RMB2.16 million was paid to the three highest paid officers. In
addition, Directors and Supervisors who are also officers or employees of us
receive certain other benefits-in-kind, such as subsidized or free health care
services, housing and transportation, which are customarily provided by large
enterprises in the PRC to their employees. Each of the Company's independent
directors receives annual cash compensation of RMB60,000. We do not have any
service contract with any director that provides for benefits upon termination
of employment.
C. Board Practice
As of the end of 2003, we, in accordance with the resolutions passed at a
shareholders' general meeting, have set up four special committees, namely,
the Audit Committee, the Strategy Committee, the Nomination Committee, and the
Remuneration and Appraisal Committee, and formulated the working regulations
for such committees in accordance with the relevant rules and regulations. All
committees operate in accordance with the working rules and utilize their
members' specific background, experience and industry expertise to provide
65
advice to us, so as to enhance our operation efficiency and to make the
decision-making process more rationalized.
The main duties of the Audit Committee are to provide proposal in
relation to the appointment or change of external auditors, to oversee the
internal audit system and its implementation, to co-ordinate the communication
between the internal audit department and external auditors, to examine the
financial information and its disclosure; and to oversee the internal control
system.
The main duties of the Strategy Committee are to advise on, and conduct
research in relation to, its long-term development strategies and decisions
regarding significant investments.
The main duties of the Nomination Committee are to conduct study and
provide advice in relation to the requirements for selection of directors and
managers and the relevant procedures; to search for the qualified candidates
of directors and managers, and to examine the candidates of directors and
managers and advise matters in relation thereto.
The main duties of the Remuneration and Appraisal Committee are to
conduct research on the appraisal guidelines for directors and managers, to
carry out performance appraisals and provide advice accordingly, and to
conduct research on the remuneration policy and proposal regarding the
directors and senior management.
The members of Audit Committee are Xia Donglin (Chairman), Shan Qunying,
Wang Xiaosong, Qian Zhongwei and Zheng Jianchao.
The members of Strategy Committee are Mr. Li Xiaopeng (Chairman), Mr.
Zheng Jianchao (Vice-chairman), Mr. Wang Xiaosong, Mr. Ye Daji, Mr. Huang
Jinkai, Mr. Liu Jinlong and Mr. Qian Zhongwei.
The members of Nomination Committee are Mr. Qian Zhongwei (Chairman), Mr.
Huang Jinkai, Mr. Yang Shengming, Mr. Gao Zongze and Mr. Zheng Jianchao.
The members of Remuneration and Evaluation Committee are Mr. Gao Zongze
(Chairman), Mr. Liu Jinlong, Mr. Xu Zujian, Mr. Zheng Jianchao and Mr. Xia
Donglin.
D. Employees
As of December 31, 2004, we employed 22,129 people. Of these, 327 are
headquarters management staff, 14,385 are power plant personnel directly
involved in the management and operation of the power plants and the remainder
are maintenance personnel, ancillary service workers and others. Approximately
41% of our work force graduated from university or technical college.
We conduct continuing education programs for our employees at the head
office and at each power plant. We provide training in language, computer,
accounting and other areas to our professionals and technicians in their
relevant fields. Employees are trained in accordance with the different
requirements for professional and managerial positions.
We have reformed the labor system by introducing individual labor
contracts. Currently, all employees are employed under employment contracts
which specify the employee's position, responsibilities, remuneration and
grounds for termination. Short-term employment contracts have fixed terms of
typically one to five years, at the end of which they may be renewed with the
agreement of both us and the employees. The remaining personnel are employed
for an indefinite term.
The contract system imposes discipline, provides incentives to adopt
better work methods and provides us with a greater degree of management
control over our work force. We believe that, by linking remuneration to
productivity, the contract system has also improved employee morale.
Each of our power plants also has a trade union and the employees of our
headquarters are also members of a trade union. These trade unions protect
employee's rights, aim to fulfill our economic objectives, encourage employees
to participate in management decisions and mediate disputes between us and
union members. We have not been subject to any strikes or other labor
disturbances interfering with our operations, and we believe that our
relations with our employees are good.
66
Total remuneration of our employees includes salary, bonuses and
allowances. The employees also receive certain benefits in the form of
housing, education and health services subsidized by us and other
miscellaneous subsidies.
In compliance with the relevant regulations, we and our employees
participate in the electric power industry pension plan under which all the
employees are entitled to the pensions payments upon retirement. See Note 8 to
the Financial Statements. Other pension payments to our retiring employees are
not required under applicable PRC laws and regulations.
We do not carry workmen's compensation or other similar insurance.
However, all employees (both contract and non-contract employees) who are
unable to work due to illness or disability, whether or not such illness or
disability is job-related, will continue, based on seniority, to receive some
or all of their base salary and certain subsidies throughout the period of
their absence up to their retirement ages, in accordance with relevant PRC
laws and regulations and subject to certain PRC Government specified time
limitations. Employees who are unable to work due to job-related illnesses or
disabilities will receive certain compensation from us, depending on the
severity of the illness or disability. The present workmen's insurance reforms
being implemented by the central and local governments and our own
implementation of the joint stock limited company accounting and financial
principles may result in certain adjustments of the funding, management and
payment methods for these types of workmen's compensation arrangements.
E. Share Ownership
None of the people listed under "Directors, members of the Supervisory
Committee and senior management" owns any of our shares.
67
ITEM 7 Major Shareholders and Related Party Transactions
A. Major shareholders
Our outstanding ordinary shares consist of A Shares and H Shares, each
with a par value of RMB1.00 per share. The following table set forth certain
information regarding the ownership of the outstanding shares of us as of
December 31, 2004 with respect to (i) each person known by us to own
beneficially more than 5% of any class of the outstanding shares of us, (ii)
our directors and officers and (iii) local government investment companies.
Percentage of
Number of A Number of H Total Number of
Shares Shares Shares Outstanding
-------------- ------------- ------------------
(in thousands) (in thousands)
HIPDC....................................................... 5,197,680 -- 43.12%
Hebei Provincial Construction Investment Company............ 904,500 -- 7.50%
Fujian International Trust & Investment Company............. 669,700 -- 5.56%
Jiangsu Province International Trust & Investment
Company................................................... 624,750 -- 5.18%
Liaoning Energy Investment (Group) Co., Ltd................. 459,370 -- 3.81%
Dalian Municipal Construction & Investment Company.......... 452,250 -- 3.75%
Nantong Investment Management Centre........................ 135,750 -- 1.13%
Shantou Power Development Joint Stock
Company Limited........................................... 38,000 -- 0.32%
Dandong Energy Investment Development Centre................ 13,000 -- 0.11%
Shantou Electric Power Development Company.................. 5,000 -- 0.04%
Officers and Directors...................................... -- -- 0.00%
TOTAL ................................................. 8,500,000 -- 70.52%
When we were established on June 30, 1994, the assets, liabilities and
businesses of the Dalian, Fuzhou, Nantong and Shangan Power Plants (excluding
Shangan Power Plant Phase II) and Shantou Oil-Fired Power Plant were acquired
by us from HIPDC and, in return, HIPDC received a then 53.64% equity interest
in us. The local governments of the respective provinces or municipalities in
which the Dalian, Fuzhou, Nantong and Shangan Power Plants and Shantou
Oil-Fired Power Plant are located had previously extended long-term loans to
these power plants to finance their construction. Such loans were subsequently
assigned to the local government investment companies. In accordance with the
Promoters' Agreement dated February 28, 1994 (the "Promoters' Agreement")
between HIPDC and the local government investment companies (excluding Shantou
Power Development Joint Stock Company Limited and Dandong Energy Investment
Development Centre) and an understanding between HIPDC and these local
government investment companies, these local government investment companies
agreed to retire approximately RMB435 million of the loans extended to Dalian,
Fuzhou, Nantong and Shangan Power Plants and Shantou Oil-Fired Power Plant and
to forfeit certain rights to participate in profits of these five power plants
in exchange for a then aggregate of 46.36% of the equity in us.
HIPDC and the local government investment companies (excluding Shantou
Power Development Joint Stock Company Limited and Dandong Energy Investment
Development Centre) have entered into the Shareholders' Agreement dated May
31, 1994 (the "Shareholders' Agreement") which, among other things, grants to
HIPDC the right to vote all the shares owned by each of the other seven
signatories to the Shareholders' Agreement so as to enable HIPDC to have
majority voting rights in general meetings for so long as we are in existence.
The Shareholders' Agreement also provides that Directors designated by HIPDC
will have majority representation on our board of directors (the "Board of
Directors") and each of the other signatories to the Shareholders' Agreement
will have one representative designated by it appointed as a member of the
Board of Directors. The Shareholders' Agreement also provides that for so long
as we are in existence (i) HIPDC and the other signatories to the
Shareholders' Agreement will maintain their combined shareholdings to ensure
their collective majority control of us, (ii) HIPDC has certain priority
rights to purchase the shares held by the other signatories to the
Shareholders' Agreement and (iii) if HIPDC does not exercise its priority
rights to purchase such shares, each of the signatories to the Shareholders'
Agreement other than HIPDC has a priority right to purchase such shares on a
pro rata basis and (iv) no shares may be sold or transferred unless their
transferees agree to abide by the terms of the Shareholders' Agreement.
68
At the completion of the initial public offering in October, 1994, HIPDC
and the local government investment companies (excluding Shantou Power
Development Joint Stock Company Limited and Dandong Energy Investment
Development Centre) have owned, respectively, 40.23% and 34.77% of the total
number of our outstanding shares.
On February 26, 1998, we placed 250 million H Shares at the price of
HK$4.40 per H Share or US$22.73 per ADS. Simultaneously with the H Share
placement, we issued 400 million A Shares to our controlling shareholder HIPDC
as part of the consideration paid for the acquisition of the Shidongkou II,
pursuant to the Shanghai Acquisition Agreement. After the completion of the H
Share Placement, HIPDC and the local government investment companies
(excluding Shantou Power Development Joint Stock Company Limited and Dandong
Energy Investment Development Centre) each has held 42.17% and 31.28% equity
interest, respectively.
On November 15 and 16, 2001, we issued successfully a total of
350,000,000 A shares in the PRC, of which 100,000,000 state-owned legal person
shares were placed to HIPDC at the same price. After the completion of the A
share issuance, the total share capital of the Company is 6,000,000,000
shares, HIPDC and the local government investment companies (excluding Shantou
Power Development Joint Stock Company Limited and Dandong Energy Investment
Development Centre) each held 42.58%, and 27.82% equity interest,
respectively.
In May, 2004, we paid to our shareholders stock dividend and converted
additional paid-in capital and statutory surplus reserve funds to share
capital pursuant to a dividend plan approved by our Board of Directors and
shareholders. Under the plan, each share of the issued and outstanding common
stock of the Company received one share of the Company's common stock. As a
result of such stock dividend, the total share capital of the Company was
increased to 12,055,342,400. Our total share capital was further increased to
12,055,383,440 as a result of the conversion of our convertible bonds with an
aggregate principal amount of US$15,000 (and as a result of the simultaneous
stock split effected pursuant to the stock dividend plan) into 41,040 H shares
of the Company by the holders of such convertible bonds in 2004.
On May 12, 2004, SEPDC transferred to HIPDC 30,000,000 legal person
shares of the Company held by SEPDC. Thereafter, on December 21, 2004, SEPDC
further transferred to HIPDC another 28,000,000 legal person shares of the
Company held by it in consideration for HIPDC's payment of certain debt
obligations owed by SEPDC to Bank of Communications Shantou Branch as part of
a court-ordered debt settlement plan. As a result of these two share
transfers, HIPDC holds 43.12% of the equity interest in the Company.
As a result of the Shareholders' Agreement, HIPDC currently has 70.09% of
the total voting rights of the outstanding shares. As a result, HIPDC will
continue to control us and will continue to have the power, subject to the
Shareholders' Agreement, to control the election of all of our Directors and
to direct our management and policies.
In January, 2000, Huaneng Group underwent a restructuring, in which State
Power Corporation transferred its 17.22% interest in HIPDC to Huaneng Group.
Huaneng Group became a 51.98% shareholder of HIPDC. At the same time, Huaneng
Group has granted us a preferential right to purchase interest in existing
power plants owned by Huaneng Group and the preferential right on all future
power development projects of Huaneng Group that we may realistically develop.
B. Related party transactions
Guarantees
As of December 31, 2004, the Company provided guarantees on long-term
bank borrowings of certain subsidiaries and an associated company totaling
approximately RMB1.735 billion. These included guarantees granted to the
Weihai Power Company, the Qinbei Power Company, the Yushe Power Company and
the Rizhao Power Company amounting to RMB30 million, RMB740 million, RMB660
million and RMB305 million respectively. The Company had no contingent
liabilities other than these described above.
As of December 31, 2003, the Company succeeded the original loan
guarantee granted by Shandong Huaneng Power Development Company Limited
("Shandong Huaneng") on the Weihai Power Company and the Rizhao Power Company
and the original guarantee granted by Huaneng Group on the Taicang Power
Company amounting to approximately RMB330 million, RMB339 million and RMB1.114
billion respectively.
69
The Company also provided guarantees on long-term borrowings of the Huaiyin
Power Company, the Qinbei Power Company and the Yushe Power Company amounting
to approximately RMB10 million, RMB905 million and RMB101 million
respectively. The Company had no contingent liabilities other than those
described above.
Lease Agreement
Pursuant to a leasing agreement between us and HIPDC signed on December
26, 2000, HIPDC agreed to lease Tianyin Mansion with an area of 27,800 square
meters to us for 5 years, and the annual rent is RMB25 million. The Leasing
Agreement was effective retroactively as of January 1, 2000.
T&T Service Agreements
Pursuant to the T&T Service Agreements we agreed to pay service fees to
HIPDC in relation to the provision of transmission and transformer facilities
for our newly constructed power plants, power plants under expansion and
acquired power plants which commence commercial operations after January 1,
1997 for a fixed fee equal to 12% of the original book value of the
transmission and transformer facilities as set forth in the financial
statements of HIPDC. The terms of the T&T Service Agreements are to be
reviewed after a period of 10 years.
Acquisitions from Huaneng Group in 2004 and 2005
We made the following acquisitions from Huaneng Group in 2004 and 2005,
each of which has been disclosed to our shareholders in more details in the
respective circulars dated April 29, 2004 and November 3, 2004, respectively
regarding each acquisition and each has been approved by the independent
shareholders.
In 2004, we acquired 90% equity interest of Jinggangshan Huaneng Power
Generation Limited Liability Company, 40% equity interest of Hebei Hanfeng
Power Generation Limited Liability Company from the Huaneng Group, and in 2005
we acquired 60% interest of Sichuan Huaneng Hydropower Development
Corporation, Ltd. and 65% interest of Gansu Huaneng Pingliang Power Generation
Limited Liability Company from it.
Acquisition from HIPDC in 2004
We made the following acquisitions from HIPDC in 2004, each of which has
been disclosed to our shareholders in more details in the respective circulars
dated April 29, 2004 and has been approved by the independent shareholders.
We acquired the entire assets and liabilities in Yingkou Power Plant, 60%
equity interest of Huaneng Chongqing Luohuang Power Generation Limited
Liability Company and 55% equity interest of Huaneng Hunan Yueyang Power
Generation Limited Liability Company from HIPDC.
Entrusted Management Agreement with Huaneng Group and HIPDC
In 2002, we entered into an Entrusted Management Agreement with Huaneng
Group and HIPDC in relation to the management of their thermal power plants
(the "2002 Entrusted Management Agreement"). Our services include,
comprehensive planned management, annual planned management, power operation
and sale management, production management of power plants, fuel management,
construction management, financial management, human resources and labor wages
management, comprehensive affairs management, shareholding management and
reporting/co-ordination management. The 2002 Entrusted Management Agreement
has a term of 5 years. Upon the expiry of such agreement, unless any party
intends otherwise, it will continue to be operational. The 2002 Entrusted
Management Agreement may also be terminated by, inter alia, (i) Huaneng Group
and/or HIPDC giving 30 days notice to us or (ii) we giving 90 days notice to
Huaneng Group and/or HIPDC. The entrusted power plants include 17 power plants
currently managed by Huaneng Group with a total net installed capacity of
10,799 MW and 5 power plants currently managed by HIPDC with a total net
installed capacity of 3,644 MW.
By entering into the 2002 Entrusted Management Agreement, we will further
accumulate management experience as a result of the expansion of our operation
scale and set a precedent for large-scale and multi-entities entrusted
management in the PRC. The 2002 Entrusted Management will also enable us to
obtain direct knowledge of the development status of more power markets,
thereby exploring new development opportunities.
70
The service fee payable by Huaneng Group and HIPDC comprises the
following three components:
(i) costs (including set-up, operational and other recurrent items to
be incurred by the Company in managing the Entrusted Power
Plants), namely RMB46 million per annum;
(ii) a premium to cover estimation risks which represents 10% of the
costs, namely RMB4.6 million per annum; and
(iii) an incentive / penalty component which is calculated based on the
confirmed results of the Entrusted Management and shall not exceed
15% of the costs in (i), namely either an incentive or a penalty
of not more than RMB6.9 million per annum.
The costs in (i) will be adjusted annually in accordance with the 2002
Entrusted Management Agreement, which will be by reference to the inflation
rate of the previous year as published by the State Statistic Department and
the salary component of the service fee will be adjusted by the percentage
increase approved by our board.
The 2002 Entrusted Management Agreement has been disclosed to our
shareholders in more details in the circular dated November 22, 2002 and has
been approved by the independent shareholders.
On April 11, 2005, we entered into another Entrusted Management Agreement
with Huaneng Group regarding the management of Sichuan Hydropower that we
acquired from Huaneng Group in January, 2005 (the "2005 Entrusted Management
Agreement"). Under such agreement, we agreed to entrust Huaneng Group to
manage certain affairs of Sichuan Hydropower. The Principal Term of such
agreement is summarized below:
(1) Scope of the management services: planning management during the
preliminary stage of the project, annual overall project management,
power sales management, power plant operation management,
construction management, personnel and labor wages management,
administrative affairs management, legal affairs, supervisory work,
corporate culture work, reporting/coordination management and
management of other affairs.
The Company has not entrusted to Huaneng Group other management
matters including financial management, auditing and changes in
shareholdings and assets of Sichuan Hydropower.
(2) Management fee for this entrustment: The Company shall pay a
management fee to Huaneng Group in relation to the entrusted
management services provided by Huaneng Group pursuant to the 2005
Entrusted Management Agreement. The management fee shall comprise the
following three portions:
(i) Management costs, that is RMB1,936,100 each year;
(ii) Risk premium, equivalent to 10% of the management costs, that
is RMB193,600 each year; and
(iii) profit, which means bonus or penalty payment not exceeding
+/-15% of the management costs to be determined on an
assessment of the operating results, that is not exceeding
+/-RMB 290,400 each year.
If the sum of the controllable generation capacity and equity
participation capacity of Sichuan Hydropower does not exceed
1,098MW, the management fee shall not be adjusted. If the sum of
the controllable generation capacity and equity participation
capacity of Sichuan Hydropower exceeds 1,098MW, the management
fees payable by the Company to Huaneng Group each month shall be
adjusted according to the amount calculated as follows:
71
Sum of the actual controllable
Management fee generation capacity and equity
payable Management fee paid participation capacity of Sichuan
for the current month = for the previous month X Hydropower for the current month
---------------------------------
Sum of the actual controllable
generation capacity and equity
participation capacity of
Sichuan Hydropower for the
previous month
The Management fee shall be adjusted at once per any increase in
staff remunerations as approved by the Management Party and
shall also be adjusted at the beginning of every year according
to the inflation rate of the previous year as published by the
State Statistics Bureau. As agreed between the Company and New
Energy Corporation, New Energy Corporation will bear 40% of the
management fee.
(3) Performance assessment: The Company shall assess the management
services of Huaneng Group according to but not limited to the
following two main categories of performance assessment standards:
(i) the extent of completion of annual targets (including but not
limited to indices such as power generation and profit); and (ii)
safe operation.
(4) Method of payment: The Company proposes to pay the management fee to
Huaneng Group in cash. The portions of management costs and risk
premium under the management fees shall be settled each month. The
Company shall pay the management fee for the current month to Huaneng
Group before the tenth day of each month. The profit portion (bonus
or penalty payment) under the management fee shall be paid after the
performance assessment of Huaneng Group but not later than 90 days
after the end of each year.
(5) Conditions for becoming effective: The 2005 Entrusted Management
Agreement shall become effective after approval and signing by
Huaneng Group and the Company by way of appropriate procedures.
(6) Term of performance: Except otherwise agreed between the Company and
Huaneng Group, the valid term of the 2005 Entrusted Management
Agreement shall be one year. When the valid term of the 2005
Entrusted Management Agreement expires, such agreement shall continue
to be effective if there is no disagreement between both parties to
the agreement. This entrustment may be terminated: (i) due to default
by the Company; (ii) due to default by Huaneng Group; (iii) upon 30
days' prior notice given by the Company to the or 90 days' prior
notice given by Huaneng Group to the Company; or (iv) if the Company
and/or Huaneng Group becomes bankrupt or insolvent.
C. Interests of experts and counsel
Not applicable.
72
ITEM 8 Financial Information
A. Consolidated Statements and Other Financial Information
See pages F-1 to F-69.
Legal proceedings
We are not a defendant in any material litigation or arbitration and no
litigation or claim of material importance is known to us or any member of the
Board of Directors of us to be pending or threatened against us.
Dividend Distribution Policy
Our Board of Directors will determine the payment of dividends, if any,
with respect to our shares on a per share basis. Any final dividend for a
financial year shall be subject to shareholders' approval. The Board may
declare interim and special dividends at any time under general authorization
by a shareholders' ordinary resolution. A decision to declare or to pay any
dividends in the future, and the amount of any dividends, will depend on our
results of operations, cash flows, financial condition, future prospects and
other factors which our Directors may determine as important.
For holders of our H shares, cash dividend payments, if any, shall be
declared by our Board of Directors in Renminbi and paid in HK dollars. The
depositary will convert the HK dollar dividend payments and distribute them to
holders of ADSs in US dollars, less expenses of conversion.
Dividends may be paid only out of our distributable profits (less
allocations to the statutory funds which generally range from 15% to 20% of
our net income determined in accordance with PRC GAAP) and may be subject to
any applicable PRC withholding tax. Our Articles of Association limit our
distributable profits to the lower of the amount determined in accordance with
PRC GAAP and IFRS. Subject to the above, we expect to carry a positive,
balanced and stable dividend distribution policy.
On March 16, 2004, the Board of Directors proposed a cash and stock
dividend plan together with the conversion of additional paid-in capital and
statutory surplus reserve fund to share capital. Under the plan, every 10
shares of the issued and outstanding common stock of the Company will be
entitled to receiving RMB5.0 in cash and 10 shares of the Company's common
stock. The proposed dividend plan was approved by our shareholders at our 2003
Annual General Meeting of Shareholders held on May 11, 2004, and the cash and
stock dividend has been distributed to our shareholders.
On March 15, 2005, the Company's Board of Directors proposed cash
dividend of RMB0.25 per share for all the shares of the Company's issued and
outstanding stock. This proposed cash dividend is subject to approval by our
shareholders at our 2004 Annual General Meeting of Shareholders to be held on
May 11, 2005.
B. Significant Changes
None.
73
ITEM 9 The Offer and Listing
Offer and listing details and markets
The ADSs have been listed on the New York Stock Exchange since October 6,
1994. The table below sets forth, for the periods indicated, the high and low
closing prices of the ADSs on the New York Stock Exchange.
Closing Price Per ADS
----------------------------
High Low
----------- ----------
(US$) (US$)
2000....................................................................... 18.94 7.00
2001....................................................................... 24.91 16.75
2002....................................................................... 35.82 23.06
2003....................................................................... 71.35 31.36
2004....................................................................... 86.91 27.30
2003 First Quarter....................................................... 38.43 31.36
Second Quarter...................................................... 46.60 34.75
Third Quarter....................................................... 56.18 46.40
Fourth Quarter...................................................... 71.35 54.21
2004 First Quarter....................................................... 78.95 64.80
Second Quarter...................................................... 86.91 32.85
Third Quarter....................................................... 35.80 27.30
Fourth Quarter...................................................... 32.90 29.00
2005 First Quarter....................................................... 31.24 27.33
2004 October............................................................. 32.90 29.00
November............................................................ 32.44 29.89
December............................................................ 31.79 29.83
2005 January............................................................. 29.30 27.33
February............................................................ 30.87 27.99
March............................................................... 31.24 28.55
---------------
Source: Reuters
Each ADS represents 40 Overseas Listed Foreign Shares. As of December 31,
2004, there were 121 registered holders of American Depositary Receipts
evidencing ADS.
On January 21, 1998, we listed our H shares on the Hong Kong Stock
Exchange. On February 26, 1998, we placed 250 million H Shares Placement at
the price of HK$4.40 per H share or US$22.73 per ADS. In May, 2004, we
effected a two-for-one stock split by way of stock dividend for all our
outstanding shares including H shares. The table below sets forth, for the
periods indicated, the high and low closing prices of H shares on the Hong
Kong Stock Exchange.
74
Closing Price Per H shares
--------------------------
High Low
--------- ----------
(HK$) (HK$)
2000.......................................... 3.77 1.27
2001.......................................... 4.20 3.40
2002.......................................... 6.95 4.53
2003.......................................... 13.20 6.05
2004.......................................... 13.45 6.05
2003 First Quarter........................ 7.50 6.05
Second Quarter....................... 8.90 6.60
Third Quarter........................ 11.20 8.90
Fourth Quarter....................... 13.45 10.55
2004 First Quarter...................... 15.50 12.50
Second Quarter....................... 16.95 6.05
Third Quarter........................ 7.00 5.30
Fourth Quarter....................... 6.40 5.60
2005 First Quarter........................ 6.15 5.30
2004 October.............................. 6.40 5.60
November............................. 6.30 5.80
December............................. 6.20 5.75
2005 January.............................. 5.75 5.30
February............................. 6.05 5.40
March................................ 6.15 5.65
________________
Source: Reuters
As of December 31, 2004, there were 277 registered holders of H Shares.
ITEM 10 Additional Information
A. Share Capital
Not applicable.
B. Memorandum and articles of association
The information under the heading "Description of Capital Stock" in the
Registration Statement on Form F-3 filed with SEC on December 25, 1997 is
incorporated herewith by reference.
C. Material Contracts
See "Item 7. Major Shareholders and Related Party Transactions -- B.
Related Party Transactions" for certain arrangements we have entered into with
HIPDC and Huaneng Group.
D. Exchange controls
The existing foreign exchange regulations have significantly reduced
government foreign exchange controls for transactions under the current
account, including trade and service related foreign exchange transactions and
payment of dividends. We may undertake current account foreign exchange
transactions without prior approval from the State Administration of Foreign
Exchange by producing commercial documents evidencing such transactions,
provided that they are processed through Chinese banks licensed to engage in
foreign exchange transactions. The PRC government has stated publicly that it
intends to make the Renminbi freely convertible in
75
the future. However, we cannot predict whether the PRC government will
continue its existing foreign exchange policy and when the PRC government will
allow free conversion of Renminbi to foreign currency.
Foreign exchange transactions under the capital account, including
principal payments in respect of foreign currency-denominated obligations,
continue to be subject to significant foreign exchange controls and require
the approval of the State Administration of Foreign Exchange. These
limitations could affect our ability to obtain foreign exchange through debt
or equity financing, or to obtain foreign exchange for capital expenditures.
Since 1994, the conversion of Renminbi into Hong Kong and United States
dollars has been based on rates set by the People's Bank of China, which are
set daily based on the previous day's PRC interbank foreign exchange market
rate and current exchange rates on the world financial markets. Although the
Renminbi to US dollar exchange rate has been relatively stable since 1994, we
cannot predict nor give any assurance of its future stability. Fluctuations in
exchange rates may adversely affect the value, translated or converted into US
dollars or Hong Kong dollars, of our net assets, earnings and any declared
dividends. We cannot give any assurance that any future movements in the
exchange rate of the Renminbi against the US dollar and other foreign
currencies will not adversely affect our results of operations and financial
condition.
The following table sets forth the noon buying rates in New York for
cable transfers payable in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate") for
the periods indicated:
Noon Buying Rate
Period Period End Average(1) High Low
---------- ---------- ---- ------
(expressed in RMB per US$)
2000............................................... 8.2774 8.2784 8.2799 8.2768
2001............................................... 8.2766 8.2770 8.2786 8.2676
2002............................................... 8.2800 8.2772 8.2780 8.2759
2003............................................... 8.2767 8.2772 8.2800 8.2769
2004............................................... 8.2765 8.2768 8.2774 8.2764
2004 October..................................... 8.2766 8.2765 8.2768 8.2765
November.................................... 8.2765 8.2765 8.2765 8.2764
December.................................... 8.2765 8.2765 8.2767 8.2765
2005 January..................................... 8.2765 8.2765 8.2765 8.2765
February.................................... 8.2765 8.2765 8.2765 8.2765
March....................................... 8.2765 8.2765 8.2765 8.2765
_______________
Source: DataStream
Note:
(1) Determined by averaging the rates on the last business day of each month during the respective periods.
E. Taxation
The following is a summary of (i) certain tax consequences from
acquiring, owning and disposing the H Shares and ADSs based on tax laws of the
PRC, the United States and the Income Tax Treaty between the PRC and the
United States (the "Tax Treaty") as in effect on the date of this annual
report, and is subject to changes in PRC or United States law, including
changes that could have retroactive effect, and (ii) the principal PRC taxes
to which we are subject to. The following summary does not take into account
or discuss the tax laws of any countries or regions other than the PRC and the
United States, nor does it take into account the individual circumstances of
an investor. This summary does not purport to be a complete technical analysis
or examination of all potential tax effects relevant to an investment in the H
Shares or ADSs and current and prospective investors in all jurisdictions of
the H Shares or ADSs are advised to consult their tax advisors as to PRC,
United States or other tax consequences of the purchase, ownership and
disposition of the H Shares or ADSs. This summary also does not purport to be
a complete technical analysis or examination of all potential PRC taxes that
may be levied upon us.
76
PRC Tax Considerations
Tax on Dividends
Individual Investors. According to the Provisional Regulations of China
Concerning Questions of Taxation on Enterprises Experimenting with the Share
System (the "Provisional Regulations"), dividends paid by PRC companies are
ordinarily subject to a PRC withholding tax levied at a flat rate of 20%.
However, the PRC State Tax Bureau issued, on July 21, 1993, a Notice
Concerning the Taxation of Gains on Transfer and Dividends from Shares
(Equities) Received by Foreign Investment Enterprises, Foreign Enterprises and
Foreign Individuals (the "Tax Notice") which states that dividends paid by a
PRC company to individuals with respect to shares listed on an overseas stock
exchange, such as H Shares (including H Shares represented by ADSs), would not
be subject to PRC withholding tax.
Under the Individual Income Tax Law of China, as amended on August 30,
1999, foreign individuals are subject to withholding tax on dividends paid by
a PRC company at a rate of 20% unless specifically exempted by the financial
authority of the State Council. However, in a letter dated July 26, 1994 to
Former State Commission for Restructuring the Economic System, the former
State Council Securities Commission and the China Securities Regulatory
Commission, the PRC State Administration of Taxation (the "SAT", the PRC
central government tax authority which succeeded the State Tax Bureau)
reiterated the temporary tax exemption stated in the Tax Notice for dividends
received from a PRC company listed overseas. In the event that this letter is
withdrawn, a 20% tax may be withheld on dividends in accordance with the
Provisional Regulations, and the Individual Income Tax Law. Such withholding
tax may be reduced pursuant to an applicable double taxation treaty.
Under the Tax Treaty, China may tax a dividend paid by us to an eligible
US Holder up to a maximum of 10% of the gross amount of such dividends.
Enterprises. According to the Income Tax Law of the PRC Concerning
Foreign Investment Enterprises and Foreign Enterprises, dividends paid by PRC
companies to enterprises are ordinarily subject to a PRC withholding tax
levied at a flat rate of 20%. However, according to the Tax Notice, a foreign
enterprise with no permanent establishment in China receiving dividends paid
with respect to a PRC company's H Shares will temporarily not be subject to
the 20% withholding tax. If such withholding tax becomes applicable in the
future, the rate could be reduced pursuant to an applicable double taxation
treaty.
Capital Gains Tax on Sales of Shares
The Tax Notice provides that a foreign enterprise not having an
establishment in the PRC and selling or disposing of shares of a PRC
corporation listed overseas will be exempted from PRC income tax on such
capital gains. With respect to shareholders who are foreign individuals,
whether or not resident in the PRC, the PRC's Individual Income Tax Law, which
superseded the July 21, 1993 Notice with respect to this particular matter,
provides that such capital gains realized by individuals will be taxable and
authorizes the State Tax Bureau to promulgate implementing regulations.
However, in April, 1994 the State Tax Bureau expressed its intention not to
impose the tax for two years. In March, 1996, the Ministry of Finance and the
State Tax Bureau jointly issued a notice stating that personal income tax
shall not be collected on capital gains realized on the sales or dispositions
of shares in 1996. The exemption was further renewed by a notice issued by SAT
on March 30, 1998. There can be no assurance that such exemption will continue
to be available. In the event that capital gains tax is imposed on gains from
the sale or disposition of H Shares or ADSs, foreign holders would be subject
to a 20% tax unless reduced by an applicable double-taxation treaty. It is
arguable that pursuant to the terms of the Tax Treaty, gains derived from the
alienation of H Shares or ADSs by a Foreign Holder that is a resident of the
United States for purposes of the Tax Treaty should not be subject to PRC tax;
provided that such foreign holder owns H Shares or ADSs which represent a
participation of less than 25% in us. But this position is uncertain and the
PRC authorities may take a different position. Further, the PRC has not,
promulgated any rules or regulations that address the procedures that a
Foreign Holder must follow in order to claim the benefits of the Tax Treaty.
Accordingly, it is currently unclear how a Foreign Holder may claim the
benefits of the Tax Treaty.
On November 18, 2000, the State Council issued a notice entitled "State
Council Notice on the Income Tax Reduction for Interest and Other Income that
Foreign Enterprises derive in China" ( the "State Council Notice"). Under the
State Council Notice, beginning January 1, 2001, enterprise income tax at a
reduced 10% rate will apply to interests, rental, license fees and other
income obtained in China by foreign enterprises without
77
agencies or establishment in China, or by foreign enterprises without any
substantive relationship with their agencies or establishment in China. If the
exemption as described in the preceding paragraph does not apply or is not
renewed, and the State Council Notice is found not to apply, a foreign
enterprise shareholder may be subject to a 20% tax on capital gain, unless
reduced by an applicable double tax treaty.
Tax Treaties
Non-PRC Investors residing in countries which have entered into
double-taxation treaties with the PRC may be entitled to a reduction of the
withholding tax imposed on the payment of dividends to such Foreign Holders of
us. The PRC currently has double-taxation treaties with a number of countries,
including Australia, Canada, France, Germany, Japan, Malaysia, the
Netherlands, Singapore, the United Kingdom and the United States.
Stamp Tax
Under the Provisional Regulations of The People's Republic of China
Concerning Stamp Tax, which became effective in October, 1988, PRC stamp tax
should not be imposed on the transfer of shares of PRC publicly traded
companies (including H Shares or ADSs) effected outside China.
Taxation of the Company
Income Tax. Pursuant to the Income Tax Law of the People's Republic of
China concerning Foreign Invested Enterprises and Foreign Enterprises (the
"EIT Law"), Sino-foreign joint stock companies are subject to a 30% state
income tax plus 3% local income tax. In certain special zones, however, such
tax rate may be reduced. In addition, manufacturing FIEs with an operating
period of more than ten years enjoy a tax holiday of a two-year exemption and
a three-year 50% reduction starting from the first profit-making year.
We are a Sino-foreign joint stock company and enjoy the tax holiday
described above. Pursuant to Document 327 (1989) of the PRC State Tax Bureau,
the Dalian, Fuzhou, Nantong and Shangan Power Plants (excluding Shangan Power
Plant Phase II) and Shantou Oil-Fired Power Plant, which previously belonged
to HIPDC, were subject to income tax supervision by the local tax bureaus and
were entitled to calculate each of their tax holidays separately. Following
the Reorganization, we have continued to pay tax pursuant to the EIT Law, so
these five Power Plants enjoyed the tax holidays available to them prior to
the Reorganization. The tax holiday for each of these five Power Plants has
expired. For new projects, including the Shantou Power Plant, each new plant
will enjoy its own tax holiday to be calculated separately.
For details of income tax information, please refer to Note 2 (q)(ii) to
the Financial Statements.
Value-added Tax. Since January 1, 1994, the government has implemented a
turnover tax system applicable to FIEs. Under the turnover tax provisions, we
have to collect from our electricity customers and pay to the PRC tax
authorities a value-added tax ("VAT") on our sales. The tax rate on sales of
electricity by us is 17% of total sales. The amount of VAT payable by us is
the VAT on sales reduced by the VAT paid by us on our purchases of coal, fuel
and other inputs.
United States Federal Income Tax Considerations
The following is a summary of United States federal income tax
considerations that are anticipated to be material for US Holders (as defined
below) who purchase H shares or ADSs of the Company. This summary is based
upon existing United States federal income tax law, which is subject to
change, possible with retroactive effect. This summary does not discuss all
aspects of United States federal income taxation which may be important to
particular investors in light of their individual investment circumstances,
such as investors subject to special tax rules including: financial
institutions, insurance companies, broker-dealers, tax-exempt organizations,
and, except as described below, non-US Holders, or to persons that will hold H
shares or ADSs as part of a straddle, hedge, conversion, or constructive sale
transaction for United States federal income tax purposes or that have a
functional currency other than the United States dollar, all of whom may be
subject to tax rules that differ significantly from those summarized below. In
addition, this summary does not discuss any foreign, state, or local tax
consideration. This summary assumes that investors will hold their H shares or
ADSs as "capital assets" (generally, property held for investment) under the
United States Internal Revenue Code. Each prospective investor is urged to
consult its tax advisor regarding the United Stated federal, state, local, and
foreign income and other tax considerations of the purchase, ownership, and
disposition of H shares or ADSs.
78
For purposes of this summary, a US Holder is a beneficial owner of H
shares or ADSs that is for United States federal income tax purposes:
o an individual who is a citizen or resident of the United States;
o a corporation, partnership or other entity created in or organized
under the laws of, the United States or any state or political
subdivision thereof;
o an estate the income of which is includible in gross income for
United States federal income tax purposes regardless of its source;
o a trust the administration of which is subject to the primary
supervision of a United States court and which has one or more United
States persons who have the authority to control all substantial
decisions of the trust; or
o a trust that was in existence on August 20, 1996, was treated as a
United States person, for United States federal income tax purposes,
on the previous day and elected to continue to be so treated.
A beneficial owner of the H shares or ADSs that is not a US Holder is
referred to herein as a "Non-US Holder."
If a partnership (including any entity treated as a partnership for
United States federal income tax purposes) holds ADS or H shares, the tax
treatment of a partner in such partnership will depend upon the status of the
partner and the activities of the partnership. Partners in such a partnership
should consult their tax advisors as to the particular United States federal
income tax consequences applicable to them.
A foreign corporation will be treated as a "passive foreign investment
company" (a "PFIC"), for United States federal income tax purposes, if 75% or
more of its gross income consists of certain types of "passive" income or 50%
or more of its assets are passive. The Company presently believes that it is
not a PFIC and does not anticipate becoming a PFIC. This is, however, a
factual determination made on an annual basis and is subject to change. The
following discussion assumes that the Company will not be subject to treatment
as a PFIC for United States federal income tax purposes.
US Holders
For United States federal income tax purposes, a US Holder of an ADS will
be treated as the owner of the proportionate interest of the H shares held by
the depositary that is represented by an ADS and evidenced by such ADS.
Accordingly, no gain or loss will be recognized upon the exchange of an ADS
for the holders' proportionate interest in the H shares. A US Holder's tax
basis in the withdrawn H shares will be the same as the tax basis in the ADS
surrendered therefore, and the holding period in the withdrawn H shares will
include the period during which the holder held the surrendered ADS.
Dividends
Any cash distributions paid by the Company out of earnings and profits,
as determined under United States federal income tax principles, will be
subject to tax as ordinary dividend income and will be includible in the gross
income of a US Holder upon receipt. Cash distributions paid by the Company in
excess of its earnings and profits will be a return of capital to the extent
of the US Holder's adjusted tax basis in its shares or ADSs, which will not be
subject to tax. Any excess will be treated as gain from the sale or exchange
of a capital asset which will be treated as discussed below. Dividends paid in
Hong Kong dollar will be includible in income in a United States dollar amount
based on the United States Dollar - Hong Kong dollar exchange rate prevailing
at the time of receipt of such dividends by the depositary, in the case of
ADSs, or by the US Holder, in the case of H shares held directly by such US
Holder. A non-corporate holder of ADS or shares of Common Stock will generally
be subject to tax on such dividend income at a maximum U.S. federal rate of
15% rather than the marginal tax rates generally applicable to ordinary
income. Dividends received on H shares or ADSs will not be eligible for the
dividends received deduction allowed to corporations. Any subsequent gain or
loss in respect of such Hong Kong dollar arising from exchange rate
fluctuations will be ordinary income or loss. This gain or loss will generally
be treated as United States source income for United States foreign tax credit
limitation purposes. If the Depository converts the Hong Kong dollar to U.S.
Dollar on the date it receives such Hong Kong dollar, United States persons
will not recognize any such gain or loss.
79
Dividends received on H shares or ADSs will be treated, for United States
federal income tax purposes, as foreign source income. A US Holder may be
eligible, subject to a number of complex limitations, to claim a foreign tax
credit in respect of any foreign withholding taxes imposed on dividends
received on H shares or ADSs. US Holders who do not elect to claim a foreign
tax credit for foreign income tax withheld may instead claim a deduction, for
United States federal income tax purposes, in respect of such withholdings,
but only for a year in which the US Holder elects to do so for all creditable
foreign income taxes. In certain circumstances, a US Holder may not claim a
foreign tax credit (and instead may claim a deduction) for foreign taxes
imposed on the payment of a dividend if the US Holder:
o has not held the H shares or ADSs for at least 16 days in the 30-day
period beginning 15 days before the ex-dividend date, during which it
is not protected from risk of loss;
o is obligated to make payments related to the dividends; or
o subject to the promulgation of future Treasury regulations that are
anticipated to be retroactively applied, holds the H shares or ADSs
in an arrangement in which the expected economic profit of the US
Holder is insubstantial compared to the value of the foreign tax
credit expected to be obtained as a result of the arrangement.
A distribution of additional shares of the Company's stock to US Holders
with respect to their H shares or ADSs that is pro rata to all the Company's
shareholders may not be subject to Unites States federal income tax. The tax
basis of such additional shares will be determined by allocating the US
Holders' adjusted tax basis in the H shares or ADSs between the H shares or
ADSs and the additional shares, based on their relative fair market values on
the date of distribution.
Sale or Other Disposition of H shares or ADSs
A US Holder will recognize capital gain or loss upon the sale or other
disposition of H shares or ADSs in an amount equals to the difference between
the amount realized upon the disposition and the US Holder's adjusted tax
basis in such H shares or ADSs, as each is determined in US dollars. Any
capital gain or loss will be long-term if the H shares or ADSs have been held
for more than one year and will generally be United States source gain or
loss. The claim of a deduction in respect of a capital loss, for United States
federal income tax purposes, may be subject to limitations. Under the Tax
Treaty, any such gain should be treated as foreign source income.
PFIC Considerations
If the Company were to be classified as a PFIC in any taxable year, a
U.S. Holder would be subject to special rules generally intended to reduce or
eliminate any benefits from the deferral of United States federal income tax
that a U.S. Holder could derive from investing in a foreign company that does
not distribute all of its earnings on a current basis. In such event, a U.S.
Holder of the H shares or ADSs may be subject to tax at ordinary income tax
rates on (i) any gain recognized on the sale of the H shares or ADSs and (ii)
any "excess distribution" paid on the H shares or ADSs (generally, a
distribution in excess of 125% of the average annual distributions paid by the
Company in the three preceding taxable years). In addition, a U.S. Holder may
be subject to an interest charge on such gain or excess distribution.
Non-US Holders
An investment in H shares or ADSs by a Non-US Holder will not give rise
to any United States federal income tax consequences unless:
o the dividends received or gain recognized on the sale of H shares or
ADSs by such person are treated as effectively connected with the
conduct of a trade or business by such person in the United States as
determined under United States federal income tax law; or
o in the case of gains recognized on a sale of H shares or ADSs by an
individual, such individual is present in the United States for 183
days or more and certain other conditions are met.
In order to avoid back-up withholding on dividend payments made in the
United States, a Non-US Holder of the H shares or ADSs may be required to
complete, and provide the payor with, an Internal Revenue Service Form W-8, or
other documentary evidence, certifying that such holder is an exempt foreign
person.
80
F. Dividends and paying agents
Not applicable.
G. Statement by experts
Not applicable.
H. Documents on display
We are subject to the information reporting requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance with
the Act, file certain reports and other information with the SEC. You may read
and copy and report, statement or other information filed by us at the SEC's
public reference rooms in Washington, D.C., New York and Chicago, Illinois.
Please call the SEC at 1-800-0330 for further information on the public
reference rooms. Our reports and other information filed with the SEC are also
available to the public from commercial document retrieval services and the
website maintained by the SEC at http://www.sec.gov.
I. Subsidiary Information
Not applicable.
J. Comparison of New York Stock Exchange Corporate Governance Rules
and China Corporate Governance Rules For Listed Companies
Under the amended Corporate Governance Rules of New York Stock Exchange
(NYSE), foreign issuers (including the Company) listed on the NYSE are
required to disclose a summary of the significant differences between their
domestic corporate governance rules and NYSE corporate governance rules that
would apply to a U.S. domestic issuer. A summary of such differences is listed
below:
81
Corporate governance rules applicable to the
domestically listed
NYSE corporate governance rules companies in China and the Company's governance
practices
------------------------------------------------------------------------------------------------------------------
Director Independence A listed company must have a It is required in China that any listed company must
majority of independent directors on its board of establish an independent director system and set
directors. No director qualifies as "independent" unless forth specific requirements for the qualification of
the board of directors affirmatively determines that the independent directors. For example, an independent
director has no material relationship with the listed director shall not hold any other position in the
company (either directly or as a partner, shareholder or listed company other than being a director and shall
officer of an organization that has a relationship with not be influenced by the main shareholders or the
the company). In addition, a director must meet certain controlling persons of the listed company, or by any
standards to be deemed independent. For example, a other entities or persons with whom the listed
director is not independent if the director is, or has company has a significant relationship. The Company
been within the last three years, an employee of the has complied with the relevant Chinese corporate
listed company, or if the director has received, during governance rules and has implemented internal rules
any twelve-month period within the last three years, more governing the independence and responsibilities of
than US$100,000 in direct compensation from the listed independent directors. The Company determines the
company. independence of independent directors every year.
To empower non-management directors to serve as a more No similar requirements.
effective check on management, the non-management
directors of each listed company must meet at regularly
scheduled executive sessions without management.
------------------------------------------------------------------------------------------------------------------
Nominating/Corporate Governance Committee
Listed companies must have a nominating/corporate The board of directors of a listed company may,
governance committee composed entirely of independent through the resolution of the shareholders' meeting,
directors. establish a nominating committee composed entirely
of directors, of which the independent directors
shall be the majority and the convener. The Company
has established a nominating committee.
The nominating/corporate governance committee must have a Relevant responsibilities of the nominating/
written charter that addresses the committee's purposes corporate governance committee are similar to those
and responsibilities which, at minimum, must be to: stipulated by the NYSE rules, but the main
search for eligible people for the board of directors, responsibilities do not include the research and
select and nominate directors for the next session of the recommendation of corporate governance guidelines,
shareholders' annual meeting, study and propose corporate the supervision of the evaluation of the board of
governance guidelines, supervise the evaluation of the directors and management, or the annual evaluation
board of directors and management, and evaluate the of the committee.
performance of the committee every year.
------------------------------------------------------------------------------------------------------------------
82
NYSE corporate governance rules Corporate governance rules applicable to the
domestically listed companies in China and the
Company's governance practices
------------------------------------------------------------------------------------------------------------------
Compensation Committee
Listed companies must have a compensation committee The board of directors of a listed company can,
composed entirely of independent directors. through the resolution of shareholders' meeting,
have a compensation and evaluation committee
composed entirely of directors, of whom the
independent directors are the majority and act as
the convener.
------------------------------------------------------------------------------------------------------------------
The written charter of the compensation committee must The responsibilities are similar to those stipulated
state, at least, the following purposes and by the NYSE rules, but the committee is not required
responsibilities: to produce a report on the executive compensation or
make an annual performance evaluation of the
committee. The board of directors of the Company has
established a compensation and evaluation committee
composed mainly of independent directors who act as
the convener, and the committee has a written
charter.
(1) review and approve the corporate goals associated with
CEO's compensation, evaluate the performance of the
CEO in fulfilling these goals, and based on such
evaluation determine and approve the CEO's
compensation level;
(2) make recommendations to the board with respect to
non-CEO executive officer compensation, and
incentive-compensation and equity-based plans that are
subject to board approval;
(3) produce a committee report on executive compensation
as required by the SEC to be included in the annual
proxy statement or annual report filed with the SEC.
The charter must also include the requirement for an
annual performance evaluation of the compensation
committee.
------------------------------------------------------------------------------------------------------------------
Audit Committee
Listed companies must have an audit committee that The board of directors of a listed company can,
satisfies the requirements of Rule 10A-3 of Exchange Act. through the resolution of the shareholders' meeting,
It must have a minimum of three members, and all audit establish an audit committee composed entirely of
committee members must satisfy the requirements for directors, of which the independent directors are
independence set forth in Section 303A.02 of NYSE the majority and act as the convener, and, at
Corporate Governance Rules as well as the requirements of minimum, one independent director is an accounting
Rule 10A-3b (1) of the Exchange Act. professional.
The written charter of the audit committee must specify The responsibilities of the audit committee are
that the purpose of the audit committee is to assist the similar to those stipulated by the NYSE rules, but
board oversight of the integrity of financial statements, according to the domestic practices, the company is
the company's compliance with legal and regulatory not required to make an annual performance
requirements, qualifications and independence of evaluation of the audit committee, and the audit
independent auditors and the performance of the listed committee is not required to prepare an audit report
company's internal audit function and independent to be included in the company's annual proxy
auditors. statement. The Board of Directors of the Company has
established an audit committee that satisfies
relevant domestic requirements and the audit
committee has a written charter.
The written charter must also require the audit committee
to prepare an audit committee report as required by the
SEC to be included in the listed company's annual proxy
statement as well as an annual performance evaluation of
the audit committee.
83
Corporate governance rules applicable to the
domestically listed
NYSE corporate governance rules companies in China and the Company's governance
practices
------------------------------------------------------------------------------------------------------------------
Audit Committee (Continued)
Each listed company must have an internal audit department. China has a similar regulatory provision, and the
Company has an internal audit department.
Shareholders must be given the opportunity to vote on The relevant regulations of China require the board
equity-compensation plans and material revisions thereto, of directors to propose plans and types of director
except for employment incentive plans, certain awards and compensation for the shareholders' meeting to
plans in the context of mergers and acquisitions. approve. The compensation plan of executive officers
is subject to approval by the board and announced at
the shareholders' meeting and disclosed to the
public upon the approval of the board of directors.
Corporate governance guidelines
Listed companies must adopt and disclose corporate CSRS has issued the Corporate Governance Rules, with
governance guidelines, involving director qualification which the Company has complied.
standards, director compensation, director continuing
education, annual performance evaluation of the board of
directors, etc.
Code of ethics for directors, officers and employees
Listed companies must adopt and disclose a code of China does not have such requirement for a code for
business conduct and ethics for directors, officers and ethics. But, the directors and officers must perform
employees, and promptly disclose any waivers of the code their legal responsibilities in accordance with the
for directors or executive officers. Company Law of PRC, relative requirements of CSRS
and Mandatory Provisions to the Charter of Companies
Listed Overseas.
Each listed company CEO must certify to the NYSE each year No similar requirements.
that he or she is not aware of any violation by the
company of NYSE corporate governance listing standards and
he or she must promptly notify the NYSE on writing of any
material non-compliance with any applicable provisions of
Section 303A.
ITEM 11 Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in foreign currency exchange
rates, interest rates and fuel prices.
Foreign currency exchange rate risk exists with respect to (i) our
indebtedness denominated in currencies other than Renminbi and (ii) our
equipment purchase commitments. Fluctuations in exchange rates may lead to
significant fluctuations in the exposure of our foreign currency denominated
liabilities.
We are subject to market rate risks due to fluctuations in interest
rates, principally as a result of our indebtedness that bears interests at
variable rates.
We are also exposed to market rate risk due to fluctuations in fuel
prices, mainly coal prices. For the year ended December 31, 2004, our total
fuel costs were RMB15,068 million and the weighted average unit fuel cost was
RMB139.4 per MWh.
The following table provides information, by maturity date, regarding our
foreign currency sensitive financial instruments, which consist of cash and
cash equivalents, temporary cash investments, short-term and long-term debt
obligations and capital commitments as of December 31, 2004.
84
(RMB expressed in millions, except interest rate)
As of December 31, 2004
--------------------------------------------------------------------------
Total
recorded Fair
Expected Maturity Date value value
------------------------------------------------------ -------- --------
2005 2006 2007 2008 2009 Thereafter
------- ------- ------- ------- ------ ----------
On-balance sheet financial
instruments
Cash and cash equivalents:
in US$ 10 - - - - - 10 10
in RMB 2,285 - - - - - 2,285 2,285
Temporary cash investments:
in RMB 13 - - - - - 13 13
Debts:
Fixed rate bank and other loans
(US$) 827 812 794 794 794 1,868 5,889 6,033
Average interest rate 6.182% 6.199% 6.209% 6.213% 6.221% 6.280%
Fixed rate bank loans (Euro) 58 60 60 60 60 566 864 724
Average interest rate 2% 2% 2% 2% 2% 2%
Variable rate bank and other
loans (US$) 80 76 76 76 76 323 707 629
Average interest rate 2.933% 2.926% 2.920% 2.913% 2.901% 2.868%
Variable rate bank and other
loans (Yen) 19 19 19 19 19 28 123 103
Average interest rate 5.800% 5.800% 5.800% 5.800% 5.800% 5.800%
Capital commitments (in US$) 290 293 83 31 - - 697 697
Capital Commitments (Euro) 714 79 - - - - 793 793
__________
(1) The interest rates for variable rate bank and other loans are calculated
based on the year end indice.
The following table provides information, by maturity dates, regarding our
interest rate sensitive financial instruments, which consist of fixed and
variable rate short-term and long-term debt obligations, as of December 31,
2004.
(RMB expressed in millions, except interest rate)
As of December 31, 2004
--------------------------------------------------------------------------
Total
recorded Fair
Expected Maturity Date value value
------------------------------------------------------ -------- --------
2005 2006 2007 2008 2009 Thereafter
------- ------- ------- ------- ------ ----------
Debts
Fixed rate bank and other
loans 9,543 1,377 2,239 2,235 3,008 6,165 24,567 24,234
Average interest rate 5.204% 5.294% 5.269% 5.235% 5.190% 4.892%
Variable rate bank and other
loans 99 95 95 95 95 552 1,031 911
Average interest rate 3.494% 3.489% 3.484% 3.477% 3.468% 3.516%
______________
(1) The interest rates for variable rate bank and other loans are calculated
based on the year end indice.
ITEM 12 Description of Securities Other than Equity Securities
Not applicable.
85
PART II
ITEM 13 Defaults, Dividend Arrearages and Delinquencies
None.
ITEM 14 Material Modifications to the Rights of Security Holders and Use
of Proceeds
None.
ITEM 15 Controls and Procedures
Our principal executive officer and principal financial officer have
evaluated the effectiveness of our disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31,
2004 (the "Evaluation Date"), and they have concluded that, based on their
evaluation, our disclosure controls and procedures are effective as to ensure
that material information required to be included in this annual report is
made known to them by others on a timely basis. There has been no change in
our internal control over financial reporting during the period covered by
this annual report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 16 [Reserved]
ITEM 16A Audit Committee Financial Expert
The Board of Directors has determined that Mr. Xia Donglin qualifies as
an Audit Committee Financial Expert in accordance with the terms of Item 16.A
of Form 20-F. See "Item 6 Directors, Senior Management and Employees -- A.
Directors, members of the supervisory committee and senior management".
ITEM 16B Code of Ethics
Although, as of the date of this annual report, we do not have, in form,
a code of ethics that applies to the Company's principal executive officer,
principal financial officer and principal accounting officer (collectively,
the "Senior Corporate Officers"), we believe that, as a substantive matter,
the Senior Corporate Officers are subject to a set of written requirements
under the PRC law that are substantially similar to the ethical standards
described under Item 16B(b) of Form 20-F. Joint stock companies that are
incorporated in China and listed on both PRC and foreign stock exchanges are
heavily regulated by the central government. To a large extent, these
requirements, which are designed to promote honest and ethical conduct and
compliance with applicable laws and regulations by the directors and senior
executives of such companies, are not merely ethical requirements, but more
importantly, statutory obligations that are legally binding on these
individuals under the PRC Company Law, relevant rules and regulations
promulgated by China Securities Regulatory Commission and the Mandatory
Provisions of Articles of Association of Overseas Listed Companies.
In spite of the above specific circumstances relating to the Company, we
nevertheless intend to adopt the type of written code of ethics as described
in Item 16B(b) of Form 20-F and expect to do so soon.
86
ITEM 16C Principal Accountant Fees and Services
PricewaterhouseCoopers has served as our independent public auditors for
each of the fiscal years in the two-year period ended December 31, 2004, for
which audited consolidated financial statements appear in this annual report
on Form 20-F.
The following table shows information about fees paid by us to
PricewaterhouseCoopers:
For the year ended
December 31,
--------------------------------------
(RMB millions) 2004 2003
------------------ ------------------
Audit fees 15.2 13.8
Audit-related fees 5.2 1.8
Tax fees - -
All other fees - -
------------------ ------------------
Total 20.4 15.6
------------------ ------------------
Audit Services are defined as the standard audit work that needs to be
performed each year in order to issue an opinion on the consolidated financial
statements of the Company and its subsidiaries. It also includes other audit
services which are those services that only the external auditors reasonably
can provide, such as auditing of non-recurring transactions and application of
new accounting policies, audits of significant and newly implemented system
controls and pre-issuance reviews of quarterly financial results.
Audit Related Services include those other assurances and related
services provided by auditors, but not restricted to those that can only
reasonably be provided by the external auditors signing the auditors' report,
that are reasonably related to the performance of the audit or review of the
Company's financial statements such as acquisition due diligence, audits of
pension and benefit plans, consultations concerning financial accounting and
reporting standards.
Tax Services include the assistance with compliance and reporting of
enterprise and value added taxes, assistance with our assessment of new or
changing tax regimes, assessment of our transfer pricing policies and
practices, and assistance with assessing relevant rules, regulations and facts
going into our correspondence with tax authorities.
Audit Committee Pre-approval Policies and Procedures
The Audit Committee of the Company's Board of Directors is responsible,
among other things, for the oversight of the external auditors subject to the
requirements of the PRC Law and the Company's Articles of Association. The
Audit Committee has adopted a policy regarding pre-approval of audit and
permissible non-audit services to be provided by our independent auditors (the
"Policy"). Under the Policy, proposed services either (i) may be pre-approved
by the Audit Committee without consideration of specific case-by-case services
("general pre-approval"); or (ii) require the specific pre-approval of the
Audit Committee ("specific pre-approval"). General approval applies to
services of recurring and predictable nature. These types of services, once
approved by the Audit Committee in the beginning, will not require further
approval in future, except when actual fees and expenses exceed pre-approved
budget levels. In such a case, the Audit Committee may authorize one of its
members to approve budget increases subject to the requirement that such
member provide a report on his decision to approve or deny an application for
budget increases to the Audit Committee at an Audit Committee meeting held
immediately after such member grants or denies the approval.
Specific pre-approval applies to all other services. These services must
be approved by the Audit Committee on a case-by-case basis after an
application including proposed budget and scope of services to be provided by
our independent auditors is submitted to the Audit Committee.
87
ITEM 16D Exemptions from the Listing Standards for Audit Committees
Not applicable.
ITEM 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable.
ITEM 17 Financial Statements
See pages F-1 through F-69 incorporated by reference.
ITEM 18 Financial Statements
Not applicable.
ITEM 19 Exhibits
1.1 Amended Articles of Association of Huaneng Power International,
Inc., incorporated by reference to Exhibit 1.1 of the Annual Report
on Form 20-F for the year ended December 31, 2001 filed with the
SEC.
3.1 Shareholders' Agreement dated May 31, 1994, incorporated by
reference to Exhibit 9.1 of our Registration Statement on Form F-1,
filed with the SEC on August 24, 1994.
12.1 Certifications of Principal Executive Officer pursuant to Rule
13a-14(a) promulgated under the U.S. Securities Exchange Act of
1934.
12.2 Certifications of Principal Financial Officer pursuant to Rule
13a-14(a) promulgated under the U.S. Securities Exchange Act of
1934.
13.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
88
THIS PAGE IS INTENTIONALLY LEFT BLANK
89
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF HUANENG POWER INTERNATIONAL, INC.
(Incorporated in the People's Republic of China with limited liability)
We have audited the accompanying consolidated balance sheets of Huaneng Power
International, Inc. (the "Company") and its subsidiaries as of December 31,
2004 and 2003, and the related consolidated statements of income, of cash
flows and of changes in shareholders' equity for each of the three years in
the period ended December 31, 2004. These financial statements set out on
pages F-2 to F-7 are the responsibility of the management of Company and its
subsidiaries. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly in all material respects, the financial position of the Company
and its subsidiaries at December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2004, in conformity with International Financial Reporting
Standards, as published by the International Accounting Standards Board.
International Financial Reporting Standards vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in Note 42 to the consolidated financial statements.
PricewaterhouseCoopers
Certified Public Accountants
Hong Kong, March 15, 2005
F-1
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Amounts expressed in thousands of RMB or US$, except per share data)
For the year ended December 31,
----------------------------------------------------------------------------
Note 2004 2003 2002
------- --------------------------------- ----------------- --------------------
RMB US$ RMB RMB
Operating revenue, net 30,118,278 3,639,011 23,388,237 18,474,469
--------------- ---------------- ----------------- --------------------
Operating expenses
Fuel (15,068,188) (1,820,599) (9,025,013) (6,916,038)
Maintenance (807,689) (97,588) (921,561) (607,951)
Depreciation (4,706,992) (568,718) (4,117,478) (3,533,609)
Labor (1,877,264) (226,819) (1,439,673) (1,035,740)
Service fees to HIPDC 7(a) (133,609) (16,143) (214,723) (263,716)
Others (606,346) (73,261) (596,627) (539,401)
--------------- ---------------- ----------------- --------------------
Total operating expenses (23,200,088) (2,803,128) (16,315,075) (12,896,455)
--------------- ---------------- ----------------- --------------------
Profit from operations 6,918,190 835,883 7,073,162 5,578,014
--------------- ---------------- ----------------- --------------------
Interest income 43,092 5,207 53,044 83,015
Interest expense (663,424) (80,158) (569,148) (561,875)
Bank charges and
exchange losses, net (119,452) (14,433) (28,181) (31,405)
--------------- ---------------- ----------------- --------------------
Total financial expenses (739,784) (89,384) (544,285) (510,265)
--------------- ---------------- ----------------- --------------------
Share of profit of associates 11 377,565 45,619 212,091 (11,145)
Investment income 13 22,542 2,724 - -
(Loss) / Gain from disposal
of investments (1,988) (240) 10,705 1,288
Other income, net 5 18,666 2,255 12,070 -
--------------- ---------------- ----------------- --------------------
Profit before tax 6 6,595,191 796,857 6,763,743 5,057,892
Income tax expense 32 (1,014,262) (122,547) (1,149,441) (980,854)
--------------- ---------------- ----------------- --------------------
Profit before minority
interests 5,580,929 674,310 5,614,302 4,077,038
Minority interests 33 (257,053) (31,058) (183,894) (156,034)
--------------- ---------------- ----------------- --------------------
Net profit attributable to
shareholders 5,323,876 643,252 5,430,408 3,921,004
=============== ================ ================= ====================
Dividends paid and proposed 22 6,019,432 727,292 5,063,244 3,849,408
=============== ================ ================= ====================
Proposed dividend 22 3,013,846 364,145 3,013,836 2,049,408
=============== ================ ================= ====================
Proposed dividend per share
(RMB) 22 0.25 0.03 0.25 0.17
=============== ================ ================= ====================
Basic earnings per share
(RMB) 34 0.44 0.05 0.45 0.33
=============== ================ ================= ====================
Diluted earnings per share
(RMB) 34 0.44 0.05 0.45 0.33
=============== ================ ================= ====================
The accompanying notes is an integral part of these consolidated financial
statements.
F-2
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003
(Amounts expressed in thousands of RMB or US$)
As of December 31,
------------------------------------------------------
Note 2004 2003
-------- ------------------------------------------------------
RMB US$ RMB
ASSETS
Non-current assets
Property, plant and equipment, net 10 57,780,410 6,981,261 42,658,365
Investments in associates 11 4,328,307 522,963 2,766,031
Available-for-sale investment 13 254,990 30,809 254,990
Land use rights 14 1,546,026 186,797 831,026
Other non-current assets 225,890 27,293 206,833
Deferred income tax assets 29 97,539 11,785 21,311
Goodwill 15 376,726 45,518 298,876
Less: Negative goodwill 15 (1,483,670) (179,263) (1,730,949)
-------------- --------------- ---------------
Total non-current assets 63,126,218 7,627,163 45,306,483
-------------- --------------- ---------------
Current assets
Inventories, net 16 1,431,404 172,948 800,281
Other receivables and assets, net 17 723,316 87,394 259,421
Accounts receivable 18 4,973,103 600,870 2,804,026
Due from other related parties 7(g) 14,970 1,809 5,862
Restricted cash 202,688 24,490 159,961
Temporary cash investments 19 12,641 1,527 144,996
Cash and cash equivalents 35(a) 2,295,531 277,355 4,128,648
-------------- --------------- ---------------
Total current assets 9,653,653 1,166,393 8,303,195
-------------- --------------- ---------------
Total assets 72,779,871 8,793,556 53,609,678
============== =============== ===============
F-3
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D)
AS OF DECEMBER 31, 2004 AND 2003
(Amounts expressed in thousands of RMB or US$)
As of December 31,
-------------------------------------------------
Note 2004 2003
-------- -------------------------------------------------
RMB US$ RMB
EQUITY AND LIABILITIES
8,500,000,000 (2003: 4,250,000,000)
Domestic Shares, par value RMB1.00 each,
in form of legal person shares 20 8,500,000 1,027,004 4,250,000
500,000,000 (2003: 250,000,000) A shares,
par value RMB1.00 each 20 500,000 60,412 250,000
3,055,383,440 (2003: 1,527,671,200)
Overseas Listed Foreign Shares, par value
RMB1.00 each 20 3,055,383 369,164 1,527,671
Additional paid-in capital 20 8,972,184 1,084,055 10,780,133
Dedicated capital 20, 21 4,065,970 491,267 4,328,423
Equity component of convertible notes 20 - - 255
Retained earnings
Proposed dividend 22 3,013,846 364,145 3,013,836
Others 8,158,136 985,699 9,805,037
---------------- --------------- -------------
Total shareholders' equity 36,265,519 4,381,746 33,955,355
---------------- --------------- -------------
Minority interests 33 3,266,393 394,659 1,155,197
---------------- --------------- -------------
Non-current liabilities
Long-term loans from shareholders,
unsecured 23 800,000 96,659 -
Long-term bank loans, unsecured 24 14,854,471 1,794,777 8,305,320
Other long-term loans, unsecured 25 300,818 36,346 848,284
Deferred income tax liabilities 29 546,717 66,057 103,114
Other non-current liability 13,000 1,571 -
---------------- --------------- -------------
Total non-current liabilities 16,515,006 1,995,410 9,256,718
---------------- --------------- -------------
Current liabilities
Accounts payable and other liabilities 26 4,551,158 549,887 3,342,517
Dividends payable to shareholders of the
Company 8,250 997 -
Taxes payable 27 999,792 120,799 917,362
Due to HIPDC 7(g) 1,258,799 152,093 87,508
Due to other related parties 7(g) 13,426 1,622 27,338
Staff welfare and bonus payables 259,291 31,329 220,896
Short-term loans, unsecured 28 8,099,000 978,554 1,600,000
Current portion of long-term loans from
shareholders, unsecured 23 - - 420,380
Current portion of long-term bank loans,
unsecured 24 1,257,476 151,933 2,409,240
Current portion of other long-term loans,
unsecured 25 285,761 34,527 211,881
Liability component of convertible notes - - 935
Other financial liabilities 38 - - 4,351
---------------- --------------- -------------
Total current liabilities 16,732,953 2,021,741 9,242,408
---------------- --------------- -------------
Total equity and liabilities 72,779,871 8,793,556 53,609,678
================ ==============================
The accompanying notes is an integral part of these consolidated financial
statements.
F-4
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Amounts expressed in thousands of RMB)
Equity
Component
Additional of
Share Paid-in Convertible Retained
Capital Capital Dedicated Capital Notes Earnings Total
----------------------------------------------------------------------------------------------------
Statutory
and Statutory
discretionary public
surplus welfare
reserve fund fund Sub-total
Balance at January 1,
2002 6,000,000 10,137,732 1,896,270 762,742 2,659,012 510,506 8,986,280 28,293,530
Dividend relating to 2001
- - - - - (1,800,000) (1,800,000)
Net profit for the year
ended December 31,
2002 - - - - - - 3,921,004 3,921,004
Conversion of
convertible notes to
share capital (Note
20) 274 1,696 - - - (444) - 1,526
Redemption of
convertible notes - 465,415 - - - (465,415) - -
Transfer from statutory
public welfare fund
to discretionary
surplus reserve fund - - 15,398 (15,398) - - - -
Transfer to dedicated
capital (Note 21) - - 408,235 306,176 714,411 - (714,411) -
----------------------------------------------------------------------------------------------------
Balance at December 31, 6,000,274 10,604,843 2,319,903 1,053,520 3,373,423 44,647 10,392,873 30,416,060
2002
Dividend relating to 2002 - - - - - - (2,049,408) (2,049,408)
Net profit for the year
ended December 31,
2003 - - - - - - 5,430,408 5,430,408
Conversion of
convertible notes to
share capital (Note
20) 27,397 175,290 - - - (44,392) - 158,295
Transfer from statutory
public welfare fund
to discretionary
surplus reserve fund - - 2,104 (2,104) - - - -
Transfer to dedicated
capital (Note 21) - - 545,714 409,286 955,000 - (955,000) -
----------------------------------------------------------------------------------------------------
Balance at December 31, 6,027,671 10,780,133 2,867,721 1,460,702 4,328,423 255 12,818,873 33,955,355
2003
Dividend relating to 2003 - - - - - - (3,013,836) (3,013,836)
Ordinary shares split
(Note 20) 6,027,671 (1,808,301) (1,205,534) - (1,205,534) - (3,013,836) -
Net profit for the year
ended December 31,
2004 - - - - - - 5,323,876 5,323,876
Conversion of
convertible notes to
share capital and
redemption of
convertible notes
(Note 20) 41 352 (4) - (4) (255) (10) 124
Transfer from statutory
public welfare fund
to discretionary
surplus reserve fund - - 1,600 (1,600) - - - -
Transfer to dedicated
capital (Note 21) - - 538,906 404,179 943,085 - (943,085) -
----------------------------------------------------------------------------------------------------
Balance at December 31, 12,055,383 8,972,184 2,202,689 1,863,281 4,065,970 - 11,171,982 36,265,519
2004
====================================================================================================
The accompanying notes is an integral part of these consolidated financial
statements.
F-5
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Amounts expressed in thousands of RMB or US$)
For the year ended December 31,
----------------------------------------------------------------------
Note 2004 2003 2002
------- ----------------------------------------------------------------------
RMB US$ RMB RMB
CASH FLOWS FROM OPERATING
ACTIVITIES
Profit before tax 6,595,191 796,857 6,763,743 5,057,892
Adjustments to reconcile
profit before tax to net
cash provided by operating
activities:
Depreciation 4,706,992 568,718 4,117,478 3,533,609
Amortization of prepaid
land use rights 28,074 3,392 19,136 16,847
Amortization of goodwill
and negative goodwill (205,277) (24,802) (222,108) (246,128)
Amortization of other
non-current assets 39,731 4,800 41,566 24,112
(Reversal) / Provision for
doubtful accounts (10,654) (1,287) 12,567 15,826
Provision for / (reversal)
of inventory obsolescence 1,521 184 (751) (945)
Loss / (Gain) from disposals
of investments 1,988 240 (10,705) (1,288)
Investment income (22,542) (2,724) - -
(Gain) / Loss on disposals of
property, plant and
equipment, net (29,176) (3,525) 138,726 31,980
Unrealized exchange loss 89,913 10,873 1,094 4,846
Gain on interest rate swaps (925) (112) (11,771) (2,179)
Share of profit of
associates (377,565) (45,619) (212,091) 11,145
Interest income (43,092) (5,207) (53,044) (83,015)
Interest expenses 663,424 80,158 569,148 561,875
Changes in working capital:
Restricted cash (23,108) (2,792) (146,702) (13,259)
Accounts receivable (742,005) (89,652) (353,637) (496,559)
Due from other related
parties (9,108) (1,100) (5,862) -
Inventories, net (414,275) (50,054) 159,419 (39,272)
Other receivables and
assets, net (206,873) (24,995) (65,900) 92,579
Accounts payable and other
liabilities 243,524 29,424 226,584 279,019
Taxes payable 3,796 459 131,281 44,070
Other non-current liability 13,000 1,571 - -
Due to HIPDC (53,263) (6,435) (12,967) 65,891
Due to other related
parties (13,912) (1,681) 13,370 (3,225)
Staff welfare and bonus
payable (17,728) (2,142) (12,670) (152,033)
Interest paid (974,879) (117,789) (617,162) (733,600)
Income tax paid (1,123,966) (135,802) (989,635) (984,047)
Interest received 43,895 5,304 54,182 95,577
-------------- --------------- ------------------- ----------------
Net cash provided by
operating activities 8,162,701 986,262 9,533,289 7,079,718
-------------- --------------- ------------------- ----------------
F-6
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS (CONT'D)
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Amounts expressed in thousands of RMB or US$)
For the year ended December 31,
--------------------------------------------------------------------
Note 2004 2003 2002
------ --------------------------------- --------------- ----------------
RMB US$ RMB RMB
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (9,877,553) (1,193,446) (3,606,704) (1,552,580)
Proceeds from disposals of property,
plant and equipment 27,768 3,355 7,679 41,567
Prepayments of land use right (154,754) (18,698) (16,508) (41,630)
Increase in other non-current assets (3,680) (445) (12,847) 3,412
Decrease in temporary cash investments 132,355 15,992 1,066,629 5,082,568
Proceeds from disposal of investments 548 66 80,704 2,390
Cash consideration paid for
available-for-investment - - - (254,990)
Cash dividend received 172,542 20,847 - -
Cash consideration paid for acquisitions 3 (4,575,000) (552,770) (2,940,000) (2,759,435)
Direct transaction costs paid for
acquisitions 3 (31,685) (3,828) (19,618) (17,042)
Cash inflow from the acquired power plants 3 659,174 79,644 215,585 569,841
---------------- --------------- --------------- ----------------
Net cash (used in) / provided by
investing activities (13,650,285) (1,649,283) (5,225,080) 1,074,101
---------------- --------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Drawdown of short-term loans, unsecured 8,724,000 1,054,069 769,000 120,000
Repayments of short-term loans, unsecured (2,940,313) (355,260) (450,000) (190,000)
Drawdown of long-term loans from
shareholders, unsecured 800,000 96,659 - -
Repayments of long-term loans from
shareholders, unsecured (1,504,827) (181,819) (388,988) (15,565)
Drawdown of long-term bank loans,
unsecured 4,944,000 597,354 1,016,230 173,379
Repayments of long-term bank loans,
unsecured (3,192,843) (385,772) (2,322,348) (2,954,748)
Drawdown of other long-term loans,
unsecured - - 350,000 -
Repayments of other long-term loans,
unsecured (679,062) (82,047) (36,060) (283,683)
Capital injection from minority
shareholders of the subsidiaries 677,034 81,802 77,632 -
Dividend paid to shareholders of the
Company (3,005,586) (363,147) (2,049,408) (1,800,000)
Dividend paid to minority shareholders of
the subsidiaries (167,125) (20,193) (148,220) (138,847)
Redemption of convertible notes (811) (98) - (2,234,790)
---------------- --------------- --------------- ----------------
Net cash provided by / (used in)
financing activities 3,654,467 441,548 (3,182,162) (7,324,354)
---------------- --------------- --------------- ----------------
NET (DECREASE) / INCREASE IN CASH AND CASH
EQUIVALENTS (1,833,117) (221,473) 1,126,047 829,465
Cash and cash equivalents, beginning of year 4,128,648 498,828 3,002,601 2,173,136
---------------- --------------- --------------- ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR 35(a) 2,295,531 277,355 4,128,648 3,002,601
================ =============== =============== ================
The accompanying notes is an integral part of these consolidated financial
statements.
F-7
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
1. COMPANY ORGANIZATION AND PRINCIPAL ACTIVITIES
Huaneng Power International, Inc. (the "Company") was incorporated in
the People's Republic of China (the "PRC") as a Sino-foreign joint
stock limited company on June 30, 1994. As of December 31, 2004, the
Company and its subsidiaries had 22,129 employees (2003: 17,886
employees; 2002: 15,222 employees).
The Company and its subsidiaries are principally engaged in the
generation and sale of electric power to the respective regional or
provincial grid companies in the PRC.
The parent company and ultimate parent company of the Company are
Huaneng International Power Development Corporation ("HIPDC") and
China Huaneng Group Corporation ("Huaneng Group"), respectively. Both
companies are incorporated in the PRC.
2. ACCOUNTING POLICIES
The principal accounting policies adopted in the preparation of these
consolidated financial statements are set out below:
(a) Basis of preparation
The consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards
("IFRS") and under the historical cost convention. This basis of
accounting differs from that used in the preparation of the
statutory financial statements of the Company and its
subsidiaries ("PRC statutory financial statements"). The PRC
statutory financial statements of the Company and its
subsidiaries comprising the financial statements have been
prepared in accordance with the relevant accounting principles
and regulations applicable to the Company and its subsidiaries,
as appropriate in the PRC. Appropriate adjustments have been
made to the PRC statutory financial statements to conform with
IFRS. Differences arising from the restatement have not been
incorporated in the statutory accounting records of the Company
and its subsidiaries.
The consolidated financial statements are expressed in Renminbi
("RMB"), the national currency of the PRC. Solely for the
convenience of the reader, the December 31, 2004 financial
statements have been translated into United States dollars (US$)
at the rate of US$1.00=RMB8.2765 announced by the People's Bank
of China on December 31, 2004. No representation is made that
Renminbi amounts could have been, or could be, converted into
United Stated dollars at the rate on December 31, 2004, or at
any other certain rate.
The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Although these estimates are based on management's best
knowledge of current event and actions, actual results
ultimately may differ from those estimates.
During 2004, a significant portion of the Company and its
subsidiaries' funding requirements for capital expenditures were
satisfied by short-term borrowings. Consequently, as of December
31, 2004, the Company and its subsidiaries have a negative
working capital balance of approximately RMB7 billion. The
Company and its subsidiaries have significant undrawn available
banking facilities as disclosed in Note 35 and may refinance
and/or restructure certain short-term loans into long-term loans
and will also consider alternative sources of financing, where
applicable. The directors of the Company and its subsidiaries
are of the opinion that the Company and its subsidiaries will be
able to meet its liabilities as and when they fall due within
the next twelve months and have prepared these consolidated
financial statements on a going concern basis.
F-8
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. ACCOUNTING POLICIES (CONT'D)
(a) Basis of preparation (Cont'd)
The Company and its subsidiaries adopted IFRS 3 Business
Combinations and International Accounting Standard ("IAS") 36
Impairment of Assets in relation to acquisitions with respective
agreements dated on or after March 31, 2004 (Notes 2(f) & (g)).
Goodwill arising from acquisition with the agreement date before
March 31, 2004 is amortized using the straight-line method over
their estimated useful lives and recognized in the income
statement until December 31, 2004. In accordance with the
provisions of IFRS 3, goodwill arising from acquisitions on or
after March 31, 2004 is not amortized but instead is tested
annually for impairment and carried at cost less accumulated
impairment losses. There is no impact on opening retained
earnings as of January 1, 2004 from the adoption of these
standards.
(b) Consolidation
(i) Subsidiaries
Subsidiaries, which are those entities in which the Company has
an interest of more than one half of the voting rights or
otherwise has power to govern the financial and operating
policies are consolidated.
Subsidiaries are consolidated from the date on which control is
transferred to the Company and are no longer consolidated from
the date that control ceases. The purchase method of accounting
is used to account for the acquisition of subsidiaries. The cost
of an acquisition is measured as the fair value of the assets
given up, shares issued and liabilities undertaken at the date
of acquisition plus costs directly attributable to the
acquisition. The excess of the cost of acquisition over the fair
value of the net assets of subsidiaries acquired is recorded as
goodwill. See Note 2(f) for the accounting policy on goodwill.
Intercompany transactions, balances and unrealized gains on
transactions between group companies are eliminated; unrealized
losses are also eliminated unless cost cannot be recovered.
Where necessary, accounting policies of subsidiaries have been
changed to ensure consistency with the policies adopted by the
Company.
In the Company's financial statements, investments in
subsidiaries are accounted for using the equity method.
(ii) Associates
Associates are entities over which the Company and its
subsidiaries generally have between 20% and 50% of the voting
rights, or over which the Company and its subsidiaries have
significant influence, but which they do not control.
Investments in associates are accounted for by the equity method
of accounting. Under this method the Company's share of the
post-acquisition profits or losses of associates is recognized
in the income statement and its share of post-acquisition
movements in reserves is recognized in reserves. The cumulative
post-acquisition movements are adjusted against the cost of the
investment. Unrealized gains on transactions between the Company
and its subsidiaries and its associates are eliminated to the
extent of the Company and its subsidiaries' interest in the
associates; unrealized losses are also eliminated unless the
transaction provides evidence of an impairment of the asset
transferred. The Company and its subsidiaries' investments in
associates include goodwill (net of accumulated amortization) on
acquisition. When the Company and its subsidiaries' share of
losses in an associate equals or exceeds their interest in the
associate, further losses are not recognised, unless the Company
and its subsidiaries have incurred obligations or made payments
on behalf of the associates.
In the Company's financial statements, investments in associates
are accounted for using the equity method.
F-9
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. ACCOUNTING POLICIES (CONT'D)
(c) Foreign currency translation
(i) Measurement currency
Items included in the financial statements of each entity in the
Company and its subsidiaries are measured using the currency
that best reflects the economic substance of the underlying
events and circumstances relevant to that entity (the
"measurement currency"). The consolidated financial statements
are presented in Renminbi ("RMB"), which is the measurement
currency of the Company and its subsidiaries.
(ii) Transactions and balances
Foreign currency transactions are translated into the
measurement currency using the exchange rates prevailing at the
dates of the transactions. Foreign exchange gains and losses
resulting from the settlement of such transactions and from the
translation of monetary assets and liabilities denominated in
foreign currencies, are recognized in the income statement.
(d) Property, plant and equipment, net
Property, plant and equipment, net is stated at historical cost
less accumulated depreciation and accumulated impairment loss.
When assets are sold or retired, their cost and accumulated
depreciation and accumulated impairment loss are eliminated from
the accounts and any gain or loss resulting from their disposal
is determined by comparing proceeds with the carrying amount and
is included in the income statement.
The initial cost of property, plant and equipment comprises its
purchase price, including import duties and non-refundable
purchase taxes and any directly attributable costs of bringing
the asset to its working condition and location for its intended
use.
Expenditures incurred after the property, plant and equipment
have been put into operation, such as repairs and maintenance
and overhaul costs, are normally charged to income statement in
the period the costs are incurred. In situations where it can be
clearly demonstrated that the expenditures have resulted in an
increase in the future economic benefits expected to be obtained
from the use of an item of property, plant and equipment beyond
its originally assessed standard of performance, the
expenditures are capitalized as an additional cost of property,
plant and equipment.
Depreciation is calculated on the straight-line method to write
off the cost of each asset to their estimated residual values
over their estimated useful lives as follows:
Buildings 8-35 years
Electric utility plant in service 4-30 years
Transportation facilities 6-27 years
Others 2.5-18 years
The useful lives and depreciation methods are reviewed
periodically to ensure that the methods and periods of
depreciation are consistent with the expected pattern of
economic benefits from items of property, plant and equipment.
Where the carrying amount of an asset is greater than its
estimated recoverable amount, it is written down immediately to
its recoverable amount.
F-10
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. ACCOUNTING POLICIES (CONT'D)
(d) Property, plant and equipment, net (Cont'd)
Construction-in-progress ("CIP") represents property, plant and
equipment under construction and is stated at cost. This
includes the costs of construction, plant and machinery and
other direct costs. CIP is not depreciated until such time as
the relevant asset is completed and ready for its intended use.
Interest costs on borrowings to finance the construction of
property, plant and equipment are capitalized, during the period
of time that is required to complete and prepare the asset for
its intended use. Other borrowing costs are expensed.
(e) Investments
The Company and its subsidiaries classified its investments in
debt and equity securities into the following categories:
trading, held-to-maturity and available-for-sale. The
classification is dependent on the purpose for which the
investments were acquired. Management determines the
classification of its investments at the time of the purchase
and re-evaluates such designation on a regular basis.
Investments that are acquired principally for the purpose of
generating a profit from short-term fluctuations in price are
classified as trading investments and included in current
assets; for the purpose of these financial statements short-term
is defined as 3 months. Investments with a fixed maturity that
management has the intent and ability to hold to maturity are
classified as held-to-maturity and are included in non-current
assets, except for maturities within 12 months from the balance
sheet date which are classified as current assets. Investments
intended to be held for an indefinite period of time, which may
be sold in response to needs for liquidity or changes in
interest rates, are classified as available-for-sale; and are
included in non-current assets unless management has the express
intention of holding the investment for less than 12 months from
the balance sheet date or unless they will need to be sold to
raise operating capital, in which case they are included in
current assets.
Purchases and sales of investments are recognized on the trade
date, which is the date that the Company and its subsidiaries
commits to purchase or sell the investment. Cost of purchase
includes transaction costs. Trading and available-for-sale
investments are subsequently carried at fair value.
Held-to-maturity investments are carried at amortized cost using
the effective yield method. Realized and unrealized gains and
losses arising from changes in the fair value of trading
investments are included in the income statement in the period
in which they arise. Unrealized gains and losses arising from
changes in the fair value of securities classified as
available-for-sale are recognized in equity. The fair values of
investments are based on quoted bid prices or amounts derived
from cash flow models. Fair values for unlisted equity
securities are estimated using applicable price/earnings or
price/cash flow ratios refined to reflect the specific
circumstances of the issuer. Equity securities for which fair
values cannot be measured reliably are recognized at cost less
impairment. When securities classified as available-for-sale are
sold or impaired, the accumulated fair value adjustments are
included in the income statement as gains and losses from
investment securities.
(f) Goodwill and negative goodwill
Goodwill represents the excess of the cost of an acquisition
over the fair value of the Company's share of the net
identifiable assets of the acquired subsidiary/associate at the
date of acquisition. Goodwill on acquisition of associates is
included in investments in associates. Gains and losses on the
disposal of an entity include the carrying amount of goodwill
relating to the entity sold. Goodwill arising from acquisitions
dated before March 31, 2004 is amortized to the income statement
using the straight-line method over its estimated useful life
until December 31, 2004 and will be tested annually for
impairment effective from January 1, 2005. Management determines
the estimated useful life of goodwill based on the remaining
weighted average useful lives of the identifiable acquired
depreciable/amortizable assets of the respective business at the
time of the acquisition. In accordance with the provisions of
IFRS 3, goodwill arising from acquisitions on or after March 31,
2004 is not amortized but tested annually for impairment (see
Note 2(g)) and carried at cost less accumulated impairment
losses. Goodwill is allocated to cash-generating unit ("CGUs")
for the purpose of impairment testing.
F-11
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. ACCOUNTING POLICIES (CONT'D)
(f) Goodwill and negative goodwill (Cont'd)
Negative goodwill represents the excess of the fair value of the
Company's share of the net assets of the acquired
subsidiary/associate over the cost of an acquisition. Negative
goodwill arising from acquisitions dated before March 31, 2004
is amortized using the straight-line method over their estimated
useful lives and recognized in the income statement until
December 31, 2004 and will be derecognized on January 1, 2005,
with a corresponding adjustment to retained earnings as of
January 1, 2005. Management determines the estimated useful
lives of negative goodwill based on the remaining weighted
average useful lives of the identifiable acquired
depreciable/amortizable assets of the respective business at the
time of the acquisition. For negative goodwill arising from
acquisitions dated on or after March 31, 2004, the Company
reassesses the identification and measurement of the
identifiable assets and liabilities and contingent liabilities
and the measurement of the cost of the combination. Any excess
of the fair value of the Company's share of net assets of the
subsidiary / associate over the cost of the acquisition after
that reassessment is recognized immediately in profit or loss.
(g) Impairment of assets
Assets that have indefinite useful lives are not subject to
amortization and are tested annually for impairment. Assets that
are subject to amortization are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount may not be recoverable. An impairment loss is recognized
for the amount by which the asset's carrying amount exceeds its
recoverable amount. The recoverable amount is the higher of an
asset's fair value less costs to sell and value in use. For the
purpose of assessing impairment, assets are grouped at the
lowest levels for which there are separately identifiable cash
flows.
(h) Inventories
Inventories consist of fuel, materials and supplies. They are
stated at the lower of weighted average costs or net realizable
values after provision for obsolete items, and are expensed to
fuel costs or repairs and maintenance when used, or capitalized
to fixed assets when installed, as appropriate. Cost of
inventories includes direct material cost and transportation
expenses incurred in bringing the inventories to the working
locations.
(i) Receivables
Receivables are carried at original invoice amount less
provision made for impairment of these receivables. A provision
for impairment of receivables is established when there is
objective evidence that the Company and its subsidiaries will
not be able to collect all amounts due according to the original
terms of receivables.
(j) Temporary cash investments
Temporary cash investments comprise cash invested in fixed-term
deposits with original maturities ranging from more than 3
months to one year. Temporary cash investments are classified as
held-to-maturity investments and are carried at amortized cost
(see Note 2(e)).
(k) Cash and cash equivalents
Cash and cash equivalents are carried in the balance sheet at
cost. For the purposes of the cash flow statement, cash and cash
equivalents comprise cash on hand, deposits held at call with
banks, other short-term highly liquid investments with original
maturities of three months or less.
F-12
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. ACCOUNTING POLICIES (CONT'D)
(l) Borrowings and convertible notes
Borrowings are recognized initially at the proceeds received,
net of transaction costs incurred. Borrowings are subsequently
stated at amortized cost using the effective yield method; any
difference between proceeds (net of transaction costs) and the
redemption value is recognized in the income statement over the
period of the borrowings.
The proceeds received on the issue of the convertible notes were
allocated into liability and equity components. Upon initial
recognition, the liability component represents the present
value, at the issuance date, of the contractually determined
stream of cash flows discounted at the market interest rate for
instruments of comparable credit status providing substantially
the same cash flows, on the same terms, but without the
conversion option. The equity component is then determined by
deducting the liability component from the proceeds received on
the issue of the notes. After the initial recognition, the
liability component is measured at amortized cost.
As the convertible notes were issued at par with a put option
allowing the investors to redeem the notes at a premium for cash
at 128.575% of the par value on May 21, 2002. The put option is
accounted for as an embedded derivative and separated from the
host contract. This embedded derivative is carried at fair
value, with changes in fair value included in the income
statement.
(m) Provisions
Provisions are recognized when the Company and its subsidiaries
have a present legal or constructive obligation as a result of
past events, it is probable that an outflow of resources will be
required to settle the obligation, and a reliable estimate of
the amount can be made. Where the Company and its subsidiaries
expect a provision to be reimbursed, for example under an
insurance contract, the reimbursement is recognized as a
separate asset but only when the reimbursement is virtually
certain.
(n) Revenue and income recognition
Revenue and income are recognized when it is probable that the
economic benefits associated with the transaction will flow to
the Company and its subsidiaries and the amount of the revenue
and income can be measured reliably.
(i) Operating revenue, net
Net operating revenue represents amounts earned for electricity
generated and transmitted to the respective regional or
provincial grid companies (net of value added tax ("VAT") and
amounts received in advance). Revenue is earned and recognized
upon transmission of electricity to the power grid controlled
and owned by the respective grid companies.
(ii) Interest income
Interest income from deposits in banks or other financial
institutions is recognized on a time proportion basis that
reflects the effective yield on the deposits.
(iii) Management service income
As mentioned in Note 5, the Company provides management services
to certain power plants owned by Huaneng Group and HIPDC. The
Company recognizes the service income as other income when
service is provided in accordance with the management service
agreement.
F-13
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. ACCOUNTING POLICIES (CONT'D)
(o) Borrowing costs
Borrowing costs generally are expensed as incurred. Borrowing
costs are capitalized as part of the cost of property, plant and
equipment, if they are directly attributable to the acquisition,
construction or production of a qualifying asset. Capitalization
of borrowing costs commences when the activities to prepare the
asset are in progress and expenditures and borrowing costs are
being incurred. Borrowing costs are capitalized until the assets
are substantially ready for their intended use. Borrowing costs
include interest charges and other costs incurred in connection
with the borrowing of funds, including exchange differences
arising from foreign currency borrowings used to finance these
projects to the extent that they are regarded as an adjustment
to interest costs.
(p) Operating leases
Leases where a significant portion of the risks and rewards of
ownership are retained by the lessor are classified as operating
leases. Payments made under operating leases (net of any
incentives received from the lessor) are charged to the income
statement on a straight-line basis over the periods of the
leases.
(q) Taxation
(i) VAT
Under the relevant PRC tax laws, the Company and its
subsidiaries are subject to VAT. The Company and its
subsidiaries are subject to output VAT levied at 17% of the
Company's and its subsidiaries' operating revenue. The input VAT
can be used to offset the output VAT levied on operating revenue
to determine the net VAT payable. Because VAT is a tax on the
customer and the Company and its subsidiaries collect such tax
from the customers and pay such tax to the suppliers on behalf
of the tax authority, the VAT has not been included in operating
revenues or operating expenses.
(ii) Income tax
In accordance with the practice notes on the PRC income tax laws
applicable to foreign investment enterprises investing in energy
and transportation infrastructure businesses, the reduced income
tax rate of 15% (after the approval of State Tax Bureau) is
applicable across the country.
All the power plants (except for Huaneng Dezhou Power Plant (the
"Dezhou Power Plant"), Huaneng Jining Power Plant (the "Jining
Power Plant"), Huaneng Changxing Power Plant (the "Changxing
Power Plant"), Huaneng Shanghai Shidongkou I Power Plant (the
"Shidongkou I Power Plant"), Huaneng Xindian Power Plant (the
"Xindian Power Plant"), Huaneng Weihai Power Limited Liability
Company (the "Weihai Power Company"), Suzhou Industrial Park
Huaneng Power Limited Liability Company (the "Taicang Power
Company"), Jiangsu Huaneng Huaiyin Power Limited Company ("the
Huaiyin Power Company"), Shanxi Huaneng Yushe Power Limited
Liability Company (the "Yushe Power company"), Henan Huaneng
Qinbei Power Limited Company (the "Qinbei Power Company") and
Huaneng Hunan Yueyang Power Generation Limited Liability Company
(the "Yueyang Power Company") are exempted from income tax for
two years starting from the first profit-making year, after
offsetting all tax losses carried forward from the previous
years (at most five years), followed by a 50% reduction of the
applicable tax rate for the next three years ("tax holiday").
F-14
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. ACCOUNTING POLICIES (CONT'D)
(q) Taxation (Cont'd)
(ii) Income tax (Cont'd)
The tax holiday of Huaneng Dalian Power Plant ( the "Dalian
Power Plant"), Huaneng Dalian Power Plant Phase II ("the Dalian
phase II"), Huaneng Shang'an Power Plant (the "Shang'an power
plant"), Huaneng Nantong Power Plant (the "Nantong Power
Plant"), Huaneng Fuzhou Power Plant (the "Fuzhou Power Plant"),
Huaneng Shantou Oil-Fired Power Plant (the "Shantou Oil-Fired
Power Plant"), Huaneng Shanghai Shidongkou Second Power Plant
(the "Shidongkou II Power Plant"), Huaneng Nanjing Power Plant
(the "Nanjing Power Plant") and Huaneng Shang'an Power Plant
Phase II (the "Shang'an Phase II") had already expired prior to
2004. The tax holiday of Huaneng Nantong Power Plant Phase II
(the "Nantong Phase II") and Huaneng Fuzhou Power Plant Phase II
(the "Fuzhou Phase II") expired in 2004, the tax holiday of the
Huaneng Shantou Coal-Fired Power Plant ("the Shantou Power
Plant") will expire in 2005, the tax holiday of Huaneng
Chongqing Luohuang Power Generation Limited Liability Company
(the "Luohuang Power Company") will expire in 2007 and the tax
holiday of Huaneng Jinggangshan Power Plant (the "Jinggangshan
Power Plant") will expire in 2008.
The statutory income tax is assessed on an individual power
plant basis, based on each of their results of operations. The
commencement dates of the tax holiday period of each power plant
are individually determined. The statutory income tax rates
applicable to the head office, Shandong branch and the operating
power plants, after taking the effect of tax holidays into
consideration, are summarized below:
F-15
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. ACCOUNTING POLICIES (CONT'D)
(q) Taxation (Cont'd)
(ii) Income tax (Cont'd)
2004 2003 2002
--------------- --------------- ------------
Head Office 15.0% 15.0% 15.0%
Dalian Power Plant 18.0% 18.0% 18.0%
Dalian Phase II 1 15.0% 7.5% 7.5%
Shang'an Power Plant 18.0% 18.0% 18.0%
Shang'an Phase II 18.0% 9.0% 9.0%
Nantong Power Plant 15.0% 15.0% 15.0%
Nantong Phase II 2 7.5% 7.5% 7.5%
Fuzhou Power Plant 15.0% 15.0% 15.0%
Fuzhou Phase II 3 7.5% 7.5% 7.5%
Shantou Oil-Fired Plant 15.0% 15.0% 15.0%
Shantou Power Plant 4 10.0% 10.0% 7.5%
Shidongkou II Power Plant 16.5% 16.5% 16.5%
Huaneng Dandong Power Plant (the
"Dandong Power Plant") 5 - - -
Nanjing Power Plant 6 10.0% 10.0% 15.0%
Shandong Branch 17.0% 17.0% 17.0%
Dezhou Power Plant 17.0% 17.0% 17.0%
Jining Power Plant 15.0% 15.0% 15.0%
Changxing Power Plant 16.5% 16.5% 16.5%
Shidongkou I Power Plant 18.0% 18.0% 33.0%
Xindian Power Plant 7, 10 15.0% 18.0% N/A
Huaneng Yingkou Power Plant (the
"Yingkou Power Plant") 5, 10 - N/A N/A
Jinggangshan Power Plant 8, 10 - N/A N/A
Weihai Power Company 33.0% 33.0% 33.0%
Taicang Power Company 33.0% 33.0% 33.0%
Huaiyin Power Company 33.0% 33.0% 33.0%
Yushe Power Company10 33.0% 33.0% N/A
Yueyang Power Company 10 33.0% N/A N/A
Luohuang Power Company 9, 10 - N/A N/A
Qinbei Power Company 10, 11 - N/A N/A
=============== =============== ============
1 In accordance with Guo Shui Zhi Shui Han [2004] No. 12, the
tax holiday of Dalian Phase II is determined separately from
the Dalian Power Plant. The Dalian Phase II is entitled to a
50% reduction of the applicable tax rate from January 1,
2001 to December 31, 2003 and an exemption of local income
tax of 3% from January 1, 1999 to December 31, 2008.
2 In accordance with Su Guo Shui Han [2003] No. 248 and Tong
Guo Shui Wai Zi [2003] No.1, the tax holiday of the Nantong
Phase II is determined separately from the Nantong Power
Plant. The Nantong Phase II is entitled to a 50% reduction
of the applicable tax rate from January 1, 2002 to December
31, 2004.
3 In accordance with Min Guo Shui Han [2003] No. 37, the tax
holiday of the Fuzhou Phase II is determined separately
from the Fuzhou Power Plant. The Fuzhou Phase II is
entitled to a 50% reduction of the applicable tax rate from
January 1, 2002 to December 31, 2004.
F-16
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. ACCOUNTING POLICIES (CONT'D)
(q) Taxation (Cont'd)
(ii) Income tax (Cont'd)
4 In accordance with the approval from Shantou State Tax
Bureau Shewai Branch dated January 16, 2003, the Shantou
Power Plant is qualified as a foreign invested advanced
technology enterprise and is, therefore, entitled to extend
its tax holiday for three years from January 1, 2003 to
December 31, 2005. The applicable tax rate during the
extension is 10%.
5 The tax holidays of Dandong Power Plant and Yingkou Power
Plant have not commenced yet.
6 In accordance with Ning Guo Shui Wai Zi [1997] No.39, the
Nanjing Power Plant qualifies as a foreign invested
advanced technology enterprise and is, therefore, entitled
to extend its tax holiday for three years from January 1,
2002 to December 31, 2004. The applicable tax rate during
the extension is 10%. Nanjing Power Plant is currently
negotiating with the Jiangsu State Tax Bureau for a refund
of the overpaid income tax for the year of 2002 and 2003.
7 The Company acquired all of the assets and liabilities of
the Xindian Power Plant on October 27, 2003 and the Xindian
Power Plant became a branch of the Company. In accordance
with Lin Guo Shui Han [2004] No.123, the Xindian Power
Plant is entitled to preferential tax treatment applicable
to Sino-foreign enterprises investing in energy industry at
a reduced income tax rate of 15%.
8 In accordance with Ji An Shi Guo Shui Zhong Qi Fa [2004]
No. 20, the Jinggangshan Power Plant is entitled to a tax
holiday from July 1, 2004 to December 31, 2008.
9 In according with the approval from Chongqing State Tax
Bureau Shewai Branch, the Luohuang Power Company is
entitled to a tax holiday from January 1, 2003 to December
31, 2007.
10 Not applicable in 2003 and / or 2002 as they were not
branches or subsidiaries of the Company.
11 Not applicable in 2003 as the Qinbei Power Company did not
commence its commercial operations until November, 2004.
F-17
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. ACCOUNTING POLICIES (CONT'D)
(q) Taxation (Cont'd)
(ii) Income tax (Cont'd)
The income tax charge is based on profit for the year and after
considering deferred taxation.
Deferred income tax is provided in full, using the liability
method, on temporary differences arising between the tax bases
of assets and liabilities and their carrying amounts in the
financial statements. Currently enacted tax rates are used in
the determination of deferred income tax. Deferred income tax
assets are recognized to the extent that it is probable that
future taxable profit will be available against which the
temporary differences can be utilized. Deferred income tax is
provided on temporary differences arising on investments in
subsidiaries and associates, except where the timing of the
reversal of the temporary difference can be controlled and it is
probable that the temporary difference will not reverse in the
foreseeable future.
(r) Employee benefits
(i) Pension obligations
The Company and its subsidiaries have various defined
contribution plans in accordance with the local conditions and
practices in the provinces in which they operate.
Under these defined contribution plans, the Company and its
subsidiaries pay contributions to publicly administered pension
insurance plans on a mandatory, contractual or voluntary basis.
Once the contributions have been paid, the Company and its
subsidiaries have no further payment obligations. The regular
contributions constitute net periodic costs for the year in
which they are due and as such are included in staff costs.
(ii) Termination benefits
Termination benefits are payable whenever an employee's
employment is terminated before the normal retirement date or
whenever an employee accepts voluntary redundancy in exchange
for these benefits. The Company and its subsidiaries recognizes
termination benefits when it is demonstrably committed to either
terminate the employment of current employees according to a
detailed formal plan without possibility of withdrawal or to
provide termination benefits as a result of an offer made to
encourage voluntary redundancy which has been accepted. Benefits
falling due more than 12 months after balance sheet date are
discounted to present value.
(s) Related parties
Parties are considered to be related if one party has the
ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making
financial and operating decisions. Parties are also considered
to be related if they are subject to common control or common
significant influence.
F-18
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. ACCOUNTING POLICIES (CONT'D)
(t) Financial instruments
Financial instruments are classified as liabilities or equity in
accordance with the substance of the contractual arrangement.
Interest, dividends, gains and losses relating to a financial
instrument classified as a liability, are reported as expense or
income. Distributions to holders of financial instruments
classified as equity are charged directly to equity. When the
rights and obligations regarding the manner of settlement of
financial instruments depend on the occurrence or non-occurrence
of uncertain future events or on the outcome of uncertain
circumstances that are beyond the control of both the issuer and
the holder, the financial instrument is classified as a
liability unless the possibility of the issuer being required to
settle in cash or another financial asset is remote at the time
of issuance, in which case the instrument is classified as
equity.
Financial instruments are reviewed for impairment at each
balance sheet date. For financial assets carried at amortized
cost, whenever it is probable that the Company and its
subsidiaries will not collect all amounts due according to the
contractual terms of loans, receivables or held-to-maturity
investments, an impairment or bad debt loss is recognized in the
income statement. Reversal of impairment losses previously
recognized is recorded when the decrease in impairment loss can
be objectively related to an event occurring after the
write-down. Such reversal is recorded in income. However, the
increased carrying amount is only recognized to the extent it
does not exceed what amortized cost would have been had the
impairment not been recognized.
(u) Contingencies
Contingent liabilities are not recognized in the financial
statements. They are disclosed unless the possibility of an
outflow of resources embodying economic benefits is remote. A
contingent asset is not recognized in the financial statement
but disclosed when an inflow of economic benefits is probable.
(v) Dividends
Dividends are recorded in the financial statements of the
Company and its subsidiaries in the period in which they are
approved by the shareholders of the Company and its
subsidiaries.
(w) Comparatives
A long-term loan of approximately RMB32 million have been
reclassified from other long-term loan to long-term loan from
shareholders in the consolidated balance sheet to confirm with
the presentation in the current year.
F-19
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
3. ACQUISITIONS
During 2004, 2003 and 2002, the Company acquired a number of power plants
from the Huaneng Group, HIPDC as well as other parties. These
acquisitions have been accounted for under the purchase method of
accounting. These acquisitions became effective when, amongst other
things, the Company obtained minority shareholders' approval, where
applicable, and all necessary government approvals, and has paid the
purchase consideration. The consideration for all of these acquisitions
was in the form of cash.
Details of these acquisitions are shown in the table below:
For the year ended December 31, 2004
------------------------------------------------------------------------------------
Acquisition of subsidiaries and Acquisition of Acquisition of an
subsidiaries and net
net assets assets associate
--------------------------------- --------------------------- ---------------------
40% equity
55% equity interest in the interest in Hebei
Yueyang Power Company, 60% Hanfeng Power
equity interest in the Luohuang Generation Limited
Power Company and all of the All of the assets and Liability Company
assets and liabilities of the liabilities of the (the "Hanfeng Power
Equity interest acquired Yingkou Power Plant* Jinggangshan Power Plant* Company") (Note 11)*
--------------------------------- --------------------------- ---------------------
Original equity holder HIPDC 90% equity interest from Huaneng Group
Huaneng Group and 10%
equity interest from
Jiangxi Province
Investment Company
Effective date of
acquisition July 1, 2004 July 1, 2004 July 1, 2004
Consideration paid RMB2,564 million RMB636 million RMB1,375 million
Direct transaction costs
of acquisitions RMB12 million RMB3 million RMB7 million
Fair value of net assets
acquired RMB2,475 million RMB628 million RMB1,089 million
Goodwill RMB101 million RMB11 million RMB293 million
================================== =========================== =====================
The above acquisitions contributed net operating revenue of approximately
RMB2,573 million and net profit of approximately RMB397 million to the
Company and its subsidiaries for the period from July 1, 2004 to December
31, 2004. If the acquisitions had occurred on January 1, 2004, the
unaudited net operating revenue of the Company and its subsidiaries would
have been approximately RMB33 billion, and unaudited profit before
allocations would have been approximately RMB6 billion.
F-20
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
3. ACQUISITIONS (CONT'D)
For the eyar ended December 31, 2003
--------------------------------------------------------------------
Acquisition of subsidiaries Acquisition of an associate
and net assets
------------------------------ -----------------------------------
Equity interest acquired 55% equity interest in the
Qinbei Power Company, 60%
equity interest in the Yushe 25% equity interest in Shenzhen
Power Company and all of the Energy Group Co., Ltd.s ("SEG")
assets and liabilities of enlarged share capital (Note 11)
the Xindian Power Plant*
------------------------------ -----------------------------------
Original equity holder Huaneng Group Shenzhen Investment Holding
Corporation ("SIH") and SEG
Effective date of acquisition October 27, 2003 April 22, 2003
Consideration paid RMB550 million RMB2,390 million
Direct transaction costs of R MB12 million RMB15 million
acquisitions
Fair value of net assets acquired RMB374 million RMB1,585 million
Goodwill RMB188 million RMB820 million
============================== ===================================
F-21
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
3. ACQUISITIONS (CONT'D)
For the year ended December 31, 2002
--------------------------------------------------------------------------------------
Acquisition of
subsidiaries, an
associate and net
assets Acquisition of additional equity interests in subsidiaries
-------------------- --------------------------------------------------------------
70% equity interest
in the Shidongkou I
Power Plant, 70%
equity interest in
the Taicang Power 30% additional
Company, 44.16% equity interest
equity interest in in the
the Huaiyin Power Shidongkou I
Company and all of Power Plant and 19.48%
the assets and 25% additional additional 5% additional
liabilities of the equity interest equity interest equity interest
Equity interest Changxing Power in the Jinning in the Taicang in the Huaiyin
acquired Plant* Power Plant Power Company Power Company*
-------------------- ---------------- ---------------- ---------------
Shandong
Electricity Jiangsu Huaiyin
Power Group Investment
Original equity holder Huaneng Group Corporation Huaneng Group Company ("JHIC")
Effective date of December 31, December 31,
acquisition July 1, 2002 June 18, 2002 2002 2002
Consideration paid RMB2,050 million RMB109 million RMB415 million RMB185 million
Direct transaction
costs of
acquisitions RMB18 million - RMB4 million -
Fair value of net
assets acquired RMB2,047 million RMB106 million RMB374 million RMB109 million
Goodwill RMB21 million RMB3 million RMB45 million RMB76 million
===================== ================= ================== ==================
Goodwill arising from the acquisitions in 2004, 2003 and 2002 is
attributable to the high profitability of the acquired businesses and the
significant synergies expected to arise after the Company's acquisitions
of the branches, subsidiaries and associated companies stated above.
F-22
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
3. ACQUISITIONS (CONT'D)
* The aggregated assets and liabilities arising from these acquisitions in 2004, 2003 and 2002
were as follows:
2004 2003 2002
---------------------------------------- --------------------- ----------------
Fair value Acquirees'
carrying amounts Fair value Fair value
------------------ ------------------ --------------------- ----------------
Property, plant and
equipment, net 9,392,195 7,691,230 3,085,503 4,923,490
Deferred income tax
assets 81,082 81,082 19,603 -
Long-term investments in
associates (Note 11) 1,400,239 967,244 - -
Other non-current
assets 752,418 219,106 18,667 121,324
Inventories 218,118 218,118 35,608 164,127
Other current assets 114,084 114,084 96,608 54,402
Accounts receivable 1,348,007 1,348,007 88,556 458,103
Cash and cash
equivalents 659,174 659,174 215,585 569,841
Minority interest (1,336,936) (655,869) (121,575) (829,320)
Long-term loans, unsecured (4,700,696) (4,700,696) (1,706,104) (2,039,735)
Due to HIPDC (1,224,554) (1,224,554) - -
Due to Huaneng
Group - - (13,968) -
Deferred income tax
liabilities (478,189) (67,826) - (109,568)
Other current
liabilities (1,739,219) (1,739,219) (1,344,842) (1,156,534)
------------------ ------------------ --------------------- ----------------
Net assets acquired 4,485,723 2,909,881 373,641 2,156,130
==================
Add: Goodwill 111,710 188,139 97,280
Less: Direct transaction
costs of acquisitions (22,433) (11,780) (18,410)
------------------ --------------------- ----------------
Total consideration
paid 4,575,000 550,000 2,235,000
Add: Direct transaction
costs of acquisitions 22,433 2,528 17,042
Less: Cash inflow from
the acquired power
plants (659,174) (215,585) (569,841)
------------------ --------------------- ----------------
Net cash outflow for the
acquisitions 3,938,259 336,943 1,682,201
================== ===================== ================
F-23
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
4. FINANCIAL RISK MANAGEMENT
(1) Financial risk factors
The Company and its subsidiaries' activities expose them to a variety
of financial risks including the effects of changes in debt and
equity market price, foreign currency exchange rates and interest
rates. The Company and its subsidiaries' overall risk management
program focuses on the unpredictability of financial markets and
seeks to minimize potential adverse effects on the financial
performance of the Company and its subsidiaries. The Company and its
subsidiaries use derivative financial instruments such as interest
rate swaps to hedge certain risk exposures.
(a) Interest rate risk
The Company's floating rate bank loans expose the Company to
interest rate risk. The Company uses derivative instruments when
considered appropriate, to manage exposures arising from changes
in interest rates by entering into interest rate swap agreements
with PRC banks to convert certain floating rate bank loans into
fixed rate debts of the same principal amounts and for the same
maturities to hedge against cash flow interest rate risk.
The interest rates and terms of repayment of shareholder loans,
bank loans, and other loans are disclosed in Notes 23, 24, 25
and 28.
(b) Foreign currency risk
The Company and its subsidiaries have foreign currency risk as a
significant portion of its long-term loans from shareholders,
long-term bank loans and other long-term loans are denominated
in foreign currencies, principally US dollar ("US$") and Euro,
as described in Notes 23, 24(b), 24(c) and 25. When considered
appropriate, the Company and its subsidiaries manage exposures
arising from changes in exchange rate of Euro by entering into
currency swap agreements. Fluctuation of exchange rates of RMB
against foreign currencies could affect the Company and its
subsidiaries' results of operation.
(c) Credit risk
Significant portion of the Company and its subsidiaries' cash
and cash equivalents and temporary cash investment maturing over
3 months are deposited with the four largest state-owned banks
of the PRC and a non-bank financial institution in the PRC,
which is a related party of the Company.
Each power plant of the Company and its subsidiaries sells the
electricity generated to its sole customer (the provincial or
regional grid companies) in the province or region where the
power plant is situated.
F-24
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
4. FINANCIAL RISK MANAGEMENT (CONT'D)
(2) Fair value estimation
The fair value of publicly traded derivatives and trading and
available-for-sale securities is based on quoted market prices at the
balance sheet date.
In assessing the fair value of non-traded derivatives and other
financial instruments, the Company and its subsidiaries use a variety
of methods and make assumption that are based on market conditions
existing at each balance sheet date. Quoted market prices or dealer
quotes for similar instruments are used for long-term debts. Other
techniques, such as estimated discounted cash flows, are used to
determine fair values for the remaining financial instruments.
The face values less any estimated credit adjustments for financial
assets and liabilities with a maturity of less than one year are
assumed to approximate their fair values. The fair value of financial
liabilities for disclosure purposes is estimated by discounting the
future contractual cash flows at the current market interest rate
available to the Company and its subsidiaries for similar financial
instruments.
5. OTHER INCOME, NET
Pursuant to a management service agreement entered into with Huaneng
Group and HIPDC, the Company has provided management services to
certain power plants owned by Huaneng Group and HIPDC in return for a
service fee. Net other income represented the management service fee
income net of relevant expenses.
F-25
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
6. PROFIT BEFORE TAX
Profit before tax was determined after charging and (crediting) the
following:
2004 2003 2002
--------------- ------------- ------------
Interest expenses on long-term bank loans, unsecured:
- wholly repayable within 5 years 370,461 104,012 155,987
- not wholly repayable within 5 years 521,654 422,809 415,181
Interest expenses on long-term loans from shareholders, unsecured:
- wholly repayable within 5 years 16,551 22,053 29,622
- not wholly repayable within 5 years 36,586 - -
Interest expenses on other long-term loans, unsecured:
- wholly repayable within 5 years 37,083 57,493 29,619
- not wholly repayable within 5 years 12,692 - -
Interest expenses on convertible notes 26 3,248 47,904
--------------- ------------- ------------
995,053 609,615 678,313
Less: Amount capitalized in property, plant and equipment (331,629) (40,467) (116,438)
--------------- ------------- ------------
Total interest expenses 663,424 569,148 561,875
Interest income (43,092) (53,044) (83,015)
Bank charges and exchange losses, net 119,452 28,181 31,405
Change in fair value on financial instruments:
- Gains of interest rate swaps (925) (11,771) (2,179)
Auditors' remuneration 17,239 19,359 10,750
(Gain) / Loss on disposals of property, plant and equipment, net (29,176) 138,726 31,980
Loss / (Gain) from disposals of investment 1,988 (10,705) (1,288)
Operating leases:
- Buildings 30,067 25,985 27,566
- Land use rights 40,272 44,100 42,293
Depreciation of property, plant and equipment 4,706,992 4,117,478 3,533,609
Amortization of prepaid land use rights 28,074 19,136 16,847
Amortization of other non-current assets 39,731 41,566 24,112
Amortization of goodwill 42,002 25,170 1,150
Amortization of negative goodwill (247,279) (247,278) (247,278)
Cost of inventories 15,302,929 9,222,583 7,100,336
(Reversal of) / Provision for doubtful accounts (10,654) 12,567 15,826
Provision for / (Reversal of) inventory obsolescence 1,521 (751) (945)
Staff costs:
- Wages and staff welfare 1,249,836 1,020,444 698,862
- Retirement benefits (Note 8) 299,120 235,950 142,734
- Termination benefits 18,546 - -
- Staff housing benefits (Note 31) 100,751 72,163 78,612
- Other staff costs 209,011 111,116 115,532
=============== ============= ============
F-26
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
7. RELATED PARTY TRANSACTIONS
The related parties of the Company and its subsidiaries include:
Name of related parties Nature of relationship
---------------------------------------------------- -------------------------------------------------
Huaneng Group Ultimate parent
HIPDC Parent
China Huaneng Finance Company ("Huaneng Finance") A subsidiary of Huaneng Group
Weihai Power Development Bureau ("WPDB") Minority shareholder of the Weihai Power
Company
Chongqing Construction and Investment Limited Minority shareholder of the Luohuang Power
Liability Company ("CCI") Company
Henan Construction Investment Company ("Henan Minority shareholder of the Qinbei Power
Investment") Company
Jiangsu Electric Power Development Co., Ltd. Minority shareholder of the Huaiyin Power
("JEPDC") Company
China Huaneng International Trade Economics A subsidiary of Huaneng Group
Corporation ("CHITEC")
Shanghai Time Shipping Company Ltd. ("Time A joint venture of Huaneng Group
Shipping")
Shandong Rizhao Power Company Ltd. (the "Rizhao An associate of the Company
Power Company")
Chongqing Huaneng Shifen Company Limited (the An associate of the Luohuang Power Company
"Shifen Company ")
Jiyuan Construction & Investment Company (the Minority shareholder of the Qinbei Power
"Jiyuan Investment") Company
Shanxi International Power (Group) Company Limited Minority shareholder of the Yushe Power
(the "Shanxi International") Company
Hebei Huaneng Jingyuan Coal Company Limited (the A subsidiary of Huaneng Group
"Huaneng Jingyuan")
a. Pursuant to the relevant service agreements entered into between the
Company and HIPDC on June 30, 1994, HIPDC provides transmission
services and transformer facilities to some of the power plants of
the Company and receives service fees. The agreements cover a period
of 10 years. The total amount of service fees paid to HIPDC for the
year ended December 31, 2004 was approximately RMB134 million (2003:
approximately RMB215 million; 2002: approximately RMB264 million) and
was included in operating expenses.
F-27
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
7. RELATED PARTY TRANSACTIONS (CONT'D)
b. Pursuant to a leasing agreement entered into amongst the Company,
HIPDC and Nanjing Investment Company, the land use rights of the
Nanjing Power Plant is leased to the Company for 50 years with an
annual rental payment of approximately RMB1.3 million, starting from
January 1, 1999.
c. As of December 31, 2004, current deposits of approximately RMB1,363
million (2003: approximately RMB2,792 million) were placed with a
non-bank PRC financial institution, Huaneng Finance.
As of December 31, 2004, the interest rate per annum of the current
deposits placed with Huaneng Finance ranged from 0.72% to 1.44% (2003:
0.72% to 1.44%; 2002: current deposits: 0.72% to 1.44%; fixed
deposits: 1.71%) per annum. The interest earned from these deposits
amounted to approximately RMB9 million in 2004 (2003: approximately
RMB14 million; 2002: approximately RMB52 million).
d. Pursuant to the leasing agreement between the Company and HIPDC, HIPDC
agreed to lease its office building to the Company for 5 years at an
annual rental of RMB25 million effective from January 1, 2000.
e. As described in Notes 23 and 25, certain loans of the Company and its
subsidiaries were borrowed from Huaneng Group, CCI, WPDB and JEPDC.
f. As of December 31, 2004, short-term loans amounting to approximately
RMB3,694 million (2003: approximately RMB1,130 million) were borrowed
from Huaneng Finance, which bore interest at 4.54% to 5.02% (2003:
4.78% to 5.05%; 2002: 5.56%) per annum.
g. As of December 31, 2004 and 2003, the balances with HIPDC and other
related parties are unsecured, non-interest bearing and receivable or
repayable within one year.
h. As of December 31, 2004, long-term bank loans of approximately
RMB3,937 million, RMB3,798 million, RMB100 million, RMB200 million,
RMB545 million and RMB125 million (2003: approximately RMB4,648
million, RMB1,096 million, RMB280 million, RMB34 million, nil and nil)
were guaranteed by HIPDC, Huaneng Group, WPDB, Henan Investment, the
Shanxi International and the Jiyuan Investment, respectively.
i. As of December 31, 2004, the Company had provided guarantees on
certain long-term bank loans of the Rizhao Power Company totaling
approximately RMB305 million (2003: approximately RMB339 million).
j. During the years ended December 31, 2004 and 2003, the Company entered
into several agreements with Huaneng Group and HIPDC to acquire equity
interests or net assets of certain power plants (see Note 3).
k. On November 6, 2002, the Company entered into a management service
agreement with Huaneng Group and HIPDC. Pursuant to which, the Company
provides management services to certain power plants owned by Huaneng
Group and HIPDC for 5 years. For the year ended December 31, 2004, the
service fee earned from Huaneng Group and HIPDC amounted to
approximately RMB46 million and RMB12 million (2003: approximately
RMB33 million and RMB17 million; 2002: nil and nil), respectively. The
Company incurred total costs of services of approximately RMB39
million (2003: approximately RMB38 million; 2002: nil), and recorded
the management service fee, net of relevant expenses, as other income.
F-28
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
7. RELATED PARTY TRANSACTIONS (CONT'D)
l. For the year ended December 31, 2004, the Company and its subsidiaries
paid approximately RMB215 million for coal purchased from CHITEC
(2003: approximately RMB145 million; 2002: nil).
m. For the year ended December 31, 2004, the Company and its subsidiaries
paid approximately RMB563 million for the fuel purchased and
transportation services received from Time Shipping (2003:
approximately RMB457 million; 2002: approximately RMB301 million).
n. For the year ended December 31, 2004, the Company and its subsidiaries
paid approximately RMB26 million for lime purchased from the Shifen
Company (2003 and 2002: N/A).
o. For the year ended December 31, 2004, the Company and its subsidiaries
paid approximately RMB16 million for coal purchased from Huaneng
Jingyuan (2003 and 2002: nil).
p. As of December 31, 2004, HIPDC had provided guarantees on the equity
portion of certain accounts receivable balances of the Company and its
subsidiaries totaling approximately RMB360 million (2003: nil) (see
Note 18).
8. RETIREMENT PLAN AND POST-RETIREMENT BENEFITS
All PRC employees of the Company and its subsidiaries are entitled to a
monthly pension on their retirement dates. The PRC government is
responsible for the pension liability to these employees on retirement.
The Company and its subsidiaries are required to make contributions to
the state-sponsored retirement plan at a specified rate, currently set at
18% to 20%, of the basic salary of the PRC employees. The retirement plan
contributions paid by the Company and its subsidiaries for the year ended
December 31, 2004 were approximately RMB167 million (2003: approximately
RMB132 million; 2002: approximately RMB89 million).
In addition, the Company and its subsidiaries have implemented a
supplementary defined contribution retirement scheme. Under this scheme,
the employees are required to make a specified contribution based on the
number of years of service with the Company and its subsidiaries, and the
Company and its subsidiaries are required to make a contribution equal to
two to three times the employees' contributions. The employees will
receive the total contributions upon their retirement. The contributions
paid by the Company and its subsidiaries for the year ended December 31,
2004 totaled approximately RMB132 million (2003: approximately RMB111
million; 2002: approximately RMB80 million).
The Company and its subsidiaries have no further obligation for
post-retirement benefits beyond the above annual contributions made.
F-29
>
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
9. DIRECTORS', SENIOR MANAGEMENTS' AND SUPERVISORS' EMOLUMENTS
(a) Directors' and supervisors' emoluments
The aggregate amounts of emoluments payable to directors and
supervisors of the Company during the year are as follows:
2004 2003 2002
--------------- ------------------ -------------
Fees for directors - - -
Fees for independent non-executive directors 300 - -
Fees for supervisors - - -
Other emoluments for directors
Basic salaries and allowances 674 1,452 1,563
Discretionary bonuses 889 264 1,027
Contributions to pension schemes for
directors (and past directors):
- as directors - - -
- for other offices - 42 263
Other emoluments for independent non-executive
directors:
Basic salaries and allowances - - -
Discretionary bonuses - - -
Contributions to pension schemes for directors
(and past directors):
- as directors - - -
- for other offices - - -
Other emoluments for supervisors
Basic salaries and allowances 223 850 576
Discretionary bonuses 277 - -
Contributions to pension schemes for supervisors
(and past supervisors):
- as supervisors - - -
- for other offices - - -
--------------- ------------------ -------------
2,363 2,608 3,429
=============== ================== =============
During the year, no option was granted to the directors or the
supervisors (2003 and 2002: nil).
During the year, no emolument was paid to the directors or the
supervisors (including the five highest paid employees) as an
inducement to join or upon joining the Company or as compensation for
loss of office (2003 and 2002: nil).
The annual emoluments paid during the years 2002, 2003 and 2004 to
each of the directors and the supervisors fell within the range of nil
to RMB1 million.
No director or supervisors had waived or agreed to waive any
emoluments during the years 2002, 2003 and 2004.
F-30
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
9. DIRECTORS', SENIOR MANAGEMENTS' AND SUPERVISORS' EMOLUMENTS (CONT'D)
(b) Five highest paid individuals
For the year ended December 31, 2004, two of the five individuals,
whose emoluments were the highest in the Company and its
subsidiaries, were directors (2003: none of the five individuals,
whose emoluments were the highest in the Company and its
subsidiaries, were directors or supervisors; 2002: all of the five
individuals were directors). The emoluments payable to the five
highest paid individuals during the year are as follows:
2004 2003 2002
---------------- --------------- -------------
Basic salaries and allowances 1,455 516 477
Discretionary bonuses 1,977 1,835 1,034
Contributions to pension schemes 372 192 282
---------------- --------------- -------------
3,804 2,543 1,793
================ =============== =============
The annual emoluments paid during the years 2002, 2003 and 2004 to
each of the five highest paid individuals fell within the range of
nil to RMB1 million.
10. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net comprised:
2004 2003
---------------------------------------------------------------------------- ------------
Electric
Utility
Plant in Transportation Construction
Buildings Service Facilities Others -in-progress Total Total
----------- -------------- ----------- ------------ ----------- ------------
Cost
Beginning of year 1,356,782 55,015,630 604,068 1,294,891 4,190,164 62,461,535 57,052,734
Reclassifications (18,668) 209,690 (205,053) 14,031 - - -
Acquisition (Note 3) 259,253 8,372,033 444 217,547 542,918 9,392,195 3,085,503
Additions 10,726 20,291 2,840 66,318 10,352,279 10,452,454 2,733,279
Transfer from CIP 435,766 5,537,895 12,755 72,371 (6,058,787) - -
Disposals (788) (88,145) (1,800) (14,029) - (104,762) (409,981)
------------ ----------- -------------- ----------- ------------ ----------- ------------
End of year 2,043,071 69,067,394 413,254 1,651,129 9,026,574 82,201,422 62,461,535
------------ ----------- -------------- ----------- ------------ ----------- ------------
Accumulated Depreciation
Beginning of year 332,300 18,776,233 145,094 549,543 - 19,803,170 15,949,266
Reclassifications (5,566) 72,770 (62,903) (4,301) - - -
Charge for the year 75,004 4,421,906 30,469 187,145 - 4,714,524 4,117,478
Disposals (171) (85,073) (1,787) (9,651) - (96,682) (263,574)
------------ ----------- -------------- ----------- ------------ ----------- ------------
End of year 401,567 23,185,836 110,873 722,736 - 24,421,012 19,803,170
------------ ----------- -------------- ----------- ------------ ----------- ------------
Net Book Value
End of year 1,641,504 45,881,558 302,381 928,393 9,026,574 57,780,410 42,658,365
============ =========== ============== =========== ============ =========== ============
Beginning of year 1,024,482 36,239,397 458,974 745,348 4,190,164 42,658,365 41,103,468
============ =========== ============== =========== ============ =========== ============
Borrowing costs capitalized to CIP for the year ended December 31,
2004 amounted to approximately RMB332 million (2003: approximately
RMB40 million; 2002: approximately RMB116 million). An average
capitalization rate of 4.38% (2003: 5.06%; 2002: 5.25%) per annum was
used, representing the average borrowing cost of the loans used to
finance the project.
There was no write-down of any property, plant and equipment during
the year (2003 and 2002: nil).
F-31
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
11. INVESTMENTS IN ASSOCIATES
2004 2003
---------------- -----------------
Beginning of year 2,766,031 200,960
Acquisition of 25% equity interest of SEG (Note 3) - 2,404,562
Acquisition of 40% equity interest of the Hanfeng Power
Company (Note 3) 1,382,210 -
Acquisition of 25% equity interest of the Shifen Company
(Note 3) 18,029 -
Share of profit before tax 377,565 212,091
Share of income tax expense (Note 32) (65,528) (51,582)
Share of dividends (150,000) -
---------------- -----------------
End of year 4,328,307 2,766,031
================ =================
The share of profit before tax included the amortization charge of
goodwill of approximately RMB82 million (2003: approximately RMB55
million; 2002: nil) in respect of the acquisition of an associate.
Investment in associates at December 31, 2004 included goodwill with a
carrying amount of approximately RMB976 million (2003: approximately
RMB765 million).
As at December 31, 2004, details of the Company's investment in
associates are as follows:
Percentage of Registered and
Country and date of equity fully Principal
Name incorporation interest held paid capital activities
---------------------- ------------------------ ----------------------- ------------------- ----------------
Direct Indirect
----------- ----------
Rizhao Power Company PRC 25.5% - US$150,000,000 Power
March 20, 1996 generation
SEG PRC 25% - RMB955,555,556 Power
July 16, 1997 generation
Hanfeng Power Company PRC 40% - RMB1,975,000,000 Power
October 28,1996 generation
Shifen Company PRC - 25% RMB50,000,000 Lime
November 5, 1996 production and
sale
There were no changes in the interests held in the Rizhao Power Company
and SEG in 2004. The Company acquired 40% equity interest of the Hanfeng
Power Company in 2004 and an indirect interest of 25% of the Shifen
Company through the acquisition of the 60% equity interest in the
Luohuang Power Company in the current year (see Note 3).
F-32
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
12. INVESTMENTS IN SUBSIDIARIES
As of December 31, 2004, the Company had equity interests in the
following subsidiaries:
Name of subsidiaries Country, date of Percentage of Registered
incorporation and type of equity interest and fully Principal
legal entity held paid capital Activities
----------------------------- ------------------------------------------------- -------------------------------------
Direct Indirect
---------- ---------
Weihai Power Company PRC 60% - RMB761,838,300 Power
November 22, 1993 Limited generation
liability company
Taicang Power Company PRC 75% - RMB632,840,000 Power
June 19, 1997 generation
Limited liability company
Huaneng Taicang Power Co., PRC 75% - Registered capital of Power
Ltd. (the "Taicang II June 18, 2004 RMB894,410,000 generation
Power Company") Limited liability company with total paid-in
capital of
RMB447,210,000
Huaiyin Power Company PRC 63.64% - RMB265,000,000 Power
January 26, 1995 generation
Limited liability company
Jiangsu Huaneng Huaiyin II PRC 63.64% - RMB474,000,000 Power
Power Limited Company June 22, 2004 generation
(the "Huaiyin II Power Limited liability company
Company")
Qinbei Power Company PRC 55% - RMB10,000,000 Power
July 12, 1995 generation
Limited liability company
Yushe Power Company PRC 60% - RMB80,000,000 Power
November 29, 1994 generation
Limited liability company
Shanxi Huaneng Yushe PRC - 95% RMB3,000,000 Logistic
Yuanheng Power Industry September 17, 2002 services
Limited Liability Company Limited liability company
Shandong Huaneng Xindian PRC 95% - RMB100,000,000 Power
Power Co., Ltd. (the March 14, 2004 generation
"Xindian II Power Limited liability company
Company")
Yueyang Power Company PRC 55% - RMB560,000,000 Power
December 16, 2003 generation
Limited liability company
Luohuang Power Company PRC 60% - RMB900,000,000 Power
December 16, 2003 generation
Limited liability company
F-33
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
12. INVESTMENTS IN SUBSIDIARIES (CONT'D)
Summarized financial information of the Yueyang Power Company and the
Luohuang Power Company acquired in 2004 (2003: the Qinbei Power Company and
the Yushe Power Company; 2002: the Taicang Power Company and the Huaiyin
Power Company) is as follows:
As of December 31,
---------------------------------------------------------------------
2004 2003 2002
------------------------ --------------------- --------------------
Balance sheet
Current assets 2,087,010 323,032 576,600
Non-current assets 6,715,295 2,739,414 2,993,917
------------------------ --------------------- --------------------
Total assets 8,802,305 3,062,446 3,570,517
======================== ===================== ====================
Current liabilities 2,074,894 1,073,960 462,326
Non-current liabilities 3,062,157 1,641,484 1,497,529
------------------------ --------------------- --------------------
Total liabilities 5,137,051 2,715,444 1,959,855
======================== ===================== ====================
For the period from the effective date of the acquisition to
December 31,
---------------------------------------------------------------------
2004 2003 2002
------------------------ -------------------- --------------------
Income statement
Revenue 1,463,127 57,348 1,559,287
Expenses (1,280,712) (54,282) (1,334,383)
------------------------ -------------------- --------------------
Net profit 182,415 3,066 224,904
======================== ==================== ====================
13. AVAILABLE-FOR-SALE INVESTMENT
Available-for sale investment represents a 3% equity interest (unlisted) in
a power generation company China Yangtze Power Co., Ltd. ("Yangtze Power")
in the PRC.
There was no disposal of available-for-sale investment in 2004 and 2003.
14. LAND USE RIGHTS
Details of the prepaid land use rights are as follows:
2004 2003
--------------------- --------------------
Outside Hong Kong, held on:
Leases of over 50 years 10,539 3,022
Leases of between 10 to 50 years 1,535,487 828,004
--------------------- --------------------
1,546,026 831,026
===================== ====================
F-34
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
15. GOODWILL AND NEGATIVE GOODWILL
Goodwill and negative goodwill arose from acquisitions. The movements in
the carrying amount of goodwill and negative goodwill during the year are
as follows:
Goodwill Negative Total
goodwill
--------------------------------------- ----------------
Year ended December 31, 2003:
Beginning of year 126,560 (1,978,227) (1,851,667)
Addition from acquisitions (Note 3) 197,486 - 197,486
Amortization for the year (25,170) 247,278 222,108
------------------ ------------------- -----------------
End of year 298,876 (1,730,949) (1,432,073)
================== =================== =================
As of December 31, 2003
Cost 325,196 (2,472,784) (2,147,588)
Accumulated amortization (26,320) 741,835 715,515
------------------ ------------------- -----------------
Net book value 298,876 (1,730,949) (1,432,073)
================== =================== =================
Year ended December 31, 2004:
Beginning of year 298,876 (1,730,949) (1,432,073)
Addition from acquisitions (Note 3) 111,710 - 111,710
Adjustment 8,142 - 8,142
Amortization for the year (42,002) 247,279 205,277
------------------ ------------------- -----------------
End of year 376,726 (1,483,670) (1,106,944)
================== =================== =================
As of December 31, 2004
Cost 445,048 (2,472,784) (2,027,736)
Accumulated amortization (68,322) 989,114 920,792
------------------ --------------------------------------
Net book value 376,726 (1,483,670) (1,106,944)
================== ======================================
F-35
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
15. GOODWILL AND NEGATIVE GOODWILL (CONT'D)
Goodwill is allocated to the Company and its subsidiaries' CGUs identified
according to their operations in different provinces.
The carrying amounts of significant portion of goodwill allocated to CGUs
are as follows:
2004
-----------
Yueyang Power Company 100,907
Hanfeng Power Company* 293,070
-----------
393,977
===========
*The goodwill on acquisition of the Hanfeng Power Company is included
in investments in associates (see Note 11). In respect of the amount of
goodwill from acquisitions made on or after March 31, 2004, the Company
and its subsidiaries have undertaken an impairment review and have
determined that no provision for impairment is required as of December
31, 2004.
The recoverable amount of a CGU is determined based on value-in-use
calculations. These calculations use cash flow projections based on
financial budgets approved by management covering a three-year period.
The Company expects cash flows beyond the three-year period will be
similar to that of the third year based on existing production capacity.
The pre-tax discount rates applied to the cash flow projections of the
Yueyang Power Company and the Hanfeng Power Company were 12% and 11%
respectively. Such discount rates used reflect specific risks relating
to the power plants. Other key assumptions used are based on past
performance and the Company's expectations for the market development.
16. INVENTORIES, NET
Inventories comprised:
2004 2003
------------------- --------------------
Fuel (coal and oil) for power generation 732,834 308,861
Material and other supplies 715,250
505,041
------------------- --------------------
1,448,084 813,902
Less: Provision for inventory obsolescence (16,680) (13,621)
------------------- --------------------
1,431,404 800,281
=================== ====================
As of December 31, 2004, approximately RMB556 million of the total carrying
amount of inventories were carried at net realizable value (2003:
approximately RMB406 million).
Movements of provision for inventory obsolescence during the year are
analyzed as follows:
2004 2003
-------------------------- ---------------------------
Beginning of year (13,621) (12,239)
Addition from acquisitions (12,329) (2,133)
Provision (1,712) (129)
Write-offs 10,791 -
Reversal 191 880
-------------------------- ---------------------------
End of year (16,680) (13,621)
========================== ===========================
During the year, the Company and its subsidiaries reversed part of the
previous inventory write-downs as the Company has utilized such
inventories in the current year. The amount reversed has been included in
operating expenses in the income statement.
F-36
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
17. OTHER RECEIVABLES AND ASSETS, NET
Other receivables and assets comprised:
2004 2003
---------------------- -----------------------
Prepayments for inventories 328,181 76,543
Prepayments for contractors 168,616 42,282
Interest receivable on temporary cash investments 1,982 3,291
Others 273,645 191,190
---------------------- -----------------------
772,424 313,306
Less: Provision for doubtful accounts (49,108) (53,885)
---------------------- -----------------------
723,316 259,421
====================== =======================
Movements in the provision for doubtful accounts during the year are
analyzed as follows:
2004 2003
------------------- ---------------------
Beginning of year (53,885) (21,444)
Additions from acquisitions (15,086) (19,874)
Provision (2,405) (12,567)
Write-offs 9,209 -
Reversal 13,059 -
------------------- ---------------------
End of year (49,108) (53,885)
=================== =====================
F-37
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
18. ACCOUNTS RECEIVABLE
Accounts receivable comprised:
2004 2003
----------------------------- ----------------------------
Accounts receivable 3,730,431 2,356,826
Notes receivable 1,242,672 447,200
----------------------------- ----------------------------
4,973,103 2,804,026
============================= ============================
The Company and its subsidiaries usually grant about one month's credit
period to local power grid customers from the end of the month in which the
sales are made.
As of December 31, 2004, the aging analysis of accounts receivable was as
follows:
2004 2003
------------------------------ ----------------------------
Within 1 year 4,510,368 2,800,330
Between 1 to 2 years 96,808 -
Between 2 to 3 years - 3,696
Over 3 years 365,927 -
------------------------------ ----------------------------
4,973,103 2,804,026
============================== ============================
As of December 31, 2004, HIPDC had provided guarantees on the equity
portion of certain accounts receivable balances of the Company and its
subsidiaries of approximately RMB360 million. These receivable balances
were acquired as part of the acquisition of the Luohuang Power Company and
the Yueyang Power Company as disclosed in Note 3.
As of December 31, 2004, the maturity period of the notes receivable ranged
from one month to six months (2003: one month to six months).
19. TEMPORARY CASH INVESTMENTS
Temporary cash investments consist of fixed-term deposits denominated in
RMB (2003: RMB and US$) with original maturities ranging from more than
three months to one year. The effective interest rate on short-term bank
deposits was 1.98% to 2.25% (2003: 0.01% to 1.71 %) per annum.
F-38
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
20. CAPITALIZATION
Authorized Share Capital and Paid-in Capital
As of December 31, 2004, the authorized share capital of the Company was
RMB12,055,383,440 (2003: RMB6,027,671,200), divided into 12,055,383,440
shares (2003: 6,027,671,200 shares) of RMB1.00 each (2003: RMB1.00 each).
In addition, the issued and fully paid share capital of the Company as of
December 31, 2004 was RMB12,055,383,440 (2003: RMB6,027,671,200) comprising
of 9,000,000,000 Domestic Shares (2003: 4,500,000,000 Domestic Shares) and
3,055,383,440 Overseas Listed Foreign Shares (2003: 1,527,671,200 Overseas
Listed Foreign Shares). The holders of Domestic Shares and Overseas Listed
Foreign Shares, with minor exceptions, are entitled to the same economic
and voting rights.
Conversion of Convertible Notes to Share Capital
During the year, the noteholders converted the convertible notes with
principal of US$15,000 (2003: US$ 20 million) to 513 American Depository
shares ("ADS") (20,520 H shares equivalent) (2003: 684,931 ADS; 27,397,240
H shares equivalent).
Ordinary Shares Split
On May 11, 2004, the shareholders approved a ten-for-ten stock split of the
Company's ordinary shares effected in the form of a) 5 bonus shares for
every 10 existing ordinary shares and b) 5 conversion shares for every 10
existing ordinary shares. The shares split was completed on August 9, 2004.
The bonus shares amounting to approximately RMB3,014 million were charged
to retained earnings. The conversion shares issued, amounting to also
approximately RMB3,014 million, were charged to additional paid-in capital
and statutory and discretionary surplus reserve fund in the amount of
approximately RMB1,808 million and approximately RMB1,206 million
respectively. The basic and diluted earnings per share included in this
consolidated financial statements have been adjusted retrospectively to
reflect the shares split (see Note 34).
F-39
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
21. APPROPRIATION AND DISTRIBUTION OF PROFIT
The Board of Directors decides on an annual basis the percentages of the
profit after tax, as determined under the PRC accounting standards and
regulations, to be appropriated to the statutory surplus reserve fund, the
statutory public welfare fund and, on an optional basis, the discretionary
surplus reserve fund. When the balance of the statutory surplus reserve
fund reaches 50% of the Company's share capital, any further appropriation
will be optional. The statutory surplus reserve fund can be used to offset
prior years' losses, if any, and may be converted into share capital by the
issue of new shares to shareholders in proportion to their existing
shareholding or by increasing the par value of the shares currently held by
them, provided that the balance after such an issue is not less than 25% of
registered capital. The statutory public welfare fund can only be utilized
on capital items for the collective benefits of the Company's employees.
Titles of these capital items will remain with the Company. This fund is
non-distributable other than in liquidation. The discretionary surplus
reserve fund can be provided and used in accordance with the resolutions of
the shareholders.
For the year ended December 31, 2004, the Board of Directors resolved the
following on March 15, 2005:
(i) to appropriate 10% and 7.5% (2003: 10% and 7.5%; 2002: 10% and 7.5%),
respectively, of the profit after taxation as determined under the PRC
accounting standards and regulations to the statutory surplus reserve
fund and the statutory public welfare fund. The total amount of
appropriation is approximately RMB943 million (2003: approximately
RMB955 million; 2002: approximately RMB714 million).
(ii) to make no appropriation to the discretionary surplus reserve fund
(2003 and 2002: nil).
In accordance with the Articles of Association, earnings available for
distribution by the Company will be based on the lowest of the amounts
determined in accordance with (a) the PRC accounting standards and
regulations and (b) IFRS. The amount of distributable profit resulting from
the current year operation after appropriation to dedicated capital for the
year ended December 31, 2004 was approximately RMB4.38 billion (2003:
approximately RMB4.48 billion; 2002: approximately RMB3.18 billion). The
cumulative balance of distributable profit as of December 31, 2004 was
approximately RMB11.17 billion (2003: approximately RMB12.82 billion; 2002:
approximately RMB10.4 billion).
22. DIVIDENDS
On March 15, 2005, the Board of Directors proposed a cash dividend of
RMB0.25 per share, totaling approximately RMB3,014 million. This proposal
is subject to the approval of the shareholders at the annual general
meeting. These financial statements do not reflect this dividend payable,
which will be accounted for in shareholders' equity as an appropriation of
retained earnings in the year ending December 31, 2005.
On May 11, 2004, the shareholders approved the declaration of cash
dividends of RMB0.50 per ordinary share (RMB0.25 per adjusted ordinary
share after the ordinary shares split as mentioned in Note 20), totaling
approximately RMB3,014 million, together with an issue of bonus shares
accounted for as a stock split on the basis of 5 bonus shares for every 10
existing ordinary shares in respect of the year ended December 31, 2003,
based on the 6,027,671,200 outstanding shares on the date in their annual
general meeting.
On May 28, 2003, the shareholders approved the declaration of RMB0.34
(RMB0.17 per adjusted ordinary share after the ordinary share split as
mentioned in Note 20), totaling approximately RMB2,049 million in respect
of the year ended December 31, 2002, based on the 6,027,671,200 outstanding
shares on that date, in their annual general meeting.
F-40
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
23. LONG-TERM LOANS FROM SHAREHOLDERS, UNSECURED
As of December 31, 2004, long-term loans borrowed from shareholders
represented loans from Huaneng Group. These loans are unsecured, bear both
fixed and floating interest rates that ranged from 3.78% to 4.60% per annum
for the year ended December 31, 2004 and are repayable in accordance with
the repayment schedules set by the contracts.
As of December 31, 2003, long-term loans from shareholders represented the
US$ denominated bank loans on lent by HIPDC and an RMB loan borrowed from
Jiangsu Province International Trust & Investment Company. These loans were
unsecured, bore both fixed and floating interest rates that ranged from
3.60% to 5.76% per annum for the year ended December 31, 2004 (2003: 3.62%
to 5.76%; 2002: 4.01% to 7.40%), and had been fully repaid as of December
31, 2004.
Long-term loans from shareholders, unsecured are repayable as follows:
2004 2003
----------------------------- -------------------------------
Within 1 year
- 420,380
Between 1 to 2 years
- -
Between 2 to 5 years
- -
Over 5 years
800,000 -
----------------------------- -------------------------------
800,000 420,380
Less: Amount due within 1 year included
under current liabilities - (420,380)
----------------------------- -------------------------------
800,000 -
============================= ===============================
24. LONG-TERM BANK LOANS, UNSECURED
Long-term bank loans, unsecured comprised:
2004 2003
-------------------------------------------- ----------------------
Original currency
'000
Renminbi loans (a) - 8,805,069 4,064,499
Foreign currency loans
US$ (b) 778,474 6,443,044 6,650,061
Euro (c) 76,699 863,834 -
--------------------- ----------------------
16,111,947 10,714,560
===================== ======================
F-41
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
24. LONG-TERM BANK LOANS, UNSECURED (CONT'D)
a. RMB bank loans were borrowed from PRC banks to finance the
construction of the power plants of the Company and its subsidiaries.
These loans bear fixed interest rates from 3.60% to 5.76% per annum
for the year ended December 31, 2004 (2003: 4.94% to 6.21%; 2002:
5.76% to 6.21%) and are repayable in accordance with the agreed
repayment schedules set by the banks.
b. US$ bank loans were borrowed to finance the construction of the power
plants of the Company and its subsidiaries. These loans bear interest
at lending rates (both fixed and floating) ranging from 1.225% to
6.97% per annum for the year ended December 31, 2004 (2003: 1.18% to
6.60%; 2002: 2.00% to 6.60%), and are repayable in accordance with
the agreed repayment schedules set by the banks. The Company had
entered into interest rate swap agreements with PRC banks to convert
certain floating rate bank loans into fixed rate debts to hedge
against the interest rate risk (see Note 38).
c. Euro bank loans were borrowed to finance the construction of the
Phase I of the Luohuang Power Company before its acquisition by the
Company. These loans bear fixed interest at 2% per annum for the year
ended December 31, 2004 and are repayable in accordance with the
agreed repayment schedule set by the banks.
The long-term bank loans are unsecured and are repayable as follows:
2004 2003
---------------------- ----------------------
Within 1 year 1,257,476 2,409,240
Between 1 to 2 years 1,362,697 1,058,155
Between 2 to 5 years 7,639,071 2,940,506
Over 5 years 5,852,703 4,306,659
---------------------- ----------------------
16,111,947 10,714,560
Less: Amount due within 1 year included under current
liabilities (1,257,476) (2,409,240)
---------------------- ----------------------
14,854,471 8,305,320
====================== ======================
As of December 31, 2004, approximately RMB4,052 million of long-term bank
loans are wholly repayable within five years (2003: approximately
RMB2,258 million) while approximately RMB12,060 million are not wholly
repayable within five years (2003: approximately RMB8,457 million).
F-42
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
25. OTHER LONG-TERM LOANS, UNSECURED
Other long-term loans, unsecured comprised:
2004 2003
------------------------------------------ ----------------------
Original currency
'000
Renminbi loans 309,526 744,837
Foreign currency loans
US$ 18,571 153,706 177,358
Japanese Yen ("JPY")
1,547,619 123,347 137,970
--------------------- ----------------------
586,579 1,060,165
===================== ======================
The other long-term loans were drawn from:
2004 2003
--------------------- -----------------------
Long-term loan from WPDB 106,389 106,389
Long-term loan from Huaneng Finance - 610,000
Long-term loan from Huaian Investment Company - 8,980
Long-term loan from JEPDC 19,468 19,468
Long-term foreign loans on lent by Ministry of
Finance 277,052 315,328
Long-term loan from CCI 183,670 -
--------------------- -----------------------
586,579 1,060,165
===================== =======================
The other long-term loans are unsecured, bear both fixed and floating
interest rates that ranged from 1.70% to 5.93% per annum for the year
ended December 31, 2004 (2003: 4.94% to 6.21%; 2002: 5.64% to 6.21%),
and are repayable in accordance with the repayment schedules set by the
contracts.
Other long-term loans, unsecured are repayable as follows:
2004 2003
--------------------------- --------------------------
Within 1 year 285,761 211,881
Between 1 to 2 years 109,012 267,044
Between 2 to 5 years 127,871 476,131
Over 5 years 63,935 105,109
--------------------------- --------------------------
586,579
1,060,165
Less: Amounts due within one year included
under current liabilities (285,761) (211,881)
--------------------------- --------------------------
300,818 848,284
=========================== ==========================
As of December 31, 2004, approximately RMB310 million of other long-term
loans are wholly repayable within five years (2003: approximately RMB955
million) while approximately RMB277 million are not wholly repayable
within five years (2003: approximately RMB105 million).
F-43
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
26. ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities comprised:
2004 2003
------------------------------ -----------------------------
Accounts and notes payable 761,689 635,860
Received in advance 1,129,598 987,500
Payable to contractors for construction 1,592,621 846,473
Other payables to contractors 237,513 207,257
Accrued interest 116,322 96,127
Others 713,415 569,300
------------------------------ -----------------------------
4,551,158 3,342,517
============================== =============================
As of December 31, 2004, the aging analysis of accounts and notes payable
was as follows:
2004 2003
----------------------------- -----------------------------
Within 1 year 754,406 595,994
Between 1 to 2 year 2,911 36,188
Over 2 years 4,372 3,678
----------------------------- -----------------------------
761,689 635,860
============================= =============================
27. TAXES PAYABLE
Taxes payable comprises:
2004 2003
----------------------------- -----------------------------
VAT payable 527,292 415,147
Income tax payable 407,450 472,850
Others 65,050 29,365
----------------------------- -----------------------------
999,792 917,362
============================= =============================
28. SHORT-TERM LOANS, UNSECURED
Short-term loans denominated in RMB are unsecured, bear interest from
4.30% to 5.02% per annum for the year ended December 31, 2004 (2003:
4.54% to 5.05%; 2002: 4.78% to 5.56%), and are repayable within one year
(see Note 7(f)).
29. DEFERRED INCOME TAXES
Deferred income taxes are calculated in full on temporary differences
under the liability method using the applicable tax rates for the
respective operating units.
The movement in the deferred income tax account is as follows:
2004 2003
----------------------- -----------------------
As of January 1 81,803 121,853
Acquisitions (Note 3) 399,313 (21,809)
Charged to the
income statement (Note 32) (31,938) (18,241)
----------------------- -----------------------
As of December 31 449,178 81,803
======================= =======================
F-44
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
29. DEFERRED INCOME TAXES (CONT'D)
The temporary differences that gave rise to deferred taxation arose
primarily from the acquisition of power plants, which resulted in the tax
bases of certain assets and liabilities being different from the fair value
basis that are used in recording these assets and liabilities in the
financial statements. Details of the movements in deferred income tax
assets and liabilities are as follows:
Difference in
----------------------------------------------------------------------------------
Amortization of Provisions Termin-
prepaid land use for doubtful ation
rights debts benefits Others Total
------------------- ---------------- -------------- ------------- ---------------
Deferred income tax
assets
As of January 1, 2003 - - - - -
Acquisition of power
plants 13,261 3,288 - 5,260 21,809
Charged to the income
statement (22) (69) - (407) (498)
------------------- ---------------- -------------- ------------- ---------------
As of December 31, 2003 -
13,239 3,219 4,853 21,311
Acquisition of power
plants (2,206) 60,172 17,032 3,878 78,876
(Charged) /
Credited to
the income
statement (221) (2,215) 1,019 (1,231) (2,648)
------------------- ---------------- -------------- ------------- ---------------
As of December 31, 2004 10,812 61,176 18,051 7,500 97,539
=================== ================ ============== ============= ===============
Deferred income tax liabilities arising from differences in depreciation
As of January 1, 2003 121,853
Credited to the income statement (18,739)
------------------------------
As of December 31, 2003 103,114
Acquisition of power plants (Note 3) 478,189
(Credited) / Charged to the income statement (34,586)
------------------------------
As of December 31, 2004 546,717
==============================
F-45
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
29. DEFERRED INCOME TAXES (CONT'D)
Deferred income tax assets are recognized for tax loss carried-forwards to
the extent that the realization of the related tax benefits through the
future taxable profits is probable. The Company and its subsidiaries did
not recognize any deferred income tax assets in respect of losses that can
be carried forward against future taxable income with expiry dates as
follows:
2004 2003 2002
-------------- --------------- ---------------
Year of expiry
2003 N/A N/A N/A
2004 N/A 62,104 132,020
2005 111,441 154,678 154,678
2006 177,197 177,197 177,196
2007 71,125 71,125 71,125
2008 - - N/A
2009 - N/A N/A
-------------- --------------- ---------------
As of December 31 359,763 465,104 535,019
============== =============== ===============
Deferred income tax assets and liabilities are offset when there is legally
enforceable right to set off current tax assets against current tax
liabilities and when the deferred income taxes relate to the same fiscal
authority. The following amounts, determined after appropriate offsetting,
are shown in the consolidated balance sheet:
2004 2003
-------------------- ------------------
Deferred income tax assets (97,539) (21,311)
Deferred income tax liabilities 546,717 103,114
-------------------- ------------------
449,178 81,803
==================== ==================
The amounts shown in the consolidated balance sheet include the
following:
Deferred income tax assets to be recovered after more than
12 months (93,941) (21,311)
Deferred income tax liabilities to be settled after more
than 12 months 491,122 84,375
==================== ==================
30. ADDITIONAL FINANCIAL INFORMATION ON BALANCE SHEET
As of December 31, 2004, the net current liabilities of the Company and its
subsidiaries amounted to approximately RMB7,079 million (2003:
approximately RMB939 million). On the same date, the total assets less
current liabilities was approximately RMB56,047 million (2003:
approximately RMB44,367 million).
F-46
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
31. HOUSING SCHEMES
In accordance with the PRC housing reform regulations, the Company and its
subsidiaries are required to make contributions to the State-sponsored
housing fund at 7%-11% of the specified salary amount of the PRC employees.
At the same time, the employees are required to make a contribution equal
to the Company's and its subsidiaries' contribution out of their payroll.
The employees are entitled to claim the entire sum of the fund under
certain specified withdrawal circumstances. For the year ended December 31,
2004, the Company and its subsidiaries contributed approximately RMB101
million (2003: approximately RMB77 million; 2002: approximately RMB71
million) to the fund.
In addition, the Company and its subsidiaries provided housing benefits to
certain employees to enable them to purchase living quarters from the
Company and its subsidiaries at a substantial discount. Such housing
benefits represent the difference between the cost of the staff quarters
sold to and the net proceeds collected from the employees. The provision of
housing benefits is expected to benefit the Company and its subsidiaries
over the estimated remaining average service life of the relevant
employees. For the year ended December 31, 2004, the housing benefits
provided by the Company and its subsidiaries to the employees amounted to
approximately RMB34 million (2003: approximately RMB29 million; 2002:
approximately RMB18 million) which is recorded as a long-term deferred
asset and amortized over the remaining average service life of the relevant
employees which is estimated to be about 10 years.
The Company and its subsidiaries have no further obligation for housing
benefits.
32. INCOME TAX EXPENSE
Income tax expense comprised:
2004 2003 2002
------------------ ----------------- ----------------
Current income tax expense 980,672 1,116,100 963,510
Deferred income tax (Note 29) (31,938) (18,241) 12,285
Share of income tax expense of associates
(Note 11) 65,528 51,582 5,059
------------------ ----------------- ----------------
1,014,262 1,149,441 980,854
================== ================= ================
No Hong Kong profits tax has been provided as there was no estimated
assessable profits in Hong Kong for the year (2003 and 2002: nil). The
reconciliation of the effective income tax rate from the statutory
income tax rate in the PRC is as follows:
2004 2003 2002
------------------- ---------------- -----------------
Average statutory tax rate 18% 18% 18%
Effect of tax holiday (2%) (1%) (1%)
Others (1%) - 2%
------------------- ---------------- -----------------
Effective tax rate 15% 17% 19%
=================== ================ =================
The average statutory tax rate for the year ended December 31, 2004
represented the weighted average tax rate of the head office and the
individual power plants calculated on the basis of the relative amounts
of net profit before tax and the applicable statutory tax rates.
The aggregate effect of the tax holiday was approximately RMB122 million
for the year ended December 31, 2004 (2003: approximately RMB61 million;
2002: approximately RMB58 million).
F-47
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
33. MINORITY INTERESTS
2004 2003
-------------------- --------------------
As of January 1 1,155,197 910,704
Acquisitions (Note 3) 1,342,872 115,639
Minority shares in net profit of subsidiaries 257,053 183,894
Capital injection from minority shareholders of
subsidiaries 677,034 77,632
Dividends paid (165,763) (132,672)
-------------------- --------------------
As of December 31 3,266,393 1,155,197
==================== ====================
34. EARNINGS PER SHARE
2004 2003 2002
--------------------------------- -------------------------------- ---------------------------------
Weighted Per Weighted Per Weighted Per
Average Share Average Share Average Share
Net Profit Shares Amount Net Profit Shares Amount Net Profit Shares Amount
------------ ----------- -------- ----------- ----------- -------- ----------- ----------- ---------
'000 RMB '000 RMB '000 RMB
Earnings per
Share
Net profit
attributable
to share-
holders 5,323,876 12,055,368 0.44 5,430,408 12,038,228 0.45 3,921,004 12,000,198 0.33
Finance costs
in relation
to con-
vertible
notes and
the relevant
put option
(net of tax
effect) 22 - 2,746 - 41,368 -
Effect of
assumed
conversion - 121 - 17,430 - 279,508
------------ ----------- ----------- ----------- ----------- -----------
Diluted
Earnings
per Share
Net profit
attributable
to
shareholders
plus effect
of assumed
conversion 5,323,898 12,055,489 0.44 5,433,154 12,055,658 0.45 3,962,372 12,279,706 0.33
============ =========== =========== =========== =========== ===========
Basic earnings per share was computed by dividing the net profit
attributable to shareholders of the Company by the weighted average
number of ordinary shares in issue during the year (Note 20).
Diluted earnings per share is calculated by adjusting the weighted
average number of ordinary shares outstanding to assume conversion of all
dilutive potential ordinary shares at the beginning of the year. The
Company had one category of potential ordinary share: convertible notes.
The convertible notes are assumed to have been converted into ordinary
shares and the net profit is adjusted to eliminate the interest expense
less the tax effect.
As the number of ordinary shares outstanding increased as a result of a
stock split in 2004 (Note 20), the computation of basic and diluted
earnings per share have been adjusted retroactively for the proportional
change in the number of ordinary shares outstanding for all the periods
presented to reflect the stock split.
F-48
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
35. NOTES TO CASH FLOW STATEMENT
a. Analysis of cash and cash equivalents
As of December 31, 2004, cash and cash equivalents consisted of:
2004 2003 2002
----------------------- ----------------------- ------------------------
Cash in RMB 621 726 266
Current deposits
RMB 2,284,551 3,763,015 2,815,473
US$ denominated 10,359 234,468 186,862
JPY denominated - 130,439 -
----------------------- ----------------------- ------------------------
Total cash and cash equivalents 2,295,531 4,128,648 3,002,601
======================= ======================= ========================
b. Undrawn borrowing facilities
As of December 31, 2004, the Company and its subsidiaries had
available unsecured borrowing facilities from banks of approximately
RMB30 billion (2003: approximately RMB32 billion) of which undrawn
borrowing facilities amounted to approximately RMB28 billion (2003:
approximately RMB32 billion). Out of these available undrawn
borrowing facilities, RMB20 billion relates to medium to long-term
loan facilities, the drawdown of which is subject to application and
approval procedures. Management expects to drawdown the available
facilities in accordance with the level of working capital and / or
planned capital expenditure of the Company and its subsidiaries.
c. Non-cash transactions
The principal non-cash transactions were the conversion of
convertible notes to share capital and the ordinary shares split
discussed in Note 20.
F-49
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
36. COMMITMENTS
a. Capital and Operational Commitments
(i) Commitments mainly relate to the construction of new power
projects, certain complementary facilities and renovation
projects for existing power plants and the purchase of coal.
Commitments outstanding as of December 31, 2004 not provided for
in the balance sheet were as follows:
2004 2003
------------------ ------------------
Contracted but not provided for
- purchase of inventories 3,560,175 2,279,191
- construction 7,923,087 9,793,244
------------------ ------------------
Sub-total 11,483,262 12,072,435
------------------ ------------------
Authorized but not contracted for
- construction 236,501 -
------------------ ------------------
Sub-total 236,501 -
------------------ ------------------
Total 11,719,763 12,072,435
================== ==================
(ii) During 2004, the Company entered into various long-term
agreements subject to termination only under certain limited
circumstances for the procurement of coal from year 2005 to 2009
for use in generation. In most cases, these contracts contain
provisions for price escalations and minimum purchase level
clauses. The future commitments under contracts are as follows:
Total
----------------
2005 5,768,657
2006 5,941,717
2007 6,119,968
2008 2,801,770
2009 2,801,770
----------------
23,433,882
================
F-50
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
36. COMMITMENTS (CONT'D)
b. Operating Lease Commitments
The Company has various operating lease arrangements with HIPDC for
land and buildings (see Note 7). Some of the leases contain renewal
options and most of the leases contain escalation clauses. Lease
terms do not contain restrictions on the Company's activities
concerning dividends, additional debts or further leasing.
Total future minimum lease payments under non-cancelable operating
leases in respect of land and buildings of the Nanjing Power Plant
are as follows:
2004 2003
----------------- ------------------
Land and buildings
- not later than one year 1,334 32,334
- later than one year and not later than two years 1,334 7,334
- later than two years and not later than five years 4,002 22,002
- later than five years 52,026 284,360
----------------- ------------------
58,696 346,030
================= ==================
In accordance with the land use operating lease agreement signed by
the Dezhou Power Plant and the relevant land management authorities
for the land occupied by Dezhou Phase I and Phase II, annual rental
is approximately RMB30 million effective from June, 1994 and is
subject to revision of five years after the said date. Thereafter,
the annual rental is subject to revision once every three years. The
increment for each rental revision is restricted to no more than 30
percent of the previous annual rental amount. For the year ended
December 31, 2004, the annual rental is approximately RMB29 million
(2003: approximately RMB30 million).
37. CONTINGENT LIABILITIES
2004 2003
--------------------- ---------------------
Guarantee for loan facilities
- granted to an associate 305,250 339,250
===================== =====================
38. INTEREST RATE SWAPS
As of December 31, 2004, there was no outstanding interest rate swap
agreement (2003: approximately US$20.5 million; 2002: approximately
US$52 million). For the year ended December 31, 2004, there was a gain
amounting to approximately RMB1 million (2003: approximately RMB11.8
million; 2002: RMB2.2 million) arising from changes in the fair value
of the interest rate swaps subsequent to initial recognition. Since the
hedging relationship did not meet the conditions required for special
hedge accounting as set out in IAS 39 Financial Instruments:
Recognition and Measurement, the gain was credited to income in the
current year.
F-51
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
39. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company and its subsidiaries' financial instruments not carried at fair
value are cash and cash equivalents, temporary cash investments, accounts
receivables, other current assets, other non-current assets, accounts
payable and other liabilities, short-term loans, unsecured, long-term
loans, unsecured and held-to-maturity investments.
The carrying amounts of the Company and its subsidiaries' cash and cash
equivalents, temporary cash investments, short-term investments, short-term
loans, unsecured and other current financial assets and liabilities
approximated their fair values due to the short-term maturities of these
instruments.
Similarly, the historical cost carrying amounts of receivables and payables
which are all subject to normal trade credit terms approximate their fair
values.
Available-for-sale investment is measured at fair value unless the fair
values cannot be measured reliably.
The estimated fair value of long-term debt including current maturities was
approximately RMB17.05 billion as of December 31, 2004 (2003: approximately
RMB12.43 billion). The fair value of long-term debt is determined by
discounting the stream of future payments of interest and principals at the
prevailing market interest rates for comparable instruments. The aggregate
book value of these liabilities was approximately RMB17.5 billion as of
December 31, 2004 (2003: approximately RMB12.20 billion).
40. BUSINESS RISK
The Company and its subsidiaries conduct their operations in the PRC and
accordingly investing in the shares of the Company and its subsidiaries are
subject to the risks of, among others, the PRC's political, economic and
legal environment, restructuring of the PRC electric power industry and
regulatory reform, new regulation pertaining to setting of power tariff and
availability of fuel supply at stable price.
For the year ended December 31, 2004, the Company and its subsidiaries sold
electricity to five major customers (2003 and 2002: five), each of which
amounted to approximately 10% or more of the operating revenue. In
aggregation, these customers represented approximately 79% (2003:
approximately 77%; 2002: approximately 90%) of the net operating revenue of
the Company and its subsidiaries.
F-52
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
41. EVENTS AFTER THE BALANCE SHEET DATE
On October 26, 2004, the Company entered into agreements with Huaneng Group
under which the Company agreed to acquired from Huaneng Group 60% equity
interest in Sichuan Huaneng Hydropower Development Corporation, Ltd. (the
"Sichuan Hydropower") and 65% equity interest in the Gansu Huaneng
Pingliang Power Generation Limited Liability Company (the "Pingliang Power
Company").
The total consideration for the acquisition of the two power companies was
RMB 2,025 million, which was paid in cash in January, 2005. Direct
transaction cost related to the acquisition amounted to approximately RMB17
million.
The acquisition of the two power companies became effective in January,
2005 when the Company obtained the ownership and control over the relevant
assets after obtaining the necessary approval.
Details of net assets acquired and preliminary goodwill are as followings:
Purchase consideration
- Cash paid 2,025,000
- Direct transaction cost relating to the acquisition 16,698
---------------------
Total purchase consideration 2,041,698
Preliminary fair value of assets acquired (1,731,191)
---------------------
Preliminary goodwill 310,507
=====================
Goodwill arising from the acquisitions is attributable to the high
profitability of the acquired businesses and the significant synergies
expected to arise after the Company's acquisitions of the subsidiaries
stated above.
The assets and liabilities arising from the acquisition are as follows:
Acquiree's
carrying
Fair value amount
-------------- --------------
Property, plant and equipment, net 11,992,009 10,652,359
Deferred income tax assets 12,533 12,533
Available-for-sale investment 500 500
Other non-current assets 178,841 156,187
Inventories, net 54,801 54,801
Other current assets 176,238 176,238
Accounts receivable 569,672 569,672
Cash and cash equivalents 566,704 566,704
Minority interest (2,063,434) (1,480,354)
Long-term loans, unsecured (7,572,346) (7,572,346)
Long-term loans, secured (367,000) (367,000)
Due to Huaneng Group (18,517) (18,517)
Deferred income tax liabilities (459,898) (81,109)
Other current liabilities (1,338,912) (1,338,912)
-------------- --------------
Net assets acquired 1,731,191 1,330,756
============== ==============
F-53
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
42. US GAAP INFORMATION
The consolidated financial statements of the Company and its subsidiaries
prepared under IFRS differ in certain respects from those prepared under
generally accepted accounting principles in the United States of America ("US
GAAP"). Significant differences between IFRS and US GAAP, which affect the
equity and net profit of the Company and its subsidiaries, are summarized
below:
(a) Effect of the Acquisition of Entities under Common Control
Huaneng Group is the controlling parent company of HIPDC, which in turn is
the controlling parent of the Company.
Under IFRS, the Company and its subsidiaries adopted the acquisition method
to account for the acquisition of:
(i) 70% equity interest in Shidongkou I Power Plant, 70% equity interest
in Taicang Power Company and all of the assets and liabilities of
Changxing Power Plant in July, 2002 from the Huaneng Group;
(ii) 55% equity interest in Qinbei Power Company, 60% equity interest in
Yushe Power Company and all of the assets and liabilities of the
Xindian Power Plant in October, 2003 from the Huaneng Group; and
(iii) 60% equity interest in Luohuang Power Company, 55% equity interest in
Yueyang Power Company, 90% equity interest in Jinggangshan Power
Plant and all of the assets and liabilities of the Yingkou Power
Plant in July, 2004 from HIPDC and / or from the Huaneng Group.
Under the acquisition method, the results of the acquired businesses
are included in the results of operations of the Company and its
subsidiaries from the date of the acquisition. The difference between
the purchase consideration and the fair value of the underlying net
assets acquired is treated as goodwill. Goodwill arising from the
acquisitions in (i) and (ii) above is amortized on a systematic basis
to the income statement over its useful economic life, being the
remaining weighted average useful life of the acquired depreciable or
amortizable assets. Goodwill arising from the acquisition in (iii)
above is tested annually for impairment and carried at cost less
accumulated impairment losses.
As the companies and power plants acquired were under the control of
the Huaneng Group prior to their acquisitions by the Company and its
subsidiaries, these acquisition transactions were considered common
control transactions. Under US GAAP, they are considered to be
transfers of businesses under common control and the acquired assets
and liabilities are accounted for at historical cost in a manner
similar to the pooling of interests method. Accordingly, the
consolidated financial statements for all periods presented have been
retroactively restated as if the current structure and operations
resulting from the acquisition had been in existence since the
beginning of the earliest period presented, with financial data of
previously separate entities combined. The cash consideration paid by
the Company is treated as an equity transaction in the year of the
acquisition for US GAAP purposes. Accordingly, the resulting impact
of depreciation and amortization expenses on income is also
different.
F-54
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
42. US GAAP INFORMATION (CONT'D)
(b) Effect of Acquisition of 44.16% Equity Interests in the Huaiyin Power
Company, 30% Additional Equity Interests in the Shidongkou I Power
Plant, 5% Additional Equity Interests in the Taicang Power Company
and 40% Equity Interests in the Hanfeng Power Company
Between 2002 and 2004, the Company acquired from the Huaneng Group:
(i) 44.16% equity interest of the Huaiyin Power Company in July, 2002;
(ii) 30% additional equity interests of the Shidongkou I Power Plant and
5% additional equity interests of the Taicang Power Company in
December, 2002; and
(iii) 40% equity interests of the Hanfeng Power Company in July, 2004.
Under IFRS, upon the completion of the above acquisitions, the relevant
equity interests of the net assets of the Huaiyin Power Company, the
Shidongkou I Power Plant, the Taicang Power Company and the Hanfeng Power
Company are recorded at fair value. The excess of the total cost of the
acquisition over the fair value of the relevant portion of net assets of
power plant acquired is recorded as goodwill. Goodwill arising from the
acquisitions in (i) and (ii) above is amortized on a systematic basis to
the income statement over its useful economic life, being the remaining
weighted average useful life of the acquired depreciable or amortizable
assets, while goodwill arising from the acquisition in (iii) above is
tested annually for impairment and carried at cost less accumulated
impairment losses.
Under US GAAP, upon completion of the above acquisitions, the Huaneng
Group's proportionate share in the net assets of the Huaiyin Power
Company, Shidongkou I Power Plant, the Taicang Power Company and the
Hanfeng Power Company being sold to the Company was recorded at the
historical carrying value. The excess of the total cost of acquisition
over the net assets acquired was recorded as a deemed distribution.
Accordingly, the resulting impact of depreciation and amortization
expenses on income is also different.
(c) Housing Benefits Provided by HIPDC
HIPDC sold to certain qualified employees of the Company living quarters
owned by HIPDC at preferential prices. The difference between the cost of
living quarters and the sales proceeds received from the employees is
considered to be housing benefits. Under IFRS, such housing benefits
provided by HIPDC are not reflected in the financial statements of the
Company. Under US GAAP, the amount of housing benefits provided by HIPDC
to the employees of the Company are recognized as the Company's operating
expenses on a straight-line basis over the estimated remaining average
service life of the employees. The corresponding amount is recorded as an
addition of capital contribution from HIPDC.
F-55
>
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
42. US GAAP INFORMATION (CONT'D)
(d) Acquisition of Shandong Huaneng Power Development Company Limited
("Shandong Huaneng")
Huaneng Group used to be one of the substantial shareholders of Shandong
Huaneng, holding 33.09% equity interest in it before the Company's
acquisition of Shandong Huaneng. Under IFRS, upon the completion of the
acquisition of Shandong Huaneng, the entire net assets of Shandong Huaneng
were recorded at fair value. The excess of the fair value of the entire
net assets acquired over the total cost of the acquisition was recorded as
negative goodwill. Under US GAAP, upon completion of the acquisition of
Shandong Huaneng, Huaneng Group's proportionate share of 33.09% in the net
assets of Shandong Huaneng that was sold to the Company was recorded at
the historical carrying value. The excess of the proportionate share in
the book value of the net assets acquired over the relevant portion of the
cash consideration was recorded as a capital contribution to the Company.
The book value of the remaining 66.91% of the net assets continues to be
part of the recoverable rate base under the cost recovery formula of the
tariff setting mechanism. Under US GAAP, the difference between these net
asset values and the cash consideration was recorded as a reduction to the
property, plant and equipment value of the respective power plants.
As the amount of negative goodwill under IFRS is different from the amount
of the reduction to property, plant and equipment under US GAAP due to the
33.09% portion of the net assets previously owned by the Huaneng Group as
described above and also that the negative goodwill under IFRS is
recognized as income over the remaining weighted average useful life of
the acquired depreciable or amortizable assets whereas, for US GAAP
purpose, the property, plant and equipment, after the reduction described
above, are depreciated over the respective assets' useful life, the net
profit under IFRS and US GAAP is different.
(e) Accounting Treatment of Convertible Notes
Under IFRS, the proceeds received on the issue of the convertible notes
were allocated into liability and equity components. Upon initial
recognition, the liability component represented the present value, at the
issuance date, of the contractually determined stream of cash flows
discounted at the market interest rate for instruments of comparable
credit status providing substantially the same cash flows, on the same
terms, but without the conversion option. The equity component was then
determined by deducting the liability component from the proceeds received
on the issue of the notes. Under US GAAP, the entire proceeds of the issue
of convertible notes were recorded as long-term liabilities without
distinguishing between the equity and liability components.
In accordance with IAS 39, which was effective on January 1, 2001, the put
option of the convertible notes, which allowed the noteholders to redeem
the convertible notes at a premium, was separated from the host contract
and accounted for as an embedded derivative. This put option was recorded
as a liability and measured at its fair value. When IAS 39 was initially
applied in 2001, the difference between the previous carrying amount and
the fair value of the put option was recognized as an adjustment to the
opening retained earnings as of January 1, 2001. In addition, the
liability component was measured at amortized cost and the resulting
difference with the previous carrying amount was recognized as an
adjustment to the opening retained earnings as of January 1, 2001. After
initial recognition, subsequent changes in the value of the put option and
the amortized cost of the liability component were charged or credited to
the income statements.
Under US GAAP, it is permitted not to measure the put option separately at
its fair value, as it represents a derivative embedded in a pre-1998
hybrid instrument. The Company continued to accrue for the put premium
liability together with the interest payable on the notes using effective
interest rate of 6.66% up to the redemption date of May 21, 2002. On May
21, 2002, a portion of the convertible notes was not redeemed by the
noteholders. Under US GAAP, the relevant portion of the accrued put
premium attributable to the remaining convertible notes not redeemed was
amortized as a yield adjustment over the remaining term of the convertible
notes because the put price exceeded the market value of the ordinary
shares of the Company at the time of the redemption.
F-56
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
42. US GAAP INFORMATION (CONT'D)
(f) Capitalization of Borrowing Costs
In accordance with IAS 23, the Company capitalized interest on general
borrowings used for the purpose of obtaining a qualifying asset in
addition to the capitalization of interest on specific borrowings.
Under US regulatory accounting requirements, interest on funds borrowed
generally and used for the purpose of obtaining qualifying assets are not
capitalized if such interests cannot be taken into consideration when
determining the recoverable rate base for tariff setting purposes.
Consequently, under US GAAP, the Company did not capitalize interest on
general borrowings. An adjustment is made to reverse the capitalized
interest on general borrowings net of the related depreciation on fixed
assets.
(g) Reversal of Goodwill Amortization
In 2004, in accordance with IFRS 3, goodwill arising from acquisitions for
which the agreement date was before March 31, 2004 is amortized using the
straight-line method over its estimated useful life and recognized in the
income statement as other operating expenses and subject to an impairment
review whenever events or changes in circumstances indicate their carrying
value may not be recoverable, and annually if the estimated useful life
exceeds 20 years. Under US GAAP, in accordance with Statement of Financial
Accounting Standard Number 142 "Goodwill and Other Intangible Assets",
goodwill arising from acquisition is not amortized but tested for
impairment on an annual basis and between annual tests in certain
circumstances.
(h) Deferred Tax Impact
This represents deferred tax effect on the above GAAP differences where
applicable.
(i) US Regulatory Accounting
Under US GAAP, Statement of Financial Accounting Standard Number 71
"Accounting for the Effects of Certain Types of Regulation" ("SFAS 71") is
applicable to utilities in the United States whose regulators have the
power to approve and/or regulate rates that may be charged to customers.
SFAS 71 recognizes that the regulatory process produces economic effects
which should be reflected in the financial statements. Because revenues
are based on costs, SFAS 71 governs the period in which various costs are
included in the income statements with the objective of matching costs
with revenues. Provided that, through the rate setting process, the
utility is substantially assured of recovering its allowable costs by the
collection of revenue from its customers, such costs not yet recovered are
deferred as regulatory assets. The regulatory process may also impose a
liability on a rate-regulated enterprise, usually representing obligations
to the enterprise's customers, which should be recognized as a regulatory
liability.
In order to apply SFAS 71, three criteria must be met. These criteria
require that a) the power rates for regulated services or products
provided to customers be established by or are subject to approval by an
independent, third-party regulator or by an entity's own governing board
empowered by statute or contract to establish power rates that bind
customers; b) the regulated power rates are designed to recover the costs
of providing the regulated services or products; and c) in view of the
demand for the regulated services or products and the level of
competition, direct and indirect, it is reasonable to assume that power
rates, which are set at levels that will recover costs, can be charged to
and collected from customers; this criterion requires consideration of
anticipated changes in levels of demand or competition during the recovery
period for any capitalized costs.
F-57
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
42. US GAAP INFORMATION (CONT'D)
(i) US Regulatory Accounting (Cont'd)
As of December 31, 2004, the Company and its subsidiaries believe that
10 of their power plants (2003 and 2002: 12 power plants) meet these
specific criteria of SFAS 71. Firstly, the power rates are established
by an independent regulator, the provincial or local price bureau.
Secondly, the pricing policy applicable to the power plants provides
for rate-setting based on the specific costs of the power plants. This
process has operated historically and will continue under the pricing
policy. Finally, based on the significant demand for electricity in
the Company and its subsidiaries' service territory, it is reasonable
to assume that the authorized power rates will be collected from
customers.
In November, 2004, in accordance with the issuance of a government
circular on implementation of a full-scope tariff bidding practice
that is applicable to two of the Company's power plants located in
Northeast China, the Company has discontinued the application of SFAS
71 for these two power plants as the criteria under SFAS 71 are no
longer met. Accordingly, these two power plants applied Statement of
Financial Accounting Standard Number 101 "Regulated Enterprises -
Accounting for the Discontinuation of Application of FASB Statement
No. 71" ("SFAS 101"). There was no elimination of assets or
liabilities as a result of the application of SFAS 101 as the Company
and its subsidiaries did not have any assets and/or liabilities
pursuant to SFAS 71 that were not been recognized as assets and/or
liabilities under IFRS. The Company and its subsidiaries have also
performed an impairment review on the property, plant and equipment of
the two relevant power plants and have determined that no impairment
provision is required.
With respect to the remaining power plants of the Company and its
subsidiaries, which were acquired in 2002, 2003 and 2004, the SFAS 71
criteria mentioned above are not met and, therefore, SFAS 71 cannot be
applied. Consequently, these remaining power plants have adopted US
GAAP without specific reference to the regulatory basis of accounting
provided for under SFAS 71.
Under IFRS, as there is no equivalent regulatory accounting standard,
the Company's and its subsidiaries' policy is to recognize regulatory
assets established under SFAS 71 only where they comprise rights or
other access to future economic benefits as a result of past events;
or to recognize regulatory liabilities only where they comprise a
present obligation the settlement of which is expected to result in an
outflow of resources embodying economic benefits.
(j) Impairment of Long-lived Assets
Impairment of long-lived assets (excluding goodwill)
The carrying amount of long-lived assets (excluding goodwill) under
IFRS is reviewed periodically in order to assess whether the
recoverable amount has declined below the carrying amount. When such a
decline occurs, the carrying amount is reduced to the recoverable
amount based on the expected future cash flow generated by the asset
discounted to their present value or the asset's net selling price. A
subsequent increase in the recoverable amount is written back to the
income statement when circumstances and events that led to the
write-down cease to exist.
Under US GAAP, long-lived assets (excluding goodwill) are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is evaluated by a comparison of the
carrying amount of assets to future undiscounted net cash flows
expected to be generated by the assets. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amounts of the assets exceed the fair
value of the assets. Subsequent reversal of impairment is not
permitted. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less cost to sell.
F-58
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
42. US GAAP INFORMATION (CONT'D)
(j) Impairment of Long-lived Assets (Cont'd)
Goodwill
Under IFRS, goodwill arising from a business combination for which
the agreement date was before March 31, 2004 is amortized on a
straight line basis over its estimated useful life and subject to an
impairment review whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable, and
annually if the estimated useful life exceeds 20 years. Such goodwill
will cease to be amortized from January 1, 2005 and will instead be
subject to an impairment review annually and whenever an indication
of impairment exists. Goodwill arising from a business combination
for which the agreement date is on or after March 31, 2004 is not
amortized and is subject to an impairment review annually and
whenever an indication of impairment exists. If some of the goodwill
allocated to a CGU was acquired in a business combination during the
current annual period, that CGU is required to be tested for
impairment before the end of the current period.
Under IFRS, a one-step impairment test is performed. The recoverable
amount of the CGU is compared to its carrying amount. The impairment
loss is recognized as the excess of the carrying amount over the
recoverable amount.
Under US GAAP, goodwill is reviewed for impairment, at the reporting
unit level, at least annually or whenever events or changes in
circumstances indicate that the recoverability of the carrying amount
must be assessed.
Under US GAAP, a two-step impairment test is required:
(i) The fair value and the carrying amount of the reporting
unit including goodwill should be compared. If the fair
value of the reporting unit is less than the book value,
goodwill would be considered to be impaired, then
(ii) The goodwill impairment should be measured as the excess
of the carrying amount of goodwill over its implied fair
value. The implied fair value of goodwill should be
determined by allocating fair value to the various assets
and liabilities included in the reporting unit in the same
manner as goodwill is determined in a business
combination.
F-59
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
42. US GAAP INFORMATION (CONT'D)
Differences between IFRS and US GAAP which affect the net assets and net
profit of the Company and its subsidiaries are summarized below:
Net Assets
------------------------------------------------
As of December 31, As of December 31,
Note 2004 2003
-------------------------------- ------------------------
Net assets under IFRS 36,265,519 33,955,355
Impact of US GAAP adjustments Note i:
Effect of acquisition of the Yingkou Power Plant,
the Jinggangshan Power Plant, the Luohuang
Power Company and the Yueyang Power Company (a) (2,007,383) 1,652,511
Effect of acquisition of the Qinbei Power
Company, the Yushe Power Company and the
Xindian Power Plant (a) (369,252) (417,368)
Effect of acquisition of the Shidongkou I Power
Plant, the Taicang Power Company and the
Changxing Power Plant (a) (775,592) (886,116)
Effect of acquisition of 40% equity interests in
the Hanfeng Power Company, 30% additional
equity interests in the Shidongkou I Power
Plant, 5% additional equity interests in
the Taicang Power Company and 44.16% equity
interests in the Huaiyin Power Company (b) (271,167) (296,717)
Recording of capital contribution arising from
acquisition of Shandong Huaneng (d) 862,922 862,922
Difference in accounting treatment for
acquisition of Shandong Huaneng (d) (348,364) (261,273)
Difference in capitalization of borrowing costs (f) (87,424) (93,890)
Reversal of goodwill amortization
- Reversal of goodwill amortization of
equity investment in SEG (g) 136,599 54,639
- Reversal of goodwill amortization of
investment in the Huaiyin Power Company (g) 34,740 17,370
Applicable deferred tax impact on the above GAAP
differences (h) 587,511 233,746
Others - (8,652)
----------------------- ------------------------
Net assets under US GAAP Note i 34,028,109 34,812,527
======================= ========================
F-60
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
42. US GAAP INFORMATION (CONT'D)
Differences between IFRS and US GAAP which affect the net assets and net
profit of the Company and its subsidiaries are summarized below (Cont'd):
Net profit
-----------------------------------------------
For the year ended December 31,
-----------------------------------------------
Note 2004 2003 2002
------- -------------------------------- --------------
Net profit under IFRS 5,323,876 5,430,408 3,921,004
Impact of US GAAP adjustments Note i:
Effect of acquisition of the Luohuang Power
Company, the Yueyang Power Company, the Yingkou
Power Plant and the Jinggangshan Power Plant (a) 278,027 335,105 (55,068)
Effect of acquisition of the Qinbei Power
Company, the Yushe Power Company and the
Xindian Power Plant (a) 48,116 13,109 56,919
Effect of acquisition of the Shidongkou I Power
Plant, the Taicang Power Company and the
Changxing Power Plant (a) 110,524 112,636 126,498
Effect of acquisition of 40% equity interest
in the Hanfeng Power Company, 30% additional
equity interests in the Shidongkou I Power
Plant, 5% additional equity interests in the
Taicang Power Company and 44.16% equity
interests in the Huaiyin Power Company (b) 25,550 19,347 10,556
Recording housing benefits provided by HIPDC (c) (26,152) (26,152) (26,152)
Difference in accounting treatment for
acquisition of the Shandong Huaneng (d) (87,091) (87,091) (87,091)
Difference in capitalization of borrowing costs (f) 6,466 (5,478) (88,412)
Reversal of goodwill amortization
- Reversal of goodwill amortization of
equity investment in SEG (g) 81,960 54,639 -
- Reversal of goodwill amortization of
investment in the Huaiyin Power Company (g) 17,370 17,370 -
Applicable deferred tax impact on the
GAAP differences (h) (46,978) (153,218) 37,345
Others 8,652 25,434 5,116
--------------- ---------------- --------------
Net profit under US GAAP Note i 5,740,320 5,736,109 3,900,715
=============== ================ ==============
(Note i) Consistent with applying the accounting treatment under US
GAAP as described in Note (a) above, the consolidated financial
statements under US GAAP for prior periods presented have been
retroactively restated as if the current structure and
operations resulted from the acquisition of the Luohuang Power
Company, the Yueyang Power Company, the Yingkou Power Plant and
the Jinggangshan Power Plant, had been in existence since the
beginning of the earliest period presented.
F-61
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB or US$ unless otherwise stated)
42. US GAAP INFORMATION (CONT'D)
In preparing the summary of differences between IFRS and US GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Accounting estimates have been employed in these
financial statements to determine reported amounts, including
realizability, useful lives of assets and other areas. Actual results
could differ from those estimates.
The following are condensed combined balance sheets of the Company and
its subsidiaries as of December 31, 2003 and 2004, and the related
condensed combined statements of income, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended
December 31, 2004, restated to reflect the impact of the effect of the
acquisition of entities under common control which is accounted for at
historical cost in a manner similar to the pooling of interests method,
with financial data of previously separate entities combined, under US
GAAP and other differences between IFRS and US GAAP.
Condensed Combined Balance Sheets
As of December 31,
--------------------------------------------------------------
2004 2003
------------------------------------------ -------------------
RMB US$ RMB
ASSETS
Non-current assets
Property, plant and equipment, net 53,909,081 6,513,512 47,850,691
Investment in associates 4,037,352 487,809 2,820,669
Land use rights 1,029,167 124,348 880,526
Deferred income tax assets 219,525 26,524 223,146
Other non-current assets 480,880 58,102 525,830
Goodwill 78,448 9,478 78,726
--------------------- -------------------- -------------------
Total non-current assets 59,754,453 7,129,773 52,379,588
--------------------- -------------------- -------------------
Current assets
Inventories, net 1,431,404 172,948 1,010,689
Other receivables and
assets, net 723,316 87,394 309,380
Accounts receivable 4,973,103 600,870 4,239,462
Due from other related parties 14,970 1,809 5,862
Current portion of deferred
income tax assets 61,491 7,430 77,357
Other financial assets - - 17,300
Restricted cash 202,688 24,490 183,525
Temporary cash investments 12,641 1,527 144,996
Cash and cash equivalents 2,295,531 277,355 4,299,933
---------------------- ------------------- -------------------
Total current assets 9,715,144 1,173,823 10,288,504
---------------------- ------------------- -------------------
Total assets 69,469,597 8,393,596 62,668,092
====================== =================== ===================
F-62
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB or US$ unless otherwise stated)
42. US GAAP INFORMATION (CONT'D)
Condensed Combined Balance Sheets (Cont'd)
As of December 31,
--------------------------------------------------------------
2004 2003
------------------------------------------- ------------------
RMB US$ RMB
EQUITY AND LIABILITIES
Shareholders' equity 34,028,109 4,111,414 34,812,527
-------------------- ---------------------- ------------------
Minority interests 2,597,561 313,848 1,694,609
-------------------- ---------------------- ------------------
Non-current liabilities
Long-term loans from
shareholders, unsecured 800,000 96,659 614,275
Long-term bank loans, unsecured 14,854,471 1,794,777 11,671,667
Other long-term loans, unsecured 300,818 36,346 848,284
Other non-current liability 13,000 1,571 -
Deferred income tax liabilities 142,685 17,240 148,560
-------------------- ---------------------- ------------------
Total non-current liabilities 16,110,974 1,946,593 13,282,786
-------------------- ---------------------- ------------------
Current liabilities
Accounts payable and accrued
liabilities 4,551,158 549,887 3,615,846
Dividends payable to shareholders
of the Company 8,250 997 -
Taxes payable 999,792 120,799 1,191,287
Due to HIPDC 1,258,799 152,093 1,259,649
Due to other related parties 13,426 1,622 33,338
Staff welfare and bonus payable 259,291 31,329 354,756
Short-term loans, unsecured 8,099,000 978,554 2,422,583
Current portion of long-term
loans from shareholders,
unsecured - - 938,058
Current portion of long-term
bank loans, unsecured 1,257,476 151,933 2,836,833
Current portion of other
long-term loans, unsecured 285,761 34,527 211,881
Convertible notes - - 952
Accrued put premium for
convertible notes - - 8,636
Other financial liabilities - - 4,351
-------------------- ---------------------- ------------------
Total current liabilities 16,732,953 2,021,741 12,878,170
-------------------- ---------------------- ------------------
Total liabilities and equity 69,469,597 8,393,596 62,668,092
==================== ====================== ==================
F-63
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB or US$ unless otherwise stated)
42. US GAAP INFORMATION (CONT'D)
Condensed Combined Statements of Income
Year ended December 31,
-------------------------------------------------------------------------------
2004 2003 2002
--------------------------------------------------------- --------------------
RMB US$ RMB RMB
Operating revenue, net 32,546,043 3,932,344 28,569,478 24,448,015
--------------------------------------------------------- --------------------
Operating expenses:
Fuel (16,094,816) (1,944,641) (11,103,839) (9,343,363)
Maintenance (939,939) (113,567) (1,151,538) (896,892)
Depreciation (4,839,151) (584,686) (5,111,140) (4,648,760)
Labor (2,039,386) (246,407) (1,767,832) (1,485,541)
Service fees to HIPDC (133,609) (16,143) (230,792) (263,716)
Income tax (1,156,875) (139,778) (1,349,254) (1,041,915)
Others (756,731) (91,431) (959,089) (1,266,071)
--------------------------------------------------------- --------------------
Total operating expenses (25,960,507) (3,136,653) (21,673,484) (18,946,258)
--------------------------------------------------------- --------------------
Income before financial
expenses 6,585,536 795,691 6,895,994 5,501,757
--------------------------------------------------------- --------------------
Interest income 45,992 5,557 57,168 95,807
Interest expense (826,583) (99,871) (1,031,043) (1,247,547)
Exchange losses, net (107,439) (12,981) (198,003) (261,396)
--------------------------------------------------------- --------------------
Total financial expenses (888,030) (107,295) (1,171,878) (1,413,136)
--------------------------------------------------------- --------------------
Share of profit / (loss)
of associates 465,404 56,232 266,730 (1,634)
Minority interests (422,590) (51,059) (254,737) (186,272)
--------------------------------------------------------- --------------------
Net profit attributable
to the shareholders 5,740,320 693,569 5,736,109 3,900,715
========================================================= ====================
F-64
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
42. US GAAP INFORMATION (CONT'D)
Year ended December 31,
----------------------------------------------------------------
2004 2003 2002
--------------------- --------------------- --------------------
Basic earnings per ordinary share under US
GAAP (RMB) Note i, ii 0.48 0.48 0.33
===================== ===================== ====================
Basic earnings per ADS under US GAAP (RMB)
Note i, ii 19.05 19.06 13.00
===================== ===================== ====================
Diluted earnings per ordinary share under US
GAAP (RMB) Note i, ii 0.48 0.48 0.32
===================== ===================== ====================
Diluted earnings per ADS under US GAAP (RMB)
Note i, ii 19.02 19.03 12.83
===================== ===================== ====================
(Note i) Earning per ordinary shares and per equivalent ADS were
calculated by dividing the net profit for the financial year
under US GAAP by the weighted average number of ordinary shares
and ADS in issue during the financial year. On a diluted basis,
both net profit for the financial year and the weighted average
number of ordinary shares and ADS outstanding for the financial
year were adjusted on the assumption that the convertible notes
had been fully converted at the beginning of the year.
(Note ii) As the number of ordinary Shares and equivalent ADS out-
standing increased as a result of a stock split in 2004,
the computation of basic and diluted earnings per share and
equivalent ADS have been adjusted retroactively for the pro-
portional change in the number of ordinary shares and
equivalent ADS outstanding for all the periods presented to
reflect the stock split.
F-65
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
42. US GAAP INFORMATION (CONT'D)
Condensed Combined Statements of Changes in Shareholders' Equity
Balance as of January 1, 2002 30,856,584
Dividends relating to 2001 (1,800,000)
Net profit attributable to shareholders for the year ended December 31, 2002 3,900,715
Conversion of convertible notes to new ordinary shares 1,655
Net deemed capital distribution to the Huaneng Group arising from the
acquisition of the equity interests of the Shidongkou I Power Plant, the
Taicang Power Company, the Huaiyin Power Company and the Changxing Power
Plant and additional interests in the Shidongkou I Power Plant and the
Taicang Power Company (2,034,222)
Contribution from Huaneng Group 85,735
Distribution to HIPDC (146,523)
Capital contribution from HIPDC arising from housing benefits provided by 26,152
HIPDC
------------------
Balance as of December 31, 2002 30,890,096
Dividends relating to 2002 (2,049,408)
Net profit attributable to shareholders for the year ended December 31, 2003 5,736,109
Conversion of convertible notes to new ordinary shares 165,548
Net deemed capital distribution to Huaneng Group arising from the
acquisition of the equity interests of the Qinbei Power Company, the
Yushe Power Company and the Xindian Power Plant (506,664)
Contribution from Huaneng Group 95,767
Contribution from HIPDC 454,927
Capital contribution from HIPDC arising from housing benefits provided by
HIPDC 26,152
------------------
Balance as of December 31, 2003 34,812,527
Dividends relating to 2003 (3,013,836)
Net profit attributable to shareholders for the year ended December 31, 2004 5,740,320
Conversion of convertible notes to new ordinary shares 124
Net deemed capital distribution to the Huaneng Group arising from the
acquisition of the Jinggangshan Power Plant and the Hanfeng Power Company (984,915)
Net deemed capital distribution to HIPDC arising from the acquisition of
the Luohuang Power Company, the Yueyang Power Company and the Yingkou
Power Plant (2,526,111)
------------------
Balance as of December 31, 2004 34,028,109
==================
F-66
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
42. US GAAP INFORMATION (CONT'D)
Condensed Combined Statements of Cash Flows
Year ended December 31,
---------------------------------------------------------
2004 2003 2002
------------------ ------------------ -------------------
Net cash provided by operating activities 9,465,952 11,028,736 8,863,012
Net cash (used in) / provided by investing
activities (11,825,975) (6,297,349) 1,689,723
Net cash provided by / (used in) financing activities 355,621 (4,008,934) (10,078,444)
------------------ ------------------ -------------------
Net (decrease) / increase in cash and cash
equivalents (2,004,402) 722,453 474,291
Cash and cash equivalents, beginning of year 4,299,933 3,577,480 3,103,189
------------------ ------------------ -------------------
Cash and cash equivalents, end of year 2,295,531 4,299,933 3,577,480
================== ================== ===================
Statement of Comprehensive Income
Under US GAAP, certain items shown as components of common equity must be more
prominently reported in a separate statement as components of comprehensive
income. However, for each of the years in the three-year period ended December
31, 2004, apart from the net income, there was no other comprehensive income
which should be included in the statement of comprehensive income.
New Accounting Pronouncements
IFRS
In 2004, the International Accounting Standard Board ("IASB") issued a number
of new and revised International Accounting Standards ("IASs") and
International Financial Reporting Standards ("IFRSs") which are effective for
accounting periods beginning on or after January 1, 2005. The list of the new
or revised IASs and IFRSs is as follows:
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
IAS 10 Events after the Balance Sheet Date
IAS 16 Property, Plant, and Equipment
IAS 17 Leases
IAS 18 Revenue
IAS 19 Employee Benefits
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 24 Related Party Disclosures
IAS 27 Consolidated and Separate Financial Statements
IAS 28 Investments in Associates
F-67
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
42. US GAAP INFORMATION (CONT'D)
New Accounting Pronouncements (Cont'd)
IFRS (Cont'd)
IAS 31 Interest in Joint Ventures
IAS 32 Financial Instruments: Disclosure and Presentation
IAS 33 Earnings per Share
IAS 36 Impairment of Assets
IAS 38 Intangible Assets
IAS 39 Financial Instruments: Recognition and Measurement
IAS 40 Investment Property
IFRS 2 Share-based Payment
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 6 Exploration for and Evaluation of Mineral Resources
The Company and its subsidiaries have not completed the assessment of the
effects of adopting these new or revised IASs and IFRSs.
US GAAP
In 2004, the Financial Accounting Standard Board ("FASB") issued Statement of
Financial Accounting Standards No. 151, Inventory Costs - an amendment of ARB
No. 43, Chapter 4 ("SFAS 151"), Statement of Financial Accounting Standards
No. 152 Accounting for Real Estate Time-Sharing Transactions ("SFAS 152"),
Statement of Financial Accounting Standards No. 153, Exchange of Nonmonetary
Assets ("SFAS 153") and revised Statement of Financial Accounting Standards
No. 123, Share-Based Payment ("Revised SFAS 123").
SFAS 151 amends and clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material (spoilage). It
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for inventory costs incurred during the fiscal years
beginning after June 15, 2005. The Company considered the effects of adopting
SFAS 151 and does not expect any material impact on the financial statements.
SFAS 152 amends FASB Statement No. 66, Accounting for Sales of Real Estate to
reference the financial accounting and reporting guidance for real estate
time-sharing transactions that is provided in AICPA Statement of Position
("SOP") 04-2, Accounting for Real Estate Time-Sharing Transactions and FASB
Statement No. 67 Accounting for Costs and Initial Rental Operations of Real
Estate Projects, to state the guidance for (a) incidental operations and (b)
costs incurred to sell real estate projects does not apply to real estate
time-sharing transactions. The accounting for those operations and cost is
subject to the guidance in SOP 04-2. SFAS 152 is effective for financial
statements for fiscal years beginning after June 15, 2005. The Company
considered the effects of adopting SFAS 152 and does not expect any material
impact on the financial statements.
SFAS 153 amends APB Opinion No. 29 on Accounting for Non-monetary
Transactions, to eliminate the exception for non-monetary exchanges of similar
productive assets and replaces it with a general exception of exchanges of
non-monetary assets that do not have commercial substance. It defines a
non-monetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
153 is effective for non-monetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company considered the effects of adopting
SFAS 153 and does not expect any material impact on the financial statements.
F-68
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
42. US GAAP INFORMATION (CONT'D)
New Accounting Pronouncements (Cont'd)
US GAAP (Cont'd)
Revised SFAS 123 is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation ("Original SFAS 123") and superseded APB Opinion No.
25, Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS 123 establishes standards for the accounting for transactions
in which an entity exchanges its equity instruments for goods or services that
are based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. Revised SFAS 123 focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. Revised SFAS 123 is effective a)
as at the beginning of the first interim or annual reporting period that
begins after June 15, 2005 for public entities that do not file as small
business issuers; b) as of the beginning of the first interim or annual
reporting period that begins after December 15, 2005 for public entities that
file as small business issuers; and c) as of the beginning of the first annual
reporting period that begins after December 15, 2005 for non-public entities.
The Company considered the effects of adopting Revised SFAS 123 and does not
expect any material impact on the financial statements.
F-69
Signature
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
Huaneng Power International, Inc.
By: /s/ Wang Xiao Song
-----------------------------
Name: Wang Xiao Song
Title: Vice Chairman
Date: April 15, 2005
CERTIFICATIONS
Exhibit 12.1
I, Li Xiaopeng, certify that:
1. I have reviewed this annual report on Form 20-F of Huaneng Power
International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this annual report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being
prepared;
(b) Evaluated the effectiveness of the Company's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure procedures, as of the end of the period
covered by the report based on such evaluation; and
(c) Disclosed in this report any change in the Company's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting;
and
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
Company's auditors and the audit committee of company's board of directors (or
persons performing the equivalent function):
(a) All significant deficiencies and material weakness in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Company's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal control
over financial reporting.
Date: April 15, 2005
By: /s/ Li Xiaopeng
--------------------------
Li Xiaopeng, Chairman
CERTIFICATIONS
Exhibit 12.2
I, Huang Jian, certify that:
1. I have reviewed this annual report on Form 20-F of Huaneng Power
International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this annual report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being
prepared;
(b) Evaluated the effectiveness of the Company's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure procedures, as of the end of the period
covered by the report based on such evaluation; and
(c) Disclosed in this report any change in the Company's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting;
and
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
Company's auditors and the audit committee of company's board of directors (or
persons performing the equivalent function):
(a) All significant deficiencies and material weakness in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Company's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal control
over financial reporting.
Date: April 15, 2005
By: /s/ Huang Jian
-------------------------------
Huang Jian, Chief Accountant
Exhibit 13.1
Certification of CEO and CFO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 20-F of Huaneng Power
International, Inc. (the "Company") for the year ended December 31, 2004 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), Li Xiaopeng, as Chairman of the Company, and Huang Jian, as Chief
Accountant of the Company, each hereby certifies, pursuant to 18 U.S.C. ss.
1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that,
to the best of his knowledge:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By: /s/ Li Xiaopeng
Name: Li Xiaopeng
Title: Chairman
Date: April 15, 2005
By: /s/ Huang Jian
Name: Huang Jian
Title: Chief Accountant
Date: April 15, 2005
This certification accompanies the Report pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
ss.18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906
has been provided to Huaneng Power International, Inc. and will be retained by
Huaneng Power International, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.