[LOGO GRAPHIC OMITTED]
HUANENG POWER INTERNATIONAL, INC.
[LOGO GRAPHIC OMITTED]
Annual Report On Form 20-F
2005
As filed with the Securities and Exchange Commission on June 26, 2006
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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO
OR
[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report ...................
For the transaction period form ____________ 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 RMB 1.00 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 by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes [X] No [ ]
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 RMB 1.00 each......................... 9,000,000,000
Overseas Listed Foreign Shares of RMB 1.00 each.......... 3,055,383,440
If this report is an annual or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934.
Yes [X] No [ ]
Note - Checking the box above will not relieve any registrant required
to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 from their obligations under those Sections.
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 whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 [X] Item 18 [ ]
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
_____________________
* 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........................................................3
C. Reasons for the offer and use of proceeds..............................................3
D. Risk factors...........................................................................3
ITEM 4 Information on the Company......................................................................8
A. History and development of the Company.................................................8
B. Business overview......................................................................8
C. Organizational Structure..............................................................15
D. Property, plants and equipment........................................................16
ITEM 4A Unresolved Staff Comments......................................................................29
ITEM 5 Operating and financial review and prospects...................................................29
A. General...............................................................................29
B. Operating results.....................................................................32
C. Financial position....................................................................40
D. Liquidity and cash resources..........................................................45
E. Trend information.....................................................................50
F. Performance of significant investments and their prospects............................50
G. Employee benefits.....................................................................50
H. Related Party Transactions............................................................50
I. Guarantee on Loans and Restricted Assets..............................................51
J. Off-balance sheet arrangements........................................................51
K. Tabular Disclosure of Contractual Obligations and Commercial Commitments..............51
ITEM 6 Directors, Senior Management and Employees.....................................................52
A. Directors, members of the supervisory committee and senior management.................52
B. Compensation of Directors and Officers................................................56
C. Board Practice........................................................................58
D. Employees.............................................................................58
E. Share Ownership.......................................................................59
ITEM 7 Major Shareholders and Related Party Transactions..............................................59
A. Major shareholders....................................................................59
B. Related party transactions............................................................61
C. Interests of experts and counsel......................................................68
ITEM 8 Financial Information..........................................................................68
A. Consolidated statements and other financial information...............................68
B. Significant Changes...................................................................69
ITEM 9 The Offer and Listing..........................................................................69
A. Offer and listing details and markets.................................................69
ITEM 10 Additional Information.........................................................................70
A. Share Capital.........................................................................70
B. Memorandum and articles of associate..................................................70
C. Material Contracts....................................................................76
D. Exchange controls.....................................................................76
E. Taxation................................................................................
F. Dividends and paying agents...........................................................81
G. Statement by experts..................................................................81
H. Documents on display..................................................................81
I. Subsidiary information................................................................81
J. Comparison of New York Stock Exchange Corporate Governance Rules
and China Corporate Governance Rules For listed Companies.............................82
ITEM 11 Quantitative and Qualitative Disclosures About Market Risk.....................................84
ITEM 12 Description of Securities Other than Equity Securities.........................................86
PART II. ........................................................................................................86
ITEM 13 Defaults, Dividend Arrearages and Delinquencies................................................86
i
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 16A Audit Committee Financial Expert...............................................................86
ITEM 16B Code of Ethics.................................................................................86
ITEM 16C Principal Accountant Fees and Services.........................................................87
ITEM 16D Exemptions from the Listing Standards for Audit Committees.....................................87
ITEM 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers.........................88
ITEM 17 Financial Statements...........................................................................88
ITEM 18 Financial Statements...........................................................................88
ITEM 19 Exhibit ......................................................................................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, 2005 of US$1.00 to RMB 8.0702. 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.
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 National Development and Reform Commission
(`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.
MW Megawatt. One million watts. The installed
capacity of power plants is generally
expressed in MW.
iv
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, 2005 and 2004
and the consolidated income statement and cash flow data for each of the years
in the three-year period ended December 31, 2005 are derived from the historical
financial statements included herein. Our consolidated balance sheet data as of
December 31, 2003, 2002 and 2001 and income statement and cash flow data for
each of the years in the two-year period ended December 31, 2002, 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, 2004 and 2005.
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 those power plants
stated in Note 41 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, 2005 and the equity as of
December 31, 2005 and 2004 are set forth in Note 41 to the Financial Statements.
The Selected Financial Data may not be indicative of future earnings, cash flows
or financial position.
Year Ended December 31,
-----------------------------------------------------------------------------------
2001(1) 2002(1) 2003(1) 2004(1) 2005 2005
RMB and US Dollars in thousands (RMB) (RMB) (RMB) (RMB) (RMB) (US$)(2)
except per share data ------------- -------- --------- ---------- ---------- -----------
Restated Restated Restated Restated
Income Statement Data
IFRS
Operating revenue.............. 15,816,656 18,512,585 23,433,572 30,150,602 40,190,004 4,980,051
Sales tax...................... (25,294) (38,116) (45,335) (32,324) (113,475) (14,061)
Operating expenses............. (10,777,328) (12,896,455) (16,315,075) (23,200,088) (33,067,563) (4,097,490)
------------ ------------ ------------ ------------ ------------ ------------
Profit from operations......... 5,014,034 5,578,014 7,073,162 6,918,190 7,008,966 868,500
Total financial expenses, net.. (796,215) (510,265) (544,285) (739,784) (1,124,391) (139,326)
Investment income, net......... 24,671 1,288 10,705 20,554 60,872 7,543
Share of (loss) / profit of
associates................... (5,381) (16,204) 160,509 312,037 644,376 79,846
Other income, net.............. -- -- 12,070 18,666 2,385 295
------------ ------------ ------------ ------------ ------------ ------------
Profit before tax.............. 4,237,109 5,052,833 6,712,161 6,529,663 6,592,208 816,858
Income tax expenses............ (715,220) (975,795) (1,097,859) (948,734) (1,044,297) (129,402)
------------ ------------ ------------ ------------ ------------ ------------
Profit for the year............
3,521,889 4,077,038 5,614,302 5,580,929 5,547,911 687,456
============ ============ ============ ============ ============ ============
1
Year Ended December 31,
------------------------------------------------------------------------------------------
2001(1) 2002(1) 2003(1) 2004(1) 2005 2005
RMB and US Dollars in thousands (RMB) (RMB) (RMB) (RMB) (RMB) (US$)(2)
except per share data ------------- -------- --------- ---------- ---------- ----------
Restated Restated Restated Restated
Income Statement Data (Cont'd)
IFRS
Attributable to:
Equity holders of the Company... 3,450,658 3,921,004 5,430,408 5,323,876 4,871,794 603,677
Minority interests.............. 71,231 156,034 183,894 257,053 676,117 83,779
------------ ------------ ------------ ------------ ------------ ------------
Net profit...................... 3,521,889 4,077,038 5,614,302 5,580,929 5,547,911 687,456
============ ============ ============ ============ ============ ============
Basic earnings per share........ 0.31 0.33 0.45 0.44 0.40 0.05
Fully diluted earnings per share 0.30 0.33 0.45 0.44 0.40 0.05
US GAAP(3)
Operating revenue............... 30,494,213 35,181,649 40,190,004 4,980,051
Net profit attributable to
shareholders.................. 5,898,580 6,039,429 5,429,925 672,836
Basic earnings per share........ 0.49 0.50 0.45 0.06
Fully diluted earnings per share 0.49 0.50 0.45 0.06
As of December 31,
------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2005
------------ ----------- ------------ ------------ ------------ ------------
RMB and US Dollars in thousands (RMB) (RMB) (RMB) (RMB) (RMB) (US$)(2)
except per share data
Balance Sheet Data
IFRS
Current assets.................. 10,763,919 7,685,441 8,303,195 9,653,653 12,063,175 1,494,780
Property, plant and equipment,
net.......................... 37,557,114 41,103,468 42,658,365 57,780,410 78,997,297 9,788,766
Available-for-sale investment... -- 254,990 254,990 254,990 1,033,225 128,030
Investments in associates....... 226,488 200,960 2,766,031 4,328,307 4,593,984 569,253
Land use rights and other
non-current assets........... 970,759 1,067,838 1,037,859 1,771,916 2,016,144 249,825
Deferred income tax assets...... -- -- 21,311 97,539 64,075 7,940
Goodwill........................ -- 126,560 298,876 376,726 671,796 83,244
Less: negative goodwill......... (2,225,505) (1,978,227) (1,730,949) (1,483,670) -- --
------------ ----------- ------------ ------------ ------------ ------------
Total assets.................... 47,292,775 48,461,030 53,609,678 72,779,871 99,439,696 12,321,838
------------ ----------- ------------ ------------ ------------ ------------
Current liabilities............. (8,922,347) (7,652,216) (9,242,408) (16,732,953) (23,107,142) (2,863,268)
Non-current liabilities......... (9,590,637) (9,482,050) (9,256,718) (16,515,006) (30,188,367) (3,740,721)
Total liabilities............... ------------ ------------- -------------- -------------- ------------ ------------
(18,512,984) (17,134,266) (18,499,126) (33,247,959) (53,295,509) (6,603,989)
------------ ----------- ------------ ------------ ------------ ------------
Net assets...................... 28,779,791 31,326,764 35,110,552 39,531,912 46,144,187 5,717,849
============ =========== ============ ============ ============ ============
Total equity.................... 28,779,791 31,326,764 35,110,552 39,531,912 46,144,187 5,717,849
============ =========== ============ ============ ============ ============
US GAAP (3)
Total assets.................... 81,641,120 93,875,754 11,632,395
Total liabilities............... (42,127,706) (52,464,419) (6,501,006)
Minority interests.............. (4,126,923) (4,954,726) (613,953)
------------ ------------ ------------
Net assets...................... 35,386,491 36,456,609 4,517,436
============ ============ ============
Shareholders' equity............ 35,386,491 36,456,609 4,517,436
============ ============ ============
2
Year Ended December 31,
--------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2005
----------- ----------- ------------ ----------- ------------ ---------------
RMB and US Dollars in (RMB) (RMB) (RMB) (RMB) (RMB) (US$)(2)
thousands except per
share data
Cash Flow Data
IFRS
Purchase of property,
plant and equipment.. (2,870,858) (1,594,210) (3,606,704) (9,877,553) (13,842,293) (1,715,235)
Net cash provided by
operating activities. 5,918,896 7,079,718 9,533,289 8,162,701 8,680,850 1,082,758
Net cash (used in) /
provided by
investing activities. (4,564,536) 1,074,101 (5,225,080) (13,650,285) (15,413,369) (1,909,912)
Net cash (used in) /
provided by
financing activities. (1,169,597) (7,324,354) (3,182,162) 3,654,467 7,084,653 877,878
US GAAP (3)
Purchase of property,
plant and equipment. (6,799,560) (11,876,838) (14,491,798) (1,795,717)
Net cash provided by
operating activities. 12,284,122 11,028,971 9,313,657 1,154,080
Net cash used in
investing activities (7,708,774) (13,067,191) (14,587,880) (1,807,623)
Net cash (used in) /
provided by
financing activities (3,753,866) 226,001 5,059,653 626,955
Other Financial Data
IFRS and US GAAP
Dividend declared per
share............... 0.15 0.17 0.25 0.25 0.25 0.03
Number of ordinary
shares ('000)........ 12,000,000 12,000,548 12,055,342 12,055,383 12,055,383 12,055,383
_________________
(1) The Company adopted revised International Accounting Standard 1
"Presentation of Financial Statements", under which the consolidated
operating results of prior years were restated for presentation
purposes. There is no change in the net operating results of these
periods.
(2) The US Dollar data has been translated from RMB solely for convenience
at the PBOC Rate on December 31, 2005 of US$1.00 to RMB 8.0702. See
"Item 10 Additional Information -- Exchange control for more
information on exchange rates between RMB and US Dollars".
(3) The amounts as of December 31, 2005 and 2004 and for each of the years
in the three-year period ended December 31, 2005 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
3
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
under the pricing policy applicable to us (the "Pricing Policy"). 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 and adversely affect our
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 few
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. In 2005, NDRC issued
several interim measures to carry out the pricing reform plan in the transition
period. At present, detailed rules for implementation of these interim measures
are still in the process of being formulated. There is no assurance that the
power pricing reform will not adversely affect our power rates and results of
operation. 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 Huaneng Group and HIPDC, whose interests may
differ from those of our other shareholders
Huaneng Group and HIPDC currently hold 8.75% and 42.03% of our
outstanding shares respectively. As Huaneng Group is HIPDC's parent company,
they exert effective control on us in concert. Their interests may sometimes
conflict with those of our other minority shareholders. There is no assurance
that Huaneng Group and HIPDC will always vote their shares, or direct the
directors nominated by them to act in a way that will benefit our other minority
shareholders.
Disruption in fuel supply and its transportation as well as increase in fuel
price may adversely 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.
4
In addition, our results of operation are sensitive to the fluctuation
of fuel price. Since 2003, the continuous increase of coal price has increased
our costs substantially and caused our profits to decline. Although the
government has established an electricity and coal price linkage mechanism to
allow power generation companies to increase their power rates to respond to the
increase of coal price, the implementation of the mechanism is subject to
significant conditions and uncertainty. There is no assurance that we will be
able to adjust our power rates to pass on the increase of coal price to our
customers. For a detailed discussion of the electricity and coal price linkage
mechanism, see "Item 4 Information of the Company-B Business Overview - Pricing
Policy".
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 currently maintain
property all risks insurance and machinery breakdown insurance for all of our
power plants in the 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 currently
maintain business interruption insurance only for one of our power plants, and
except for third party liability insurance coverage for accidents during
construction and equipment installation, do not carry 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 or any other types of assets insurances. 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.
5
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 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.
The value of the Renminbi against the US dollar and other currencies
may fluctuate and is affected by, among other things, changes in China's
political and economic conditions. The conversion of Renminbi into foreign
currencies, including US dollars, has historically been set by the People's Bank
of China. On July 21, 2005, the PRC government changed its policy of pegging the
value of the Renminbi to the US dollar. Under the new policy, the Renminbi is
permitted to fluctuate within a band against a basket of certain foreign
currencies. This change in policy resulted initially in an approximately 2.0%
appreciation in the value of the Renminbi against the US dollar. Since the
adoption of this new policy, the value of Renminbi against the US dollar has
fluctuated on a daily basis within narrow ranges, but overall has further
strengthened against the US dollar. There remains significant international
pressure on the PRC government to further liberalize its currency policy, which
could result in a further and more significant appreciation in the value of the
Renminbi against the US dollar. However, there is no assurance that there will
not be a devaluation of Renminbi in the future. If there is such a devaluation,
our debt servicing cost will increase and the return to our overseas investors
may decrease.
We are in the process of improving our internal controls and management system
to enable us to certify the effectiveness of our internal controls under the
Sarbanes-Oxley Act of 2002. Our failure to timely and successfully improve these
controls and systems could subject us to regulatory actions and harm the price
of our stock
The United States Securities and Exchange Commission, as required by
Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every
public company in the United States to include a management report on such
company's internal controls over financial reporting in its annual report, which
contains management's assessment of the effectiveness of the company's internal
controls over financial reporting. In addition, an independent registered public
accounting firm must attest to and report on management's assessment of the
6
effectiveness of the Company's internal controls over financial reporting. These
requirements will first apply to our annual report on Form 20-F for the fiscal
year ending December 31, 2006. During the course of our preparation for
compliance with Section 404 of the Sarbanes-Oxley Act, we have identified
certain deficiencies in our internal controls over financing reporting. Although
we have already taken remedial measures to make necessary improvements, we
cannot assure you that we will be able to effectively and completely remediate
those identified deficiencies in time to comply with Section 404 of the
Sarbanes-Oxley Act, nor can we assure you that our management and independent
registered public accounting firm will conclude our internal controls over
financial reporting is effective based on their evaluations. Our failure to
satisfactorily comply with our obligations under Section 404 of the
Sarbanes-Oxley Act of 2002 could subject us to regulatory scrutiny, and result
in a loss of public confidence in our management, which could, among other
things, adversely affect our stock price.
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 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 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 changes in 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
7
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.
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 January, 2005, we acquired 60% equity interest of Huaneng Sichuan
Hydropower Co., 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 RMB 2.025 billion.
In June 30, 2005, we acquired 26.36% additional equity interest in
Jiangsu Huaneng Huaiyin Power Limited Company ("Huaiyin Power Company") from
Jiangsu Yueda Investment Co., Ltd. ("Jiangsu Yueda"). The acquisition increased
our attributable generation capacity by 116 MW, and the consideration for the
acquisition was RMB 200.60 million.
At the end of 2005, we paid the consideration of RMB 126 million to
Huaneng Group and advanced a payment (which will represent an injection of
capital) of RMB 162 million to China Huaneng Finance Corporation Ltd. ("Huaneng
Finance") in order to acquire 20% equity interest in Huaneng Finance. The
acquisition became effective subsequent to the year end.
On April 19, 2006, we completed our shareholding reform process, in
which Huaneng Group and HIPDC offered three shares to each holder of A shares
for every ten shares held by such holder. The total number of shares offered by
Huaneng Group and HIPDC in connection with this reform was 15,000,000 shares. As
a result of the shareholding reform process, all the previously non-circulated
domestic shares were allowed to be circulated subject to certain lock-up
arrangements made by the holders of those shares. Huaneng Group and HIPDC
committed not to sell their shares within sixty months after April 19, 2006,
while the other previously non-circulated domestic shareholders committed not to
sell within one year since then. The shareholding reform process will not affect
the shareholding of overseas listed foreign shares.
See "Item 5 Operating and Financial Review and Prospects -- Liquidity
and Cash Resources" for a description of our 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 23,549 MW as of March 31, 2006. We
wholly own 16 operating power plants and have controlling interests in 12
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 2005, our power plants
had an average availability factor of 92.93% and an average capacity factor of
70.68%. We also have 7,040 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 resources.
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
8
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. Please see "Item 7 -- Major Shareholders and Related Party
Transactions" for a 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 2005, 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, 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.
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
9
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
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.
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 effective
on January 1, 2005, 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 of our
planned power plants or power plants under construction meet the conditions for
encouraged projects under the current Catalogue.
In 2005, we started going through the procedures for import-duty
exemption for imported generating equipments in the amount of RMB 100 million
for the Yuhuan project.
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.
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
RMB 40 to RMB 50 per MWh during the period when such loans were outstanding.
10
On June 6, 1994, the former Ministry of Electric Power ("MEP")
announced the Pricing Policy applicable to us, specifying 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.
We have been able to recover costs, and generate a profitable return
under the Pricing Policy. However, there is no assurance that the government
agencies will approve our proposed power rates in accordance with the Pricing
Policy. Our power rates approved by the government authorities in the last
several years represented a rate of return on Net Fixed Assets below the
permitted 15%.
The PRC government has moved toward reforming the existing power
pricing mechanism. The Electric Power Law, which came into effect in 1996, 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.
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 several
circulars to permit power generation companies to adjust their power rates.
In December, 2004, to more effectively address the problem of rising
coal prices, 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. In May 2005, NDRC issued a circular to increase on-grid rates and
retail rates in the Northern region, Central region, Eastern region, Northwest
region and Southern region pursuant to the power and coal price linkage
mechanism. We accordingly increased on-grid rates of our power plants in the
Northern region, Central region, Eastern region and Southern region on May 1,
2005, and on-grid rates of our power plants in the Northwest region on July 15,
2005.
In 2005, NDRC issued several interim measures to implement the power
pricing reform plan in the transition period. At present, detailed rules for
implementation of the interim measures are still in the process of being
formulated.
See "Item 5 Operating and Financial Review and Prospects -- Trend
Information" for a detailed discussion of this new pricing mechanism.
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 one year 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 2005, most of the
agreements entered into between our power plants and the local grid companies
were based on the Model Contract Form.
11
Power market in the Northeast region
The power market in the Northeast region commenced simulated operation
on January 15, 2004 by adopting a "two-tier pricing with full output bidding"
mode, under which on-grid rates are comprised of capacity rates and output
rates. While capacity rates are formulated by the government, output rates are
determined through a bidding process held on monthly and annual basis. The power
market in the Northeast region started settlement at actual bidding price since
May 2005, and carried out 2006 annual price bidding in early 2006. After then,
the market operation was suspended. The power regulatory authorities are
currently in the process of accumulating the relevant experience, researching
the further plan, and preparing for resuming trial operation when the timing is
appropriate.
We have three power plants in the Northeast region, namely Dalian Power
Plant, Dandong Power Plant and Yingkou Power Plant with a total of eight
generating units and an aggregate generation capacity of 2,740 MW. All of these
power plants consist of generating units with large-capacity and the management
has put in place a strong management team to manage these plants.
To ensure a fair market environment for the three power plants in
Liaoning, we will keep ourselves 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. We believe that we can optimize our competitive
strengths under a fair, reasonable and open market environment.
Power market in the Eastern region
The power market in the Eastern region commenced simulated operation of
monthly price bidding and daily price bidding respectively on May 18 and October
28, 2005. Unlike the operating mode of the power market in the Northeast region,
there is a "one-tier pricing with partial output bidding" mode applicable here.
Only 10% of the planned output was sold through the price bidding process; and
90% was still subject to the price approved by the government. The power market
in the Eastern region commenced trial operation in early April 2006, and
completed the first two phases of trial operation at the end of April. The SERC
is expected to launch the third phase of trial operation when the timing is
appropriate.
Currently, we have 8 power plants consisting of 26 power generating
units with an aggregate generation capacity of 9,024 MW, representing 14.09% of
the aggregate capacity of all bidding units in the Eastern region. Most of our
power plants are located in regional loading centres of Jiangsu, Shanghai and
Fujian, and consist of individual units with large-capacity and
high-performance, together with small number of employees and a strong
management team. Under our centralized management, these power plants will
remain highly competitive in their markets.
Power market in the other regions
The power market in the Southern region commenced simulated operation
of annul price bidding in November 2005 and is expected to enter into trial
operation at the end of 2006.
The power market in the Central region is expected to commence
simulated operation at the end of 2006.
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 us 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, 2005 and the approved power rates for 2005 and 2006.
12
--------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2005 2006
---------- ---------- ---------- --------- ---------- ----------- -----------
Average Average Average Average Average Approved Approved
Rate(1) Rate(1) Rate(1) Rate(1) Rate(1) Rate(1) Rate(1)
---------- ---------- ---------- --------- ---------- ----------- -----------
Dalian Power Plant........... 291.38 280.53 272.69 283.62 317.58 323.00 --
Dandong Power Plant.......... 298.93 273.70 276.95 289.05 301.67 332.00 --
Yingkou Power Plant.......... -- -- -- 315.48 360.09 355.00 --
Fuzhou Power Plant.......... -- 327.80 331.82 365.00 367.06 372.50 386.50
Phase I.................. 357.50 -- -- -- -- -- --
Phase II................. 349.18 -- -- -- -- -- --
Shangan Power Plant......... -- 315.65 307.94 303.25 319.91 324.00 341.00
Phase I.................. 292.71 -- -- -- -- -- --
Phase II................. 371.73 -- -- -- -- -- --
Nantong Power Plant......... 318.38 309.54 312.52 325.18 343.00 338.00 355.70
Nanjing Power Plant......... 318.60 304.07 307.31 321.67 340.65 338.00 355.70
Taicang
Phase I.................. -- 317.52 321.80 341.10 360.00 365.00 380.70
Phase II................. -- -- -- -- -- -- 386.00
Huaiyin Power Plant
Phase I.................. -- 314.79 317.21 330.88 346.43 344.00 359.70
Phase II................. -- -- -- -- 373.77 370.00 385.70
Shidongkou I................ -- 252.97 256.64 285.43 320.30 281.00 358.00
Shidongkou II............... 356.76 345.90 332.85 342.56 357.60 374.00 358.00
Shantou Oil-Fired Plant..... 618.24 621.02 672.41 604.08 610.73 594.39 594.39
Shantou Power Plant
Phase I.................. 473.85 455.95 435.17 446.86 462.83 449.41 468.51
Phase II................ -- -- -- -- -- -- 439.00
Dezhou Power Plant
(Phases I, II & III).... 340.33 339.64 333.34 332.58 349.56 336.97 355.50
Jining Power Plant
Phases I, II............. 267.31 275.15 274.66 299.89 323.41 282.26 310.00
Phase III................ -- -- -- 299.89 323.41 321.50 360.00
Weihai Power Plant.......... 390.72 393.74 386.50 394.06 398.93 397.00 400.00
Xindian..................... -- -- 342.41 320.83 337.25 321.50 345.00
Changxing................... -- 362.70 320.57 351.94 392.83 371.00 403.80
Yushe Power Plant
Phase I.................. -- -- 200.63 282.10 319.37 308.00 308.00
Phase II................. -- -- -- 282.10 256.00 250.00 259.00
Qinbei...................... -- -- -- -- 299.77 290.00 321.00
Jinggangshan Power Plant.... -- -- -- -- 353.90 348 365.00
Yueyang Power Plant.........
Phase I................... -- -- -- 316.52 341.34 345.00 369.00
Luohuang Power Plant........ -- -- -- 286.74 300.90 290.00 308.00
Pingliang Power Plant....... -- -- -- -- 211.43 -- 230.30
Sichuan Hydropower.......... -- -- -- -- 262.52 -- 299.72
___________
Notes: (1) Includes value-added tax.
Fuel supply arrangements
In 2005, all of our power plants were fueled by coal except Shantou
Oil-Fired Plant and Sichuan Hydropower.
13
Coal
Most of the coal supply for our 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 2005, coal price increased by a substantial volume compared to the
same period in 2004. We consumed a total of 68.08 million tons of coal, 54.5% of
which was purchased under the key contracts and medium and long-term agreement,
and the remainder was purchased on the open market. Coal purchase price for our
company, including transportation costs and miscellaneous expenses, averaged
approximately RMB 338.03 per ton. 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, 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 2005.
In order to address the shortage of coal supplies, we have entered into
eight medium and 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 2006. 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 50.94 million tons of coal for 2006 as of April 20, 2006, which is
about 77% of the coal required for our total planned generation. 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 2005, Shantou Oil-Fired Plant generated only a small amount of
output. Instead of purchase from external sources, it used crude oil on its
storage. There is no power generation plan for Shantou Oil-Fired Plant in 2006.
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, coal-fired generating units 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:
14
(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.
C. Organizational Structure
We are 42.03% 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 RMB 20 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 electricity. In addition to this core
business, Huaneng Group also engages in the development, investment,
construction, production and sale of projects and products in the information,
transportation, new energy source and environmental industries.
HIPDC was established in 1985 as a joint venture with 51.98% of its
equity interests currently owned by Huaneng Group. HIPDC is engaged in
developing power plants using domestic and 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.
On April 19, 2006, we completed our shareholding reform process, in
which Huaneng Group and HIPDC offered three shares to each holder of A Shares
for every ten shares held by such holder. The total number of shares offered by
Huaneng Group and HIPDC in connection with this reform was 15,000,000 shares.
As a result of the shareholding reform process, all the previously
non-circulated domestic shares were allowed to be circulated subject to certain
lock-up arrangements made by the holders of such shares. Huaneng Group and
HIPDC committed not to sell their shares within sixty months after April 19,
2006, while the other previously non-circulated share holders committed not to
sell within one year since then. The shareholding reform process will not
affect the shareholding of overseas listed foreign shares.
The following organizational chart sets forth the organizational
structure of HIPDC and us after the shareholding reform process:
15
[GRAPHIC OMITTED]
16
D. Property, plants and equipment
The following table presents certain summary information on our
power plants and projects under construction as of June 15, 2006.
Current
Province/ Actual/Estimated Installed Attributable Type
Plant or Expansion Municipality In-service Date(1) Capacity Ownership Capacity of Fuel
----------------------- ------------- ------------------ ---------- ---------- ------------ --------
(Names as defined below) (MW) % MW
Power Plants
------------------------------------------------------------------------------------------------------------------
Dalian Phase I Liaoning Unit I: Sep. 1988 2 x 350 100% 700 Coal
Unit II: Dec. 1988
Phase II Unit III: Jan. 2 x 350 100% 700 Coal
1999
Unit IV: Jan.
1999
Dandong Liaoning Unit I: Jan. 1999 2 x 350 100% 700 Coal
Unit II: Jan.
1999
Yingkou Liaoning Unit I: Jan. 1996 2 x 320 100% 640 Coal
Unit II: Dec.
1996
Fuzhou Phase I Fujian Unit I: Sep. 1988 2 x 350 100% 700 Coal
Unit II: Dec.
1988
Phase II Unit III: Oct. 2 x 350 100% 700 Coal
1999
Unit IV: Oct.
1999
Shangan Phase I Hebei Unit I: Aug. 1990 2 x 350 100% 700 Coal
Unit II: Dec.
1990
Phase II Unit III: Oct. 2 x 300 100% 600 Coal
1997
Unit IV: Oct.
1997
Nantong Phase I Jiangsu Unit I: Sep. 1989 2 x 352 100% 704 Coal
Unit II: March
1990
Phase II Unit III: Jul. 2 x 350 100% 700 Coal
1999
Unit IV: Oct.
1999
Nanjing Jiangsu Unit I: March 2 x 320 100% 640 Coal
1994
Unit II: Oct.
1994
Taicang Phase I Jiangsu Unit I: Dec. 1999 2 x 300 75% 450 Coal
Unit II: April
2000
Phase Jiangsu Unit III: Jan. 2 x 600 75% 900 Coal
II(2) 2006 Unit IV: Feb. 2006
Huaiyin Phase I Jiangsu Unit I: Nov. 1993 2 x 220(3) 90% 396 Coal
Unit II: Aug.
1994
Phase II Jiangsu Unit III: 2 x 330 63.64% 420 Coal
Jan. 2005
Unit IV: Mar.
2005
Shidongkou I Shanghai Unit I: Feb. 1988 3 x 300 100% 1,220 Coal
Unit II: Dec.
1988
Unit III: Sep.
1989
Unit IV: May 1990 1 x 320(4)
Shidongkou II Shanghai Unit I: Jun. 1992 2 x 600 100% 1,200 Coal
Unit II: Dec.
1992
Shanghai Combined Shanghai Unit I: May 2006 2 x 390 70% 546 Gas
Cycle(5) Unit II: June 2006
Shantou Oil-Fired Guangdong Units I & II: 2 x 34.1 100% 103 Oil
Jan. 1987
Unit III: April 1 x 34.95
1988
Shantou Phase I Guangdong Unit I: Jan. 1997 2 x 300 100% 600 Coal
Unit II: Jan.
1997
Phase Guangdong Unit III: Oct. 1 x 600 100% 600 Coal
II(6) 2005
Dezhou Shandong Units I & II: 1 x 300 + 1 x 100% 630 Coal
1992 330(7)
Units III & IV: 2 x 300 100% 600 Coal
Jun. 1994, May
1995
Units V & VI: 2 x 700(7) 100% 1,400 Coal
Jun. 2002; Oct.
2002
17
Current
Province/ Actual/Estimated Installed Attributable Type
Plant or Expansion Municipality In-service Date(1) Capacity Ownership Capacity of Fuel
----------------------- ------------- ------------------ ---------- ---------- ------------ --------
(Names as defined below) (MW) % MW
Power Plants
------------------------------------------------------------------------------------------------------------------
Jining (8) Shandong Units I & II: 1 x 50 100% 50 Coal
1973
Units III & IV: 1 x 115 100% 225 Coal
1976 & 1978
1 x 110
Unit V & Unit 2 x 135 100% 270 Coal
VI: July 2003 &
August 2003
Weihai Shandong Units I & II: 2 x 125 60% 150 Coal
May 1994, Jan.
1995
Units III & IV: 2 x 300 60% 360 Coal
Mar. Nov. 1998
Xindian Shandong Unit III: Jan 2 x 225 100% 450 Coal
2002
Unit IV: Dec 2001
Changxing Zhejiang Unit I: Jan. 1992 1 x 125 100% 260 Coal
Unit II: Aug. 1 x 135(9)
1992
Yushe Phase I Shanxi Unit I: June 1994 2 x 100 60% 120 Coal
Unit II: Dec 1994
Phase II Unit I: Nov. 2004 2 x 300 60% 360 Coal
Unit II: Dec.
2004
Qinbei Phase I Henan Unit I & II: 2 x 600 55% 660 Coal
Dec. 2004
Jinggangshan Jiangxi Unit I: Dec. 2000 2 x 300 100% 600 Coal
Unit II: Aug.
2001
Yueyang Phase I Hunan Unit I: Sep. 1991 2 x 362.5 55% 398.75 Coal
Unit II: Dec.
1991
Phase Unit III: March 2 x 300 55% 330 Coal
II(10) 2006 Unite IV: May 2006
Luohuang Phase I Chongqing Unit I: Sep. 1991 2 x 360 60% 432 Coal
Unit II: Feb.
1992
Phase II Unit I & II: Dec. 2 x 360 60% 432
1998 Coal
Jiangbei Chongqing Unit I: Jan. 1991 1 x 108 60% 64.8 Gas
Gas-fired
Pingliang Gansu Unit I: 2000 4 x 300 65% 780 Coal
Unit II: 2001
Unit III: June.
2003
Unit IV: Nov.
2003
Sichuan Hydropower Sichuan N/A 1,391 60% 531.2 Hydropower
--------------------------------------------------------------------------------------------------------------------
Project under
Construction
--------------------------------------------------------------------------------------------------------------------
Shanghai Combined Shanghai 1 x 390 70% Gas
Cycle
Luohuang Phase III Chongqing 2 x 600 60% Coal
Xindian Phase III Shandong 2 x 300 95% Coal
Yingkou Phase II Liaoning 2 x 600 100% Coal
Yuhuan Zhejiang 2 x 1,000 100% Coal
Huaiyin Phase III Jiangsu 2 x 330 63.64% Coal
Sichuan Hydropower Sichuan 570 60% Hydropower
--------------------------------------------------------------------------------------------------------------------
Notes:
(1) Commencement of commercial operations. See "Development of Power Plants
-- Plant Start-up and Operation".
(2) Units III and IV of Taicang Power Plant were put into operation in
January and February 2006, respectively.
(3) Units I and II of Huaiyin Power Plant each increased installed capacity
of 20MW from 200MW to 220MW; and Units III and IV were put into
operation in January and March, 2006, respectively.
(4) Unit IV of Shidongkou I Power Plant increased installed capacity of
20MW from 300MW to 320MW.
18
(5) Units I and II of Shanghai Combined Cycle Power Plant were put into
operation in May and June 2006, respectively.
(6) Unit III of Shantou Power Plant Phase II was put into operation in
October 2005.
(7) Unit IV of Dezhou Power Plant increased installed capacity of 30MW from
300 MW to 330MW; and Units V and VI expanded installed capacity of 40
MW from 660 MW to 700 MW, respectively.
(8) Unit I of Jining Power Plant with installed capacity of 50MW was put
out of operation as of January 1, 2006
(9) Unit IV of Changxing Power Plant increased installed capacity of 10MW
from 125MW to 135MW.
(10) Units III and IV of Yueyang Power Plant were put into operation in
March 2006 and May 2006, respectively.
In addition to the operating power plants and the projects under
construction described above, our proposed coal-fired power projects consist of
the total installed capacity of 6,407 MW and the proposed hydro-power projects
consist of the total installed capacity of 2,508 MW.
The following table presents the availability factors and the
capacity factors of our operating power plants for the years ended December 31,
2003, 2004, and 2005.
Availability factor (%) Capacity factor (%)
------------------------------------- --------------------------------------
2003 2004 2005 2003 2004 2005
--------- ---------- ---------- ---------- --------- ------------
Dalian 97.49 75.29
Phase I..................... 90.66 95.08 64.32 78.80
Phase II.................... 96.77 -- 73.79 --
Dandong........................ 97.74 94.95 97.09 68.84 77.94 69.12
Yingkou........................ -- 94.07 93.72 -- 80.74 83.48
Fuzhou 93.60 75.14
Phase I..................... 91.08 92.47 72.03 83.13
Phase II.................... 93.58 -- 72.43 --
Shangan 93.45 74.21
Phase I..................... 89.15 93.02 69.76 74.95
Phase II.................... 91.72 -- 71.18 --
Nantong 93.50 68.32
Phase I..................... 89.69 92.52 62.61 76.47
Phase II.................... 99.72 -- 73.80
Nanjing........................ 94.16 94.47 90.97 72.55 77.92 70.21
Taicang........................ 95.31 94.74 95.53 80.71 86.18 75.51
Huaiyin........................ 94.44 94.35 94.38 67.98 76.70 68.49
Shidongkou I................... 81.86 94.43 83.35 74.58 77.55 71.18
Shidongkou II.................. 91.47 96.51 92.63 78.87 80.64 75.71
Shantou Oil-Fired.............. 91.05 98.24 99.97 33.93 35.10 0.59
Shantou
Phase I..................... 94.23 92.40 92.35 84.71 88.57 89.80
Phase II....................
Dezhou......................... 90.47 94.49 90.58 54.05 59.27 65.37
Jining......................... 94.32 93.58 94.37 51.28 53.67 65.55
Weihai......................... 94.87 94.29 95.70 58.53 63.82 65.64
Xindian........................ 95.52 92.11 93.29 44.99 61.77 67.35
Changxing...................... 86.56 95.46 95.31 81.65 88.56 84.36
Yushe.......................... 94.69 95.84 92.27 80.20 85.43 77.37
Qinbei ........................ 92.58 70.85
Jinggangshan................... -- 92.40 93.16 -- 69.12 65.96
Yueyang........................ -- 89.25 93.70 -- 71.90 71.89
Luohuang....................... -- 90.71 89.44 -- 64.48 65.01
Pingliang...................... 95.39 76.80
Sichuan Hydropower............. 90.36 59.30
Our operating power plants and projects under construction as of
June 15, 2006 are described below.
19
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 2005, Dalian Power Plant obtained
37.3% 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 RMB 396.14 (2004: RMB 344.79) per ton in 2005.
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 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 2005, Dandong Power Plant obtained
43.18% 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 RMB 357.76 (2004: RMB 289.67) per ton in 2005.
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 2005, Yingkou Power Plant obtained
64.95% 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 RMB 352.15 (2004: RMB 301.62) per ton in 2005.
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.
Project under construction 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. We own
100% equity interest in this project.
20
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 2005, the Fuzhou Power Plant
obtained 36.59% 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 2005 was RMB 423.91 (2004: RMB 393.15) 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.
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 2005, Shangan Power Plant obtained
55.15% 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 2005 was RMB 286.70 (2004: RMB 212.20) 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.
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. We own and maintain 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.
21
Nantong Power Plant consumes up to 14,000 tons of coal per day
when operated at maximum generating capacity. In 2005, Nantong Power Plant
obtained 54.17% 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 2005 was RMB 397.03 (2004: RMB 332.41) 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.
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 2005, Nanjing Power Plant obtained approximately 39.91% 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 2005 was RMB 412.11 (2004: RMB 348.95) 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.
Taicang Power Plant. Taicang Power Plant Phase I 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 Phase I
consists of 2 x 300 MW PRC-built coal-fired generating units, which commenced
operation in December, 1999 and April, 2000 respectively. Taicang Phase II
Expansion consists of two 600 MW coal-fired generating units, which commenced
operation in January and February 2006, 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 2005, Taicang Power Plant obtained approximately 68.81% 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 2005 was RMB 391.03 (2004: RMB 339.94) 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.
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 220 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 440 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 2005, Huaiyin Power Plant obtained approximately 59.6% 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 2005 was RMB 403.61 (2004: RMB 358.62) 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.
22
Project under construction in Jiangsu Province
Huaiyin Power Plant Phase III is expected to consist of two 330 MW
generating units. We own 63.64% equity interest in this project.
Power plants in Shanghai Municipality
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 3 x 300 MW and 1 x 320 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 1,220 MW.
The coal supply for Shidongkou I is primarily from Shanxi
Province, Anhui Province and Henan Province.
In 2005, Shidongkou I obtained approximately 20.14% 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 2005 was RMB 409.69 (2004: RMB 359.93) 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.
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 2005, Shidongkou II obtained 48.18% 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 2005 was RMB
393.10 (2004: RMB 342.30) 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.
Project under construction in Shanghai Municipality
Shanghai Combined Cycle project is expected to consist of three 390
MW combined-cycle-gas-turbine generating units. We own 70% equity interest in
this project. While two generating units have already been put into operation
respectively since May and June 2006, the remaining one is still under
construction.
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.
In 2005, Shantou Oil-Fired Power Plant used only the crude oil on
storage instead of purchase from external sources. There is no power generation
plan for Shantou Oil-Fired Plant in 2006.
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
23
Plant Phase I 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. Shantou Power Plant Phase II consists of one 600
MW coal-fired generating unit and commenced operation in October 2005.
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 2005, the Shantou Power Plant
obtained 37.79% 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 2005 was RMB 435.55 (2004: RMB 371.30) 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.
Power plants in Shandong Province
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
consisting of one 300MW and one 330MW coal-fired generating units, phase II
consisting of two 300 MW coal-fired generating units, and Phase III consisting
of two 700 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 2005, Dezhou Power Plant
obtained approximately 73.54% 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 2005 was RMB 270.51 (2004: RMB
217.03) 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 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. On
January 1, 2006, Unit I of Jining Power Plant with capacity of 50MW was put out
of operation. As a result, Jining Power Plant currently comprises five
coal-fired generating units, with an aggregate installed capacity of 545 MW.
Jining Power Plant consumes up to 7,000 tons of coal per day when
operating at maximum generating capacity. In 2005, Jining Power Plant obtained
approximately 31.0% 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 2005 was RMB 361.76 (2004: RMB 274.63) 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. 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
24
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 2005, Weihai Power Plant obtained
approximately 38.6% 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 2005 was RMB 383.94 (2004: RMB 318.83) 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.
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.
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 2005, Xindian Power Plant obtained 59.1% 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 RMB 355.43 (2004: RMB
292.76) per ton in 2005.
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.
Project under Construction in Shandong Province
Xindian Power Plant Phase III Expansion ("Xindian Phase III
Expansion") Xindian Phase III Expansion is planned to consist of two 300 MW
coal-fired generating units. We own 100%equity interest in this project.
Power plants in Zhejiang Province
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 1 x 125 MW and 1 x 135 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 2005, Changxing Power Plant obtained approximately 53.54% 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 2005 was RMB 390.98 (2004: RMB 360.82) per ton.
Changxing Power Plant sells its electricity to Zhejiang Provincial
Electric Power Company. Changxing Power Plant delivers its electricity to
Zhejiang Provincial Power Grid.
25
Project under Construction in Zhejiang Province
Yuhuan Power Plant Yuhuan Power Plant is expected to consist two
1,000 MW ultra-super critical coal-fired generating units. We own 100%
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.
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
2005, Yushe Power Plant obtained all of its coal through purchases on the open
market. The weighted average cost of coal for Yushe Power Plant was RMB 225.34
(2004: RMB 181.96) per ton in 2005.
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. In 2005, Qinbei Power Plant obtained
10.91% 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 Qinbei Power Plant was RMB 357.30 per ton in 2005.
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 2005, Jinggangshan Power Plant obtained 65.12% its total coal
consumption pursuant to the key contracts and the remainder on the open market.
In 2005, the weighted average cost of coal for Jinggangshan Power Plant was RMB
392.18 (2004:RMB 360.90) 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. Yueyang Power Plant Phase I
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. Yueyang Power Plant Phase II consists of two
coal-fired generating units with installed capacity of 600 MW, which were put
into operation in March and May 2006, respectively.
26
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 2005, Yueyang Power Plant
obtained 45.21% its total consumption of coal pursuant to the key contracts and
the remainder on the open market. In 2005, the weighted average cost of coal
for Yueyang Power Plant was RMB 378.81 (2004: RMB 315.30) 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.
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 2005, Luohuang Power
Plant obtained all of its coal supplies through purchases on the open market.
In 2005, the weighted average cost of coal for Luohuang Power Plant was RMB
213.61 (2004: RMB 184.89) 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 planned to consist of two 600 MW coal-fired generating
units with an installed capacity of 1,200mw. We 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 2005, Pingliang Power Plant
obtained all of its coal supplies through purchases on the open market. The
weighted average cost of coal for Pingliang Power Plant was RMB 130.06 per ton.
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.
Power plants in Sichuan Province
We own 60% equity interest in Sichuan Hydropower, and Sichuan
Hydropower directly holds 68%, 59.33%, 60%, 60%, 52.2%, 55% and 95% equity
interests in Baoxinghe Power Company, Dongxiguan Hydropower, Taipingyi
Hydropower, Kangding Hydropower, Mingtai Hydropower, Jialingjiang Hydropower
and Fujiang Hydropower respectively. The subsidiaries of Sichuan Hydropower
currently own ten operating hydro-electric power plants with the total
installed capacity of 1,391 MW, and four hydro-electric power plants under
construction with the total installed capacity of 570 MW.
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
27
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
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.
As power generation companies were separated from power grid
companies and more competitors entered into the market, the SERC issued the
"Interim Measures Regarding Promotion of Openness, Fairness and Equitableness
of Power Dispatch", requiring power dispatch centers to treat all competitors
indiscriminately in respect of dispatch administration and information
disclosure except in cases where safe and stable operation of the electric
power system requiring different 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.
At present, new projects are subject to the environmental
evaluation approval. The project proposal is required to be submitted to the
State Environmental Protection Administration ("SEPA") for approval.
According to the New Emission Standards, promulgated by SEPA 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. The emission of sulfur dioxide by
newly constructed coal-fired power plants is required to be no more than 400mg
per standard cubic meter. Due to shortage of low-sulfur content coal, we
generally install flue gas desulphurization ("FGD") equipments with all of our
newly constructed generating units.
In addition, we have gradually carried out sulfur disposal reform
on the existing generating units. All of the disposal equipments and facilities
for sulfur dioxide, fly ash, waste water and noise in our existing power plants
completely satisfy the existing national standard.
28
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 and installing FGD equipments, 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.
In 2003 and 2004, we paid discharge fees to local governments of
approximately RMB 72.68 million and RMB 170.32 million respectively. 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 Emission 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 have increased annually by RMB 0.21 per kilogram from RMB
0.21 in 2003 to RMB 0.63 in 2005. Discharge fees for nitrous dioxide were
increased to RMB 0.63 per kilogram starting from July 1, 2004. The discharge
fees for the dust are RMB 0.28 per kilogram from July 1, 2003. In 2005, we paid
to the local governments a total discharge fee of approximately RMB 376.72
million.
We believe 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. 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 the currently effective
national and local environmental protection regulations. It is expected that
the PRC Government will impose additional and stricter regulations to implement
the emission plan which would require additional expenditure in 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 RMB 133.8 billion of coverage on our property, plant and
equipment (including construction insurance). We do not usually carry business
interruption insurance, which is not customarily carried by power companies in
the PRC. However, we continuously maintain business interruption insurance on
Hanfeng Power Plant acquired in 2004 for historical reason. In 2005, we started
maintaining construction insurance on Yueyang Phase II, Yuhuan power plant,
Xindian Phase III, Yingkou Phase II and Huaiyin Phase III.
We believe that our insurance coverage is adequate and is standard
for the power industry in China.
ITEM 4A Unresolved Staff Comments
None.
ITEM 5 Operating and financial review and prospects
A. General
Huaneng Power International, Inc. is China's largest listed power
producer. Its main business is investment, construction, operation and
management of power plants. The Company provides stable and reliable electricity
supply to customers through the grid companies where its operating plants are
located. The Company insists on scientific development and focuses on
increasing economic efficiency, improving return for shareholders, conserving
resources and protecting the environment.
The Company now wholly owns 16 operating power plants, have
controlling interests in 12 operating power companies and minority interests in
4 power companies. The Company has 23,549 MW of generation capacity on an
equity basis, among which 97.7% is coal-fired generation capacity, and 2.3% is
29
hydropower generation capacity. The generation capacity under construction is
7,040 MW. The Company's electricity generation business is widely located,
covering the Northeast China Grid, the North China Grid, the Northwest China
Grid, the East China Grid and the South China Grid.
Looking back on 2005, China's national economy continues to
develop at a very fast pace. China's electricity industry thus had very good
development opportunities and gained significant development. Over the year,
the Company oversaw the overall operation of the Company by using a scientific
development view. The Company actively opened up new markets, strived hard,
capitalized on every opportunity that it came across and overcame various
difficulties. The Company reached its targets in various areas, such as safe
production, operation, management, construction, facility renovation and
environmental protection. The Company's corporate presence continued to grow,
its sales revenue continued to increase, its competitiveness and its ability to
generate profits and manage resources effectively continued to improve, and its
environmental protection standards continued to be maintained at an advanced
level when compared to its competitors. Although the Company's profit was lower
than the previous year because of high coal prices, the Company's cash flow was
healthy, its financing channels were readily available and its financial
condition was very good.
Looking forward to 2006, the electricity market and the coal
market, which have significant impact upon the Company's operation management
and operating results, are full of opportunities and challenges. In the
electricity market, the rapid development of the national economy and the
increase in residential electricity consumption will cause China's electricity
industry to continue to develop rapidly, providing opportunities for the
Company to expand and develop more projects, and for the Company's projects
that are going to be completed to gain market share. However, because there are
quite a number of electricity projects going into operation in the coming
years, the short supply of electricity is going to ease, market competition may
be more fierce, and the power plants in certain areas which currently have
relatively high utilization hours will be affected. In the coal market, coal
supply and demand is basically balanced, and it is hopeful that the situation
of short supply of coal resources and coal transportation will be eased, hence
providing a favorable condition for the supply of coal for power plants. But
the coal price trend is not very predictable, hence bringing challenges to the
Company to control its fuel costs. However, the Company is confident that it
can seize the opportunities, face challenges, enhance management and increase
and enhance its competitiveness, thereby generating profits, getting better
return for its shareholders and maintaining its good financial condition.
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. 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:
Dam 44-55 years
Buildings 8-55 years
Electric utility plant in service 4-40 years
Transportation facilities 5-27 years
Others 2.5-18 years
The residual values, useful lives and depreciation method are
reviewed, and adjusted if appropriate, at least at each financial year-end.
The determination of residual values, useful lives and
depreciation method for the property, plant and equipment requires the use of
estimates. This estimate is based on projected wear and tear incurred during
power generation. It could change significantly as a result of technical
innovations on power generators. It is reasonably possible, based on existing
knowledge, that outcomes within the future that are different from assumptions
could require a material adjustment to the carrying amount of property, plant
and equipment.
30
Impairment of long-lived assets
The long-lived assets include property, plant and equipment,
investments in associates and other non-current 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.
Key assumptions applied in the impairment tests include the
expected tariff rates, demands of electricity in specific regions where these
power plants are located and fuel cost. Management determined these key
assumptions based on past performance and its expectations on market
development. If different judgments were applied, estimates could differ
significantly. Actual results could vary materially from these estimates.
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 recognized to the extent that it is probable that future
taxable income will be available against which the unused tax losses can be
utilized.
Newly adopted accounting policies
In 2005, the Company and its subsidiaries changed certain of its
accounting policies following the adoption of the revised / new International
Financial Reporting Standards ("IFRSs"), International Accounting Standards
("IASs") and IFRIC interpretation below, which are relevant to its operation.
The 2004 and 2003 comparatives have been reclassified / restated as required,
in accordance with the relevant requirements.
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 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
IAS 32 Financial Instruments: Disclosure and Presentation
IAS 33 Earnings per Share
IAS 36 Impairment of Assets
IAS 38 Intangible Assets
31
IAS 39 Financial Instruments: Recognition and Measurement
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRIC Interpretation 1 Changes in Existing Decommissioning,
Restoration and Similar Liabilities
IAS 1 has affected the presentation of minority interests, share
of profit of associates and other disclosures.
IASs 2, 8, 10, 16, 17, 32, 33, 38 and 39, IFRS 4 and IFRIC
Interpretation 1 had no material effect on the policies of the Company and its
subsidiaries.
IAS 21 had no material effect on the policy of the Company and its
subsidiaries. The functional currency of each of the entities of the Company
and its subsidiaries has been re-evaluated based on the guidance to the revised
standard. All the entities used RMB as their functional currency as well as
their presentation currency.
IAS 24 has extended the identification and disclosure of related
parties to include state-owned enterprises. Related parties include Huaneng
Group, HIPDC and their related parties, other state-owned enterprises and their
subsidiaries directly or indirectly controlled by the PRC government (other
than those shown on the face of financial statements as other related parties),
other entities and corporations in which the Company is able to control,
jointly control or exercise significant influence and key management personnel
of the Company, HIPDC and Huaneng Group as well as their close family members.
The adoptions of IASs 27 and 28 have resulted in changes in
accounting policies for investments in subsidiaries and associates at company
level. Until December 31, 2004, investments in subsidiaries and associates at
company level are accounted for using the equity method. Subsequent to that
date, the Company and its subsidiaries, at the entity level, restated such
investments at cost less any accumulated impairment losses.
The adoption of IFRS 3 and IAS 36 results in changes in the
accounting policies for goodwill and negative goodwill and the assessment by
management of asset impairment.
All changes in the accounting policies have been made in
accordance with the transition provisions in the respective standards, wherever
applicable.
For a detailed discussion on the adoption and application of these
new accounting policies, see Note 2 to the Financial Statements.
New accounting pronouncements
For a detailed discussion of new accounting pronouncements, see
Notes 2(v) and 41 to the Financial Statements.
B. 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 41 to the Financial
Statements.
32
Year ended December 31, 2005 compared with year ended December 31, 2004
--------------------------------------------------------------------
For the Year Ended December 31,
--------------------------------------------------------------------
Increased/
2005 2004 (Decreased)
-------------------- --------------------- ---------------------
RMB'000 RMB'000 %
Restated
Operating revenue 40,190,004 30,150,602 33.30
Sales tax (113,475) (32,324) 251.05
Operating expenses
Fuel (21,202,952) (15,068,188) 40.71
Maintenance (1,165,374) (807,689) 44.28
Depreciation (6,167,692) (4,706,992) 31.03
Labor (2,487,098) (1,877,264) 32.49
Service fees to HIPDC (141,102) (133,609) 5.61
Others (1,903,345) (606,346) 213.90
-------------------- ---------------------
Total operating expenses (33,067,563) (23,200,088) 42.53
-------------------- ---------------------
Profit from operations 7,008,966 6,918,190 1.31
-------------------- ---------------------
Financial expenses
Interest income 53,685 43,092 24.58
Interest expenses (1,426,609) (663,424) 115.04
Bank charges and exchange gain /
(losses), net 248,533 (119,452) (308.06)
-------------------- ---------------------
Total financial expenses, net (1,124,391) (739,784) 51.99
-------------------- ---------------------
Share of profit of associates 644,376 312,037 106.51
Investment income, net 60,872 20,554 196.16
Other income, net 2,385 18,666 (87.22)
-------------------- ---------------------
Profit before tax 6,592,208 6,529,663 0.96
(1,044,297) (948,734) 10.07
Income tax
-------------------- ---------------------
Profit for the year 5,547,911 5,580,929 (0.59)
==================== =====================
Attributable to:
Equity holders of the Company 4,871,794 5,323,876 (8.49)
Minority interests 676,117 257,053 163.03
-------------------- ---------------------
5,547,911 5,580,929 (0.59)
==================== =====================
In 2005, the national economy developed at a rapid pace and there
was strong demand for electricity. The growth rate of electricity generation
and consumption exceeded the growth rate of the GDP, providing the favorable
environment for us to generate more electricity and increase operating
revenues. In 2005, the total output of our operating power plants was 150.505
billion KWh, representing an increase of 31.70% from 2004. However, associated
with the rapidly developing national economy, demand for coal remained very
strong. Inadequate coal resources and transportation capacity, high coal prices
as well as low coal quality have posed considerable challenge for us to arrange
coal supply, maintain stable power generation and control fuel cost.
We strived hard to strengthen our management over coal supply.
Through various means, we were able to secure an adequate coal supply. Taking
advantage of our advanced technology and experienced management, we increased
our output, maintained our market share, and achieved our expected operating
results.
Operating revenue
In 2005, the consolidated operating revenue of the Company and its
subsidiaries amounted to RMB 40.190 billion, representing an increase of 33.30%
over RMB 30.151 billion in 2004. The increase in operating revenue is mainly
due to the acquired power plants and newly operating power plants, which
increased the scale of operation of the Company. The acquired power plants
(including the projects acquired in mid-2004 and early 2005) contributed RMB
5.7 billion to the increase in revenue, newly operating power plants (including
the Qinbei Phase II and Yushe Phase II that were put into operation in late
2004, as well as the Huaiyin Phase II and Shantou generating unit No. 3 that
were put into operation in 2005) contributed RMB 3.8 billion to the increase in
revenue.
33
The increase in operating revenue was also attributable to the
increased power tariff rate.
The following table sets forth the average tariff rate of the
Company and its subsidiaries, as well as percentage changes from 2004 to 2005.
Average Tariff Rate
(RMB/MWh)
---------------------------------------------------------
Operating Power Plant 2004 2005 Increase/(decrease) (%)
------------------------------------------------------ ----------- ----------------- ---------------------------
Dalian................................................ 283.62 317.58 11.97%
Fuzhou................................................ 365.00 367.06 0.56%
Nantong............................................... 325.18 343.00 5.48%
Shang'an.............................................. 303.25 319.91 5.49%
Shantou Oil-fired..................................... 604.08 610.73 1.10%
Shantou Coal-fired.................................... 446.86 459.12 2.74%
Dandong............................................... 289.05 301.67 4.37%
Shidongkou II......................................... 342.56 357.60 4.39%
Nanjing............................................... 321.67 340.65 5.90%
Dezhou................................................ 332.58 349.56 5.11%
Weihai................................................ 394.06 398.93 1.24%
Jining................................................ 299.89 323.41 7.84%
Shidongkou I.......................................... 285.43 320.30 12.22%
Taicang............................................... 341.10 360.00 5.54%
Changxing............................................. 351.94 392.83 11.62%
Huaiyin Phase I....................................... 330.88 346.43 4.70%
Huaiyin Phase II...................................... -- 373.77 N/A
Xindian............................................... 320.83 337.25 5.12%
Yushe Phase I......................................... 293.09 319.37 8.97%
Yushe Phase II........................................ 250.01 256.00 2.40%
Yingkou............................................... 315.48 360.09 14.14%
Jinggangshan.......................................... 325.67 353.49 8.54%
Luohuang.............................................. 286.74 300.90 4.94%
Yueyang............................................... 316.52 341.34 7.84%
Qinbei................................................ 273.11 299.77 9.76%
Pingliang............................................. -- 211.43 N/A
Sichuan Hydropower.................................... -- 262.52 N/A
Consolidated average.................................. 327.88 331.41 1.08%
The average tariff rate of the Company and its subsidiaries
increased by approximately 1.08% from RMB 327.88 per MWh in 2004 to RMB 331.41
per MWh in 2005. The increase was primarily due to the implementation of the
"Coal-electricity price linkage mechanism" starting from May 2005, and our
subsequent adjustment of tariff rate of each power plant. The effect of the
tariff adjustment was partially offset by acquisition of the Pingliang Power
Company and Sichuan Hydropower in 2005. The average tariff rate would have
increased by RMB 13.89 per MWh, or 4.24% if these two power plants were
excluded.
Sales tax
Sales tax mainly consists of taxes associated with value-added
tax. According to relevant administrative regulations, such taxes include the
City Construction Tax and Education Surcharge. These taxes are based on the
amount of value-added tax the Company paid at the specified tax rate, and
currently not applicable to direct foreign investment enterprises approved by
the government. As a result, certain power plants of the Company do not have to
pay such taxes. In 2005, the sales tax increased by 251.05% from RMB 32 million
in 2004 to RMB 113 million. The increase was mainly due to the increased number
of power plants subject to such taxes as a result of acquisition of power
plants and putting newly constructed power plants into operation.
Operating expenses
The total operating expenses of the Company and its subsidiaries
increased by 42.53% from RMB 23.2 billion in 2004 to RMB 33.068 billion in
2005. The increase was primarily attributable to the expansion of power
generation capacity and increase in fuel costs. The acquired power plants
contributed RMB 4.404 billion, and newly operating power plants contributed RMB
2.981 billion.
The growth rate of operating expenses exceeded the growth rate of
power generation mainly because of the significant increase in fuel prices. In
addition, the increase in average tariff rate was lower than that in unit fuel
cost. As a result, the growth rate of operating expenses was more than the
growth rate of the operating revenue. The operating expenses mainly consisted
of the following:
34
Fuel
Fuel cost represented the major operating expenses of the Company
and its subsidiaries, increasing by 40.71% from RMB 15.068 billion in 2004 to
RMB 21.203 billion in 2005. The increase was primarily due to the expansion of
power generation capacity and the increased fuel price. The expansion of power
generation capacity contributed RMB 3.896 billion, up by 25.84% from 2004, and
the increased fuel price contributed to RMB 2.239 billion, up by 14.99% from
2004.
The unit fuel cost increased by 11.77% to RMB 156.13 associated
with the increase in the average unit price of coal from RMB 307.92 in 2004 to
RMB 338.03 in 2005, up by 9.78%.
Maintenance
The maintenance expense of the Company and its subsidiaries
amounted to RMB 1.165 billion in 2005, representing an increase of 44.28% from
RMB 808 million in 2004. The increase was mainly due to the expansion of our
power generation capacity and the increased maintenance arrangements and fees
after postponement from prior year as a result of power shortage in certain
regions last year.
Depreciation
The depreciation of the Company and its subsidiaries increased by
31.03% from RMB 4.707 billion in 2004 to RMB 6.168 billion in 2005. The
acquired power plants contributed RMB 1.163 billion, and newly operating power
plants contributed RMB 404 million. Depreciation on the remaining power plants
decreased by 2.54%, or RMB 106 million compared with 2004.
Labor
Labor costs of the Company and its subsidiaries amounted to RMB
2.487 billion in 2005, representing an increase of 32.49% from RMB 1.877
billion in 2004. The increase was primarily due to the increased number of
employees and human resources cost as a result of acquisition of Yingkou Power
Plant, Luohuang Power Company, Yueyang Power Company and Jinggangshan Power
Plant in July 2004 and Pingliang Power Company and Sichuan Hydropower in
January 2005. In addition, the employee salary which had originally been
accounted for as construction cost was accounted for as labor cost as newly
constructed units were put into operation, resulting in the increase in labour
costs as well.
Service fees to HIPDC
The service fees paid to HIDPC represents fees paid for the use of
its grid connection and transmission facilities. There was no significant
change in the service fees paid to HIPDC from 2004 to 2005.
Other operating expenses
Other operating expenses consist of expenses such as environmental
protection expenses, insurance fees, administrative expenses, and amortization.
In 2005, the other operating expenses of the Company and its subsidiaries
amounted to RMB 1.903 billion, representing an increase of 213.90% from RMB 606
million in 2004. The increase was largely attributable to the following
factors:
o termination of negative goodwill amortization in 2005 because
of changes in accounting policies, resulting in the increase
of approximately RMB 250 million (the negative goodwill
amortization in 2004 was approximately RMB 250 million) in
the other operating expenses;
o expansion of power generation capacity of the Company and its
subsidiaries in the acquired power plants and newly operating
power plants;
o increase of RMB 211 million in the environmental protection
fees.
Financial expenses
Financial expenses consist of interest income, interest expenses,
bank charges and net exchange differences.
Interest expenses
The interest expenses of the Company and its subsidiaries in 2005
amounted to RMB 1.427 billion, representing a relatively large increase from
RMB 663 million in 2004. The increase was largely due to the increased loans
borrowed for acquisition of power plants and expansion of existing power
plants.
35
Bank charges and net exchange differences
The net exchange gain of the Company and its subsidiaries less
bank charges amounted to RMB 249 million in 2005, representing a relatively
significant increase from the net exchange loss plus bank charges totaling RMB
119 million in 2004. In 2005, the foreign exchange rate for RMB appreciated in
relation to US Dollar and Euro. As a result, loans denominated in US Dollar and
Euro generated approximately RMB 290 million in exchange gain, representing an
increase of RMB 383 million from the exchange loss of RMB 93 million in 2004.
Share of profit of associates
Share of profit of associates in 2005 was RMB 644 million,
representing a relatively large increase from RMB 312 million in 2004. The
increase was largely attributable to the increased investment income from
Shenzhen Energy Group Co., Ltd. and the recognition of the investment income
from Hanfeng Power Company since July 2004. In addition, because of changes in
accounting policies, goodwill was no longer amortized (and there was no
impairment identified in annual testing), which also contributed to the
increase compared with 2004.
Enterprise income tax ("EIT")
The EIT of the Company and its subsidiaries amounted to RMB 1.044
billion in 2005, representing an increase of 10.07% from RMB 949 million in
2004. The effective tax rate increased from 15% in 2004 to 16% in 2005. The
acquisition of domestic enterprises in the current year contributed to such an
increase. Please refer to Note 32 to the Financial Statements for detailed
analysis.
Profit for the year
The profit of the Company and its subsidiaries amounted to RMB
5.548 billion in 2005, remaining at the same level with the profit of RMB 5.581
billion in 2004. The impact of 2004 and 2005 acquisitions contributed to an
increase in profit by approximately RMB 673 million. The increase in power
demand and implementation of coal-electricity price mechanism also contributed
to such increases. However, these were offset by the increased coal price.
Profit attributable to the Company's equity holders and minority interests
The profit attributable to minority interests increased from RMB
257 million to RMB 676 million as a result of the acquisitions in 2004 and
2005. These acquisitions included Luohuang Power Company, Yueyang Power
Company, Pingliang Power Company and Sichuan Hydropower of which less than 100%
was acquired.
36
Year ended December 31, 2004 compared with year ended December 31, 2003
For the Year Ended December 31,
-------------------------------------
2004 2003 Increase / (Decrease)
----------------- ------------------ ----------------------
RMB'000 RMB'000 (%)
Restated Restated
Operating revenue 30,150,602 23,433,572 28.66
Sales tax (32,324) (45,335) (28.70)
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 expenses (663,424) (569,148) 16.56
Bank charges and exchange losses, net (119,452) (28,181) 323.87
----------------- ------------------
Total financial expenses, net (739,784) (544,285) 35.92
----------------- ------------------
Share of profit of associates 312,037 160,509 94.40
Investment income, net 20,554 10,705 92.00
Other income, net 18,666 12,070 54.65
----------------- ------------------
Profit before tax 6,529,663 6,712,161 (2.72)
Income tax expenses (948,734) (1,097,859) (13.58)
----------------- ------------------
Profit for the year 5,580,929 5,614,302 (0.59)
================= ==================
Attributable to:
Equity holders of the Company 5,323,876 5,430,408 (1.96)
Minority interests 257,053 183,894 39.78
----------------- ------------------
5,580,929 5,614,302 (0.59)
================= ==================
Operating Revenue
In 2004, the consolidated operating revenue of the Company and its
subsidiaries amounted to RMB 30.151 billion, representing an increase of
approximately 28.66% from RMB 23.434 billion in 2003. The increase of the
operating revenue was mainly due to the increase of power generation capacity,
operating hours of the power plants and the average tariff rates.
The following table sets forth the average tariff rate
(value-added tax included) of our power plants and the percentage changes from
2003 to 2004.
Average Tariff Rate
(RMB/MWh)
------------------------------------------------
Increase / (decrease)
Operating power plants 2004 2003 (%)
----------------------------- ------------ ------------- ---------------------
Dalian 283.62 272.69 4.01%
Fuzhou 365.00 331.82 10.00%
Nantong 325.18 312.52 4.05%
Shang'an 303.25 307.94 (1.52%)
Shantou Oil-Fired 604.08 672.14 (10.13%)
Shantou 446.86 435.17 2.69%
Dandong 289.05 276.95 4.37%
Shidongkou II 342.56 332.85 2.92%
Nanjing 321.67 307.31 4.67%
Dezhou 332.58 333.34 (0.23%)
37
Average Tariff Rate
(RMB/MWh)
------------------------------------------------
Increase / (decrease)
Operating power plants 2004 2003 (%)
----------------------------- ------------ ------------- ---------------------
Weihai 394.06 386.50 1.96%
Jining 299.89 274.66 9.19%
Shidongkou I 285.43 256.64 11.22%
Taicang 341.10 321.80 6.00%
Changxing 351.94 320.57 9.79%
Huaiyin 330.88 317.21 4.31%
Xindian (1) 320.83 342.41 (6.30%)
Yushe(1) 282.10 200.63 40.61%
Yingkou(2) 315.48 N/A N/A
Jinggangshan(2) 325.67 N/A N/A
Luohuang(2) 286.74 N/A N/A
Yueyang(2) 316.52 N/A N/A
Qinbei(3) 273.11 N/A N/A
Consolidated average 327.88 318.68 2.89%
_______________-
Note:
(1) Since November, 2003, we have held a more than 50% equity interest in
the Xindian Power Plant and the Yushe Power Company.
(2) 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.
(3) The two generators of the Qinbei Power Company commenced production in
November and December 2004 respectively.
The average tariff rate of the Company and its subsidiaries
increased by approximately 2.89% from RMB 318.68 per MWh in 2003 to RMB 327.88
per MWh. The increase was attributable to 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 NDRC.
Operating expenses
The total operating expenses of the Company and its subsidiaries
increased by 42.20% from approximately RMB 16.315 billion in 2003 to
approximately RMB 23.2 billion in 2004. The increase was largely attributable
to the expansion of power generation capacity and the increased fuel costs. The
power plants acquired in 2004 attributed RMB 2.074 billion to the total
operating expenses. Excluding the impact from the power plants acquired in
2004, the increase in operating expenses amounted to approximately RMB 4.811
billion.
The growth rate of operating expenses exceeded both of the growth
rate of power generation and operating revenue. The significant increase in
fuel costs was 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
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 operating revenue.
Fuel
Fuel costs represented the major operating expenses of the Company
and its subsidiaries in 2004, which increased by approximately 66.96% from
2003. 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% unit fuel cost from prior year in 2004.
Maintenance
The maintenance expense of the Company and its subsidiaries
amounted to approximately RMB 808 million in 2004, representing a decrease of
approximately 12.36% from approximately RMB 922 million in the prior year. The
decrease in the maintenance expense was mainly due to two factors: first,
enhanced utilization rate of equipment and minimized duration of maintenance
projects through the careful scheduling of maintenance programs; and second,
38
the improvement of the operating condition of the equipment as a result of
continuous technological improvements.
Depreciation
The depreciation of the Company and its subsidiaries increased by
approximately 14% from RMB 4.117 billion in 2003 to RMB 4.707 billion in 2004.
The newly acquired power plants in 2004 contributed to an increase of
approximately 12.34%.
Labor
The labor costs of the Company and its subsidiaries amounted to
approximately RMB 1.877 billion in 2004, representing an increase of
approximately 30.40% from approximately RMB 1.440 billion in 2003. The labor
cost of the original power plants increased to approximately RMB 1.744 billion,
representing an increase of approximately 21.14% compared with 2003, among
which, the full year impact from the Xindian Power Plant and the Yushe Power
Company acquired in October, 2003 contributed approximately RMB 112 million.
The newly acquired Yingkou Power Plant, the Jinggangshan Power Plant, the
Yueyang Power Company and the Luohuang Power Company contributed additional
labor costs of approximately RMB 133 million in 2004.
Service fees to HIPDC
The service fees paid to HIDPC represents 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 RMB 134
million in 2004, representing a decrease of 37.78% compared to approximately
RMB 215 million in 2003. The decrease of service fees rate upon the conclusion
of a supplementary agreement with HIPDC represented the primary reason for this
decrease.
Other operating expenses
Other operating expenses of the Company and its subsidiaries
amounted to approximately RMB 606 million in 2004, representing an increase of
approximately 1.63% from approximately RMB 597 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 RMB 542 million, representing a decrease of
approximately 9.20% from approximately RMB 597 million in 2003.
Profit from operations
The increasing fuel costs contributed to a decrease of
approximately 2.19% in profit from operations from approximately RMB 7.073
billion in 2003 to approximately RMB 6.918 billion in 2004.
Financial expenses
The total financial expenses (net) of the Company and its
subsidiaries totaled approximately RMB 740 million for the year 2004, which
represented an increase of approximately 35.92% from approximately RMB 544
million in 2003. The original power plants accounted for approximately RMB 554
million, representing an increase of approximately 1.80% from 2003. 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 RMB 186 million.
Enterprise income tax ("EIT")
The total EIT of the Company and its subsidiaries amounted to
approximately RMB 0.949 billion in 2004 which represented a decrease of
approximately 13.58% from approximately RMB 1.098 billion in 2003. The decrease
was mainly due to the decreased profit from operation and the increased ratio
of the profit from the power plants subject to lower tax rates.
Profit attributable to equity holders of the Company
The 2004 consolidated profit attributable to the equity holders of
the Company was RMB 5.324 billion, which represented a decrease of
approximately 1.96% from approximately RMB 5.430 billion in 2003. 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
39
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 brought about increases in
the operating revenue and profit attributable to equity holders of the Company
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 profit attributable to the equity holders of the Company
decreased slightly compared with 2003. The profit attributable to the equity
holders of the Company, excluding the impact of newly acquired power plants in
the 2004 was approximately RMB 4.927 billion, representing a decrease of 9.28%
compared to RMB 5.430 billion in 2003.
C. Financial position
General
Compare with 2004, the assets and liabilities of the Company and
its subsidiaries had a significant change due to the increase in capital
expenditure on constriction and acquisitions.
As of December 31, 2005, the total assets of the Company and its
subsidiaries amounted to RMB 99.440 billion, representing an increase of 36.63%
from RMB 72.780 billion as of December 31, 2004. Non-current assets increased
by 38.42% to RMB 87.377 billion. The increases were largely due to assets
acquisition and capital injection. Assets acquisition contributed RMB 14.496
billion to the total assets. In addition, there was a one-time credit of the
unamortized balance of negative goodwill of RMB 1.484 billion to retained
earnings at the beginning of 2005. Current assets increased by 24.96% to RMB
12.063 billion, because of, among others, an increase in inventories by RMB 880
million and an increase in accounts receivable by RMB 1.049 billion as a result
of the expansion of the scale of operations.
The total liabilities of the Company and its subsidiaries amounted
to RMB 53.296 billion, representing an increase of 60.30% from RMB 33.248
billion as of December 31, 2004. The non-current liabilities increased 82.79%
to approximately RMB 30.188 billion, while the current liabilities increased
38.09% to approximately RMB 23.107 billion. The increases were primarily
attributable to an increase in loans to finance acquisition and project
construction.
Total interest-bearing debts of the Company amounted to RMB 43.539
billion, which included long-term loans (including long-term loans that would
mature within one year), short-term loans, short-term bonds and certain notes
payables. Among those, liabilities denominated in foreign currencies amounted
to approximately RMB 6.343 billion.
The total equity amounted to RMB 46.144 billion, representing an
increase of 16.73% from 2004. The increase was mainly because our
available-for-sale investment (investment in China Yangtze Power Co., Ltd.) had
gained the right to be traded in the stock market subject to certain conditions
since 2005. The difference of RMB 637 million between the market value and the
net book value of the investment as of December 31, 2005 was recorded as a fair
value reserve net of deferred taxation recognized. In addition, the unamortized
balance of negative goodwill of RMB 1.484 billion was accounted for as retained
earnings.
As of December 31,
-------------------------------------------
2005 2004 Increase /
(Decrease)
-------------------- ----------------------- ----------------
RMB'000 RMB'000 (%)
Restated
ASSETS
Non-current assets
Property, plant and equipment, net 78,997,297 57,780,410 36.72
Investments in associates 4,593,984 4,328,307 6.14
Available-for-sale investment 1,033,225 254,990 305.20
Land use rights 1,679,765 1,546,026 8.65
Other non-current assets 336,379 225,890 48.91
Deferred income tax assets 64,075 97,539 (34.31)
Goodwill 671,796 376,726 78.32
Less: negative goodwill -- (1,483,670) (100.00)
-------------------- ----------------------
Total non-current assets 87,376,521 63,126,218 38.42
-------------------- ----------------------
40
As of December 31,
-------------------------------------------
2005 2004 Increase /
(Decrease)
-------------------- ----------------------- ----------------
RMB'000 RMB'000 (%)
Restated
Current assets
Inventories, net 2,311,357 1,431,404 61.47
Other receivables and assets, net 855,952 723,316 18.34
Accounts receivable, net 6,022,426 4,973,103 21.10
Due from HIPDC 21,847 -- N/A
Due from other related parties -- 14,970 (100.00)
Restricted cash 201,276 202,688 (0.70)
Temporary cash investments 2,652 12,641 (79.02)
Cash and cash equivalents 2,647,665 2,295,531 15.34
-------------------- ----------------------
Total current assets 12,063,175 9,653,653 24.96
-------------------- ----------------------
Total assets 99,439,696 72,779,871 36.63
==================== ======================
EQUITY AND LIABILITIES
Paid-in capital 12,055,383 12,055,383 --
Additional paid-in capital 8,988,107 8,972,184 0.18
Dedicated capital 4,899,429 4,065,970 20.50
Fair value gains from available-for-sale
investment, net of tax 636,964 -- N/A
Retained earnings
Proposed dividend 3,013,846 3,013,846 --
Others 10,443,745 8,158,136 28.02
-------------------- ----------------------
40,037,474 36,265,519 10.40
Minority interests 6,106,713 3,266,393 86.96
-------------------- ----------------------
Total equity 46,144,187 39,531,912 16.73
-------------------- ----------------------
Non-current liabilities
Long-term loans from a shareholder 2,800,000 800,000 250.00
Long-term bank loans 25,711,255 14,761,271 74.18
Other long-term loans 351,009 394,018 (10.92)
Deferred income tax liabilities 1,157,775 546,717 111.77
Other non-current liabilities 168,328 13,000 1,194.83
-------------------- ----------------------
Total non-current liabilities 30,188,367 16,515,006 82.79
-------------------- ----------------------
Current liabilities
Accounts payable and other liabilities 6,905,240 4,551,158 51.72
Dividends payable to shareholders of the Company -- 8,250 (100.00)
Taxes payable 1,131,284 999,792 13.15
Due to Huaneng Group 50,720 190 26,594.74
Due to HIPDC 53,230 1,258,799 (95.77)
Due to an associate -- 3,799 (100.00)
Due to other related parties 29,620 9,437 213.87
Staff welfare and bonus payables 251,949 259,291 (2.83)
Short-term bonds 4,938,250 -- N/A
Short-term loans 6,580,870 8,099,000 (18.74)
Current portion of long-term bank loans 2,653,339 1,225,476 116.51
Current portion of other long-term loans 512,640 317,761 61.33
-------------------- ----------------------
Total current liabilities 23,107,142 16,732,953 38.09
-------------------- ----------------------
Total equity and liabilities 99,439,696 72,779,871 36.63
==================== ======================
41
Analysis of selected consolidated balance sheet items
Property, plant and equipment, net
As of December 31, 2005, property, plant and equipment, net of the
Company and its subsidiaries amounted to approximately RMB 78.997 billion,
representing an increase of RMB 21.217 billion from approximately RMB 57.780
billion in 2004. The increase was primarily due to the acquisition and addition
of property, plant and equipment totaling RMB 27.682 billion, partially offset
by disposal of assets, depreciation and impairment. Please refer to Note 11 to
the Financial Statements for a detailed analysis of such an increase.
Available-for-sale investment
Available-for-sale investment of the Company and its subsidiaries
increased by approximately RMB 0.778 billion from RMB 0.255 billion as of
December 31, 2004 to RMB 1.033 billion as of December 31, 2005. The increase
was due to the revaluation of the legal person shares of China Yangtze Power
Co., Ltd. ("Yangtze Power") held by the Company which are now allowed to be
traded in the open market after Yangtze Power completed a process of
shareholding structure reform. The difference between the market value and the
net book value of the investment was recorded as a fair value reserve with
corresponding decrease for deferred taxation recognized.
Deferred income tax assets
As of December 31, 2005, deferred income tax assets of the Company
and its subsidiaries amounted to RMB 64 million, representing a decrease of RMB
34 million compared with RMB 98 million as of December 31, 2004. Please refer
to Note 29 to the Financial Statements for a detailed analysis of such a
decrease.
Goodwill and negative goodwill
As of December 31, 2005, goodwill and negative goodwill of the
Company and its subsidiaries totaled approximately RMB 0.672 billion and nil
respectively, representing an increase of approximately RMB 0.295 billion and a
decrease of RMB 1.484 billion respectively from approximately RMB 0.377 billion
and RMB(1.484) billion respectively as of December 31, 2004. The increase in
goodwill from prior year was mainly attributable to acquisition while the
change in accounting policy contributed to the decrease in negative goodwill.
Please refer to Note 2(a) to the Financial Statements for a detailed analysis
on the change in accounting policy.
Inventories, net
As of December 31, 2005, the inventories, net of the Company and
its subsidiaries increased by RMB 0.880 billion from RMB 1.431 billion as of
December 31, 2004. The increases were primarily due to the increased amount and
price of the coal held for power generation.
Accounts receivable, net
Accounts receivable, net as of December 31, 2005 amounted to RMB
6.022 billion, representing an increase of 21.1% from RMB 4.973 billion as of
December 31, 2004. The increase was primarily due to the increase in power
generation and sales.
Minority interests
As of December 31, 2005, minority interests of the Company and its
subsidiaries amounted to RMB 6.107 billion, representing an increase of
approximately RMB 2.841 billion from RMB 3.266 billion in 2004. The increase
was primarily due to the additional minority interests of RMB 1.979 billion
arising from acquisition of Sichuan Hydropower and Pingliang Power Plant, the
capital injection of RMB 0.596 million by minority shareholders of the
Company's subsidiaries, and net profit attributable to minority interests of
RMB 5.548 million.
Long-term loans
Long-term loans consist of long-term loans from a shareholder,
long-term bank loans and other long-term loans. As of December 31, 2005,
long-term loans of the Company and its subsidiaries increased by approximately
RMB 14.529 billion from RMB 17.499 billion as of December 31, 2004 to RMB
32.028 billion, which was primarily due to the increased long-term borrowings
to finance acquisition and construction of the new power plants.
42
Deferred income tax liabilities
As of December 31, 2005, deferred income tax liabilities of the
Company and its subsidiaries amounted to approximately RMB 1.158 billion,
representing an increase of approximately RMB 0.611 billion from RMB 0.547
billion as of December 31, 2004. Please refer to Note 29 to the Financial
Statements for a detailed analysis of such an increase.
Accounts payable and other liabilities
As of December 31, 2005, accounts payable and other liabilities of
the Company and its subsidiaries amounted to approximately RMB 6.905 billion,
representing an increase of approximately RMB 2.354 billion from RMB 4.551
billion as of 2004. Please refer to Note 25 to the Financial Statements for a
detailed analysis of such an increase.
Due to Huaneng Group
As of December 31, 2005, due to Huaneng Group amounted to
approximately RMB 50.720 million, representing an increase of approximately RMB
50.530 million from RMB 0.190 million in 2004. The increase was due to the
acquisition of Sichuan Hydropower.
Due to HIPDC
As of December 31, 2005, due to HIPDC amounted to approximately
RMB 53.230 million, representing a decrease of RMB 1.206 billion from RMB 1.259
billion as of December 31, 2004. The decrease was mainly due to the repayment
for a payable brought forward upon the acquisition of Yingkou Power Plant.
Short-term bonds
As of December 31, 2005, the Company's short-term bonds amounted
to RMB 4.938 billion resulting from the issuance of RMB 4.5 billion and RMB 0.5
billion unsecured short-term zero-coupon bonds on May 27, 2005.
Short-term loans
As of December 31, 2005, the Company's short-term loans amounted
to RMB 6.581 billion, representing a decrease of 18.74% from RMB 8.099 billion
as of December 31, 2004. The decrease was due to the repayment of short-term
loans according to the repayment schedules.
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, 2005,
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, 2005, 2004 and 2003 under US GAAP. See also Note
41 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; 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; and the acquisition of 60% equity interest in Sichuan
Hydropower and 65% equity interest in Pingliang Power Company in 2005.
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
three years ended December 31, 2005 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
43
interest would not be taken into consideration when determining the recoverable
rate base for tariff setting purposes.
In 2003, goodwill arising from acquisitions was amortized using
the straight-line method over its estimated useful life and recognized in the
income statements as other operating expense. In 2004, in accordance with IFRS
3, goodwill arising form 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
indicated 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 form acquisition is not amortized but
tested for impairment on an annual basis and between annual tests in certain
circumstances. There is no such a GAAP difference for goodwill arising from
acquisitions for which the agreement date was on or after March 31, 2004. As
all the goodwill arising from the acquisitions ceased to be amortized in 2005,
there was no such a GAAP difference.
Upon the completion of the acquisition of Shandong Huaneng Power
Development Company Limited ("Shandong Huaneng"), the entire net assets of
Shandong Huaneng were recorded at fair value. In 2003 and 2004, the excess of
the fair value of the entire net assets acquired over the total cost of the
acquisition was recorded as negative goodwill and amortized using the
straight-line method over its estimated useful life. In 2005, the ending
balance of negative goodwill brought forward from 2004 is credited to opening
retained earnings in accordance with IFRS 3. 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 at the acquisition date. As the amount of negative goodwill originally
recognized under IFRS is different from the amount of the reduction to
property, plant and equipment under US GAAP and that the negative goodwill
under IFRS is offset against opening retained earnings in 2005 whereas, for US
GAAP purposes, it was a reduction to the value of the property, plant and
equipment, which reduced value is being depreciated over the respective assets'
useful life, the operating result under IFRS and US GAAP is different.
Therefore, the impact of the GAAP difference on operating expense was RMB 161
million in 2005 and RMB 86 million both in 2003 and 2004.
The impact on depreciation arising from the GAAP difference
between IFRS and US was mainly attributable to the acquisitions from related
parties that are considered as common control transactions and thus, required
to account the acquired assets at historical cost which cause the GAAP
difference on the carrying amounts and the depreciation of property, plant and
equipment ("the impact of using historical method"), in addition, for the
acquisitions to be considered as common control, the operating results of the
power plants acquired before acquisition should be consolidated into the
Company and its subsidiaries' operating results in a manner similar to the
pooling of interests method which also cause the GAAP difference in the
depreciation expense ("the impact of pooling method").
Hence, in 2005, the impact of using historical method resulted in
a decrease in depreciation of 8% from RMB 6,167 million under IFRS to RMB 5,696
million under US GAAP. As the acquisitions occurred as of the beginning of the
current year, and there is no material pooling impact under US GAAP.
In 2004, the impact of using historical method caused the
depreciation to drop by RMB 278 million, and the impact of pooling method of
the acquisitions in 2005 and 2004 increases the deprecation by RMB 575 million
and RMB 410 million respectively as under the pooling method these companies
were treated as though they were acquired by the Company at the dates they were
acquired / owned by Huaneng Group and depreciation was recorded for the entire
year.
In 2003, the impact of using historical method caused the
depreciation to drop by RMB 68 million, and the impact of pooling method of the
acquisitions in 2005, 2004 and 2003 increases the deprecation by RMB 516
million, RMB 1,043 million and RMB 19 million respectively.
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 among the years ended
December 31, 2005, 2004 and 2003.
44
Major financial position ratios
As of December 31,
----------------------------------------
2005 2004 2003
------------ ------------ -----------
Current ratio 0.52 0.58 0.90
Quick ratio 0.42 0.49 0.81
Ratio of liability and equity
attributable to equity
holders of the Company 1.33 0.92 0.54
Multiples of interest earned 3.77 7.23 11.94
Calculation formula of the financial ratios
Current ratio = balance of the 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 amounts
of inventories at the end of the year) / balance of current liabilities at the
end of the year
Ratio of liabilities and equity attributable to equity holders of the Company
=balance of liabilities at the end of the year / balance of equity attributable
to equity holders of the Company at the end of the year
Multiples of interest earned = (profit before tax + interest expenses) /
interest expenditure (including capitalized interest)
The current ratio and quick ratio remained at a relatively low
level and decreased as of December 31, 2005 compared with December 31, 2004.
This was mainly due to the increased current liabilities as a result of
issuance of short-term bond by the Company in 2005. The significant increase in
the ratio of liabilities and shareholders' equity as of December 31, 2005
compared with December 31, 2004 was mainly due to the significant increases in
construction borrowings and the impact of the relatively high ratio of
liabilities and equity holders of Sichuan Hydropower and Pingliang Power
Company acquired in 2005. The multiples of interest earned decreased
significantly from that of the same period of the prior year mainly due to:
first, the acquisitions increased the liability and total interest expenses,
however, the profit before tax did not increase at the same rate as liabilities
or interest expense due to the coal price factor. Second, the continuous
commencement of the projects under construction led to the increase in
construction borrowings and total capitalized interest compared with 2004.
As of December 31, 2004, the current ratio and quick ratio of the
Company and its subsidiaries decreased significantly compared to that of 2003,
which was mainly due to increased capital expenditure and the cash
consideration paid during acquisitions. 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 equity
attributable to the equity holders of the Company. The multiples of interest
earned of the Company and its subsidiaries decreased from that of the prior
year mainly due to the drop in income and the increase in interest expenses
(including capitalized interest) on loans borrowed to finance construction and
acquisition.
D. Liquidity and cash resources
The primary sources of funding for the Company and its
subsidiaries have been cash provided by internal fund operating activities and
short-term and long-term borrowings, and the primary use of funds have been for
working capital, capital expenditure and repayment of short-term and long-term
borrowings.
As of December 31, 2005, the net current liabilities of the
Company and its subsidiaries totaled RMB 11.044 billion. Based on the
successful financing history of the Company, the significant amount of undrawn
banking facilities available to the Company and the stable operating results,
the Company believes that it has substantial borrowing capacity to meet cash
requirements and prevent financial risks. Moreover, the Company will continue
to minimize interest expenses by issuing short-term bonds and asset-backed
bills of exchange.
45
Liquidity
Cash flows from operating activities
For the Year Ended December 31,
--------------------------------------------------------
2005 2004 2003
------------------- ------------------ -----------------
RMB'000 RMB'000 RMB'000
Restated Restated
Cash flows from operating activities
Profit before tax............................. 6,592,208 6,529,663 6,712,161
Non-cash items adjustments.................... 6,894,680 4,907,940 4,440,827
Changes in working capital.................... (1,778,721) (1,219,952) (67,084)
Interest paid................................. (1,965,094) (974,879) (617,162)
Interest received............................. 52,475 43,895 54,182
Income tax paid............................... (1,114,698) (1,123,966) (989,635)
Net cash provided by operating activities..... 8,680,850 8,162,701 9,533,289
Net cash provided by operating activities is the main source of
cash for the Company. The net cash provided by operating activities amounted to
RMB 8.681 billion in 2005, representing an increase of 6% from RMB 8.163
billion in 2004. The increase was primarily due to the increased operating
revenue resulting from the expansion of power generation capacity. Net cash
provided by operating activities was partially offset by the increased interest
paid of RMB 1.114 billion, resulting from the increased borrowings bearing
interests.
Net cash provided by operating activities amounted to RMB 8,163
billion in 2004, representing a decrease of 14% compared with 2003. The
decrease was primarily due to the significant increase in the fuel costs.
The Company and its subsidiaries expect the operating activities
will continue to provide sufficient and sustained cash flows for the operations
and expansion in the future.
Cash flows used in investing activities
For the year ended December 31,
---------------------------------------------------
2005 2004 2003
--------------- ---------------- ----------------
RMB'000 RMB'000 RMB'000
Cash flows from investing activities Restated Restated
Purchase of property, plant and equipment........... (13,842,293) (9,877,553) (3,606,704)
Proceeds from disposals of property, plant and
equipment, net.................................... 32,098 27,768 7,679
Prepayments of land use rights...................... (99,745) (154,754) (16,508)
Increase in other non-current assets................ 15,766 (3,680) (12,847)
Decrease in temporary cash investments.............. 9,989 132,355 1,066,629
Proceeds from disposals of investments.............. - 548 80,704
Cash dividend received ............................. 429,589 172,542 -
Cash consideration paid for acquisitions ........... (2,528,300) (4,575,000) (2,940,000)
Direct transaction costs paid for acquisitions...... (16,698) (31,685) (19,618)
Cash from the power plants acquisitions............. 566,704 659,174 215,585
Proceeds from disposal of Huaneng Nanjing Ranji
Power Generation Limited Liability Company
("Nanjing Ranji")................................. 30,000 - -
Cash outflow on disposal of Nanjing Ranji........... (10,479) - -
--------------- ---------------- ---------------
Net cash used in investing activities.............. (15,413,369) (13,650,285) (5,225,080)
--------------- ---------------- ---------------
Net cash used in investing activities amounted to approximately
RMB 15.413 billion, RMB 13.650 billion and RMB 5.225 billion in 2005, 2004 and
2003. The increase in net cash used in investing activities in 2005 was mainly
due to the increased capital expenditures on purchase of property, plant and
equipment for construction and renovation. The cash considerations paid for
acquisitions amounted to RMB 2.528 billion,
46
RMB 4.575 billion and RMB 2.940 billion in 2005, 2004 and 2003, respectively.
Such change was because of different scale of assets acquisition from year to
year.
In 2006, the Company will remain in a comparatively concentrated
period of capital expenditures for construction projects with comparatively
substantial amounts.
Cash flows from financing activities
For the year ended December 31,
-----------------------------------------------------
2005 2004 2003
-------------------- ------------- ----------------
RMB'000 RMB'000 RMB'000
Cash flows from financing activities Restated Restated
Bonds issuance expense paid..................... (22,500) - -
Drawdown of short-term bonds.................... 4,862,200 - -
Drawdown of short-term loans.................... 11,657,569 8,724,000 769,000
Repayments of short-term loans.................. (13,670,000) (2,940,313) (450,000)
Drawdown of long-term loans from a shareholder.. 2,000,000 800,000 -
Repayments of long-term loans from shareholders. - (1,504,827) (388,988)
Drawdown of long-term bank loans................ 8,297,018 4,944,000 950,230
Repayments of long-term bank loans.............. (2,933,870) (3,192,843) (2,322,348)
Drawdown of other long-term loans............... - - 416,000
Repayments of other long-term loans (351,118) (679,062) (36,060)
Capital injection from minority shareholders of
the subsidiaries.............................. 585,702 677,034 77,632
Dividends paid to shareholders of the Company... (3,022,096) (3,005,586) (2,049,408)
Dividends paid to minority shareholders of the
subsidiaries.................................. (318,252) (167,125) (148,220)
Redemption of convertible notes................. - (811) -
------------------- -------------- ---------------
Net cash provided by/(used in) financing
activities......................................... 7,084,653 3,654,467 (3,182,162)
------------------- -------------- ---------------
Net cash inflow provided by financing activities in 2005 amounted
to RMB 7.085 billion primarily because our proceeds from bank and other loans
exceeded repayment of bank and other loans by approximately RMB 5 billion. The
net cash inflow was further increased by issuance of short-term bonds in the
principal amounts of RMB 5 billion. On the other hand, the net cash inflow was
partially offset by the dividends of RMB 3.022 billion paid to the shareholders
of the Company.
Net cash inflow provided by financing activities in 2004 amounted
to RMB 3.654 billion, primarily because our proceeds from bank and other loans
exceeded repayment of bank and other loans by approximately RMB 6.151 billion.
The net cash inflow was partially offset by the dividends of approximately RMB
3.006 billion to the shareholders of the Company.
Net cash outflow used in financing activities in 2003 amounted to
RMB 3.182 billion, primarily because our repayment of bank and other loans
exceeded our proceeds from bank and other loans by RMB 1.062 billion. The net
cash outflow was further increased by the dividends of approximately RMB 2.049
billion paid to the shareholders of the Company.
As of December 31, 2005, the net current liabilities of the
Company and its subsidiaries totaled RMB 11.044 billion. Based on the
successful financing history of the Company, the significant amount of undrawn
banking facilities available to the Company and the stable operating results,
the Company believes that it will be able to meet their liabilities as and when
they fall due and meet the capital required for operations. Moreover, the
Company will continue to minimize interest expenses by issuing short-term bonds
and asset-backed bills of exchange. The Company believes it will be able to
control the scale of liabilities and the financial risks.
47
Cash and cash equivalents
For the Year Ended December 31,
------------------------------------------------
2005 2004 2003
RMB'000 RMB'000 RMB'000
--------------- -------------- ---------------
Net increase / (decrease) in cash and cash
equivalents....................................... 352,134 (1,833,117) 1,126,047
Cash and cash equivalents as of the beginning of
the year.......................................... 2,295,531 4,128,648 3,002,601
--------------- -------------- ---------------
Cash and cash equivalents as of the end of the year.. 2,647,665 2,295,531 4,128,648
=============== ============== ===============
As of December 31, 2005, the Company's cash and cash equivalents
amounted to RMB 2.648 billion, of which, cash in RMB accounted for RMB 1.042
million, current deposits in RMB accounted for RMB 2.632 billion, and current
deposits in US dollar accounted for RMB 14.13 million.
The Company's cash and cash equivalents as of December 31, 2004
amounted to RMB 2.296 billion as compared with RMB 4.129 billion as of December
31, 2003.
Please refer to Notes 24, 28 and 34(a) to the Financial Statement
for a detailed discussion of the level of fixed rate loans and the denominated
currency and amount of cash and cash equivalents respectively.
Capital expenditure and cash resources
Capital expenditure on acquisition
In January 2005, the Company paid cash consideration of RMB 2.025
billion to acquire 65% equity interest in the Pingliang Power Company and 60%
equity interest in Sichuan Hydropower.
At the end of 2005, the Company paid the consideration of RMB 126
million to Huaneng Group and advanced a payment (which will represent an
injection of capital) of RMB 162 million to Huaneng Finance in order to acquire
20% equity interest in Huaneng Finance. As such shareholding transfer and
capital injection were still pending approval by the regulatory departments at
the end of 2005, they were recorded as "other receivables and assets, net"
under current assets. This acquisition became effective subsequent to the year
end.
Cash payments for acquisitions during 2004 amounted to
approximately RMB 4.575 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.
Cash payments for acquisitions during 2003 amounted to RMB 2.940
billion.
The Company will continue to follow the strategy of a balance
between development and acquisition by proactively seeking new acquisition
opportunities to ensure the sustainable growth of profitability and
shareholders' value. Since there are uncertainties associated with the timing
and size of future asset acquisition projects, the amount of capital
expenditures required is also uncertain. However, the significant cash flows
from operating activities, the available undrawn borrowing facilities and the
implementation of a plan to issue of short-term financing bonds and
asset-backed bills of exchange which has been approved at the shareholders'
meeting should provide the Company with a sufficient level of cash to support
asset acquisition projects.
Capital expenditure on construction and renovation
The capital expenditures on construction and renovation in 2005
amounted to approximately RMB 13.984 billion, including RMB 707 million for the
Huaiyin Phase II project, RMB 647 million for the Shantou Phase II project, RMB
1.669 billion for the Taicang Phase II project, RMB 938 million for the Yueyang
Phase II project, RMB 1.107 billion for the Shanghai Combined-Cycle project,
RMB 995 million for the Luohuang Phase III project, RMB 494 million for the
Xindian Phase III project, RMB 1.055 billion for the Yingkou Phase II project
and RMB 2.975 billion for the Yuhuan project. Other expenditure consists mainly
of RMB 2.536 billion for prepaid construction and RMB 861 million for routine
renovation expenditure.
The capital expenditures on construction and renovation amounted
to approximately RMB 10.036 billion and RMB 3.607 billion in 2004 and 2003,
respectively.
48
The Company will continue to incur significant capital
expenditures in 2006. The capital expenditure on construction and renovation is
expected to amount to RMB 18.741 billion and RMB 2.259 billion, respectively.
The construction projects of the Company in 2006 include two 1,000MW
ultra-supercritical coal-fired generating units (the first in the PRC) for the
Yuhuan Power Plant Phase I project, two 300MW coal-fired generating units for
the Yueyang Phase II project, three 390MW gas-fired units for the Shanghai
Combined Cycle project, two 600MW coal-fired generating units of the Taicang
Power Plant Phase II project commenced operation in the first quarter of 2006),
two 600MW coal-fired generating units for the Luohuang Phase III project, two
300MW coal-fired project for the Xindian Phase III project and two 600MW
coal-fired generating units for the Yingkou Phase II project. The Company will
actively engage in new project developments to lay the foundation for the
long-term development of the Company.
Cash resources and anticipated financing costs
The Company expects the cash resources for capital expenditures to
be principally generated from internal funds, cash flow from operating
activities and future debt and equity financing.
The Company has strong financing capacity by virtue of good
operating results and credit history. As of December 31, 2005, the Company and
its subsidiaries had available unsecured borrowing facilities from banks of RMB
34.857 billion, providing a sufficient level of available cash and effectively
raising the Company's liquidity and repayment capabilities.
As of December 31, 2005, the total short-term loans of the Company
and its subsidiaries amounted to RMB 6.581 billion at the interest rate between
4.3% and 5.51% per annum (2004: RMB 8.099 billion at the interest rate between
4.3% and 5.02% per annum). The total short-term bonds of the Company and its
subsidiaries amounted to RMB 4.938 billion.
As of December 31, 2005, the total long-term bank loans of the
Company and its subsidiaries amounted to approximately RMB 28.365 billion
(2004: approximately RMB 15.987 billion). These loans include bank loans
denominated in Renminbi of approximately 22.241 billion (2004: approximately
RMB 8.680 billion); denominated in US Dollar of approximately 672 million
(2004: approximately US$778 million) and denominated in Euro of approximately
73 million (2004: approximately Euro77 million). Included in these borrowings
were approximately US Dollar 60 million of floating-rate borrowings. In 2005,
the long-term bank loans bore an interest rate ranging from 2.00% to 6.97%
(2004: 1.225% to 6.97%) per annum.
As of December 31, 2005, the total long-term shareholder's loans
to the Company and its subsidiaries amounted to RMB 2.8 billion (2004:
approximately RMB 800 million). In 2005, these loans bore an interest rate
ranging from 4.05% to 5.02% (2004: 3.78% to 4.60%) per annum.
As of December 31, 2005, other long-term loans of the Company and
its subsidiaries amounted to approximately RMB 864 million (2004: approximately
RMB 712 million). These loans included borrowings denominated in Renminbi of
approximately 647 million (2004: approximately RMB 435 million), denominated in
US Dollar of approximately 16 million (2004: approximately US Dollar 19
million) and Japanese Yen of approximately 1.31 billion (2004: approximately
JPY1.548 billion). The loans denominated in US Dollar and Japanese Yen were at
floating rates. In 2005, these borrowings bore an interest ranging from 2.99%
to 6.12% (2004: 1.67% to 5.8%) per annum.
The following table sets forth the maturity profile of the
Company's loans as of December 31, 2005.
Unit: RMB billion
Item 2006 2007 2008 2009 2010
--------------------------------------------------------------------------------
Principal proposed to be repaid 15.1 3.3 4.1 5.1 3.9
Interest proposed to be repaid 2.1 1.7 1.5 1.2 1.0
--------------------------------------------------------------------------------
Total 17.2 5.0 5.6 6.3 4.9
--------------------------------------------------------------------------------
-------------
Note: (1) This table is prepared according to the amounts in the contracts
which have been entered into;
(2) The amount of the principal to be repaid in 2006 is relatively
large because it includes short-term borrowings and short-term bonds.
The Company and its subsidiaries will closely monitor changes in
the exchange rate and interest rate markets and cautiously assess the exchange
rate and interest rate risks.
49
Combining the current development of the power industry and the
growth of the Company. The Company 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 risks through effective financial management activities
thereby maintaining sustainable and stable returns to the shareholders.
E. Trend information
Impact of power demand and supply on the Company
The shortage of power supply as compared with power demand in 2006
is expected to change and an excess of generating capacity will emerge in
certain regions. As a result, the utilization hours of the generating units of
the Company may decline. However, we believe we will be able to maintain high
utilization hours in the long-term by virtue of our advanced technology.
Impact of coal demand and supply on the Company
In 2006, a balance between coal demand and supply is expected to
be achieved and the shortage of coal resources and coal transportation capacity
will be eased compared with 2005, thereby providing favorable conditions for
the Company to manage coal supply. However, as coal prices will still remain at
a high level, the Company will continue to face challenges in controlling fuel
costs.
Impact of the financial foreign exchange market on the Company
The reforms on foreign exchange rate setting mechanism increased
flexibility as well as risk. However, as the amount of foreign exchange used by
us for importing equipment and materials and servicing foreign exchange
borrowings are not large, we expect the reforms will not have significant
impact on our cash flows.
F. Performance of significant investments and their prospects
On April 22, 2003, the Company paid RMB 2.39 billion to acquire a
25% equity interest in Shenzhen Energy Group. This investment brought the
Company a share of profit of RMB 396 million in 2005 under IFRS. Shenzhen
Energy Group 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 in the future.
In July 2004, the Company paid RMB 1.375 billion to acquire a
40% equity interest in Hanfeng Power Company. This investment brought the
Company a profit of RMB 207 million in 2005 under IFRS. The Hanfeng Power
Company is located in Hebei Province in northern China and there is a strong
demand for electricity in that region. Through this acquisition, the Company
increased the equity share of production capacity in Hebei Province from
1,300MW to 1,828MW or 40.6%. The Company expects this investment will
contribute stable returns in the future.
G. Employee benefits
As of December 31, 2005, the Company and its subsidiaries had
23,531 employees. In 2005, total staff costs incurred amounted to RMB 2.487
billion. The Company and its subsidiaries provided the employees competitive
remunerations and pegged such remunerations 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 characteristics of individual employees, the Company and its
subsidiaries tailor-made various training programs on management skills,
technical skills, marketing skills and incentives. These programs enhanced both
the knowledge of the employees and the standards of operations.
H. Related Party Transactions
The Company 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, etc. Such transactions were for daily operations at prices no
different from transactions conducted with other third parties and do not have
a material impact on the business and operations
50
of the Company. Moreover, Huaneng Group, HIPDC and the minority shareholders of
other subsidiaries have committed or agreed through contracts to provide
guarantees on loans of the Company and its subsidiaries.
Pursuant to the relevant agreements, the Company rendered
management services to those power plants owned by Huaneng Group and HIPDC at
standard fees covering its costs and a reasonable profit. In 2005, such service
fees amounted to RMB 34.996 million which was below 1% of the operating revenue
of the Company.
Please refer to Note 8 to the Financial Statements for details of
related party transactions.
I. Guarantee on Loans and Restricted Assets
As of December 31, 2005, the guarantees provided by the Company to
Rizhao Power Company, its associate, totaled RMB 225 million. The Company had
no contingent liabilities other than those described above.
As of December 31, 2005, certain assets of Sichuan Hydropower, a
controlling subsidiary of the Company, were used to secure borrowings. The
original acquisition cost of such pledged assets was approximately RMB 1.10
billion.
As of December 31, 2005, restricted bank deposits amounted to RMB
201 million which were mainly deposits for letters of credits.
J. Off-balance sheet arrangements
Our off-balance sheet arrangements primarily consisted of the
guarantees for an associate's long-term loans.
As of December 31, 2005, the balance of the guarantees provided by
the Company to Rizhao Power Company, an associated company amounting to RMB 225
million.
The Company succeeded such guarantee obligation from Huaneng Group
after acquisition of Rizhao Company. The off-balance sheet arrangement does not
have or reasonably likely to have an effect on our financial condition, changes
in financial condition, revenues or expenses, results of operation, liquidity,
capital expenditures or capital resources that is material to investors.
K. Tabular Disclosure of Contractual Obligations and Commercial
Commitments
A summary of payments due by period of our contractual obligations
and commercial commitments as of December 31, 2005 is shown in the tables
below. A more complete description of these obligations and commitments is
included in the Notes to Financial Statements as referenced below.
51
As of December 31, 2005
Contractual Cash Obligations
(RMB millions) 2006 2007-2008 2009-2010 Thereafter Total
-------- ----------- ----------- ----------- ------------
Long-term Loans from a Shareholder(1) - - - 2,800 2,800
Long-term Bank Loans(1) 2,653 7,248 8,944 13,554 32,399
Other Long-term Loans(1) 513 252 78 20 863
Interest Payments 1,812 3,167 2,197 3,597 10,773
Operating Lease - Head Office(2) 26 - - - 26
Operating Lease - Jining Power Plant(2) 3 6 7 18 34
Operating Lease - Shidongkou II Power
Plant(2) 1 2 1 15 19
Operating Lease - Nanjing Power Plant(2) 1 3 3 51 58
Operating Lease - Dezhou Power Plant(2) 30 60 60 402 552
Operating Lease - Other Power Plants(2) 2 3 3 54 62
-------- ----------- ----------- ----------- ------------
5,041 10,741 11,293 20,511 47,586
======== =========== =========== =========== ============
Other Commercial Commitments
(RMB millions) 2006 2007-2008 2009-2010 Thereafter Total
-------- ----------- ----------- ----------- ------------
Long-term coal purchase contracts(2) 7,771 11,598 3,826 - 23,195
Other commitments(2) 17,076 - - - 17,076
-------- ----------- ----------- ----------- ------------
24,847 11,598 3,826 - 40,271
======== =========== =========== =========== ============
-------------
(1) See Note 24 to the Financial Statements, "Long-term Loans".
(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 payments 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 9 to the
Financial Statements.
ITEM 6 Directors, Senior Management and Employees
A. Directors, members of the supervisory committee and senior
management
Directors
On May 11, 2005, Mr. Li Xiaopeng, Mr. Huang Yongda, Mr. Na Xi Zhi,
Mr. Huang Long, Mr. Wang Xiaosong, Mr. Wu Dawei, Mr. Shan Qunying, Mr. Xu
Zujian, Mr. Liu Shuyuan, Mr. Yang Shengming, Mr. Qian Zhongwei, Mr. Xia Donglin,
Mr. Liu Jipeng, Mr. Wu Yusheng, and Mr. Yu Ning were elected as our directors at
the new session of the Board of Directors. Mr. Ye Daji, Mr. Huang Jinkai, Mr.
Liu Jinlong, Mr. Gao Zongze and Mr. Zheng Jianchao had served up their
respective terms and were no longer our directors at the new session of the
Board of Directors. Mr. Yang Shengming and Mr. Wang Xiaosong resigned
respectively from their position as our directors on August 9, 2005 and March 7,
2006. Mr. Ding Shida was appointed as our director on November 17, 2005.
The table below sets forth certain information concerning our
directors as of June 15, 2006. The current term for all of our directors is
three years, which will expire in May 2008.
Name Age Position with us
--------------------------- ---- -------------------------------------------
Li Xiaopeng 47 Chairman of the Board of Directors
Huang Yongda 49 Vice Chairman of the Board of Directors
Na Xizhi 53 Director, President
Huang Long 53 Vice Chairman of the Board of Directors,
Secretary of the Board
Wu Dawei 53 Director
Shan Qunying 53 Director
Ding Shida 58 Director
Xu Zujian 52 Director
Liu Shuyuan 56 Director
Qian Zhongwei 68 Independent Director
52
Xia Donglin 45 Independent Director
Liu Jipeng 50 Independent Director
Wu Yusheng 50 Independent Director
Yu Ning 52 Independent Director
Li Xiaopeng, aged 47, is Chairman of the Company and President of Huaneng Group
as well as Chairman and President of HIPDC. Mr. Li is a senior engineer. He
served as 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. He graduated from the North China Institute of Electric
Power specializing in power plants and power systems.
Huang Yongda*, aged 49, is Vice Chairman of the Company as well as the Vice
President of Huaneng Group. Mr. Huang is a senior accountant. He served as
Deputy Director of the Economic Moderation and State Asset 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, Vice President of HIPDC, Chairman of Xi'an Thermal Industrial
Research Institute Limited Company and Huaneng Capital Services Limited
Company. He graduated from China Renmin University, specializing in industrial
financial accounting.
* resigned from the position of President on March 7, 2006.
Na Xizhi*, aged 53, is a director and President of the Company. Mr. Na is a
senior engineer. He served as Vice President of the Company, Deputy Manager of
the Power Generation Department, General Manager of the Operation Department,
General Manager of the Power Safety and Production Department, Deputy Chief
Engineer and Vice President of Huaneng Group. He graduated from Wuhan
Hydroelectric University, specializing in thermal power with a master degree in
engineering.
* appointed as President on March 7, 2006.
Huang Long*, aged 53, is Vice Chairman of the Company and Secretary of the Board
of Directors. Mr. Huang Long has served as Vice President of Huaneng Group since
April 30, 2006. Pursuant to the applicable laws, he shall not serve as Secretary
of the Board of Directors as well. His resignation application will be reviewed
at the next Board meeting and will become effective when it is approved by the
Board. Mr. Huang is a senior engineer. He served as Deputy General Manager and
General Manager of the International Co-operation Department, General manager of
the International Co-operation and Commerce Department, and Vice President of
the Company. He graduated with a M.S. degree from North Carolina State
University in the U.S. specializing in communications and auto-control.
* elected as Vice Chairman and resigned from the position of Vice President
on March 7, 2006.
Wu Dawei, aged 53, is a director of the Company, Deputy Chief Engineer of
Huaneng group and President of Huaneng Group East China Branch Company. Mr. Wu
is a senior engineer. He served as Deputy General Manager of Huaneng Shanghai
Shidongkou Second Power Plant, Deputy General Manager of Shanghai branch of the
Company, and the General Manager of Huaneng Shanghai Shidongkou Second Power
Plant. He has obtained a Master of Business Administration degree from the
Central Europe International Business School.
Shan Qunying, aged 53, is a director of the Company and Vice President of Hebei
Provincial Construction Investment Company. Mr. Shan is a senior engineer. He
served as Division Chief of Hebei Provincial Construction Investment Company.
He graduated from Beijing Steel Institute specializing in automation.
Ding Shida, aged 58, is a director of the Company, President of Fujian
Investment Enterprise Group Corporation, Chairman of Minxin Group Limited (a
Hong Kong listed company), Director and Executive Director of Xiamen
International Bank, Director and Executive Director of Macau International Bank
and Chairman of Hong Kong Guixin Limited. Mr. Ding is a senior engineer. He
served as General Manager of Fujian Provincial Construction Materials
Corporation. He graduated from the China Academy of Social Sciences,
specializing in agricultural economics management and was conferred a doctoral
degree in management.
Xu Zujian, aged 52, is a director of the Company, a director and Vice President
of Jiangsu Province Guoxin Asset Management Group Limited Company, and Chairman
of Jiangsu Investment Management Co. Ltd. Mr. Xu is a senior engineer. He
served as Vice President of Jiangsu Provincial International Trust & Investment
Corporation, President of Jiangsu Provincial Investment & Management Limited
Liability Company, Director. He graduated from Liaoning Finance Institute
majoring in infrastructure finance.
53
Liu Shuyuan, aged 56, is a director of the Company, and President of Liaoning
Energy Investment (Group) Limited Liability Company. Mr. Liu is a senior
engineer. He served as Vice President, a director and President of Liaoning
Provincial Trust and Investment Corporation, of Liaoning Chuangye (Group)
Limited Liability Company (Liaoning Energy Corporation). He is a postgraduate
of PRC Liaoning Province Communist Party School specializing in economic
management.
Qian Zhongwei, aged 68, is an independent director of the Company. Mr. Qian is
a senior engineer. He served as Deputy Chief Engineer, Chief Engineer and
Deputy Chief of the Eastern China Power Industry Management Bureau, Director of
Shanghai Electricity Bureau, Director of Easter China Power Administration
Bureau, and President of Easter China Power group Company. He graduated from
the electrical engineering department of Tsinghua University.
Xia Donglin, aged 45, is an independent director of the Company, a professor
and Ph. D. tutor of the Economic and Management School of Tsinghua University.
He is also an advisory specialist of the Accounting Standard Committee of the
Ministry of Finance, Deputy Secretary of China Accounting Society, and an
independent Director of Zhejiang Zhongda companies and other companies. Mr. Xia
is a certified public accountant (non-practising member). He served as Head of
Accounting Department of Economic and Management School of Tsinghua University.
He graduated from the Finance and Administration Science Research Institute of
Ministry of Finance, specializing in accounting and was awarded a Ph D. degree
of Economics.
Liu Jipeng, aged 50, is an independent director of the Company, Chairman of
Beijing Standard Consulting Company, a professor of Capital Economic and Trade
University, an adjunct professor of the Graduate School of China Academy of
Social Science and a mentor of graduate students of the Centre for Financial
Studies of the Ministry of Finance. Mr. Liu is a certified accountant. He
served as Senior Consultant of China Power Enterprises Union and China
Securities Market Research and Design Centre as well as Consultant of former
State Power Corporation. He graduated from the Economic Department of the
graduate School of China Academy of Social Science with a master`s degree in
economics.
Wu Yusheng, aged 50, is an independent direct of the Company, Deputy Chief
Engineer and Manager of Technology Department of State Grid Corporation of
China. Mr. Wu is a senior engineer. Mr. Wu served as Deputy Director and Senior
Engineer of Electric Grid Department of China Electric Power Research Institute
and Deputy Chief Engineer Deputy Dean and Dean of China Electric Power Research
Institute. He graduated from Postgraduate School of China Electric Power
Research Institute socializing in electric power system and automation with a
master degree.
Yu Ning, aged 52, is an independent director of the Company. He is also
President of All China Lawyers Association, a part-time professor at Peking
University, a mentor of master postgraduates at Tsinghua University Law School
and a practicing lawyer at Beijing Times Highland Law Firm. Mr. Yu is a lawyer.
He served as Deputy Director and of CCP Central Disciplinary Inspection
Commission. He graduated from Peking University specializing in economic law
with a master degree.
Supervisors
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 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
convening of shareholders' meetings from time to time.
On May 11, 2005, Mr. Ye Daji, Ms. Yu Ying, Mr. Shen Zongmin, Mr.
Zou Cui, Mr. Wang Zhaobin, Mr. Shen Weibing were elected as our supervisors at
the new session of the Supervisory Committee. Mr. Wei Yunpeng, Mr. Li Yonglin,
Mr. Pan Jianmin and Mr. Zhao Xisheng had served up their respective terms and
were no longer our supervisors at the new session of the Supervisory Committee.
Mr. Shen Weibing and Mr. Ye Daji resigned respectively from their positions as
our supervisors on August 9, 2005 and November 30, 2005. Mr. Gu Jianguo and Mr.
Guo Junming were appointed as our supervisors respectively on November 17, 2005
and January 18, 2006 to fill their roles.
54
The table below sets forth certain information concerning our
supervisors as of June 15, 2006. The current term for all of our supervisors is
three years, which will expire in May 2008.
Name Age Position with us
--------------------------- ---- -------------------------------------------
Guo Junming 41 Chairman of the Supervisory Committee
Yu Ying 51 Vice Chairman of the Supervisory Committee
Gu Jianguo 40 Supervisor
Shen Zongmin 52 Supervisor
Zou Cui 53 Supervisor
Wang Zhaobin 51 Supervisor
Guo Junming, aged 41, is Chairman of the Board of Supervisors of the Company as
well as Deputy Chief Accountant and Manager of Finance Department of Huaneng
Group. Mr. Guo is a senior accountant. He served as Deputy Manager of the
Finance Department of Huaneng Group, Vice President and President of China
Huaneng Finance Limited Liability Company, President of Huaneng Capital
Services Limited Company. He graduated from Shanxi Finance and Economic
Institute specializing in business finance and accounting.
* elected as the Supervisor on January 18, 2006.
Yu Ying (Ms), aged 51, is Vice Chairman of the Company's Supervisory Committee
and President of Dalian Municipal Investment Corporation. Ms. Yu is a senior
economic engineer. She served as Director of Social Affair Department of Dalian
Municipal Planning Commission and Director of Fixed Assets Investment
Department of Dalian Municipal Development and Planning Commission. She
graduated from Liaoning University of Finance and Economics, specializing in
finance and credit, with a master degree in Economics.
Gu Jianguo, aged 40, is a supervisor of the Company and President of Nantong
Investment & Management Limited Company. Mr. Gu is an economic engineer. He
served as Deputy Chief and Chief of General Department, Investment Department,
Finance Department and Foreign Economic Affairs Department of the Nantong
Municipal Planning Committee; Vice President of Nantong Ruici Investment
Limited Company; Executive Director of Ruici Hospital, President of Ruici
(Maanshan) Development Limited Company; Chairman and President of Nantong
Zhonghe Guarantee Limited Company and Chief Officer of Nantong Municipal
Investment Management Centre. He graduated from Nanjing Aviation University.
Shen Zongmin, aged 52, is a supervisor of the Company and Manager of Shantou
Electric Power Development Corporation. Mr. Shan is a corporate culture
specialist. He served as Deputy Manager of Shantou Electric Power Development
Corporation and Chairman of Shantou Power Development Stock Company; Manager of
Shantou Electric Corporation and Chairman of Shantou Power Development Joint
Stock Company. He graduated from Macau Technology University and has a MBA
degree.
Zou Cui (Ms.), aged 53, is a supervisor and Manager of Human Resources
Department of the Company. Ms. Zou is a senior engineer. She served as Deputy
Chief and Chief of Personnel Division of Human Resources Department of HIPDC,
Deputy Manager of Human Resources Department and Deputy Manager of Supervision
and Auditing Department of the Company. She graduated from Xi'an Jiaotong
University specializing in computer science.
Wang Zhaobin, aged 51, is a supervisor and Manager of Administration Department
of the Company. Mr. Wang is a corporate culture specialist. He served as Chief
of Corporate Culture Division of Human Resources Department, and Director of
Retirement Department of HIPDC. He graduated from China Beijing Municipal
Communist Party School, specializing in economic management.
Other Executive Officers
On March 7, 2006, Mr. Huang Yongda resigned from the position of
President of the company, and Mr. Na Xizhi was appointed as President of the
Company and no longer Vice President of the Company. Mr. Zhang Hong, Mr. Huang
Long and Mr. Li Shiqi resigned from the position of Vice President of the
Company and Mr. Qu Xiaojun, Mr. Huang Jian, Ms. Lu Dan and Mr. Fan Xiaxia were
appointed as Vice President of the Company. Mr. Huang Jian was no longer Chief
Accountant of the Company and Ms. Zhou Hui was appointed to fill his role.
55
Liu Guoyue, aged 43, is Vice President of the Company. Mr. Liu is a senior
engineer. He served as Deputy General Manager (Deputy Director) and General
Manager (Director) of Huaneng Shijiazhong branch company (Shang'an Power Plant)
and Director of Huaneng Dezhou Power Plant.
Qu Xiaojun, aged 48, is Vice President of the Company. He served as Deputy
Manager and Manager of the Personnel and Labour Department, Manager of Human
Resources Department and Chief of the Disciplinary Division of the Company.
Before joining the Company, he was the Deputy Manager of Electricity Technology
Research Institute Services Company and Supervising Officer of the Supervisory
Division of Energy Department and a director of second Supervisory Division of
Power Department.
Huang Jian*, aged 44, is Vice President of the Company. Mr. Huang is a senior
accountant. He served as Deputy Chief and 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, Deputy Chief
Accountant of the Company.
* appointed as Vice President on March 7, 2006, and is no longer the Chief
Accountant.
Lu Dan (Ms.), aged 50, is Vice President of the Company. Ms. Lu is a senior
engineer. She served as Deputy Manager of the General Planning Department of
Huaneng Power Generation Company, Assistant to Manager of General Planning
Department, Deputy Manager of Planning Development Department, Deputy Manager of
General Planning Department of Huaneng Group, Manager of Planning Development
Department of the Company, and Assistant to President of the Company.
Fan Xiaxia, aged 44, is Vice President of the Company. Mr. Fan is a senior
engineer. He served as Deputy Chief of General Administration Division of
Engineering Department of HIPDC, Deputy Chief of Construction Management
Department, Deputy General Manager of the Company's Nantong branch company,
Deputy Manager of Construction Management Department of HIPDC, Deputy Manager
and Manager of International Co-operation and Business Department of the
Company, Manager of Construction Management Department of the Company,
Assistant to President of the Company and General Manager of the Company's
Zhejiang branch company.
Zhou Hui (Ms.), aged 43, is Chief Accountant and Manager of the Finance
Department of the Company. Ms. Zhou is a senior accountant. She served as
Deputy Chief of the Financial Management Division of the Finance Department of
HIPDC, Deputy Chief of Price Management Division, Chief of Second Finance and
Accounting Division of the Finance Department of the Company, Deputy Manager
and Manager of the Company's Finance Department, and Deputy Chief Accountant of
the Company.
B. Compensation for Directors, Supervisors and Executive Officers
The table below sets forth the compensation on individual basis
for the directors, supervisors and other executive officers for the year ended
December 31, 2005:
Remuneration Paid
by the Company in
Name Position with the Company 2005(1)
------------------------------------- ----------------------------------- --------------------
(RMB in thousand)
Directors
---------
Mr. Li Xiaopeng(2) Chairman of the Board of Directors 0
Vice Chairman of the Board of Directors 0
Mr. Huang Yongda(2) and (8) President (until March 7, 2006)
Director, President 517
Mr. Na Xizhi(2) and (9) Vice President (until March 7, 2006)
Vice Chairman of the Board of Directors
Secretary of the Board 575
Mr. Huang Long(3) and (8) Vice President (until March 7, 2006)
Mr. Wu Dawei(3) Director 147
Mr. Shan Qunying(2) Director 40
Mr. Ding Shida(7) Director 20
Mr. Xu Zujian(2) Director 40
Mr. Liu Shuyuan(2) Director 40
Mr. Qian Zhongwei(2) Independent Director 60
Mr. Xia Donglin(2) Independent Director 60
56
Remuneration Paid
by the Company in
Name Position with the Company 2005(1)
------------------------------------- ----------------------------------- --------------------
(RMB in thousand)
Directors(Cont'd)
-----------------
Mr. Liu Jipeng(2) Independent Director 60
Mr. Wu Yusheng(3) Independent Director 60
Mr. Yu Ning(3) Independent Director 60
Mr. Wang Xiaosong(2) and (4) Director (until March 7, 2006) 0
Mr. Yang Shengming(2) Director (until August 9, 2005)
and (7) 20
Mr. Ye Daji (5) Director (until May 11, 2005) 209
Mr. Huang Jinkai(5) Director (until May 11, 2005) 309
Mr. Liu Jinlong(5) Director (until May 11, 2005) -
Mr. Gao Zongze(5) Independent Director (until May 11, 2005) 30
Mr. Zheng Jianchao(5) Independent Director (until May 11, 2005) 30
----------------------------------------------------------------
Sub-total: 2,277
----------------------------------------------------------------
Supervisors
-----------
Ms. Yu Ying(3) Vice Chairman of the Supervisory Committee 40
Mr. Gu Jianguo(7) Supervisor 20
Mr. Shen Zongmin(2) Supervisor 40
Ms. Zou Cui(3) Supervisor 453
Mr. Wang Zhaobin(3) Supervisor 416
Mr. Wei Yunpeng(5) Supervisor (until May 11, 2005) 0
Mr. Li Yonglin(5) Supervisor (until May 11, 2005) 20
Mr. Pan Jianmin(5) Supervisor (until May 11, 2005) 0
Mr. Zhao Xisheng(5) Supervisor (until May 11, 2005) 208
Mr. Shen Weibing(5) Supervisor (until August 9, 2005) 20
Mr. Ya Daji(3) and (6) Supervisor (until November 30, 2005) 452
----------------------------------------------------------------
Sub-total 1,669
----------------------------------------------------------------
Other Executive officers
------------------------
Mr. Liu Guoyue Vice President 840
Mr. Zhang Hong((8)) Vice President (until March 7, 2006) 837
Mr. Li Shiqi(8) Vice President (until March 7, 2006) 842
Chief Economic Engineer (until March 2005)
Mr. Huang Jian(10) Chief Accountant (Until March 7, 2006) 838
----------------------------------------------------------------
Subtotal: 3,357
----------------------------------------------------------------
____________________
(1) Includes the remuneration received in their capacities of our
directors, supervisors and executive officers for the year ended
December 31, 2005. While the remuneration for directors and
supervisors is after income tax; the remuneration for other executive
officers is before income tax.
(2) Retired and reelected on May 11, 2005.
(3) Elected on May 11, 2005.
(4) Mr. Wang Xiaosong resigned from his position as our director on March
7, 2006.
(5) Retired on May 11, 2005.
(6) Mr. Ye Daji resigned from his position as our supervisor on November
30, 2005.
(7) Mr. Yang Shengming and Mr. Shen Weibing retired and were reelected on
May 11, 2005 as our director and supervisor respectively. They
resigned on August 9, 2005 and Mr. Ding Shida and Mr. Gu Jianguo were
appointed to fill their roles on November 17, 2005 respectively.
(8) Mr. Huang Yongda resigned from his position as President on March 7,
2006. Mr. Huang Long, Mr. Zhang Hong and Mr. Li Shiqi resigned from
their position as Vice President on March 7, 2006.
(9) Mr. Naxizhi served as Vice President until he was appointed as
President on March 7, 2006. (10) Mr. Huang Jian served as Chief
Accountant until he was appointed as Vice President on March 7, 2006.
The total remuneration paid to our directors, supervisors and
executive officers is comprised of basic salaries and allowances, discretionary
bonuses and employer's contributions to pension scheme. Of these, discretionary
bonuses account for 60% of the total remuneration, which are determined on the
basis of working performance of our directors, supervisors and executive
officers.
57
In 2005, a total of RMB 3.357 million was paid to the five highest
paid individuals including one director. 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 RMB 60,000. 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 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 Mr. Xia Donglin (Chairman), Mr.
Qian Zhongwei, Mr. Liu Jipeng, Mr. Wu Yusheng and Mr. Yu Ning.
The members of Strategy Committee are Mr. Li Xiaopeng (Chairman),
Mr. Huang Yongda, Mr. Huang Long, Mr. Na Xizhi, Mr. Wu Dawei and Mr. Wu Yusheng.
The members of Nomination Committee are Mr. Qian Zhongwei
(Chairman), Mr. Huang Long, Mr. Shan Qunying, Mr. Ding Shida, Mr. Xia Donglin,
Mr. Liu Jipeng and Mr. Yu Ning.
The members of Remuneration and Evaluation Committee are Mr. Liu
Jipeng (Chairman), Mr. Na Xizhi, Mr. Xu Zujian, Mr. Liu Shuyuan, Mr. Qian
Zhongwei, Mr. Xia Donglin, and Mr. Wu Yusheng.
D. Employees
As of December 31, 2005, we employed 23,531 people. Of these, 306
are headquarters management staff, 15,455 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
45% our work force graduated from university or technical college. As of
December 31, 2003 and 2004, we had approximately 17,886 and 22,129 employees
respectively.
We conduct continuing education programs for our employees at the
head office and at each power plant. We provide training in foreign 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
58
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.
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 9 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. Such compensation payment obligation
does not have any significant impact on our financial conditions due to its
relatively small magnitude and low frequency. 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.
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 RMB 1.00 per share. The following table set forth
certain information regarding the ownership of our outstanding shares as of
June 15, 2006.
Approximate
Percentage in
the Company's
total issued
Shareholder Number of shares share capital
%
----------------------------------------------------------------------------------------------------------------
Huaneng International Power Development Corporation 5,066,662,118 42.03
China Huaneng Group 1,055,124,549 8.75
Hebei Provincial Construction Investment Company 603,000,000 5.00
Jiangsu Provincial International Trust & Investment Corporation 416,500,000 3.45
Fujian Investment Enterprise Holdings Limited 338,466,667 2.81
Liaoning Energy Investment (Group) Limited Liability Company 332,913,333 2.76
Dalian Municipal Construction Investment Company 301,500,000 2.50
59
Approximate
Percentage in
the Company's
total issued
Shareholder Number of shares share capital
%
----------------------------------------------------------------------------------------------------------------
Minxin Group Limited Company 108,000,000 0.90
Nantong Investment Management Limited Company 90,500,000 0.75
Shantou Power Development Joint Stock Company Limited 25,333,333 0.21
Dandong Energy Investment Development Centre 8,666,667 0.07
Shantou Electric Power Development Company 3,333,333 0.03
Other domestic shares 650,000,000 5.40
----------------------------------------------------------------------------------------------------------------
Sub-total 9,000,000,000 74.66
Foreign shares 3,055,383,440 25.34
----------------------------------------------------------------------------------------------------------------
Total 12,055,383,440 100.00
----------------------------------------------------------------------------------------------------------------
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 RMB 435 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.
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.
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.
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
60
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 held 43.12% of the equity interest in the Company.
On September 26, 2005, HIPDC transferred its 40,000,000 shares of
the Company to Liaoning Energy Investment Company. As a result of this
transfer, HIPDC held 42.78% of the equity interest in the Company.
On April 19, 2006, we completed our shareholding reform process,
in which Huaneng Group and HIPDC offered three shares to each holder of A
Shares for every ten A Shares held by each of such holder. The total number of
shares offered by Huaneng Group and HIPDC in connection with this reform was
15,000,000 shares. As a result of the share reform process, Huaneng Group and
HIPDC currently hold, respectively, 8.75% and 42.03% shares of the Company.
Before we were established in 1994, HIPDC and other seven
promoters 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 promoters so as to enable
HIPDC to have majority voting rights in general meetings for so long as we are
in existence. In addition, directors designated by HIPDC will have majority
representation on our board of directors and each of the other promoters will
have one representative designated by it appointed as a member of our 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. As a result of the Shareholders' Agreement, HIPDC held
70.09% of the total voting rights of the outstanding shares and, subject to the
Shareholders' Agreement, had the power to control the election of all of our
directors and to direct our management and policies.
On May 12, 2006, HIPDC and other promoters of the Company
(including those shareholders who assumed the rights and obligations of
original promoters due to share transfer) entered into an amendment to the
Shareholders' Agreement, pursuant to which, each promoter of the Company shall
be entitled to exercise its own voting rights at the shareholders' general
meeting. As a result, HIPDC currently holds 42.03% of the total voting rights
of our outstanding shares. Since its parent company, Huaneng Group currently
holds 8.75% of the total voting rights of our outstanding shares, it is able to
control the election of the entire board when acting in concert with Huaneng
Group.
B. Related party transactions
Guarantees
The table below sets forth information on guarantees provided by
the Company, Huaneng Group and HIPDC to the related parties. Such guarantees
were provided for the purposes of financing the operation, construction, and
renovation of the relevant power companies indicated.
---------------------- -------------------- -------------- ------------------------ ------------------------------
Guarantor Guarantee Interest Largest Amount Amount Outstanding
Rate Outstanding As of May 31, 2006
in 2005
---------------------- -------------------- -------------- ------------------------ ------------------------------
(%) (RMB) (RMB)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Huaneng Group The Company 6.36 450,775,931 384,513,705
(Ultimate Parent of
the Company)
---------------------- -------------------- -------------- ------------------------ ------------------------------
The Company LIBOR + 0.075 549,864,301 456,637,314
---------------------- -------------------- -------------- ------------------------ ------------------------------
The Company 5.51-5.63 1,123,000,000 -
---------------------- -------------------- -------------- ------------------------ ------------------------------
61
---------------------- -------------------- -------------- ------------------------ ------------------------------
Taipingyi 5.51 250,000,000 250,000,000
Hydropower(1)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Taipingyi 5.51 18,000,000 9,000,000
Hydropower(1)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Taipingyi 5.51 21,000,000 11,000,000
Hydropower(1)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Taipingyi 5.51 31,700,000 16,500,000
Hydropower(1)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Taipingyi 5.51 39,520,000 19,800,000
Hydropower(1)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Taipingyi 5.51 224,997,606 38,037,606
Hydropower(1)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Mingtai 5.51 130,000,000 130,000,000
Hydropower(2)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Kangding 5.51 120,000,000 115,000,000
Hydropower(3)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Kangding 5.51 212,000,000 195,000,000
Hydropower(3)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Kangding 5.51 258,000,000 238,000,000
Hydropower(3)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 6.12 30,000,000 30,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 6.12 50,000,000 50,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 6.12 30,000,000 30,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 5.51 20,000,000 20,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 5.51 20,000,000 20,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 5.51 30,000,000 30,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 5.51 15,000,000 15,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 5.51 15,000,000 15,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 5.51 20,000,000 20,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 5.18 20,000,000 20,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 5.51 30,000,000 30,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 5.51 40,000,000 40,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 5.51 40,000,000 40,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 5.51 30,000,000 30,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 5.51 30,000,000 30,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 5.51 30,000,000 30,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 5.51 30,000,000 30,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Jialingjiang 5.51 40,000,000 40,000,000
Hydropower(4)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Fujiang 5.51 150,000,000 150,000,000
Hydropower(5)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Fujiang 5.51 200,000,000 200,000,000
Hydropower(5)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Fujiang 5.51 131,440,000 131,440,000
Hydropower(5)
---------------------- -------------------- -------------- ------------------------ ------------------------------
62
---------------------- -------------------- -------------- ------------------------ ------------------------------
Fujiang 5.51 561,100,000 741,100,000
Hydropower(5)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Dongxiguan 5.51 404,650,000 360,650,000
Hydropower(6)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 50,000,000 50,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 10,000,000 10,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 20,000,000 20,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 50,000,000 50,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 60,000,000 60,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 80,000,000 80,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 50,000,000 50,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 30,000,000 30,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 50,000,000 50,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 20,000,000 20,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 50,000,000 50,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 25,000,000 25,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 50,000,000 50,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 30,000,000 30,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 50,000,000 50,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 50,000,000 50,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Baoxinghe Power 5.51 50,000,000 50,000,000
Company(7)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Luohuang Power 5.95 1,397,380,111 1,063,755,624
Company(8)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Hanfeng Power 5.51 944,000,000 654,000,000
Company(9)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Hanfeng Power 5.51 279,300,000 231,000,000
Company(9)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Qinbei Power LIBOR+ 0.43 153,706,428 114,554,285
Company(10)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Qinbei Power LIBOR + 0.3 123,346,786 85,044,048
Company(10)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Pingliang Power 5.51 1,232,000,000 1,112,000,000
Company(11)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Pingliang Power 5.51 406,250,000 331,500,000
Company(11)
---------------------- -------------------- -------------- ------------------------ ------------------------------
HIPDC The Company 5.95 898,316,906 683,843,759
---------------------- -------------------- -------------- ------------------------ ------------------------------
The Company 6.60 675,709,165 523,736,019
---------------------- -------------------- -------------- ------------------------ ------------------------------
The Company 6.60 263,019,682 207,049,543
---------------------- -------------------- -------------- ------------------------ ------------------------------
The Company 6.54 1,062,069,199 823,200,188
---------------------- -------------------- -------------- ------------------------ ------------------------------
The Company 5.95 1,037,872,162 861,905,574
---------------------- -------------------- -------------- ------------------------ ------------------------------
The Company Yushe Power 5.51 630,000,000 612,000,000
Company(12)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Yushe Power 5.18 30,000,000 -
Company(12)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Qinbei Power 5.51 740,000,000 740,000,000
Company(10)
---------------------- -------------------- -------------- ------------------------ ------------------------------
63
---------------------- -------------------- -------------- ------------------------ ------------------------------
Weihai Power 5.76 30,000,000 -
Company(13)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Rizhao Power 6.12 63,750,000 63,750,000
Company(14)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Rizhao Power 6.12 42,500,000 25,500,000
Company(14)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Rizhao Power 6.12 29,750,000 25,500,000
Company(14)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Rizhao Power 6.12 37,187,500 32,937,500
Company(14)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Rizhao Power 6.12 86,062,500 69,062,500
Company(14)
---------------------- -------------------- -------------- ------------------------ ------------------------------
Rizhao Power 6.12 46,000,000 -
Company(14)
---------------------- -------------------- -------------- ------------------------ ------------------------------
------------
Notes:
(1) Taipingyi Hydropower is a subsidiary of Sichuan Hydropower, which is in
turn a subsidiary of the Company.
(2) Mingtai Hydropower is a subsidiary of Sichuan Hydropower, which is in turn
a subsidiary of the Company.
(3) Kangding Hydropower is a subsidiary of Sichuan Hydropower, which is in
turn a subsidiary of the Company.
(4) Jialingjiang Hydropower is a subsidiary of Sichuan Hydropower, which is in
turn a subsidiary of the Company.
(5) Fujiang Hydropower is a subsidiary of Sichuan Hydropower, which is in turn
a subsidiary of the Company.
(6) Dongxiguan Hydropower is a subsidiary of Sichuan Hydropower, which is in
turn a subsidiary of the Company.
(7) Baoxinghe Power Company is a subsidiary of Sichuan Hydropower, which is in
turn a subsidiary of the Company.
(8) Luohuang Power Company is a subsidiary of the Company.
(9) Hanfeng Power Company is an associate of the Company.
(10) Qinbei Power Company is a subsidiary of the Company.
(11) Pingliang Power Company is a subsidiary of the Company.
(12) Yushe Power Company is a subsidiary of the Company.
(13) Weihai Power Company is a subsidiary of the Company.
(14) Rizhao Power Company is a subsidiary of the Company.
Loans
The table below sets forth the loans made by Huaneng Group and
Huaneng Finance. Such loans were made for the purposes of financing the
operation, construction and renovation of the relevant power companies
indicated.
---------------------- ------------------------------- ------------ ------------------- -------------------------
Lender Borrower Interest Largest Amount Outstanding Balance
Outstanding
Rate in 2005 as of May 31, 2006
(%) (RMB) (RMB in million)
---------------------- ------------------------------- ------------ ------------------- -------------------------
Huaneng Group The Company 5.02 2,000,000,000 2,000,000,000
(Ultimate Parent of
the Company
---------------------- ------------------------------- ------------ ------------------- -------------------------
Yushe Power Company(1) 4.60 225,000,000 225,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Yushe Power Company(1) 4.05 75,000,000 75,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Qinbei Power Company(2) 4.60 375,000,000 375,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
64
---------------------- ------------------------------- ------------ ------------------- -------------------------
Qinbei Power Company(2) 4.05 125,000,000 125,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Huaneng Finance The Company 5.02 900,000,000 -
(Subsidiary of
Huaneng Group)
---------------------- ------------------------------- ------------ ------------------- -------------------------
The Company 4.78 400,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
The Company 4.70 1,000,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
The Company 5.02 100,000,000 100,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Weihai Power Company(3) 4.78 130,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Weihai Power Company(3) 5.02 130,000,000 130,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Taicang Power Company(4) 4.78 200,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Taicang Power Company(4) 5.02 200,000,000 200,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Taicang II Power Company(5) 5.02 400,000,000 400,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Taicang II Power Company(5) 5.02 400,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Huaiyin II Power Company(6) 5.02 200,000,000 450,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Yushe Power Company(1) 4.78 41,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Yushe Power Company(1) 5.02 16,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Yushe Power Company(1) 5.02 18,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Yushe Power Company(1) 5.02 35,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Yushe Power Company(1) 5.02 127,700,000 127,700,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Yushe Power Company(1) 5.02 41,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Yushe Power Company(1) 5.02 10,000,000 10,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Yushe Power Company(1) 5.02 35,000,000 35,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Yushe Power Company(1) 5.02 50,000,000 50,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Yushe Power Company(1) 5.02 10,000,000 10,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Qinbei Power Company(2) 4.78 120,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Qinbei Power Company(2) 4.70 120,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Qinbei Power Company(2) 4.78 50,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Qinbei Power Company(2) 4.70 200,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Qinbei Power Company(2) 4.70 120,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Qinbei Power Company(2) 5.02 50,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Qinbei Power Company(2) 5.02 200,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Qinbei Power Company(2) 5.02 114,000,000 114,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Yueyang Power Company(7) 4.54 100,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Yueyang Power Company(7) 4.70 100,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Yueyang Power Company(7) 5.02 100,000,000 100,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Dongxiguan Hydropower(8) 5.18 20,000,000 20,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Dongxiguan Hydropower(8) 5.18 30,000,000 30,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Kangding Hydropower(9) 4.78 50,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Kangding Hydropower(9) 5.02 50,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Kangding Hydropower(9) 4.78 50,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
Mingtai Hydropower(10) 5.02 10,000,000 10,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Mingtai Hydropower(10) 5.18 10,000,000 10,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Mingtai Hydropower(10) 5.18 20,000,000 20,000,000
---------------------- ------------------------------- ------------ ------------------- -------------------------
Baoxinghe Power Company(11) 5.02 60,000,000 -
---------------------- ------------------------------- ------------ ------------------- -------------------------
------------
Notes:
(1) Yueshe Power Company is a subsidiary of the Company.
(2) Qinbei Power Company is a subsidiary of the Company.
(3) Weihai Power Company is a subsidiary of the Company.
(4) Taicang Power Company is a subsidiary of the Company.
(5) Taicang II Power Company is a subsidiary of the Company.
(6) Huaiyin II Power Company is a subsidiary of the Company.
(7) Yueyang Power Company is a subsidiary of the Company.
(8) Dongxiguan Hydropower is a subsidiary of Sichuan Hydropower, which is in
turn a subsidiary of the Company.
65
(9) Kangding Hydropower is a subsidiary of Sichuan Hydropower, which is in
turn a subsidiary of the Company.
(10) Mingtai Hydropower is a subsidiary of Sichuan Hydropower, which is in turn
a subsidiary of the Company.
(11) Baoxinghe Power Company is a subsidiary of Sichuan Hydropower, which is in
turn a subsidiary of the Company.
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 RMB 25 million. The
leasing agreement was effective retroactively as of January 1, 2000. In 2005,
the leasing agreement was renewed for 5 years with the annual rent of RMB 26
million.
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% 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. In 2004, we entered into a Supplementary Agreement with HIPDC to lower
the fees paid by Shangan power plant to 6%. The total amount of service fees
paid to HIPDC in 2005 was approximately RMB 141 million.
Acquisitions from Huaneng Group in 2005
In 2005 we acquired 60% equity interest of Sichuan Huaneng
Hydropower Development Corporation, Ltd. and 65% equity interest of Gansu
Huaneng Pingliang Power Generation Limited Liability Company from Huaneng
Group.
These acquisitions have been disclosed to our shareholders in more
details in the circular filed on Form 6-K dated November 4, 2004 and has been
approved by the independent shareholders.
At the end of 2005, we paid the consideration of RMB 126 million
to Huaneng Group and advanced a payment (which will represent an injection of
capital) of RMB 162 million to Huaneng Finance in order to acquire 20% equity
interest in Huaneng Finance. The acquisition becomes effective subsequent to
the year end.
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. 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.
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:
66
(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 RMB 1,936,100 each year;
(ii) Risk premium, equivalent to 10% the management costs, that is RMB
193,600 each year; and
(iii) Profit, which means bonus or penalty payment not exceeding +/-15%
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:
Sum of the actual
controllable generation
capacity and equity
participation capacity
of Sichuan Hydropower
Management fee payable Management fee paid for the current month
for the current month = for the previous month X -----------------------
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.
(3) Performance assessment: The Company shall assess the management services
of Huaneng Group accordingly 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.
67
(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.
The Agreement expired on April 11, 2006. As we have already had
competent personnel and facilities to manage hydropower plants, we started to
manage Sichuan Hydropower directly by ourselves.
Current deposits with Huaneng Finance
As of December 31, 2005, the Company placed with Huaneng Finance
current deposits of approximately RMB 1,768 million, which bore interest
ranging from 0.72% to 1.62% per annum.
Coal purchases
In 2005, the Company paid for coal purchase RMB 284.301 million,
RMB 241.960 million and RMB 606.753 million, respectively, to China Huaneng
International Trade Economics Corporation ("CHITEC"), Hebei Huaneng Jingyuan
Coal Company Limited ("Huaneng Jingyuan") and Shanghai Times Shipping Company
Ltd. ("Time Shipping").
For a detailed discussion of other related party transactions, see
Note 8 to the Financial Statements.
C. Interests of experts and counsel
Not applicable.
ITEM 8 Financial Information
A. Consolidated statements and other financial information
See pages F-1 to F-80.
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.
In accordance with the profit appropriation plan approved by the
shareholders' general meeting on June 13, 2006, the Company expects to pay a
cash dividend of approximately RMB 3.014 billion.
68
B. Significant Changes
None.
ITEM 9 The Offer and Listing
A. 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$)
2001............................................. 24.91 16.75
2002............................................. 35.82 23.06
2003............................................. 71.35 31.36
2004............................................. 86.91 27.30
2005............................................. 31.24 26.21
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
Second Quarter............................ 30.45 28.32
Third Quarter............................. 31.21 27.62
Fourth Quarter............................ 29.74 26.21
2006 First Quarter............................. 28.40 25.97
2005 December.................................. 27.56 26.21
2006 January................................... 28.40 26.64
February.................................. 28.34 26.98
March..................................... 27.79 25.97
April..................................... 30.25 26.85
May....................................... 30.68 25.82
June (up to June 15) ..................... 25.98 24.30
--------------
Source: Reuters
Each ADS represents 40 Overseas Listed Foreign Shares. As of May
31, 2006, there were 116 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$22.73 per ADS. In May, 2004, we effected a
two-for-one stock split by way of stock dividend for all our outstanding shares
including H shares. The table below sets forth, for the periods indicated, the
high and low closing prices of H shares on the Hong Kong Stock Exchange.
69
Closing Price Per H shares
-----------------------------
High Low
-------------- ------------
(HK$) (HK$)
2001.............................................. 4.20 3.40
2002.............................................. 6.95 4.53
2003.............................................. 13.20 6.05
2004.............................................. 13.45 6.05
2005.............................................. 6.10 5.10
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............................ 6.10 5.25
Second Quarter........................... 6.05 5.50
Third Quarter............................ 5.80 5.45
Fourth Quarter........................... 5.75 5.10
2006 First Quarter............................ 5.45 5.00
2005 December..................................... 5.35 5.10
2006 January.................................. 5.45 5.10
February................................. 5.45 5.20
March.................................... 5.30 5.00
April.................................... 5.85 5.20
May...................................... 5.95 5.00
June (up to June 15) .................... 4.95 4.73
---------------
Source: Reuters
As of May 31, 2006, there were 475 registered holders of H Shares.
ITEM 10 Additional Information
A. Share Capital
Not applicable.
B. Memorandum and articles of association
The following is a brief summary of certain provisions of our
Articles of Association, as amended, the Company Law and certain other
applicable laws and regulations of the PRC. Such summary does not purport to be
complete. For further information, you and your advisors should refer to the
text of our Articles of Association, as amended, and to the texts of applicable
laws and regulations.
Objects and Purposes
We are a joint stock limited company established in accordance
with the Standard Opinion for Joint Stock Limited Companies (the "Standard
Opinion") and certain other relevant laws and regulations of the PRC. We are
registered with the PRC State Administration for Industry and Commerce with
business license number Qi Gu Guo Zi No. 000496. Article 10 of our Articles of
Association provides that our scope of businesses includes, among other things,
investment, construction, operation and management of power plants and
development, investment and operation of other export-oriented enterprises
related to power plants.
70
Directors
Our directors shall be elected at our shareholders' general
meeting. Because the shares do not have cumulative voting rights, a holder of a
majority of the shares is able to elect all of the directors. Our directors
shall be elected for a term of three years and may serve consecutive terms upon
re-election, except that independent directors may only serve a maximum of two
terms. Our directors are not required to hold any shares in us, and there is no
age limit requirement for the retirement or non-retirement of our directors.
Where a director is materially interested, directly or indirectly,
in a contract, transaction or arrangement (including any proposed contract,
transaction or arrangement) with us, he or she shall declare the nature and
extent of his or her interests to the board of directors at the earliest
opportunity, whether or not such contract, transaction or arrangement is
otherwise subject to the approval of the board. A director shall not vote, and
shall not be counted in the quorum of the meeting, on any resolution concerning
any contract, transaction or arrangement where the director owns material
rights or interests therein. A director is deemed to be interested in a
contract, transaction or arrangement in which his associate (as defined by
Article 132 of the Articles of Association) is interested.
Unless the interested director discloses his interests to the
board and the contract, transaction or arrangement in which the director is
materially interested is approved by the board at a meeting in which the
director neither votes nor is counted in the quorum, such contract, transaction
or arrangement may be revoked by us except with respect to a bona fide party
thereto who does not have notice of the director's interests.
We are prohibited from making loans or providing guarantees to our
directors and their associates except where such loan or guarantee is made or
provided under a service contract as approved by our shareholders at the
shareholders' general meeting and to meet expenditure requirement incurred or
to be incurred by the director for the purposes of the company or for the
purpose of enabling the director to perform his or her duties properly.
Matters relating to the remuneration of our directors shall be
determined by the shareholders' general meeting.
Dividends
Distribution of dividends may be proposed by our board of
directors for approval by an ordinary resolution of our shareholders at the
shareholders' general meeting. The Articles of Association allows for cash or
stock dividends.
Dividends may only be distributed after allowance has been made
for:
o recovery of losses, if any;
o allocations to the statutory surplus reserve fund;
o allocations to the statutory common welfare reserve fund; and
o allocations to a discretionary surplus reserve fund.
The minimum and maximum aggregate allocations to the statutory
surplus reserve fund and statutory common welfare reserve fund are 15% and 20%,
respectively, of our net income determined in accordance with the PRC
accounting rules.
The Articles of Association require that cash dividends and other
distribution with respect of H Shares be declared in Renminbi and paid by the
Company in US dollars or Hong Kong dollar in terms of the H Shares listed on
the Hong Kong Stock Exchange. The Articles of Association further stipulate
that for dividends and other distributions paid in currencies other than
Renminbi, we shall use an exchange rate equal to the median closing exchange
rate of Renminbi for such currencies announced by PBOC for two working days in
the week preceding the date on which such dividends or other distributions are
declared.
We will appoint receiving agents to receive, on behalf of the
holders of H Shares, any dividend distributions and all other money owing by us
in respect of such shares (Receiving Agents). The Receiving Agents will comply
with the laws and regulations of the applicable stock exchanges on which our
shares are listed. Any Receiving Agent appointed on behalf of the holders of H
Shares listed on the Hong Kong Stock Exchange will be a company registered as a
trust corporation under the Trustee Ordinance of Hong Kong.
Dividends payments may be subject to PRC withholding tax.
71
Voting Rights and Shareholders' Meetings
Our board of directors shall convene a shareholders' annual
general meeting once every year and within six months from the end of the
preceding financial year. Our board shall convene an extraordinary general
meeting within two months after the occurrence of any one of the following
events:
o where the number of directors is less than the number required by
the PRC Company Law or two-thirds of the number specified in our
Articles of Association;
o where our unrecovered losses reach one-third of the total amount of
our share capital;
o where shareholder(s) holding 10% or more of our voting rights
request(s) in writing the convening of an extraordinary general
meeting; or
o whenever our board deems necessary or our supervisory committee so
requests.
Resolutions proposed by the supervisory committee or
shareholder(s) holding 5% or more of the total number of voting shares shall be
included in the agenda for the relevant annual general meeting if they are
matters which fall within the scope of the functions and powers of shareholders
in general meeting.
All shareholders' meetings must be convened by our board by
written notice given to shareholders not less than 45 days before the meeting.
Based on the written replies received by us 20 days before a shareholders'
meeting, we shall calculate the number of voting shares represented by
shareholders who have indicated that they intend to attend the meeting. Where
the number of voting shares represented by those shareholders amount to more
than one-half of our total voting shares, we shall convene the shareholders'
general meeting (regardless of the number of shareholders who actually attend).
Otherwise, we shall, within five days before holding the shareholders' general
meeting, inform the shareholders again of the motions to be considered and the
date and venue of the meeting by way of public announcement. After the
announcement is made, the shareholders' meeting may be convened. The accidental
omission by us to give notice of a meeting to, or the non-receipt of notice of
a meeting by, a shareholder will not invalidate the proceedings at that
shareholders' meeting.
Shareholders at meetings have the power, among other things, to
examine and approve our profit distribution plans and plans to recover loses,
the annual budget, an increase or reduction of registered share capital, the
reports of our board of directors and supervisory committee, the issuance of
debentures, and the plans for merger, division, dissolution or liquidation; to
elect or remove our directors and supervisors; and to review and amend our
Articles of Association. In addition, the rights of a class of shareholders may
not be modified or abrogated, unless approved by a special resolution of
shareholders at a general shareholders' meeting and by a special resolution of
shareholders of that class of shares at a separate meeting. Our Articles of
Association enumerate, without limitation, certain amendments which would be
deemed to be a modification or abrogation of the rights of a class of
shareholders, including increasing or decreasing the number of shares of such
class or the number of shares of a class with voting or distribution rights or
privileges equal or superior to the shares of such class, removing or reducing
rights to receive dividends in a particular currency, and creating shares with
voting or distribution rights or privileges equal or superior to shares of such
class.
Each share is entitled to one vote on all such matters submitted
to a vote of our shareholders at the shareholders' general meetings, except for
meetings of a special class of shareholders where only holders of shares of the
affected class are entitled to vote on the basis of one vote per share of the
affected class.
Shareholders are entitled to attend and vote at meetings either in
person or by proxy. Proxies must be in writing and deposited at our legal
address, or such other place as is specified in the meeting notice, not less
than 24 hours before the time for holding the meeting at which the proxy
proposes to vote or the time appointed for the passing of the relevant
resolution(s). When the instrument appointing a proxy is executed by the
shareholder's attorney-in-fact, such proxy when deposited must be accompanied
by a notary certified copy of the relevant power of attorney or other authority
under which the proxy was executed.
Except for those actions discussed below which require
supermajority votes ("special resolutions"), resolutions of the shareholders
are passed by a simple majority of the voting shares held by shareholders who
are present in person or by proxy. Special resolutions must be passed by more
than two-thirds of the voting shares held by shareholders who are present in
person or by proxy.
The following decisions must be adopted by special resolution:
o an increase or reduction of our registered share capital or the
issuance of shares, including stock distributions, of any class,
warrants and other similar securities;
o issuance of debentures;
72
o our division, merger, dissolution and liquidation;
o amendments to our Articles of Association; and
o any other matters our shareholders have resolved by way of an
ordinary resolution at a general meeting to be of a nature which
may have a material impact on us and should be adopted by special
resolution.
In addition, amendments to the Articles of Association require the
approval and consent of the relevant PRC authorities.
All other actions taken by the shareholders, including the
appointment and removal of our directors and supervisors and the declaration of
cash dividend payments, will be decided by an ordinary resolution of the
shareholders.
Any shareholder resolution which is in violation of any laws or
regulations of the PRC will be null and void.
Liquidation Rights
In the event of our liquidation, the H Shares will rank pari passu
with the domestic ordinary shares, and any of our assets remaining after
payment (in order of priority) of (a) the costs of liquidation: (b) wages and
social insurance fees payable to or for our employees for the past three years
prior to the date of liquidation; (c) overdue taxes and tax surcharges, funds
and other amounts payable pursuant to the applicable administrative
regulations; and (d) bank loans, corporate bonds and other debts, will be
divided among our shareholders in accordance with the class of shares and their
proportional shareholdings.
Further Capital Call
Shareholders are not liable to make any further contribution to
the share capital other than according to the terms, which were agreed by the
subscriber of the relevant shares at the time of subscription
Increases in Share Capital and Preemptive Rights
The Articles of Association require the approval by a special
resolution of the shareholders prior to authorizing, allotting, issuing or
granting shares, securities convertible into shares or options, warrants or
similar rights to subscribe for any shares or such convertible securities. New
issues of shares must also be approved by the relevant PRC authorities.
Shareholders do not have preemptive rights with respect to new
issues of shares of the Company.
Reduction of Share Capital and Purchase by Us of Our Shares and General Mandate
to Repurchase Shares
We may reduce our registered share capital only upon obtaining the
approval of the shareholders by a special resolution and, in certain
circumstances, of relevant PRC authorities. The number of H Shares, which may
be purchased is subject to the Hong Kong Takeovers and Share Repurchase Codes.
Restrictions on Large or Controlling Shareholders
Our Articles of Association provide that, in addition to any
obligation imposed by laws and administration regulations or required by the
listing rules of the stock exchanges on which our H Shares are listed, a
controlling shareholder shall not exercise his voting rights in a manner
prejudicial to the interests of the shareholders generally or of some part of
the shareholders:
(11) to relieve a director or supervisor from his or her duty to act
honestly in our best interests;
(12) to approve the expropriation by a director or supervisor (for his
or her own benefit or for the benefit of another person) of our
assets in any way, including, without limitation, opportunities
which may benefit us; or
(13) to approve the expropriation by a director or supervisor (for his
or her own benefit or for the benefit of another person) of the
individual rights of other shareholders, including, without
limitation, rights to distributions and voting rights (save
according to a restructuring of our company which has been
submitted for approval by the shareholders in a general meeting in
accordance with our Articles of Association).
73
A controlling shareholder, however, will not be precluded by our
Articles of Association or any laws and administrative regulations or the
listing rules of the stock exchanges on which our H Shares are listed from
voting on these matters.
A controlling shareholder is defined by our Articles of
Association as any person who acting alone or in concert with others:
o is in a position to elect more than one-half of the board of
directors;
o has the power to exercise, or to control the exercise of, 30% or
more of our voting rights;
o holds 30% or more of our issued and outstanding shares; or
o has de facto control of us in any other way.
Disclosure
The Listing Agreement imposes a requirement on us to keep the Hong
Kong Stock Exchange, our shareholders and other holders of our listed
securities informed as soon as reasonably practicable of any information
relating to us and our subsidiaries, including information on any major new
developments which are not public knowledge, which:
o is necessary to enable them and the public to appraise the position
of us and our subsidiaries;
o is necessary to avoid the establishment of a false market in its
securities; and
o might be reasonably expected materially to affect market activity
in and the price of its securities.
There are also requirements under the Listing Rules for us to
obtain prior shareholders' approval and/or to disclose to shareholders details
of certain acquisitions or disposals of assets and other transactions
(including transactions with controlling shareholders).
Sources of Shareholders' Rights
The PRC's legal system is based on written statutes and is a
system in which decided legal cases have little precedent value. Prior to the
effectiveness of the Company Law, the PRC did not have a comprehensive body of
laws governing joint stock limited companies. The rights and obligations of our
shareholders are principally contained in our constitutive documents and the
Standard Opinion, under which we were established. In December 1993, the
Standing Committee of the 8th National People's Congress adopted the PRC
Company Law, which superseded the Standard Opinion. In accordance with Article
229 of the Company Law, we must comply with the relevant requirements of the
Company law within an unspecified time period. As a result, we amended our
Articles of Association pursuant to the Company Law on June 6, 1995. On October
27, 2005, the Company law was amended by the Standing Committee of the 10th
National People's Congress, and came into force on January 1, 2006.
Currently, the primary sources of shareholder rights are our
Articles of Association, as amended, the PRC Company Law and the Listing Rules
of the Hong Kong Stock Exchange, which, among other things, impose certain
standards of conduct, fairness and disclosure on us, our directors and our
controlling shareholder. To facilitate the offering and listing of shares of
PRC companies overseas, and to regulate the behavior of companies whose shares
are listed overseas, the State Council Securities Committee and the State
Commission for Restructuring the Economic System issued on August 27, 1994 the
Mandatory Provisions for Articles of Association of Company Listing Overseas
(the "Mandatory Provisions"). These Mandatory Provisions become entrenched in
that, once they are incorporated into the Articles of Association of a PRC
company, any amendment to those provisions will only become effective after
approval by the State-owned Assets Supervision and Administration Commission of
the State Council. The Listing Rules require a number of additional provisions
to the Mandatory Provisions to be included in the Articles of Association of
PRC companies listing H Shares on the Hong Kong Stock Exchange (the "Additional
Provisions"). The Mandatory Provisions and the Additional Provisions have been
incorporated into our Articles of Association.
In addition, upon the listing of and for so long as the H Shares
are listed on the Hong Kong Stock Exchange, we are subject to the relevant
ordinances, rules and regulations applicable to companies listed on the Hong
Kong Stock Exchange, including the Listing Rules of the Hong Kong Stock
Exchange, the Securities (Disclosure of Interests) Ordinance (the "SDI
Ordinance"), the Securities (Insider Dealing) Ordinance and the Hong Kong Codes
on Takeovers and Mergers and Share Repurchases (the "Hong Kong Takeovers and
Repurchase Codes").
74
Enforceability of Shareholders' Rights
There has not been any public disclosure in relation to the
enforcement by holders of H Shares of their rights under constitutive documents
of joint stock limited companies or the Company Law or in the application or
interpretation of the PRC or Hong Kong regulatory provisions applicable to the
PRC joint stock limited companies.
The Company Law, as amended in October 2005 and effective in
January 2006, has granted shareholders with the rights to bring derivative
suits. Within the Company Law, Shareholders holding more than 1 percent of the
shares of the company for more than 180 consecutive days are entitled to
request the supervisory committee (in terms of directors and senior management)
or the board of directors (in terms of supervisors) to bring legal proceedings,
or bring legal proceedings in their own name on behalf of the company where it
is in emergency and the company will be subject to irreparable loss if not to
do so, against directors, supervisors or senior management who fail to comply
with the laws and regulations or the company's Articles of Association in the
course of performing their duties and cause loss to the company;
Our Articles of Association provide that all differences or
claims:
o between a holder of H Shares and us;
o between a holder of H Shares and any of our directors, supervisors,
general managers, deputy general managers or other senior officers;
or
o between a holder of H Shares and a holder of domestic ordinary
shares, arising from any provision of our Articles of Association,
any right or obligation conferred or imposed by the Company Law or
any other relevant law or administrative regulation which concerns
our affairs
must, with certain exceptions, be referred to arbitration at either the China
International Economic and Trade Arbitration Commission in the PRC or the Hong
Kong International Arbitration Center. Our Articles of Association provide that
such arbitration will be final and conclusive. In June 1999, an arrangement was
made between the People's Courts of the PRC and the courts of Hong Kong to
mutually enforce arbitration rewards rendered in the PRC and Hong Kong
according to their respective laws. This new arrangement was approved by the
Supreme Court of the PRC and the Hong Kong Legislative Council and became
effective on February 1, 2000.
The holders of H Shares will not be able to bring actions on the
basis of violations of the Listing Rules and must rely on the Hong Kong Stock
Exchange to enforce its rules. The SDI Ordinance establishes certain
obligations in relation to disclosure of shareholder interests in Hong Kong
listed companies, the violation of which is subject to prosecution by the
Securities and Futures Commission of Hong Kong. The Hong Kong Takeovers and
Repurchase Codes do not have the force of law and are only standards of
commercial conduct considered acceptable for takeover and merger transactions
and share repurchases in Hong Kong as established by the Securities and Futures
Commission and the securities and futures industry in Hong Kong.
We have appointed CT Corporation System, New York, New York, as
our agent to receive service of process with respect to any action brought
against us in certain courts in New York under the United States federal and
New York State's securities laws. However, as the PRC does not have treaties
providing for the reciprocal recognition and enforcement of judgments of courts
within the United States, the United Kingdom, Japan or most other the
Organization for Economic Cooperation and Development countries, administrative
actions brought by regulatory authorities, such as the Commission, and other
actions which result in foreign court judgments, could (assuming such actions
are not required by PRC law and the Articles of Association to be arbitrated)
only be enforced in the PRC on a reciprocal basis or according to relevant
international treaty to which China is a party if such judgments or rulings do
not violate the basic principles of the law of the PRC or the sovereignty,
security and public interest of the society of the PRC, as determined by a
People's Court of the PRC which has the jurisdiction for recognition and
enforcement of judgments. We have been advised by our PRC counsel, Haiwen &
Partners, that there is uncertainty as to the enforceability in the PRC of
actions to enforce judgments of United States courts arising out of or based on
the ownership of H Shares or ADSs, including judgments arising out of or based
on the civil liability provisions of United States federal or state securities
laws.
Restrictions on Transferability and the Share Register
H Shares may be traded only among investors who are not PRC
persons, and may not be sold to PRC investors. There are no restrictions on the
ability of investors who are not PRC residents to hold H Shares.
As provided in the Articles of Associations we may refuse to
register a transfer of H Shares unless:
75
o a fee (for each instrument of transfer) of HK dollar 2.50, or any
higher fee as agreed by the Hong Kong Stock Exchange, has been paid
to us;
o the instrument of transfer only involves H Shares;
o the stamp duty chargeable on the instrument of transfer has been
paid;
o the relevant share certificate and upon the reasonable request of
the board of directors, any evidence in relation to the right of
the transferor to transfer the shares have been submitted;
o if it is intended to transfer the shares to joint owners, then the
maximum number of joint owners must not exceed four;
o we does not have any lien on the relevant shares.
We are required to maintain original share register for holders of
H Shares in Hong Kong and a copy of the register at our legal address.
Shareholders have the right to inspect and, for a reasonable charge, to copy
the share register. No transfers of ordinary shares shall be recorded in our
share register within 30 days prior to the date of a shareholders' general
meeting or within 5 days prior to the record date established for the purpose
of distributing a dividend.
We have appointed Hong Kong Registrars Limited to act as the
registrar of our H Shares. This registrar maintains our register of holders of
H Shares in Hong Kong and enters transfers of shares in such register upon the
presentation of the documents described above.
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 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.
The conversion of Renminbi into foreign currencies, including US
dollars, has historically been set by the People's Bank of China based on the
previous day's PRC inter-bank foreign exchange market rate and current exchange
rates on the world financial markets. On July 21, 2005, the PRC government
changed its policy of pegging the value of the Renminbi to the US dollar. Under
the new policy, the Renminbi is permitted to fluctuate within a band against a
basket of certain foreign currencies. This change in policy resulted initially
in an approximately 2.0% appreciation in the value of the Renminbi against the
US dollar. Since the adoption of this new policy, the value of Renminbi against
the US dollar has fluctuated on a daily basis within narrow ranges, but overall
has further strengthened against the US dollar. There remains significant
international pressure on the PRC government to further liberalize its currency
policy, which could result in a further and more significant appreciation in
the value of the Renminbi against the US dollar. However, there is no assurance
that there will not be a devaluation of Renminbi in the future. If there is
such a devaluation, our debt servicing cost will increase and the return to our
overseas investors may decrease.
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:
76
Noon Buying Rate
------------------------------------------------------
Period End Average(1) High Low
------ ------------- -------------- ---------- -----------
(RMB per US$1.00)
2001............................... 8.2766 8.2770 8.2786 8.2676
2002............................... 8.2800 8.2772 8.2800 8.2759
2003............................... 8.2767 8.2772 8.2800 8.2769
2004............................... 8.2765 8.2767 8.2774 8.2764
2005............................... 8.0702 8.1826 8.2765 8.0702
2005 December .................... 8.0702 8.0702 8.0808 8.0702
2006 January ..................... 8.0608 8.0608 8.0702 8.0596
February .................... 8.0415 8.0415 8.0616 8.0415
March........................ 8.0167 8.0167 8.0505 8.0167
April ....................... 8.0165 8.0165 8.0248 8.0040
May.......................... 8.0215 8.0215 8.0300 8.0005
June (up to June 23)......... 7.9997 7.9997 8.0225 7.9963
---------------
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.
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% the gross amount of such dividends.
77
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 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
According to the relevant income tax law, Sino-foreign
enterprises are, in general, subject to statutory income tax of 33% (30%
Enterprise Income Tax and 3% local income tax). If these enterprises are
located in certain specified locations or cities, or are specifically
approved by State Tax Bureau, a lower tax rate would be applied. Effective
from January 1, 1999, in accordance with the practice notes on the PRC income
tax laws applicable to Sino-foreign enterprises investing in energy and
transportation infrastructure businesses, a reduced income tax rate of 15%
(after the approval of State Tax Bureau) is applicable across the country. The
78
Company applied this rule to all of its fully owned operating power plants
after obtaining the approval of State Tax Bureau.
Certain power plants 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 of five years), followed by a
50% reduction of the applicable tax rate for the next three years ("tax
holiday").
The statutory income tax is assessed on an individual entity
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 income tax charges are based on profit for the year and after
considering deferred taxation.
For details of income tax information, please refer to Note 2
(n)(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% 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.
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
79
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.
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.
80
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% 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.
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.
81
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:
NYSE corporate governance rules Corporate governance rules applicable
to the domestically listed companies
in China and the Company's governance
practices
--------------------------------------------------------------------------------
DIRECTOR INDEPENDENCE
A listed company must have a majority It is required in China that any
of independent directors on its board listed company must establish an
of directors. No director qualifies as independent director system and set
"independent" unless the board of forth specific requirements for the
directors affirmatively determines qualification of independent
that the director has no material directors. For example, an independent
relationship with the listed company director shall not hold any other
(either directly or as a partner, position in the listed company other
shareholder or officer of an than being a director and shall not be
organization that has a relationship influenced by the main shareholders or
with the company). In addition, a the controlling persons of the listed
director must meet certain standards company, or by any other entities or
to be deemed independent. For example, persons with whom the listed company
a director is not independent if the has a significant relationship. The
director is, or has been within the Company has complied with the relevant
last three years, an employee of the Chinese corporate governance rules and
listed company, or if the director has has implemented internal rules
received, during any twelve-month governing the independence and
period within the last three years, responsibilities of independent
more than US$100,000 in direct directors. The Company determines the
compensation from the listed company. independence of independent directors
every year.
To empower non-management directors to No similar requirements.
serve as a more 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 The board of directors of a listed
nominating/corporate governance company may, through the resolution of
committee composed entirely of the shareholders' meeting, establish a
independent directors. 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 Relevant responsibilities of the
committee must have a written charter nominating/corporate governance
that addresses the committee's committee are similar to those
purposes and responsibilities which, stipulated by the NYSE rules, but the
at minimum, must be to: search for main responsibilities do not include
eligible people for the board of the research and recommendation of
directors, select and nominate corporate governance guidelines, the
directors for the next session of the supervision of the evaluation of the
shareholders' annual meeting, study board of directors and management, or
and propose corporate governance the annual evaluation of the
guidelines, supervise the evaluation committee.
of the board of directors and
management, and evaluate the
performance of the committee every
year.
COMPENSATION COMMITTEE
Listed companies must have a The board of directors of a listed
compensation committee composed company can, through the resolution of
entirely of independent directors. 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 The responsibilities are similar to
compensation committee must state, at those stipulated by the NYSE rules,
least, the following purposes and but the committee is not required to
responsibilities: 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;
82
(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 The board of directors of a listed
committee that satisfies the company can, through the resolution of
requirements of Rule 10A-3 of Exchange the shareholders' meeting, establish
Act. It must have a minimum of three an audit committee composed entirely
members, and all audit committee of directors, of which the independent
members must satisfy the requirements directors are the majority and act as
for independence set forth in Section the convener, and, at minimum, one
303A.02 of NYSE Corporate Governance independent director is an accounting
Rules as well as the requirements of professional.
Rule 10A-3b (1) of the Exchange Act.
The written charter of the audit The responsibilities of the audit
committee must specify that the committee are similar to those
purpose of the audit committee is to stipulated by the NYSE rules, but
assist the board oversight of the according to the domestic practices,
integrity of financial statements, the the company is not required to make an
company's compliance with legal and annual performance evaluation of the
regulatory requirements, audit committee, and the audit
qualifications and independence of committee is not required to prepare
independent auditors and the an audit report to be included in the
performance of the listed company's company's annual proxy statement. The
internal audit function and Board of Directors of the Company has
independent auditors. 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.
Each listed company must have an China has a similar regulatory
internal audit department. provision, and the Company has an
internal audit department.
Shareholders must be given the The relevant regulations of China
opportunity to vote on require the board of directors to
equity-compensation plans and material propose plans on the amount and types
revisions thereto, except for of director compensation for the
employment incentive plans, certain shareholders' meeting to approve. The
awards and plans in the context of compensation plan of executive
mergers and acquisitions. 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 CSRS has issued the Corporate
disclose corporate governance Governance Rules, with which the
guidelines, involving director Company has complied.
qualification 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 China does not have such requirement
disclose a code of business conduct for a code for ethics. But, the
and ethics for directors, officers and directors and officers must perform
employees, and promptly disclose any their legal responsibilities in
waivers of the code for directors or accordance with the Company Law of
executive officers. PRC, relative requirements of CSRS and
Mandatory Provisions to the Charter of
Companies Listed Overseas.
Each listed company CEO must certify No similar requirements.
to the NYSE each year 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.
83
ITEM 11 Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk exposures are fluctuations fuel prices,
foreign exchange rates and interest rates.
Commodity price risk
We are exposed to fluctuations in fuel prices, mainly coal prices.
In 2005, our total fuel cost amounted to RMB 21.203 billion and the weighted
average unit fuel cost was RMB 156.13 per MWh. In 2004, our total fuel cost
amounted to RMB 15.068 billion and the weighted average unit fuel cost was RMB
139.4 per MWh.
We purchase substantial volumes of coals from suppliers for power
generation. Therefore, fluctuations of fuel prices have a significant effect on
our operating expenses and net profits.
Foreign exchange rate risk
A portion of our Renminbi revenues are converted into foreign
currencies to (i) repay our debts denominated in currencies other than RMB, and
(ii) pay for imported equipment.
The exchange rate of Renminbi to foreign currencies may fluctuate
and is affected by, among other things, changes in China's political and
economic conditions. The conversion of Renminbi into foreign currencies,
including US dollars, has historically been set by the People's Bank of China.
On July 21, 2005, the PRC government changed its policy of pegging the value of
the Renminbi to the US dollar. Under the new policy, the Renminbi is permitted
to fluctuate within a band against a basket of certain foreign currencies. This
change in policy resulted initially in an approximately 2.0% appreciation in
the value of the Renminbi against the US dollar. Since the adoption of this new
policy, the value of Renminbi against the US dollar has fluctuated on a daily
basis within narrow ranges, but overall has further strengthened against the US
dollar. There remains significant international pressure on the PRC government
to further liberalize its currency policy. We cannot assure you that any future
movements in the exchange rate of the Renminbi against the US dollar and other
currencies will not adversely affect our results of operations and financial
conditions. The following table provides information, by maturity date,
regarding our foreign currency sensitive financial instruments, which consist
of cash and cash equivalents, short-term and long-term debt obligations and
capital commitments as of December 31, 2005 and average interest rates for the
year ended December 31, 2005.
(RMB expressed in millions, except interest rate)
As of December 31, 2005
--------------------------------------------------------------------------------
Total
recorded Fair
Expected Maturity Date value value
----------------------------------------------------------- --------- --------
2006 2007 2008 2009 2010 Thereafter
--------- -------- -------- ------- ------- -----------
On-balance sheet financial
instruments
Cash and cash equivalents:
In US Dollar 14 - - - - - 14 14
Debts
Fixed rate bank loans (US Dollar) 792 774 774 774 766 1,056 4,936 5,003
Average interest rate 6.207% 6.211% 6.217% 6.227% 6.260% 6.424%
Fixed rate bank loans (Euro) 68 51 51 51 51 430 702 615
Average interest rate 2.000% 2.000% 2.000% 2.000% 2.000% 2.000%
Variable rate bank and other
loans (US Dollar) 74 74 74 74 74 242 612 600
Average interest rate 4.843% 4.837% 4.828% 4.814% 4.792% 4.775%
Variable rate other loans (JPY) 16 16 16 16 16 10 90 90
Average interest rate 5.800% 5.800% 5.800% 5.800% 5.800% 5.800%
Capital commitments (in US Dollar) 472 59 20 - - - 551 551
Capital commitments (in Euro) 275 - - - - - 275 275
-------------
(1) The interest rates for variable rate bank and other loans are calculated
based on the individual year end indices.
84
The outstanding balances of the Company's loans denominated in
foreign currency has decreased continually as a result of due repayment of the
loans by the company according to agreed-upon repayment schedule. The loans
denominated in US dollar decreased from RMB 7.217 billion as of December 31,
2003 to RMB 5.548 billion as of December 31, 2005; the loans denominated in JPY
decreased from RMB 138 million as of December 31, 2003 to RMB 90 million as of
December 31, 2005. As a result, the associated foreign exchange risk to which
the Company is exposed has decreased.
Interest rate risk
We are exposed to interest rate risk primarily resulting from
fluctuations in interest rates on our variable rate debts. Upward fluctuations
in interest rates increase the cost of new variable rate debt and the interest
cost of outstanding floating rate borrowings.
At present, the interest rate of loans with the term of more than
one year denominated in RMB is subject to the change on the benchmark interest
rate published and adjusted by the People's Bank of China. Different interest
rate level corresponds to loans with different term. However, in accordance
with the loan agreements the interest rate of loans with the term of one year
or less is not subject to the change in such benchmark interest rate. As a
result, if the People's Bank of China adjusts the benchmark interest rate, the
interest rate of the Company's loans with the term of more than one year will
be adjusted accordingly. Most of the Company's loans denominated in foreign
currency are fixed rate loans, which are not subject to the changes in market
interest rate. Only a small portion of the Company's loans denominated in
foreign currency are floating rate loans, which depends on the trend of
six-month LIBOR.
The following table provides information, by maturity date,
regarding our interest rate sensitive financial instruments, which consist of
fixed rate loans, variable rate loans and short-term bonds as of December 31,
2005 and average interest rates for the year ended December 31, 2005.
(RMB expressed in millions, except interest rate)
As of December 31, 2005
--------------------------------------------------------------------------------
Total
recorded Fair
Expected Maturity Date value value
----------------------------------------------------------- --------- --------
2006 2007 2008 2009 2010 Thereafter
--------- -------- -------- ------- ------- -----------
Debts
Fixed rate shareholder, bank
and other loans 9,656 3,042 3,199 4,367 3,336 14,307 37,907 37,710
Average interest rate 5.369% 5.352% 5.329% 5.317% 5.274% 5.256%
Variable rate bank and other
loans 90 90 90 90 90 252 702 690
Average interest rate 4.959% 4.943% 4.920% 4.885% 4.825% 4.775%
Short-term bonds 4,862 - - - - - 4,862 4,862
Average interest rate 3.391% - - - - -
-------------
(1) The interest rates for variable rate bank and other loans are calculated
based on the individual year end indices.
As of December 31, 2005, the Company's floating rate loans
denominated in foreign currency amounted to RMB 0.702 billion, accounting for
11.7% the total foreign loans, and the average interest rate level was
relatively low, which is six-month US dollar LIBOR plus 18 basis points. The
financing cost of US dollar loans has been climbing at a high pace because the
market forecasts the Federal Reserve of the United States will increase the
benchmark interest rate of US dollar again. As a result, the current six-month
US dollar LIBOR has reached approximately 5.16%. With only a small portion of
loans denominated in foreign currency bearing variable interest rate, the
Company is exposed to a relatively low level of interest risk.
The Company has paid special attention to the trend of
international interest rate market by keeping up with the market conditions and
predicting the future trend, and has made efforts to explore the feasibility of
risk management by application of derivative financial products. The Company
expects to implement the relevant plan according to its internal approval
procedures and use interest rate swap and other derivative financial products
to control its interest rate risk upon appropriate time.
As the Company repaid the loans in accordance with the repayment
agreements, the balance of floating rate loans decreased from RMB 2.306 billion
as of December 31, 2003 to RMB 702 million as of December 31, 2005. As a
result, the associated interest rate risk related to variable rate bank and
85
other loans to which the Company is exposed has decreased. The balance of fixed
rate loans increased from RMB 11.489 billion as of December 31, 2003 to RMB
37.907 billion as of December 31, 2005 to cover the expenditure on construction
and acquisitions. As a result of the increased scale of the fixed rate loans,
the interest rate risk related to fixed rate loans has increased.
ITEM 12 Description of Securities Other than Equity Securities
Not applicable.
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 management, with the participation of our principal executive
officer and principal financial officer, has 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, 2005 (the "Evaluation Date"), the
end of the fiscal year covered by this annual report. Based on this evaluation,
our management has concluded that, as of the end of the fiscal year covered by
this annual report, our disclosure controls and procedures were effective as to
ensure that material information relating to our company and consolidated
subsidiaries, was made known to them by others within our company and our
consolidated subsidiaries on a timely basis.
In order to assure the credibility of our financial statements, achieve
our expected operating results and efficiency, and effectively improve our
capability to manage risks, we launched a project in 2003 to improve our
internal control. During the last three years, we established a strategic plan
and set objectives for internal control. Our long-term objective is to enhance
our internal control in all aspects to constantly improve our capability to
develop, compete and manage risk. We established an internal control
organization system, and strengthened internal control at both the corporate and
the power plant levels. We further strengthened our corporate governance and
management system, and completed the annual evaluation of the effectiveness of
the design of our existing system at the end of 2005. We established our
internal control procedures on the basis of the COSO control framework, which
accommodates our management characteristics. We designed and implemented the
"Internal Control Manual", which is recognized by us as the "constitution" for
the management of internal control. We carried out several self-evaluations of
internal control, identified certain deficiencies and remediated such
deficiencies. We disseminated information to, and trained our employees with
regard to internal control concepts and procedures. Based on comprehensive
evaluations, we believe that we have improved the effectiveness of our internal
control over financial reporting.
Section 404 of the Sarbanes-Oxley Act will first apply to our
annual report on Form 20-F for the year ending December 31, 2006. We will
consolidate the improvements we have achieved and continue our preparation for
compliance with Section 404 of the Sarbanes-Oxley Act.
ITEM 16 Reserved
ITEM 16A Audit Committee Financial Expert
The Board of Directors has determined that Mr. Xia Donglin and Mr.
Liu Jipeng qualify as Audit Committee Financial Experts in accordance with the
terms of Item 16A 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
86
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.
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,
2005, 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) 2005 2004
-------------------- -------------------
Audit fees......................... 18.0 15.2
Audit-related fees................. 12.5 5.2
Tax fees........................... - -
All other fees..................... - -
-------------------- -------------------
Total.......................... 30.5 20.4
==================== ===================
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.
ITEM 16D Exemptions from the Listing Standards for Audit Committees
Not applicable.
87
ITEM 16E Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
Not applicable.
ITEM 17 Financial Statements
See pages F-1 through F-80 incorporated by reference.
ITEM 18 Financial Statements
Not applicable.
ITEM 19 Exhibit
1.1 Articles of Association, amended and adopted by the shareholders'
meeting on July 28, 2005.
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. Amendment to Shareholders'
Agreement dated May 12, 2006.
8 A list of subsidiaries.
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
Page
----
Report of independent registered public accounting firm .................. F-1
Consolidated income statements for the years ended
December 31, 2005, 2004 and 2003 ......................................... F-2
Consolidated balance sheets as of December 31, 2005 and 2004 ............. F-3
Consolidated statements of changes in shareholders' equity for the
years ended December 31, 2005, 2004 and 2003.............................. F-5
Consolidated statements of cash flows for the years ended
December 31, 2005, 2004 and 2003.......................................... F-7
Notes to the financial statements......................................... F-9
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,
2005 and 2004, and the related consolidated statements of income, of cash flows
and of changes in equity for each of the three years in the period ended
December 31, 2005. These financial statements set out on pages F-2 to F-80 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, 2005 and 2004, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2005, in conformity with International Financial Reporting Standards
("IFRS"), as published by the International Accounting Standards Board.
As discussed in Note 2(a) to the consolidated financial statements, the Company
and its subsidiaries adopted the revised / new IFRS in 2005 which resulted in
changes primarily in the accounting for (a) goodwill and negative goodwill and
(b) assessment of asset impairment.
In addition, 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 41 to the consolidated financial statements.
PricewaterhouseCoopers
Certified Public Accountants
Hong Kong, March 28, 2006
F-1
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Amounts expressed in thousands of RMB or US$, except per share data)
For the year ended December 31,
-----------------------------------------------------------------------
Note 2005 2004 2003
------- -------------------------------- ----------------- ------------------
RMB US$ RMB RMB
Restated Restated
(Note 2(a)) (Note 2(a))
Operating revenue 40,190,004 4,980,051 30,150,602 23,433,572
Sales tax (113,475) (14,061) (32,324) (45,335)
Operating expenses
Fuel (21,202,952) (2,627,314) (15,068,188) (9,025,013)
Maintenance (1,165,374) (144,405) (807,689) (921,561)
Depreciation (6,167,692) (764,255) (4,706,992) (4,117,478)
Labor (2,487,098) (308,183) (1,877,264) (1,439,673)
Service fees to HIPDC 8(b) (141,102) (17,484) (133,609) (214,723)
Others (1,903,345) (235,849) (606,346) (596,627)
--------------- -------------- ----------------- ------------------
Total operating expenses (33,067,563) (4,097,490) (23,200,088) (16,315,075)
--------------- -------------- ----------------- ------------------
Profit from operations 7,008,966 868,500 6,918,190 7,073,162
--------------- -------------- ----------------- ------------------
Interest income 53,685 6,652 43,092 53,044
Interest expenses (1,426,609) (176,775) (663,424) (569,148)
Bank charges and exchange gain
/ (losses), net 248,533 30,797 (119,452) (28,181)
--------------- -------------- ----------------- ------------------
Total financial expenses, net (1,124,391) (139,326) (739,784) (544,285)
--------------- -------------- ----------------- ------------------
Share of profit of associates 12 644,376 79,846 312,037 160,509
Investment income, net 60,872 7,543 20,554 10,705
Other income, net 6 2,385 295 18,666 12,070
--------------- -------------- ----------------- ------------------
Profit before tax 7 6,592,208 816,858 6,529,663 6,712,161
(1,044,297) (948,734) (1,097,859)
Income tax expenses 32 (129,402)
--------------- -------------- ----------------- ------------------
Profit for the year 5,547,911 687,456 5,580,929 5,614,302
=============== ============== ================= ==================
Attributable to:
Equity holders of the Company 4,871,794 603,677 5,323,876 5,430,408
Minority interests 676,117 83,779 257,053 183,894
--------------- -------------- ----------------- ------------------
5,547,911 687,456 5,580,929 5,614,302
=============== ============== ================= ==================
Dividends paid and proposed 6,035,942 747,930 6,019,432 5,063,244
=============== ============== ================= ==================
Proposed dividend 23 3,013,846 373,454 3,013,846 3,013,836
=============== ============== ================= ==================
Proposed dividend per share
(expressed in RMB per share) 23 0.25 0.03 0.25 0.25
=============== ============== ================= ==================
Earnings per share for profit
attributable to the equity
holders of the Company during
the year (expressed in RMB per
share)
- Basic 33 0.40 0.05 0.44 0.45
=============== ============== ================= ==================
- Diluted 33 0.40 0.05 0.44 0.45
=============== ============== ================= ==================
The accompanying notes are an integral part of these consolidated financial statements.
F-2
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2005 AND 2004
(Amounts expressed in thousands of RMB or US$)
As of December 31,
----------------------------------------------------------------------
Note 2005 2004
--------- --------------------------------------------- ------------------------
RMB US$ RMB
Restated
ASSETS
Non-current assets
Property, plant and equipment, net 11 78,997,297 9,788,766 57,780,410
Investments in associates 12 4,593,984 569,253 4,328,307
Available-for-sale investment 14 1,033,225 128,030 254,990
Land use rights 15 1,679,765 208,144 1,546,026
Other non-current assets 336,379 41,681 225,890
Deferred income tax assets 29 64,075 7,940 97,539
Goodwill 16 671,796 83,244 376,726
Less: negative goodwill 16 - - (1,483,670)
-----------------------
Total non-current assets 87,376,521 10,827,058 63,126,218
------------------------- -------------------- -----------------------
Current assets
Inventories, net 17 2,311,357 286,406 1,431,404
Other receivables and assets, net 18 855,952 106,063 723,316
Accounts receivable, net 19 6,022,426 746,255 4,973,103
Due from HIPDC 8(a)(v) 21,847 2,707 -
Due from other related parties 8(a)(v) - - 14,970
Restricted cash 201,276 24,941 202,688
Temporary cash investments 20 2,652 329 12,641
Cash and cash equivalents 34(a) 2,647,665 328,079 2,295,531
------------------------- -------------------- -----------------------
Total current assets 12,063,175 1,494,780 9,653,653
------------------------- -------------------- -----------------------
Total assets 99,439,696 12,321,838 72,779,871
========================= ==================== =======================
F-3
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D)
AS OF DECEMBER 31, 2005 AND 2004
(Amounts expressed in thousands of RMB or US$)
As of December 31,
---------------------------------------------------------
Note 2005 2004
------ ------------------------------------ --------------------
RMB US$ RMB
Restated
EQUITY AND LIABILITIES
Capital and reserves attributable to equity
holders of the Company
8,500,000,000 (2004: 8,500,000,000) domestic
shares, par value of RMB 1.00 each, in form
of legal person shares 21 8,500,000 1,053,258 8,500,000
500,000,000 (2004: 500,000,000) A shares, par
value of RMB 1.00 each 21 500,000 61,956 500,000
3,055,383,440 (2004: 3,055,383,440) overseas
listed foreign shares, par value of RMB 1.00
each 21 3,055,383 378,601 3,055,383
Additional paid-in capital 8,988,107 1,113,740 8,972,184
Dedicated capital 22 4,899,429 607,101 4,065,970
Fair value gains from available-for-sale 14 &
investment, net of tax 29 636,964 78,928 -
Retained earnings
Proposed dividend 23 3,013,846 373,454 3,013,846
Others 10,443,745 1,294,112 8,158,136
---------------------- --------------- -------------------
40,037,474 4,961,150 36,265,519
Minority interests 6,106,713 756,699 3,266,393
---------------------- --------------- -------------------
Total equity 46,144,187 5,717,849 39,531,912
---------------------- --------------- -------------------
NON-CURRENT LIABILITIES
Long-term loans from a shareholder 24 2,800,000 346,955 800,000
Long-term bank loans 24 25,711,255 3,185,950 14,761,271
Other long-term loans 24 351,009 43,494 394,018
Deferred income tax liabilities 29 1,157,775 143,463 546,717
Other non-current liabilities 168,328 20,859 13,000
---------------------- --------------- -------------------
Total non-current liabilities 30,188,367 3,740,721 16,515,006
---------------------- --------------- -------------------
CURRENT LIABILITIES
Accounts payable and other liabilities 25 6,905,240 855,647 4,551,158
Dividends payable to shareholders of the Company - - 8,250
Taxes payable 26 1,131,284 140,180 999,792
Due to Huaneng Group 8(a)(v) 50,720 6,285 190
Due to HIPDC 8(a)(v) 53,230 6,596 1,258,799
Due to an associate 8(a)(v) - - 3,799
Due to other related parties 8(a)(v) 29,620 3,670 9,437
Staff welfare and bonus payables 251,949 31,220 259,291
Short-term bonds 27 4,938,250 611,912 -
Short-term loans 28 6,580,870 815,453 8,099,000
Current portion of long-term bank loans 24 2,653,339 328,782 1,225,476
Current portion of other long-term loans 24 512,640 63,523 317,761
---------------------- --------------- -------------------
Total current liabilities 23,107,142 2,863,268 16,732,953
---------------------- --------------- -------------------
Total equity and liabilities 99,439,696 12,321,838 72,779,871
====================== =============== ===================
These consolidated financial statements have been approved for issue by the Board of Directors on March 28, 2006.
The accompanying notes are 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, 2005, 2004 AND 2003
(Amounts expressed in thousands of RMB)
Attributable to equity holders of the Company
-------------------------------------------------------------------------------
Available-for-sale
Additional investment
Share paid-in revaluation
capital capital Dedicated capital reserve
---------- ------------ ----------------------------------- -------------------
Statutory
and Statutory
discretionary public
surplus welfare
reserve funds fund Sub-total
------------- ---------- ----------
Balance as of January 1, 2005, as previously
reported as equity 12,055,383 8,972,184 2,202,689 1,863,281 4,065,970 -
Balance as of January 1, 2005, as previously
separately reported as minority interests - - - - - -
Effect of changes in accounting policy (Note 2(a)) - - - - - -
---------- ------------ ------------- ---------- ---------- -------------------
Balance as of January 1, 2005, as restated 12,055,383 8,972,184 2,202,689 1,863,281 4,065,970 -
Minority interests arising on business
combinations (Note 5) - - - - - -
Capital injection from minority shareholders of
subsidiaries - - - - - -
Dividends waived by a shareholder of an associate - 15,923 - - - -
Dividends relating to 2004 - - - - - -
Dividends relating to 2005 - - - - - -
Net profit for the year ended December 31, 2005 - - - - - -
Fair value gains from available-for-sale
investment - gross (Note 14) - - - - - 749,369
Fair value gains from available-for-sale
investment - tax (Note 29) - - - - - (112,405)
Transfer from statutory public welfare fund to
discretionary surplus reserve fund - - 3,473 (3,473) - -
Transfer to dedicated capital (Note 22) - - 476,262 357,197 833,459 -
---------- ------------ ------------- ---------- ---------- -------------------
Balance as of December 31, 2005 12,055,383 8,988,107 2,682,424 2,217,005 4,899,429 636,964
========== ============ ============= ========== ========== ===================
Balance as of January 1, 2004, as previously
reported as equity 6,027,671 10,780,133 2,867,721 1,460,702 4,328,423 -
Balance as of January 1, 2004, as previously
separately reported as minority interests - - - - - -
---------- ------------ ------------- ---------- ---------- -------------------
Balance as of January 1, 2004, as restated 6,027,671 10,780,133 2,867,721 1,460,702 4,328,423 -
Minority interests arising on business
combinations (Note 5) - - - - - -
Capital injection from minority shareholders of
subsidiaries - - - - - -
Dividends relating to 2003 - - - - - -
Ordinary shares split 6,027,671 (1,808,301) (1,205,534) - (1,205,534) -
Net profit for the year ended December 31, 2004 - - - - - -
Conversion of convertible notes to share capital
and redemption of convertible notes 41 352 (4) - (4) -
Transfer from statutory public welfare fund to
discretionary surplus reserve fund - - 1,600 (1,600) - -
Transfer to dedicated capital (Note 22) - - 538,906 404,179 943,085 -
---------- ------------ ------------- ---------- ---------- -------------------
Balance as of December 31, 2004 12,055,383 8,972,184 2,202,689 1,863,281 4,065,970 -
========== ============ ============= ========== ========== ===================
[TABLE CONTINUED]
Attributable to equity
holders of the Company Minority Total
(cont'd) interests equity
-------------------------- ----------- -----------
Equity (Note 2(a))
component of
convertible Retained
notes earnings
------------- -----------
Balance as of January 1, 2005, as previously
reported as equity - 11,171,982 - 36,265,519
Balance as of January 1, 2005, as previously
separately reported as minority interests - - 3,266,393 3,266,393
Effect of changes in accounting policy (Note 2(a)) - 1,261,120 - 1,261,120
------------- ------------ ----------- -----------
Balance as of January 1, 2005, as restated - 12,433,102 3,266,393 40,793,032
Minority interests arising on business
combinations (Note 5) - - 1,979,219 1,979,219
Capital injection from minority shareholders of
subsidiaries - - 596,064 596,064
Dividends waived by a shareholder of an associate - - - 15,923
Dividends relating to 2004 - (3,013,846) (196,992) (3,210,838)
Dividends relating to 2005 - - (214,088) (214,088)
Net profit for the year ended December 31, 2005 - 4,871,794 676,117 5,547,911
Fair value gains from available-for-sale
investment - gross (Note 14) - - - 749,369
Fair value gains from available-for-sale
investment - tax (Note 29) - - - (112,405)
Transfer from statutory public welfare fund to
discretionary surplus reserve fund - - - -
Transfer to dedicated capital (Note 22) - (833,459) - -
------------- ------------ ----------- -----------
Balance as of December 31, 2005 - 13,457,591 6,106,713 46,144,187
============= ============ =========== ===========
Balance as of January 1, 2004, as previously
reported as equity 255 12,818,873 - 33,955,355
Balance as of January 1, 2004, as previously
separately reported as minority interests - - 1,155,197 1,155,197
------------- ------------ ----------- -----------
Balance as of January 1, 2004, as restated 255 12,818,873 1,155,197 35,110,552
Minority interests arising on business
combinations (Note 5) - - 1,342,872 1,342,872
Capital injection from minority shareholders of
subsidiaries - - 677,034 677,034
Dividends relating to 2003 - (3,013,836) (165,763) (3,179,599)
Ordinary shares split - (3,013,836) - -
Net profit for the year ended December 31, 2004 - 5,323,876 257,053 5,580,929
Conversion of convertible notes to share capital
and redemption of convertible notes (255) (10) - 124
Transfer from statutory public welfare fund to
discretionary surplus reserve fund - - - -
Transfer to dedicated capital (Note 22) - (943,085) - -
------------- ------------ ----------- -----------
Balance as of December 31, 2004 - 11,171,982 3,266,393 39,531,912
============= ============ =========== ===========
F-5
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONT'D)
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Amounts expressed in thousands of RMB)
Attributable to equity holders of the Company
-----------------------------------------------------------
Additional
Share paid-in
capital capital Dedicated capital
---------- ------------ -----------------------------------
Statutory
and Statutory
discretionary public
surplus welfare
reserve funds fund Sub-total
------------- ---------- ----------
Balance as of January 1, 2003, as previously
reported as equity 6,000,274 10,604,843 2,319,903 1,053,520 3,373,423
Balance as of January 1, 2003, as previously
separately reported as minority interests - - - - -
------------------------------------------------------
Balance as of January 1, 2003, as restated 6,000,274 10,604,843 2,319,903 1,053,520 3,373,423
Minority interests arising on business
combinations (Note 5) - - - - -
Capital injection from minority shareholders of
subsidiaries - - - - -
Dividends relating to 2002 - - - - -
Net profit for the year ended December 31, 2003 - - - - -
Conversion of convertible notes to share capital 27,397 175,290 - - -
Transfer from statutory public welfare fund to
discretionary surplus reserve fund - - 2,104 (2,104) -
Transfer to dedicated capital (Note 22) - - 545,714 409,286 955,000
----------------------------------------------------------
Balance as of December 31, 2003 6,027,671 10,780,133 2,867,721 1,460,702 4,328,423
==========================================================
[TABLE CONTINUED]
Attributable to equity
holders of the Company Minority Total
(cont'd) interests equity
-------------------------- ----------- -----------
Equity (Note 2(a))
component of
convertible Retained
notes earnings
------------- -----------
Balance as of January 1, 2003, as previously
reported as equity 44,647 10,392,873 - 30,416,060
Balance as of January 1, 2003, as previously
separately reported as minority interests - - 910,704 910,704
------------- ------------ ----------- -----------
Balance as of January 1, 2003, as restated 44,647 10,392,873 910,704 31,326,764
Minority interests arising on business
combinations (Note 5) - - 115,639 115,639
Capital injection from minority shareholders of
subsidiaries - - 77,632 77,632
Dividends relating to 2002 - (2,049,408) (132,672) (2,182,080)
Net profit for the year ended December 31, 2003 - 5,430,408 183,894 5,614,302
Conversion of convertible notes to share capital (44,392) - - 158,295
Transfer from statutory public welfare fund to
discretionary surplus reserve fund - - - -
Transfer to dedicated capital (Note 22) - (955,000) - -
------------- ------------ ----------- -----------
Balance as of December 31, 2003 255 12,818,873 1,155,197 35,110,552
============= ============ =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Amounts expressed in thousands of RMB or US$)
For the year ended December 31,
--------------------------------------------------------------------
Note 2005 2004 2003
------- --------------------------------- ---------------- ---------------
RMB US$ RMB RMB
Restated Restated
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax 6,592,208 816,858 6,529,663 6,712,161
Adjustments to reconcile profit
before tax to net cash
provided by operating
activities:
Depreciation 6,172,866 764,896 4,706,992 4,117,478
Impairment loss on property,
plant and equipment 30,080 3,727 - -
Amortization of land use rights 36,429 4,514 28,074 19,136
Amortization of goodwill and
negative goodwill - - (205,277) (222,108)
Amortization of other
non-current assets 54,555 6,760 39,731 41,566
Provision for / (Reversal of)
doubtful accounts 49,869 6,179 (10,654) 12,567
Provision for / (Reversal of)
inventory obsolescence 31,724 3,931 1,521 (751)
Investment income, net (60,872) (7,543) (20,554) (10,705)
Loss / (Gain) on disposals /
write-off of property, plant
and equipment, net 145,762 18,062 (29,176) 138,726
Unrealized exchange (gain) /
losses, net (294,281) (29,375) 89,913 1,094
Gain on interest rate swaps - - (925) (11,771)
Share of profit of associates (644,376) (79,846) (312,037) (160,509)
Interest income (53,685) (6,652) (43,092) (53,044)
Interest expenses 1,426,609 176,775 663,424 569,148
Changes in working capital:
Inventories, net (831,622) (103,048) (414,275) 159,419
Other receivables and assets,
net 265,320 32,877 (206,873) (65,900)
Accounts receivable, net (596,517) (73,916) (742,005) (353,637)
Due from HIPDC (21,847) (2,707) - -
Due from other related parties 14,970 1,855 (9,108) (5,862)
Restricted cash 1,412 175 (23,108) (146,702)
Other non-current liabilities 91,188 11,299 13,000 -
Accounts payable and other
liabilities 574,654 71,207 243,524 226,584
Taxes payable (69,569) (8,620) 3,796 131,281
Due to Huaneng Group 6,128 759 - -
Due to HIPDC (1,205,569) (149,385) (53,263) (12,967)
Due to an associate (3,799) (471) 3,799 -
Due to other related parties 20,183 2,501 (17,711) 13,370
Staff welfare and bonus payable (23,653) (2,931) (17,728) (12,670)
Interest paid (1,965,094) (243,500) (974,879) (617,162)
Interest received 52,475 6,502 43,895 54,182
Income tax paid (1,114,698) (138,125) (1,123,966) (989,635)
---------------- --------------- ---------------- ---------------
Net cash provided by operating
activities 8,680,850 1,082,758 8,162,701 9,533,289
---------------- --------------- ---------------- ---------------
F-7
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
FOR THE YEARS ENDED DECEMBER 31, 2005 2004 AND 2003
(Amounts expressed in thousands of RMB or US$)
For the year ended December 31,
-----------------------------------------------------------------
2005 2004 2003
Note
------- -------------------------------- -------------- ---------------
RMB US$ RMB RMB
Restated Restated
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and
equipment (13,842,293) (1,715,235) (9,877,553) (3,606,704)
Proceeds from disposals of property,
plant and equipment, net 32,098 3,977 27,768 7,679
Prepayments of land use rights (99,745) (12,360) (154,754) (16,508)
Increase in other non-current assets 15,766 1,954 (3,680) (12,847)
Decrease in temporary cash investments 9,989 1,238 132,355 1,066,629
Proceeds from disposals of investments - - 548 80,704
Cash dividend received 429,589 53,232 172,542 -
Cash consideration paid for
acquisitions 5 (2,528,300) (313,288) (4,575,000) (2,940,000)
Direct transaction costs paid for
acquisitions 5 (16,698) (2,069) (31,685) (19,618)
Cash from the power plants
acquisitions 5 566,704 70,220 659,174 215,585
Proceeds from disposal of Huaneng
Nanjing Ranji Power Generation
Limited Liability Company ("Nanjing
Ranji") 8(b) 30,000 3,717 - -
Cash outflow on disposal of Nanjing
Ranji (10,479) (1,298) - -
--------------- --------------- -------------- ---------------
Net cash used in investing activities (15,413,369) (1,909,912) (13,650,285) (5,225,080)
--------------- --------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bonds issuance expense paid (22,500) (2,788) - -
Drawdown of short-term bonds 4,862,200 602,488 - -
Drawdown of short-term loans 11,657,569 1,444,520 8,724,000 769,000
Repayments of short-term loans (13,670,000) (1,693,886) (2,940,313) (450,000)
Drawdown of long-term loans from a
shareholder 2,000,000 247,825 800,000 -
Repayments of long-term loans from
shareholders - - (1,504,827) (388,988)
Drawdown of long-term bank loans 8,297,018 1,028,106 4,944,000 950,230
Repayments of long-term bank loans (2,933,870) (363,544) (3,192,843) (2,322,348)
Drawdown of other long-term loans - - - 416,000
Repayments of other long-term loans (351,118) (43,508) (679,062) (36,060)
Capital injection from minority
shareholders of the subsidiaries 585,702 72,576 677,034 77,632
Dividends paid to shareholders of the
Company (3,022,096) (374,476) (3,005,586) (2,049,408)
Dividends paid to minority
shareholders of the subsidiaries (318,252) (39,435) (167,125) (148,220)
Redemption of convertible notes - - (811) -
--------------- --------------- -------------- ---------------
Net cash provided by financing
activities 7,084,653 877,878 3,654,467 (3,182,162)
--------------- --------------- -------------- ---------------
NET INCREASE / (DECREASE) IN CASH AND
CASH EQUIVALENTS 352,134 50,724 (1,833,117) 1,126,047
Cash and cash equivalents, beginning of
the year 2,295,531 277,355 4,128,648 3,002,601
--------------- --------------- -------------- ---------------
CASH AND CASH EQUIVALENTS, END OF THE
YEAR 34(a) 2,647,665 328,079 2,295,531 4,128,648
=============== =============== ============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
F-8
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. 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 Directors consider that 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. Neither Huaneng
Group nor HIPDC produced financial statements available for public use.
2. PRINCIPAL ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of these
financial statements are set out below. These policies have been
consistently applied to all the years presented, unless otherwise stated.
(a) Basis of preparation
The financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS"). The financial
statements have been prepared under the historical cost convention, as
modified by the revaluation of available-for-sale investment. 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 to 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, 2005 financial statements have been translated
into United States Dollars (US$) at the rate of US$1.00=RMB 8.0702
announced by the People's Bank of China on December 31, 2005. No
representation is made that Renminbi amounts could have been, or could be,
converted into United States Dollars at the rate on December 31, 2005, or
at any other certain rate.
The preparation of financial statements in conformity with IFRS requires
the use of certain critical accounting estimates. It also requires
management to exercise its judgment in the process of applying accounting
policies of the Company and its subsidiaries. The areas involving a higher
degree of judgment or complexity, or areas where assumptions and estimates
are significant to the financial statements, are disclosed in Note 4.
F-9
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(a) Basis of preparation (cont'd)
During 2005, 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, 2005, the Company and its
subsidiaries have a negative working capital balance of approximately RMB
11 billion (December 31, 2004: approximately RMB 7 billion). The Company
and its subsidiaries have significant undrawn available banking facilities
amounting to approximately RMB 23 billion (December 31, 2004:
approximately RMB 28 billion) 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 financial
statements on a going concern basis.
In 2005, the Company and its subsidiaries has changed certain of its
accounting policies following its adoption of the revised / new IFRS,
International Accounting Standards ("IAS") and IFRIC Interpretation below,
which are relevant to its operations. The 2004 and 2003 comparatives have
been reclassified / restated as required, in accordance with the relevant
requirements.
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 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
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
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRIC Interpretation 1 Changes in Existing Decommissioning, Restoration
and Similar Liabilities
Management assessed the relevance of the adoption of IASs 1, 2, 8, 10, 16,
17, 21, 32, 33, 38 and 39, IFRS 4 and IFRIC Interpretation 1 with respect
to the operations of the Company and its subsidiaries and concluded that
they did not result in substantial changes to the accounting policies of
the Company and its subsidiaries. In summary:
IAS 1 has affected the presentation of minority interests, share of profit
of associates and other disclosures.
IASs 2, 8, 10, 16, 17, 32, 33, 38 and 39, IFRS 4 and IFRIC Interpretation
1 had no material effect on the policies of the Company and its
subsidiaries.
F-10
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(a) Basis of preparation (cont'd)
IAS 21 had no material effect on the policy of the Company and its
subsidiaries. The functional currency of each of the entities of the
Company and its subsidiaries has been re-evaluated based on the guidance
to the revised standard. All the entities used Renminbi ("RMB") as their
functional currency as well as their presentation currency.
IAS 24 has extended the identification and disclosure of related parties
to include state-owned enterprises. Related parties include Huaneng Group,
HIPDC and their related parties, other state-owned enterprises and their
subsidiaries directly or indirectly controlled by the PRC government
(other than those shown on the face of financial statements as other
related parties), other entities and corporations in which the Company is
able to control, jointly control or exercise significant influence and key
management personnel of the Company, HIPDC and Huaneng Group as well as
their close family members.
The adoptions of IASs 27 and 28 have resulted in changes in accounting
policies for investments in subsidiaries and associates at company level.
Until December 31, 2004, investments in subsidiaries and associates at
company level are accounted for using the equity method. Subsequent to
that date, the Company and its subsidiaries, at the entity level, restated
such investments at cost less any accumulated impairment losses.
The adoption of IFRS 3 and IAS 36 results in changes in the accounting
policies for goodwill and negative goodwill and the assessment by
management of asset impairment.
In accordance with the provisions of IFRS 3 (Note 2(f)):
o the Company and its subsidiaries ceased amortization of goodwill and
negative goodwill from January 1, 2005;
o accumulated amortization as of December 31, 2004 has been eliminated
with a corresponding decrease in the costs of goodwill and negative
goodwill; and
o from January 1, 2005 onwards, goodwill arising from all acquisitions is
tested annually for impairment, as well as when there are indications
of impairment while negative goodwill is derecognized as of January 1,
2005 with a corresponding adjustment to the opening balance of retained
earnings.
All changes in the accounting policies have been made in accordance with
the transitional provisions in the respective standards, wherever
applicable. All of the revised / new standards adopted by the Company and
its subsidiaries require retrospective application other than:
o IAS 16 - the initial measurement of an item of property, plant and
equipment acquired in an exchange of assets transaction is accounted at
fair value prospectively only to future transactions;
F-11
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(a) Basis of preparation (cont'd)
o IAS 39 - the derecognition of financial assets is applied
prospectively;
o IFRS 3 - prospectively after March 31, 2004; and
o IFRS 4 - prospective application of the disclosure
requirements of this standard except for disclosures
required about accounting policies, recognized liabilities
and expenses.
The adoption of IAS 1 resulted in the following changes:
For the year ended December 31,
----------------------------------------
2005 2004 2003
---------- --------- ---------
Decrease in share of
profit of associates (109,295) (65,528) (51,582)
Decrease in income tax expenses 109,295 65,528 51,582
The adoption of IFRS 3 resulted in an increase in opening retained
earnings as of January 1, 2005 by approximately RMB 1,261 million. Changes
to other items in the financial statements as follows:
As of December 31, 2005
-----------------------
Increase in investments in associates 81,959
Increase in goodwill 42,002
Decrease in negative goodwill 1,483,670
Increase in deferred income tax liability (185,459)
For the year ended
December 31, 2005
------------------
Increase in operating expenses - others (205,277)
Decrease in income tax expense 37,091
Decrease in basic and diluted earnings per share (RMB) (0.01)
(b) Consolidation
(i) Subsidiaries
Subsidiaries are all entities over which the Company and its subsidiaries
have the power to govern the financial and operating policies generally
accompanying a shareholding of more than one half of the voting rights.
Subsidiaries are fully consolidated from the date on which control is
transferred to the Company and its subsidiaries. They are de-consolidated
from the date that control ceases.
F-12
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(b) Consolidation (cont'd)
(i) Subsidiaries (cont'd)
The purchase method of accounting is used to account for the acquisition
of subsidiaries by the Company and its subsidiaries (including
acquisitions from common control shareholders). The cost of an acquisition
is measured as the fair value of the assets given and liabilities incurred
or assumed at the date of exchange, plus costs directly attributable to
the acquisition. Identifiable assets acquired and liabilities and
contingent liabilities assumed in a business combination are measured
initially at their fair values at the acquisition date, irrespective of
the extent of any minority interest. The excess of the cost of acquisition
over the fair value of the share of the Company and its subsidiaries on
the identifiable net assets acquired is recorded as goodwill. If the cost
of acquisition is less than the fair value of the net assets of the
subsidiary acquired, the difference is recognized directly in the
statement of income (Note 2(f)).
Inter-company transactions, balances and unrealized gains on transactions
between group companies are eliminated. Unrealized losses are also
eliminated but considered an impairment indicator of the asset
transferred. Accounting policies of subsidiaries have been changed where
necessary to ensure consistency with the policies adopted by the Company
and its subsidiaries.
At company level, investments in subsidiaries are stated at costs less any
accumulated impairment loss. The results of subsidiaries are accounted for
by the Company on the basis of dividends received and receivable.
(ii) Transactions with minority interests
The Company and its subsidiaries apply a policy of treating transactions
with minority interests as transactions with parties external to the
Company and its subsidiaries. Disposals to minority interests result in
gains and losses for the Company and its subsidiaries that are recorded in
the statement of income. Purchases from minority interests result in
goodwill, being the difference between any consideration paid and the
relevant share acquired of the fair value of net assets of the
subsidiaries.
(iii) Associates
Associates are all entities over which the Company and its subsidiaries
have significant influence but not control, generally accompanying a
shareholding of between 20% and 50% the voting rights. Investments in
associates are accounted for using the equity method of accounting and are
initially recognized at cost. The investments in associates of the Company
and its subsidiaries include goodwill (net of any accumulated impairment
loss) identified on acquisition (Note 2(f)).
F-13
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(b) Consolidation (cont'd)
(iii) Associates (cont'd)
The shares of the Company and its subsidiaries on post-acquisition profits
or losses of associates are recognized in the statement of income and
their shares of post-acquisition movements in reserves are recognized in
reserves. The cumulative post-acquisition movements are adjusted against
the carrying amounts of the investments. When the shares of the Company
and its subsidiaries on losses in an associate equals or exceeds their
interest in the associate, including any other unsecured receivables, the
Company and its subsidiaries do not recognize further losses, unless they
have incurred obligations or made payments on behalf of the associate.
Unrealized gains on transactions between the Company and its subsidiaries
and their associates are eliminated to the extent of the interest of the
Company and its subsidiaries in the associates. Unrealized losses are also
eliminated unless the transaction provides evidence of an impairment of
the asset transferred. Accounting policies of associates have been changed
where necessary to ensure consistency with the policies adopted by the
Company and its subsidiaries.
At company level, investments in associates are stated at costs less any
accumulated impairment loss. The results of associates are accounted for
by the Company on the basis of dividends received and receivable.
(c) Foreign currency translation
(i) Functional and presentation currency
Items included in the financial statements of each entity of the Company
and its subsidiaries are measured using the currency of the primary
economic environment in which the entity operates (the "functional
currency"). The financial statements are presented in RMB, which is the
functional and presentation currency of the Company and its subsidiaries.
(ii) Transactions and balances
Foreign currency transactions are translated into the functional 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 at year-end exchange rates of
monetary assets and liabilities denominated in foreign currencies are
recognized in the statement of income.
F-14
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(d) Property, plant and equipment, net
Property, plant and equipment, net is stated at historical cost less
accumulated depreciation and any accumulated impairment loss. Historical
cost includes expenditure that is directly attributable to the acquisition
of the item.
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.
Subsequent costs are included in the carrying amount of the asset or
recognized as a separate asset, as appropriate, only when it is probable
that future economic benefits associated with the item will flow to the
Company and its subsidiaries and the cost of the item can be measured
reliably. All other repairs and maintenance are charged to the statement
of income during the financial period in which they are incurred.
Depreciation on property, plant and equipment is calculated using the
straight-line method to write off their costs to their residual values
over their estimated useful lives as follows:
Dam 45 - 55 years
Buildings 8 - 55 years
Electric utility plant in service 4 - 40 years
Transportation facilities 5 - 27 years
Others 2.5 - 18 years
The residual values, useful lives and depreciation method of the assets
are reviewed, and adjusted if appropriate, at each financial year-end.
The carrying amount of an asset is written down immediately to its
recoverable amount if the carrying amount of the asset is greater than its
estimated recoverable amount (Note 2(g)).
Gains and losses on disposals are determined by comparing proceeds with
carrying amounts. These are included in the statement of income.
(e) Financial assets
The Company and its subsidiaries classify their financial assets in the
following categories: loans and receivables, held-to-maturity and
available-for-sale. The classification depends on the purpose for which
the financial assets were acquired. Management determines the
classification of its financial assets at initial recognition and
re-evaluates this designation at every reporting date.
F-15
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(e) Financial assets (cont'd)
(i) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. They are
included in current assets, except for maturities greater than 12 months
after the balance sheet date. These are classified as non-current assets.
Loans and receivables are primarily classified as `accounts receivable',
`other receivables and assets' and `other non-current assets' in the
balance sheets (Note 2(i)).
(ii) Held-to-maturity investments
Held-to-maturity investments are non-derivative financial assets with
fixed or determinable payments and fixed maturities that the management of
the Company and its subsidiaries has the positive intention and ability to
hold to maturity. If the Company and its subsidiaries were to sell other
than an insignificant amount of held-to-maturity investments, the whole
category would be tainted and reclassified as available-for-sale.
Held-to-maturity investments are included in non-current assets, except
for those with maturities less than 12 months from the balance sheet date,
which are classified as current assets.
(iii) Available-for-sale investments
Available-for-sale investments are non-derivatives that are either
designated in this category or not classified in any of the other
categories. They are included in non-current assets unless management
intends to dispose of the investment within 12 months of the balance sheet
date.
(iv) Recognition and derecognition of financial assets
Regular purchases and sales of investments are recognized on trade-date -
the date on which the Company and its subsidiaries commit to purchase or
sell the asset. Investments are initially recognized at fair value plus
transaction costs for all the above financial assets. Investments are
derecognized when the rights to receive cash flows from the investments
have expired or have been transferred and the Company and its subsidiaries
have transferred substantially all risks and rewards of ownership.
Available-for-sale investments are subsequently carried at fair value.
Loans and receivables and held-to-maturity investments are carried at
amortized costs using the effective interest method.
Changes in the fair value of monetary securities classified as
available-for-sale are recognized in equity.
When securities classified as available-for-sale are sold or impaired, the
accumulated fair value adjustments recognized in equity are included in
the statement of income as `investment income, net'. Dividends on
available-for-sale equity instruments are recognized in the statement of
income when the right of the Company and its subsidiaries to receive
payments is established.
F-16
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(e) Financial assets (cont'd)
The fair values of quoted investments are based on current bid prices.
The Company and its subsidiaries assess at each balance sheet date whether
there is objective evidence that a financial asset or a group of financial
assets is impaired. In the case of equity securities classified as
available-for-sale, a significant or prolonged decline in the fair value
of the security below its cost is considered as an indicator that the
securities are impaired. If any such evidence exists for
available-for-sale investments, the cumulative loss - measured as the
difference between the acquisition cost and the current fair value, less
any accumulated impairment loss on that financial asset previously
recognized in statement of income - is removed from equity and recognized
in the statement of income. Impairment loss recognized in the statement of
income on equity instrument is not reversed through the statement of
income. Impairment testing of receivables is described in Note 2(i).
(f) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair
value of the share of the Company and its subsidiaries on the net
identifiable assets of the acquired subsidiary / associate at the date of
acquisition. Goodwill on acquisitions of associates is included in
`investments in associates'. Separately recognized goodwill is tested
annually for impairment and carried at cost less any accumulated
impairment loss. Impairment losses on goodwill are not reversed. Gains and
losses on the disposal of an entity include the carrying amount of
goodwill relating to the entity sold.
Any excess of acquirer's interest in the net fair value of acquiree's
identifiable assets, liabilities and contingent liabilities over cost in
any business combination, the Company and its subsidiaries will reassess
the identification and measurement of the acquiree's identifiable assets,
liabilities and contingent liabilities and the measurement of the cost of
the combination and recognize immediately in profit or loss any excess
remaining after that reassessment.
Goodwill is allocated to cash-generating units ("CGUs") for the purpose of
impairment testing. The allocation is made to those CGUs or groups of CGUs
that are expected to benefit from the business combination in which the
goodwill arose. The Company and its subsidiaries allocate goodwill to CGUs
or groups of CGUs in each region in which they operate (Note 2(g)).
(g) Impairment of non-financial assets
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 carrying amount of the asset exceeds its recoverable
amount. The recoverable amount is the higher of fair value of an asset
less costs to sell and value in use. For the purposes of assessing
impairment, assets are grouped at the lowest levels for which there are
separately identifiable cash flows (CGUs). Non-financial assets other than
goodwill that suffered impairment are reviewed for possible reversal of
the impairment at each reporting date.
F-17
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(h) Inventories
Inventories consist of fuel, materials and supplies. They are stated at
the lower of cost and net realizable value. Cost is determined using the
weighted average cost method. The cost of inventories includes direct
material cost and transportation expenses incurred in bringing the
inventories to the working locations. Net realizable value is the
estimated selling price in the ordinary course of business, less
applicable variable selling expenses.
(i) Receivables
Receivables are recognized initially at fair value and subsequently
measured at amortized cost using the effective interest method, less
provision for doubtful accounts. A provision for doubtful accounts of
receivable 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. Significant financial
difficulties of the debtor, probability that the debtor will enter
bankruptcy or financial reorganization, and default or delinquency in
payments are considered indicators that the receivable is impaired. The
amount of the provision is the difference between the carrying amount of
the asset and the present value of estimated future cash flows, discounted
at the effective interest rate. The amount of the provision is recognized
in the statement of income within operating expenses - others.
(j) 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.
(k) 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)).
(l) Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at call with
banks and other short-term highly liquid investments with original
maturities of three months or less.
F-18
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(m) Borrowings
Borrowings are recognized initially at fair value, net of transaction
costs incurred. Borrowings are subsequently stated at amortized costs; any
differences between the proceeds (net of transaction costs) and the
redemption value is recognized in the statement of income over the period
of the borrowings using the effective interest method.
Borrowings are classified as current liabilities unless the Company and
its subsidiaries have an unconditional right to defer settlement of the
liability for at least 12 months after the balance sheet date.
(n) Taxation
(i) Value-added tax ("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% 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 revenue or operating expenses.
(ii) Income tax
According to the relevant income tax law, Sino-foreign enterprises are, in
general, subject to statutory income tax of 33% (30% Enterprise Income Tax
and 3% local income tax). If these enterprises are located in certain
specified locations or cities, or are specifically approved by State Tax
Bureau, a lower tax rate would be applied. Effective from January 1, 1999,
in accordance with the practice notes on the PRC income tax laws
applicable to Sino-foreign enterprises investing in energy and
transportation infrastructure businesses, a reduced income tax rate of 15%
(after the approval of State Tax Bureau) is applicable across the country.
The Company applied this rule to all of its fully owned operating power
plants after obtaining the approval of State Tax Bureau.
Certain power plants 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 of five years), followed by a 50%
reduction of the applicable tax rate for the next three years ("tax
holiday").
The statutory income tax is assessed on an individual entity 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 income tax charges are based on profit for the year and after
considering deferred taxation.
F-19
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(n) Taxation (cont'd)
(iii) Deferred income tax
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.
However, the deferred income tax is not accounted for if it arises from
initial recognition of an asset or liability in a transaction other than a
business combination that at the time of the transaction affects neither
accounting nor taxable profit or loss. Deferred income tax is determined
using income tax rates (and laws) that have been enacted or substantially
enacted by the balance sheet date and are expected to apply when the
related deferred income tax asset is realized or the deferred income tax
liability is settled.
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.
(o) Employee benefits
(i) Pension obligations
The Company and its subsidiaries operate various defined contribution
plans in accordance with the local conditions and practices in the
provinces in which they operate. A defined contribution plan is a pension
plan under which the Company and its subsidiaries pay fixed contributions
into a separate publicly administered pension insurance plan on mandatory
and voluntary bases. The Company and its subsidiaries have no legal or
constructive obligations to pay further contributions if the fund does not
hold sufficient assets to pay all employees the benefits relating to
employee service in the current and prior periods. The contributions are
recognized as employee benefit expenses when they are due.
(ii) Termination benefits
Termination benefits are payable when employment is terminated by the
Company and its subsidiaries before the normal retirement date, or
whenever an employee accepts voluntary redundancy in exchange for these
benefits. The Company and its subsidiaries recognize termination benefits
when it is demonstrably committed to provide termination benefits as a
result of an offer made to encourage voluntary redundancy. Benefits
falling due more than 12 months after the balance sheet date are
discounted to present value.
(p) 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.
F-20
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(p) Revenue and income recognition (cont'd)
(i) Operating revenue
Operating revenue represents the fair value of the consideration received
or receivable for electricity sold in the ordinary course of the
activities of the Company and its subsidiaries (net of 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
regional or provincial grid companies.
(ii) Management service income
As mentioned in Note 6, 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 rendered in
accordance with the management service agreement.
(iii) Interest income
Interest income is recognized on a time-proportion basis using the
effective interest method.
(iv) Dividend income
Dividend income is recognized when the right to receive payment is
established.
(q) Operating leases
Leases in which 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 statement of income on a straight-line
basis over the period of the lease.
(r) Borrowing costs
Borrowing costs incurred for the construction of any qualifying assets
(including in 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.
F-21
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(s) Financial guarantee contracts
(i) Classification
The Company issues financial guarantee contracts that transfer significant
insurance risk.
Financial guarantee contracts are those contracts that require the issuer
to make specified payments to reimburse the holders for losses they incur
because specified debtors fail to make payments when due in accordance
with the original or modified terms of debt instruments.
(ii) Liability adequacy test
At each balance sheet date, liability adequacy tests are performed to
ensure the adequacy of the contract liabilities. In performing these
tests, current best estimates of future contractual cash flows and related
administrative expenses are used. Any deficiency is immediately charged to
statement of income.
(t) Dividend distribution
Dividend distribution to the shareholders of the Company and its
subsidiaries is recognized as a liability in the financial statements of
the Company and its subsidiaries in the period in which the dividends are
approved by the shareholders of the Company and its subsidiaries.
(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. Contingent assets are not
recognized in the financial statements but disclosed when an inflow of
economic benefit is probable.
(v) Standards, interpretations and amendments to published standards that
are not yet effective
Certain new standards, amendments and interpretations to existing
standards have been published that are mandatory for the accounting
periods of the Company and its subsidiaries beginning on or after January
1, 2006 or later periods but which the Company and its subsidiaries have
not early adopted. These are summarized as follows:
o IAS 39 (Amendment), The Fair Value Option and a complementary Amendment
to IAS 32, Financial Instruments: Disclosure and Presentation
(effective from annual periods beginning on or after January 1, 2006).
This amendment changes the definition of financial instruments
classified at fair value through profit or loss and restricts the
ability to designate financial instruments as part of this category.
The Company and its subsidiaries believe that this amendment should not
have a significant impact on the classification of financial
instruments, as the Company and its subsidiaries should be able to
comply with the amended criteria for the designation of financial
instruments at fair value through profit and loss. The Company and its
subsidiaries will apply this amendment from annual periods beginning
January 1, 2006.
F-22
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(v) Standards, interpretations and amendments to published standards that
are not yet effective (cont'd)
o IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts and a
complementary Amendment to IAS 32, Financial Instruments: Disclosure
and Presentation (effective from annual periods beginning on or after
January 1, 2006). This amendment requires issued financial guarantees,
other than those previously asserted by the entity to be insurance
contracts, to be initially recognized at their fair value and
subsequently measured at the higher of (i) the unamortized balance of
the related fees received and deferred, and (ii) the expenditure
required to settle the commitment at the balance sheet date. Management
considered this amendment to IAS 39 and concluded that it is not
relevant to the Company and its subsidiaries.
o IFRS 7, Financial Instruments: Disclosures and a complementary
Amendment to IAS 1, Presentation of Financial Statements - Capital
Disclosures (effective from annual periods beginning on or after
January 1, 2007). IFRS 7 introduces new disclosures to improve the
information about financial instruments. It requires the disclosure of
qualitative and quantitative information about exposure to risks
arising from financial instruments, including specified minimum
disclosures about credit risk, liquidity risk and market risk,
including sensitivity analysis to market risk. It replaces IAS 30,
Disclosures in the Financial Statements of Banks and Similar Financial
Institutions, and disclosure requirements in IAS 32, Financial
Instruments: Disclosure and Presentation. It is applicable to all
entities that report under IFRS. The amendment to IAS 1 introduces
disclosures about the level of an entity's capital and how it manages
capital. Management is currently assessing the impact of IFRS 7 and the
amendment to IAS 1 on the operations of the Company and its
subsidiaries. The Company and its subsidiaries will apply IFRS 7 and
the amendment to IAS 1 from annual periods beginning January 1, 2007.
o IFRIC Interpretation 4, Determining whether an Arrangement contains a
Lease (effective from annual periods beginning on or after January 1,
2006). IFRIC Interpretation 4 requires the determination of whether an
arrangement is or contains a lease to be based on the substance of the
arrangement. It requires an assessment of whether: (i) fulfillment of
the arrangement is dependent on the use of a specific asset or assets
(the asset); and (ii) the arrangement conveys a right to use the asset.
Management is currently assessing the impact of IFRIC Interpretation 4
on the operations of the Company and its subsidiaries.
3. FINANCIAL AND INSURANCE RISKS MANAGEMENT
(a) Financial risk factors
The activities of the Company and its subsidiaries expose them to a
variety of financial risks: market risk (including currency risk, fair
value interest rate risk and price risk), credit risk, liquidity risk and
cash flow interest rate risk. The overall risk management programme of the
Company and its subsidiaries focuses on the unpredictability of financial
markets and seeks to minimize potential adverse effects on the financial
performance of the Company and its subsidiaries.
F-23
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
3. FINANCIAL AND INSURANCE RISKS MANAGEMENT (CONT'D)
(a) Financial risk factors (cont'd)
Risk management, including the management on the financial risks, is
carried out under the instruction of the Risk Management Team. The Company
works out written principles for overall management as well as written
policies covering specific areas. In considering the importance of risks,
the Company identifies and evaluates risks at head office and individual
power company level, and requires analysis and proper communication for
the information collected periodically. To avoid, mitigate and manage such
risks, the Company takes all reasonable steps, including but not limited
to pay constant attention on international foreign exchange markets to
make forecast based on the understanding of the market trend as well as
uses appropriate derivative instruments. The Company also maintains a
close watch on the debt ratio and refinances and/or restructures its
liabilities to ensure liquidity and optimizes capital structure.
(i) Market risk
(1) Foreign exchange risk
Foreign exchange risk arises from a significant portion of long-term bank
loans and other loans denominated in foreign currencies, including US
Dollar ("US$"), Euro ("(euro)") and Japanese yen ("JPY") described in Note
24. Fluctuations of exchange rates of RMB against these foreign currencies
could affect the operating results of the Company and its subsidiaries.
(2) Price risk
The Company and its subsidiaries are exposed to equity security price risk
because of investments held by the Company and its subsidiaries and
classified on the balance sheets as available-for-sale. The Company and
its subsidiaries have entered into several long-term coal purchase
contracts (Note 36(a)(ii)) to reduce its exposure to fluctuations in the
price of coal.
(ii) Credit risk
The Company and its subsidiaries are exposed to significant concentrations
of credit risk, in terms of cash and cash equivalents, temporary cash
investments and power sales respectively.
Significant portions of cash and cash equivalents and temporary cash
investments of the Company and its subsidiaries are deposited with certain
large state-owned banks of the PRC and a non-bank financial institution in
the PRC which are related parties of the Company.
The power plants of the Company and its subsidiaries sell electricity
generated to their sole customers, the power grid companies of their
respective provinces or regions where the power plants operate (Note 38).
The Company and its subsidiaries are also exposed to credit risks from
financial guarantees provided to subsidiaries and an associate. The risk
exposure relates to the relevant subsidiaries and the associate being
unable to settle liabilities in full when due (Note 3(b)).
F-24
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
3. FINANCIAL AND INSURANCE RISKS MANAGEMENT (CONT'D)
(a) Financial risk factors (cont'd)
(iii) Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash and
cash equivalents through an adequate amount of committed credit
facilities. Due to the dynamic nature of the underlying businesses, the
Company and its subsidiaries aim to maintain flexibility in funding by
keeping committed credit lines available.
(iv) Cash flow and fair value interest rate risk
As the Company and its subsidiaries have no significant interest-bearing
assets, the income and operating cash flows of the Company and its
subsidiaries are substantially independent of changes in market interest
rates.
The interest rate risk of the Company and its subsidiaries arises from
long-term loans. Loans issued at variable rates expose the Company and its
subsidiaries to cash flow interest rate risk. Bonds and loans issued at
fixed rates expose the Company and its subsidiaries to fair value 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.
(b) Insurance risk
The Company and its subsidiaries issue contracts that transfer insurance
risk.
The risk relates to the financial guarantees provided to banks by the
Company on the borrowings of certain subsidiaries and an associate. The
risk under any one financial guarantee contract is the possibility that
the insured event (default of a specified debtor) occurs and the
uncertainty of the amount of the resulting claims. By the nature of a
financial guarantee contract, this risk is predictable.
Experience shows credit risks from specified debtors are relatively
remote. The Company and its subsidiaries maintain a close watch on the
financial position and liquidity of the subsidiaries and the associate for
which financial guarantees have been granted in order to mitigate such
risks (Note 2(s)(ii)). The Company and its subsidiaries take all
reasonable steps to ensure that they have appropriate information
regarding any claim exposures. Please refer to Note 37 for details of
claim history.
F-25
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
3. FINANCIAL AND INSURANCE RISKS MANAGEMENT (CONT'D)
(c) Fair value estimation
The fair value of financial instruments traded in active markets (such as
available-for-sale investments) is based on quoted market prices at the
balance sheet date. The quoted market price used for financial assets held
by the Company and its subsidiaries is the current bid price.
The fair value of financial instruments that are not traded in an active
market is determined by using valuation techniques. The Company and its
subsidiaries use a variety of methods and makes assumptions that are based
on market conditions existing at each balance sheet date. Techniques, such
as estimated discounted cash flows, are used to determine fair value for
long-term loans.
The nominal value less impairment provision of accounts receivable,
accounts payable, other receivables and assets, other liabilities and
short-term loans 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 that is available to the Company and its subsidiaries for
similar financial instruments.
The estimated fair value of long-term loans including current maturities
was approximately RMB 31.82 billion as of December 31, 2005 (December 31,
2004: approximately RMB 17.05 billion). The aggregate book value of these
liabilities was approximately RMB 32.03 billion as of December 31, 2005
(December 31, 2004: approximately RMB 17.50 billion).
4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
Estimates and judgments are continually evaluated and are based on
historical experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
The Company and its subsidiaries make estimates and assumptions concerning
the future. The resulting accounting estimates will, by definition, seldom
equal the related actual results. The estimates and assumptions that have
a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year are
discussed below.
(a) Estimated impairment of goodwill
The Company and its subsidiaries test annually whether goodwill has
suffered any impairment, in accordance with the accounting policy stated
in Note 2(f). The recoverable amounts of CGUs have been determined based
on value-in-use calculations. These calculations require the use of
estimates (Note 16). It is reasonably possible, based on existing
knowledge, that outcomes within the next financial year that are different
from assumptions could require a material adjustment to the carrying
amount of goodwill.
F-26
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (CONT'D)
(b) Income tax expenses
The Company and its subsidiaries are subject to income tax expenses in
various provinces and regions within the PRC. Judgment is required in
determining the income tax expenses. There are many transactions and
calculations for which the ultimate tax determination is uncertain during
the ordinary course of business. The Company and its subsidiaries
recognize liabilities for anticipated tax audit issues based on estimates
of whether additional taxes will be due. When the final tax outcome of
these matters is different from the amounts that were initially recorded,
such differences will impact the income tax expenses and deferred income
tax provisions in the period in which such determination is made. It is
reasonably possible, based on existing knowledge, that outcomes within the
next financial year that are different from assumptions could require a
material adjustment to the carrying amounts of taxes payable, deferred
income tax assets and liabilities.
(c) Useful lives of property, plant and equipment
The management of the Company and its subsidiaries determine the estimated
useful lives and related depreciation charges for its property, plant and
equipment. This estimate is based on projected wear and tear incurred
during power generation. It could change significantly as a result of
technical innovations on power generators. Management will adjust the
depreciation charge where useful lives vary with previously estimated
lives, or they will write-off or write-down technically obsolete or
non-strategic assets that have been abandoned or sold. It is reasonably
possible, based on existing knowledge, that outcomes within the next
financial year that are different from assumptions could require a
material adjustment to the carrying amount of property, plant and
equipment.
(d) Estimated impairment of property, plant and equipment
The Company and its subsidiaries test annually whether property, plant and
equipment suffered any impairment. In accordance with the Note 2(g), an
impairment loss is recognized for the amount by which the carrying amount
of the asset exceeds its recoverable amount. It is reasonably possible,
based on existing knowledge, that outcomes within the next financial year
that are different from assumptions could require a material adjustment to
the carrying amount of property, plant and equipment.
F-27
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
5. MATERIAL ACQUISITIONS
During 2003, 2004 and 2005, the Company acquired a number of power plants
from Huaneng Group, HIPDC as well as other parties for business expansion
purposes. 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 paid the purchase consideration.
The purchase 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, 2005
--------------------------------------------------------------------------------------
Acquisitions of subsidiaries
--------------------------------------------------------------------------------------
60% equity interest in
Huaneng Sichuan
Hydropower Co., Ltd. 65% equity interest in
("Sichuan Hydropower") Gansu Huaneng Pingliang
(formerly known as Power Generation Limited 26.36% additional equity
Sichuan Huaneng Liability Company interest in Jiangsu Huaneng
Equity interest Hydropower Development ("Pingliang Power Huaiyin Power Limited Company
acquired Corporation, Ltd.) Company") ("Huaiyin Power Company")*
--------------------------------------------------------------------------------------
Jiangsu Yueda Investment
Original equity holder Huaneng Group Huaneng Group Co., Ltd. ("Jiangsu Yueda")
Effective date of
acquisition January 5, 2005 January 5, 2005 June 30, 2005
Consideration paid RMB 1,219.00 million RMB 806.00 million RMB 200.60 million
Direct transaction
costs of
acquisitions paid RMB 10.05 million RMB 6.65 million -
Fair value of net
assets acquired RMB 1,099.32 million RMB 704.91 million RMB 143.50 million
Goodwill RMB 129.73 million RMB 107.74 million RMB 57.10 million
=========================== ======================= ==========================
* The Company previously held equity interest of 63.64% in this entity.
The above acquisitions contributed operating revenue, profit for the year
and profit attributable to equity holders of the Company of approximately
RMB 2,715 million, RMB 617 million and RMB 296 million for the period from
the dates of their acquisitions to December 31, 2005 respectively. If the
acquisitions had occurred on January 1, 2005, there would have been no
material impact on operating revenue, profit for the year and profit
attributable to equity holders of the Company because the Sichuan
Hydropower and the Pingliang Power Company acquisitions took place in
early January, 2005 and Huaiyin Power Company was already a subsidiary of
the Company prior to the acquisition of the additional interest and
therefore, its operating results were already consolidated.
F-28
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
5. MATERIAL ACQUISITIONS (CONT'D)
For the year ended December 31, 2004
------------------------------------------------------------------------------------
Acquisition of an
Acquisitions of subsidiaries and net assets associate
-------------------------------------------------------------- ---------------------
55% equity interest in Huaneng
Hunan Yueyang Power Generation
Limited Liability Company
("Yueyang Power Company"), 60%
equity interest in Huaneng
Chongqing Luohuang Power All of the assets 40% equity
Generation Limited Liability and liabilities interest in Hebei
Company ("Luohuang Power of Huaneng Hanfeng Power
Company") and all of the assets and Jinggangshan eneration Limited
liabilities of Huaneng Yingkou Power Plant Liability Company
Power Plant ("Yingkou ("Jinggangshan ("Hanfeng Power
Equity interest acquired Power Plant") Power Plant") Company")(Note 12)
---------------------------------- --------------------------- ---------------------
90% equity interest from
Huaneng Group and 10%
equity interest from
Jiangxi Province
Original equity holder HIPDC Investment Company Huaneng Group
Effective date of
acquisition July 1, 2004 July 1, 2004 July 1, 2004
Consideration paid RMB 2,564.00 million RMB 635.53 million RMB 1,375.47 million
Direct transaction costs
of acquisitions paid RMB 12.57 million RMB 3.12 million RMB 6.74 million
Fair value of net assets
acquired RMB 2,475.66 million RMB 627.85 million RMB 1,089.14 million
Goodwill RMB 100.91 million RMB 10.80 million RMB 293.07 million
================================== =========================== =======================
The above acquisitions contributed operating revenue, profit for the year
and profit attributable to equity holders of the Company of approximately
RMB 2,559 million, approximately RMB 472 million and approximately RMB 397
million to the Company and its subsidiaries for the period from July 1,
2004 to December 31, 2004 respectively. If the acquisitions had occurred
on January 1, 2004, the operating revenue, profit for the year and profit
attributable to equity holders of the Company would have been
approximately RMB 32,604 million, approximately RMB 5,749 million and
approximately RMB 5,660 million on an unaudited basis respectively.
F-29
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
5. MATERIAL ACQUISITIONS (CONT'D)
For the year ended December 31, 2003
--------------------------------------------------------------------
Acquisition of subsidiaries
and net assets Acquisition of an associate
------------------------------ -----------------------------------
55% equity interest in
Henan Huaneng Qinbei Power
Limited Company ("Qinbei
Power Company"), 60% equity
interest in Shanxi Huaneng
Yushe Power Limited
Liability Company ("Yushe
Power Company") and all of
the assets and liabilities 25% equity interest in Shenzhen
of Huaneng Xindian Power Energy Group Co., Ltd.'s ("SEG")
Equity interest acquired Plant ("Xindian Power Plant") enlarged share capital
------------------------------ -----------------------------------
Shenzhen Investment Holding
Original equity holder Huaneng Group Corporation and SEG
Effective date of acquisition October 27, 2003 April 22, 2003
Consideration paid RMB 550 million RMB 2,390 million
Direct transaction costs of
acquisitions RMB 12 million RMB 15 million
Fair value of net assets acquired RMB 374 million RMB 1,585 million
Goodwill RMB 188 million RMB 820 million
============================== ===================================
The above acquisitions contributed operating revenue, profit for the year
and profit attributable to equity holders of the Company of approximately
RMB 207 million, approximately RMB 192 million and approximately RMB 191
million to the Company and its subsidiaries for the period from the dates
of their acquisitions to December 31, 2003 respectively. If the
acquisitions had occurred on January 1, 2003, the operating revenue,
profit for the year and profit attributable to equity holders of the
Company would have been approximately RMB 24,186 million, approximately
RMB 5,858 million and approximately RMB 5,669 million on an unaudited
basis respectively.
Goodwill arising from the acquisitions in 2003, 2004 and 2005 is
attributable to the high profitability of the acquired businesses and the
significant synergies expected to arise after the acquisitions of the
Company on the equity interests in the branches, subsidiaries and
associates stated above.
F-30
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
5. MATERIAL ACQUISITIONS (CONT'D)
The aggregated assets and liabilities arising from the acquisitions from
Huaneng Group and minority interests of acquirees in 2003, 2004 and 2005
were as follows:
2005 2004 2003
---------------------------- --------------------------- -----------------------------
Fair value Acquirees' Acquirees' Fair value Acquirees'
carrying carrying carrying
amounts Fair value amounts amounts
------------ ------------ ----------- ------------ ------------- -----------
Property, plant
and equipment,
net 12,061,897 10,652,359 1,919,401 1,854,174 3,085,503 2,838,425
Deferred income tax
assets 33,475 33,475 - - 19,603 65,120
Long-term investment
in an associate
(Note 12) - - 1,382,210 949,215 - -
Other non-current
assets 179,341 156,686 149,511 30,673 18,667 18,667
Inventories 54,801 54,801 31,438 31,438 35,608 35,608
Other current assets 176,237 176,238 29,876 29,876 96,608 96,608
Accounts receivable 569,672 569,672 85,905 85,905 88,556 88,556
Cash and cash
equivalents 566,704 566,704 64,331 64,331 215,585 215,585
Minority interests (1,993,416) (1,385,875) - - (121,575) (121,575)
Long-term loans,
unsecured (7,286,880) (7,286,880) (1,030,500) (1,030,500) (1,706,104) (1,706,104)
Long-term loans,
secured (567,000) (567,000) - - - -
Due to Huaneng Group - - - - (13,968) (13,968)
Deferred income tax
liabilities (404,205) (25,416) - - - -
Other non-current
liabilities (75,466) (75,466) - - - -
Other current
liabilities (1,367,429) (1,367,429) (622,114) (622,114) (1,344,842) (1,344,842)
------------ ------------ ----------- ------------ ------------- -----------
Net assets acquired 1,947,731 1,501,869 2,010,058 1,392,998 373,641 172,080
============ ============ ===========
Add: goodwill 294,567 10,803 188,139
Less: direct
transaction costs
of acquisitions (16,698) (9,861) (11,780)
------------ ----------- -------------
Total consideration
paid 2,225,600 2,011,000 550,000
Add: direct
transaction costs
of acquisitions
paid 16,698 9,861 2,528
Less: cash from the
power plants
acquisitions (566,704) (64,331) (215,585)
------------ ----------- -------------
Net cash outflow for
the acquisitions 1,675,594 1,956,530 336,943
============ =========== =============
F-31
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
5. MATERIAL ACQUISITIONS (CONT'D)
The aggregated assets and liabilities arising from the acquisition in 2004
were as follows (cont'd):
HIPDC
-----------------------------------------
Acquirees'
carrying
Fair value amounts
-------------------- -----------------
Property, plant and equipment, net 7,472,794 5,837,056
Deferred income tax assets 81,082 81,082
Long-term investment in an associate (Note 12) 18,029 18,029
Other non-current assets 602,907 188,433
Inventories 186,680 186,680
Other current assets 84,208 84,208
Accounts receivable 1,262,102 1,262,102
Cash and cash equivalents 594,843 594,843
Minority interests (1,336,936) (655,869)
Long-term loans, unsecured (3,670,196) (3,670,196)
Due to HIPDC (1,224,554) (1,224,554)
Deferred income tax liabilities (478,189) (67,826)
Other current liabilities (1,117,105) (1,117,105)
-------------------- -----------------
Net assets acquired 2,475,665 1,516,883
=================
Add: goodwill 100,907
Less: direct transaction costs of acquisitions (12,572)
--------------------
Total consideration paid 2,564,000
Add: direct transaction costs of acquisitions paid 12,572
Less: cash from the power plants acquisitions (594,843)
--------------------
Net cash outflow for the acquisitions 1,981,729
====================
6. OTHER INCOME, NET
Pursuant to a management service agreement entered into with Huaneng Group
and HIPDC, the Company 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-32
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
7. PROFIT BEFORE TAX
Profit before tax was determined after charging and (crediting) the
following:
For the year ended December 31,
--------------------------------------------------------
2005 2004 2003
---------------- -------------- ----------------
Interest expenses on long-term bank loans:
- wholly repayable within five years 881,823 363,679 104,012
- not wholly repayable within five years 1,021,467 521,654 422,809
Interest expenses on long-term loans from
shareholders:
- wholly repayable within five years - 16,551 22,053
- not wholly repayable within five years 84,506 36,586 -
Interest expenses on other long-term loans:
- wholly repayable within five years 44,262 43,865 57,493
- not wholly repayable within five years 12,495 12,692 -
Interest expenses on short-term bonds 84,615 - -
Interest expenses on convertible notes - 26 3,248
---------------- -------------- ----------------
Total interest expenses 2,129,168 995,053 609,615
Less: amount capitalized in property, plant and
equipment (702,559) (331,629) (40,467)
---------------- -------------- ----------------
1,426,609 663,424 569,148
Change in fair value on financial instruments:
- Gains of interest rate swaps - (925) (11,771)
Auditors' remuneration 33,781 17,239 19,359
Loss / (Gain) on disposals / write-off of property,
plant and equipment, net 145,762 (29,176) 138,726
Operating leases:
- Property, plant and equipment 33,077 30,067 25,985
- Land use rights 42,402 40,272 44,100
Depreciation of property, plant and equipment 6,172,866 4,706,992 4,117,478
Impairment loss of property, plant and equipment 30,080 - -
Amortization of prepaid land use rights 36,429 28,074 19,136
Amortization of other non-current assets 54,555 39,731 41,566
Amortization of goodwill - 42,002 25,170
Amortization of negative goodwill - (247,279) (247,278)
Cost of inventories consumed 21,580,927 15,302,929 9,222,583
Provision for / (Reversal of) doubtful accounts 49,869 (10,654) 12,567
Bad debts recovery (59,740) - -
Provision for / (Reversal of) inventory obsolescence 31,724 1,521 (751)
Staff costs:
- Wages and staff welfare 1,735,065 1,249,836 1,020,444
- Retirement benefits (Note 9) 407,846 299,120 235,950
- Termination benefits - 18,546 -
- Staff housing benefits (Note 31) 147,479 100,751 72,163
- Other staff costs 196,708 209,011 111,116
================ ============== ================
F-33
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
8. RELATED PARTY BALANCES AND TRANSACTIONS
The related parties of the Company and its subsidiaries that had
transactions with the Company and its subsidiaries are as follows:
Names of related parties Nature of relationship
---------------------------------------------------- -------------------------------------------------------
Huaneng Group Ultimate parent
HIPDC Parent
China Huaneng Finance Corporation Ltd. ("Huaneng A subsidiary of Huaneng Group
Finance")
Hebei Huaneng Jingyuan Coal Company Limited A subsidiary of Huaneng Group
("Huaneng Jingyuan")
China Huaneng International Trade Economics A subsidiary of Huaneng Group
Corporation ("CHITEC")
Shanghai Time Shipping Company Ltd. ("Time A jointly controlled entity of Huaneng Group
Shipping")
Shandong Rizhao Power Company Ltd. An associate of the Company
("Rizhao Power Company")
Chongqing Huaneng Shifen Company Limited An associate of Luohuang Power Company
("Shifen Company")
Jiangsu Yueda A minority shareholder of Huaiyin Power Company
State-owned enterprises* Related parties of the Company
* Huaneng Group is a state-owned enterprise. In accordance with the
revised IAS 24, "Related Party Disclosures", state-owned enterprises
and their subsidiaries, other than entities under Huaneng Group,
directly or indirectly controlled by the PRC government are also
defined as related parties of the Company and its subsidiaries.
The majority of the business activities of the Company and its
subsidiaries are conducted with state-owned enterprises. For the
purpose of the related party transactions disclosure in accordance with
IAS 24, the Company and its subsidiaries have established procedures to
determine, to the extent possible, the identification of the ownership
structure of its customers and suppliers as to whether they are
state-owned enterprises. However, many state-owned enterprises have a
multi-layered corporate structure and the ownership structures change
over time as a result of transfers and privatization programs.
Nevertheless, management believes that all material related party
balances and transactions have been adequately disclosed.
In addition to the related party information shown elsewhere in the
financial statements, the following is a summary of significant related
party transactions entered into in the ordinary course of business between
the Company and its subsidiaries and their related parties during the year
and significant balances arising from related party transactions as of
year end.
(a) Related party balances
(i) As of December 31, 2005, current deposits of approximately RMB 1,768
million (December 31, 2004: RMB 1,363 million) were placed with a
non-bank PRC financial institution, Huaneng Finance, which bore
interest that ranged from 0.72% to 1.62% (for the years ended December
31, 2004 and 2003: from 0.72% to 1.44%) per annum.
(ii) As described in Note 24, certain loans of the Company and its
subsidiaries were borrowed from Huaneng Group.
F-34
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
8. RELATED PARTY BALANCES AND TRANSACTIONS (CONT'D)
(a) Related party balances (cont'd)
(iii) As of December 31, 2005, long-term loans (including current portion)
from Huaneng Finance amounted to RMB 80 million (December 31, 2004:
nil), with interest at 5.18% (for the years ended December 31, 2004
and 2003: N/A) per annum.
(iv) As of December 31, 2005, short-term loans amounting to approximately
RMB 2,008 million (December 31, 2004: approximately RMB 3,694
million) were borrowed from Huaneng Finance, which bore interest that
ranged from 4.70% to 5.02% (for the years ended December 31, 2004 and
2003: from 4.54% to 5.02% and from 4.78% to 5.05%) per annum.
(v) As of December 31, 2005, balances with Huaneng Group, HIPDC,
associates and other related parties are unsecured, non-interest
bearing and receivable / repayable within one year. As of December
31, 2005, no provision is made on receivable balances from these
parties (December 31, 2004: approximately RMB 12 million).
(vi) As of December 31, 2005, HIPDC had provided guarantees on certain
accounts receivable balances of the Company and its subsidiaries
totaling approximately RMB 77 million (December 31, 2004:
approximately RMB 209 million).
(vii) Included in the balance sheets, the balances with state-owned
enterprises are as follows:
As of December 31,
--------------------------------
2005 2004
------------- ---------------
RMB million RMB million
Non-current assets
Available-for-sale investment 1,033 255
Other non-current assets 50 -
Current assets
Other receivable and assets, net 195 216
Accounts receivable, net 5,333 4,067
Temporary cash investments 3 13
Cash at banks 851 752
Non-current liabilities
Long-term bank loans 19,445 8,506
Other long-term loans 130 -
Current liabilities
Accounts payable and other liabilities 2,777 1,781
Short-term bonds 4,780 -
Short-term loans 4,973 3,921
Current portion of long-term bank loans 1,761 354
Current portion of other long-term loans 70 -
Except for available-for-sale investment, other non-current assets,
temporary cash investments, cash at banks, loans and short-term bonds
stated above, all the balances of assets and liabilities are
unsecured, non-interest bearing and receivable or repayable within one
year. Long-term receivables included in other non-current assets are
unsecured, interest-bearing at 5.508% (for the years ended December
31, 2004 and 2003: N/A) per annum and receivable in accordance with
specified repayment schedules. Terms of the long-term loans are
described in Note 24. As of December 31, 2005, approximately RMB 58
million provision has been made on the receivable balances (December
31, 2004: nil).
For the year ended December 31, 2005, the interest rates of short-term
loans and long-term loans from state-owned enterprises is from 4.54%
to 5.76% and from 3.60% to 5.12% (for the year ended December 31,
2004: from 4.30% to 5.02% and from 3.60% to 5.76%; for the year ended
December 31, 2003: from 4.54% to 5.05% and from 3.62% to 6.21%) per
annum respectively.
F-35
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
8. RELATED PARTY BALANCES AND TRANSACTIONS (CONT'D)
(b) Related party transactions
For the year ended December 31,
-------------------------------------------------
2005 2004 2003
---------------- ---------------- ---------------
Huaneng Group
Management service fee income for management services rendered
to certain power plants 31,668 45,865 33,295
Less: related expenses (29,510) (30,987) (25,353)
---------------- ---------------- ---------------
Management service fee income, net 2,158 14,878 7,942
Management service expense for management services received on
Sichuan Hydropower 2,420 - -
Consideration paid for the acquisitions (Note 5) (2,025,000) (1,949,000) (550,000)
HIPDC
Proceeds from disposal of Nanjing Ranji 30,000 - -
Management service fee income for management services rendered
to certain power plants 3,328 11,678 17,305
Less: related expenses (3,101) (7,890) (13,177)
---------------- ---------------- ---------------
Management service fee income, net 227 3,788 4,128
Service fees expenses on transmission and transformer facilities (141,102) (133,609) (214,723)
Rental charge on land use rights of Huaneng Nanjing Power Plant
("Nanjing Power Plant") for 50 years from January 1, 1999 (1,334) (1,334) (1,334)
Rental charge on office building (26,000) (25,000) (25,000)
Compensation paid for doubtful accounts recoveries of Luohuang
Power Company (31,269) - -
Huaneng Finance
Discounting of notes receivable 298,098 42,968 -
Discounting charges (2,415) (298) -
Drawdown of short-term loans 2,127,700 3,694,000 719,000
Interest on short-term and long-term loans (140,250) (87,739) (41,129)
CHITEC
Coal purchased from CHITEC (284,301) (214,941) (145,058)
Equipment purchased from CHITEC (11,200) - -
Time Shipping
Coal purchased from Time Shipping and service fee paid for
transportation (606,753) (562,567) (456,539)
Shifen Company
Lime purchased from Shifen Company (42,817) (25,563) N/A
F-36
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
8. RELATED PARTY BALANCES AND TRANSACTIONS (CONT'D)
(b) Related party transactions (cont'd)
For the year ended December 31,
------------------------------------------------------
2005 2004 2003
---------------- ------------------ ------------------
Huaneng Jingyuan
Coal purchased from Huaneng Jingyuan (241,960) (16,355) -
Jiangsu Yueda
Consideration paid for the acquisition of additional
equity interest in Huaiyin Power Company (Note 5) (200,600) - -
Other related party
Reversal of / (Provision for) a doubtful account 11,639 - (11,639)
For the year ended December 31,
------------------------------------------------------
2005 2004 2003
---------------- ------------------ ------------------
RMB million RMB million RMB million
---------------- ------------------ ------------------
State-owned enterprises
-----------------------
Sales of electricity 40,977 32,546 23,812
Purchases of fuel 13,763 7,638 5,612
Acquisition of property, plant and equipment 5,578 5,110 584
Purchases of raw materials and spare parts 365 145 155
Subcontracting labor for
- construction and renovation 2,088 1,307 301
- maintenance 140 89 54
Interest income 20 30 38
Dividend income 35 23 1
Drawdown of short-term loans 6,650 2,375 250
Drawdown of long-term bank loans 9,465 2,713 632
Other charges
- interest expenses of loans and bonds to banks and
other financial institutions 881 289 230
F-37
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
8. RELATED PARTY BALANCES AND TRANSACTIONS (CONT'D)
(c) Guaranteed loans
As of December 31,
-------------------------------
2005 2004
------------- --------------
(i) Short-term loan guaranteed by a state-owned enterprise 400,000 600,000
(ii) Long-term loans guaranteed by
- Huaneng Group 7,343,525 3,798,074
- HIPDC 3,311,164 3,936,987
- state-owned enterprises 1,226,500 845,000
(iii) Certain long-term bank loans of Rizhao Power Company
guaranteed by the Company 225,250 305,250
(d) Key management personnel compensation
For the year ended December 31,
--------------------------------------------
2005
2004 2003
------------ ----------- -----------
Salaries and other short-term employee benefits 6,049 7,367 4,814
Post-employment benefits 1,413 1,119 2,059
------------ ----------- -----------
Total 7,462 8,486 6,873
============ =========== ===========
9. 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
publicly administered retirement plan at a specified rate, currently set
at 18% to 22% (for the years ended December 31, 2004 and 2003: 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, 2005 were approximately RMB 227 million (for the years ended
December 31, 2004 and 2003: approximately RMB 167 million and RMB 132
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,
2005 totaled approximately RMB 181 million (for the years ended December
31, 2004 and 2003: approximately RMB 132 million and RMB 111 million).
The Company and its subsidiaries have no further obligation for
post-retirement benefits beyond the above annual contributions made.
F-38
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
10. DIRECTORS', SUPERVISORS' AND SENIOR MANAGEMENT' EMOLUMENTS
(a) Directors' and Supervisors' emoluments
The remuneration of every Director and Supervisor of the Company for the
year ended December 31, 2005 is set out below:
Basic Employer's
salaries contributions
and Discretionary to pension
Fees allowances bonuses schemes Total
----------- ------------ --------------- --------------- ---------------
NAME OF DIRECTOR
Mr. Li Xiaopeng(1) - - - - -
Mr. Huang Yongda(1) - - - - -
Mr. Wang Xiaosong(1) - - - - -
Mr. Na Xizhi(1) - 96 313 108 517
Mr. Ye Daji(2) - 78 66 65 209
Mr. Huang Jinkai(2) - 43 195 71 309
Mr. Liu Jinlong(2) - - - - -
Mr. Huang Long(3) - 91 375 109 575
Mr. Wu Dawei(3) - - 147 - 147
Mr. Shan Qunying(1) 40 - - - 40
Mr. Yang Shengming(5) 20 - - - 20
Mr. Xu Zujian(1) 40 - - - 40
Mr. Liu Shuyuan(1) 40 - - - 40
Mr. Gao Zongze(2) 30 - - - 30
Mr. Zheng Jianchao(2) 30 - - - 30
Mr. Qian Zhongwei(1) 60 - - - 60
Mr. Xia Donglin(1) 60 - - - 60
Mr. Liu Jipeng(1) 60 - - - 60
Mr. Wu Yusheng(3) 60 - - - 60
Mr. Yu Ning(3) 60 - - - 60
Mr. Ding Shida(5) 20 - - - 20
----------- ------------ --------------- --------------- ---------------
Sub-total 520 308 1,096 353 2,277
----------- ------------ --------------- --------------- ---------------
NAME OF SUPERVISOR
Mr. Wei Yunpeng(2) - - - - -
Mr. Li Yonglin(2) 20 - - - 20
Mr. Pan Jianmin(2) - - - - -
Mr. Zhao Xisheng(2) - 35 128 45 208
Mr. Ye Daji3 and (4) - 155 165 132 452
Mr. Shen Weibing(5) 20 - - - 20
Mr. Shen Zongmin(1) 40 - - - 40
Ms. Yu Ying(3) 40 - - - 40
Ms. Zou Cui(3) - 83 282 88 453
Mr. Wang Zhaobin(3) - 80 259 77 416
Mr. Gu Jianguo(5) 20 - - - 20
----------- ------------ --------------- --------------- ---------------
Sub-total 140 353 834 342 1,669
----------- ------------ --------------- --------------- ---------------
Total 660 661 1,930 695 3,946
=========== ============ =============== =============== ===============
F-39
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
10 . DIRECTORS', SUPERVISORS' AND SENIOR MANAGEMENT' EMOLUMENTS
(CONT'D)
a) Directors' and Supervisors' emoluments (cont'd)
The remuneration of every Director and Supervisor of the Company for the
year ended December 31, 2004 is set out below:
Basic Employer's
salaries contributions
and Discretionary to pension
Fees allowances bonuses schemes Total
----------- ------------ --------------- --------------- ---------------
NAME OF DIRECTOR
Name of Director
Mr. Li Xiaopeng - - - - -
Mr. Huang Yongda - - - - -
Mr. Wang Xiaosong - - - - -
Mr. Ye Daji - 135 579 107 821
Mr. Huang Jinkai - 147 702 120 969
Mr. Liu Jinlong - - - - -
Mr. Shan Qunying 40 - - - 40
Mr. Yang Shengming 40 - - - 40
Mr. Xu Zujian 40 - - - 40
Mr. Liu Shuyuan 20 - - - 20
Mr. Gao Zongze 60 - - - 60
Mr. Zheng Jianchao 60 - - - 60
Mr. Qian Zhongwei 60 - - - 60
Mr. Xia Donglin 60 - - - 60
Mr. Liu Jipeng 30 - - - 30
----------- ------------ --------------- --------------- ---------------
Sub-total 410 282 1,281 227 2,200
----------- ------------ --------------- --------------- ---------------
NAME OF SUPERVISOR
Mr. Wei Yunpeng - - - - -
Mr. Li Yonglin 40 - - - 40
Mr. Pan Jianmin - - - - -
Mr. Shen Weibing 40 - - - 40
Mr. Shen Zongmin 40 - - - 40
Mr. Zhao Xisheng - 120 380 87 587
Mr. Liu Shuyuan 20 - - - 20
----------- ------------ --------------- --------------- ---------------
Sub-total 140 120 380 87 727
----------- ------------ --------------- --------------- ---------------
Total 550 402 1,661 314 2,927
=========== ============ =============== =============== ===============
F-40
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
10. DIRECTORS', SUPERVISORS' AND SENIOR MANAGEMENT' EMOLUMENTS
(CONT'D)
(a) Directors' and Supervisors' emoluments (cont'd)
The remuneration of every Director and Supervisor of the Company for the
year ended December 31, 2003 is set out below:
Basic Employer's
salaries contributions
and Discretionary to pension
Fees allowances bonuses schemes Total
----------- ------------ --------------- --------------- ---------------
NAME OF DIRECTOR
Mr. Li Xiaopeng - 119 292 60 471
Mr. Wang Xiaosong - 114 264 60 438
Mr. Ye Daji - 120 264 64 448
Mr. Huang Jinkai - 127 294 64 485
Mr. Shan Qunying 30 - - - 30
Mr. Yang Shengming 30 - - - 30
Mr. Xu Zujian 30 - - - 30
Mr. Liu Shuyuan 40 - - - 40
Mr. Gao Zongze 40 - - - 40
Mr. Zheng Jianchao 40 - - - 40
Mr. Qian Zhongwei 40 - - - 40
Mr. Xia Donglin 40 - - - 40
----------- ------------ --------------- --------------- ---------------
Sub-total 290 480 1,114 248 2, 132
----------- ------------ --------------- --------------- ---------------
NAME OF SUPERVISOR
Mr. Wei Yunpeng - 114 264 60 438
Mr. Zhao Xisheng - 104 290 55 449
Mr. Liu Shuyuan 30 - - - 30
Mr. Li Yonglin 30 - - - 30
Mr. Shen Weibing 30 - - - 30
Mr. Shen Zongmin 30 - - - 30
----------- ------------ --------------- --------------- ---------------
Sub-total 120 218 554 115 1,007
----------- ------------ --------------- --------------- ---------------
Total 410 698 1,668 363 3,139
=========== ============ =============== =============== ===============
(1) Retired and re-appointed on May 11, 2005.
(2) Retired on May 11, 2005.
(3) Appointed on May 11, 2005.
(4) Mr. Ye Daji resigned from the capacity of Supervisor on November 30,
2005.
(5) Mr. Yang Shenming and Mr. Shen Weibing retired and re-appointed on
May 11, 2005 in the capacities of Director and Supervisor
respectively. They resigned on August 9, 2005 and Mr. Ding Shida and
Mr. Gu Jianguo filled their roles of Director and Supervisor on
November 17, 2005 respectively.
F-41
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
10. DIRECTORS', SUPERVISORS' AND SENIOR MANAGEMENT' EMOLUMENTS
(CONT'D)
(a) Directors' and Supervisors' emoluments (cont'd)
During the year, no option was granted to the Directors or the Supervisors
(for the years ended December 31, 2004 and 2003: 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 (for the
years ended December 31, 2004 and 2003: nil).
No Director or Supervisors had waived or agreed to waive any emoluments
during the years 2003, 2004 and 2005.
(b) Five highest paid individuals
The five individuals whose emoluments were the highest in the Company and
its subsidiaries for the year include one (for the years ended December
31, 2004 and 2003: two and nil) Director whose emoluments is reflected in
the analysis presented above. The emoluments payable to the remaining four
(for the years ended December 31, 2004 and 2003: three and five)
individuals during the year are as follows:
For the year ended December 31,
----------------------------------------
2005 2004 2003
------------ ------------ -----------
Basic salaries and allowances 510 370 516
Discretionary bonuses 2,233 1,499 1,835
Employer's contributions
to pension schemes 614 294 287
------------ ------------ -----------
3,357 2,163 2,638
============ ============ ===========
The annual emoluments paid to these individuals (excluding Directors)
during the years 2003, 2004 and 2005 fell within the range of nil to RMB 1
million.
F-42
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
11. PROPERTY, PLANT AND EQUIPMENT, NET
Electric
utility
plant in Transportation Construction
Dam Buildings service facilities Others -in-progress Total
---------- ---------- ------------- ------------- ---------- ------------- ------------
AS OF JANUARY 1, 2004
Cost - 1,356,782 55,015,630 604,068 1,294,891 4,190,164 62,461,535
Accumulated depreciation - (332,300) (18,776,233) (145,094) (549,543) - (19,803,170)
---------- ---------- ------------- ------------- ----------- ------------ ------------
Net book value - 1,024,482 36,239,397 458,974 745,348 4,190,164 42,658,365
========== ========== ============= ============= =========== ============ ============
YEAR ENDED DECEMBER 31,
2004
Beginning of the year - 1,024,482 36,239,397 458,974 745,348 4,190,164 42,658,365
Reclassification - (13,102) 136,920 (142,150) 18,332 - -
Acquisitions (Note 5) - 259,253 8,372,033 444 217,547 542,918 9,392,195
Additions - 10,726 20,291 2,840 66,318 10,352,279 10,452,454
Transfer from CIP - 435,766 5,537,895 12,755 72,371 (6,058,787) -
Disposals - (617) (3,072) (13) (4,378) - (8,080)
Depreciation charge - (75,004) (4,421,906) (30,469) (187,145) - (4,714,524)
---------- ---------- ------------- ------------- ----------- ------------ ------------
End of the year - 1,641,504 45,881,558 302,381 928,393 9,026,574 57,780,410
========== ========== ============= ============= =========== ============ ============
AS OF DECEMBER 31, 2004
Cost - 2,043,071 69,067,394 413,254 1,651,129 9,026,574 82,201,422
Accumulated depreciation - (401,567) (23,185,836) (110,873) (722,736) - (24,421,012)
---------- ---------- ------------- ------------- ----------- ------------ ------------
Net book value - 1,641,504 45,881,558 302,381 928,393 9,026,574 57,780,410
========== ========== ============= ============= =========== =========== ============
YEAR ENDED DECEMBER 31,
2005
Beginning of the year - 1,641,504 45,881,558 302,381 928,393 9,026,574 57,780,410
Reclassification - (313,831) 382,632 (186,118) 117,317 - -
Acquisitions (Note 5) 2,100,903 443,531 7,080,422 35,415 211,763 2,189,863 12,061,897
Additions - 9,032 64,715 676 94,217 15,451,757 15,620,397
Transfer from CIP 464,950 31,393 3,935,984 4,726 1,838,292 (6,275,345) -
Disposals / Write-off - (10,626) (117,592) - (11,047) (52,521) (191,786)
Disposal of a subsidiary - - - - (687) (59,342) (60,029)
Depreciation charge (74,187) (99,905) (5,720,294) (16,328) (272,798) - (6,183,512)
Impairment charge - - (30,080) - - - (30,080)
---------- ---------- ------------- ------------- ----------- ------------ ------------
End of the year 2,491,666 1,701,098 51,477,345 140,752 2,905,450 20,280,986 78,997,297
========== ========== ============= ============= =========== ============ ============
AS OF DECEMBER 31, 2005
Cost 2,565,853 2,168,543 80,113,023 223,816 3,910,861 20,280,986 109,263,082
Accumulated depreciation (74,187) (467,445) (28,605,598) (83,064) (1,005,411) - (30,235,705)
Accumulated impairment
loss - - (30,080) - - - (30,080)
---------- ---------- ------------- ------------- ----------------------- ------------
Net book value 2,491,666 1,701,098 51,477,345 140,752 2,905,450 20,280,986 78,997,297
========== ========== ============= ============= ======================= ============
Interest expenses of approximately RMB 703 million (for the years ended
December 31, 2004 and 2003: approximately RMB 332 million and RMB 40
million) arising on financing specifically entered into for the
construction of power plants were capitalized during the year and are
included in `Additions' in property plant and equipment. A capitalization
rate of approximately 5.27% (for the years ended December 31, 2004 and
2003: approximately 4.38% and 5.06%) per annum was used, representing the
interest expenses of the loan used to finance the projects.
In 2005, there were impairment losses of certain property, plant and
equipment recorded in Huaneng Dandong Power Plant. The continuous increase
in coal price and changes in the local power market contributed to such
impairment losses. The recoverable amount is determined based on
value-in-use calculations. A discount rate of approximately 7.20% was
applied in arriving at the impairment loss amount for the power plant. The
Company and its subsidiaries have also reassessed the depreciation
policies of their property, plant and equipment in this power plant and
have determined that the estimated useful lives will not be affected.
There was no impairment of any property, plant and equipment in 2004 and
2003.
F-43
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
12. INVESTMENTS IN ASSOCIATES
2005 2004
--------------- -----------------
Beginning of the year 4,328,307 2,766,031
Acquisition of 40% equity interest of Hanfeng Power Company
(Note 5) - 1,382,210
Acquisition of 25% equity interest of Shifen Company (Note 5) - 18,029
Share of additional paid-in-capital 15,923 -
Share of profit before tax 753,671 377,565
Share of income tax expense (Note 2(a)) (109,295) (65,528)
Share of dividends (394,622) (150,000)
--------------- -----------------
End of the year 4,593,984 4,328,307
=============== =================
Investment in associates as of December 31, 2005 included goodwill of
approximately RMB 976 million (December 31, 2004: approximately RMB 976
million).
As of December 31, 2005, the interest in associates of the Company and its
subsidiaries, all of which are unlisted, were as follows:
Percentage of
Country and date equity interest Registered and fully Principal
Name of associates of incorporation held paid capital activities
----------------------------- ------------------- -------------------- -------------------- -----------------
Direct Indirect
------ --------
Rizhao Power Company PRC 25.5% - US$150,000,000 Power generation
March 20, 1996
SEG PRC 25% - RMB 955,555,556 Power generation
July 16, 1997
Hanfeng Power Company PRC 40% - RMB 1,975,000,000 Power generation
October 28,1996
Shifen Company PRC - 25% RMB 50,000,000 Lime production
November 5,1996 and sale
F-44
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
12. INVESTMENTS IN ASSOCIATES (CONT'D)
The gross amounts of operating results, assets and liabilities (excluding
goodwill) of the associates of the Company and its subsidiaries were as
follows:
2005 2004
------------- -------------
Assets 33,231,354 30,525,810
Liabilities 15,299,661 13,970,553
Operating revenue 14,515,393 10,100,102
Profit before allocation 2,934,693 2,214,292
Profit attributable to equity
holders of the associates 2,224,783 1,411,933
13. INVESTMENTS IN SUBSIDIARIES
As of December 31, 2005, the interest in subsidiaries of the Company and
its subsidiaries, all of which are unlisted, were as follows:
Country, date of
incorporation and type of Percentage of Registered and fully Principal
Name of subsidiaries legal entity equity interest held paid capital activities
--------------------- ------------------------- ---------------------- -------------------- --------------
Direct Indirect
-------- ---------
Huaneng Weihai Power PRC 60% - RMB 761,838,300 Power
Limited Liability November 22, 1993 generation
Company Limited liability company
Huaiyin Power Company PRC 90% - RMB 265,000,000 Power
January 26, 1995 generation
Limited liability company
Jiangsu Huaneng PRC 63.64% - RMB 774,000,000 Power
Huaiyin II Power June 22, 2004 generation
Limited Company Limited liability company
Huaneng (Suzhou PRC 75% - RMB 632,840,000 Power
Industrial Park) June 19, 1997 generation
Power Limited Limited liability company
Liability Company
("Taicang Power
Company")
Huaneng Taicang Power PRC 75% - Registered capital Power
Co., Ltd. June 18, 2004 of RMB 894,410,000 generation
Limited liability company with total paid-in
capital of RMB
808,110,000
Qinbei Power Company PRC 55% - RMB 10,000,000 Power
July 12, 1995 generation
Limited liability company
F-45
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
13. INVESTMENTS IN SUBSIDIARIES (CONT'D)
As of December 31, 2005, the Company had equity interests in the following
subsidiaries (cont'd):
Country, date of
incorporation and type of Percentage of Registered and fully Principal
Name of subsidiaries legal entity equity interest held paid capital activities
--------------------- ------------------------- ---------------------- -------------------- --------------
Direct Indirect
-------- ---------
Yushe Power Company PRC 60% - RMB 615,760,000 Power
November 29, 1994 generation
Limited liability
company
Yushe Boyuan Power PRC - 75% RMB 2,000,000 Property
Industry Limited July 25, 2005 management
Liability Company Limited liability and leasing
company
Shandong Huaneng PRC 95% - RMB 100,000,000 Power
Xindian Power Co., March 14, 2004 generation
Ltd. Limited liability
company
Yueyang Power Company PRC 55% - RMB 560,000,000 Power
December 16, 2003 generation
Limited liability
company
Luohuang Power Company PRC 60% - RMB 900,000,000 Power
December 16, 2003 generation
Limited liability
company
Huaneng Shanghai Ranji PRC 70% - RMB 50,000,000 Power
Power Generation January 13, 2005 generation
Limited Liability Limited liability
Company company
Sichuan Hydropower PRC 60% - RMB 800,000,000 Investments
July 12, 2004 holding and
Limited liability hydropower
company projects
development
Sichuan Huaneng PRC - 60% RMB 100,000,000 Power
Taipingyi April 23, 1994 generation
Hydropower Limited Limited liability
Liability Company company
Sichuan Huaneng PRC - 68% RMB 516,100,000 Power
Baoxinghe Power June 26, 1994 generation
Limited Liability Limited liability
Company company
Sichuan Huaneng PRC - 59.33% RMB 156,725,000 Power
Dongxiguan June 29, 1994 generation
Hydropower Limited Limited liability
Liability Company company
Sichuan Huaneng PRC - 55% Registered capital Power
Jialingjiang September 30, 1998 of RMB generation
Hydropower Limited Limited liability 193,080,000 and
Liability company fully paid
Company capital of RMB
157,119,800
F-46
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
13. INVESTMENTS IN SUBSIDIARIES (CONT'D)
As of December 31, 2005, the Company had equity interests in the following
subsidiaries (cont'd):
Country, date of
incorporation and type of Percentage of Registered and fully Principal
Name of subsidiaries legal entity equity interest held paid capital activities
--------------------- ------------------------- ---------------------- -------------------- --------------
Direct Indirect
-------- ---------
Sichuan Huaneng PRC - 60% RMB 277,200,000 Power
Kangding Hydropower April 14, 1997 generation
Limited Liability Limited liability company
Company
Sichuan Huaneng PRC - 95% RMB 150,000,000 Power
Fujiang Hydropower March 22, 2002 generation
Limited Liability Limited liability company
Company
Sichuan Huaneng PRC - 52.20% RMB 97,700,000 Power
Mingtai Hydropower September 8, 1994 generation
Limited Liability Limited liability company
Company
Pingliang Power Company PRC 65% - RMB 623,000,000 Power
November 6, 1996 generation
Limited liability company
14. AVAILABLE-FOR-SALE INVESTMENT
Available-for-sale investment represents a 1.82% (December 31, 2004: 2.11%)
equity interest in a power generation company China Yangtze Power Co.,
Ltd. ("Yangtze Power") incorporated and listed in the PRC.
2005 2004
---------- ----------
Beginning of the year 254,990 254,990
Additions (Note) 28,866 -
Revaluation surplus transfer to equity (Note) 749,369 -
---------- ----------
End of the year 1,033,225 254,990
========== ==========
Note:
During the year, Yangtze Power has undergone a process of shareholding
structure reform pursuant to related government circulars issued by China
Securities Regulatory Commission on implementation of shareholding
structure reform of listed companies. Upon the completion of the process,
the legal person shares held by the Company were allowed to trade in the
open market. The additions represent the additional costs paid by the
Company to effectively exchange for the right to trade in the open market.
Given that the shares held by the Company and its subsidiaries can be
freely traded, they have been revalued at year end based on the closing
market rate.
F-47
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
15. LAND USE RIGHTS
Details of land use rights are as follows:
As of December 31,
---------------------------------------
2005 2004
------------------- -----------------
Outside Hong Kong, held on:
Leases of over 50 years 117,037 10,539
Leases of between 10 to 50 years 1,562,728 1,535,487
------------------- -----------------
1,679,765 1,546,026
=================== ==================
F-48
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
16. 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 goodwill
----------------------------------------------------
AS OF JANUARY 1, 2004
Cost 325,196 (2,472,784)
Accumulated amortization (26,320) 741,835
----------------------------------------------------
Net book value 298,876 (1,730,949)
====================================================
YEAR ENDED DECEMBER 31, 2004:
Beginning of the year 298,876 (1,730,949)
Acquisitions (Note 5) 111,710 -
Adjustment 8,142 -
Amortization charge (42,002) 247,279
----------------------------------------------------
End of the year 376,726 (1,483,670)
====================================================
AS OF DECEMBER 31, 2004
Cost 445,048 (2,472,784)
Accumulated amortization (68,322) 989,114
----------------------------------------------------
Net book value 376,726 (1,483,670)
====================================================
AS OF JANUARY 1, 2005
Cost, as previously reported 445,048 (2,472,784)
Effect of change in accounting policy (Note 2(a)) (68,322) 2,472,784
----------------------------------------------------
Cost, as restated 376,726 -
====================================================
Accumulated amortization, as previously reported 68,322 (989,114)
Effect of change in accounting policy (Note 2(a)) (68,322) 989,114
----------------------------------------------------
Accumulated amortization, as restated - -
====================================================
YEAR ENDED DECEMBER 31, 2005:
Beginning of the year, as restated 376,726 -
Acquisitions 295,070 -
----------------------------------------------------
End of the year 671,796 -
====================================================
AS OF DECEMBER 31, 2005
Cost 671,796 -
====================================================
F-49
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
16. GOODWILL AND NEGATIVE GOODWILL (CONT'D)
Impairment tests for goodwill
Goodwill is allocated to the CGUs of the Company identified according to
their operations in different regions.
The carrying amounts of significant portion of goodwill allocated to
individual CGUs are as follows:
2005 2004
------------- ---------------
Huaneng Shanghai Shidongkou I Power Plant
("Shidongkou I Power Plant") 33,854 33,854
Jinggangshan Power Plant 10,803 10,803
Xindian Power Plant 62,198 62,198
Huaiyin Power Company 118,596 61,493
Qinbei Power Company 97,552 97,552
Yueyang Power Company 100,907 100,907
Sichuan Hydropower 129,729 N/A
Pingliang Power Company 107,735 N/A
SEG(1) 682,993 682,993
Hanfeng Power Company(1) 293,070 293,070
------------ ---------------
1,637,437 1,342,870
============ ===============
_________________
(1) Included in investments in associates.
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.
Pre-tax discount rates used for value-in-use calculations:
Shidongkou I Power Plant 10.00% Yueyang Power Company 8.10%
Jinggangshan Power Plant 9.09% Sichuan Hydropower 12.32%
Xindian Power Plant 10.00% Pingliang Power Company 7.92%
Huaiyin Power Company 10.74% SEG 10.56%
Qinbei Power Company 7.67% Hanfeng Power Company 8.35%
F-50
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
16. GOODWILL AND NEGATIVE GOODWILL (CONT'D)
Impairment tests for goodwill (cont'd)
Key assumptions used for value-in-use calculations:
Key assumptions applied in the impairment tests include the expected
tariff rates, demands of electricity in specific regions where these power
plants are located and fuel cost. Management determined these key
assumptions based on past performance and its expectations on market
development. The discount rates used are pre-tax and reflect specific
risks relating to individual CGUs. Management believes that any reasonably
possible change in any of these key assumptions on which recoverable
amounts of individual CGUs are based may or may not cause carrying amounts
of individual CGUs to exceed their recoverable amounts (Note 4(a)).
No goodwill was impaired.
17 . INVENTORIES, NET
Inventories comprised:
As of December 31,
-----------------------------
2005 2004
-------------- -----------
Fuel (coal and oil) for power generation 1,498,484 732,834
Material and spare parts 857,605 711,578
-------------- -----------
2,356,089 1,444,412
Less: provision for inventory obsolescence (44,732) (13,008)
-------------- -----------
2,311,357 1,431,404
============== ===========
As of December 31, 2005, approximately RMB 670 million of the total
carrying amount of inventories were carried at fair value less cost to
sell (December 31, 2004: approximately RMB 556 million).
Movements of provision for inventory obsolescence during the year are
analyzed as follows:
2005 2004
------------- -----------
Beginning of the year (13,008) (13,621)
Provision (31,924) (1,712)
Write-offs - 2,134
Reversal 200 191
------------- -----------
End of the year (44,732) (13,008)
============= ===========
F-51
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
18. OTHER RECEIVABLES AND ASSETS, NET
Other receivables and assets comprised:
As of December 31,
-----------------------------
2005 2004
------------- ------------
Prepayments for inventories 163,435 328,181
Prepayments for contractors 137,505 168,616
Prepayment for acquisition of
Huaneng Finance (Note) 288,000 -
Receivable from a property developer 66,800 -
Others 233,435 268,781
------------- ------------
889,175 765,578
Less: provision for doubtful accounts (33,223) (42,262)
------------- ------------
855,952 723,316
============= ============
Note:
This represented the prepayment of the consideration to Huaneng Group and
Huaneng Finance of RMB 126 million and RMB 162 million respectively to
acquire a 20% equity interest in Huaneng Finance. As of December 31, 2005,
the investment was still subject to approvals from the relevant
authorities. Please refer to Note 39 for details of subsequent event in
relation to this investment.
Movements of provision for doubtful accounts during the year are analyzed
as follows:
2005 2004
------------ ------------
Beginning of the year (42,262) (53,885)
Provision (3,242) (2,405)
Write-offs 475 969
Reversal 11,806 13,059
------------ ------------
End of the year (33,223) (42,262)
============ ============
19. ACCOUNTS RECEIVABLE, NET
Accounts receivable comprised:
As of December 31,
-----------------------------
2005 2004
------------- ------------
Accounts receivable 4,963,326 3,730,431
Notes receivable 1,117,533 1,242,672
------------- ------------
6,080,859 4,973,103
Less: provision for doubtful accounts (58,433) -
------------- ------------
6,022,426 4,973,103
============= ============
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.
F-52
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
19. ACCOUNTS RECEIVABLE, NET (CONT'D)
Movements of provision for doubtful accounts during the year are analyzed
as follows:
2005 2004
------------ ------------
Beginning of the year - -
Provision (58,433) -
-------------- ------------
End of the year (58,433) -
============== ============
As of December 31, 2005, the aging analysis of accounts receivable was as
follows:
2005 2004
------------ ------------
Within 1 year 5,864,038 4,510,368
Between 1 to 2 years 3,624 96,808
Between 2 to 3 years 59,217 -
Over 3 years 153,980 365,927
------------ ------------
6,080,859 4,973,103
============ ============
As of December 31, 2005, HIPDC provided guarantees on certain accounts
receivable balances of the Company and its subsidiaries of approximately
RMB 77 million (December 31, 2004: approximately RMB 209 million).
As of December 31, 2005, the maturity period of the notes receivable
ranged from one month to twenty-six months (December 31, 2004: one month
to six months).
20. TEMPORARY CASH INVESTMENTS
Temporary cash investments consist of fixed-term deposits denominated in
RMB with original maturities ranging from more than three months to one
year. The effective interest rate is 1.62% (for the years ended December
31, 2004 and 2003: 1.98% to 2.25% and 0.01% to 1.71%) per annum.
21. AUTHORIZED SHARE CAPITAL AND PAID-IN CAPITAL
As of December 31, 2005, the authorized share capital of the Company was
RMB 12,055,383,440 (December 31, 2004: RMB 12,055,383,440), divided into
12,055,383,440 shares (December 31, 2004: 12,055,383,440 shares) of RMB
1.00 each (December 31, 2004: RMB 1.00 each). The issued and fully paid
share capital of the Company as of December 31, 2005 was RMB
12,055,383,440 (December 31, 2004: RMB 12,055,383,440) comprising of
9,000,000,000 domestic shares (December 31, 2004: 9,000,000,000 domestic
shares) and 3,055,383,440 overseas listed foreign shares (December 31,
2004: 3,055,383,440 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.
F-53
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
22. 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% the Company's share capital, any further appropriation
will be optional. The statutory surplus reserve fund can be used to offset
prior years' losses or increase share capital provided that the balance
after such an issue is not less than 25% 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 Directors and
then approved by the shareholders.
For the year ended December 31, 2005, the Board of Directors resolved the
following on March 28, 2006:
(a) to appropriate 10% and 7.5% (for the year ended December 31, 2004: 10%
and 7.5%; for the year ended December 31, 2003: 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 RMB 833 million (for the years ended
December 31, 2004 and 2003: approximately RMB 943 million and RMB 955
million).
(b) to make no appropriation to the discretionary surplus reserve fund
(for the years ended December 31, 2004 and 2003: nil).
In accordance with the Articles of Association, earnings available for
distribution by the Company will be based on the lower 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, 2005 was approximately RMB 3.93 billion
(for the years ended December 31, 2004 and 2003: approximately RMB 4.38
billion and RMB 4.48 billion). The cumulative balance of distributable
profit as of December 31, 2005 was approximately RMB 13.32 billion
(December 31, 2004: approximately RMB 11.17 billion).
F-54
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
23. DIVIDENDS
On March 28, 2006, the Board of Directors proposed a cash dividend of RMB
0.25 per share, totaling approximately RMB 3,014 million. This proposal is
subject to the approval of the shareholders at the annual general meeting.
These financial statements do not reflect this dividends payable, which
will be accounted for in shareholders' equity as an appropriation of
retained earnings for the year ending December 31, 2006.
On May 11, 2005, the shareholders approved the declaration of cash
dividends of RMB 0.25 per ordinary share, totaling approximately RMB 3,014
million in their annual general meeting.
On May 11, 2004, the shareholders approved the declaration of cash
dividends of RMB 0.50 per ordinary share (RMB 0.25 per adjusted ordinary
share after the ordinary shares split), totaling approximately RMB 3,014
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.
F-55
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
24. LONG-TERM LOANS
As of December 31,
----------------------------------------------------------------------------------------------
2005 2004
------------------------------------------------ ------------------------------------------
Original Interest Amount Original Interest Amount
currency rate currency rate
------------- ------------- ------------- ----------- ---------- -------------
'000 '000
Shareholder's
loans
Unsecured
RMB
- Fixed rate 2,800,000 4.05% - 2,800,000 800,000 3.78% - 800,000
5.02% 4.60%
============= =============
Bank loans
Secured
RMB
- Fixed rate 407,000 5.18% -5.76% 407,000 - - -
------------- -------------
Unsecured
RMB
- Fixed rate 21,833,838 3.60% -6.12% 21,833,838 8,679,869 3.60% - 8,679,869
5.76%
US$
- Fixed rate 611,668 5.40% -6.97% 4,936,284 712,037 1.225% - 5,893,180
6.97%
- Variable rate 60,109 2.155%- 485,096 66,437 549,864
3.385%
(euro)
- Fixed rate 73,319 2% 702,376 76,699 2% 863,834
------------- -------------
27,957,594 15,986,747
------------- -------------
28,364,594 15,986,747
============= =============
Other loans
Secured
RMB
- Fixed rate 200,000 5.27% 200,000 - - -
------------- -------------
Unsecured
RMB
- Fixed rate 446,847 4.94% - 6.12% 446,847 434,726 4.94% - 434,726
5.76%
US$
- Variable rate 15,714 2.99% - 126,817 18,571 1.67% - 153,706
3.93% 2.055%
JPY
- Variable rate 1,309,524 5.80% 89,985 1,547,619 5.80% 123,347
------------- -------------
663,649 711,779
------------- -------------
863,649 711,779
============= =============
Certain loans totaling approximately RMB 407 million (December 31, 2004:
nil) are secured by various property, plant and equipment of the Company
and its subsidiaries (Note 35) while another long-term loan of RMB 200
million (December 31, 2004: nil) is secured by tariff collection right.
Please refer to Note 8(c)(ii) for details of certain loans guaranteed by
state-owned enterprises.
F-56
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
24. LONG-TERM LOANS (CONT'D)
The maturity of long-term loans is as follows:
Shareholder's loans Bank loans Other loans
------------------------ ------------------------------ ---------------------------
As of December 31, As of December 31, As of December 31,
------------------------ ------------------------------ ---------------------------
2005 2004 2005 2004 2005 2004
---------- ---------- ------------ -------------- ----------- ------------
One year or less - - 2,653,339 1,225,476 512,640 317,761
More than one year
but not more
than two years - - 2,979,225 1,409,497 153,044 202,212
More than two years
but not more than
three years - - 3,189,885 1,834,237 99,419 42,624
More than three
years but not
more than four
years - - 4,417,885 2,043,237 39,419 42,624
More than four years
but not more than
five years - - 3,386,732 3,621,597 39,419 42,623
More than five years 2,800,000 800,000 11,737,528 5,852,703 19,708 63,935
---------- ---------- ------------ -------------- ----------- ------------
2,800,000 800,000 28,364,594 15,986,747 863,649 711,779
Less: amount due
within one year
included under
current
liabilities - - (2,653,339) (1,225,476) (512,640) (317,761)
---------- ---------- ------------ -------------- ----------- ------------
2,800,000 800,000 25,711,255 14,761,271 351,009 394,018
========== ========== ============ ============== =========== ============
The analysis of the above is as follows:
As of December 31,
-------------------------------------------
2005 2004
-------------------- ------------------
Shareholder's loans
- Not wholly repayable within five years 2,800,000 800,000
==================== ==================
Bank loans
- Wholly repayable within five years 8,429,132 3,926,907
- Not wholly repayable within five years 19,935,462 12,059,840
-------------------- ------------------
28,364,594 15,986,747
==================== ==================
Other loans
- Wholly repayable within five years 686,265 434,726
- Not wholly repayable within five years 177,384 277,053
-------------------- ------------------
863,649 711,779
==================== ==================
F-57
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
25. ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities comprised:
As of December 31,
--------------------------------
2005 2004
--------------- ---------------
Accounts and notes payable 1,231,162 761,689
Amounts received in advance 1,196,352 1,129,598
Payable to contractors for construction 2,430,133 1,592,621
Other payables to contractors 778,488 237,513
Accrued interest 197,637 116,322
Others 1,071,468 713,415
--------------- ---------------
6,905,240 4,551,158
=============== ===============
As of December 31, 2005, the aging analysis of accounts and notes payable
was as follows:
2005 2004
--------------- ---------------
Within 1 year 1,223,004 754,406
Between 1 to 2 year 4,227 2,911
Over 2 years 3,931 4,372
--------------- ---------------
1,231,162 761,689
=============== ===============
26. TAXES PAYABLE
Taxes payable comprises:
As of December 31,
--------------------------------
2005 2004
--------------- ---------------
VAT payable 576,488 527,292
Income tax payable 458,982 407,450
Others 95,814 65,050
--------------- ---------------
1,131,284 999,792
=============== ===============
27. SHORT-TERM BONDS
On May 27, 2005, the Company and its subsidiaries issued RMB 4.5 billion
and RMB 0.5 billion unsecured short-term zero-coupon bonds with maturity of
one year and nine months, respectively, and will be redeemed at par. The
unit face value of such bonds was RMB 100 each and issued prices were RMB
97.16 and RMB 98.00 respectively with effective interest rates of 3.40% per
annum and 3.32% per annum respectively.
28. SHORT-TERM LOANS
Short-term loans denominated in RMB are unsecured, bear interest from 4.30%
to 5.51% per annum for the year ended December 31, 2005 (for the years
ended December 31, 2004 and 2003: 4.30% to 5.02% and 4.54% to 5.05% per
annum) (Note 8(a)(iv) and (vii)).
F-58
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
Deferred income tax assets and liabilities are offset when there is a
legally enforceable right to offset current tax assets against current
tax liabilities and when the deferred income taxes relate to the same
fiscal authority. The offset amounts are as follows:
As of December 31,
------------------------------------------
2005 2004
------------------ -------------------
Deferred income tax assets:
- Deferred income tax assets to be recovered after more
than 12 months 51,874 93,941
- Deferred income tax assets to be recovered within 12
months 12,201 3,598
------------------ -------------------
64,075 97,539
------------------ -------------------
Deferred income tax liabilities:
- Deferred income tax liabilities to be recovered after
more than 12 months (1,056,412) (491,122)
- Deferred income tax liabilities to be recovered within 12
months (101,363) (55,595)
------------------ -------------------
(1,157,775) (546,717)
------------------ -------------------
(1,093,700) (449,178)
================== ===================
The gross movement on the deferred income tax accounts is as follows:
2005 2004
------------------- --------------------
Beginning of the year, as previously reported (449,178) (81,803)
Effect of changes in accounting policy (Note 2(a)) (222,551) -
------------------- --------------------
Beginning of the year, as restated (671,729) (81,803)
Acquisitions (Note 5) (370,730) (399,313)
Charged to statement of income (Note 32) 61,164 31,938
Charged to equity (112,405) -
------------------- --------------------
End of the year (1,093,700) (449,178)
=================== ====================
F-59
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 movements in deferred income tax assets and liabilities during the
year, without taking into consideration the offsetting of balances within
the same tax jurisdictions, are as follows:
Deferred income tax assets:
Provisions
Amortization of for
prepaid land use doubtful Termination
rights debts benefits Others Total
------------------ ------------- ---------------- ------------- -------------
As of January 1, 2004 13,239 3,219 - 4,853 21,311
Acquisitions (Note 5) (2,206) 60,172 17,032 3,878 78,876
(Charged) / Credited to
the statement of
income (221) (2,215) 1,019 (1,231) (2,648)
------------------ ------------- ---------------- ------------- -------------
As of December 31, 2004 10,812 61,176 18,051 7,500 97,539
Acquisitions (Note 5) - 20,942 - 12,533 33,475
(Charged) / Credited to
the statement of
income (221) (13,466) (4,085) 39,240 21,468
------------------ ------------- ---------------- ------------- -------------
As of December 31, 2005 10,591 68,652 13,966 59,273 152,482
================== ============= ================ ============= =============
Deferred income tax liabilities:
Amortization
of goodwill
and Amortization
Fair value negative of land use
gains goodwill rights Depreciation Others Total
--------------- ------------- ------------- ------------- ----------- -----------
As of January 1,
2004 - - - (103,114) - (103,114)
Acquisitions
(Note 5) - - (53,172) (425,017) - (478,189)
(Charged) /
Credited to
the statement
of income - - - 34,586 - 34,586
--------------- ------------- ------------- ------------- ----------- -----------
As of December - - (53,172) (493,545) - (546,717)
31, 2004
Effect of
changes in
accounting
policy (Note
2(a)) - (222,551) - - - (222,551)
--------------- ------------- ------------- ------------- ----------- -----------
As of December - (222,551) (53,172) (493,545) - (769,268)
31, 2004, as
restated
Acquisitions
(Note 5) - - - (404,205) - (404,205)
(Charged) /
Credited to
the statement
of income - 36,330 358 10,372 (7,364) 39,696
Charge to equity* (112,405) - - - - (112,405)
--------------- ------------- ------------- ------------- ----------- -----------
As of December
31, 2005 (112,405) (186,221) (52,814) (887,378) (7,364) (1,246,182)
=============== ============= ============= ============= =========== ===========
* The deferred income tax charged to equity during the year represented
the tax impact of a fair value reserve for an available-for-sale
investment recognized in shareholders' equity (for the years ended
December 31, 2004 and 2003: nil).
F-60
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:
As of December 31,
-------------------------------------------------
2005 2004
---------------------- --------------------
Year of expiry
2005 N/A 111,441
2006 177,197 177,197
2007 71,125 71,125
2008 - -
2009 12,970 -
2010 80,754 N/A
---------------------- --------------------
342,046 359,763
====================== ====================
30. ADDITIONAL FINANCIAL INFORMATION ON BALANCE SHEETS
As of December 31, 2005, the net current liabilities of the Company and
its subsidiaries amounted to approximately RMB 11,044 million (December
31, 2004: approximately RMB 7,079 million). On the same date, total
assets less current liabilities was approximately RMB 76,333 million
(December 31, 2004: approximately RMB 56,047 million).
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%-15% (for the years ended December 31,
2004 and 2003: 7%-11%) of the specified salary amount of the PRC
employees. At the same time, the employees are required to make
contributions out of their payroll equal to the contributions of the
Company and its subsidiaries. The employees are entitled to claim the
entire sum of the fund under certain specified withdrawal circumstances.
For the year ended December 31, 2005, the Company and its subsidiaries
contributed approximately RMB 147 million (for the years ended December
31, 2004 and 2003: approximately RMB 101 million and RMB 77 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, 2005, the housing
benefits provided by the Company and its subsidiaries to the employees
amounted to approximately RMB 39 million (for the years ended December
31, 2004 and 2003: approximately RMB 34 million and RMB 29 million) which
is recorded as other non-current assets 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.
F-61
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
32. INCOME TAX EXPENSES
Income tax expenses comprised:
For the year ended December 31,
-----------------------------------------
2005 2004 2003
------------ ------------ -----------
Restated Restated
Current income tax expense 1,105,461 980,672 1,116,100
Deferred income tax (Note 29) (61,164) (31,938) (18,241)
------------ ------------ -----------
1,044,297 948,734 1,097,859
============ ============ ===========
No Hong Kong profits tax has been provided as there was no estimated
assessable profits in Hong Kong for the year (for the years ended
December 31, 2004 and 2003: nil). The reconciliation of the effective
income tax rate from the statutory income tax rate in the PRC is as
follows:
For the year ended December 31,
-----------------------------------------
2005 2004 2003
------------ ------------ -----------
Restated
Average statutory tax rate 21% 18% 18%
Effect of tax holiday (4%) (2%) (1%)
Others (1%) (1%) (1%)
------------ ------------ -----------
Effective tax rate 16% 15% 16%
============ ============ ===========
The average statutory tax rate for the year ended December 31, 2005
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
acquisitions of domestic enterprises in the current year contributed to
the increase of average statutory tax rate.
The aggregated effect of the tax holiday was approximately RMB 255
million for the year ended December 31, 2005 (for the years ended
December 31, 2004 and 2003: approximately RMB 122 million and RMB 61
million). The granting of further preferential treatments to existing
power plants existed before 2005 and those acquired in 2005 contributed
to such an increase in the percentage.
F-62
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
33. EARNINGS PER SHARE
For the year ended December 31,
--------------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------- -------------------------------- --------------------------------
Profit Profit
attributable Profit attributable
to the attributable to the
equity to the equity
holders of Weighted Per equity Weighted Per holders of Weighted Per
the average share holders of average share the average share
Company shares amount the Company shares amount Company shares amount
----------- ---------- ------- ------------ ----------- ------- ----------- ----------- --------
'000 RMB '000 RMB '000 RMB
Earnings per
Share 4,871,794 12,055,383 0.40 5,323,876 12,055,368 0.44 5,430,408 12,038,228 0.45
Finance costs
in
relation
to
convertible
notes and
the
relevant
put option
(net of
tax effect) - - 22 - 2,746 -
Effect of
assumed
conversion - - - 121 - 17,430
----------- ---------- ------------ ----------- ----------- -----------
Diluted
Earnings
per Share
Net profit
attributable
to
shareholders
plus
effect of
assumed
conversion 4,871,794 12,055,383 0.40 5,323,898 12,055,489 0.44 5,433,154 12,055,658 0.45
========== ========== ========== ========== ========= ==========
Basic
The calculation of basic earnings per share is computed by dividing net
profit attributable to the equity holders of the Company by weighted
average number of outstanding ordinary shares during the year.
Diluted
Diluted earnings per share is calculated by adjusting both net profit
attributable to the equity holders of the Company and weighted average
number of ordinary shares outstanding assuming conversion of all dilutive
potential ordinary shares at the beginning of the year. In 2005, the
Company had no potential ordinary shares (for the years ended December 31,
2004 and 2003: convertible notes, being a category of potential ordinary
shares). The convertible notes in 2003 and 2004 are assumed to have been
converted into ordinary shares and the profit attributable to equity
holders of the Company is adjusted eliminating interest expenses less
respective tax effect for the purpose of calculating diluted earnings per
share for 2003 and 2004.
F-63
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
34. NOTES TO CASH FLOW STATEMENT
(a) Analysis of cash and cash equivalents
As of December 31, 2005, cash and cash equivalents consisted of:
2005 2004 2003
------------ ------------ ------------
Cash in RMB 1,042 621 726
Current deposits
RMB 2,632,493 2,284,551 3,763,015
US$ 14,130 10,359 234,468
JPY - - 130,439
------------ ------------ ------------
Total cash and cash equivalents 2,647,665 2,295,531 4,128,648
============ ============ ============
(b) Undrawn borrowing facilities
As of December 31, 2005, the Company and its subsidiaries had available
unsecured borrowing facilities from banks of approximately RMB 34.86
billion (December 31, 2004: approximately RMB 30 billion) of which
undrawn borrowing facilities amounted to approximately RMB 23 billion
(December 31, 2004: approximately RMB 28 billion). Out of these available
undrawn borrowing facilities, approximately RMB 10 billion (December 31,
2004: approximately RMB 20 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
During the year, there is no material non-cash transaction. The principal
non-cash transactions were the conversion of convertible notes to share
capital in both 2003 and 2004 and the ordinary shares split in 2004.
F-64
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
35. PLEDGE OF ASSETS
As mentioned in Note 24, the Company and its subsidiaries have pledged
various assets as collateral against certain loans. A summary of the
pledged assets is as follows:
As of December 31, 2005
-----------------------
Dongxiguan Hydropower
- Dam 383,423
- Buildings 1,933
- Electric utility plant in service 190,306
- Others 10,485
Kangding Hydropower
- Electric utility plant in service 26,798
Mingtai Hydropower
- Electric utility plant in service 54,394
-----------------------
Total 667,339
=======================
As of December 31, 2004, the Company and its subsidiaries did not have
any asset pledged as collateral.
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, 2005 not provided for in the balance sheet were as
follows:
2005 2004
--------------- ---------------
Contracted but not provided for
- purchase of inventories - 3,560,175
- construction 17,076,451 7,923,087
--------------- ---------------
Sub-total 17,076,451 11,483,262
--------------- ---------------
Authorized but not contracted for
- construction 11,983 236,501
--------------- ---------------
Sub-total 11,983 236,501
--------------- ---------------
Total 17,088,434 11,719,763
=============== ===============
F-65
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)
(a) Capital and operational commitments (cont'd)
(ii) During 2004 and 2005, the Company entered into various long-term
agreements subject to termination only under certain limited
circumstances for the procurement of coal from 2005 to 2009 for use
in power generation. In most cases, these contracts contain
provisions for price escalations and minimum purchase level clauses.
Purchases for the years ended December 31, 2005 and 2004 were
approximately RMB 4,619 million and nil respectively. The future
purchase commitments under contracts are as follows:
As of December 31,
----------------------------------------
2005 2004
------------------ ------------------
2005 N/A 5,768,657
2006 7,771,230 5,941,717
2007 7,771,230 6,119,968
2008 3,826,281 2,801,770
2009 3,826,281 2,801,770
------------------ ------------------
23,195,022 23,433,882
================== ==================
(b) Operating lease commitments
The Company has various operating lease arrangements with HIPDC for land
and buildings (see Note 8(b)). 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
are as follows:
As of December 31,
--------------------------------
2005 2004
-------------- --------------
Land and buildings
- not later than one year 33,495 1,334
- later than one year and not later than two years 7,372 1,334
- later than two years and not later than five years 19,639 4,002
- later than five years 138,058 52,026
-------------- --------------
198,564 58,696
============== ==============
In addition to the commitments above was the commitment on land use rights
of Huaneng Dezhou Power Plant ("Dezhou Power Plant"). The related
operating lease agreement was signed by Dezhou Power Plant and the
relevant land management authorities for the land occupied by Dezhou Phase
I and Phase II, annual rental is approximately RMB 30 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, 2005, the annual rental is approximately RMB 30 million
(for the years ended December 31, 2004 and 2003: approximately RMB 29
million and RMB 30 million).
F-66
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
37. CONTINGENT LIABILITIES
As of December 31,
---------------------------
2005 2004
------------ -------------
Financial guarantees granted to an associate 225,250 305,250
============ =============
Based on historical experience, no claims have been made against the
Company and its subsidiaries since the dates of granting the financial
guarantees described above.
38. 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, political, economic and legal
environment in the PRC, 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, 2005, the Company and its subsidiaries
sold electricity to four major customers (for the years ended December
31, 2004 and 2003: five), each of which amounted to approximately 10% or
more of the operating revenue. In aggregate, these customers accounted
for approximately 57% (for the years ended December 31, 2004 and 2003:
approximately 79% and 77%, respectively) of the operating revenue of the
Company and its subsidiaries.
39. EVENTS AFTER THE BALANCE SHEET DATE
Subsequent to the year end, the Company and its subsidiaries completed
its acquisition of 20% the registered capital of Huaneng Finance at a
consideration of RMB 288 million.
40. COMPARATIVES
Certain prior year comparative figures have been reclassified to conform
to the current year presentation. Specifically certain bank loans have
been reclassified as other long-term loans in the current year.
F-67
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
41. 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 acquisitions 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 Huaneng Changxing Power Plant ("Changxing Power
Plant"), in July, 2002 from 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
Xindian Power Plant in October, 2003 from Huaneng Group;
(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 Yingkou Power
Plant in July, 2004 from HIPDC and / or from Huaneng Group; and
(iv) 60% equity interest in Sichuan Hydropower and 65% equity interest
in Pingliang Power Company in January, 2005 from 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. In prior years, goodwill arising from the
acquisitions in (i) and (ii) above is amortized on a systematic basis to
the statement of income 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. In the current year, goodwill arising from
all the acquisitions above is not amortized and 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
Huaneng Group prior to their acquisitions by the Companies 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 years 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 year 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-68
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
41. US GAAP INFORMATION (CONT'D)
(b) Effect of acquisitions of 44.16% equity interest in Huaiyin Power
Company, 30% additional equity interest in Shidongkou I Power Plant,
5% additional equity interest in Taicang Power Company and 40%
equity interest in Hanfeng Power Company.
The Company acquired from Huaneng Group:
(i) 44.16% equity interest of Huaiyin Power Company in July, 2002;
(ii) 30% additional equity interest of Shidongkou I Power Plant and 5%
additional equity interest of Taicang Power Company in December,
2002; and
(iii) 40% equity interest of 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 acquired companies and power
plants 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. In prior years, goodwill
arising from the acquisitions of Shidongkou I Power Plant, the Taicang
Power Company and the Huaiyin Power Company was amortized on a systematic
basis to the statement of income over its useful economic life, being the
remaining weighted average useful life of the acquired depreciable or
amortizable assets, while goodwill arising from the acquisitions of
Hanfeng Power Company was tested annually for impairment and carried at
cost less accumulated impairment losses. In the current year, goodwill
arising from the acquisitions is not amortized and is tested annually for
impairment and carried at cost less accumulated impairment losses.
Under US GAAP, upon completion of the above acquisitions, Huaneng Group's
proportionate share in the net assets of Huaiyin Power Company,
Shidongkou I Power Plant, Taicang Power Company and 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-69
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
41. 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. In prior years, the excess of the
fair value of the entire net assets acquired over the total cost of the
acquisition was recorded as negative goodwill. In the current year, the
ending balance of negative goodwill brought forward from 2004 is offset
against opening retained earnings according to IFRS 3. 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% 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 originally recognized 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 Huaneng Group as described above and also that the
negative goodwill under IFRS is offset against opening retained earnings
in the current year whereas, for US GAAP purposes, it was a reduction to
the value of 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) 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 used for obtaining regulatory assets. An adjustment is
made to reverse the capitalized interest on general borrowings net of the
related depreciation on property, plant and equipment.
F-70
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
41. US GAAP INFORMATION (CONT'D)
(f) 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 statement of income 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.
There is no such a GAAP difference in the current year.
(g) Deferred income tax impact
This represents the deferred income tax effect on the above GAAP
differences where applicable.
(h) US regulatory accounting
Under US GAAP, Statement of Financial Accounting Standard ("SFAS") No. 71
"Accounting for the Effects of Certain Types of Regulation" 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 year in which various costs are
included in the statements of income 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.
As of December 31, 2005, the Company and its subsidiaries believe that 10
of their power plants (December 31, 2004 and 2003: 10 and 12 power plants
respectively) 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.
F-71
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
41. US GAAP INFORMATION (CONT'D)
(h) US regulatory accounting (cont'd)
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 (pound)- 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
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, 2004 and 2005, 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
policy of the Company and its subsidiaries 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.
(i) Impairment of long-lived assets
Impairment of long-lived assets (excluding goodwill)
The carrying amount of long-lived asset (excluding indefinite lived
assets and 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 statement of income 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.
Goodwill
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.
F-72
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
41. US GAAP INFORMATION (CONT'D)
(i) Impairment of long-lived assets (cont'd)
Goodwill (cont'd)
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.
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,
-----------------------------------------------
Note 2005 2004
------ --------------------- ------------------------
Net assets under IFRS 46,144,187 36,265,519
Minority interests as of January 1, as
previously separately reported i - 3,266,393
--------------------- ------------------------
Net assets under IFRS, as restated 46,144,187 39,531,912
Minority interests i (6,106,713) (3,266,393)
Impact of US GAAP adjustments Note ii:
Effect of acquisition of Sichuan Hydropower and
Pingliang Power Company (a) (1,014,585) 1,350,323
Effect of acquisition of Luohuang Power Company,
Yueyang Power Company, Jinggangshan Power
Plant and Yingkou Power Plant (a) (1,837,845) (2,007,383)
Effect of acquisition of Qinbei Power Company,
Yushe Power Company and Xindian Power Plant (a) (342,555) (369,252)
Effect of acquisition of Shidongkou I Power
Plant, Taicang Power Company and Changxing
Power Plant (a) (472,473) (775,592)
Effect of acquisition of 40% equity interests
in Hanfeng Power Company, 30% additional
equity interests in Shidongkou I
Power Plant, 5% additional equity interests
in Taicang Power Company and
44.16% equity interests in
Huaiyin Power Company (b) (251,615) (271,167)
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) (1,671,048) (348,364)
Difference in capitalization of borrowing costs (e) (109,227) (87,424)
Reversal of goodwill amortization
- Reversal of goodwill amortization of
equity investment in SEG (f) 136,599 136,599
- Reversal of goodwill amortization of
investment in Huaiyin Power Company (f) 34,740 34,740
Reversal of impairment loss on property, plant
and equipment (i) 30,080 -
Applicable deferred income tax impact on the
above GAAP differences (g) 1,054,142 595,570
---------------------- ------------------------
Net assets under US GAAP Note ii 36,456,609 35,386,491
====================== ========================
F-73
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
41. US GAAP INFORMATION (CONT'D)
Net profit
-------------------------------------------------
For the year ended December 31,
-------------------------------------------------
Note 2005 2004 2003
------ --------------- -------------- ---------------
Net profit under IFRS 5,547,911 5,323,876 5,430,408
Minority interests for the year ended December 31,
2004 and 2003, as previously separately reported
as minority interest i - 257,053 183,894
--------------- -------------- ---------------
Net profit under IFRS, as restated 5,547,911 5,580,929 5,614,302
Profit attributable to minority interests i (676,117) (257,053) (183,894)
Impact of US GAAP adjustments ii
Effect of acquisition of Sichuan Hydropower and
Pingliang Power Company (a) 30,823 341,914 187,203
Effect of acquisition of Luohuang Power Company,
Yueyang Power Company, Jinggangshan Power
Plant, and Yingkou Power Plant (a) 169,538 278,027 335,105
Effect of acquisition of Qinbei Power Company,
Yushe Power Company and Xindian Power Plant (a) 26,697 48,116 13,109
Effect of acquisition of Shidongkou I Power
Plant, Taicang Power Company and Changxing
Power Plant (a) 303,119 110,524 112,636
Effect of acquisition of 40% equity interest in
Hanfeng Power Company,
30% additional equity interest =
in Shidongkou I Power Plant, 5%
additional equity interest in Taicang
Power Company and 44.16% equity
interest in Huaiyin Power Company (b) 19,552 25,550 19,347
Recording housing benefits provided by HIPDC (c) (26,152) (26,152) (26,152)
Difference in accounting treatment for
acquisition of Shandong Huaneng (d) 160,986 (87,091) (87,091)
Difference in capitalization of borrowing costs (e) (21,803) 6,466 (5,478)
Reversal of goodwill amortization
- Reversal of goodwill amortization of
equity investment in SEG (f) - 81,960 54,639
- Reversal of goodwill amortization of
investment in Huaiyin Power Company (f) - 17,370 17,370
Reversal of impairment loss on property, plant
and equipment (i) 30,080 - -
Applicable deferred income tax impact on the
GAAP differences (g) (134,709) (89,783) (177,950)
Others - 8,652 25,434
--------------- -------------- ---------------
Net profit under US GAAP 5,429,925 6,039,429 5,898,580
=============== ============== ===============
(Note i) Consistent with disclosure requirement of revised IAS 1 -
Presentation of Financial Statements, minority interests in the
consolidated net assets and net profit under IFRS for prior year
should be included as a portion of total equity and total profit
attributable to shareholders respectively.
(Note ii) Consistent with applying the accounting treatment under US
GAAP as described in Note (a) above, the consolidated net assets
and net profit under US GAAP for prior years presented have been
retroactively restated as if the current structure and operations
resulted from the acquisitions of Xindian Power Plant, Qinbei
Power Company, Yushe Power Company, Jinggangshan Power Plant,
Yingkou Power Plant, Yueyang Power Company, Luohuang Power
Company, Sichuan Hydropower and Pingliang Power Company had been
in existence since the beginning of the earliest year presented.
F-74
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMBor US$ unless otherwise stated)
41. 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, 2004 and 2005, and the related
condensed combined statements of income, changes in shareholders' equity,
cash flows and comprehensive income for each of the years in the
three-year period ended December 31, 2005, 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,
-------------------------------------------------------
2005 2004
----------------------------------- ------------------
RMB US$ RMB
ASSETS
Non-current assets
Property, plant and equipment, net 74,554,743 9,238,277 64,561,441
Investments in associates 4,314,634 534,638 4,037,852
Land use rights 1,150,420 142,552 1,029,167
Available-for-investment 1,033,225 128,030 254,990
Other non-current assets 336,379 41,680 382,077
Deferred income tax assets 200,076 24,792 219,525
Goodwill 136,053 16,859 78,448
----------------- ---------------- ------------------
Total non-current assets 81,725,530 10,126,828 70,563,500
----------------- ---------------- ------------------
Current assets
Inventories, net 2,311,357 286,406 1,486,206
Other receivables and assets, net 855,952 106,063 861,139
Accounts receivable, net 6,022,426 746,255 5,542,775
Due from HIPDC 21,847 2,707 -
Due from other related parties - - 14,970
Current portion of deferred
income tax assets 87,049 10,787 94,966
Restricted cash 201,276 24,941 202,688
Temporary cash investments 2,652 329 12,641
Cash and cash equivalents 2,647,665 328,079 2,862,235
----------------- ---------------- ------------------
Total current assets 12,150,224 1,505,567 11,077,620
----------------- ---------------- ------------------
Total assets 93,875,754 11,632,395 81,641,120
================= ================ ==================
F-75
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMBor US$ unless otherwise stated)
41. US GAAP INFORMATION (CONT'D)
Condensed combined balance sheets (cont'd)
As of December 31,
--------------------------------------------------------
2005 2004
------------------------------------- ------------------
RMB US$ RMB
EQUITY AND LIABILITIES
Paid-in capital 12,055,383 1,493,815 12,055,383
Additional paid-in capital and other
additional capital 17,337,991 2,148,397 17,295,916
Retained earnings 6,426,271 796,296 6,035,192
Accumulated other comprehensive income 636,964 78,928 -
------------------ ------------------ ------------------
Shareholders' equity 36,456,609 4,517,436 35,386,491
------------------ ------------------ ------------------
Minority interests 4,954,726 613,953 4,126,923
------------------ ------------------ ------------------
NON-CURRENT LIABILITIES
Long-term loans from a shareholder 2,800,000 346,955 800,000
Long-term bank loans 25,711,255 3,185,950 21,643,541
Other long-term loans 351,009 43,494 585,124
Deferred income tax liabilities 319,324 39,568 168,101
Other non-current liabilities 168,328 20,859 89,966
------------------ ------------------ ------------------
Total non-current liabilities 29,349,916 3,636,826 23,286,732
------------------ ------------------ ------------------
CURRENT LIABILITIES
Accounts payable and other liabilities 6,905,240 855,647 5,134,783
Dividends payable to shareholders of the
Company - - 8,250
Taxes payable 1,131,284 140,180 1,210,153
Due to Huaneng Group 50,720 6,285 62,919
Due to HIPDC 53,230 6,596 1,258,799
Due to other related parties 29,620 3,670 13,426
Staff welfare and bonus payables 251,949 31,220 275,602
Short-term bonds 4,938,250 611,912 -
Short-term loans 6,580,870 815,453 8,593,300
Current portion of long-term bank loans 2,653,339 328,782 1,971,021
Current portion of other long-term loans 512,640 63,523 312,721
Current portion of deferred income tax
liabilities 7,361 912 -
------------------ ------------------ ------------------
Total current liabilities 23,114,503 2,864,180 18,840,974
------------------ ------------------ ------------------
Total equity and liabilities 93,875,754 11,632,395 81,641,120
================== ================== ==================
F-76
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMBor US$ unless otherwise stated)
41. US GAAP INFORMATION (CONT'D)
Condensed combined statements of income
For the year ended December 31,
----------------------------------------------------------------------
2005 2004 2003
--------------------------------- ----------------- ----------------
RMB US$ RMB RMB
Operating revenue 40,190,004 4,980,051 35,181,649 30,494,213
Sales tax (113,475) (14,061) (72,933) (67,367)
Operating expenses
Fuel (21,202,952) (2,627,314) (16,556,803) (11,403,228)
Maintenance (1,165,374) (144,405) (1,035,045) (1,194,994)
Depreciation (5,696,142) (705,824) (5,413,807) (5,626,729)
Labor (2,513,457) (311,449) (2,178,940) (1,856,980)
Service fees to HIPDC (141,102) (17,484) (133,609) (230,792)
Income tax expenses (1,179,007) (146,094) (1,264,640) (1,408,125)
Others (1,438,635) (178,266) (946,782) (1,111,246)
---------------- -------------- ----------------- ----------------
Total operating expenses (33,336,669) (4,130,836) (27,529,626) (22,832,094)
---------------- -------------- ----------------- ----------------
Income before financial expenses 6,739,860 835,154 7,579,090 7,594,752
---------------- -------------- ----------------- ----------------
Interest income 53,685 6,652 58,986 68,060
Interest expenses (1,457,490) (180,601) (1,235,426) (1,382,723)
Bank charges and exchange gain /
(losses), net 241,691 29,948 (107,492) (198,257)
---------------- -------------- ----------------- ----------------
Total financial expenses, net (1,162,114) (144,001) (1,283,932) (1,512,920)
---------------- -------------- ----------------- ----------------
Share of profit of associates 652,691 80,877 465,440 266,761
Minority interests (800,512) (99,194) (721,169) (450,013)
---------------- -------------- ----------------- ----------------
Net profit attributable to the shareholders 5,429,925 672,836 6,039,429 5,898,580
================ ============== ================= ================
Basic earnings per ordinary share under US
GAAP (RMB) (Notes i, ii) 0.45 0.50 0.49
================ ================= ================
Basic earnings per American Depository
Shares ("ADS") under US GAAP (RMB)
(Notes i, ii) 18.02 20.04 19.60
================ ================= ================
Diluted earnings per ordinary share under
US GAAP (RMB) (Notes i, ii) 0.45 0.50 0.49
================ ================= ================
Diluted earnings per ADS under US GAAP
(RMB) (Notes i, ii) 18.02 20.02 19.57
================ ================= ================
(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
outstanding 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
proportional change in the number of ordinary shares and
equivalent ADS outstanding for all the periods presented to
reflect the stock split.
F-77
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
41. US GAAP INFORMATION (CONT'D)
Condensed combined statements of changes in shareholders' equity
Balance as of January 1, 2003 31,627,429
Dividends relating to 2002 (2,049,408)
Net profit attributable to shareholders for the year ended
December 31, 2003 5,898,580
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 Qinbei Power
Company, Yushe Power Company and Xindian Power Plant (506,664)
Contribution from Huaneng Group 198,327
Distribution to HIPDC 454,927
Capital contribution from HIPDC arising from housing benefits
provided by HIPDC 26,152
---------------------
Balance as of December 31, 2003 35,814,891
Dividends relating to 2003 (3,013,836)
Net profit attributable to shareholders for the year ended
December 31, 2004 6,039,429
Conversion of convertible notes to new ordinary shares 124
Net deemed capital distribution to Huaneng Group arising from
the acquisition of Jinggangshan Power Plant (573,534)
Net deemed capital distribution to HIPDC arising from the acquisition of
Luohuang Power Company, Yueyang Power Company
and Yingkou Power Plant (2,564,000)
Contribution from Huaneng Group (354,470)
Contribution from HIPDC 11,735
Capital contribution from HIPDC arising from housing benefits
provided by HIPDC 26,152
---------------------
Balance as of December 31, 2004 35,386,491
Dividends relating to 2004 (3,013,846)
Net profit attributable to shareholders for the year ended
December 31, 2005 5,429,925
Net deemed capital distribution to Huaneng Group arising from the acquisitions
of Sichuan Hydropower and Pingliang Power
Company (2,025,000)
Capital contribution from HIPDC arising from housing benefits
provided by HIPDC 26,152
Dividend waived by a shareholder of an associate 15,923
Fair value gains from an available-for-sale investment, net of
tax 636,964
---------------------
Balance as of December 31, 2005 36,456,609
=====================
F-78
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
41. US GAAP INFORMATION (CONT'D)
Condensed combined statements of cash flows
For the year ended December 31,
-------------------------------------------------------
2005 2004 2003
------------------ ---------------- ------------------
Net cash provided by operating activities 9,313,657 11,028,971 12,284,122
Net cash used in investing activities (14,587,880) (13,067,191) (7,708,774)
Net cash provided by / (used in) financing
activities 5,059,653 226,001 (3,753,866)
------------------ ---------------- ------------------
Net (decrease) / increase in cash and cash
equivalents (214,570) (1,812,219) 821,482
Cash and cash equivalents, beginning of the
year 2,862,235 4,674,454 3,852,972
------------------ ---------------- ------------------
Cash and cash equivalents, end of the year 2,647,665 2,862,235 4,674,454
================== ================ ==================
Statement of comprehensive income
For the year
ended December
31, 2005
--------------------
Net profit attributable to the shareholders 5,429,925
--------------------
Unrealized holding gains arising during the year 749,369
Related income tax expense (112,405)
--------------------
Other comprehensive income, net of tax 636,964
--------------------
Comprehensive income 6,066,889
====================
For the years ended December 31, 2004 and 2003, apart from net income,
there was no other comprehensive income which should be included in the
statements of comprehensive income.
New accounting pronouncements
In 2004 and 2005, the Financial Accounting Standard Board ("FASB") issued
SFAS 153, Exchange of Nonmonetary Assets, and SFAS 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and
FASB Statement No. 3.
SFAS 153 amends APB Opinion No. 29 on Accounting for Nonmonetary
Transactions, to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception of
exchanges of nonmonetary assets that do not have commercial substance. It
defines a nonmonetary 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 nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Management
considered the effects of adoption SFAS 153 and does not expect any
material impact on the financial statements.
F-79
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
41. US GAAP INFORMATION (CONT'D)
New accounting pronouncements (cont'd)
SFAS 154 requires retrospective application to prior periods' financial
statements of changes in accounting principle and applies to all
voluntary changes in accounting principle instead of including in net
income of the period of the change the cumulative effect of changing to
the new accounting principle governed previously by APB Opinion No. 20
and SFAS 3, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change, while
SFAS 154 states the guidance for dealing with the impracticable situation
above. SFAS 154 requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change.
Indirect effects of a change in accounting principle should be recognized
in the period of the accounting change. SFAS 154 also requires that a
change in depreciation, amortization, or depletion method for long-lived,
nonfinancial assets be accounted for as a change in accounting estimate
effected by a change in accounting principle. SFAS 154 shall be effective
for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Management considered the effects of
adopting SFAS 154 and does not expect any material impact on the
financial statement.
F-80