HUANENG POWER INTERNATIONAL, INC.
[LOGO GRAPHIC OMITTED]
Annual Report On Form 20-F
2006
As filed with the Securities and Exchange Commission on April 16, 2007
================================================================================
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, 2006
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
-------------------------------
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 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
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 [ ]
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 [ ] No |X|
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.
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........................................................17
ITEM 4A Unresolved Staff Comments......................................................................29
ITEM 5 Operating and financial review and prospects...................................................29
A. General...............................................................................29
B. Operating results.....................................................................30
C. Financial position....................................................................38
D. Liquidity and cash resources..........................................................40
E. Trend information.....................................................................44
F. Employee benefits.....................................................................45
G. Guarantee on loans and restricted assets..............................................45
H. Off-balance sheet arrangements........................................................45
I. Performance of significant investments and their prospects............................45
J. Tabular disclosure of contratual obligations and commercial commitments...............46
ITEM 6 Directors, Senior Management and Employees.....................................................46
A. Directors, members of the supervisory committee and senior management.................46
B. Compensation for directors, supervisors and executive officers........................50
C. Board practice........................................................................51
D. Employees.............................................................................52
E. Share ownership.......................................................................53
ITEM 7 Major Shareholders and Related Party Transactions..............................................53
A. Major shareholders....................................................................53
B. Related party transactions............................................................54
C. Interests of experts and counsel......................................................63
ITEM 8 Financial Information..........................................................................63
A. Consolidated statements and other financial information...............................63
B. Significant changes...................................................................63
ITEM 9 The Offer and Listing..........................................................................64
A. Offer and listing details and markets.................................................64
ITEM 10 Additional Information.........................................................................65
A. Share capital.........................................................................65
B. Memorandum and articles of association................................................65
C. Material contracts....................................................................71
D. Exchange controls.....................................................................71
E. Taxation..............................................................................72
F. Dividends and paying agents...........................................................76
G. Statement by experts..................................................................76
H. Documents on display..................................................................77
I. Subsidiary information................................................................77
J. Comparison of New York Stock Exchange corporate governance rules and
China corporate governance rules for listed companies.................................77
ITEM 11 Quantitative and Qualitative Disclosures About Market Risk ....................................79
ITEM 12 Description of Securities Other than Equity Securities.........................................81
PART II.
ITEM 13 Defaults, Dividend Arrearages and Delinquencies................................................81
ITEM 14 Material Modifications to the Rights of Security Holders and Use of Proceeds...................81
i
ITEM 15 Controls and Procedures........................................................................81
ITEM 16 Reserved ......................................................................................82
ITEM 16A Audit Committee Financial Expert...............................................................82
ITEM 16B Code of Ethics.................................................................................82
ITEM 16C Principal Accountant Fees and Services.........................................................82
ITEM 16D Exemptions from the Listing Standards for Audit Committees.....................................83
ITEM 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers.........................83
ITEM 17 Financial Statements...........................................................................83
ITEM 18 Financial Statements...........................................................................84
ITEM 19 Exhibit .......................................................................................84
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, 2006 of US$1.00 to
RMB 7.8087. 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 tradable shares issued to domestic
shareholders.
References to the "central government" refer to the national government of the
PRC and its various ministries, agencies and commissions.
References to the "Company", "we", "our" and "us" include, unless the context
requires otherwise, Huaneng Power International, Inc. and the operations of our
power plants and our construction 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 "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 for the amount of coals 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 "power companies" or "our power companies" are to the power
companies in which we hold minority 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.
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.
MWh Megawatt-hour. One thousand kilowatt-hours.
peak load The maximum demand on a power plant or power
system during a specific period of time.
iv
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, 2006 and
2005 and the consolidated income statement and cash flow data for each of the
years in the three-year period ended December 31, 2006 are derived from the
historical financial statements included herein. Our consolidated balance sheet
data as of December 31, 2004, 2003 and 2002 and income statement and cash flow
data for each of the years in the two-year period ended December 31, 2003, 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. 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 38 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 impact on
the net income for each of the years in the three-year period ended December 31,
2006 and the equity as of December 31, 2006 and 2005 are set forth in Note 38 to
the Financial Statements. The Selected Financial Data may not be indicative of
future earnings, cash flows or financial position.
Year Ended December 31,
----------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2006
---- ---- ---- ---- ---- ----
RMB and US Dollars in thousands (RMB) (RMB) (RMB) (RMB) (RMB) (US$)(1)
except per share data
INCOME STATEMENT DATA
IFRS
Operating revenue................. 18,512,585 23,433,572 30,150,602 40,190,004 44,301,403 5,673,339
Sales tax.........................
(38,116) (45,335) (32,324) (113,475) (148,057) (18,960)
Operating expenses............... (12,896,455) (16,315,075) (23,200,088) (33,067,563) (35,594,935) (4,558,369)
----------- ----------- ----------- ----------- ----------- ----------
Profit from operations............ 5,578,014 7,073,162 6,918,190 7,008,966 8,558,411 1,096,010
Total financial expenses, net..... (510,265) (544,285) (739,784) (1,124,391) (1,471,304) (188,419)
1
Year Ended December 31,
----------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2006
---- ---- ---- ---- ---- ----
RMB and US Dollars in thousands (RMB) (RMB) (RMB) (RMB) (RMB) (US$)(1)
except per share data
INCOME STATEMENT DATA (Cont'd)
IFRS
Investment income, net............ 1,288 10,705 20,554 60,872 128,595 16,468
Share of (loss) / profit of
associates...................... (16,204) 160,509 312,037 644,376 790,629 101,250
Other income, net................. -- 12,070 18,666 2,385 10,442 1,337
--------- --------- --------- --------- --------- ---------
Profit before tax................. 5,052,833 6,712,161 6,529,663 6,592,208 8,016,773 1,026,646
Income tax expenses............... (975,795) (1,097,859) (948,734) (1,044,297) (1,127,699) (144,415)
--------- ---------- --------- ---------- ---------- ---------
Profit for the year............... 4,077,038 5,614,302 5,580,929 5,547,911 6,889,074 882,231
========= ========== ========== ========== ========== =========
Attributable to:
Equity holders of the Company..... 3,921,004 5,430,408 5,323,876 4,871,794 6,071,154 777,486
Minority interests................ 156,034 183,894 257,053 676,117 817,920 104,745
--------- ---------- --------- ---------- ---------- ---------
Net profit........................ 4,077,038 5,614,302 5,580,929 5,547,911 6,889,074 882,231
========= ========== ========== ========== ========== =========
Basic earnings per share.......... 0.33 0.45 0.44 0.40 0.50 0.06
Fully diluted earnings per share.. 0.33 0.45 0.44 0.40 0.50 0.06
US GAAP(2)
Operating revenue................. 30,494,213 35,181,649 40,190,004 44,301,403 5,673,339
Net profit attributable to
shareholders.................... 5,898,580 6,039,429 5,429,925 6,394,686 818,918
Basic earnings per share.......... 0.49 0.50 0.45 0.53 0.07
Fully diluted earnings per share.. 0.49 0.50 0.45 0.53 0.07
As of December 31,
----------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2006
---- ---- ---- ---- ---- ----
RMB and US Dollars in thousands (RMB) (RMB) (RMB) (RMB) (RMB) (US$)(1)
except per share data
BALANCE SHEET DATA
IFRS
Current assets.................. 7,685,441 8,303,195 9,653,653 12,063,175 13,226,326 1,693,794
Property, plant and equipment,
net.......................... 41,103,468 42,658,365 57,780,410 78,997,297 90,444,225 11,582,495
Available-for-sale investment... 254,990 254,990 254,990 1,033,225 1,458,759 186,812
Investments in associates....... 200,960 2,766,031 4,328,307 4,593,984 5,418,213 693,869
Land use rights and other
non-current assets........... 1,067,838 1,037,859 1,771,916 2,016,144 2,282,884 292,350
Deferred income tax assets...... -- 21,311 97,539 64,075 98,429 12,605
Goodwill........................ 126,560 298,876 376,726 671,796 671,796 86,032
Less: negative goodwill......... (1,978,227) (1,730,949) (1,483,670) -- -- --
----------- ----------- ----------- ----------- ----------- ----------
Total assets.................... 48,461,030 53,609,678 72,779,871 99,439,696 113,600,632 14,547,957
----------- ----------- ----------- ----------- ----------- ----------
Current liabilities............. (7,652,216) (9,242,408) (16,732,953) (23,107,142) (26,504,494) (3,394,226)
Non-current liabilities......... (9,482,050) (9,256,718) (16,515,006) (30,188,367) (36,487,446) (4,672,666)
----------- ----------- ----------- ----------- ----------- ----------
Total liabilities............... (17,134,266) (18,499,126) (33,247,959) (53,295,509) (62,991,940) (8,066,892)
----------- ----------- ----------- ----------- ----------- ----------
Net assets...................... 31,326,764 35,110,552 39,531,912 46,144,187 50,608,692 6,481,065
=========== =========== =========== =========== =========== ==========
Total equity.................... 31,326,764 35,110,552 39,531,912 46,144,187 50,608,692 6,481,065
=========== =========== =========== =========== =========== ==========
US GAAP (2)
Total assets.................... 81,641,120 93,875,754 108,623,537 13,910,579
Total liabilities............... (42,127,706) (52,464,419) (62,255,777) (7,972,618)
Minority interests.............. (4,126,923) (4,954,726) (6,118,089) (783,496)
----------- ----------- ----------- ----------
Net assets...................... 35,386,491 36,456,609 40,249,671 5,154,465
=========== =========== =========== ==========
Shareholders' equity............ 35,386,491 36,456,609 40,249,671 5,154,465
=========== =========== =========== ==========
2
Year Ended December 31,
----------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2006
---- ---- ---- ---- ---- ----
RMB and US Dollars in thousands (RMB) (RMB) (RMB) (RMB) (RMB) (US$)(1)
except per share data
CASH FLOW DATA
IFRS
Purchase of property,
plant and equipment.. (1,594,210) (3,606,704) (9,877,553) (13,842,293) (15,998,575) (2,048,814)
Net cash provided by
operating activities. 7,079,718 9,533,289 8,162,701 8,680,850 11,494,713 1,483,026
Net cash (used in) /
provided by
investing activities. 1,074,101 (5,225,080) (13,650,285) (15,413,369) (15,915,542) (2,038,181)
Net cash (used in) /
provided by
financing activities. (7,324,354) (3,182,162) 3,654,467 7,084,653 4,980,356 637,796
US GAAP (2)
Purchase of property,
plant and equipment. (6,799,560) (11,876,838) (14,491,798) (16,890,223) (2,163,001)
Net cash provided by
operating activities. 12,284,122 11,028,971 9,313,657 12,386,361 1,586,226
Net cash used in
investing activities (7,708,774) (13,067,191) (14,587,880) (16,807,190) (2,152,367)
Net cash (used in) /
provided by
financing activities (3,753,866) 226,001 5,059,653 4,980,356 637,796
Other Financial Data
IFRS and US GAAP
Dividend declared per
share............... 0.17 0.25 0.25 0.25 0.28 0.04
Number of ordinary
shares ('000)........ 12,000,548 12,055,342 12,055,383 12,055,383 12,055,383 12,055,383
_____________
(1) The US Dollar data has been translated from RMB solely for convenience
at the PBOC Rate on December 31, 2006 of US$1.00 to RMB 7.8087. See
"Item 10 Additional Information -- Exchange control for more
information on exchange rates between RMB and US Dollars".
(2) The amounts as of December 31, 2006, 2005 and 2004 and for each of the
years in the four-year period ended December 31, 2006 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. The information as of December 31, 2003 and
2002 and for the year ended December 31, 2002 is omitted because such
selected financial data cannot be provided on a restated basis without
unreasonable effort.
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 on-grid power tariffs 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 grid regulations in virtually all aspects
of our operations, including the amount and timing of electricity generations,
the setting of on-grid tariffs, the performance of scheduled maintenance and
compliance with power grid control and dispatch directives and environment
protection. There can be no assurance that these regulations will not change in
the future in a manner which could adversely affect our business.
3
The on-grid tariffs for our planned output are subject to a review
and approval process involving the NDRC and the relevant provincial government.
Prior to April 2001, the on-grid tariffs of our planned output were designed to
enable us to recover all operating and debt servicing costs and to earn a fixed
rate of return. Since April 2001, however, the PRC government has started to
gradually implement a new on-grid tariff-setting mechanism based on the
operating terms of power plants as well as the average costs of comparable
power plants. Pursuant to the NDRC circular issued in June 2004, the on-grid
tariffs for our newly built power generating units commencing operation from
June 2004 have been set on the basis of the average social cost of comparable
units adding tax and reasonable return in the regional grid. Any future
reductions in our tariffs, or our inability to raise tariffs (for example, to
cover any increased costs we may have to incur) as a result of the new on-grid
tariff-setting mechanism, may adversely affect our revenue and profit.
In addition, the PRC government started in 1999 to experiment with
a program to effect power sales through competitive bidding in some of the
provinces where we operate our power plants. The on-grid tariffs for power sold
through competitive bidding are generally lower than the pre-approved on-grid
tariffs for planned output. Although the power sales through competitive bidding
in the last few years constituted only a small fraction of our total output, the
PRC government is in the process of gradually expanding the program with a view
to create a market-oriented electric power industry. Any increased power sales
through competitive bidding may reduce our on-grid tariffs and adversely affect
our revenue and profits.
The on-grid tariff-setting mechanism is evolving with the reforming
of the PRC electric power industry. There is no assurance that it will not
change in a manner which could adversely affect our business and results of
operations. 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 directly hold 8.75% and 42.03%
of our total outstanding shares respectively. As Huaneng Group is HIPDC's
parent company, they may exert effective control over 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.
4
Disruption in coal supply and its transportation as well as increase in coal
price may adversely affect the normal operation of our power plants
Almost all of our power plants are fueled by coal. We have obtained
coal for our power plants through a combination of purchases pursuant to the key
contracts and purchases in the open market. Although we have received sufficient
and timely coal supply and transportation services for our operations and have
not experienced shutdowns or reduced electricity generation caused by inadequate
coal 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.
In addition, our results of operation are sensitive to the
fluctuation of coal 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 a coal-electricity price linkage mechanism to
allow power generation companies to increase their power tariffs to respond to
the increase of coal price, the implementation of the mechanism involves
significant uncertainties. There is no assurance that we will be able to adjust
our power tariff to pass on the increase of coal price to our customers. For a
detailed discussion of the coal-electricity 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 insurance coverage that is typical in the
electric power industry in the PRC and in amounts that we believe to be
adequate. Such insurance, however, may not provide adequate coverage in
5
certain circumstances. In particular, in accordance with industry practice in
the PRC, we do not generally maintain business interruption insurance, or any of
third party liability insurance other than that included in construction all
risks insurance or erection all risks insurance to cover claims in respect of
bodily injury or property or environment damage arising from accidents on our
property or relating to our operation. Although each of our power plants has a
good record of safe operation, there is no assurance that the afore-mentioned
accidents will not occur in the future.
If the PRC government adopts new and stricter environmental laws and additional
capital expenditure is required for complying with such laws, the operation of
our power plants may be adversely affected and we may be required to make more
investment in compliance with these environmental laws
Our power plants, like all coal-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.
Our business benefits from certain PRC government tax incentives. Expiration
of, or changes to, the incentives could adversely affect our operating results
According to the relevant income tax law, foreign invested
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 foreign invested enterprises investing in energy and
transportation infrastructure businesses, a reduced enterprise income tax rate
of 15% (after the approval of State Tax Bureau) is applicable across the
country. We applied this rule to all of our wholly owned operating power plants
after obtaining the approval of State Tax Bureau. In addition, certain power
plants are exempted from enterprise 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. The statutory income tax is
assessed individually based on each of their results of operations.
On March 16, 2007, the Corporate Income Tax Law of PRC, or the New
Corporate Income Tax Law, was enacted, which will become effective on January
1, 2008. The New Corporate Income Tax Law will impose a uniform income tax rate
of 25% for domestic enterprises and foreign invested enterprises. Therefore,
our power plants currently subject to a 33% income tax rate may be subject to a
lower tax rate of 25% starting on January 1, 2008. With regard to our power
plants currently entitled to a reduced enterprise income tax rate of 15%, their
effective tax rate may be gradually increased to 25% within a five-year
transition period commencing on January 1, 2008. Accordingly, the effective tax
rate of our wholly-owned power plants may increase over time. In addition,
although our power plants currently entitled to tax exemption and reduction
under the current income tax laws and regulations may continue to enjoy such
preferential treatments until the expiration of the same, newly established
power plants may not be able to benefit from such tax incentives after the New
Corporate Income Tax Law becomes effective, unless they can satisfy specific
qualifications, if any, provided by then effective laws and regulations on
preferential tax treatment.
6
The State Council of PRC is in the process of formulating detailed
rules and regulations for the implementation of the New Corporate Income Tax
Law. Given that there are a number of uncertain factors involved in the
implementation of the New Corporate Income Tax Law, we are currently unable to
accurately evaluate its impact on us. However, the increase of applicable
income tax rate and elimination of the preferential tax treatment with regard
to certain of our power plants may adversely affect our financial condition and
results of operations. Moreover, our historical operating results may not be
indicative of our operating results for future periods as a result of the
expiration of the tax benefits currently available to us.]
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 devaluation,
our debt servicing cost will increase and the return to our overseas investors
may decrease.
Forward-looking information may prove inaccurate
This document contains certain forward-looking statements and
information relating to us that are based on the beliefs of our management as
well as assumptions made by and information currently available to our
management. When used in this document, the words "anticipate," "believe,"
"estimate," "expect," "going forward" and similar expressions, as they relate to
us or our management, are intended to identify forward-looking statement. Such
statements reflect the current views of our management with respect to future
events and are subject to certain risks, uncertainties and assumptions,
including the risk factors described in this document. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected. We do not intend to update these
forward-looking statements.
Risks relating to the PRC
China's 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 tariff 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
7
regulations are relatively new, and because of the limited volume of published
cases and judicial interpretation and their lack of force as precedents,
interpretation and enforcement of these laws and regulations involve significant
uncertainties. In addition, as the PRC legal system develops, we cannot assure
that changes in such laws and regulations, and their interpretation or their
enforcement will not have a material adverse effect on our business operations.
We are subject to certain PRC regulations governing PRC companies
that are listed overseas. These regulations contain certain provisions that are
required to be included in the articles of association of these PRC companies
and are intended to regulate the internal affairs of these companies. The PRC
Company Law and these regulations, in general, and the provisions for protection
of shareholders' rights and access to information, in particular, are less
developed than those applicable to companies incorporated in Hong Kong, the US,
the UK and other developed countries or regions. Such limited investor
protections are compensated for, to a certain extent, by the Mandatory
Provisions for the Articles of Association of Companies to be Listed Overseas
and certain additional requirements that are imposed by the Listing Rules of The
Hong Kong Stock Exchange with a view to reduce the magnitude of differences
between the Hong Kong Company Law and PRC Company Law. The articles of
association of all PRC companies listed in Hong Kong must incorporate such
Mandatory Provisions and these additional requirements. Although our Articles of
Association have incorporated such provisions and requirements, there can be no
assurance that our shareholders will enjoy protections to which they may be
entitled in other jurisdictions.
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.
On April 19, 2006, we carried out the reform to convert all
non-tradable domestic shares to tradable domestic shares. According to the
reform plan, Huaneng Group and HIPDC offered three shares to each holder of A
Shares for every ten shares held by them. The total number of shares offered in
connection with the reform was 15,000,000 shares. As a result, all non-tradable
domestic shares were permitted to be listed on stock exchange for trading with
certain selling restrictions. The period of selling restrictions is sixty months
for the non-tradable shares held by Huaneng Group and HIPDC, and one year for
the non-tradable shares held by others starting from April 19, 2006. The reform
did not affect the rights of shareholders of our overseas listed foreign shares.
On September 28, 2006, we entered into an assets transfer
agreement with Huaneng Group. Pursuant to the agreement, we agreed to acquire
5% equity interests of Huaneng Qinbei Power Plant ("Qinbei Power Plant") for a
consideration of RMB 65.75 million. As a result of the acquisition, we held 60%
equity interests of Qinbei Power Plant.
On September 28, 2006, we entered into an additional capital
contribution agreement with Huaneng Group and Huaneng Sichuan Hydropower
Company ("Sichuan Hydropower"). Pursuant to the agreement, Huaneng Group
unilaterally injected additional capital of RMB 615 million in Sichuan
Hydropower. Consequently, the shareholdings of Huaneng Group in Sichuan
Hydropower increased from 40% to 51%; and our shareholdings decreased from 60%
to 49% from January 1, 2007. As Sichuan Hydropower is currently controlled by
Huaneng Group, its accounts will no longer be consolidated in our financial
statements starting from 2007.
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 the 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 28,187 MW as of April 6, 2007. We
wholly own 17 operating power plants and have controlling interests in 12
operating power plants and minority interests in 5 operating power companies.
Our power plants are located in 12 of China's provinces: Liaoning, Hebei,
Shanxi, Shandong, Henan, Fujian, Jiangsu, Zhejiang, Guangdong, Jiangxi, Gansu,
Hunan and in Shanghai and Chongqing Municipalities. In 2006, our power plants
had an average availability factor of 93.61% and an average capacity factor of
66.88%. We also have 8,800 MW total generation capacity of construction
projects 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.
8
In 2006, we achieved the best performance in respect of projects
development and construction since our formation. 18 new coal-fired and
hydro-power generating units were put into commercial operations with a total
installed capacity of 7,150 MW. Among them, the power generating unit I at
Huaneng Yuhuan Power Plant ("Yuhuan Power Plant"), which commenced commercial
operation on November 28, 2006 six months ahead of schedule, was the first
1,000 MW ultra-supercritical coal-fired power generating unit in China. On
December 30, 2006, the power generating unit II was also put into operations,
and Yuhuan Power Plant became the first 1,000 MW-level ultra-supercritical
coal-fired power plant in China. The operations of Yuhuan Power Plant marked
that we are in forefront of the ultra-supercritical coal-fired power generation
technology in the world.
In 2006, we achieved good results on safe, reliable and increased
power generation. Our total power generation reached 159.9 billion kWh,
representing an increase of 6.24% from 2005. Although the average utilization
hours of our coal-fired generating units were decreased to 6,045 hours in 2006
by 203 hours from 2005, they were still 412 hours above the industry average and
remained at the highest level among power generation companies in China.
In 2006, we continue to take various measures to control our fuel
cost, and achieved good results in respect of coal purchase and transportation,
quality control and inventory enhancement. The coal purchase under key contracts
accounted for 62% of our total coal purchases, representing an increase of 7%
from 2005. Our average unit fuel cost for power output increased by 0.75% from
2005.
In 2006, the NDRC reactivated the coal-electricity price linkage
mechanism to increase on-grid tariff and end-user tariff in the northeastern
region, central region, eastern region, northwestern region and southern region.
We accordingly increased the on-grid tariffs of most of our power plants in
these regions, and relieved the pressures due to the rising coal price.
To maintain our leading 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 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. 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.
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.
9
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 tariff. 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.
In January 2007, the Office of the National Energy Leading Group
and the NDRC with the approval of the State Council jointly issued the opinions
to accelerate shutdowns of small coal-fired generating units. Power generation
companies are encouraged to close small coal-fired generating units and replace
them with newly built large units, and their new projects may be granted
priority in the confirmation and registration process on the basis of their
proactive implementation of the opinions.
Permits and contracts
In developing a new power plant, we and third parties are required
to obtain permits before commencement of the project. Such permits include
operating licenses and similar approvals related to plant site, land use,
construction, and the environment. To encourage the cooperation and support of
the local governments of the localities of the power plants, it has been and
will be our policy to seek investment in such power plants by the relevant local
governments.
Power plant construction
We have generally acted as the general contractor for the
construction of our power plants. Equipment procurement and installation, site
preparation and civil works are subcontracted to domestic and foreign
subcontractors through a competitive bidding process. All of our power plants
were completed on or ahead of schedule, enabling certain units to enter service
and begin generating income earlier than the estimated in-service date.
Import duties
China's general import-tariff level has been declining since China
acceded to the WTO in November, 2001. China's average import-tariff rate was
reduced annually from 15.3% in 2001 to 9.9% in 2005 and 2006. Starting from
January 1, 2007, the average import-tariff rate has been further reduced to
9.8%. 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.
Under the relevant PRC laws and regulations, foreign invested
enterprises, or "FIE", will be entitled to import duty exemption in respect of
imported equipment and raw materials for investment projects that fall into the
encouraged category under the Catalogue for the Guidance of Foreign Investment
Industries ("the Catalogue"). Pursuant to the current Catalogue effective on
January 1, 2005, construction and operation of natural gas-fired power plants,
and coal-fired power plants consisting of 300 MW or larger generating units or
using clean-burning coal technologies belong to the category of encouraged
projects. Because all of our construction projects meet the conditions for
encouraged projects under the current catalogue, they are eligible for
import-duty exemption for imported generating units.
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In addition, pursuant to the Catalogue for the Encouragement of
Development of Key Industries, Products and Technologies, our power plants with
independent legal person status are eligible for exemption from import duty and
related value-added tax with regard to the basic construction and expansion
projects falling into its scope subject to the approval of the
relevant government authorities.
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
Prior to April 2001, the on-grid tariffs for our planned output
were designed to enable us to recover all operating and debt servicing costs
and to earn a fixed rate of return. Since April 2001, however, the PRC
government has started to gradually implement a new on-grid tariff-setting
mechanism based on the operating terms of power plants as well as the average
costs of comparable power plants.
On July 3, 2003, the State Council approved the tariff reform plan
and made it clear that the long-term objective of the reform is to establish a
standardized and transparent tariff-setting mechanism.
Pursuant to the NDRC circular issued in June 2004, on-grid tariffs
for the newly built power generating units commencing operation from June 2004
should be set on the basis of the average social cost of comparable units
adding tax and reasonable return in the regional grid. It provides challenges
and incentives for power generation companies to control costs for building new
generating units.
On March 28, 2005, the NDRC issued the Interim Measures on
Regulation of On-grid Tariff, the Interim Measures on Regulation of
Transmission and Distribution Tariff, and the Interim Measures on Regulation of
End-user Tariff, or collectively the Interim Measures, to provide guidances for
the reform of tariff-setting mechanism in the transition period. Under the
Interim Measures, power tariff is classified into on-grid tariff, transmission
and distribution tariff and ender-user tariff. Transmission and distribution
tariff will be instituted by the government. End-user tariff will be based on
on-grid tariff and transmission and distribution tariff. The government is
responsible to regulate and supervise power tariffs in light of the principles
of efficiency, incentives, and investment encouragement and taking into
consideration of affordability.
In December 2004, the NDRC proposed and the State Council approved
to establish a linkage mechanism between coal and power prices, pursuant to
which, the NDRC may adjust power tariffs if the change volume of the average
coal price reaches 5% within a period of six months compared with the same
preceding period. The change volume in a period, if less than 5%, will be
carried forward to the future periods until the accumulated amounts reach 5%.
With a target to encourage power generation companies to reduce cost and
improve efficiency, only around 70% of coal price increases will be allowed to
pass to end-users through an increase of power tariffs, and power generation
companies will bear the remaining 30%. In May 2005, the NDRC activated the
coal-electricity price linkage mechanism for the first time to increase on-grid
tariffs and end-user tariffs in the northeastern region, central region,
eastern region, northwestern region and southern region. We accordingly
increased the on-grid tariffs of our power plants in the northeastern region,
central region, eastern region and northwestern region on May 1, 2005 and in
the southern region on July 15, 2005. In June 2006, the coal-electricity price
linkage mechanism was reactivated by the NDRC to increase on-grid tariffs and
end-user tariffs in the northeastern region, central region, eastern region,
northwestern region and southern region. We accordingly increased the on-grid
tariffs of most of our power plants in the same regions on June 30, 2006.
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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 2006, most of the
agreements entered into between our power plants and the local grid companies
were based on the Model Contract Form.
Power sales through competitive bidding are one of the targets of
power market reform. The PRC government started in 1999 to experiment with a
program to effect power sales through competitive bidding in some provinces,
and has been gradually expanding the program with a view to creating a
market-oriented electric power industry. Pursuant to the opinions regarding
promotion of electric power system reform in the period of "The Eleventh
Five-Year Plan" adopted by the State Council in November 2006, the SERC will
speed up the reform to establish an electric power market suitable to China's
circumstances. Among others, the SERC will propose the relevant policies based
on the practices pioneered in the northeastern region and eastern region;
promote the construction of uniform competitive bidding platform in each
regional power market; accelerate the development of power market in the
eastern region and the northeastern region; carry out trial or simulated
operations in the southern region and central region on appropriate timing;
formulate plans and marketing rules for power market in the northern region and
northwestern region, and expand the experiment program on direct power sales
between power generation companies and large-scaled end-users.
Power market in the Northeastern region
The power market in the northeastern region commenced simulated
operation on January 15, 2004, and trial operation of monthly and annual
bidding in early 2005. It adopted a model of two-tier tariff system where all
the power generated is subject to competitive bidding. Under two-tier tariff
system, on-grid tariff includes a capacity tariff and an energy tariff. While
the capacity tariff is based on average fixed cost for building a generating
unit in the same area and set by the government, the energy tariff is formed by
market competition. The northeastern regional power market carried out the
trial operation of 2006 annual price bidding in early 2006, and then was
suspended. At the end of March 2006, it was resumed and carried out the annual
price bidding, but was suspended again afterwards. The bidding results in 2006
were not used in actual settlements. The relevant regulatory authorities are
currently in the process of formulating new competitive bidding plans and rules
for the northeastern regional power market.
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. It adopted a model of one-tier tariff system where
only 10% of the annual power generation will be subject to competitive bidding.
In April and December 2006, the eastern regional power market carried out two
trial operations of daily price bidding respectively, and the bidding results
were used in actual settlements.
Most of our power plants in the eastern region 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 closely cooperate with each other to
strengthen their competitiveness and strive to achieve good bidding results.
12
Power market in the other regions
The power market in the southern region carried out the simulated
operations of annual price bidding in 2006 and made stable development. The
plans for establishment of power market in central region, northwestern region
and northern region have been formulated, but not yet officially issued to the
public for comments.
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 tariff (RMB/MWh)
of electric power sold by our power plants, for each of the five years ended
December 31, 2006 and the approved power tariff for 2007.
--------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007
--------- ---------- ---------- ---------- ---------- ----------
Average Average Average Average Average Approved
Tariff(1) Tariff (1) Tariff (1) Tariff (1) Tariff (1) Tariff (1)
--------- ---------- ---------- ---------- ---------- ----------
Dalian Power Plant........... 280.53 272.69 283.62 317.58 315.95 324.7
Dandong Power Plant.......... 273.70 276.95 289.05 301.67 322.76 331.8
Yingkou Power Plant.......... -- -- 315.48 360.09 334.47 343.8
Fuzhou Power Plant.......... 327.80 331.82 365.00 367.06 342.46 386.5
Phase I.................. -- -- -- -- -- --
Phase II................. -- -- -- -- -- --
Shangan Power Plant......... 315.65 307.94 303.25 319.91 340.22 350.5
Phase I.................. -- -- -- -- -- --
Phase II................. -- -- -- -- -- --
Nantong Power Plant......... 309.54 312.52 325.18 343.00 344.92 363.7
Nanjing Power Plant......... 304.07 307.31 321.67 340.65 345.56 363.7
Taicang 393.2
Phase I.................. 317.52 321.80 341.10 360.00 361.64 --
Phase II -- -- -- -- 371.50 --
Huaiyin Power Plant
Phase I................... 314.79 317.21 330.88 346.43 366.44 363.7
Phase II.................. -- -- -- 373.77 362.26 389.7
Phase III................. -- -- -- -- 362.26 390
Shidongkou I................ 252.97 256.64 285.43 320.30 358.85 364.2
Shidongkou II............... 345.90 332.85 342.56 357.60 357.08 364.2
Shantou Power Plant
Phase I.................. 455.95 435.17 446.86 462.83 487.55 497.7
Phase II -- -- -- -- 446.54 453.2
Dezhou Power Plant
(Phases I, II & III).... 339.64 333.34 332.58 349.56 360.68 366.4
Jining Power Plant
Phases I, II............. 275.15 274.66 299.89 323.41 342.42 330.9
Phase III................ -- -- 299.89 323.41 342.42 370.9
Weihai Power Plant.......... 393.74 386.50 394.06 398.93 402.99 406
Xindian.....................
Phases I, II.............. -- 342.41 320.83 337.25 350.54 355.9
13
--------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007
--------- ---------- ---------- ---------- ---------- ----------
Average Average Average Average Average Approved
Tariff(1) Tariff (1) Tariff (1) Tariff (1) Tariff (1) Tariff (1)
--------- ---------- ---------- ---------- ---------- ----------
Phase III................. -- -- -- -- 351.90 354.9
Changxing................... 362.70 320.57 351.94 392.83 408.90 413.3
Yushe Power Plant
Phase I.................. -- 200.63 282.10 319.37 316.16 324.4
Phase II................. -- -- 282.10 256.00 268.21 275.4
Qinbei...................... -- -- -- 299.77 311.20 334.2
Jinggangshan Power Plant.... -- -- -- 353.90 369.87 378
Yueyang Power Plant.........
Phase I................... -- -- 316.52 341.34 360.88 387.5
Phase II.................. -- -- -- -- 363.38 402.5
Luohuang Power Plant........
Phases I, II.............. -- -- 286.74 300.90 314.87 322.4
Phase III................. -- -- -- -- 337.30 337.3
Pingliang Power Plant....... -- -- -- 211.43 216.27 232.8
Sichuan Hydropower.......... -- -- -- 262.52 266.32 --
Yuhuan power plant -- -- -- -- 360.95 419.5(2)
____________
Notes: (1) Includes value-added tax.
(2) The approved tariff of Yuhuan power plant for 2007 is still
subject to the approval of the relevant government authority.
Fuel supply arrangements
In 2006, all of our power plants were fueled by coal and gas except
Sichuan Hydropower.
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. Power companies obtain
allocations for coal on a plant-by-plant basis. Each of power plant then signs
supply contracts with the coal suppliers, and with the railway and shipping
companies for the amount of coal and transportation allocated to them. 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 purchased 68.08 million tons of coal and consumed
66.03 million tons of coal. Of our total coal purchases, 55% was purchased
under the key contracts and medium- and long-term agreements, and the remainder
was purchased in the open market. Coal purchase price for our company,
including transportation costs and miscellaneous expenses, averaged
approximately RMB 338.03 per ton.
In 2006, the national supply and demand of coal reached
equilibrium. We purchased 67.76 million tons of coal and consumed 68.83 million
tons of coal. Of our total coal purchases, 62% was purchased under the key
contracts, and the remainder was purchased in the open market. Coal purchase
price for our company, including transportation costs and miscellaneous
expenses, averaged approximately RMB 343.73 per ton. We strive to reduce the
fuel costs in a number of ways, including seeking to purchase high quality coal
14
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. In order to address the shortage of coal
supplies, we have entered into nine 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 key 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.
In 2007, the annual coal purchase conferences sponsored and
coordinated by the NDRC were cancelled. The power generation companies and coal
suppliers are permitted to negotiate coal price and execute coal purchase
contracts. The government will take temporary interventional measures to
regulate coal price only in exceptional circumstances. We have already entered
into coal purchase contracts with a total of 61.6 million tons of coal, which
accounted for approximately 81.1% of the coal required for our total planned
generation in 2007.
Gas
Huaneng Shanghai Combined Cycle Gas Turbine Power Plant ("Shanghai
CCGT") is a gas-fired power plant. The gas supply for Shanghai CCGT is
transported through the pipeline of "West-East Gas Transport Project". In 2006,
the total gas supply for Shanghai CCGT was 95 million cubic meters and the
weighted average gas price was RMB 1.53 per cubic meter.
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:
(i) regular checks and routine maintenance are carried out
throughout the period during which 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.
15
The following organizational chart sets forth the organizational
structure of HIPDC and us as of April 6, 2007:
|------------------------------------------------------------------------------------------------------------------
|Huaneng | Guohua Power | China Group | Pro-Power Investment | China Cinda | China International |
|Group | Investment | Development | Limited | Trust | Water & Electric |
| | Limited Company | Limited | | Company | Corporation |
-------------------------------------------------------------------------------------------------------------------
| | | | | | |
| | 51.98% | 15.77% | 15.0% | 10.0% | 5.8% | 1.45%
| -----------------------------------------------------------------------------------------------------------------
| |
|5%(1) |
| |
| | Hebei Fujian Dalian Nantong Dandong
| | Provincial Investment Municipal Investment Energy
| | Construction Enterprise Construction Management Investment Other
|----- HIPDC Investment Holdings Investment Limited Development Domestic
| Company Limited Company Company Centre Shares
| | | | | | |
| | | | | | |
| | | Liaoning | | Shantou | |
| | Jiangsu | Energy | | Power | |
| | Provincial | Investment | Minxin | Development | Shantou | Foreign
| | International | (Group) Limited | Group | Joint Stock | Electric Power | Shares
| Huaneng | Trust & Investment | Liability | Limited | Company | Development |
| Group | Corporation | Company | Company | Limited | Company |
| | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
42.03%| 8.75%| 5.00% | 3.45% | 2.81% | 2.76% | 2.50% | 0.9% | 0.75% | 0.21% | 0.07% | 0.03% |5.40%|
| | | | | 25.34%
-----------------------------------------------------------------------------------------------------------------------------------
COMPANY
Note: (1) Huaneng Group indirectly holds 50% equity interests in Pro-Power
Investment Limited through its wholly-owned subsidiary, China Huaneng
Hong Kong Company Limited, and Pro-Power Investment Limited in turn
holds 10% equity interests in HIPDC. As a result, Huaneng Group
indirectly holds additional 5% equity interests in HIPDC.
For a detailed discussion of the Company's subsidiaries, see Note
12 to the FInancial Statements.
16
D. Property, plants and equipment
The following table presents certain summary information on our
power plants as of April 6, 2007.
Actual Current
Province/ In-service Installed Attributable Type
Plant or Expansion Municipality Date(1) Capacity Ownership Capacity of Fuel
------------------------- -------------- ------------------ --------------- ------------- -------------- ----------
(Names as defined below) (MW) % MW
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: Mar.
1990
Phase II Unit III: Jul. 2 x 350 100% 700 Coal
1999
Unit IV: Oct.
1999
Nanjing Jiangsu Unit I: Mar. 1994 2 x 320 100% 640 Coal
Unit II: Oct.
1994
Taicang Phase I Jiangsu Unit I: Dec. 1999 2 x 300 75% 450 Coal
Unit II: Apr.
2000
Phase II Jiangsu Unit III: Jan. 2 x 600 75% 900 Coal
2006
Unit IV: Feb.
2006
Huaiyin Phase I Jiangsu Unit I: Nov. 1993 2 x 220 90% 396 Coal
Unit II: Aug.
1994
Phase II Jiangsu Unit III: Jan. 2 x 330 63.64% 420 Coal
2005
Unit IV: Mar.
2005
Phase III Jiangsu Unit V: May 2006 2 x 330 63.64% 420 Coal
Unit VI: Sep.
2006
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
Shidongkou II Shanghai Unit I: Jun. 1992 2 x 600 100% 1,200 Coal
Unit II: Dec.
1992
Shanghai CCGT Shanghai Unit I: May 2006 3 x 390 70% 819 Gas
Unit II: Jun.
2006
Unit III: Jul.
2006
Shantou Phase I Guangdong Unit I: Jan. 1997 2 x 300 100% 600 Coal
Unit II: Jan.
1997
Phase II Guangdong Unit III: Oct. 1 x 600 100% 600 Coal
2005
Dezhou Shandong Units I: 1992 1 x 330 100% 650 Coal
Unit II: 1992 1 x 320 (2)
Units III: Jun. 2 x 300 100% 600 Coal
1994
Unit IV: May 1995
Units V: Jun. 2 x 700 100% 1,400 Coal
2002
Unit VI: Oct 2002
17
Jining Shandong Units III: 1976 1 x 115 100% 225 Coal
Unit IV: 1978 1 x 110
Unit V: Jul. 2 x 135 100% 270 Coal
2003
Unit VI: Aug.
2003
Weihai Shandong Units I: May. 2 x 125 60% 150 Coal
1994
Unit II: Jan.
1995
Units III: Mar. 2 x 300 60% 360 Coal
1998
Unit IV: Nov.
1998
Xindian Shandong Unit III: Jan 2 x 225 100% 450 Coal
2002
Unit IV: Dec 2001
Unit V: Sep 2006 2 x 300 95% 570 Coal
Unit VI: Nov 15
Changxing Zhejiang Unit I: Jan. 1992 1 x 135 100% 260 Coal
Unit II: Aug. 1 x 125
1992
Yuhuan Phase I Zhejiang Unit I: Nov. 2006 2x 1000 100% 2,000 Coal
Unit II: Dec.
2006
Yushe Phase I Shanxi Unit I: Jun. 1994 2 x 100 60% 120 Coal
Unit III: Dec
1994
Phase II Unit IV: Oct. 2 x 300 60% 360 Coal
2004
Unit II: Nov.
2004
Qinbei Phase I Henan Unit I: Dec. 2004 2 x 600 55% 660 Coal
Unit II: Dec.
2004
Jinggangshan Jiangxi Unit I: Dec. 2000 2 x 300 100% 600 Coal
Unit II: Aug.
2001
Yueyang Phase I Hunan Unit I: Aug. 1991 2 x 362.5 55% 398.75 Coal
Unit II: Sep.
1991
Phase II Unit III: Mar. 2 x 300 55% 330 Coal
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 III: Dec. 1998 2 x 360 60% 432 Coal
Unit IV: Dec.
1998
Phase III Unit V: Dec. 2006 2 x 600 60% 720 Coal
Unit VI: Jan.
2007
Pingliang Gansu Unit I: Sep. 2000 4 x 300 65% 780 Coal
Unit II: Jun.
2001
Unit III: Jun.
2003
Unit IV: Nov.
2003
Notes:
(1) Commencement of commercial operations. See "Development of Power Plants
-- Plant Start-up and Operation".
(2) The Unit II at Dezhou Power Plant increased its installed capacity from
MW 300 to MW 320 in 2006.
18
The following table sets forth certain summary information on our
construction projects as of April 6, 2007.
Expected
Province/ Installed Attributable Type
Plant or Expansion Municipality Capacity Ownership Capacity of Fuel
---------------------------- ---------------- ---------------- --------------- --------------- ----------------
(Names as defined below) (MW) % MW
Yingkou Phase II Liaoning 2x600 100% 1,200 Coal
Qinbei Phase II Henan 2x600 60% 720 Coal
Yuhuan Zhejiang III Zhejiang 2x1,000 100% 2,000 Coal
Shang'an Phase III Hebei 2x600 100% 1,200 Coal
Haimen Phase I Guangdong 2x1,000 100% 2,000 Coal
Rizhao Phase II Shandong 2x600 100% 1,200 Coal
The following table presents the availability factors and the
capacity factors of our operating coal-fired power plants for the years ended
December 31, 2004, 2005, and 2006.
Availability factor (%) Capacity factor (%)
------------------------------------- --------------------------------------
2004 2005 2006 2004 2005 2006
----------- ------------ ------------ ----------- ------------ -------------
Dalian......................... 95.08 97.49 93.96 78.80 75.29 81.76
Dandong........................ 94.95 97.09 93.93 77.94 69.12 80.66
Yingkou........................ 94.07 93.72 92.04 80.74 83.48 87.22
Fuzhou......................... 92.47 93.60 98.37 83.13 75.14 68.02
Shangan........................ 93.02 93.45 91.76 74.95 74.21 69.38
Nantong........................ 92.52 93.50 94.32 76.47 68.32 62.28
Nanjing........................ 94.47 90.97 93.76 77.92 70.21 61.56
Taicang........................ 94.74 95.53 93.22 86.18 75.51 63.94
Huaiyin........................ 94.35 94.38 94.16 76.70 68.49 60.27
Shidongkou I................... 94.43 83.35 92.22 77.55 71.18 70.15
Shidongkou II.................. 96.51 92.63 97.21 80.64 75.71 70.45
Shantou........................ 92.40 92.35 92.51 88.57 89.80 80.35
Dezhou......................... 94.49 90.58 92.22 59.27 65.37 62.48
Jining......................... 93.58 94.37 94.37 53.67 65.55 65.61
Weihai......................... 94.29 95.70 95.18 63.82 65.64 59.50
Xindian........................ 92.11 93.29 96.21 61.77 67.35 60.93
Changxing...................... 95.46 95.31 95.33 88.56 84.36 78.25
Yushe.......................... 95.84 92.27 93.16 85.43 77.37 79.45
Qinbei ........................ 92.58 90.59 70.85 66.84
Jinggangshan................... 92.40 93.16 92.74 69.12 65.96 68.09
Yueyang........................ 89.25 93.70 95.14 71.90 71.89 60.39
Luohuang....................... 90.71 89.44 90.88 64.48 65.01 69.93
Pingliang...................... ---- 95.39 93.08 ---- 76.80 75.48
Yuhuan......................... ---- ---- N/A ---- ---- N/A
The details of our operating power plants and construction projects
as of April 6, 2007 are described below.
Power plants in Liaoning Province
Huaneng 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.
19
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.
In 2006, Dalian Power Plant obtained 39.0% of its total consumption
of coal pursuant to the key contracts and the remainder in the open market. The
weighted average cost of coal for Dalian Power Plant was RMB 393.67 (2005: RMB
396.14) per ton in 2006.
Dalian Power Plant sells all its electricity through the Liaoning
Electric Power Co., Ltd. and the Northeastern Power Grid. Electricity generated
by Dalian Power Plant is delivered to the Liaoning Provincial Power Grid.
Huaneng 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.
In 2006, Dandong Power Plant obtained 80.8% of its total
consumption of coal pursuant to the key contracts and the remainder in the open
market. The weighted average cost of coal for Dandong Power Plant was RMB 355.58
(2005: 357.76) per ton in 2006.
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. and the Northeastern Power Grid. 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") 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. In 2006, Yingkou Power Plant obtained 55.4% of its total
consumption of coal pursuant to the key contracts and the remainder in the open
market. The weighted average cost of coal for Yingkou Power Plant was RMB 360.41
(2005: 352.15) per ton in 2006.
Yingkou Power Plant sells all its electricity through Liaoning
Electric Power Co., Ltd. and the Northeastern Power Grid. Electricity generated
by Yingkou Power Plant is delivered to the Liaoning Provincial Power Grid.
Construction Project in Liaoning Province
Yingkou Power Plant Phase II is planned to consist of two 600 MW
coal-fired generating units. We own 100% equity interests in this project.
Power plant in Fujian Province
Huaneng 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.
20
In 2006, the Fuzhou Power Plant obtained 47.8% its total
consumption of coal pursuant to the key contracts and the remainder was obtained
in the open market. The weighted average cost of coal for Fuzhou Power Plant in
2006 was RMB 411.43 (2005: 423.91) 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") 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.
In 2006, Shangan Power Plant obtained 67.6% of its total
consumption of coal pursuant to the key contracts and the remainder was obtained
in the open market. The weighted average cost of coal for Shangan Power Plant in
2006 was RMB 297.91 (2005: 286.70) 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.
Construction Project in Hebei Province
Shangan Power Plant Phase III is planned to consist of two 600 MW
coal-fired generating units. We own 100% equity interests in this project.
Power plants in Jiangsu Province
Huaneng 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.
In 2006, Nantong Power Plant obtained 68.0% of its total
consumption of coal pursuant to the key contracts and the remainder was obtained
in the open market. The weighted average cost of coal for Nantong Power Plant in
2006 was RMB 390.00 (2005: RMB 397.03) 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.
21
Huaneng 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 2006, Nanjing Power Plant obtained approximately 43.8% of its
total consumption of coal pursuant to the key contracts and the remainder was
obtained in the open market. The weighted average cost of coal for Nanjing Power
Plant in 2006 was RMB 404.29 (2005: 412.11) 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.
Huaneng Taicang Power Plant ("Taicang Power Plant") 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. In 2006, Taicang Power Plant
obtained approximately 48.6% of its total consumption of coal pursuant to the
key contracts and the remainder was obtained in the open market. The weighted
average cost of coal for Taicang Power Plant in 2006 was RMB 404.15 (2005:
391.03) 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.
Huaneng Huaiyin Power Plant ("Huaiying 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. Huaiyin Power Plant Phase III consists of
two 330 MW coal-fired generating units, and was put into operations in August
and September 2006, respectively.
In 2006, Huaiyin Power Plant obtained approximately 45.6% of its
total consumption of coal pursuant to the key contracts and the remainder was
obtained in the open market. The weighted average cost of coal for Huaiyin Power
Plant in 2006 was RMB 398.05 (2005: 403.61) per ton.
The coal supply for the Huaiyin Power Plant is primarily from Anhui
Province, Henan Province and Shanxi Province.
Huaiyin Power Plant sells its electricity to Jiangsu Electric Power
Company and delivers its electricity to the Jiangsu Provincial Power Grid.
Power plants in Shanghai Municipality
Huaneng Shanghai Shidongkou First Power Plant ("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 2006, Shidongkou I obtained approximately
28.7% of its total consumption of coal pursuant to the key contracts and the
remainder was obtained in the open market. The weighted average cost of coal for
Shidongkou I in 2006 was RMB 407.68 (2005: RMB 409.69) per ton.
22
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") 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.
In 2006, Shidongkou II obtained 57.9% of its total consumption of
coal pursuant to the key contracts and the remainder was obtained in the open
market. The weighted average cost of coal for Shidongkou II in 2006 was RMB
388.05 (2005: 393.10) per ton.
Shidongkou II sells all its electricity through Shanghai Municipal
Electric Power Company. Electricity generated by Shidongkou II is delivered to
the Shanghai Municipal Power Grid.
Shanghai CCGT is located in Baoshan district of Shanghai
municipality. Shanghai CCGT consists of three 390 MW gas-fired combined-cycle
generating units with a total installed capacity of 1,170 MW, which were put
into operation in May, June and July, 2006, respectively.
The gas supply for Shanghai CCGT is transported through the
pipeline of "West-East Gas Transport Project". In 2006, the total gas supply
for Shanghai CCGT was 95 million cubic meters and the weighted average gas
price was RMB 1.53 per cubic meter. Shanghai CCGT generates electricity during
the peak load periods and sells its electricity through Shanghai Municipal
Electric Power Company. In 2006, the Shanghai Municipal government granted
special power tariff policy to Shanghai CCGT to mitigate the adverse effect of
insufficient gas supply on its operations.
Power plants in Guangdong Province
Huaneng Shantou Oil-Fired Power Plant ("Shantou Oil-Fired Power
Plant") was shut down in 2006.
Huaneng Shantou Coal-Fired Power Plant ("Shantou Power Plant") had
originally been developed and constructed by HIPDC which transferred all its
rights and interests therein to us effective on December 31, 1994. See "Item 7.
Major Shareholders and Related Party Transactions." Located on the outskirts of
the city of Shantou, Shantou Power Plant was set up with the support of the
Shantou municipal government and the Guangdong provincial government. Shantou
Power 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.
In 2006, the Shantou Power Plant obtained 36.6% of its total
consumption of coal pursuant to the key contracts and the remainder was
purchased in the open market. The weighted average costs of coal for Shantou
Power Plant in 2006 was RMB 424.69 (2005: 435.55) 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.
23
Construction Project in Guangdong Province
Huaneng Haimen Power Plant ("Haimen Power Plant") is planned to
consist of two 1,000 MW generating units with a total installed capacity of
2,000 MW. We own 100% equity interests in this project.
Power plants in Shandong Province
Huaneng 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 320MW 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.
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. In 2006, Dezhou Power Plant obtained approximately 72.9% of
its total consumption of coal pursuant to the key contracts and the remainder
was obtained in the open market. The weighted average cost of coal for Dezhou
Power Plant in 2006 was RMB 282.73 (2005: RMB 270.51) 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.
Huaneng 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. In 2006
Unit I and II of Jining Power Plant with a total capacity of 100 MW were put out
of operation. As a result, Jining Power Plant currently comprises four
coal-fired generating units, with an aggregate installed capacity of 495 MW.
In 2006, Jining Power Plant obtained approximately 85.7% of its
total consumption of coal pursuant to the key contracts and the remainder was
obtained in the open market. The weighted average cost of coal for Jining Power
Plant in 2006 was RMB 345.03 (2005: 361.76) per ton.
Jining Power Plant sells its electricity through the Shandong
Electric Power Corporation and delivers its electricity to Shandong Provincial
Power Grid.
Huaneng Weihai Power Plant ("Weihai Power Plant") is located
approximately 16 km southeast of Weihai City, on the shore of the Bohai Gulf.
Its location provides access to cooling water for operations and transportation
of coal as well as ash and slag disposal facilities. We hold a 60% interest in
Weihai Power Plant, the remaining 40% interest of which is owned by Weihai Power
Development Bureau ("WPDB").
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.
In 2006, Weihai Power Plant obtained approximately 45.3% of its
total consumption of coal pursuant to the key contracts and the remainder was
obtained in the open market. The weighted average cost of coal for Weihai Power
Plant in 2006 was RMB 368.76 (2005: RMB 383.94) 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.
24
Huaneng 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. Xindian Power Plant Phase III Expansion consists of two 300
MW generating units with a total installed capacity of 600 MW, which were put
into operation in September and November 2006, respectively.
The coal supply for Xindian Power Plant is obtained from several
coal producers located mostly in Shanxi Province. In 2006, Xindian Power Plant
obtained 47.0% of its total consumption of coal pursuant to the key contracts
and the remainder in the open market. The weighted average cost of coal for
Xindian Power Plant was RMB 376.67 (2005: 355.43) per ton in 2006.
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.
Construction Project in Shandong Province
Huaneng Rizhao Power Plant Phase II ("Rizhao Power Plant Phase II")
is planned to consist of two 600 MW generating units with a total installed
capacity of 1,200 MW. We own 100% equity interests in this project.
Power plants in Zhejiang Province
Huaneng 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 one 125 MW and one 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. In 2006, Changxing Power Plant
obtained approximately 55.2% of its total consumption of coal pursuant to the
key contracts and the remainder was obtained in the open market. The weighted
average cost of coal for Changxing Power Plant in 2006 was RMB 388.87 (2005:
390.98) 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.
Yuhuan Power Plant is located in Taizhou of Zhejiang Province and
consists of two 1,000 MW ultra-supercritical coal-fired generating units with a
total installed capacity of 2,000 MW. Unit I and Unit II were put into
operations on November 28, 2006 and December 30, 2006, respectively.
The coal supply for Yuhuan Power Plant is primarily obtained from
Shanxi Province and Inner Mongolia Autonomous Region. In 2006, Yuhuan Power
Plant obtained approximately 18% of its total consumption of coal pursuant to
the key contracts and the remainder was obtained in the open market. The
weighted average cost of coal for Yuhuan Power Plant in 2006 was RMB 424.63.
Yuhuan Power Plant sells its electricity to Zhejiang Power Grid.
Construction Project in Zhejiang Province
Huaneng Yuhuan Power Plant Phase II ("Yuhuan Power Plant Phase II")
is planned to consist of a total installed capacity of 2,000 MW. We own 100%
equity interests in this project.
Power Plant in Shanxi Province
Huaneng Yushe Power Plant ("Yushe Power Plant") is located in Yushe
County of Shanxi Province. Yushe Power Plant Phase I 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.
Two 300 MW coal-fired generating units of Yushe Power Plant Phase
II commenced commercial operations in November and December 2004, respectively.
25
The coal supply for Yushe Power Plant is obtained from several coal
producers located mostly in Shanxi Province. In 2006, Yushe Power Plant obtained
approximately 93.5% of its total consumption of coal from the open market and
the remainder was obtained pursuant to the key contracts. The weighted average
cost of coal for Yushe Power Plant was RMB 245.04 (2005: 225.34) per ton in
2006.
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
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. In 2006, Qinbei Power Plant obtained 14.0% of its total consumption of
coal pursuant to the key contracts and the remainder was obtained in the open
market. The weighted average cost of coal for Qinbei Power Plant was RMB 348.59
(2005: 357.30) per ton in 2006.
Power plant in Jiangxi Province
Huaneng 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. In 2006, Jinggangshan Power Plant
obtained 73.6% of its total coal consumption pursuant to the key contracts and
the remainder in the open market. In 2006, the weighted average cost of coal for
Jinggangshan Power Plant was RMB 382.64 (2005: 392.18) 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") 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.
The coal supply for Yueyang Power Plant is obtained from Datong in
Shanxi Province. In 2006, Yueyang Power Plant obtained 61.8% of its total
consumption of coal pursuant to the key contracts and the remainder in the open
market. In 2006, the weighted average cost of coal for Yueyang Power Plant was
RMB 388.50 (2005: 378.81) 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") is located in
Chongqing Municipality. Each of Phase I and Phase II of 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. Luohuang Power Plant Phase III consist
of two 600 MW coal-fired generating units with an installed capacity of 1,200
MW, which were put into operations in December 2006 and January 2007,
respectively. The coal supply for Luohuang Power Plant is obtained from
Chongqing Municipality. In 2006, Luohuang Power Plant obtained all of its coal
supplies through purchases in the open market. In 2006, the weighted average
cost of coal for Luohuang Power Plant was RMB 227.74 (2005: RMB 213.61) per ton.
26
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.
Power plant in Gansu Province
Huaneng 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. In 2006, Pingliang Power Plant obtained all of its coal supplies
through purchases in the open market. The weighted average cost of coal for
Pingliang Power Plant was RMB 137.82 (2005: 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.
Competition and dispatch
All power plants in China are subject to dispatch conducted by
various dispatch Centres. A dispatch Centre is required to dispatch electricity
pursuant to the Regulations on the Administration of Electric Power Dispatch
Networks and Grids, issued by the State Council with effect from November 1,
1993, and in accordance with its agreements with power plants subject to its
dispatch. Power generation companies are also required to enter into on-grid
dispatch agreements with power grid companies. As a result, there is competition
for favorable dispatch treatment in the PRC electric power industry, especially
during the off-peak load periods. More efficient power plants usually operate at
higher output than less efficient power plants. We believe that in order to
increase system stability, large and efficient power plants such as ours will be
preferred as base load plants to generate power for the grids to which they
connect. We believe that our dispatch arrangements with the local power
corporations and dispatch Centres, superior quality equipment, lower coal
consumption rate, higher efficiency of plant operation, lower emission levels
and larger capacity represent competitive advantages in the markets in which we
operate.
Since 1985, a number of foreign power developers and foreign
companies (including Hong Kong companies), have been pursuing investment
opportunities in the PRC electric power industry, which opportunities include
the development of power plants (through joint ventures with PRC partners) or
the purchase of interests in existing power plants. While we believe that we
currently possess advantages over such foreign developers because of our
extensive experience in the electric power industry of China and our close
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.
27
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.
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 were increased annually
by RMB 0.21 per kilogram from RMB 0.21 in 2003 to RMB 0.63 in 2005 and 2006.
Discharge fees for nitrous dioxide were increased to RMB 0.63 per kilogram on
July 1, 2004. The discharge fees for the dust have been RMB 0.28 per kilogram
since July 1, 2003. In 2004, 2005 and 2006, we paid to the local governments
total discharge fees of approximately RMB 170.32 million, 376.72 million and 432
million, respectively.
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.
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.
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.
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 property all risks insurance and machinery
breakdown insurance for all of our power plants, and construction all risks
insurance or erection all risks insurance for all of our newly built and
expansion projects as well as large-scaled upgrading projects. Our current
insurance coverage maintained with 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 on our property, plant and equipment (including construction all risk
insurance) is approximately RMB 163.1 billion.
We do not maintain any third party liability insurance to cover
claims in respect of bodily injury or property or environment damage arising
from accidents on our property or relating to our operation other than the third
party additional risk insurance included in construction all risk insurance or
erection all risk insurance. We do not usually carry business interruption
insurance either, which is not customarily carried by power companies in the
PRC. We currently only maintain business interruption insurance for Hanfeng
Power Plant acquired in 2004. We believe that our insurance coverage is adequate
and is standard for the power industry in China. Please refer to the section
entitled "Risk Factors - Risks relating to the Company and the PRC Power
Industry - Operating power plants involves many risks and we may not have
sufficient insurance coverage to cover the economic losses if any of our power
plant' s ordinary operation is interrupted."
28
ITEM 4A Unresolved Staff Comments
None
ITEM 5 Operating and Financial Review and Prospects
A. General
The principal activities of the Company are investment,
construction, operation and management of power plants. The Company provides
stable and reliable electricity supply to customers through the grid companies
where the operating plants are located. The Company insists on scientific
development, increasing economic efficiency, improving returns for shareholders,
conserving resources and protecting the environment. The Company also attaches
importance to social responsibilities, and makes active efforts in building up a
harmonious society .
Currently, Huaneng Power International, Inc. is China's largest
listed power producer. 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, the Central China Grid and the South China
Grid. Since incorporation, the operating scale of the Company continued to
expand. Its operating 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 with its competitors. It is actively pursuing
fast and better development.
Looking back on 2006, China's national economy continued to develop
at a very fast pace. China's electricity industry thus had very good development
opportunities and gained significant development. The demand and supply of
electricity has been generally brought into balance. Over the year, the Company
oversaw the overall operations of the Company with a scientific development
view. The Company actively pioneered in the business, strived hard, seized 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, facilities renovation and environmental protection.
The Company achieved its best performance on project developments since its
establishment and many technically advanced generating units began their
commercial operations as scheduled, hence increased its generation capacity.
Among those projects put into commercial operations during 2006, Yuhuan Power
Plant was China's first 1,000 MW ultra-supercritical coal-fired generating unit
which also featured efficient resources utilization and improved environmental
performance.
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 periods. There can be no assurance that
actual results will not differ from those estimates.
Depreciation of property, plant and equipment
Depreciation on property, plant and equipment is calculated using
the straight-line method to allocate their cost to their estimated residual
values over their estimated useful lives as follows:
29
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 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.
Impairment of long-lived assets
Goodwill is tested annually for impairment and carried at cost less
any accumulated impairment loss. Impairment losses on goodwill are not reversed.
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 the region in which they operate.
Assets that are subject to amortization are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. An impairment loss is recognized for the amount by which
the asset's carrying amount exceeds its recoverable amount. The recoverable
amount is the higher of an asset's fair value less costs to sell and value in
use. For the purpose of assessing impairment, assets are grouped at the lowest
level for which there are separately identifiable cash flows. Assets other than
goodwill that suffered an impairment are reviewed for possible reversal of the
impairment at each reporting date.
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.
Newly adopted accounting policies
The following new interpretation is mandatory for financial year
with annual period beginning on or after January 1, 2006.
International Financial Reporting Interpretations Committee
Interpretation ("IFRIC Interpretation") 4, "Determining whether an arrangement
contains a lease", effective for annual periods beginning on or after
January 1, 2006. This interpretation had no material impact on the accounting
policies of the Company and its subsidiaries.
New accounting pronouncements
For a detailed discussion of new accounting pronouncements, see
Notes 2(v) and 38 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 38 to the Financial Statements.
30
Year ended December 31, 2006 compared with year ended December 31, 2005
-----------------------------------------------------------
For the Year Ended December 31,
-----------------------------------------------------------
Increased/
2006 2005 (Decreased)
----------------- ------------------- ------------------
RMB'000 RMB'000 %
Operating revenue 44,301,403 40,190,004 10.23
Sales tax (148,057) (113,475) 30.47
Operating expenses
Fuel (22,608,151) (21,202,952) 6.63
Maintenance (1,306,888) (1,165,374) 12.14
Depreciation (6,719,158) (6,167,692) 8.94
Labor (2,886,767) (2,487,098) 16.07
Service fees to HIPDC (140,771) (141,102) (0.23)
Others (1,933,200) (1,903,345) 1.57
----------------- -------------------
Total operating expense (35,594,935) (33,067,563) 7.64
----------------- -------------------
Profit from operations 8,558,411 7,008,966 22.11
----------------- -------------------
Financial expense
Interest income 51,910 53,685 (3.31)
Interest expense (1,591,033) (1,426,609) 11.53
Bank charges and exchange gain , net 67,819 248,533 (72.71)
----------------- -------------------
Total financial expense, net (1,471,304) (1,124,391) 30.85
----------------- -------------------
Share of profit of associates 790,629 644,376 22.70
Investment income, net 128,595 60,872 111.25
Other income, net 10,442 2,385 337.82
----------------- -------------------
Profit before tax 8,016,773 6,592,208 21.61
Income tax expense (1,127,699) (1,044,297) 7.99
----------------- -------------------
Profit for the year 6,889,074 5,547,911 24.17
================= ===================
Attributable to:
Equity holders of the Company 6,071,154 4,871,794 24.62
Minority interests 817,920 676,117 20.97
----------------- -------------------
6,889,074 5,547,911 24.17
================= ===================
In 2006, the national economy developed at a rapid pace and there
was strong demand for electricity, hence providing the external conditions for
the Company to generate more electricity and increase its revenue. Under the
context of a rapidly developing national economy, demand for coal was very
strong. However, relatively slow improvement in coal transportation against to
the increasing coal demand result in high coal price levels, and this has caused
considerable difficulties for the Company to organize coal supply, control fuel
cost and achieve its profit target.
For the year ended December 31, 2006, total power generated by our
operating power plants was 159.897 billion kWh, representing an increase of
6.24% from prior year.
Construction projects achieved the best performance since the
Company's formation. Completion of projects and commencement of commercial
operation create a solid foundation for the Company to expand its scale of
operation, consolidate and increase its market share, and increase its revenue.
The Company has always been committed to social responsibility and
harmonious development. In 2006, the average coal consumption for power
generation was 316.39 g/kWh, while weighted average self consumption rate of
power plants was 5.69%, both stayed at a lower level when compared to the rest
of the power generation industry, which represented the improvement in
efficiency of utilization and in saving of resources. The Company always
emphasizes environmental protection and has effectively reduced the emission
levels of sulphur dioxide, nitrogen oxides, dust and other pollutants by using
advanced technology and facilities, such as installing desulphurization
facilities and other facilities.
31
Operating revenue
Operating revenue represents amounts receivable or received from
electricity sold net of amounts received in advance. For the year ended
December 31, 2006, the consolidated operating revenue of the Company and its
subsidiaries amounted to RMB 44.301 billion, representing an increase of 10.23
% over RMB 40.190 billion in 2005. The increase in operating revenue is mainly
due to the commencements of operations of new power plants, which increased the
operation scale of the Company. The newly operated power plants (including
Shantou Phase II which went into operation in the second half of 2005 and those
put into operations in 2006, and thus reference applies hereafter) contributed
RMB 4.527 billion to the increase in revenue.
The following table sets forth the average tariff rate of the
Company and its subsidiaries, as well as percentage changes from 2005 to 2006.
Average tariff rate
(VAT inclusive)
(RMB/MWh)
-----------------------------------------------------
Power Plant 2005 2006 Change
---------------- ------------------ -----------------
Dalian 317.58 315.95 -0.51%
Fuzhou 367.06 342.46 -6.70%
Nantong 343.00 344.92 0.56%
Shang'an 319.91 340.22 6.35%
Shantou Oil-fired 610.73 - N/A
Shantou Coal-fired 459.12 467.37 1.80%
Dandong 301.67 322.76 6.99%
Shidongkou II 357.60 357.08 -0.15%
Nanjing 340.65 345.56 1.44%
Dezhou 349.56 360.68 3.18%
Weihai 398.93 402.99 1.02%
Jining 323.41 342.42 5.88%
Shidongkou I 320.30 358.85 12.04%
Taicang 360.00 361.64 0.46%
Changxing 392.83 408.90 4.09%
Huaiyin Phase I 346.43 366.44 5.78%
Huaiyin Phase II 373.77 362.26 -3.08%
Xindian 337.25 350.54 3.94%
Yushe 273.58 281.47 2.88%
Yingkou 360.09 334.47 -7.11%
Jinggangshan 353.49 369.87 4.63%
Luohuang 300.90 315.46 4.84%
Yueyang 341.34 361.68 5.96%
Qinbei 299.77 311.20 3.81%
Pingliang 211.43 216.27 2.29%
Sichuan Hydropower 262.52 266.32 1.45%
Yuhuan - 360.95 N/A
Taicang II - 371.50 N/A
Xindian II - 351.90 N/A
Consolidated 331.41 343.59 3.68%
The average tariff rate of the Company and its subsidiaries
increased by approximately 3.68% from RMB 331.41 per MWh in 2005 to RMB 343.59
per MWh. The major reason for such was the implementation of the
"Coal-electricity price linkage mechanism", and the tariff of each coal-fired
power plant was adjusted accordingly.
Sales tax
Sales tax mainly consists of taxes associated with value-added
tax. According to relevant administrative regulations, such additional taxes
include the City Construction Tax and Education Tax. The additional taxes are
based on the value-added tax that the Company and its subsidiaries paid, a
percentage of which will be taken as the additional taxes according to
regulations. Such taxes are currently not applicable to direct foreign
investments that have been approved by the government, hence certain power
plants of the Company do not have to pay such taxes. In 2006, the sales tax
increased 30.47% to RMB 148 million from RMB 113 million in 2005, mainly due to
the increased number of power plants that needed to pay such taxes due to the
newly operated power plants.
32
Operating expenses
The total operating expenses of the Company and its subsidiaries
increased by 7.64% from RMB 33.068 billion in 2005 to RMB 35.595 billion in
2006. The increase was attributable to the expansion of the scale of operations
and the increase in fuel cost. The newly operated power plants accounted for RMB
3.296 billion of the increase in total operating expenses.
Fuel
Fuel cost represented the major operating expenses of the Company
and its subsidiaries, which has increased by 6.63% to RMB 22.608 billion in 2006
from RMB 21.203 billion in 2005. The increase in fuel cost was due to expansion
of the scale of operation and increase in fuel price. In 2006, RMB 1.235 billion
of the increase in fuel cost was due to the increase in the quantities of
electricity generated, while the increase in fuel price accounted for RMB 0.17
billion of the increase.
As the average price of natural coal increased by 1.69% from RMB
338.03 per ton in 2005 to RMB 343.73 in 2006, the unit fuel cost per quantity
sold (per Mwh) hence increased by 0.75% to RMB 157.31.
Maintenance
The maintenance expenses of the Company and its subsidiaries
amounted to RMB 1,307 million in 2006, representing an increase of 12.14% from
RMB 1,165 million in 2005. The increase in the maintenance expenses was mainly
due to the expansion of scale of operation of the Company.
Depreciation
Depreciation expenses of the Company and its subsidiaries have
increased by 8.94% from RMB 6.168 billion in 2005 to RMB 6.719 billion in 2006.
The newly operated power plants accounted for RMB 566 million of the increase.
Depreciation of the remaining power plants has decreased by RMB 15 million from
the prior year.
Labor
Labor costs of the Company and its subsidiaries amounted to RMB
2.887 billion in 2006, representing an increase of RMB0.4 billion from RMB 2.487
billion in 2005. The main reason for the increase in labor costs was that, as a
result of the operation of new power plants and the expansion of scale of
operations of the Company which contributed the increase of RMB 0.261 billion.
Service fees to HIPDC
The service fees paid to HIDPC refer to fees paid for use of its
grid connection and transmission facilities based on reimbursement of cost plus
a profit. The service fees that were paid to HIPDC in 2006 did not experience
significant changes when compared with that of prior year.
Other operating expenses
Other operating expenses include expenses such as environmental
protection, insurance fee, administrative expenses and amortization, etc. The
other operating expenses of the Company and its subsidiaries amounted to RMB
1,933 million, representing an increase of 1.57% from RMB 1,903 million in 2005.
The expansion of scale of operations of the Company and the increase in
environmental protection fee levy rates caused the environmental protection fee
to increase by RMB 55 million. The other operating expenses apart from
environmental protection fee decreased by RMB 25 million as a result of cost
control of the Company.
Financial expenses
Financial expenses include the net of interest income, interest
expense, bank charges and net exchange differences.
Interest expenses
The interest expense of the Company and its subsidiaries in 2006
amounted to RMB 1,591 million, representing an increase of 11.53 % from RMB
1,427 million in last year. The increase was primarily attributable to the
expense off of interest expense upon commencement of commercial operation for
the newly operated power plants instead of continued capitalization.
Bank charges and net exchange differences
Bank charges and net exchange differences of the Company and its
subsidiaries amounted to RMB 68 million in 2006, representing a relatively
significant change from the RMB 249 million of exchange gain plus bank charges
in 2005. In 2005, RMB appreciated against US dollar and Euro. As a result, loans
denominated in US dollar and Euro generated approximately RMB 290 million in
foreign exchange gain, while in 2006, an exchange gain of RMB 112 million was
resulted, giving rise to a decrease to a foreign exchange gain of RMB 178
million.
33
Share of profit of associates
Share of profit of associates in 2006 was RMB 791 million,
representing an increase of RMB 147 million from RMB 644 million in 2005. The
increase of share of profit of associates has benefited from the increase in
investment income from Shandong Rizhao Power Company Ltd. and the inclusion of
investment income from Huaneng Finance in the Company's accounts starting from
January 2006.
Enterprise Income Tax ("EIT")
The EIT of the Company and its subsidiaries amounted to RMB 1,128
million, representing an increase of 7.99% from RMB 1,044 million in 2005. The
increase in EIT was mainly caused by the increase of profit.
Profit for the year, Profit attributable to the Company's equity holders and
minority interests
The profit of the Company and its subsidiaries amounted to RMB
6.889 billion in 2006, which represented a significant increase when comparing
with the profit of RMB 5.548 billion in 2005, reflecting that the actual
effective implementation of the Company's acquisition and development strategy
plays an important role in raising revenue and maintaining profit level. The
pace of profit increase was more proportionate than that of the revenue as a
result of the effective cost controls implemented by the Company and its
subsidiaries. The profit attributable to equity holders of the Company and
minority interests increased at similar pace.
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 %
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 expense
Interest income 53,685 43,092 24.58
Interest expense (1,426,609) (663,424) 115.04
Bank charges and exchange gain /
(losses), net 248,533 (119,452) (308.06)
-------------------- ---------------------
Total financial expense, 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
Income tax expense (1,044,297) (948,734) 10.07
-------------------- ---------------------
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
-------------------- ---------------------
34
--------------------------------------------------------------------
For the Year Ended December 31,
--------------------------------------------------------------------
Increased/
2005 2004 (Decreased)
-------------------- --------------------- ---------------------
RMB'000 RMB'000 %
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.
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
35
Average Tariff Rate
(RMB/MWh)
------------------------------------------------------
Operating Power Plant 2004 2005 Increase/(decrease) (%)
---------------------------------------------------- ------------ ------------- -------------------------
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:
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.
36
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 labor 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.
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 30 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.
37
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.
C. Financial position
General
Compared with 2005, the assets and liabilities of the Company and
its subsidiaries experienced a significant change as a result of the increase
in expenditure on project construction in 2006. As at December 31, 2006, the
total assets of the Company and its subsidiaries amounted to RMB 113.601
billion, representing an increase of 14.24% from RMB 99.440 billion in 2005.
Among them, non-current assets increased by 14.88% to RMB 100.374 billion and
current assets increased by 9.64% to RMB 13.226 billion. The major reason for
such was due to continuous capital expenditure. Current assets increased by RMB
1.163 billion from the beginning of 2006. Among them, there was net increase of
accounts receivable amounted to RMB 955 million, the majority of which was the
increase of receivables for electricity sold generated by the newly operated
power plants, and net decrease of inventories amounting to RMB 190 million,
mainly caused by the decrease of coal reserve for generating electricity.
As at December 31, 2006, the total liabilities of the Company and
its subsidiaries amounted to RMB 62.992 billion, representing an increase of
18.19% from RMB 53.296 billion as at December 31, 2005 mainly due to the
increase in borrowings for the financing of construction projects. The
non-current liabilities of the Company and its subsidiaries mainly consisted of
bank loans and shareholder's loans that are of similar terms as bank loans. The
current liabilities at year end increased comparing with the beginning of the
year as a result of expansion of scale of operation of the Company.
As at December 31, 2006, total interest-bearing debts of the
Company amounted to RMB 52.006 billion, which included long-term loans
(inclusive of current portion), short-term loans, short-term bonds and notes
payable. Among these, liabilities denominated in foreign currencies amounted to
approximately RMB 5.281 billion.
Excluding the impact of profit and dividend distribution in 2006,
there was an increase in equity from the beginning to the end of 2006. This was
mainly attributable to the inclusion in our equity of RMB 426 million of the
difference between the market value at the end of 2006 and the net book value in
the beginning of 2006 of our available-for-sale investment (investment in China
Yangtze Power Co., Ltd.), gross of tax.
Major financial position ratios
2006 2005 2004
------------- --------------- ---------------
Current ratio 0.50 0.52 0.58
Quick ratio 0.42 0.42 0.49
Ratio of liability and shareholders' equity 1.45 1.33 0.92
Multiples of interest earned 3.87 3.77 7.23
Formula of the financial ratios
Current ratio = balance of current assets as of the year end / balance of
current liabilities as of the year end
Quick ratio = (balance of current assets as of the year end - net inventories as
of the year end) / balance of current liabilities as of the year end
Ratio of liabilities and shareholders' equity = balance of liabilities as of the
year end / balance of shareholders' equity (excluding minority interests) as of
the year end
Multiples of interest earned = (profit before tax + interest expense) / interest
expenditure (inclusive of capitalized interest)
The current ratio and quick ratio remained at a relatively low level in which
current ratio decreased as of December 31, 2006 compared with December 31,
2005. The significant increase in the ratio of liabilities and shareholders'
equity as of December 31, 2006 compared with December 31, 2005 was mainly due
to the significant increase in borrowings for the new construction projects.
The multiples of interest earned increased from that of the same period of the
prior year mainly due to the increase of profit generated by the newly operated
power plants.
38
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 increase 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.
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, 2006,
2005 and 2004, 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, 2006, 2005 and 2004 under US GAAP. See also Note 38 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 interests
in the Qinbei Power Company, 60% equity interests 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 interests in the Yueyang Power Company, 60%
equity interests in the Luohuang Power Company, 90% equity interests 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 interests in Sichuan
Hydropower and 65% equity interests 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, 2006 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 and used for the
purpose of obtaining a qualifying asset was not capitalized if such interest
would not 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
and the related depreciation on property, plant and equipment.
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.
39
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 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, Huaneng Group's proportionate share of 33.09% in the
net assets of Shandong Huaneng that was sold to the Company was recorded at the
historical carrying value. The excess of the proportionate share in the book
value of the net assets acquired over the relevant portion of the cash
consideration was recorded as a capital contribution to the Company. The book
value of the remaining 66.91% of the net assets continues to be part of the
recoverable rate base under the cost recovery formula of the tariff setting
mechanism. Under US GAAP, the difference between these net asset values and the
cash consideration was recorded as a reduction to the property, plant and
equipment 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 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 2006 and 2005 and RMB 87 million in 2004.
The impact on depreciation arising from the GAAP difference between
IFRS and US GAAP was mainly attributable to the acquisitions from related
parties that are considered as common control transactions and thus, required to
be accounted for at historical cost under US GAAP 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 2006, the impact of using historical method resulted in a
decrease in depreciation of 7% from RMB 6,719 million under IFRS to RMB 6,265
million under US GAAP.
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.
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.
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,
2006, 2005 and 2004.
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 at December 31, 2006, the net current liabilities of the
Company and its subsidiaries totaled to 13.30 billion. Based on the successful
financing record 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 its liabilities as and when they
fall due and meet the capital required for operations. In addition, the Company
will continue to minimize interest expense by issuing short-term bonds. The
Company is confident that it will be able to control the level of its
liabilities and financial risks.
40
Liquidity
Cash flows from operating activities
For the Year Ended December 31,
-------------------------------------------------------
2006 2005 2004
----------------- ------------------- -----------------
RMB'000 RMB'000 RMB'000
Cash flows from operating activities
Profit before tax............................. 8,016,773 6,592,208 6,529,663
Non-cash items adjustments.................... 7,425,755 6,894,680 4,907,940
Changes in working capital.................... (99,402) (1,778,721) (1,219,952)
Interest paid................................. (2,507,354) (1,965,094) (974,879)
Interest received............................. 53,444 52,475 43,895
Income tax paid............................... (1,394,503) (1,114,698) (1,123,966)
----------------- ------------------- -----------------
Net cash provided by operating activities..... 11,494,713 8,680,850 8,162,701
----------------- ------------------- -----------------
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 11.495 billion in 2006 which was higher than that of the prior year mainly
because of an increase in the scale of operations.
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 borrowing bearing interests.
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,
---------------------------------------------------
2006 2005 2004
--------------- ---------------- ----------------
RMB'000 RMB'000 RMB'000
Cash flows from investing activities
Purchase of property, plant and equipment........... (15,998,575) (13,842,293) (9,877,553)
Proceeds from disposals of property, plant and
equipment, net.................................... 32,180 32,098 27,768
Prepayments of land use rights...................... (250,627) (99,745) (154,754)
(Increase)/decrease in other non-current assets.... (8,973) 15,766 (3,680)
Decrease in temporary cash investments.............. 2,652 9,989 132,355
Proceeds from disposals of investments.............. - - 548
Cash dividends received ............................ 482,609 429,589 172,542
Cash injections in associates....................... (174,918) - -
Cash consideration paid for acquisitions ........... - (2,528,300) (4,575,000)
Direct transaction costs paid for acquisitions...... - (16,698) (31,685)
Cash from the power plants acquisitions............. - 566,704 659,174
Net cash inflow on disposals of a subsidiary and
other investment.................................. 110 19,521 -
--------------- ---------------- ---------------
Net cash used in investing activities.............. (15,915,542) (15,413,369) (13,650,285)
--------------- ---------------- ---------------
Net cash used in investing activities amounted to approximately
RMB15.916 billion, RMB 15.413 billion and RMB 13.650 billion in 2006, 2005 and
2004. The increase in net cash used in investing activities in 2006 was mainly
due to the increased capital expenditures on construction and renovation offset
by no payment for acquisition.
41
Cash flows from financing activities
For the year ended December 31,
-----------------------------------------------------
2006 2005 2004
------------------- -------------- ----------------
RMB'000 RMB'000 RMB'000
Cash flows from financing activities
Bonds issuance expense paid..................... (20,000) (22,500) -
Drawdown of short-term bonds.................... 5,000,000 4,862,200 -
Repayments of short-term bonds.................. (4,862,200) - -
Drawdown of short-term loans.................... 14,458,700 11,657,569 8,724,000
Repayments of short-term loans.................. (13,215,850) (13,670,000) (2,940,313)
Drawdown of long-term loans from a shareholder.. - 2,000,000 800,000
Repayments of long-term loans from shareholders. - - (1,504,827)
Drawdown of long-term bank loans................ 9,982,982 8,297,018 4,944,000
Repayments of long-term bank loans.............. (3,010,623) (2,933,870) (3,192,843)
Drawdown of other long-term loans............... 40,000 - -
Repayments of other long-term loans (472,154) (351,118) (679,062)
Capital injection from minority shareholders of
the subsidiaries.............................. 588,708 585,702 677,034
Dividends paid to shareholders of the Company... (3,013,846) (3,022,096) (3,005,586)
Dividends paid to minority shareholders of the
subsidiaries.................................. (495,361) (318,252) (167,125)
Redemption of convertible notes................. - - (811)
------------------- -------------- ---------------
Net cash provided by/(used in) financing
activities......................................... 4,980,356 7,084,653 3,654,467
------------------- -------------- ---------------
Net cash inflow provided by financing activities in 2006 amounted
to RMB 4.980 billion primarily because our proceeds from bank loans exceeded
repayment of bank loans by approximately RMB 8 billion. On the other hand, the
net cash inflow was partially offset by the dividends of RMB 3.014 billion paid
to the shareholders of the Company.
Net cash inflow provided by financial 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 amount 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.
Cash and cash equivalents
For the Year Ended December 31,
------------------------------------------------
2006 2005 2004
--------------- -------------- ---------------
RMB'000 RMB'000 RMB'000
Net increase / (decrease) in cash and cash
equivalents....................................... 559,527 352,134 (1,833,117)
Cash and cash equivalents as of the beginning of
the year.......................................... 2,647,665 2,295,531 4,128,648
--------------- -------------- ---------------
Cash and cash equivalents as of the end of the year.. 3,207,192 2,647,665 2,295,531
=============== ============== ===============
As of December 31, 2006, the Company's cash and cash equivalents
amounted to RMB 3.207 billion, of which, cash in RMB accounted for RMB 1.327
million, current deposits in RMB accounted for RMB 3.204 billion, and current
deposits in US dollar accounted for RMB 2.153 million.
42
The Company's cash and cash equivalents as of December 31, 2005
amounted to RMB2.648 billion as compared with RMB2.296 billion as of December
31, 2004.
Please refer to Notes 22, 26 and 32(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 expenditures
The capital expenditures in 2006 amounted to approximately RMB 16.3
billion, which was mainly used for capital expenditures on construction and
renovation, including RMB 1,136 million for the Huaiyin Phase III project, RMB
499 million for the Haimen project, RMB 352 million for the Taicang Phase II
project, RMB 477 million for the Yueyang Phase II project, RMB 1,019 million for
the Shanghai Combined-Cycle project, RMB 1,647 million for the Luohuang Phase
III project, RMB 1,085 million for the Xindian Phase III project, RMB 986
million for the Yingkou Phase II project, RMB 4,397 million for the Yuhuan
project and RMB 706 billion for Shang'an Phase III project. Other expenditure
mainly consisted of pre-construction expenditure and routine renovation
expenditure.
The capital expenditures on construction and renovation amounted to
approximately RMB13.984 billion and RMB10.036 billion in 2005 and 2004,
respectively.
The Company will continue to incur significant capital expenditures
in 2007. The Company will actively engage in new project developments in order
to lay the foundation for the long-term development of the Company. The Company
expects to finance the above capital expenditure through internal funding, debt
financing and cash flows provided by operating activities.
Cash resources and anticipated financing costs
The Company expects the cash resources for capital expenditure and
acquisition to be primarily generated from internal funds, cash flow from
operating activities and future debt and equity financing.
Good operating results and good credit status provide the Company
strong financing capabilities. As at December 31, 2006, the Company and its
subsidiaries obtained from undrawn banking facilities of RMB 25.61 billion,
which provided the Company with a sufficient level of credit facilities and
effectively raised the level of asset liquidity and repayment capability of the
Company.
As at December 31, 2006, the total short-term loans of the Company
and its subsidiaries amounted to RMB 7.824 billion with interest rates charged
between 4.30% and 5.51% per annum (2005: RMB 6.581 billion with interest rates
charged between 4.30% and 5.76% per annum); apart from the short-term loans, the
total amount of the short-term bonds of the Company and its subsidiaries
amounted to RMB 5.078 billion (2005: RMB 4.938 billion).
As at December 31, 2006, the total long-term bank borrowings of
the Company and its subsidiaries amounted to approximately RMB 35.206 billion
(2005: approximately RMB 28.365 billion). These loans included bank borrowings
denominated in Renminbi of approximately RMB 30.096 billion (2005: approximately
RMB 22.241 billion), US dollar of approximately US$ 567 million (2005:
approximately US$672 million), and Euro of approximately Euro 66 million (2005:
approximately Euro 73 million). Included in these borrowings were approximately
US$ 54 million (2005: US$ 60 million) of floating-rate borrowings. For the year
ended December 31, 2006, the long-term bank borrowings bore interest rates that
ranged from 2% to 6.97% (2005: 2% to 6.97%) per annum.
As at December 31, 2006, the total long-term shareholder's loans
to the Company and its subsidiaries amounted to RMB 2.80 billion (2005:
approximately RMB 2.80 billion). For the year ended December 31, 2006, these
borrowings bore interest rate that ranged from 4.05% to 5.02% (2005: 4.05% to
5.02%) per annum.
As at December 31, 2006, other long-term loans of the Company and
its subsidiaries amounted to approximately RMB 424 million (2005: approximately
RMB 864 million). These loans included borrowings denominated in Renminbi of
approximately RMB 254 million (2005: approximately RMB 647 million), US dollar
of approximately US$ 13 million (2005: approximately US$16 million) and
Japanese Yen of approximately JPY 1.071 billion (2005: approximately JPY1.31
billion). The US dollar and Japanese Yen borrowings were at floating rates. For
the year ended December 31, 2006, these borrowings bore interest rates that
ranged from 4.94% to 6.12% (2005: 2.99% to 6.12%) per annum.
43
The Company and its subsidiaries will closely monitor changes in
the exchange rate and interest rate markets and cautiously assess the currency
rate and interest rate risks.
Combining the current development of the power generation 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.
The objective of the Company is to bring long-term, stable and
growing returns to the shareholders. In line with this objective, the Company
follows a proactive, stable and balanced dividend policy. In 2007, in accordance
with the profit appropriation plan of the board of directors of the Company
(subject to the approval of the shareholders' meeting), the Company expects to
pay a cash dividend of approximately RMB 3.376 billion.
The following table sets forth the maturity profile of the
Company's loans as of December 31, 2006.
Maturity Profile
(RMB billions) 2007 2008 2009 2009 2010
---- ---- ---- ---- ----
Principal proposed to be repaid 16.5 4.3 9.5 4.3 3.4
Interest proposed to be repaid 2.3 1.7 1.3 0.9 0.7
Total 18.8 6.0 10.8 5.2 4.1
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 2007 is relatively large
because this includes expected repayment of short-term borrowings and
short-term bonds. The amount of the principal to be repaid in 2009 is
relatively large because a significant amount of the long-term loans
borrowed in 2006 have a three-year maturity period.
E. Trend information
Impact of power demand and supply on the Company
In the power market, the rapid growth of the national economy, the
continuous increase in national living standard will cause increase in power
demand, providing opportunities for the Company to expand and develop more
projects. However, with the commencement of commercial operations of new
generations in recent years, market competition may be fiercer, and the
utilization hours of the generating units are expected to drop in 2007.
The implementation of the state policies of "encouraging to build
large generating units, closing small generating units", and "saving of
resources and reducing the emission of pollutants" provide opportunities to the
Company to enjoy advantages with large generating units, high efficiency and
wide service coverage and enhance its competitiveness. However, it will also be
a challenge for the Company as to how to capitalize the opportunities, make a
good use of the policies and turns its advantages into accelerating the
development and achieving good operating results.
Impact of coal demand and supply on the Company
In the coal market, coal supply and demand is basically balanced,
and the tension of coal transportation has been relatively relieved, hence
providing a favorable condition for the supply of coal for power plants.
However, the coal prices of key contracts have a relatively large increase and
spot-market coal price still hover at a high level, bringing challenges to the
Company in terms of fuel cost control.
Impact of the financial foreign exchange market on the Company
There are sufficient funds in the domestic financial market and
there are no significant fluctuations in funding costs. Because of the good
loan repayment capabilities and credit status of the Company, the Company is
confident in raising sufficient funds for construction of power plants and
daily operations by using various financial products.
44
The reforms of the Renminbi exchange rate setting mechanism
increased exchange rate flexibility. However, as both the scales of the use of
foreign exchange for the import of equipment and materials and foreign exchange
payments in servicing foreign currency borrowings are not significant, it is
anticipated that the reforms will not have a significant impact on the cash flow
of the Company.
F. Employee benefits
As at December 31, 2006, the Company and its subsidiaries had
23,508 employees. The Company and its subsidiaries provided the employees with
competitive remuneration and linked such remuneration to operating results as
working incentives for the employees. Currently, the Company and its
subsidiaries do not have any non-cash remuneration packages.
Based on the development plans of the Company and its subsidiaries
and the requirements of individual positions, together with consideration of
specific characteristics of individual employees, the Company and its
subsidiaries tailored various training programs for their employees on
management skills, technical skills and marketing skills. These programs
enhanced both the knowledge and operational skills of the employees.
G. Guarantee on loans and restricted assets
As of December 31, 2006, the balance of the guarantees provided by
the Company to Rizhao Power Company, an associate, amounted to RMB 123 million.
The Company assumed such guarantee obligation from Huaneng Group as a result of
the acquisition of Huaneng Group's equity investment in Rizhao Company.
As of December 31, 2006, certain property, plant and equipment of
Sichuan Hydropower, a subsidiary of the Company, were used to secure borrowings.
The original acquisition cost of such pledged assets was approximately RMB 90
million.
As of December 31, 2006, restricted bank deposits amounted to RMB
204 million, which were mainly deposits for letters of credits.
The Company had no contingent liabilities as of December 31, 2006.
H. Off-balance sheet arrangements
The off-balance sheet arrangements primarily consisted of the
guarantees provided for an associate's long-term loans mentioned above.
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 operations, liquidity, capital
expenditures or capital resources that is material to investors.
I. 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 profit of RMB 396 million in 2006 under IFRS. Shenzhen Energy Group is
the largest power supplier in Shenzhen and its power plants are located in
Guangdong Province, one of the most prosperous provinces in China. With strong
demand for electricity in that region, the Company expects that this investment
will generate stable returns 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 212 million in 2006 under IFRS. Hanfeng Power Company is located
in Hebei Province in north China and there is strong demand for electricity in
that region. The Company expects that this investment will generate stable
returns in the future.
45
J. 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, 2006 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.
As of December 31, 2006
Contractual Cash Obligations
(RMB millions) 2007 2008-2009 2010-2011 Thereafter Total
---------- ------------ ------------ ------------ -------------
Long-term Loans from a Shareholder(1) - - - 2,800 2,800
Long-term Bank Loans(1) 2,891 13,639 7,686 6,802 31,018
Other Long-term Loans(1) 152 136 57 - 345
Interest Payments 1,857 3,035 1,590 1,857 8,339
Operating Lease - Head Office(2) 26 - - - 26
Operating Lease - Nanjing Power Plant(2) 1 2 2 49 54
Operating Lease - Dezhou Power Plant(2) 30 60 60 372 522
Operating Lease - Shang'an Power
Plant(2) 2 4 4 62 72
---------- ------------ ------------ ------------ -------------
4,959 16,876 9,399 11,942 43,176
========== ============ ============ ============ =============
Other Commercial Commitments
(RMB millions) 2007 2008-2009 2010-2011 Thereafter Total
---------- ------------ ------------ ------------ -------------
Long-term coal purchase contracts(2) 9,457 11,024 - - 20,481
Other commitments(2) 17,388 - - - 17,388
---------- ------------ ------------ ------------ -------------
26,845 11,024 - - 37,869
========== ============ ============ ============ =============
(1) See Note 22 to the Financial Statements, "Long-term Loans".
(2) See Note 34 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 8 to the
Financial Statements.
ITEM 6 Directors, Senior Management and Employees
A. Directors, members of the supervisory committee and senior management
Directors
The table below sets forth certain information concerning our
directors as of April 6, 2007. The current term for all of our directors is
three years, which will expire in May 2008.
Name Age Position with us
-------------------------------- ----- ---------------------------------------
Li Xiaopeng 48 Chairman of the Board of Directors
Huang Yongda 50 Vice Chairman of the Board of Directors
Huang Long 54 Vice Chairman of the Board of Directors
Na Xizhi 54 Director, President
Wu Dawei 54 Director
Shan Qunying 54 Director
Ding Shida 59 Director
Xu Zujian 53 Director
Liu Shuyuan 57 Director
Qian Zhongwei 69 Independent Director
Xia Donglin 46 Independent Director
Liu Jipeng 51 Independent Director
Wu Yusheng 51 Independent Director
Yu Ning 53 Independent Director
46
Li Xiaopeng, aged 48, has served as Chairman of the Company since April 8,
1999. He also serves as President of Huaneng Group as well as Chairman 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 50, has served as Vice Chairman of the Company since May 11,
2005. He also serves as 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 ("Xi'an Thermal"),
Chairman of Huaneng Capital Services Limited Company ("Huaneng Capital
Service"), and President of the Company. He graduated from Renmin University of
China, with a master's degree in industrial financial accounting.
Huang Long, aged 54, has served as Vice Chairman of the Company since March 7,
2006. He also serves as Vice President of Huaneng Group. Mr. Huang is a senior
engineer. He served as Deputy General Manager and General Manager of the
International Co-operation Department, Vice President and Secretary to the
Board of the Company. He graduated from North Carolina State University in the
U.S. with a M.S. degree in communications and auto-control.
Na Xizhi, aged 54, has served as a director of the company since May 12, 2005
and President of the Company since March 7, 2006. Mr. Na is a professor-level
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
technology.
Wu Dawei, aged 54, has served as a director of the Company since May 11, 2005.
He also serves as Deputy Chief Engineer of Huaneng group and President of
Huaneng Group East China Branch Company. Mr. Wu is a professor-level senior
engineer. Since joining the Company in 1988, he has served as Deputy General
Manager of Huaneng Shanghai Shidongkou Second Power Plant, Deputy General
Manager of Shanghai branch of the Company, General Manager of Huaneng Shanghai
Shidongkou Second Power Plant, and vice president of the Company. He has
obtained a MBA degree from the China Europe International Business School.
Shan Qunying, aged 54, has served as a director of the Company since June 6,
2006. He also served as Vice President of Hebei Provincial Construction
Investment Company. Mr. Shan is a senior engineer. He served as Division Chief
of the Energy and Transportation Division of Hebei Provincial Construction
Investment Company. He graduated from Beijing Steel Institute specializing in
automation.
Ding Shida, aged 59, has served as a director of the Company since November 17,
2005. He also serves as President of Fujian Investment Enterprise Group
Corporation, Chairman of Minxin Group Limited (a Hong Kong listed company),
Director, Executive Director and Vice Chairman of Xiamen International Bank,
Director, Executive Director and Vice Chairman of Macau International Bank, and
Chairman of Hong Kong Guixin Limited. Mr. Ding is a senior economist. He served
as Secretary of the Party Committee of Shanghang County, member of the Party
Committee of Longyan Region, Secretary of the Party Committee of Longyan City,
General Manager and Chairman of Fujian Provincial Construction Materials
Corporation, and Chairman of Fujan Cement Inc. (a domestic listed company). 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 53, has served as a director of the Company since June 6, 2000.
He also served as Vice President of Jiangsu Province Guoxin Asset Management
Group Limited Company, and Chairman of Jiangsu Investment Management Co. Ltd.
Mr. Xu is a senior economist. He served as Vice President of Jiangsu
Provincial International Trust & Investment Corporation, and President of
Jiangsu Provincial Investment & Management Limited Liability Company. He
graduated from Liaoning Finance Institute specializing in infrastructure
finance.
47
Liu Shuyuan, aged 57, has served as a director of the Company since September
28, 2004. He also serves as Chairman of Liaoning Energy Investment (Group)
Limited Liability Company. Mr. Liu is a senior economist and senior
professional manager. He served as Vice President of Liaoning Provincial Trust
& Investment Corporation, a director, Vice President, and President of Liaoning
Chuangye (Group) Limited Liability Company (Liaoning Energy Corporation), and a
director and President of Liaoning Energy Investment (Group) Limited Liability
Company. He graduated from Liaoning Province Communist Party School
with a master's degree in economic management.
Qian Zhongwei, aged 69, has served as an independent director of the Company
since May 15, 2002. Mr. Qian is a professor-level 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 46, has served as an independent director of the Company since
December 23, 2002. Mr. Xia is a professor and mentor for doctorate graduate of
the School of Economics and Management, Tsinghua University. He is also an
advisory specialist of the Accounting Standard Committee of the Ministry of
Finance, Deputy Secretary-General of China Accounting Society, and an
independent director of Zhejiang Zhongda Company and other companies. Mr. Xia is
a certified public accountant (non-practising member). He served as Head of
Accounting Department of School of Economics and Management, 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 51, has served as an independent director of the Company since
September 28, 2004. He also serves as Chairman of Beijing Standard Consulting
Company, a professor of Law and Economic Research Center of China University of
Political Science and Law. 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 51, has served as an independent direct of the Company since
May 11, 2005. He also serves as Deputy Chief Engineer and Manager of Technology
Department of State Grid Corporation of China. Mr. Wu is a professor-level
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 with a master's degree in electric power system and
automation.
Yu Ning, aged 53, has served as an independent director of the Company since
May 11, 2005. He is also President of All China Lawyers Association, a
part-time professor at Peking University, a mentor for 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
Director of the Central Commission for Discipline Inspection of the Communist
Party of China. He graduated from Peking University specializing in economic
law with a master degree.
Supervisors
The table below sets forth certain information concerning our
supervisors as of April 6, 2007. The current term for all of our supervisors is
three years, which will expire in May 2008.
48
Name Age Position with us
----------------------------- ----- ---------------------------------------
Guo Junming 42 Chairman of the Supervisory Committee
Yu Ying 52 Vice Chairman of the Supervisory Committee
Gu Jianguo 41 Supervisor
Shen Zongmin 53 Supervisor
Zou Cui 54 Supervisor
Wang Zhaobin 52 Supervisor
Guo Junming, aged 42, has served as Chairman of the Board of Supervisors of the
Company since January 18, 2006. He also serves as Chief Accountant 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 Corporation Limited ("Huaneng Finance"), President of Huaneng
Capital Services, Deputy Chief Accountant and Manager of Finance Department of
Huaneng Group. He graduated from Shanxi Finance and Economic Institute
specializing in business finance and accounting.
Yu Ying (Ms), aged 52, has served as Vice Chairman of the Company's Supervisory
Committee since May 11, 2005. She also serves as President of Dalian Municipal
Investment Corporation. Ms. Yu is a senior economist. She served as Director of
Capital Construction 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 41, has served a supervisor of the Company since November 17,
2005. He also serves as President of Nantong Investment & Management Limited
Company. Mr. Gu is an economist. 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; General Secretary of the Party
Committee and 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 53, has served as a supervisor of the Company since December
23, 2002. He also serves as Manager of Shantou Electric Power Development
Corporation. Mr. Shan is a senior 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 Electric Power Development Co., Ltd. He
graduated from Macau Technology University with a MBA degree.
Zou Cui (Ms.), aged 54, has served as a supervisor of the Company since May 11,
2005. She also serves as Manager of the Human Resources Department of the
Company. Ms. Zou is a senior engineer. She served as Deputy Chief and Chief of
the Personnel Division of the Human Resources Department of HIPDC, Deputy
Manager of the Human Resources Department and Deputy Manager of the Supervision
and Auditing Department of the Company. She graduated from Xi'an Jiaotong
University specializing in computer science.
Wang Zhaobin, aged 52, has served as a supervisor of the Company since May 11,
2005. He also serves as Manager of the Administration Department of the
Company. Mr. Wang is a corporate culture specialist. He served as Chief of
the Corporate Culture Division of the Human Resources Department, Director of
the Retirement Department of HIPDC, Deputy Secretary of the Party Committee,
Secretary of the Discipline Inspection Committee and Chairman of the Labor
Union of HIPDC Beijing Branch Company, and Manager of the Political Department
of the Company. He graduated from Beijing Municipal Communist Party School,
specializing in economic management.
Other Executive Officers
Liu Guoyue, aged 44, has served as Vice President of the Company since
September 19, 2001. 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. He graduated from North China Electric Power University specializing in
electric power system and management engineering, and was awarded his
bachelor's degree in technology and management.
49
Qu Xiaojun, aged 49, has served as Vice President of the Company since March 7,
2006. He served as Deputy Secretary of the Party Committee, Secretary of the
Discipline Inspection Committee and Chairman of the Labor Union of HIPDC
Beijing Branch Company, and Deputy Manager and Manager of the Personnel and
Labor Department, Manager of the 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,
Deputy Director of the Party Committee office, Supervising Officer of the
Supervisory Division of Energy Department, and a director of second Supervisory
Division of Power Department. He graduated from Central Communist Party School
specializing in economic management.
Huang Jian, aged 45, has served as Vice President and Secretary to the Board of
the Company since March 7, 2006. Mr. Huang is a senior accountant. He served as
Deputy Division Chief and Division Chief of the Financial Affairs Department of
the Company, Chief Accountant of HIPDC Beijing Branch Company, Deputy Manager
of the Financial Affairs Department of the Company and Deputy Chief Accountant
and Chief Accountant of the Company. Mr. Huang graduated from the Finance and
Administration Science Research Institute of Ministry of Finance, specializing
in accounting and was awarded a master's degree of Economics.
Lu Dan (Ms.), aged 51, has served as Vice President of the Company since March
7, 2006. Ms. Lu is a professor-level senior engineer. She served as Deputy
Manager of the General Planning Department of Huaneng Power Generation Company,
Assistant to Manager of the General Planning Department, Deputy Manager of the
Planning Development Department, Deputy Manager of the General Planning
Department of Huaneng Group, Manager of the Planning Development Department of
the Company, and Assistant to President of the Company. She graduated from
Beijing University of Chemical Technology specializing in chemical engineering
and machinery.
Fan Xiaxia, aged 45, has served as Vice President of the Company since March 7,
2006. Mr. Fan is a senior engineer. He served as Deputy Chief of the General
Administration Division of the Engineering Department of HIPDC, Deputy Chief of
the Construction Management Department, Deputy General Manager of the Company's
Nantong Branch Company, Deputy Manager of the Construction Management
Department of HIPDC, Deputy Manager and Manager of the International
Co-operation and Business Department of the Company, Manager of the
Construction Management Department of the Company, Assistant to President of
the Company and General Manager of the Company's Zhejiang Branch Company. He
graduated from Beijing University of Civil Engineering and Architecture
specializing in civil architecture.
Zhou Hui (Ms.), aged 44, has served as Chief Accountant of the Company since
March 7, 2006. Ms. Zhou is a senior accountant. She served as Deputy Chief of
the Financial Management Division of the Finance Department, Deputy Chief of
the Price Management Division and Division Chief of the Second Financial
Affairs and Accounting Division of HIPDC, Deputy Manager and Manager of the
Company's Finance Department, and Deputy Chief Accountant, Chief Accountant and
Manager of the Finance Department of the Company. She graduated from Renmin
University of China with a master's degree in financial accounting.
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, 2006:
Remuneration Paid
by the Company in
Name Position with the Company 2006
---------------------------- ------------------------------------------- --------------------
(RMB in thousand)
Directors
---------
Mr. Li Xiaopeng Chairman of the Board of Directors 0
Mr. Huang Yongda Vice Chairman of the Board of Directors 0
President (until March 7, 2006)
Mr. Huang Long Vice Chairman of the Board of Directors 666
(since March 7, 2006)
Vice President (until March 7, 2006)
Mr. Na Xizhi President (since March 7, 2006) 708
Vice President (until March 7, 2006)
Mr. Wu Dawei Director 163
Mr. Shan Qunying Director 40
Mr. Ding Shida Director 40
Mr. Xu Zujian Director 40
Mr. Liu Shuyuan Director 40
50
Remuneration Paid
by the Company in
Name Position with the Company 2006
---------------------------- ------------------------------------------- --------------------
(RMB in thousand)
Mr. Qian Zhongwei Independent Director 60
Mr. Xia Donglin Independent Director 60
Mr. Liu Jipeng Independent Director 60
Mr. Wu Yusheng Independent Director 60
Mr. Yu Ning Independent Director 60
Mr. Wang Xiaosong Director (until March 7, 2006) 0
------------------------------------------- --------------------
Sub-total: 1,997
------------------------------------------- --------------------
Supervisors
-----------
Ms. Guo Junming Chairman of the Supervisory Committee 0
Ms. Yu Ying Vice Chairman of the Supervisory Committee 40
Mr. Gu Jiangou Supervisor 40
Mr. Shen Zongmin Supervisor 40
Ms. Zou Cui Supervisor 678
Mr. Wang Zhaobin Supervisor 647
------------------------------------------- --------------------
Sub-total 1,445
------------------------------------------- --------------------
Other Executive officers
------------------------
Mr. Liu Guoyue Vice President 843
Mr. Qu Xiaojun Vice President (since March 7, 2006) 593 (1)
Mr. Huang Jian Vice President and Secretary to the Board
(since March 7, 2006) 842
Chief Accountant (Until March 7, 2006)
Ms. Lu Dan Vice President (since March 7, 2006) 563 (1)
Ms. Fan Xiaxia Vice President (since March 7, 2006) 562 (1)
------------------------------------------- --------------------
Ms. Zhou Hui Chief Accountant (since March 7, 2006) 554 (1)
------------------------------------------- --------------------
Mr. Zhang Hong Vice President (until March 7, 2006) 233(2)
Mr. Li Shiqi Vice President (until March 7, 2006) 233(2)
------------------------------------------- --------------------
Subtotal: 4,423
------------------------------------------- --------------------
--------------
Note:
(1) Mr. Qu Xiaojun, Ms. Lu Dan, Mr. Fan Xiaxia and Ms. Zhou Hui have
served as Vice President and Chief Accountant since March 7, 2006.
The data indicated include the compensation they received from us in
the capacity of vice presient from April to December 2006.
(2) Mr. Zhang Hong and Mr. Li Shiqi served as Vice President until March
7, 2006, and did not receive any compensation from us in the capacity
of Vice President afterwards. The data indicated include the
compensation they received from us from January to March 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 around 60% of the total remuneration, which are determined
on the basis of their performance. 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 assist our board in
performing its statutory and fiduciary duties of supervising our accounting,
financial reports, internal controls and compliance, including but not limited
to, assisting our board in supervising (i) the integrity of our financial
statements; (ii) our compliance with the applicable laws and regulations; (iii)
the qualification and independence of our independent auditors and (iv) the
performances of our independent auditors and internal auditing department.
51
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, 2006, we employed 23,508 people. Of these, 304
are headquarters management staff, 15,989 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
48% our work force graduated from university or technical college. As of
December 31, 2004 and 2005, we had approximately 22,129 and 23,531 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
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.
52
In compliance with the relevant regulations, we and our employees
participate in the electric power industry pension plan under which all the
employees are entitled to the pensions payments upon retirement. See Note 8 to
the Financial Statements. Other pension payments to our retiring employees are
not required under applicable PRC laws and regulations.
E. Share Ownership
As of December 31, 2006, Mr. Na Xizhi, a director and president of
the Company, held a total of 7,240 tradable domestic shares of us, representing
less than 1% of the total domestic shares. Mr. Na does not have different voting
rights from other holders of domestic shares. None of our other directors,
supervisors or 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 our major shareholders as of April 6, 2007.
Approximate Approximate
percentage in percentage in
the total issued the total
domestic share issued share
capital capital
Shareholder Number of shares % %
------------------------------------------------------- --------------------- ------------------ ----------------
Huaneng International Power Development Corporation(1) 5,066,662,118 56.30 42.03
China Huaneng Group 1,055,124,549 11.72 8.75
Hebei Provincial Construction Investment Company 603,000,000 6.70 5.00
------------
Note: Huaneng Group indirectly holds 22% of our total issued shares through
HIPDC, its 51.98% owned subsidiary in addition to the direct
shareholdings of 8.75% in us.
As of April 1, 2004, HIPDC and Heibei Provincial Construction
Investment Company ("HPCIC") directly holds 42.39% and 7.50% of our total issued
shares, respectively. Huaneng Group indirectly holds 22% of our total issued
shares through HIPDC, its 51.98% owned subsidiary.
In 2004, Shantou Electric Power Development Company transferred a
total of 58 million shares of us to HIPDC, and the shareholdings of HIPDC
increased to 43.12%. In 2005, HIPDC transferred a total of 40 million shares to
Liaoning Energy Investment (Group) Limited Liability Company, and therefore
decreased its shareholdings in us to 42.78%.
In 2006, all of our shareholders of non-tradable domestic shares
except HIPDC transferred a total of approximately 1.1 billion shares to Huaneng
Group, representing 9.24% of our total issued shares. Among others, HPCIC
transferred approximately 301 million shares to Huaneng Group, and decreased its
shareholdings in us to 5.00%.
On April 19, 2006, we carried out our reform plan to convert all
non-tradable domestic shares into tradable domestic shares. According to the
plan, Huaneng Group and HIPDC transferred a total of 15 million shares to our
shareholders of A Shares. As a result, the direct shareholdings of Huaneng Group
and HIPDC decreased to 8.75% and 42.03%, respectively.
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.
53
On May 12, 2006, HIPDC and other promoters (including the
shareholders who assumed the rights and obligations of original promoters as a
result of share transfer) entered into an amendment to the Shareholders'
Agreement, pursuant to which, each promoter shall be entitled to exercise its
own voting rights at the shareholders' general meeting. Consequently, HIPDC
currently holds 42.03% of our total voting rights. Since HIPDC's parent
company, Huaneng Group currently directly holds 8.75% of our total voting
rights, it is able to exert control over us when acting in concert with Huaneng
Group.
B. Related party transactions
Guarantees
The table below sets forth information on guarantees provided by
Huaneng Group, HIPDC and the Company to the related parties in 2006 for the
purposes of financing their operation, construction and renovation.
Largest Amount
Outstanding Amount Outstanding
Guarantor Guarantee Interest Rate in 2006 As of March 31, 2007
-------------------- ---------------------- --------------------- ----------------------- ----------------------
(%) (RMB) (RMB)
Huaneng Group The Company 6.36 397,737,757 330,804,983
(Ultimate Parent
of the Company)
The Company LIBOR + 0.075 485,095,682 391,493,803
Taipingyi 5.75 250,000,000 250,000,000
Hydropower(1)
Taipingyi 5.51 56,300,000 -
Hydropower(1)
Mingtai Hydropower(2) 5.75 130,000,000 130,000,000
Kangding 6.16 115,000,000 110,000,000
Hydropower(3)
Kangding 6.16 195,000,000 178,000,000
Hydropower(3)
Kangding 5.75 238,000,000 218,000,000
Hydropower(3)
Jialingjiang 6.84 30,000,000 30,000,000
Hydropower(4)
Jialingjiang 6.12 50,000,000 50,000,000
Hydropower(4)
54
Largest Amount
Outstanding Amount Outstanding
Guarantor Guarantee Interest Rate in 2006 As of March 31, 2007
-------------------- ---------------------- --------------------- ----------------------- ----------------------
(%) (RMB) (RMB)
Jialingjiang 6.84 30,000,000 30,000,000
Hydropower(4)
Jialingjiang 6.16 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 5.75 15,000,000 15,000,000
Hydropower(4)
Jialingjiang 5.75 15,000,000 15,000,000
Hydropower(4)
Jialingjiang 6.16 20,000,000 20,000,000
Hydropower(4)
Jialingjiang 6.16 20,000,000 20,000,000
Hydropower(4)
Jialingjiang 6.16 30,000,000 30,000,000
Hydropower(4)
Jialingjiang 6.16 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 5.75 30,000,000 30,000,000
Hydropower(4)
Jialingjiang 5.75 30,000,000 30,000,000
Hydropower(4)
Jialingjiang 5.51 40,000,000 40,000,000
Hydropower(4)
Jialingjiang 5.18 10,000,000 -
Hydropower(4)
Fujiang Hydropower(5) 5.51 25,000,000 25,000,000
Fujiang Hydropower(5) 5.75 15,000,000 15,000,000
Fujiang Hydropower(5) 5.75 10,000,000 10,000,000
55
Largest Amount
Outstanding Amount Outstanding
Guarantor Guarantee Interest Rate in 2006 As of March 31, 2007
-------------------- ---------------------- --------------------- ----------------------- ----------------------
(%) (RMB) (RMB)
Fujiang Hydropower(5) 5.75 10,000,000 10,000,000
Fujiang Hydropower(5) 6.16 10,000,000 10,000,000
Fujiang Hydropower(5) 6.16 20,000,000 20,000,000
Fujiang Hydropower(5) 6.16 60,000,000 60,000,000
Fujiang Hydropower(5) 5.51 30,000,000 30,000,000
Fujiang Hydropower(5) 5.75 50,000,000 50,000,000
Fujiang Hydropower(5) 6.16 30,000,000 30,000,000
Fujiang Hydropower(5) 6.16 40,000,000 40,000,000
Fujiang Hydropower(5) 6.16 50,000,000 50,000,000
Fujiang Hydropower(5) 5.51 50,000,000 50,000,000
Fujiang Hydropower(5) 5.51 50,000,000 50,000,000
Fujiang Hydropower(5) 5.75 31,440,000 31,440,000
Fujiang Hydropower(5) 5.75 50,000,000 50,000,000
Fujiang Hydropower(5) 6.16 100,000,000 100,000,000
Fujiang Hydropower(5) 6.16 101,100,000 101,100,000
Fujiang Hydropower(5) 5.75 30,000,000 30,000,000
Fujiang Hydropower(5) 5.75 30,000,000 30,000,000
Fujiang Hydropower(5) 5.75 40,000,000 40,000,000
Fujiang Hydropower(5) 6.16 50,000,000 50,000,000
Fujiang Hydropower(5) 6.16 40,000,000 40,000,000
56
Largest Amount
Outstanding Amount Outstanding
Guarantor Guarantee Interest Rate in 2006 As of March 31, 2007
-------------------- ---------------------- --------------------- ----------------------- ----------------------
(%) (RMB) (RMB)
Fujiang Hydropower(5) 6.16 20,000,000 20,000,000
Fujiang Hydropower(5) 6.16 50,000,000 50,000,000
Fujiang Hydropower(5) 6.16 50,000,000 50,000,000
Fujiang Hydropower(5) 5.51 20,000,000 20,000,000
Fujiang Hydropower(5) 5.51 10,000,000 10,000,000
Fujiang Hydropower(5) 5.51 10,000,000 10,000,000
Fujiang Hydropower(5) 5.51 20,000,000 20,000,000
Fujiang Hydropower(5) 5.51 10,000,000 10,000,000
Fujiang Hydropower(5) 5.51 30,000,000 30,000,000
Fujiang Hydropower(5) 5.51 30,000,000 30,000,000
Fujiang Hydropower(5) 5.75 10,000,000 10,000,000
Fujiang Hydropower(5) 5.75 20,000,000 20,000,000
Fujiang Hydropower(5) 5.75 20,000,000 20,000,000
Fujiang Hydropower(5) 5.75 10,000,000 10,000,000
Dongxiguan 5.51 360,650,000 360,650,000
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)
57
Largest Amount
Outstanding Amount Outstanding
Guarantor Guarantee Interest Rate in 2006 As of March 31, 2007
-------------------- ---------------------- --------------------- ----------------------- ----------------------
(%) (RMB) (RMB)
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 1,167,899,160 839,455,560
Company(8)
Qinbei Power LIBOR+0.43 126,817,428 99,439,713
Company(9)
Qinbei Power LIBOR+0.3 89,985,238 70,220,357
Company(9)
Pingliang Power 5.51 1,112,000,000 752,000,000
Company(10)
Pingliang Power 5.51 331,500,000 0
Company(10)
Hanfeng Power 5.51 704,000,000 0
Company(11)
Hanfeng Power 5.51 595,000,000 0
Company(11)
Rizhao Power 6.12 86,250,000 0
Company(12)
58
Largest Amount
Outstanding Amount Outstanding
Guarantor Guarantee Interest Rate in 2006 As of March 31, 2007
-------------------- ---------------------- --------------------- ----------------------- ----------------------
(%) (RMB) (RMB)
Rizhao Power 6.12 46,000,000 23,000,000
Company(12)
Rizhao Power 6.12 34,500,000 28,750,000
Company(12)
Rizhao Power 6.39 44,562,500 33,062,500
Company(12)
Rizhao Power 6.84 93,437,500 70,437,500
Company(12)
Rizhao Power 6.84 280,000,000 250,000,000
Company(12)
HIPDC The Company 5.95 750,793,254 539,650,681
The Company 6.6 571,017,572 463,052,137
The Company 6.6 224,405,708 184,339,418
The Company 6.54 897,516,583 661,652,910
The Company 5.95 867,430,987 692,763,164
The Company Yushe Power 5.75 612,000,000 0
Company(13)
Qinbei Power 5.51 740,000,000 0
Company(10)
Rizhao Power 6.12 63,750,000 0
Company(12)
Rizhao Power 6.12 34,000,000 17,000,000
Company(12)
Rizhao Power 6.12 25,500,000 21,250,000
Company(12)
Rizhao Power 6.39 32,937,500 24,437,500
Company(12)
Rizhao Power 6.84 69,062,500 52,062,500
Company(12)
------------
Notes:
(1) Taipingyi Hydropower is a subsidiary of Sichuan Hydropower, which was a
subsidiary of the Company as of December 31, 2006 and is a subsidiary
of Huaneng Group from January 1, 2007.
(2) Mingtai Hydropower is a subsidiary of Sichuan Hydropower, which was a
subsidiary of the Company as of December 31, 2006 and is a subsidiary
of Huaneng Group from January 1, 2007.
(3) Kangding Hydropower is a subsidiary of Sichuan Hydropower, which was a
subsidiary of the Company as of December 31, 2006 and is a subsidiary
of Huaneng Group from January 1, 2007.
59
(4) Jialingjiang Hydropower is a subsidiary of Sichuan Hydropower, which
was a subsidiary of the Company as of December 31,2006 and is a
subsidiary of Huaneng Group from January 1, 2007.
(5) Fujiang Hydropower is a subsidiary of Sichuan Hydropower, which was a
subsidiary of the Company as of December 31,2006 and is a subsidiary of
Huaneng Group from January 1, 2007.
(6) Dongxiguan Hydropower is a subsidiary of Sichuan Hydropower, which was
a subsidiary of the Company as of December 31, 2006 and is a subsidiary
of Huaneng Group from January 1, 2007.
(7) Baoxinghe Power Company is a subsidiary of Sichuan Hydropower, which
was a subsidiary of the Company as of December 31, 2006 and is a
subsidiary of Huaneng Group from January 1, 2007.
(8) Luohuang Power Company is a subsidiary of the Company.
(9) Qinbei Power Company is a subsidiary of the Company.
(10) Pingliang Power Company is a subsidiary of the Company.
(11) Hanfeng Power Company is an associate of the Company.
(12) Rizhao Power Company is an associate of the Company.
(13) Yushe Power Company is a subsidiary of the Company.
Loans
The table below sets forth the loans made by Huaneng Group and
Huaneng Finance to the related parties in 2006 for the purposes of financing
their operation, construction and renovation.
Outstanding
Balance
Largest Amount as of March 31,
Lender Borrower Interest Rate Outstanding 2007
(%) (RMB) (RMB)
------------------ ----------------- --------------- ----------------- ------------------
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) 4.32 75,000,000 75,000,000
Qinbei Power
Company(2) 4.60 375,000,000 375,000,000
Qinbei Power
Company(2) 4.32 125,000,000 125,000,000
Huaneng Finance The Company 4.86 500,000,000 -
(Subsidiary of
Huaneng Group)
The Company 5.02 100,000,000 -
Weihai Power
Company(3) 5.27 130,000,000 130,000,000
Taicang Power
Company(4) 5.27 200,000,000 200,000,000
Taicang II Power
Company(5) 5.51 490,000,000 490,000,000
Huaiyin II Power
Company(6) 5.02 500,000,000 -
Huaiyin II Power
Company(6) 5.27 200,000,000 200,000,000
Yushe Power
Company(1) 5.27 41,000,000 40,000,000
Yushe Power
Company(1) 5.51 35,000,000 35,000,000
Yushe Power
Company(1) 5.51 127,700,000 127,700,000
Yushe Power
Company(1) 5.51 10,000,000 10,000,000
60
Outstanding
Balance
Largest Amount as of March 31,
Lender Borrower Interest Rate Outstanding 2007
(%) (RMB) (RMB)
------------------ ----------------- --------------- ----------------- ------------------
Yushe Power
Company(1) 5.51 50,000,000 50,000,000
Yushe Power
Company(1) 5.51 10,000,000 -
Qinbei Power
Company(2) 5.27 120,000,000 120,000,000
Qinbei Power
Company(2) 5.27 250,000,000 250,000,000
Qinbei Power
Company(2) 5.02 100,000,000 0
Qinbei Power
Company(2) 5.51 210,000,000 300,000,000
Qinbei Power
Company(2) 5.51 0 45,000,000
Yueyang Power
Company(7) 5.51 100,000,000 100,000,000
Pingliang Power
Company(8) 5.27 110,000,000 110,000,000
Pingliang Power
Company(8) 5.51 90,000,000 90,000,000
Pingliang Power
Company(8) 5.51 200,000,000 200,000,000
Dongxiguan
Hydropower(9) 5.18 20,000,000 20,000,000
Dongxiguan
Hydropower(9) 5.67 30,000,000 30,000,000
Mingtai
Hydropower(10) 5.27 10,000,000 10,000,000
Mingtai
Hydropower(10) 5.51 12,000,000 12,000,000
Mingtai
Hydropower(10) 5.67 10,000,000 10,000,000
Mingtai
Hydropower(10) 5.67 20,000,000 20,000,000
------------
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) Pingliang Power Company is a subsidiary of the Company.
(9) Dongxiguan Hydropower is a subsidiary of Sichuan Hydropower, which was
a subsidiary of the Company as of December 31, 2006 and is a subsidiary
of Huaneng Group from January 1, 2007.
(10) Mingtai Hydropower is a subsidiary of Sichuan Hydropower, which was a
subsidiary of the Company as of December 31, 2006 and is a subsidiary
of Huaneng Group from January 1, 2007.
Lease Agreement
Pursuant to a leasing agreement between HIPDC and us signed on
December 26, 2000, HIPDC agreed to lease Tianyin Mansion with a total 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.
61
T&T Service Agreements
Pursuant to the T&T Service Agreements we agreed to pay service
fees to HIPDC in relation to the provision of transmission and transformer
facilities for our newly constructed power plants, power plants under expansion
and acquired power plants which commence commercial operations after January 1,
1997 for a fixed fee equal to 12% of the original book value of the transmission
and transformer facilities as set forth in the financial statements of HIPDC.
The terms of the T&T Service Agreements are to be reviewed after a period of 10
years. 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 2006 was approximately RMB 141 million.
Acquisition from Huaneng Group in 2006
At the end of 2005, we paid a consideration of RMB 126 million to
Huaneng Group and advanced a payment of RMB 162 million as capital injection to
Huaneng Finance in order to acquire 20% equity interests in Huaneng Finance.
The acquisition became effective in January 2006.
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.
Current deposits with Huaneng Finance
As of December 31, 2006, we placed with Huaneng Finance current
deposits of approximately RMB 2,247 million, which bore interest rates ranging
from 0.72% to 1.62% per annum.
Coal purchases
In 2006, we paid for coal purchase RMB 139.97 million, RMB 49.16
million and RMB 735.08 million, respectively, to China Huaneng International
Trade Economics Corporation ("CHITEC"), Hebei Huaneng Jingyuan Coal Company
Limited ("Huaneng Jingyuan") and Shanghai Time Shipping Company Ltd. ("Time
Shipping"). CHITEC and Huaneng Jingyuan are subsidiaries of Huaneng Group; Time
Shipping is a joint controlled entity of Huaneng Group.
Continuous transactions with Huaneng Energy and Transportation Industry
Holdings Co., Ltd.
On January 15, 2007, we entered into two framework agreements
with Huaneng Energy and Transportation Industry Holdings Co., Ltd. ("Huaneng
Energy and Transportation"), including an agreement on purchase of auxiliary
equipment and products involving an estimated total amount of approximately
RMB 900 million and an agreement on coal supply and transportation involving
an estimated total amount of approximately RMB 4.2 billion. Huaneng Energy and
Transportation is 100% owned by Huaneng Group. These agreements became
effective retrospectively from January 1, 2007 and will expire on December 31,
2007.
Continuous Transactions with Xi'an Thermal
On January 15, 2007, we entered into a framework agreement with
Xi'an Thermal on provision of technical services, project contracting and
purchase of auxiliary equipment and products involving an estimated total
amount of approximately RMB 360 million. Xi'an Thermal is 52% owned by Huaneng
Group. The agreement became effective retrospectively from January 1, 2007 and
will expire on December 31, 2007.
62
Issuance of short-term bonds
In 2006, we issued short-term bonds to Huaneng Finance, Huaneng
Capital Service and Greatwall Securities Co., Ltd. ("Greatwall Securities")
with an aggregate principal amount of RMB 900 million, RMB 250 million and RMB
300 million, respectively. Huaneng Finance, Huaneng Capital Service and
Greatwall Securities are subsidiaries of Huaneng Group.
For a detailed discussion of other related party transactions, see
Note 7 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-76.
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
allocation to the statutory funds of 10% 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.
Our board has proposed a final dividend of RMB 0.28 per ordinary
share for the year ended December 31, 2006, which is equivalent to RMB 11.2
per ADS. The total dividend to be paid amounted to approximately RMB 3.38
billion.
B. Significant Changes
On January 4, 2007, Huaneng Group contributed additional capital of
RMB 615 million to Sichuan Hydropower, thus increasing its direct equity
interests in Sichuan Hydropower from 40% to 51%, while reducing our equity
interests from 60% to 49%. As Sichuan Hydropower is currently controlled by
Huaneng Group, its accounts will no longer be consolidated in our financial
statements starting from January 1, 2007.
In 2007, the New Corporate Income Tax Law was enacted which will
become effective on January 1, 2008 and supersede the Income Tax Law for
Foreign invested Enterprises and Foreign Enterprises of the PRC and the
Provisional Regulations on Enterprise Income Tax of the PRC. The New Corporate
Income Tax Law will impose a uniform income tax rate of 25% for domestic
enterprises and foreign invested enterprises. Therefore, our power plants
currently subject to a 33% income tax rate may be subject to a lower tax
rate of 25% starting on January 1, 2008. With regard to our power plants
currently entitled to a reduced enterprise income tax rate of 15%, their
effective tax rate may be gradually increased to the uniform tax rate of 25%
within a five-year transition period commencing on January 1, 2008. The State
Council of PRC is in the process of formulating detailed rules and regulations
for the implementation of the New Corporate Income Tax Law. Given that there
are a number of uncertain factors involved in the implementation of the New
Corporate Income Tax Law, we are currently unable to accurately evaluate its
impacts on us.
63
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$)
2002..................................................... 35.82 23.06
2003..................................................... 71.35 31.36
2004..................................................... 86.91 27.30
2005..................................................... 31.24 26.21
2006..................................................... 36.35 24.05
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..................................... 28.59 25.92
Second Quarter.................................... 30.85 24.05
Third Quarter..................................... 28.43 24.86
Fourth Quarter.................................... 36.35 28.62
2007 First Quarter..................................... 40.45 32.01
2006 October........................................... 31.80 28.60
November.......................................... 32.97 31.03
December.......................................... 36.35 32.44
2007 January........................................... 40.45 35.07
February.......................................... 38.25 34.16
March............................................. 37.37 32.01
April (up to April 11) ........................... 42.51 34.99
--------------
Source: Reuters
Each ADS represents 40 Overseas Listed Foreign Shares. As of March
31, 2007, there were 131 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$22.73 per ADS. In May, 2004, we
affected a two-for-one stock split by way of stock dividend for all our
outstanding shares including H shares. The table below sets forth, for the
periods indicated, the high and low closing prices of H shares on the Hong
Kong Stock Exchange.
64
Closing Price Per H shares
--------------------------
High Low
-------- --------
(US$) (US$)
2002................................................. 6.95 4.53
2003................................................. 13.20 6.05
2004................................................. 13.45 6.05
2005................................................. 6.10 5.10
2006................................................. 7.00 4.70
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............................... 5.55 5.00
Second Quarter.............................. 5.95 4.70
Third Quarter............................... 5.68 4.88
Fourth Quarter.............................. 7.00 5.59
2006 October..................................... 6.13 5.59
November.................................... 6.47 5.94
December.................................... 7.00 6.25
2007 January..................................... 7.90 6.25
February.................................... 7.49 6.85
March....................................... 7.35 6.34
April (up to April 11)...................... 8.29 6.73
---------------
Source: Reuters
As of March 31, 2007, there were 494 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.
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
65
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 consecutive terms of six years. 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 133 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.
66
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. 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:
67
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;
o our division, merger, dissolution, liquidation and change of the
legal form;
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 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:
(1) to relieve a director or supervisor from his or her duty to act
honestly in our best interests;
(2) 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
68
(3) 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).
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 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.
69
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").
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 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, 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.
70
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 listed on Hong Kong Stock Exchange unless:
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 do 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 or its local branch offices by performing
certain required procedures. 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, under
most circumstances, 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 or its local branch offices. 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
71
against a basket of certain foreign currencies based on market supply and
demand. 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:
Noon Buying Rate
---------------------------------------------------
Period End Average(1) High Low
------ --------- --------- --------- ---------
(RMB per US$1.00)
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
2006.................................................... 7.8041 7.9579 8.0702 7.8041
October............................................ 7.8785 7.8785 7.9168 7.8728
November........................................... 7.8340 7.8340 7.8750 7.8303
December........................................... 7.8041 7.8041 7.8350 7.8041
2007 January............................................ 7.7714 7.7714 7.8127 7.7705
February........................................... 7.7410 7.7410 7.7632 7.7410
March.............................................. 7.7232 -- 7.7454 7.7232
April (up to April 13)............................. 7.7222 -- 7.7345 7.7222
---------------
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 current PRC tax regulations, dividends paid by
PRC companies to individual investors are ordinarily subject to a PRC
withholding tax levied at a flat rate of 20%. However, such withholding tax is
not applicable with respect to those PRC companies which have their shares
listed on an overseas stock exchange, such as H Shares and ADSs, because of an
exemption issued first in 1993 and then confirmed in 1994. The relevant tax
authority has not collected withholding tax on dividend payments on H Shares or
ADSs.
In the event that the exemption is no longer available or is
withdrawn, a 20% tax may be withheld on dividends in accordance with the PRC
individual income tax law. Such withholding tax may be reduced under an
applicable treaty on the avoidance of double taxation.
72
Enterprises
According to the current PRC tax regulations, dividends paid by
PRC companies to foreign enterprises are ordinarily subject to a PRC
withholding tax levied at a flat rate of 20%. However, foreign enterprises with
no permanent establishment in China receiving dividends paid with respect to a
PRC company's H Shares or ADSs have been temporarily exempted from the 20%
withholding tax.
In accordance with the New Corporate Income Tax Law that will
become effective on January 1, 2008, dividends paid by PRC companies to foreign
enterprises with no permanent establishment in China are generally subject to a
PRC withholding tax levied at a flat rate of 20%. However, such withholding tax
may be exempted or reduced by the State Council. As the State Council has not
yet promulgated any regulations on exemption or reduction of the withholding
tax as of the date of this annual report, it may become applicable to holders
of H Shares and ADSs as of January 1, 2008, unless exempted or reduced pursuant
to an applicable double-taxation treaty or other exemptions.
Capital gains tax on sales of shares
A PRC tax regulation provides that gains realized upon the sale of
overseas shares by foreign enterprises and individuals are not subject to tax
on capital gains. However, the Provision for Implementing of the Individual
Income Tax Law of the PRC (the "Detailed Implementing Rules"), promulgated on
January 28, 1994, imposes income tax of 20% on gains derived from the sale of
equity shares by an individual. A notice issued in 1998 by the Ministry of
Finance and State Administration of Tax states that no capital gains tax will
be imposed on gains from the sale of shares by individuals from 1997. If such
tax exemption relief is no longer available, individual holders of H Shares or
ADSs may be subject to a 20% capital gains tax unless such tax is reduced or
eliminated by an applicable double taxation treaty. As the Amendments and the
Detailed Implementing Rules only relate to individual income tax, the tax
exemption for foreign enterprises under the PRC tax regulation should still be
valid.
In accordance with the New Corporate Income Tax Law, capital gains
realized by foreign enterprises with no permanent establishment in China upon
the sale of oversea shares are generally subject to a PRC withholding tax
levied at a flat rate of 20%. However, such withholding tax may be exempted or
reduced by the State Council under the New Corporate Income Tax Law. As the
State Council has not yet promulgated any regulations on exemption or reduction
of the withholding tax as of the date of this annual report, it may become
applicable to holders of H Shares and ADSs as of January 1, 2008, unless
exempted or reduced pursuant to an applicable double-taxation treaty or other
exemptions.
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).
73
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 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.
On March 16, 2007, the New Corporate Income Tax Law of PRC was
enacted, which will become effective on January 1, 2008. The New Corporate
Income Tax Law will impose a single income tax rate of 25% for domestic
enterprises and foreign invested enterprises. Therefore, our power plants
currently subject to a 33% income tax rate may be subject to the uniform tax
rate of 25% starting on January 1, 2008. With regard to our power plants
currently entitled to a reduced income tax rate of 15%, their effective tax
rate may be gradually increased to 25% within a five-year transition period
commencing on January 1, 2008. In addition, our power plants currently
entitled to tax exemption and reduction under the current income tax laws and
regulations may continue to enjoy such preferential treatments after January
1, 2008 until the expiration of their respective tax holiday, but new power
plants established after January 1, 2008 may not be able to benefit from such
tax incentives, unless they can satisfy specific qualifications, if any, as
provided by then effective laws and regulations on preferential tax treatment.
Value-added tax
Since January 1, 1994, the government has implemented a turnover
tax system applicable to FIEs. Under the turnover tax provisions, we have to
collect from our electricity customers and pay to the PRC tax authorities a
value-added tax ("VAT") on our sales. The tax rate on sales of electricity by
us is 17% of total sales. The amount of VAT payable by us is the VAT on sales
reduced by the VAT paid by us on our purchases of coal, fuel and other inputs.
United States federal income tax considerations
The following is a summary of United States federal income tax
considerations that are anticipated to be material for US Holders (as defined
below) who purchase H shares or ADSs of the Company. This summary is based
upon existing United States federal income tax law, which is subject to
change, possible with retroactive effect. This summary does not discuss all
aspects of United States federal income taxation which may be important to
particular investors in light of their individual investment circumstances,
such as investors subject to special tax rules including: financial
institutions, insurance companies, broker-dealers, tax-exempt organizations,
and, except as described below, non-US Holders, or to persons that will hold H
shares or ADSs as part of a straddle, hedge, conversion, or constructive sale
transaction for United States federal income tax purposes or that have a
functional currency other than the United States Dollar, all of whom may be
subject to tax rules that differ significantly from those summarized below. In
addition, this summary does not discuss any foreign, state, or local tax
consideration. This summary assumes that investors will hold their H shares or
ADSs as "capital assets" (generally, property held for investment) under the
United States Internal Revenue Code. Each prospective investor is urged to
consult its tax advisor regarding the United Stated federal, state, local, and
foreign income and other tax considerations of the purchase, ownership, and
disposition of H shares or ADSs.
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;
74
o a corporation, partnership or other entity created in or
organized under the laws of, the United States or any state or
political subdivision thereof;
o an estate the income of which is includible in gross income for
United States federal income tax purposes regardless of its
source;
o a trust the administration of which is subject to the primary
supervision of a United States court and which has one or more
United States persons who have the authority to control all
substantial decisions of the trust; or
o a trust that was in existence on August 20, 1996, was treated
as a United States person, for United States federal income tax
purposes, on the previous day and elected to continue to be so
treated.
A beneficial owner of the H shares or ADSs that is not a US
Holder is referred to herein as a "Non-US Holder".
If a partnership (including any entity treated as a partnership
for United States federal income tax purposes) holds ADS or H shares, the tax
treatment of a partner in such partnership will depend upon the status of the
partner and the activities of the partnership. Partners in such a partnership
should consult their tax advisors as to the particular United States federal
income tax consequences applicable to them.
A foreign corporation will be treated as a "passive foreign
investment company" (a "PFIC"), for United States federal income tax purposes,
if 75% or more of its gross income consists of certain types of "passive"
income or 50% or more of its assets are passive. The Company presently
believes that it is not a PFIC and does not anticipate becoming a PFIC. This
is, however, a factual determination made on an annual basis and is subject to
change. The following discussion assumes that the Company will not be subject
to treatment as a PFIC for United States federal income tax purposes.
US holders
For United States federal income tax purposes, a US Holder of an
ADS will be treated as the owner of the proportionate interest of the H shares
held by the depositary that is represented by an ADS and evidenced by such
ADS. Accordingly, no gain or loss will be recognized upon the exchange of an
ADS for the holders' proportionate interest in the H shares. A US Holder's tax
basis in the withdrawn H shares will be the same as the tax basis in the ADS
surrendered therefore, and the holding period in the withdrawn H shares will
include the period during which the holder held the surrendered ADS.
Dividends
Any cash distributions paid by the Company out of earnings and
profits, as determined under United States federal income tax principles, will
be subject to tax as ordinary dividend income and will be includible in the
gross income of a US Holder upon receipt. Cash distributions paid by the
Company in excess of its earnings and profits will be a return of capital to
the extent of the US Holder's adjusted tax basis in its shares or ADSs, which
will not be subject to tax. Any excess will be treated as gain from the sale
or exchange of a capital asset which will be treated as discussed below.
Dividends paid in Hong Kong Dollar will be includible in income in a United
States Dollar amount based on the United States Dollar - Hong Kong Dollar
exchange rate prevailing at the time of receipt of such dividends by the
depositary, in the case of ADSs, or by the US Holder, in the case of H shares
held directly by such US Holder. A non-corporate holder of ADS or shares of
Common Stock will generally be subject to tax on such dividend income at a
maximum U.S. federal rate of 15% rather than the marginal tax rates generally
applicable to ordinary income. Dividends received on H shares or ADSs will not
be eligible for the dividends received deduction allowed to corporations. Any
subsequent gain or loss in respect of such Hong Kong Dollar arising from
exchange rate fluctuations will be ordinary income or loss. This gain or loss
will generally be treated as United States source income for United States
foreign tax credit limitation purposes. If the Depository converts the Hong
Kong Dollar to U.S. Dollar on the date it receives such Hong Kong Dollar,
United States persons will not recognize any such gain or loss.
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:
75
o has not held the H shares or ADSs for at least 16 days in the
30-day period beginning 15 days before the ex-dividend date,
during which it is not protected from risk of loss;
o is obligated to make payments related to the dividends; or
o subject to the promulgation of future Treasury regulations that
are anticipated to be retroactively applied, holds the H shares
or ADSs in an arrangement in which the expected economic profit
of the US Holder is insubstantial compared to the value of the
foreign tax credit expected to be obtained as a result of the
arrangement.
A distribution of additional shares of the Company's stock to US
Holders with respect to their H shares or ADSs that is pro rata to all the
Company's shareholders may not be subject to Unites States federal income tax.
The tax basis of such additional shares will be determined by allocating the
US Holders' adjusted tax basis in the H shares or ADSs between the H shares or
ADSs and the additional shares, based on their relative fair market values on
the date of distribution.
Sale or other disposition of H shares or ADSs
A US Holder will recognize capital gain or loss upon the sale or
other disposition of H shares or ADSs in an amount equals to the difference
between the amount realized upon the disposition and the US Holder's adjusted
tax basis in such H shares or ADSs, as each is determined in US Dollars. Any
capital gain or loss will be long-term if the H shares or ADSs have been held
for more than one year and will generally be United States source gain or
loss. The claim of a deduction in respect of a capital loss, for United States
federal income tax purposes, may be subject to limitations. Under the Tax
Treaty, any such gain should be treated as foreign source income.
PFIC considerations
If the Company were to be classified as a PFIC in any taxable
year, a U.S. Holder would be subject to special rules generally intended to
reduce or eliminate any benefits from the deferral of United States federal
income tax that a U.S. Holder could derive from investing in a foreign company
that does not distribute all of its earnings on a current basis. In such
event, a U.S. Holder of the H shares or ADSs may be subject to tax at ordinary
income tax rates on (i) any gain recognized on the sale of the H shares or
ADSs and (ii) any "excess distribution" paid on the H shares or ADSs
(generally, a distribution in excess of 125% 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 payer 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.
76
H. Documents on display
We are subject to the information reporting requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance with
the Act, file certain reports and other information with the SEC. You may read
and copy and report, statement or other information filed by us at the SEC's
public reference rooms in Washington, D.C., New York and Chicago, Illinois.
Please call the SEC at 1-800-0330 for further information on the public
reference rooms. Our reports and other information filed with the SEC are also
available to the public from commercial document retrieval services and the
website maintained by the SEC at http://www.sec.gov.
I. Subsidiary information
Not applicable.
J. Comparison of New York Stock Exchange corporate governance rules and
China corporate governance rules for listed companies
Under the amended Corporate Governance Rules of New York Stock
Exchange (NYSE), foreign issuers (including the Company) listed on the NYSE
are required to disclose a summary of the significant differences between
their domestic corporate governance rules and NYSE corporate governance rules
that would apply to a U.S. domestic issuer. A summary of such differences is
listed below:
Corporate governance rules applicable to the
domestically listed companies in China and the
NYSE corporate governance rules Company's governance practices
------------------------------------------------------------------------------------------------------------------
Director Independence
A listed company must have a majority of independent It is required in China that any listed company
directors on its board of directors. No director must establish an independent director system and
qualifies as "independent" unless the board of directors set forth specific requirements for the
affirmatively determines that the director has no qualification of independent directors. For
material relationship with the listed company (either example, an independent director shall not hold
directly or as a partner, shareholder or officer of an any other position in the listed company other
organization that has a relationship with the company). than being a director and shall not be influenced
In addition, a director must meet certain standards to be by the main shareholders or the controlling
deemed independent. For example, a director is not persons of the listed company, or by any other
independent if the director is, or has been within the entities or persons with whom the listed company
last three years, an employee of the listed company, or has a significant relationship. The Company has
if the director has received, during any twelve-month complied with the relevant Chinese corporate
period within the last three years, more than US$100,000 governance rules and has implemented internal
in direct compensation from the listed company. rules governing the independence and
responsibilities of independent directors. The
Company determines the independence of independent
directors every year.
To empower non-management directors to serve as a more No similar requirements.
effective check on management, the non-management
directors of each listed company must meet at regularly
scheduled executive sessions without management.
Nominating/Corporate Governance Committee
Listed companies must have a nominating/corporate The board of directors of a listed company may,
governance committee composed entirely of independent through the resolution of the shareholders'
directors. meeting, establish a nominating committee composed
entirely of directors, of which the independent
directors shall be the majority and the convener.
The Company has established a nominating committee.
The nominating/corporate governance committee must have a Relevant responsibilities of the
written charter that addresses the committee's purposes nominating/corporate governance committee are
and responsibilities which, at minimum, must be to: similar to those stipulated by the NYSE rules, but
search for eligible people for the board of directors, the main responsibilities do not include the
select and nominate directors for the next session of the research and recommendation of corporate
shareholders' annual meeting, study and propose corporate governance guidelines, the supervision of the
governance guidelines, supervise the evaluation of the evaluation of the board of directors and
board of directors and management, and evaluate the management, or the annual evaluation of the
performance of the committee every year. committee.
77
Compensation Committee
Listed companies must have a compensation committee The board of directors of a listed company can,
composed entirely of independent directors. through the resolution of shareholders' meeting,
have a compensation and evaluation committee
composed entirely of directors, of whom the
independent directors are the majority and act as
the convener.
The written charter of the compensation committee must The responsibilities are similar to those
state, at least, the following purposes and stipulated by the NYSE rules, but the committee is
responsibilities: not required to produce a report on the executive
compensation or make an annual performance
evaluation of the committee. The board of
directors of the Company has established a
compensation and evaluation committee composed
mainly of independent directors who act as the
convener, and the committee has a written charter.
(1) review and approve the corporate goals
associated with CEO's compensation, evaluate the
performance of the CEO in fulfilling these goals, and
based on such evaluation determine and approve the CEO's
compensation level;
(2) make recommendations to the board with respect
to non-CEO executive officer compensation, and
incentive-compensation and equity-based plans that are
subject to board approval;
(3) produce a committee report on executive compensation
as required by the SEC to be included in the annual proxy
statement or annual report filed with the SEC.
The charter must also include the requirement for an
annual performance evaluation of the compensation
committee.
Audit Committee
Listed companies must have an audit committee that The board of directors of a listed company can,
satisfies the requirements of Rule 10A-3 of Exchange Act. through the resolution of the shareholders'
It must have a minimum of three members, and all audit meeting, establish an audit committee composed
committee members must satisfy the requirements for entirely of directors, of which the independent
independence set forth in Section 303A.02 of NYSE directors are the majority and act as the
Corporate Governance Rules as well as the requirements of convener, and, at minimum, one independent
Rule 10A-3b (1) of the Exchange Act. director is an accounting professional.
The written charter of the audit committee must specify The responsibilities of the audit committee are
that the purpose of the audit committee is to assist the similar to those stipulated by the NYSE rules, but
board oversight of the integrity of financial statements, according to the domestic practices, the company
the company's compliance with legal and regulatory is not required to make an annual performance
requirements, qualifications and independence of evaluation of the audit committee, and the audit
independent auditors and the performance of the listed committee is not required to prepare an audit
company's internal audit function and independent report to be included in the company's annual
auditors. proxy statement. The Board of Directors of the
Company has established an audit committee that
satisfies relevant domestic requirements and the
audit committee has a written charter.
The written charter must also require the audit committee
to prepare an audit committee report as required by the
SEC to be included in the listed company's annual proxy
statement as well as an annual performance evaluation of
the audit committee.
Each listed company must have an internal audit China has a similar regulatory provision, and the
department. Company has an internal audit department.
Shareholders must be given the opportunity to vote on The relevant regulations of China require the
equity-compensation plans and material revisions thereto, board of directors to propose plans on the amount
except for employment incentive plans, certain awards and and types of director compensation for the
plans in the context of mergers and acquisitions. shareholders' meeting to approve. The compensation
plan of executive officers is subject to approval
by the board and announced at the shareholders'
meeting and disclosed to the public upon the
approval of the board of directors.
78
Corporate governance guidelines
Listed companies must adopt and disclose corporate CSRS has issued the Corporate Governance Rules,
governance guidelines, involving director qualification with which the Company has complied.
standards, director compensation, director continuing
education, annual performance evaluation of the board of
directors, etc.
Code of ethics for directors, officers and employees
Listed companies must adopt and disclose a code of China does not have such requirement for a code
business conduct and ethics for directors, officers and for ethics. But, the directors and officers must
employees, and promptly disclose any waivers of the code perform their legal responsibilities in accordance
for directors or executive officers. with the Company Law of PRC, relative requirements
of CSRS and Mandatory Provisions to the Charter of
Companies Listed Overseas.
Each listed company CEO must certify to the NYSE each No similar requirements.
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.
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 2006, our total fuel cost amounted to RMB22.608 billion and the
weighted average unit fuel cost was RMB157.31 per MWh. In 2005, our total fuel
cost amounted to RMB21.203 billion and the weighted average unit fuel cost was
RMB156.13 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 other
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, 2006 and average interest rates for the year ended December 31,
2006.
79
(RMB expressed in millions, except interest rate)
As of December 31, 2006
---------------------------------------------------------------------------
Total
recorded Fair
Expected Maturity Date value value
-------------------------------------------------------- -------- ------
2007 2008 2009 2010 2011 Thereafter
------ ------ ------ ------ ------ ----------
On-balance sheet financial
instruments
Cash and cash equivalents:
In US Dollar 2 - - - - - 2 2
Debts
Fixed rate bank loans (US Dollar) 749 749 749 741 739 283 4,010 4,076
Average interest rate 6.211% 6.217% 6.227% 6.260% 6.465% 6.360%
Fixed rate bank loans (Euro) 55 55 55 55 55 405 680 579
Average interest rate 2.000% 2.000% 2.000% 2.000% 2.000% 2.000%
Variable rate bank and other
loans
(US Dollar) 72 72 72 72 61 172 521 521
Average interest rate 5.547% 5.539% 5.527% 5.508% 5.493% 5.493%
Variable rate other loans (JPY) 16 16 16 16 6 - 70 70
Average interest rate 5.800% 5.800% 5.800% 5.800% 5.800%
Capital commitments (in US Dollar) 79 13 23 16 - - 131 131
Capital commitments (in Euro) 79 1 - - - - 80 80
-------------
(1) The interest rates for variable rate bank and other loans are calculated
based on the individual year end indices.
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 RMB6.596 billion as of December 31,
2004 to RMB4.531 billion as of December 31, 2006; the loans denominated in JPY
decreased from RMB123 million as of December 31, 2004 to RMB70 million as of
December 31, 2006; the loans denominated in Euro decreased from RMB864 million
as of December 31, 2004 to RMB680 million as of December 31, 2006. 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 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 the Company's 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. On the
other hand, the interest rate of the Company's loans with the term of one year
or less is not subject to the change in such benchmark interest rate in
accordance with the loan agreements. New loan contracts entered hereafter will
be subject to current benchmark interest rate. 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,
2006 and average interest rates for the year ended December 31, 2006.
80
(RMB expressed in millions, except interest rate)
As of December 31, 2006
---------------------------------------------------------------------------
Total
recorded Fair
Expected Maturity Date value value
-------------------------------------------------------- -------- ------
2007 2008 2009 2010 2011 Thereafter
------ ------ ------ ------ ------ ----------
Debts
Fixed rate shareholder, bank
and other loans 11,068 3,967 9,678 3,799 3,357 13,794 45,663 45,392
Average interest rate 5.487% 5.466% 5.466% 5.417% 5.380% 5.367%
Variable rate bank and other
loans 88 88 88 88 67 172 591 591
Average interest rate 5.574% 5.563% 5.546% 5.517% 5.493% 5.493%
Short-term bonds 5,000 - - - - - 5,000 5,000
Average interest rate 3.742% - - - - -
------------
(1) The interest rates for variable rate bank and other loans are calculated
based on the individual year end indices.
As of December 31, 2006, the Company's floating rate loans
denominated in foreign currency amounted to RMB0.591 billion, accounting for
approximately 11.2% of the total foreign loans, and the average interest rate
level was relatively low, which is six-month US dollar LIBOR plus 16 basis
points. In 2006, Federal Reserve of United States stopped raising federal
funds rate. The Company expects that there is less possibilities of
continuously increasing federal funds rate. With only a small portion of loans
denominated in foreign currency bearing floating interest rate, the Company is
exposed to relatively low risk of interest rate increases.
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
instruments. The Company expects to implement the relevant plan according to
its internal approval procedures and use interest rate swap and other
derivative financial instruments 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 RMB1.031 billion
as of December 31, 2004 to RMB 591 million as of December 31, 2006. As a
result, the associated interest rate risk related to variable rate bank and
other loans to which the Company is exposed has decreased. The balance of
fixed rate loans increased from RMB 24.567 billion as of December 31, 2004 to
RMB45.663 billion as of December 31, 2006 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
Disclosure Controls and Procedures
81
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 Rules 13a-15(e) and
15d-15(e) of the U.S. Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of December 31, 2006 (the "Evaluation Date"), the end of
the fiscal year covered by this annual report. Based on this evaluation, our
principal executive officer and principal financial officer have concluded
that, as of the Evaluation Date, our disclosure controls and procedures were
effective.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in the Exchange
Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of our chairman of the board, or principal executive officer, and
chief accountant, or principal financial officer, our management conducted an
evaluation of the effectiveness of our internal control over financial
reporting based upon the framework in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
as of the end of the period covered by this annual report. Based on that
evaluation, our management has concluded that our internal control over
financial reporting was effective as of December 31, 2006 at providing
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Our management's assessment of the
effectiveness of our internal control over financial reporting as of December
31, 2006, has been audited by PricewaterhouseCoopers, an independent registered
public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2006, there have been no
changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 16D 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. Mr. Xia Donglin and Mr. Liu Jipeng were
respectively appointed as our independent non-executive directors on May 11,
2005. See "Item 6 Directors, Senior Management and Employees -- A. Directors,
members of the supervisory committee and senior management".
ITEM 16B Code of Ethics
Although, as of the date of this annual report, we do not have,
in form, a code of ethics that applies to the Company's principal executive
officer, principal financial officer and principal accounting officer
(collectively, the "Senior Corporate Officers"), we believe that, as a
substantive matter, the Senior Corporate Officers are subject to a set of
written requirements under the PRC law that are substantially similar to the
ethical standards described under Item 16B(b) of Form 20-F. Joint stock
companies that are incorporated in China and listed on both PRC and foreign
stock exchanges are heavily regulated by the central government. To a large
extent, these requirements, which are designed to promote honest and ethical
conduct and compliance with applicable laws and regulations by the directors
and senior executives of such companies, are not merely ethical requirements,
but more importantly, statutory obligations that are legally binding on these
individuals under the PRC Company Law, relevant rules and regulations
promulgated by China Securities Regulatory Commission and the Mandatory
Provisions of Articles of Association of Overseas Listed Companies.
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, 2006,
for which audited consolidated financial statements appear in this annual
report on Form 20-F.
82
The following table shows information about fees paid by us to
PricewaterhouseCoopers:
For the year ended
December 31,
--------------------------------
(RMB millions) 2006 2005
-------------- --------------
Audit fees................................. 42.4 18.0
Audit-related fees......................... 1.5 12.5
Tax fees................................... - -
All other fees............................. - -
Total.................................. -------------- --------------
43.9 30.5
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 and internal control over financial reporting 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.
ITEM 16E Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
Not applicable.
ITEM 17 Financial Statements
See pages F-1 through F-76 following Item 19.
83
ITEM 18 Financial Statements
Not applicable.
ITEM 19 Exhibit
1.1 Articles of Association amended and adopted by the
shareholders' meeting on June 13, 2006.
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.
84
THIS PAGE IS INTENTIONALLY LEFT BLANK
Report of Independent Registered Public Accounting Firm
To the shareholders of Huaneng Power International, Inc.
We have completed an integrated audit of Huaneng Power International, Inc.
(the "Company")'s 2006 consolidated financial statements and of its internal
control over financial reporting as of December 31, 2006 and audits of its
2005 and 2004 consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in equity and cash flows present
fairly, in all material respects, the financial position of the Company and
its subsidiaries at December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2006 in conformity with International Financial Reporting
Standards ("IFRS"). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements 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 of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
IFRS vary in certain significant respects from accounting principles generally
accepted in the United States of America ("US GAAP"). Information relating to
the nature and effect of such differences is presented in the note 38 to the
consolidated financial statements.
Internal control over financial reporting
Also, in our opinion, management's assessment included in Item 15 appearing on
page 81 of the 2006 Annual Report to Shareholders, that the Company
maintained effective internal control over financial reporting as of December
31, 2006 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO"), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2006, based on criteria established in Internal Control -
Integrated Framework issued by the COSO. The Company's management is
responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express opinions on management's
assessment and on the effectiveness of the Company's internal control over
financial reporting based on our audit. We conducted our audit of internal
control over financial reporting 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 effective internal control over financial reporting was
maintained in all material respects. An audit of internal control over
financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
F-1
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
Certified Public Accountants
Hong Kong
April 3, 2007
F-2
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Amounts expressed in thousands of RMB or US$, except per share data)
For the year ended December 31,
-----------------------------------------------------------------------
Note 2006 2005 2004
------- -------------------------------- ----------------- ------------------
RMB US$ RMB RMB
Operating revenue 44,301,403 5,673,339 40,190,004 30,150,602
Sales tax (148,057) (18,960) (113,475) (32,324)
Operating expenses
Fuel (22,608,151) (2,895,252) (21,202,952) (15,068,188)
Maintenance (1,306,888) (167,363) (1,165,374) (807,689)
Depreciation (6,719,158) (860,471) (6,167,692) (4,706,992)
Labor (2,886,767) (369,686) (2,487,098) (1,877,264)
Service fees to HIPDC 7(b) (140,771) (18,027) (141,102) (133,609)
Others (1,933,200) (247,570) (1,903,345) (606,346)
--------------- -------------- ----------------- ------------------
Total operating expense (35,594,935) (4,558,369) (33,067,563) (23,200,088)
--------------- -------------- ----------------- ------------------
Profit from operations 8,558,411 1,096,010 7,008,966 6,918,190
--------------- -------------- ----------------- ------------------
Interest income 51,910 6,648 53,685 43,092
Interest expense (1,591,033) (203,751) (1,426,609) (663,424)
Bank charges and exchange gain
/ (losses), net 67,819 8,684 248,533 (119,452)
--------------- -------------- ----------------- ------------------
Total financial expense, net (1,471,304) (188,419) (1,124,391) (739,784)
--------------- -------------- ----------------- ------------------
Share of profit of associates 11 790,629 101,250 644,376 312,037
Investment income, net 128,595 16,468 60,872 20,554
Other income, net 5 10,442 1,337 2,385 18,666
--------------- -------------- ----------------- ------------------
Profit before tax 6 8,016,773 1,026,646 6,592,208 6,529,663
Income tax expense 30 (1,127,699) (144,415) (1,044,297) (948,734)
--------------- -------------- ----------------- ------------------
Profit for the year 6,889,074 882,231 5,547,911 5,580,929
=============== ============== ================= ==================
Attributable to:
Equity holders of the Company 6,071,154 777,486 4,871,794 5,323,876
Minority interests 817,920 104,745 676,117 257,053
--------------- -------------- ----------------- ------------------
6,889,074 882,231 5,547,911 5,580,929
=============== ============== ================= ==================
Dividends paid 3,013,846 385,960 3,022,096 3,055,586
=============== ============== ================= ==================
Proposed dividend 21 3,375,507 432,275 3,013,846 3,013,846
=============== ============== ================= ==================
Proposed dividend per share
(expressed in RMB per share) 21 0.28 0.04 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 31 0.50 0.06 0.40 0.44
=============== ============== ================= ==================
- Diluted 31 0.50 0.06 0.40 0.44
=============== ============== ================= ==================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2006 AND 2005
(Amounts expressed in thousands of RMB or US$)
As of December 31,
----------------------------------------------------------------------
Note 2006 2005
--------- ------------------------------------------------- --------------------
RMB US$ RMB
ASSETS
Non-current assets
Property, plant and equipment, net 10 90,444,225 11,582,495 78,997,297
Investments in associates 11 5,418,213 693,869 4,593,984
Available-for-sale investment 13 1,458,759 186,812 1,033,225
Land use rights 14 2,013,480 257,851 1,679,765
Deferred income tax assets 27 98,429 12,605 64,075
Goodwill 15 671,796 86,032 671,796
Other non-current assets 269,404 34,499 336,379
------------------------- ----------------------- --------------------
Total non-current assets 100,374,306 12,854,163 87,376,521
------------------------- ----------------------- --------------------
Current assets
Inventories, net 16 2,121,489 271,683 2,311,357
Other receivables and assets, net 17 615,488 78,821 855,952
Accounts receivable, net 18 6,977,493 893,554 6,022,426
Financial assets at fair value through
profit or loss 100,180 12,829 -
Due from HIPDC 7(a)(v) - - 21,847
Due from other related parties 7(a)(v) 621 80 -
Restricted cash 203,863 26,107 201,276
Temporary cash investment - - 2,652
Cash and cash equivalents 32(a) 3,207,192 410,720 2,647,665
------------------------- ----------------------- --------------------
Total current assets 13,226,326 1,693,794 12,063,175
------------------------- ----------------------- --------------------
Total assets 113,600,632 14,547,957 99,439,696
========================= ======================= ====================
F-4
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D)
AS OF DECEMBER 31, 2006 AND 2005
(Amounts expressed in thousands of RMB or US$)
As of December 31,
-------------------------------------------------------
Note 2006 2005
-------- -------------------------------------- ----------------
RMB US$ RMB
EQUITY AND LIABILITIES
Capital and reserves attributable to equity
holders of the Company
Domestic shares, par value of RMB1.00 each, in
form of legal person shares 19 - - 8,500,000
A shares, par value of RMB1.00 each 19 9,000,000 1,152,561 500,000
Overseas listed foreign shares, par value of
RMB1.00 each 19 3,055,383 391,279 3,055,383
Additional paid-in capital 8,988,973 1,151,148 8,988,107
Dedicated capital 20 5,454,467 698,512 4,899,429
Fair value gains from available-for-sale
investment, net of tax 13 & 27 998,825 127,912 636,964
Retained earnings
Proposed dividend 21 3,375,507 432,275 3,013,846
Others 12,584,354 1,611,581 10,443,745
----------------- -------------------- ----------------
43,457,509 5,565,268 40,037,474
Minority interests in equity 7,151,183 915,797 6,106,713
----------------- -------------------- ----------------
Total equity 50,608,692 6,481,065 46,144,187
----------------- -------------------- ----------------
NON-CURRENT LIABILITIES
Long-term loans from Huaneng Group 22 2,800,000 358,574 2,800,000
Long-term bank loans 22 32,065,840 4,106,425 25,711,255
Other long-term loans 22 232,779 29,810 351,009
Deferred income tax liabilities 27 1,078,897 138,166 1,157,775
Other non-current liabilities 309,930 39,691 168,328
----------------- -------------------- ----------------
Total non-current liabilities 36,487,446 4,672,666 30,188,367
----------------- -------------------- ----------------
CURRENT LIABILITIES
Accounts payable and other liabilities 23 8,375,705 1,072,612 6,905,240
Taxes payables 24 1,180,318 151,154 1,131,284
Due to Huaneng Group 7(a)(v) 44,592 5,711 50,720
Due to HIPDC 7(a)(v) 79,730 10,210 53,230
Due to associates 7(a)(vi) 83,512 10,695 -
Due to other related parties 7(a)(v) 65,795 8,426 29,620
Salary and welfare payables 441,590 56,551 251,949
Short-term bonds 25 5,077,577 650,246 4,938,250
Short-term loans 26 7,823,720 1,001,923 6,580,870
Current portion of long-term bank loans 22 3,140,393 402,166 2,653,339
Current portion of other long-term loans 22 191,562 24,532 512,640
----------------- -------------------- ----------------
Total current liabilities 26,504,494 3,394,226 23,107,142
----------------- -------------------- ----------------
Total equity and liabilities 113,600,632 14,547,957 99,439,696
================= ==================== ================
These consolidated financial statements have been approved for issue by the
Board of Directors on April 3, 2007.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Amounts expressed in thousands of RMB)
Attributable to equity holders of the Company
-------------------------------------------------------------
Additional
paid-in
Share capital capital Dedicated capital
------------- ------------ ---------------------------------
Statutory and Statutory
discretionary public
surplus reserve welfare
funds fund Sub-total
---------- --------- -----------
Balance as of January 1, 2004 6,027,671 10,780,133 2,867,721 1,460,702 4,328,423
Minority interests arising on business combinations - - - - -
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)
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 20) - - 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
========== ============ =========== ========= ===========
Balance as of January 1, 2005 12,055,383 8,972,184 2,202,689 1,863,281 4,065,970
Effect of changes in accounting policy - - - - -
---------- ------------------------ --------- -----------
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 - - - - -
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 - - - - -
Profit for the year ended December 31, 2005 - - - - -
Fair value gains from available-for-sale
investment - gross (Note 13) - - - - -
Fair value gains from available-for-sale investment
- tax (Note 27) - - - - -
Transfer from statutory public welfare fund to
discretionary surplus reserve fund - - 3,473 (3,473) -
Transfer to dedicated capital (Note 20) - - 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
========== ============ =========== ========= ===========
Attributable to equity holders Minority Total
of the Company interests equity
----------------------------------------- ----------- ------------
Available-
for-sale Equity
investment component of
revaluation convertible Retained
reserve notes earnings
------------- ------------ ------------
Balance as of January 1, 2004 - 255 12,818,873 1,155,197 35,110,552
Minority interests arising on business combinations - - - 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) - -
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 20) - - (943,085) - -
------------- ------------ ----------- ------------ ------------
Balance as of December 31, 2004 - - 11,171,982 3,266,393 39,531,912
============= ============ =========== ============ ============
Balance as of January 1, 2005 - - 11,171,982 3,266,393 39,531,912
Effect of changes in accounting policy - - 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 - - - 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)
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 13) 749,369 - - - 749,369
Fair value gains from available-for-sale investment (112,405)
- tax (Note 27) (112,405) - - -
Transfer from statutory public welfare fund to
discretionary surplus reserve fund - - - - -
Transfer to dedicated capital (Note 20) - - (833,459) - -
------------- ------------ ----------- ------------ ------------
Balance as of December 31, 2005 636,964 - 13,457,591 6,106,713 46,144,187
============= ============ =========== ============ ============
F-6
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONT'D)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Amounts expressed in thousands of RMB)
Attributable to equity holders of the Company
------------------------------------------------------------------
Additional
paid-in
Share capital capital Dedicated capital
------------ ----------- -----------------------------------------
Statutory and Statutory
discretionary public
surplus welfare
reserve funds fund Sub-total
-------------- ------------- ------------
Balance as of January 1, 2006 12,055,383 8,988,107 2,682,424 2,217,005 4,899,429
Net capital injection from minority shareholders of
subsidiaries - - - - -
Dividends waived by a shareholder of a subsidiary - 866 - - -
Dividends relating to 2005 - - - - -
Profit for the year ended December 31, 2006 - - - - -
Fair value gains from available-for-sale investment -
gross (Note 13) - - - - -
Fair value gains from available-for-sale investment -
tax (Note 27) - - - - -
Transfer from statutory public welfare fund to
statutory surplus reserve fund - - 2,217,005 (2,217,005) -
Transfer to dedicated capital (Note 20) - - 555,038 - 555,038
------------ ----------- -------------- ------------- ------------
Balance as of December 31, 2006 12,055,383 8,988,973 5,454,467 - 5,454,467
============ =========== ============== ============= ============
Attributable to equity holders Minority Total
of the Company interests equity
------------------------------ -------------- ------------
Available-
for-sale
investment
revaluation Retained
reserve earnings
---------------- -------------
Balance as of January 1, 2006 636,964 13,457,591 6,106,713 46,144,187
Net capital injection from minority shareholders of
subsidiaries - - 588,201 588,201
Dividends waived by a shareholder of a subsidiary - - 495 1,361
Dividends relating to 2005 - (3,013,846) (362,146) (3,375,992)
Profit for the year ended December 31, 2006 - 6,071,154 817,920 6,889,074
Fair value gains from available-for-sale investment -
gross (Note 13) 425,769 - - 425,769
Fair value gains from available-for-sale investment -
tax (Note 27) (63,908) - - (63,908)
Transfer from statutory public welfare fund to
statutory surplus reserve fund - - - -
Transfer to dedicated capital (Note 20) - (555,038) - -
---------------- ------------- -------------- ------------
Balance as of December 31, 2006 998,825 15,959,861 7,151,183 50,608,692
================ ============= ============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Amounts expressed in thousands of RMB or US$)
For the year ended December 31,
---------------------------------------------------------------------
Note 2006 2005 2004
-------- --------------------------------- ---------------- ----------------
RMB US$ RMB RMB
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax 8,016,773 1,026,646 6,592,208 6,529,663
Adjustments to reconcile profit
before tax to net cash provided
by operating activities:
Depreciation 6,721,684 860,794 6,172,866 4,706,992
Impairment loss on property,
plant and equipment 11,920 1,527 30,080 -
Amortization of land use rights 42,484 5,441 36,429 28,074
Amortization of goodwill and
negative goodwill - - - (205,277)
Amortization of other
non-current assets 15,719 2,013 15,297 5,233
Amortization of housing loss 38,810 4,970 39,258 34,498
Amortization of bonds issuance
expense 19,052 2,440 - -
Write off of excess of
acquirer's interest in the
net fair value of acquiree's
identifiable assets,
liabilities and contingent
liabilities over cost (24,758) (3,171) - -
(Reversal of) / Provision for
doubtful accounts (4,853) (621) 49,869 (10,654)
Provision for inventory
obsolescence 1,808 232 31,724 1,521
Investment income, net (128,595) (16,468) (60,872) (20,554)
Loss / (Gain) on disposals /
write-off of property, plant
and equipment, net 100,018 12,809 145,762 (29,176)
Unrealized exchange (gains) /
losses, net (116,028) (3,874) (294,281) 89,913
Gain on interest rate swaps - - - (925)
Share of profit of associates (790,629) (101,250) (644,376) (312,037)
Interest income (51,910) (6,648) (53,685) (43,092)
Interest expense 1,591,033 203,751 1,426,609 663,424
Changes in working capital:
Inventories, net 188,060 24,083 (831,622) (414,275)
Other receivables and assets, net (106,505) (13,639) 265,320 (206,873)
Accounts receivable, net (883,033) (113,083) (596,517) (742,005)
Due from HIPDC - - (21,847) -
Due from other related parties (621) (80) 14,970 (9,108)
Restricted cash (2,587) (331) 1,412 (23,108)
Other non-current liabilities 183,003 23,436 91,188 13,000
Accounts payable and other
liabilities 39,378 5,043 574,654 243,524
Taxes payable 151,412 19,390 (69,569) 3,796
Due to Huaneng Group (6,128) (785) 6,128 -
Due to HIPDC 26,500 3,394 (1,205,569) (53,263)
Due to associates 83,512 10,695 (3,799) 3,799
Due to other related parties 36,176 4,633 20,183 (17,711)
Salary and welfare payables 189,641 24,286 (23,653) (17,728)
Others 1,790 229 - -
Interest paid (2,507,354) (321,097) (1,965,094) (974,879)
Interest received 53,444 6,844 52,475 43,895
Income tax paid (1,394,503) (178,583) (1,114,698) (1,123,966)
--------------- ---------------- ---------------- ----------------
Net cash provided by operating
activities 11,494,713 1,483,026 8,680,850 8,162,701
--------------- ---------------- ---------------- ----------------
F-8
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Amounts expressed in thousands of RMB or US$)
For the year ended December 31,
---------------------------------------------------------------------
Note 2006 2005 2004
-------- --------------------------------- ---------------- ----------------
RMB US$ RMB RMB
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and
equipment (15,998,575) (2,048,814) (13,842,293) (9,877,553)
Proceeds from disposals of property,
plant and equipment, net 32,180 4,121 32,098 27,768
Prepayments of land use rights (250,627) (32,096) (99,745) (154,754)
(Increase) / Decrease in other
non-current assets (8,973) (1,149) 15,766 (3,680)
Decrease in temporary cash investments 2,652 340 9,989 132,355
Proceeds from disposals of investments - - - 548
Cash dividend received 482,609 61,804 429,589 172,542
Capital injections in associates (174,918) (22,400) - -
Cash consideration paid for
acquisitions - - (2,528,300) (4,575,000)
Direct transaction costs paid for
acquisitions - - (16,698) (31,685)
Cash from the power plants
acquisitions - - 566,704 659,174
Net cash inflow on disposals of a
subsidiary and other investment 110 13 19,521 -
--------------- --------------- -------------- ---------------
Net cash used in investing activities (15,915,542) (2,038,181) (15,413,369) (13,650,285)
--------------- --------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bonds issuance expense paid (20,000) (2,561) (22,500) -
Drawdown of short-term bonds 5,000,000 640,311 4,862,200 -
Repayments of short-term bonds (4,862,200) (622,664) - -
Drawdown of short-term loans 14,458,700 1,851,614 11,657,569 8,724,000
Repayments of short-term loans (13,215,850) (1,692,452) (13,670,000) (2,940,313)
Drawdown of long-term loans from
Huaneng Group - - 2,000,000 800,000
Repayments of long-term loans from
shareholders - - - (1,504,827)
Drawdown of long-term bank loans 9,982,982 1,278,444 8,297,018 4,944,000
Repayments of long-term bank loans (3,010,623) (385,547) (2,933,870) (3,192,843)
Drawdown of other long-term loans 40,000 5,122 - -
Repayments of other long-term loans (472,154) (60,465) (351,118) (679,062)
Net capital injection from minority
shareholders of the subsidiaries 588,708 75,391 585,702 677,034
Dividends paid to shareholders of the
Company (3,013,846) (385,960) (3,022,096) (3,005,586)
Dividends paid to minority
shareholders of the subsidiaries (495,361) (63,437) (318,252) (167,125)
Redemption of convertible notes - - - (811)
--------------- --------------- -------------- ---------------
Net cash provided by financing
activities 4,980,356 637,796 7,084,653 3,654,467
--------------- --------------- -------------- ---------------
559,527 82,641 352,134 (1,833,117)
NET INCREASE / (DECREASE) IN CASH AND
CASH EQUIVALENTS
Cash and cash equivalents, beginning of
the year 2,647,665 328,079 2,295,531 4,128,648
--------------- --------------- -------------- ---------------
CASH AND CASH EQUIVALENTS, END OF THE YEAR
32(a) 3,207,192 410,720 2,647,665 2,295,531
=============== =============== ============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
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 Huaneng International Power Development
Corporation ("HIPDC") and China Huaneng Group ("Huaneng Group") as the
parent company and ultimate parent company of the Company, 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 and
financial assets at fair value through profit or loss. 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, 2006 financial statements have been translated
into United States Dollars (US$) at the rate of US$1.00=RMB 7.8087
announced by the People's Bank of China on December 31, 2006. No
representation is made that Renminbi amounts could have been, or could
be, converted into United States Dollars at the rate on December 31,
2006, 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-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)
During 2006, 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 2006, the Company
and its subsidiaries have a negative working capital balance of
approximately RMB13.3 billion (2005: RMB11.0 billion). The Company and
its subsidiaries have significant undrawn available banking facilities
amounting to approximately RMB25.61 billion (2005: RMB22.57 billion). The
Company and its subsidiaries 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.
The principal accounting policies adopted are consistent with those
applied in the annual financial statements for the year ended December
31, 2005. The following new interpretation is mandatory for financial
year with annual period beginning on or after January 1, 2006.
International Financial Reporting Interpretations Committee
Interpretation ("IFRIC Interpretation") 4, `Determining whether an
arrangement contains a lease', effective for annual periods beginning on
or after January 1, 2006. This interpretation had no material impact on
the accounting policies of the Company and its subsidiaries.
(b) Consolidation
The consolidated financial statements include the financial statements of
the Company and all of its subsidiaries made up to December 31.
(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.
The existence and effect of potential voting rights that are currently
exercisable or convertible are considered when assessing whether the
Company and its subsidiaries controls another entity.
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-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)
(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 (Note 2(e)). 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 income statement.
Inter-company transactions, balances and unrealized gains on transactions
between group companies are eliminated. Unrealized losses are also
eliminated unless the transaction provides evidence of an impairment 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.
In the balance sheet of the Company, the investments in subsidiaries are
stated at costs less provision for impairment losses (Note 2(f)). 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 income statement. 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% of 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(e)).
The shares of the Company and its subsidiaries on post-acquisition
profits or losses of associates are recognized in the income statement
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.
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)
(iii) Associates (cont'd)
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.
In the balance sheet of the Company, the investments in associates are
stated at costs less provision for impairment losses (Note 2(f)). 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.
(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 income statement.
(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. The carrying amount of the replaced part is derecognized. All
other repairs and maintenance are charged to the income statement during
the financial period in which they are incurred.
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)
(d) Property, plant and equipment, net (cont'd)
Depreciation on property, plant and equipment is calculated using the
straight-line method to allocate 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(f)).
Gains and losses on disposals are determined by comparing the proceeds
with the carrying amounts and are recognized within operating expenses -
others in the income statement.
(e) 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' and is tested annually for impairment as part
of the overall balance. 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.
Goodwill is allocated to cash-generating units ("CGUs") for the purpose
of impairment testing (Note 15). 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 the region in which they operate.
(f) Impairment of investments in subsidiaries, associates and non-financial
assets
Assets that are subject to amortisation are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. An impairment loss is recognised for the
amount by which the asset's carrying amount exceeds its recoverable
amount. The recoverable amount is the higher of an asset's fair value
less costs to sell and value in use. For the purposes of assessing
impairment, assets are grouped at the lowest levels for which there are
separately identifiable cash flows (CGUs). Assets other than goodwill
that suffered an impairment are reviewed for possible reversal of the
impairment at each reporting date.
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)
(g) Financial assets
The Company and its subsidiaries classify their financial assets in the
following categories: at fair value through profit or loss, 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.
(i) Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are financial
assets held for trading. Derivatives are classified as held for trading
unless they are designated as hedges. Assets in this category are
classified as current assets.
(ii) 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,
net', `other receivables and assets, net' and `other non-current assets'
in the balance sheets.
(iii) 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 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.
(iv) 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.
(v) 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 financial assets not carried at fair value
through profit or loss. Financial assets carried at fair value through
profit or loss are initially recognized at fair value, and transaction
cost are expensed in the income statement. Financial assets 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 investment and financial assets at fair
value through profit or loss are subsequently carried at fair value.
Loans and receivables and held-to-maturity investments are carried at
amortized costs using the effective interest method.
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)
(g) Financial assets (cont'd)
(v) Recognition and derecognition of financial assets (cont'd)
Changes in the fair value of monetary securities classified as
available-for-sale are recognized in equity. Gains or loss arising from
changes in the fair value of the "financial asset at fair value through
profit or loss" category are presented in the income statement within
`investment income, net' in the period in which they arise.
When securities classified as available-for-sale are sold or impaired,
the accumulated fair value adjustments recognized in equity are included
in the income statement as `investment income, net'. Dividends on
available-for-sale equity instruments are recognized in the income
statement within `investment income, net' when the right of the Company
and its subsidiaries to receive payments is established.
The fair values of quoted investments are based on current bid prices. If
the market for a financial asset is not active, the Company and its
subsidiaries establish fair value by using valuation techniques, such as
the option pricing model, making maximum use of market inputs and relying
as little as possible on entity-specific inputs.
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 the income statement - is removed from equity and
recognized in the income statement. Impairment loss recognized in the
income statement on equity instrument is not reversed through the income
statement. The impairment loss of held-to-maturity investments is
measured as the difference between the asset's carrying amount and the
present value of estimated future cash flows (excluding future credit
losses that have not been incurred) discounted at the financial assets
original effective interest rate (i.e. the effective interest rate
computed at initial recognition). The carrying amount of such an asset
shall be reduced either directly or through use of an allowance account
while the amount of such losses shall be recognised in the income
statement. Impairment testing of receivables is described in Note 2(i).
(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.
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)
(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 the 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 original effective interest rate. The carrying amounts
of the receivables are reduced through the use of allowance accounts, and
the amount of the provision is recognized in the income statement within
operating expenses - others. When a receivable is uncollectible, it is
written off against the allowance account for receivable. Subsequent
recoveries of amounts previously written off are credited against
operating expenses - others in the income statement.
(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) 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.
(l) Accounts payables
Accounts payables are recognized initially at fair value and subsequently
measured at amortized cost using the effective interest method.
(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 income statement 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.
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)
(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% of the Company's and its subsidiaries' operating
revenue. The input VAT can be used to offset the output VAT levied on
operating revenue to determine the net VAT payable. Because VAT is a tax
on the customer and the Company and its subsidiaries collect such tax
from the customers and pay such tax to the suppliers on behalf of the tax
authority, the VAT has not been included in operating revenue or
operating expenses.
(ii) Income tax expense
According to the relevant income tax law, Sino-foreign enterprises are,
in general, subject to statutory income tax of 33% (30% of Enterprise
Income Tax and 3% of 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 accessable profit for the year and
after considering deferred taxation.
(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.
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)
(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. Prepaid
contributions are recognized as assets to the extent that a cash refund
or a reduction in the future payment is available.
(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.
(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
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.
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)
(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 income statement 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.
(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 income statement and by subsequently establishing a provision
for losses arising from liability adequacy test.
(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.
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)
(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, 2007 or later
periods but which the Company and its subsidiaries have not early adopted.
These are summarized as follows:
o IFRS 7, Financial Instruments: Disclosures and a complementary
amendment to International Accounting Standard ("IAS") 1, Presentation
of Financial Statements - Capital Disclosures (effective from annual
periods beginning on or after January 1, 2007). IFRS 7 introduces new
disclosures relating to financial instruments. This standard
introduces certain revised disclosure requirements, including the
mandatory disclosures on sensitivity analysis for each type of 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 and is
applicable to all entities reporting under IFRS. The amendment to IAS
1 introduces disclosures on the objectives, policies and processes for
managing capital. Except for an extension of disclosures, management
considered there was no significant impact from adopting IFRS 7 and
the amendment to IAS 1 on the financial statements of the Company and
its subsidiaries and will apply these standards from January 1, 2007.
o IFRS 8, Operating Segments (effective from periods beginning on or
after January 1, 2009). This standard replaces IAS 14, Segment
Reporting and specifies how an entity should report information about
its operating segments in annual financial statements and, as a
consequential amendment to IAS 34, Interim Financial Reporting,
requires an entity to report selected information about its operating
segments in interim financial reports. This standard also sets out
requirements for related disclosures about products and services,
geographical areas and major customers. Management is currently
assessing the impact of this IFRS on the accounting policies of the
Company and its subsidiaries. The Company and its subsidiaries will
apply IFRS 8 from January 1, 2009.
o IFRIC Interpretation 10, Interim Financial Reporting and Impairment
(effective from annual periods beginning on or after November 1,
2006). This interpretation prohibits the impairment losses recognized
in a previous interim period on goodwill, investments in equity
instruments and investments in financial assets carried at cost to be
reversed at subsequent balance sheet dates. Management considered
there will be no significant impact from adopting IFRIC Interpretation
10 on the financial statements of the Company and its subsidiaries.
The Company and its subsidiaries will apply IFRIC Interpretation 10
from January 1, 2007.
F-21
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
(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 program 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.
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 plant 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
pays constant attention on international foreign exchanges market 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 optimize the capital structure.
(i) Market risk
(1) Foreign exchange risk
Foreign exchange risk arises from a significant amount 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
22. 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 either as available for sale or at fair
value through profit or loss. The Company and its subsidiaries are also
exposed to commodity price risk, including the coal price risk. The Company
and its subsidiaries have entered into several long-term coal purchase
contracts (Note 34(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 and power sales
respectively.
Significant portions of cash and cash equivalents 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.
F-22
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)
(ii) Credit risk (cont'd)
Most of 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
36).
(iii) Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash and
cash equivalents, the availability of funding from an adequate amount of
committed credit facilities and the ability to close out market positions.
Due to the dynamic nature of the underlying businesses, the Company and its
subsidiaries aim to maintain flexibility in funding by maintaining
availability under committed credit facilities.
(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 will use 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 factor
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 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 the specified debtor are relatively
remote. The Company and its subsidiaries maintain a close watch on the
financial position and liquidity of 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.
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)
(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 option pricing model and estimated discounted cash flows, are used to
determine fair value for warrants and 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 RMB38.16 billion as of December 31, 2006 (2005: RMB31.82
billion). The aggregate book value of these liabilities was approximately
RMB38.43 billion as of December 31, 2006 (2005: RMB32.03 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(e). The recoverable amounts of CGUs have been determined based on
value-in-use calculations. These calculations require the use of estimates
(Note 15). 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-24
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) 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.
(c) Estimated impairment of property, plant and equipment
The Company and its subsidiaries test whether property, plant and equipment
suffered any impairment whenever any impairment indication exists. In
accordance with the Note 2(f), 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.
(d) Fair value of derivatives
The fair value of financial instruments that are not traded in an active
market is determined by using valuation techniques. The Company uses its
judgement to select a variety of methods and make assumptions that are
mainly based on market conditions existing at each balance sheet date. 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 financial assets at fair
value through profit or loss.
5. OTHER INCOME, NET
Net other income represented the management service fee income net of
relevant expenses. 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.
F-25
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
6. PROFIT BEFORE TAX
Profit before tax was determined after charging and (crediting) the
following:
For the year ended December 31,
--------------------------------------------------------
2006 2005 2004
---------------- -------------- ----------------
Interest expense on bank loans:
- wholly repayable within five years 1,327,990 881,823 363,679
- not wholly repayable within five years 833,739 1,021,467 521,654
Interest expense on long-term loans from Huaneng
Group:
- wholly repayable within five years - - 16,551
- not wholly repayable within five years 140,194 84,506 36,586
Interest expense on other long-term loans:
- wholly repayable within five years 40,483 44,262 43,865
- not wholly repayable within five years - 12,495 12,692
Interest expense on short-term bonds 140,275 84,615 -
Interest expense on convertible notes - - 26
---------------- -------------- ----------------
Total interest expense 2,482,681 2,129,168 995,053
Less: amounts capitalized in property, plant and
equipment (891,648) (702,559) (331,629)
---------------- -------------- ----------------
1,591,033 1,426,609 663,424
Change in fair value on financial instruments:
- Gains of interest rate swaps - - (925)
- Financial assets at fair value through
profit and loss (100,180) - -
Write off of excess of acquirer's interest in the net
fair value of acquiree's identifiable assets,
liabilities and contingent liabilities over cost (24,758) - -
Auditors' remuneration 48,315 33,781 17,239
Loss on disposals / write-off of property, plant and
equipment, net 100,018 145,762 (29,176)
Operating leases:
- Property, plant and equipment 33,724 33,077 30,067
- Land use rights 41,090 42,402 40,272
Depreciation of property, plant and equipment 6,721,684 6,172,866 4,706,992
Impairment loss of property, plant and equipment 11,920 30,080 -
Amortization of land use rights 42,484 36,429 28,074
Amortization of other non-current assets 15,719 15,297 5,233
Amortization of goodwill - - 42,002
Amortization of negative goodwill - - (247,279)
Cost of inventories consumed 23,034,903 21,580,927 15,302,929
(Reversal of) / Provision for doubtful accounts (4,853) 49,869 (10,654)
Bad debts recovery (35,035) (59,740) -
Provision for inventory obsolescence 1,808 31,724 1,521
Staff costs:
- Wages and staff welfare 1,936,908 1,735,065 1,249,836
- Retirement benefits (Note 8) 503,592 407,846 299,120
- Termination benefits - - 18,546
- Staff housing benefits (Note 29) 198,212 147,479 100,751
- Other staff costs 248,054 196,708 209,011
================ ============== ================
F-26
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
7. RELATED PARTY 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 company
HIPDC Parent company
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")
Huaneng Xinrui Controlled Technology Co., Ltd. A subsidiary of Huaneng Group
("Xinrui")
Xi'an Thermal Power Research Institute Co., Ltd. Subsidiaries of Huaneng Group
("Xi'an Thermal") and its subsidiaries
Huaneng Capital Service Co., Ltd. ("Huaneng A subsidiary of Huaneng Group
Capital Service")
Greatwall Securities Co., Ltd. ("Greatwall A subsidiary of Huaneng Group
Securities")
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")
China Huaneng Finance Corporation Ltd. ("Huaneng An associate of the Company
Finance")
Chongqing Huaneng Shifen Company Limited An associate of a subsidiary
("Shifen 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
considered 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 balances and transactions disclosure, 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.
F-27
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
7. RELATED PARTY BALANCES AND TRANSACTIONS (CONT'D)
(a) Related party balances
(i) As of December 31, 2006, current deposits of approximately RMB 2,247
million (2005: RMB 1,768 million) were placed with Huaneng Finance, a
non-bank PRC financial institution, which bore interest that ranged
from 0.72% to 1.62% (2005 and 2004: from 0.72% to 1.62% and from 0.72%
to 1.44% ) per annum.
(ii) As described in Note 22, certain loans of the Company and its
subsidiaries were borrowed from Huaneng Group.
(iii) As of December 31, 2006, long-term loans (including current portion)
from Huaneng Finance amounted to RMB 80 million (2005: RMB 80
million), with interest at 5.18% and 5.67% (2005 and 2004: 5.18% and
N/A) per annum.
(iv) As of December 31, 2006, short-term loans amounting to approximately
RMB 2,485 million (2005: RMB 2,008 million) were borrowed from Huaneng
Finance, which bore interest that ranged from 4.70% to 5.51% (2005 and
2004: from 4.70% to 5.02% and from 4.54% to 5.02%) per annum.
(v) As of December 31, 2006, balances with Huaneng Group, HIPDC, and other
related parties are unsecured, non-interest bearing and receivable /
repayable within one year. As of and for the years ended December 31,
2005 and 2006, no provision is made on receivable balances from these
parties.
(vi) Including in balances with associates, a balance with an associate
amounted to approximately RMB 77 million is unsecured, interest
bearing at 5.265% (2005 and 2004: nil) per annum and repayable within
one year as of December 31, 2006 (2005 and 2004: nil). All the
remaining balances are unsecured, non-interest bearing and repayable
within one year.
F-28
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
7. RELATED PARTY BALANCES AND TRANSACTIONS (CONT'D)
(a) Related party balances (cont'd)
(vii) Included in the balance sheets, the balances with state-owned
enterprises are as follows:
As of December 31,
---------------------------------
2006 2005
-------------- ---------------
RMB million RMB million
Non-current assets
Available-for-sale investment 1,459 1,033
Other non-current assets 69 50
Current assets
Other receivable and assets, net 348 195
Accounts receivable, net 6,914 5,333
Temporary cash investments - 3
Cash at banks 856 851
Non-current liabilities
Long-term bank loans 27,133 19,445
Other long-term loans 60 130
Current liabilities
Accounts payable and other liabilities 2,822 2,777
Short-term bonds 5,078 4,780
Short-term loans 4,071 4,973
Current portion of long-term bank loans 2,272 1,761
Current portion of other long-term loans 114 70
Except for available-for-sale investment, other non-current assets,
temporary cash investment, cash at banks, loans and short-term bonds stated
above, all the balances of assets and liabilities with state-owned
enterprises mentioned above are unsecured, non-interest bearing and
receivable or repayable within one year. Available-for-sale investment is
unsecured and non-interest bearing. Except for long-term receivables
including in other non-current assets which are unsecured, interest-bearing
at 5.832% (2005 and 2004: 5.508% and N/A) per annum and is receivable in
accordance with specified repayment schedules, all the remaining balances
of other non-current assets are unsecured, non-interest bearing and
receivable after more than 12 months. As of December 31, 2006,
approximately RMB 51 million provision has been made on the receivable
balances (2005: RMB 58 million).
Terms of the long-term loans, short-term bonds, short-term loans and cash
at banks, are described in Notes 22, 25, 26 and 32(a). For the year ended
December 31, 2006, the interest rates of notes payable, short-term loans
and long-term loans from state-owned enterprises are from 2.70% to 3.24%,
from 4.30% to 5.51% and from 3.60% to 6.84% (2005: nil, from 4.54% to 5.76%
and from 3.60% to 5.12%; 2004: nil, from 4.30% to 5.02% and from 3.60% to
5.76%) per annum respectively.
F-29
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
7. RELATED PARTY BALANCES AND TRANSACTIONS (CONT'D)
(b) Related party transactions
For the year ended December 31,
-------------------------------------------------
2006 2005 2004
---------------- ---------------- ---------------
Huaneng Group
-------------
Management service fee income for management services rendered
to certain power plants 39,099 31,668 45,865
Less: related expenses (29,708) (29,510) (30,987)
---------------- ---------------- ---------------
Management service fee income, net 9,391 2,158 14,878
Acquisition of equity interest in Huaneng Finance from Huaneng
Group (126,000) - -
Interest expense on long-term loans (139,946) (35,700) -
HIPDC
-----
Management service fee income for management services rendered
to certain power plants 4,378 3,328 11,678
Less: related expenses (3,327) (3,101) (7,890)
---------------- ---------------- ---------------
Management service fee income, net 1,051 227 3,788
Service fees expenses on transmission and transformer facilities (140,771) (141,102) (133,609)
Rental charge on land use rights of Huaneng Nanjing Power Plant (1,334) (1,334) (1,334)
Rental charge on office building (26,000) (26,000) (25,000)
Huaneng Finance
---------------
Discounting of notes receivable 114,150 298,098 42,968
Discounting charges (1,086) (2,415) (298)
Drawdown of short-term loans 3,374,700 2,127,700 3,694,000
Drawdown of long-term loans 40,000 - -
Issuance of short-term bonds 900,000 - -
Interest on short-term and long-term loans (128,414) (104,550) (87,739)
Huaneng Capital Service
-----------------------
Issuance of short-term bonds 250,000 - -
Greatwall Securities
--------------------
Issuance of short-term bonds 300,000 - -
CHITEC
------
Purchase of coal from CHITEC (139,972) (284,301) (214,941)
Purchase of equipment from CHITEC (34,055) (11,200) -
Time Shipping
-------------
Purchase of coal from Time Shipping and service fee paid for
transportation (735,081) (606,753) (562,567)
Huaneng Jingyuan
----------------
Purchase of coal from Huaneng Jingyuan (49,159) (241,960) (16,355)
Shifen Company
--------------
Purchase of lime from Shifen Company (47,235) (42,817) (25,563)
Xinrui
------
Technical services and industry-specific technological
project contracting services (9,425) (24,521) -
Xi'an Thermal and its subsidiaries
----------------------------------
Technical services and industry-specific technological
project contracting services (94,723) (55,605) -
F-30
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
7. RELATED PARTY BALANCES AND TRANSACTIONS (CONT'D)
(b) Related party transactions (cont'd)
For the year ended December 31,
------------------------------------------------------
2006 2005 2004
---------------- ------------------ ------------------
RMB million RMB million RMB million
---------------- ------------------ ------------------
State-owned enterprises
-----------------------
Sales of electricity 44,646 40,977 32,546
Purchases of fuel 12,499 13,763 7,638
Acquisition of property, plant and equipment 7,568 5,578 5,110
Purchases of materials and supplies 139 365 145
Subcontracting labor for
- construction and renovation 3,621 2,088 1,307
- maintenance 118 140 89
Interest income 17 20 30
Dividend income 28 35 23
Warrants granted 38 - -
Drawdown of short-term bonds 3,550 4,862 -
Drawdown of short-term loans 9,033 6,650 2,375
Drawdown of long-term bank loans 9,453 9,465 2,713
Interest expense of loans and bonds to banks and other
financial institutions 1,797 881 289
Reversal of /(Provision for) doubtful accounts 5 (58) -
(c) Guarantees
As of December 31,
-------------------------------
2006 2005
------------- --------------
(i) Short-term loan guaranteed by a state-owned bank 1,000,000 400,000
(ii) Long-term loans guaranteed by
- Huaneng Group 6,249,089 7,343,525
- HIPDC 2,693,280 3,311,164
- State-owned enterprises 353,250 1,226,500
(iii) Certain long-term bank loans of Rizhao Power Company
guaranteed by the Company (123,250) (225,250)
(iv) Purchase settlements guaranteed by a state-owned bank 80,000 -
F-31
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
7. RELATED PARTY BALANCES AND TRANSACTIONS (CONT'D)
(d) Key management personnel compensation
For the year ended December 31,
----------------------------------
2006 2005 2004
--------- --------- ---------
Salaries and other short-term employee benefits 5,670 6,049 7,367
Post-employment benefits 1,616 1,413 1,119
--------- --------- ---------
Total 7,286 7,462 8,486
========= ========= =========
8. RETIREMENT PLAN AND POST-RETIREMENT BENEFITS
All PRC employees of the Company and its subsidiaries are entitled to a
monthly pension upon their retirements. 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% (2005 and 2004: 18% to 22% and 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, 2006 were approximately
RMB 278 million (2005 and 2004: RMB 227 million and RMB 167 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, 2006
totaled approximately RMB 238 million (2005 and 2004: approximately RMB 181
million and RMB 132 million).
The Company and its subsidiaries have no further obligation for
post-retirement benefits beyond the above annual contributions made.
F-32
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
9. 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, 2006 is set out below:
Basic Employer's
salaries contributions
and Discretionary to pension
Fees allowances bonuses schemes Total
----------- ------------ --------------- --------------- ---------------
Name of director
Mr. Li Xiaopeng - - - - -
Mr. Huang Yongda - - - - -
Mr. Wang Xiaosong(1) - - - - -
Mr. Na Xizhi - 225 310 173 708
Mr. Huang Long - 150 350 166 666
Mr. Wu Dawei - 21 121 21 163
Mr. Shan Qunying 40 - - - 40
Mr. Xu Zujian 40 - - - 40
Mr. Liu Shuyuan 40 - - - 40
Mr. Qian Zhongwei 60 - - - 60
Mr. Xia Donglin 60 - - - 60
Mr. Liu Jipeng 60 - - - 60
Mr. Wu Yusheng 60 - - - 60
Mr. Yu Ning 60 - - - 60
Mr. Ding Shida 40 - - - 40
----------- ------------ --------------- --------------- ---------------
Sub-total 460 396 781 360 1,997
----------- ------------ --------------- --------------- ---------------
Name of supervisor
Mr. Guo Junming(2) - - - - -
Mr. Shen Zongmin 40 - - - 40
Ms. Yu Ying 40 - - - 40
Ms. Zou Cui - 128 398 152 678
Mr. Wang Zhaobin - 126 382 139 647
Mr. Gu Jianguo 40 - - - 40
----------- ------------ --------------- --------------- ---------------
Sub-total 120 254 780 291 1,445
----------- ------------ --------------- --------------- ---------------
Total 580 650 1,561 651 3,442
=========== ============ =============== =============== ===============
F-33
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
9. 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, 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(3) - - - - -
Mr. Huang Yongda(3) - - - - -
Mr. Wang Xiaosong(3) - - - - -
Mr. Na Xizhi(3) - 96 313 108 517
Mr. Ye Daji(4) - 78 66 65 209
Mr. Huang Jinkai(4) - 43 195 71 309
Mr. Liu Jinlong(4) - - - - -
Mr. Huang Long(5) - 91 375 109 575
Mr. Wu Dawei(5) - - 147 - 147
Mr. Shan Qunying(3) 40 - - - 40
Mr. Yang Shengming(7) 20 - - - 20
Mr. Xu Zujian(3) 40 - - - 40
Mr. Liu Shuyuan(3) 40 - - - 40
Mr. Gao Zongze(4) 30 - - - 30
Mr. Zheng Jianchao(4) 30 - - - 30
Mr. Qian Zhongwei(3) 60 - - - 60
Mr. Xia Donglin(3) 60 - - - 60
Mr. Liu Jipeng(3) 60 - - - 60
Mr. Wu Yusheng(5) 60 - - - 60
Mr. Yu Ning(5) 60 - - - 60
Mr. Ding Shida(7) 20 - - - 20
----------- ------------ --------------- --------------- ---------------
Sub-total 520 308 1,096 353 2,277
----------- ------------ --------------- --------------- ---------------
Name of supervisor
Mr. Wei Yunpeng(4) - - - - -
Mr. Li Yonglin(4) 20 - - - 20
Mr. Pan Jianmin(4) - - - - -
Mr. Zhao Xisheng(4) - 35 128 45 208
Mr. Ye Dajis (5) and (6) - 155 165 132 452
Mr. Shen Weibing(7) 20 - - - 20
Mr. Shen Zongmin(3) 40 - - - 40
Ms. Yu Ying(5) 40 - - - 40
Ms. Zou Cui(5) - 83 282 88 453
Mr. Wang Zhaobin(5) - 80 259 77 416
Mr. Gu Jianguo(7) 20 - - - 20
----------- ------------ --------------- --------------- ---------------
Sub-total 140 353 834 342 1,669
----------- ------------ --------------- --------------- ---------------
Total 660 661 1,930 695 3,946
=========== ============ =============== =============== ===============
F-34
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
9. 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
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
=========== ============ =============== =============== ===============
1 Mr. Wang Xiaosong resigned from the capacity of director on March 7,
2006.
2 Appointed on January 18, 2006.
3 Retired and re-appointed on May 11, 2005.
4 Retired on May 11, 2005.
5 Appointed on May 11, 2005.
6 Mr. Ye Daji resigned from the capacity of supervisor on November 30,
2005.
7 Mr. Yang Shengming 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-36
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
9. 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
(2005 and 2004: 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 (2005 and
2004: nil).
No director or supervisors had waived or agreed to waive any emoluments
during the years 2004, 2005 and 2006.
(b) Five highest paid individuals
The five individuals whose emoluments were the highest in the Company and
its subsidiaries for the year include one (2005 and 2004: one and two)
Director whose emoluments is reflected in the analysis presented above. The
emoluments payable to the remaining four (2005 and 2004: four and three)
individuals during the year are as follows:
For the year ended December 31,
----------------------------------
2006 2005 2004
-------- --------- --------
-------- --------- --------
Basic salaries and allowances 551 510 370
Discretionary bonuses 1,776 2,233 1,499
Employer's contributions to pension schemes 702 614 294
-------- --------- --------
-------- --------- --------
3,029 3,357 2,163
======== ========= ========
The annual emoluments paid to these individuals during the years 2004, 2005
and 2006 fell within the range of nil to RMB 1 million.
F-36
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
10. PROPERTY, PLANT AND EQUIPMENT, NET
Electric
utility
plant in Transportation Construction-
Dam Buildings service facilities Others in-progress Total
---------- ---------- ------------- ------------- ---------- ----------- ------------
As of January 1, 2005
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 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
========== ========== ============= ============= ========== =========== ============
Year ended December 31,
2006
Beginning of the year 2,491,666 1,701,098 51,477,345 140,752 2,905,450 20,280,986 78,997,297
Reclassification - (84,198) 1,748,053 (1,167) (1,662,688) - -
Additions - 8,295 21,886 39 98,117 18,306,849 18,435,186
Transfer from CIP 987,317 50,504 24,967,179 276 84,012 (26,089,288) -
Disposals / Write-off - (16,284) (225,963) (59) (5,936) - (248,242)
Depreciation charge (95,558) (97,878) (6,270,573) (15,932) (248,155) - (6,728,096)
Impairment charge - - (42,000) - - - (42,000)
Reversal of impairment
charge - - 30,080 - - - 30,080
---------- ---------- ------------- ------------- ---------- ----------- ------------
End of the year 3,383,425 1,561,537 71,706,007 123,909 1,170,800 12,498,547 90,444,225
========== ========== ============= ============= ========== =========== ============
As of December 31, 2006
Cost 3,553,170 2,053,942 106,111,993 224,007 2,386,701 12,498,547 126,828,360
Accumulated depreciation (169,745) (492,405) (34,363,986) (100,098) (1,215,901) - (36,342,135)
Accumulated impairment
loss - - (42,000) - - - (42,000)
---------- ---------- ------------- ------------- ---------- ----------- ------------
Net book value 3,383,425 1,561,537 71,706,007 123,909 1,170,800 12,498,547 90,444,225
========== ========== ============= ============= ========== =========== ============
F-37
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
10. PROPERTY, PLANT AND EQUIPMENT, NET (CONT'D)
Interest expense of approximately RMB 892 million (2005 and 2004:
approximately RMB 703 million and RMB 332 million) arising on borrowings
for the construction of power plants were capitalized during the year are
included in `Additions' in property plant and equipment. A capitalization
rate of approximately 5.25% (2005 and 2004: 5.27% and 4.38%) per annum was
used, representing the interest rate of the loan used to finance the
projects.
In 2006, there were impairment losses of certain property, plant and
equipment in Huaneng Shantou Oil-Fired Power Plant amounting to RMB 42
million. The recoverable amount is determined based on fair value less
costs to sell based on the bidding price and the valuation performed by an
independent valuer.
In 2005, there were impairment losses of certain property, plant and
equipment amounting to RMB 30 million in Huaneng Dandong Power Plant
("Dandong Power Plant") due to the continued loss incurred in the
operations. In 2006, as a result of changes in the local power market
regulations, the tariff of Dandong Power Plant increased and this led to an
increase in recoverable amount of related property, plant and equipment
based on the value-in-use calculations as of year end. An impairment charge
of RMB 30 million recorded in 2005 was, thus, reversed. A discount rate of
approximately 7.76% was applied.
There was no impairment of any property, plant and equipment in 2004.
F-38
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
11. INVESTMENTS IN ASSOCIATES
2006 2005
---------------- ----------------
Beginning of the year 4,593,984 4,328,307
Additional investments 487,676 -
Share of other equity movement 157 15,923
Share of profit before tax 896,186 753,671
Share of taxation (105,557) (109,295)
Dividends (454,233) (394,622)
---------------- ----------------
End of the year 5,418,213 4,593,984
================ ================
Investment in associates as of December 31, 2006 included goodwill of
approximately RMB 976 million (2005: RMB 976 million).
As of December 31, 2006, the interest in associates of the Company and its
subsidiaries, all of which are unlisted, were as follows:
Country and date of Percentage of Registered and Principal
Name of associate incorporation equity interest fully paid capital activities
------------------------------- -------------------- --------------------- -------------------- ----------------
Direct Indirect
---------- ---------
Rizhao Power Company PRC 34% - US$150,000,000 Power
March 20, 1996 generation
Shenzhen Energy Group Co. Ltd. PRC 25% - RMB955,555,556 Power
("SEG") July 15, 1985 generation
Hebei Hanfeng Power Generation PRC 40% - RMB1,975,000,000 Power
Limited Liability Company October 28, 1996 generation
("Hanfeng Power Company")
Shifen Company PRC - 25% RMB50,000,000 Lime
November 5,1996 production and
sale
Sichuan Jialingjiang Tourism PRC - 25% RMB80,000,000 Tourism
Development Company Inc April 25, 2006 development
and
entertainment
in Nanchong
water area
Huaneng Finance PRC 20% - RMB1,200,000,000 Advisory
May 21, 1988 service in
financing and
credit appraisal
F-39
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
11. INVESTMENTS IN ASSOCIATES (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:
2006 2005
---------------- ----------------
Assets 52,651,063 33,231,354
Liabilities (31,138,182) (15,299,661)
Operating revenue 14,204,353 14,515,393
Profit attributable to equity holders of the associates 2,768,300 2,224,783
12. INVESTMENTS IN SUBSIDIARIES
As of December 31, 2006, the interest in subsidiaries of the Company and
its subsidiaries, all of which are unlisted, were as follows:
Country, date of
incorporation and Percentage of Registered and Principal
Name of Subsidiary type of legal activity equity interest held fully 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
Huaneng Huaiyin Power PRC 90% - RMB 265,000,000 Power
Generation Co., Ltd January 26, 1995 generation
("Huaiyin Power Limited liability company
Company")
Huaneng Huaiyin II PRC 63.64% - RMB 774,000,000 Power
Power Limited June 22, 2004 generation
Company Limited liability company
Huaneng (Suzhou PRC 75% - RMB 632,840,000 Power
Industrial Park) June 19, 1997 generation
Power Generation Limited liability company
Co., Ltd. ("Taicang
Power Company")
Huaneng Taicang Power PRC 75% - RMB 894,410,000 Power
Co., Ltd. June 18, 2004 and fully paid generation
Limited liability company capital of RMB
804,146,700
Henan Huaneng Qinbei PRC 55% - RMB 810,000,000 Power
Power Limited July 12, 1995 generation
Company ("Qinbei Limited liability company
Power Company")
F-40
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
12. INVESTMENTS IN SUBSIDIARIES (CONT'D)
As of December 31, 2006, the interest in subsidiaries of the Company and
its subsidiaries, all of which are unlisted, were as follows (cont'd):
Country, date of
incorporation and Percentage of Registered and Principal
Name of Subsidiary type of legal activity equity interest held fully paid capital activities
------------------------ ---------------------- --------------------- -------------------- ----------------
Direct Indirect
---------- ---------
Huaneng Yushe Power PRC 60% - RMB 615,760,000 Power
Generation Co., November 29, 1994 generation
Ltd. ("Yushe Power Limited liability
Company") company
Huaneng Xindian Power PRC 95% - RMB 100,000,000 Power
Co., Ltd. March 24, 2004 generation
Limited liability
company
Huaneng Hunan Yueyang PRC 55% - RMB 1,055,000,000 Power
Power Generation December 16, 2003 generationon
Limited Liability Limited liability
Company ("Yueyang company
Power Company")
Huaneng Chongqing PRC 60% - RMB 1,291,650,000 Power
Luohuang Power December 16, 2003 generation
Generation Limited Limited liability
Liability Company company
("Luohuang Power
Company")
Huaneng Shanghai PRC 70% - RMB 685,800,000 Power
Combined Cycle January 13, 2005 generation
Power Limited Limited liability
Liability Company company
Huaneng Sichuan PRC 60% - RMB 800,000,000 Investments
Hydropower Co., July 12, 2004 holding and
Ltd. ("Sichuan Limited liability hydropower
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
BaoXing River Power June 26, 1994 generation
Co., Ltd. Limited liability
company
Sichuan Huaneng PRC - 59.33% RMB 156,725,000 Power
Dongxiguan June 29, 1994 generation
Hydropower Limited Limited liability
Liability Company company
("Dongxiguan
Hydropower")
Sichuan Huaneng PRC - 55% RMB 193,080,000 Power
Jialingjiang September 30, 1998 generation
Hydropower Limited Limited liability
Liability company
Company
F-41
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
12. INVESTMENTS IN SUBSIDIARIES (CONT'D)
As of December 31, 2006, the interest in subsidiaries of the Company and
its subsidiaries, all of which are unlisted, were as follows (cont'd):
Country, date of
incorporation and Percentage of Registered and Principal
Name of Subsidiary type of legal activity equity interest held fully paid capital activities
------------------------ ---------------------- --------------------- -------------------- ----------------
Direct Indirect
---------- ---------
Sichuan Huaneng PRC - 60% RMB 194,000,000 Power
Kangding April 14, 1997 generation
Hydroelectric Power Limited liability company
Co., Ltd.
("Kangding
Hydropower")
Sichuan Huaneng PRC - 95% RMB 150,000,000 Power
Fujiang Hydropower March 22, 2002 generation
Limited Liability Limited liability company
Company
Huaneng Mingtai Power PRC - 52.20% RMB 97,700,000 Power
Limited Liability September 8, 1994 generation
Company ("Mingtai Limited liability company
Hydropower")
Huaneng Pingliang PRC 65% - RMB 924,050,000 Power
Power Generation November 6, 1996 generation
Co., Ltd. Limited liability company
("Pingliang Power
Company")
13. AVAILABLE-FOR-SALE INVESTMENT
Available-for-sale investment represents a 1.82% (2005: 1.82%) equity
interest in a power generation company, China Yangtze Power Co., Ltd.
("Yangtze Power") incorporated and listed in the PRC.
2006 2005
----------- -----------
Beginning of the year 1,033,225 254,990
Additions (Note) - 28,866
Revaluation surplus transfer to equity (Note) 425,534 749,369
----------- -----------
End of the year 1,458,759 1,033,225
=========== ===========
Note:
During 2005, Yangtze Power has gone through 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. The legal person shares held by the
Company were allowed to trade in the open market after the completion of
the process.
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-42
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
14. LAND USE RIGHTS
Details of land use rights are as follows:
As of December 31,
------------------------------------
2006 2005
---------------- -----------------
Outside Hong Kong, held on:
Leases of between 10 to 50 years 1,977,738 1,562,728
Leases of over 50 years 35,742 117,037
---------------- -----------------
2,013,480 1,679,765
================ =================
15. GOODWILL
The movement in the carrying amount of goodwill duing the years are as
follows:
As of January 1, 2005
Cost 376,726
=========================
Year ended December 31, 2005:
Opening net book value 376,726
Acquisitions 295,070
-------------------------
Closing net book value 671,796
=========================
As of December 31, 2005
Cost 671,796
=========================
As of December 31, 2006
Cost 671,796
=========================
F-43
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
15. GOODWILL (CONT'D)
Impairment tests for goodwill
Goodwill is allocated to the CGUs of the Company and its subsidiaries
identified according to their operations in different regions.
The carrying amounts of significant portion of goodwill allocated to
individual CGUs are as follows:
2006 2005
------------- --------------
Huaiyin Power Company 118,596 118,596
Yueyang Power Company 100,907 100,907
Sichuan Hydropower 129,729 129,729
Pingliang Power Company 107,735 107,735
SEG(1) 682,993 682,993
Hanfeng Power Company(1) 293,070 293,070
----------
(1) Included in investments in associates.
The recoverable amount of a CGU is determined based on value-in-use
calculations. These calculations use pre-tax 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:
Huaiyin Power Company 10.80% Yueyang Power Company 8.90%
Sichuan Hydropower 13.53% Pingliang Power Company 9.26%
SEG 10.99% Hanfeng Power Company 9.40%
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.
Based on the assessments, no goodwill was impaired.
F-44
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
16. INVENTORIES, NET
Inventories comprised:
As of December 31,
-------------------------------
2006 2005
-------------- --------------
Fuel (coal and oil) for power generation 1,241,838 1,498,484
Material and supplies 926,191 857,605
-------------- --------------
2,168,029 2,356,089
Less: provision for inventory obsolescence (46,540) (44,732)
-------------- --------------
2,121,489 2,311,357
============== ==============
As of December 31, 2006, approximately RMB 606 million of the total
carrying amount of inventories were carried at fair value less cost to sell
(2005: RMB 670 million).
Movements of provision for inventory obsolescence during the year are
analyzed as follows:
2006 2005
-------------- -----------
Beginning of the year (44,732) (13,008)
Provision (4,235) (31,924)
Reversal 2,427 200
-------------- -----------
End of the year (46,540) (44,732)
============== ===========
F-45
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
17. OTHER RECEIVABLES AND ASSETS, NET
Other receivables and assets comprised:
As of December 31,
----------------------------
2006 2005
-------------- -------------
Prepayments for inventories 285,465 163,435
Prepayments to contractors 149,596 137,505
Prepayment for acquisition of Huaneng Finance - 288,000
Receivable from a property developer - 66,800
Others 213,650 233,435
-------------- -------------
648,711 889,175
Less: provision for doubtful accounts (33,223) (33,223)
-------------- -------------
615,488 855,952
\============== ============
Movements of provision for doubtful accounts during the years are analyzed
as follows:
As of December 31,
---------------------------
2006 2005
-------------- ------------
Beginning of the year (33,223) (42,262)
Provision (3,732) (3,242)
Reversal 3,474 11,806
Write-off 258 475
------------- ------------
End of the year (33,223) (33,223)
============= ============
18. ACCOUNTS RECEIVABLE, NET
Accounts receivable comprised:
As of December 31,
-----------------------------
2006 2005
-------------- ------------
Accounts receivable 6,232,275 4,963,326
Notes receivable 795,791 1,117,533
-------------- ------------
7,028,066 6,080,859
Less: provision for doubtful accounts (50,573) (58,433)
-------------- ------------
6,977,493 6,022,426
============== ============
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-46
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
18. ACCOUNTS RECEIVABLE, NET (CONT'D)
Movements of provision for doubtful accounts during the years are analyzed
as follows:
2006 2005
----------------- --------------------
Beginning of the year (58,433) -
Provision - (58,433)
Reversal 5,111 -
Write-off 2,749 -
----------------- --------------------
End of the year (50,573) (58,433)
================= ====================
As of December 31, 2006, the aging analysis of accounts receivable was as
follows:
2006 2005
---------------- --------------
Within 1 year 6,716,090 5,864,038
Between 1 to 2 years 114,121 3,624
Between 2 to 3 years 51,554 59,217
Over 3 years* 146,301 153,980
---------------- --------------
7,028,066 6,080,859
================ ==============
*During 2005 and 2006, HIPDC had provided guarantee to the Company on the
Company's share of an account receivable balance of approximately RMB 140
million recorded in the books of Yueyang Power Company when the Company
acquired the subsidiary from HIPDC in 2004. The Company received the
guarantee payment from HIPDC as of December 31, 2006.
As of December 31, 2006, the maturity period of the notes receivable ranged
from 1 month to 23 months (2005: 1 month to 26 months).
F-47
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
19. AUTHORIZED SHARE CAPITAL AND PAID-IN CAPITAL
As of December 31, Adjustment from As of December
2005 shareholding reform 31, 2006
-------------------- ------------------------ ------------------
Domestic shares, par value of RMB1.00 8,500,000 (8,500,000) -
each, in form of legal person shares
A shares, par value of RMB1.00 each 500,000 8,500,000 9,000,000
Overseas listed foreign shares, par
value of RMB1.00 each 3,055,383 - 3,055,383
-------------------- ------------------------ ------------------
Total 12,055,383 - 12,055,383
==================== ======================== ==================
As of December 31, 2006, the authorized share capital of the Company was
RMB 12,055,383,440 (2005: RMB 12,055,383,440), divided into 12,055,383,440
shares (2005: 12,055,383,440 shares) of RMB 1.00 each (2005: RMB 1.00
each).
On April 19, 2006, the Company completed its shareholding reform process on
domestic shares (including A shares), in which Huaneng Group and HIPDC,
being the major shareholders of the Company, offered to give three
Company's shares that they owned to the original Company's A share holders
for every ten shares held by the A share holders. The total number of
shares given out by Huaneng Group and HIPDC to the original A share holders
in connection with this reform was 150,000,000 shares. As a result of this
shareholding reform, all the previously non-tradeable domestic shares held
by Huaneng Group, HIPDC and other founding shareholders become tradable
subject to certain lock-up arrangements made by the holders of such shares.
All of these domestic shares were reclassified as A shares. This
shareholding reform did not affect the shareholding of overseas listed
foreign shares.
All shares issued by the Company were fully paid. The holders of domestic
shares and overseas listed foreign shares, with minor exceptions, are
entitled to the same economic and voting rights.
20. DEDICATED CAPITAL
The Board of Directors decided on an annual basis the percentages of profit
attributable to equity holders of the Company, as determined under the PRC
accounting standards and regulations, to be appropriated to the statutory
surplus reserve fund and, on an optional basis, the discretionary surplus
reserve fund. When the balance of the statutory surplus reserve fund
reaches 50% of the Company's share capital, any further appropriation will
be optional. The statutory surplus reserve fund can be used to offset prior
years' losses or increase share capital, provided that the balance after
such an issue is not less than 25% of registered capital. The discretionary
surplus reserve fund can be provided and used in accordance with the
resolutions of the directors and then approved by the shareholders.
Prior to January 1, 2006, the Board of Directors decided on an annual basis
the percentages of profit attributable to equity holders of the Company, as
determined under the PRC accounting standards and regulations, to be
appropriated to the statutory public welfare fund. 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. Pursuant to the revised Company Law, the Company stopped
providing further appropriation out of profit attributable to equity
holders of the Company to statutory public welfare fund starting from
January 1, 2006. The balance of statutory public welfare fund as of
December 31, 2005 is transferred into statutory surplus reserve fund.
F-48
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
20. DEDICATED CAPITAL (CONT'D)
In relation to the profit appropriation plan for the year ended December
31, 2006, the Board of Directors resolved the following on April 3, 2007:
(a) appropriate 10% (2005 and 2004: 10%) of profit attributable to equity
holders of the Company as determined under the PRC accounting
standards and regulations to the statutory surplus reserve fund.
(b) make no appropriation to the discretionary surplus reserve fund (2005
and 2004: 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, 2006 was approximately RMB 5.00 billion (2005 and
2004: RMB 3.93 billion and RMB 4.38 billion). The cumulative balance of
distributable profit as of December 31, 2006 was approximately RMB 15.30
billion (2005: RMB 13.32 billion).
21. DIVIDENDS
On April 3, 2007, the Board of Directors proposed a cash dividend of RMB
0.28 per share, totaling approximately RMB 3,376 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, 2007.
On June 13, 2006, the shareholders approved the declaration of cash
dividends of RMB 0.25 per share, totaling approximately RMB 3,014 million
in their annual general meeting.
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.
F-49
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
22. LONG-TERM LOANS
As of December 31,
----------------------------------------------------------------------------------------------
2006 2005
------------------------------------------------ ------------------------------------------
Annual Annual
Original Interest Original Interest
currency rate Amount currency rate Amount
------------- ------------- ------------- ----------- ------------ -----------
'000 '000
Loans from
Huaneng Group
Unsecured
RMB
- Fixed rate 4.05% - 4.05% -
2,800,000 5.02% 2,800,000 2,800,000 5.02% 2,800,000
============= ============
Bank loans
Secured
RMB
- Fixed rate 5.18% - 5.18% -
60,000 6.16% 60,000 407,000 5.76% 407,000
------------- -----------
Unsecured
RMB
- Fixed rate 3.60% - 3.60% -
30,035,770 6.84% 30,035,770 21,833,838 6.12% 21,833,838
US$
- Fixed rate
5.95% - 5.40% -
513,549 6.97% 4,010,150 611,668 6.97% 4,936,284
- Variable rate 4.13% - 2.155 -
53,782 5.49% 419,969 60,109 3.385% 485,096
(euro)
- Fixed rate 66,268 2% 680,344 73,319 2% 702,376
------------- -----------
35,146,233 27,957,594
------------- -----------
35,206,233 28,364,594
============= ===========
Other loans
Secured
RMB
- Fixed rate 130,000 5.27% 130,000 200,000 5.27% 200,000
------------- -----------
Unsecured
RMB
- Fixed rate 4.94% -
123,625 4.94% - 6.12% 123,625 446,847 6.12% 446,847
US$
- Variable rate 2.99% -
12,857 5.80% 100,398 15,714 3.93% 126,817
JPY
- Variable rate 1,071,429 5.80% 70,318 1,309,524 5.80% 89,985
------------- -----------
294,341 663,649
------------- -----------
424,341 863,649
============= ===========
The interest rates of all variable rate loans are subject to adjustment
once every six months (2005 and 2004: six months).
Certain bank loans totaling approximately RMB 60 million (2005: RMB 407
million) are secured by various property, plant and equipment of the
Company and its subsidiaries while an other long-term loan of RMB 130
million (2005: RMB 200 million) is secured by tariff collection right.
F-50
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
22. LONG-TERM LOANS (CONT'D)
The maturity of long-term loans is as follows:
Loans from
Huaneng Group Bank loans Other loans
------------------------- ------------------------------ ---------------------------
As of December 31, As of December 31, As of December 31,
------------------------- ------------------------------ ---------------------------
2006 2005 2006 2005 2006 2005
---------- ----------- ----------- -------------- ----------- ------------
1 year or less - - 3,140,393 2,653,339 191,562 512,640
More than 1 year
but not more
than 2 years - - 3,956,803 2,979,225 98,259 153,044
More than 2 years
but not more than
3 years - - 9,687,803 3,189,885 78,259 99,419
More than 3 years
but not more than
4 years - - 3,849,141 4,417,885 38,259 39,419
More than 4 years
but not more than
5 years - - 3,405,639 3,386,732 18,002 39,419
More than 5 years 2,800,000 2,800,000 11,166,454 11,737,528 - 19,708
---------- ----------- ----------- -------------- ----------- ------------
2,800,000 2,800,000 35,206,233 28,364,594 424,341 863,649
Less: amount due
within 1 year
included under
current
liabilities - - (3,140,393) (2,653,339) (191,562) (512,640)
---------- ----------- ----------- -------------- ----------- ------------
2,800,000 2,800,000 32,065,840 25,711,255 232,779 351,009
========== =========== =========== ============== =========== ============
The analysis of the above is as follows:
As of December 31,
-----------------------------
2006 2005
------------ ------------
Loans from Huaneng Group
- Not wholly repayable within five years
2,800,000 2,800,000
============ ============
Bank loans
- Wholly repayable within five years 19,307,871 8,429,132
- Not wholly repayable within five years 15,898,362 19,935,462
------------ ------------
35,206,233 28,364,594
============ ============
Other loans
- Wholly repayable within five years 424,341 686,265
- Not wholly repayable within five years - 177,384
------------ ------------
424,341 863,649
============ ============
F-51
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
23. ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities comprised:
As of December 31,
--------------------------------
2006 2005
---------------- --------------
Accounts and notes payable 2,037,447 1,231,162
Amounts received in advance 1,207,776 1,196,352
Payable to contractors for construction 2,993,257 2,430,133
Other payables to contractors 914,856 778,488
Accrued interest 195,643 197,637
Others 1,026,726 1,071,468
---------------- --------------
8,375,705 6,905,240
================ ==============
As of December 31, 2006, balances of accounts payable and other liabilities
include accrued interest to Huaneng Finance and Huaneng Group amounting to
approximately RMB 7.6 million and RMB 10 million (2005: approximately RMB
13.6 million and RMB 10 million) respectively.
The aging analysis of accounts and notes payable (including amounts due to
other related parties of trading in nature) was as follows:
As of December 31,
---------------------------
2006 2005
----------- ------------
Accounts and notes payable
Within 1 year 2,028,121 1,223,004
Between 1 to 2 years 6,170 4,227
Over 2 years 3,156 3,931
----------- ------------
Subtotal 2,037,447 1,231,162
----------- ------------
Amounts due to other related parties of
trading in nature
Within 1 year 38,336 29,093
Over 2 years 108 -
----------- ------------
Subtotal 38,444 29,093
----------- ------------
Total 2,075,891 1,260,255
=========== ============
24. TAXES PAYABLE
Taxes payable comprises:
As of December 31,
-------------------------------
2006 2005
--------------- ---------------
VAT payable 718,602 576,488
Income tax payable 373,573 458,982
Others 88,143 95,814
--------------- ---------------
1,180,318 1,131,284
=============== ===============
F-52
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
25. SHORT-TERM BONDS
The Company and its subsidiaries repaid RMB 500 million and RMB 4.5 billion
unsecured short-term zero-coupon bonds at par in February 2006 and May 2006
respectively. The effective interest rates of these bonds were 3.32% and
3.40% per annum, respectively.
Subsequently, the Company and its subsidiaries issued another RMB 500
million and RMB 4.5 billion of unsecured short-term bonds bearing coupon
rates of 3.12% per annum and 3.35% per annum in May 2006 and June 2006,
respectively. These bonds are denominated in RMB and will mature in 365
days from their respective issue dates at their nominal values. Interest
expense on these bonds is calculated using the effective interest rates of
3.53% and 3.77% per annum, respectively.
26. 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, 2006 (2005 and 2004:
4.30% to 5.76% and 4.30% to 5.02% per annum).
F-53
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
27. 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,
------------------------------------------
2006 2005
------------------ -------------------
Deferred income tax assets:
- Deferred income tax assets to be recovered after more
than 12 months 34,501 51,874
- Deferred income tax assets to be recovered within 12
months 63,928 12,201
------------------ -------------------
98,429 64,075
------------------ -------------------
Deferred income tax liabilities:
- Deferred income tax liabilities to be recovered after
more than 12 months (945,193) (1,056,412)
- Deferred income tax liabilities to be recovered within 12
months (133,704) (101,363)
------------------ -------------------
(1,078,897) (1,157,775)
------------------ -------------------
(980,468) (1,093,700)
================== ===================
The gross movement on the deferred income tax accounts is as follows:
2006 2005
--------------- ---------------
Beginning of the year (1,093,700) (671,729)
Acquisitions - (370,730)
Credited to the income statement (Note 30) 177,062 61,164
Charged directly to equity (63,830) (112,405)
--------------- ---------------
End of the year (980,468) (1,093,700)
=============== ===============
F-54
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
27. 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:
Provision
Amortization for
of land use impairment Staff Accrued
rights losses benefits Depreciation expenses Others Total
-------------- ------------ ---------- -------------- --------- ---------- ----------
As of
January 1,
2005 10,812 61,176 18,051 - - 7,500 97,539
Acquisitions - 20,942 - - - 12,533 33,475
(Charged) /
Credited
to
the
income
statement (221) (13,466) (4,085) - - 39,240 21,468
-------------- ------------ ---------- -------------- --------- ---------- ----------
As of 10,591 68,652 13,966 - - 59,273 152,482
December
31, 2005
(Charged) /
Credited
to
the
income
statement (221) 10,027 26,195 33,164 6,449 (14,859) 60,755
-------------- ------------ ---------- -------------- --------- ---------- ----------
As of
December
31, 2006 10,370 78,679 40,161 33,164 6,449 44,414 213,237
==========================================================================================
Deferred income tax liabilities:
Amortization
of goodwill
and Amortization
Fair value negative of land use
gains goodwill rights Repreciation Others Total
--------------- --------------- --------------- ---------------- ------------- ----------
As of January 1,
2005 - (222,551) (53,172) (493,545) - (769,268)
Acquisitions - - - (404,205) - (404,205)
(Charged) /
Credited to
the income
statement - 36,330 358 10,372 (7,364) 39,696
Charged directly
to equity (112,405) - - - - (112,405)
--------------- --------------- --------------- ---------------- ------------- ----------
As of December
31, 2005 (112,405) (186,221) (52,814) (887,378) (7,364) (1,246,182)
(Charged) /
Credited to
the income
statement (15,027) 36,528 (5,405) 100,211 - 116,307
Charged directly
to equity (63,830) - - - - (63,830)
--------------- --------------- --------------- ---------------- ------------- ----------
As of December
31, 2006 (191,262) (149,693) (58,219) (787,167) (7,364) (1,193,705)
==========================================================================================
F-55
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
27. 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,
-----------------------------------
2006 2005
-------------- --------------
Year of expiry
2006 N/A 177,197
2007 71,125 71,125
2008 - -
2009 12,970 12,970
2010 183,127 183,127
2011 176,934 N/A
-------------- --------------
444,156 444,419
============== ==============
28. ADDITIONAL FINANCIAL INFORMATION ON BALANCE SHEETS
As of December 31, 2006, the net current liabilities of the Company and its
subsidiaries amounted to approximately RMB 13,278 million (2005: RMB 11,044
million). On the same date, total assets less current liabilities was
approximately RMB 87,096 million (2005: RMB 76,333 million).
As of December 31, 2006, the net current liabilities of the Company
amounted to approximately RMB 7,919 million (2005: RMB 5,835 million). On
the same date, total assets less current liabilities was approximately RMB
52,695 million (2005: RMB 48,236 million).
29. 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% (2005 and 2004: 7% - 15% and 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, 2006, the Company
and its subsidiaries contributed approximately RMB 198 million (2005 and
2004: RMB 147 million and RMB 101 million) to the fund.
F-56
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
29. HOUSING SCHEMES (CONT'D)
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
and is recorded as other non-current assets and amortized over the
remaining average service life of the relevant employees which is estimated
to be approximately 10 years. For the year ended December 31, 2006, the
housing benefits being amortized by the Company and its subsidiaries to the
employees amounted to approximately RMB 39 million (2005 and 2004: RMB 39
million and RMB 34 million).
The Company and its subsidiaries have no further obligation for housing
benefits.
30. INCOME TAX EXPENSES
Income tax expenses comprised:
For the year ended December 31,
---------------------------------------
2006 2005 2004
------------- ------------ ------------
Current income tax expense 1,304,761 1,105,461 980,672
Deferred income tax (Note 27) (177,062) (61,164) (31,938)
------------- ------------ ------------
1,127,699 1,044,297 948,734
============= ============ ============
No Hong Kong profits tax has been provided as there was no estimated
assessable profits in Hong Kong for the year (2005 and 2004: 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,
----------------------------------
2006 2005 2004
----------- ----------- ----------
Average statutory tax rate 19.73% 20.83% 17.64%
Effect of tax holiday (4.60%) (3.84%) (2.16%)
Others (1.06%) (1.15%) (0.95%)
----------- ----------- ----------
Effective tax rate 14.07% 15.84% 14.53%
=========== =========== ==========
The average statutory tax rate for the year ended December 31, 2005 and
2006 represented the weighted average tax rate of the Company and its
subsidiaries calculated on the basis of the relative amounts of profit
before tax and the applicable statutory tax rates.
The aggregated effect of the tax holiday was approximately RMB 369 million
for the year ended December 31, 2006 (2005 and 2004: RMB 255 million and
RMB 122 million).
F-57
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
31. EARNINGS PER SHARE
The calculation of basic earnings per share is done based on the profit
attributable to the equity holders of the Company of approximately RMB
6,071 million (2005 and 2004: approximately RMB 4,872 million and RMB 5,324
million) and the weighted average number of approximately 12,055 million
(2005 and 2004: 12,055 million) outstanding ordinary shares during the
year.
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. There was no
dilutive effect on earnings per share since the Company had no dilutive
potential ordinary shares for the years ended December 31, 2006 and 2005
(2004: convertible notes, being a category of potential ordinary shares).
The convertible notes in 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 2004.
32. NOTES TO CASH FLOW STATEMENT
(a) Analysis of cash and cash equivalents
Cash and cash equivalents consisted of:
2006 2005 2004
------------- ------------ --------------
Cash in RMB 1,327 1,042 621
Current deposits
RMB 3,203,712 2,632,493 2,284,551
US$ (RMB equivalent) 2,153 14,130 10,359
------------- ------------ --------------
Total cash and cash equivalents 3,207,192 2,647,665 2,295,531
============= ============ ==============
(b) Undrawn borrowing facilities
As of December 31, 2006, the Company and its subsidiaries had undrawn
unsecured borrowing facilities amounting to approximately RMB 25.61 billion
(2005: RMB 22.57 billion). 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
There is no material non-cash transaction for the years ended December 31,
2006 and 2005. The principal non-cash transactions were the conversion of
convertible notes to share capital in 2004 and the ordinary shares split in
2004.
F-58
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
33. PLEDGE OF ASSETS
As mentioned in Note 22, 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 As of
December 31, 2006 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 48,976 54,394
------------------- ------------------
Total 48,976 667,339
=================== ==================
34. 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. Details of such commitments are
as follows:
2006 2005
---------------- -------------------
Contracted but not provided for
- purchase of inventories 2,829,393 -
- construction 14,558,971 17,076,451
---------------- -------------------
Sub-total 17,388,364 17,076,451
---------------- -------------------
Authorized but not contracted for
- purchase of inventories 531,360 -
- construction 2,166,046 11,983
---------------- -------------------
Sub-total 2,697,406 11,983
---------------- -------------------
Total 20,085,770 17,088,434
================ ===================
F-59
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
34. COMMITMENTS (CONT'D)
(a) Capital and operational commitments (cont'd)
(ii) In addition, from 2004 to 2006, the Company also 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 agreements contain provisions
for price escalations and minimum purchase level clauses. Purchases
for the years ended December 31, 2006 and 2005 were approximately RMB
5,701 million and RMB 4,619 million respectively. The future purchase
commitments under the above agreements are as follows:
As of December 31,
----------------------------------
2006 2005
--------------- --------------
2006 N/A 7,771,230
2007 9,457,131 7,771,230
2008 5,512,180 3,826,281
2009 5,512,180 3,826,281
--------------- --------------
20,481,491 23,195,022
=============== ==============
(b) Operating lease commitments
The Company has various operating lease arrangements with HIPDC for land
and buildings (see Note 7(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,
-----------------------
2006 2005
--------- ----------
Land and buildings
- not later than one year 29,254 33,495
- later than one year and not later than two years 3,253 7,372
- later than two years and not later than five years 9,760 19,639
- later than five years 111,138 138,058
--------- ----------
153,405 198,564
========= ==========
In addition, in accordance with a 30-year operating lease agreement signed
by Huaneng Dezhou Power Plant ("Dezhou Power Plant") and Shandong Land
Bureau for the land occupied by Dezhou Power Plant Phases I and II in June
1994, annual rental amounted to approximately RMB 30 million effective from
June 1994 and is subject to revision at the end of the fifth year from the
contract 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% of the previous annual rental amount. For the year ended
December 31, 2006 and 2005, the annual rental were approximately RMB 30
million and RMB 30 million respectively (2004: approximately RMB 29
million).
F-60
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
35. FINANCIAL GUARANTEES
As of December 31,
--------------------------
2006 2005
------------- ------------
Financial guarantees granted to an associate 123,250 225,250
============= ============
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.
36. 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, 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, 2006, the Company and its subsidiaries sold
electricity to three major customers (2005 and 2004: four and five), each
of which amounted to approximately 10% or more of the operating revenue. In
aggregation, these customers accounted for approximately 45% (2005 and
2004: approximately 57% and 79%, respectively) of the operating revenue of
the Company and its subsidiaries.
37. EVENTS AFTER THE BALANCE SHEET DATE
In 2007, the Chinese government promulgated the Corporate Income Tax Law
which will be effective from January 1, 2008. The Corporate Income Tax Law
will impose a single income tax rate of 25% for both domestic and foreign
invested enterprise. The existing Tax Law of the People's Republic of China
for Enterprises with Foreign Investment and Foreign Enterprises (the "FIE
and FE tax laws") and Provisional Regulations of the People's Republic of
China on Enterprise Income Tax (collectively referred to as the "existing
tax laws") will be abolished simultaneously. Currently, the power plants of
the Company and its subsidiaries applied the tax rates under existing tax
laws. The Corporate Income Tax Law has provided of a 5-year transitional
period for those entities that applied FIE and FE tax laws in previous
years. As there are still no detailed implementation rulings released, the
Company will continue to assess the impact of such new law in the future.
In January 2007, Huaneng Group injected an additional capital of RMB 615
million in Sichuan Hydropower, thus increasing its direct equity interest
in Sichuan Hydropower to 51% from 40%. The Company's equity interest in
Sichuan Hydropower is diluted to 49% from 60%. As Sichuan Hydropower is
controlled by Huaneng Group, its financial statements will no longer be
consolidated into the Company's financial statements starting from 2007. In
addition, the Company also acquired 5% additional equity interest in Qinbei
Power Company for a consideration of RMB 65.75 million from Huaneng Group.
As a result of the acquisition, the Company held 60% of equity interest in
Qinbei Power Company.
F-61
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
38. 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 Huaneng Shanghai Shidongkou I Power Plant
("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"), from Huaneng Group in July
2002;
(ii) 55% equity interest in Qinbei Power Company, 60% equity interest in
Yushe Power Company and all of the assets and liabilities of Huaneng
Xindian Power Plant ("Xindian Power Plant") from Huaneng Group in
October, 2003;
(iii) 60% equity interest in Luohuang Power Company, 55% equity interest in
Yueyang Power Company, 90% equity interest in Huaneng Jinggangshan
Power Plant ("Jinggangshan Power Plant") and all of the assets and
liabilities of Huaneng Yingkou Power Plant ("Yingkou Power Plant")
from HIPDC and from Huaneng Group in July, 2004; and
(iv) 60% equity interest in Sichuan Hydropower and 65% equity interest in
Pingliang Power Company from Huaneng Group in January, 2005.
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
accounted for as goodwill. Prior to 2005, goodwill arising from the
acquisitions in (i) and (ii) above was, in accordance with IAS 22,
amortized on a systematic basis to the income statement over its economic
useful life, being the remaining weighted average useful life of the
acquired depreciable or amortizable assets. With the effective
implementation of IFRS 3 (a replacement of IAS 22), goodwill arising from
acquisition for which the agreement date is on or after March 31, 2004 is
tested annually for impairment and is not to be amortized. Such goodwill is
carried at cost less accumulated impairment losses. Goodwill arising from
acquisitions in (i) and (ii) above ceased to be amortized from January 1,
2005 onwards and are carried at cost less accumulated impairment losses and
tested for impairment annually.
F-62
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
38. US GAAP INFORMATION (CONT'D)
(a) Effect of acquisitions of entities under common control (cont'd)
As the companies and power plants acquired were under the control of
Huaneng Group prior to their acquisitions by the Company and its
subsidiaries, these acquisition transactions were considered common control
transactions. Under US GAAP, they are considered to be transfers of
businesses under common control and the acquired assets and liabilities are
accounted for at historical cost in a manner similar to the pooling of
interests method. Accordingly, the consolidated financial statements for
all 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 reporting purposes. Accordingly,
the resulting impact of depreciation and amortization expenses on income is
also different.
(b) Effect of acquisitions of 44.16% equity interest in Huaiyin Power
Company, 30% additional equity interest in Shidongkou I Power Plant
and 5% additional equity interest in Taicang Power Company, 40% equity
interest in Hanfeng Power Company and 20% equity interest in Huaneng
Finance
The Company acquired from Huaneng Group:
(i) 44.16% equity interest in Huaiyin Power Company in July, 2002;
(ii) 30% additional equity interest in Shidongkou I Power Plant and 5%
additional equity interest in Taicang Power Company in December, 2002;
(iii) 40% equity interest in Hanfeng Power Company in July, 2004; and
(iv) 20% equity interest in Huaneng Finance in January 2006.
Under IFRS, upon the completion of the above acquisitions, the relevant
equity interest 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 accounted for as goodwill. Prior to 2005, goodwill
arising from the acquisitions in (i) and (ii) above was, in accordance with
IAS 22, amortized on a systematic basis to the income statement over its
economic useful life, being the remaining weighted average useful life of
the acquired depreciable or amortizable assets. With the effective
implementation of IFRS 3, goodwill arising from acquisition for which the
agreement date is on or after March 31, 2004 is tested annually for
impairment and is not to be amortized. Such goodwill is carried at cost
less accumulated impairment losses. Any excess of acquirer's interest in
the net fair value of acquiree's identifiable assets, liabilities and
contingent liabilities over cost were written off against income statement.
Goodwill arising from acquisitions in (i) and (ii) above ceased to be
amortized from January 1, 2005 onwards and are carried at cost less
accumulated impairment losses and tested for impairment annually.
Under US GAAP, upon completion of the above acquisitions, Huaneng Group's
proportionate shares in the net assets of Huaiyin Power Company, Shidongkou
I Power Plant, Taicang Power Company, Hanfeng Power Company and Huaneng
Finance being sold to the Company were recorded at the historical carrying
value. Differences between the total costs of acquisitions and the net
assets acquired were regarded as equity transactions with Huaneng Group.
Accordingly, the resulting impact of depreciation and amortization expenses
on income is also different.
F-63
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
38. US GAAP INFORMATION (CONT'D)
(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 provided to the employees. 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
operating expenses of the Company on a straight-line basis over the
estimated remaining average service life of the employees. The
corresponding amount is recorded as additional capital contribution from
HIPDC.
(d) Acquisition of Shandong Huaneng Power Development Company Limited
("Shandong Huaneng")
Huaneng Group was 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. On January 1, 2005, the ending balance of negative
goodwill brought forward from 2004 is offset against opening retained
earnings in accordance with 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% of the
net assets continues to be part of the recoverable rate base under the cost
recovery formula of the tariff setting mechanism. Under US GAAP, the
difference between these net asset values and the cash consideration was
recorded as a reduction to the property, plant and equipment 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 described above 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 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 and its subsidiaries capitalized
interest on general borrowings used for the purpose of obtaining a
qualifying asset in addition to the capitalization of interest on specific
borrowings.
F-64
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
38. US GAAP INFORMATION (CONT'D)
(e) Capitalization of borrowing costs (cont'd)
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) Reversal of goodwill amortization
In accordance with IFRS 3, goodwill arising from acquisitions for which the
agreement date was before March 31, 2004 is amortized using the
straight-line method over its estimated useful life and recognized in the
income statement as other operating expenses and subject to an impairment
review whenever events or changes in circumstances indicate their carrying
value may not be recoverable, and annually if the estimated useful life
exceeds 20 years. Under US GAAP, in accordance with Statement of Financial
Accounting Standard ("SFAS") 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 from January 1, 2005 onwards.
(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, SFAS 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 income statement 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.
F-65
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
38. US GAAP INFORMATION (CONT'D)
(h) US regulatory accounting (cont'd)
In order to apply SFAS 71, three criteria must be met. These criteria
require that a) the power tariff 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 tariff that bind
customers; b) the regulated power tariff 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 tariff, 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.
For the year ended December 31, 2006, the Company and its subsidiaries
believe that 9 of their power plants (2005 and 2004: 10 and 12 power
plants) meet these specific criteria of SFAS 71. Firstly, the power tariff
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 tariff will be collected from customers.
In November, 2004, in accordance with the issuance of a government circular
on implementation of a full-scope tariff bidding practice that is
applicable to two of the Company's power plants located in Northeast China,
the Company has discontinued the application of SFAS 71 for these two power
plants as the criteria under SFAS 71 are no longer met. Accordingly, these
two power plants applied SFAS 101 "Regulated Enterprises - Accounting for
the Discontinuation of Application of FASB Statement No. 71". 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.
In January 2006, management decided to close down an oil-fired power plant
in Guangdong Province for efficiency reason. The Company discontinued the
application of SFAS 71 for this power plant and applied SFAS 101 as a
result. 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 also performed an impairment review on the property, plant and
equipment of this power plant and have provided an impairment loss of RMB42
million based on the bidding price and the valuation performed by an
independent valuer.
With respect to the remaining power plants of the Company and its
subsidiaries, which were acquired from 2002 to 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.
F-66
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
38. US GAAP INFORMATION (CONT'D)
(h) US regulatory accounting (cont'd)
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 goodwill) under IFRS is
reviewed periodically in order to assess whether the recoverable amount has
declined below the carrying amount. When such a decline occurs, the
carrying amount is reduced to the recoverable amount based on the expected
future cash flow generated by the asset discounted to their present value
or the asset's net selling price. A subsequent increase in the recoverable
amount is written back to the income statement when circumstances and
events that led to the write-down cease to exist.
Under US GAAP, long-lived assets (excluding goodwill) are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is evaluated by a comparison of the carrying
amount of assets to future undiscounted net cash flows expected to be
generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amounts of the assets exceed the fair value of the assets. Subsequent
reversal of impairment is not permitted. Assets to be disposed of are
reported at the lower of the carrying amount and fair value less cost to
sell.
Goodwill
Goodwill is reviewed for impairment, at the CGU / reporting unit level, at
least annually or whenever events or changes in circumstances indicate that
the recoverability of the carrying amount must be assessed.
Under 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, a two-step impairment test is required:
(i) The fair value and the carrying amount of the reporting unit including
goodwill should be compared. If the fair value of the reporting unit
is less than the book value, goodwill would be considered to be
impaired, then
(ii) The goodwill impairment should be measured as the excess of the
carrying amount of goodwill over its implied fair value. The implied
fair value of goodwill should be determined by allocating fair value
to the various assets and liabilities included in the reporting unit
in the same manner as goodwill is determined in a business
combination.
F-67
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
38. US GAAP INFORMATION (CONT'D)
(i) Impairment of long-lived assets (cont'd)
As of December 31, 2005, the Company recognized impairment loss on certain
property, plant and equipment under IFRS while such an amount was reversed
under US GAAP as a result of the above GAAP difference.
As of December 31, 2006, the Company reversed this prior year impairment as
a result of changes in local power market regulations under IFRS. This
contributed to a reversal of such income effect under US GAAP due to the
above GAAP difference as of the same date.
Changes of Principal Accounting Policy
In the current year, the Company and its subsidiaries have changed their
accounting policy following their adoption of the new SFAS below, which is
relevant to their operations.
o SFAS 154 Accounting Changes and Error Corrections -
a replacement of APB Opinion No. 20 and
FASB Statement No. 3
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, non-financial assets be accounted for
as a change in accounting estimate effected by a change in accounting
principle. Management considered there was no material impact to the
accounting policies for the current year.
F-68
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
38. US GAAP INFORMATION (CONT'D)
Differences between IFRS and US GAAP which affect the net assets and net
profit of the Company and its subsidiaries are summarized below:
Net Assets
---------------------------------------------
As of December 31,
---------------------------------------------
Note 2006 2005
--------- ---------------------------------------------
Net assets under IFRS 50,608,692 46,144,187
Minority interests i (7,151,183) (6,106,713)
Impact of US GAAP adjustments
Effect of acquisitions of Sichuan Hydropower and
Pingliang Power Company (a) (969,244) (1,014,585)
Effect of acquisitions of Luohuang Power Company,
Yueyang Power Company, Jinggangshan Power Plant
and Yingkou Power Plant (a) (1,679,633) (1,837,845)
Effect of acquisitions of Qinbei Power Company,
Yushe Power Company and Xindian Power Plant (a) (314,817) (342,555)
Effect of acquisitions of Shidongkou I Power
Plant, Taicang Power Company and Changxing Power
Plant (a) (388,418) (472,473)
Effect of acquisitions of 20% equity interest in
Huaneng Finance, 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) (237,197) (251,615)
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) (1,510,062) (1,671,048)
Difference in capitalization of borrowing costs (e) (100,453) (109,227)
Reversal of goodwill amortization
- Investment in SEG (f) 136,599 136,599
- 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) 957,725 1,054,142
---------------------------------------------
Net assets under US GAAP 40,249,671 36,456,609
=============================================
F-69
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
38. US GAAP INFORMATION (CONT'D)
Net profit
-----------------------------------------------------------
For the year ended December 31,
-----------------------------------------------------------
Note 2006 2005 2004
------ --------------- ------------------- -------------------
Profit under IFRS 6,889,074 5,547,911 5,580,929
Profit attributable to minority interests i (817,920) (676,117) (257,053)
Impact of US GAAP adjustments
Effect of acquisitions of Sichuan Hydropower
and Pingliang Power Company (a) 45,341 30,823 341,914
Effect of acquisitions of Luohuang Power
Company, Yueyang Power Company,
Jinggangshan Power Plant, and Yingkou
Power Plant (a) 158,212 169,538 278,027
Effect of acquisitions of Qinbei Power
Company, Yushe Power Company and Xindian
Power Plant (a) 27,738 26,697 48,116
Effect of acquisitions of Shidongkou I Power
Plant, Taicang Power Company and Changxing
Power Plant (a) 84,055 303,119 110,524
Effect of acquisitions of 20% equity
interest in Huaneng Finance, 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) (8,925) 19,552 25,550
Recording housing benefits provided by HIPDC (c) (26,152) (26,152) (26,152)
Difference in accounting treatment for
acquisition of Shandong Huaneng (d) 160,986 160,986 (87,091)
Difference in capitalization of borrowing
costs (e) 8,774 (21,803) 6,466
Reversal of goodwill amortization
- Investment in SEG (f) - - 81,960
- Investment in Huaiyin Power Company (f) - - 17,370
Reversal of impairment loss on property,
plant and equipment (i) (30,080) 30,080 -
Applicable deferred income tax impact on the
GAAP differences (g) (96,417) (134,709) (89,783)
Others - - 8,652
--------------- ------------------- -------------------
Net profit under US GAAP 6,394,686 5,429,925 6,039,429
=============== =================== ===================
(Note i) Consistent with disclosure requirement of revised IAS 1 - Presentation of Financial Statements,
minority interests in the consolidated net assets and consolidated profit under IFRS should be included
as a portion of total equity and total profit attributable to shareholders respectively.
F-70
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMBor US$ unless otherwise stated)
38. 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, 2005 and 2006, and the related condensed
combined statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31,
2006, restated to reflect the impact of the effect of the acquisitions 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,
---------------------------------------------------------
2006 2005
------------------------------------- -------------------
RMB US$ RMB
ASSETS
Non-current assets
Property, plant and equipment, net 86,571,060 11,086,488 74,554,743
Investments in associates 5,149,354 659,438 4,314,634
Available-for-investment 1,458,759 186,812 1,033,225
Land use rights 1,495,206 191,480 1,150,420
Deferred income tax assets 209,883 26,878 200,076
Goodwill 136,053 17,423 136,053
Other non-current assets 269,404 34,501 336,379
------------------ ----------------- -------------------
Total non-current assets 95,289,719 12,203,020 81,725,530
------------------ ----------------- -------------------
Current assets
Inventories, net 2,121,489 271,683 2,311,357
Other receivables and assets, net 615,488 78,820 855,952
Accounts receivable, net 6,977,493 893,554 6,022,426
Trading securities 100,180 12,829 -
Due from HIPDC - - 21,847
Due from other related parties 621 80 -
Current portion of deferred
income tax assets 107,492 13,766 87,049
Restricted cash 203,863 26,107 201,276
Temporary cash investment - - 2,652
Cash and cash equivalents 3,207,192 410,720 2,647,665
------------------ ----------------- -------------------
Total current assets 13,333,818 1,707,559 12,150,224
------------------ ----------------- -------------------
Total assets 108,623,537 13,910,579 93,875,754
================== ================= ===================
F-71
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMBor US$ unless otherwise stated)
38. US GAAP INFORMATION (CONT'D)
Condensed combined balance sheets (cont'd)
As of December 31,
----------------------------------------------------------
2006 2005
-------------------------------------- -------------------
RMB US$ RMB
EQUITY AND LIABILITIES
Share capital 12,055,383 1,543,840 12,055,383
Other equities 28,194,288 3,610,625 24,401,226
------------------- ------------------ -------------------
Shareholders' equity 40,249,671 5,154,465 36,456,609
------------------- ------------------ -------------------
Minority interests 6,118,089 783,496 4,954,726
------------------- ------------------ -------------------
NON-CURRENT LIABILITIES
Long-term loans from Huaneng Group 2,800,000 358,574 2,800,000
Long-term bank loans 32,065,840 4,106,425 25,711,255
Other long-term loans 232,779 29,810 351,009
Deferred income tax liabilities 320,342 41,024 319,324
Other non-current liabilities 309,930 39,691 168,328
------------------- ------------------ -------------------
Total non-current liabilities 35,728,891 4,575,524 29,349,916
------------------- ------------------ -------------------
CURRENT LIABILITIES
Accounts payable and other liabilities 8,375,705 1,072,612 6,905,240
Taxes payable 1,180,318 151,154 1,131,284
Due to Huaneng Group 44,592 5,711 50,720
Due to HIPDC 79,730 10,210 53,230
Due to associates 83,512 10,695 -
Due to other related parties 65,795 8,426 29,620
Salary and welfare payables 441,590 56,551 251,949
Short-term bonds 5,077,577 650,246 4,938,250
Short-term loans 7,823,720 1,001,923 6,580,870
Current portion of long-term bank loans 3,140,393 402,166 2,653,339
Current portion of other long-term loans 191,562 24,532 512,640
Current portion of deferred income tax
liabilities 22,392 2,868 7,361
------------------- ------------------ -------------------
Total current liabilities 26,526,886 3,397,094 23,114,503
------------------- ------------------ -------------------
Total equity and liabilities 108,623,537 13,910,579 93,875,754
=================== ================== ===================
F-72
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMBor US$ unless otherwise stated)
38. US GAAP INFORMATION (CONT'D)
Condensed combined statements of income
For the year ended December 31,
----------------------------------------------------------------
Note 2006 2005 2004
------------------------------- --------------- --------------
RMB US$ RMB RMB
Operating revenue 44,301,403 5,673,339 40,190,004 35,181,649
Sales tax (148,057) (18,960) (113,475) (72,933)
Operating expenses
Fuel (22,608,151) (2,895,252) (21,202,952) (16,556,803)
Maintenance (1,306,888) (167,363) (1,165,374) (1,035,045)
Depreciation (6,265,198) (802,336) (5,696,142) (5,413,807)
Labor (2,912,919) (373,035) (2,513,457) (2,178,940)
Service fees to HIPDC (140,771) (18,027) (141,102) (133,609)
Income tax expense (1,226,729) (157,098) (1,179,007) (1,264,640)
Others (1,692,423) (216,735) (1,438,635) (946,782)
---------------- ------------ --------------- --------------
Total operating expenses (36,153,079) (4,629,846) (33,336,669) (27,529,626)
---------------- ------------ --------------- --------------
Income before financial expenses 8,000,267 1,024,533 6,739,860 7,579,090
---------------- ------------ --------------- --------------
Interest income 51,910 6,648 53,685 58,986
Interest expense (1,591,033) (203,751) (1,457,490) (1,235,426)
Bank charges and exchange gain /
(losses), net 67,819 8,684 241,691 (107,492)
---------------- ------------ --------------- --------------
Total financial expenses, net (1,471,304) (188,419) (1,162,114) (1,283,932)
---------------- ------------ --------------- --------------
Share of profit of associates 802,535 102,774 652,691 465,440
Minority interests (936,812) (119,970) (800,512) (721,169)
---------------- ------------ --------------- --------------
Net profit for the year 6,394,686 818,918 5,429,925 6,039,429
================ ============ =============== ==============
Basic earnings per ordinary share
under US GAAP (RMB) i 0.53 0.45 0.50
================ =============== ==============
Basic earnings per American
Depository Shares ("ADS") under
US GAAP (RMB) i 21.22 18.02 20.04
================ =============== ==============
Diluted earnings per ordinary share
under US GAAP (RMB) i 0.53 0.45 0.50
================ =============== ==============
Diluted earnings per ADS under US
GAAP (RMB) i 21.22 18.02 20.02
================ =============== ==============
(Note i) Earning per ordinary share and per equivalent ADS were calculated by dividing the net profit for the
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 year and the weighted average number of
ordinary shares and ADS outstanding for the year were adjusted on the assumption that the convertible
notes had been fully converted at the beginning of 2004. There was no dilution effect on earnings per
ordinary share and per equivalent ADS since the Company had no dilution potential ordinary shares for
the years ended December 31, 2005 and 2006.
F-73
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
38. US GAAP INFORMATION (CONT'D)
Condensed combined statements of changes in shareholders' equity
Balance as of January 1, 2004 35,814,891
Dividends relating to 2003 (3,013,836)
Net profit 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)
Distribution 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 for the year ended December 31, 2005 5,429,925
Net deemed capital distribution to Huaneng Group arising from
the acquisition 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
Dividends relating to 2005 (3,013,846)
Net profit for the year ended December 31, 2006 6,394,686
Contribution from Huaneng Group 23,343
Capital contribution from HIPDC arising from housing benefits
provided by HIPDC 26,152
Dividend waived by a shareholder of a subsidiary 866
Fair value gains from an available-for-sale investment, net of
tax 361,861
---------------------
Balance as of December 31, 2006 40,249,671
=====================
F-74
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
38. US GAAP INFORMATION (CONT'D)
Condensed combined statements of cash flows
For the year ended December 31,
-------------------------------------------------------
2006 2005 2004
------------------ ---------------- ------------------
Net cash provided by operating activities 12,386,361 9,313,657 11,028,971
Net cash used in investing activities (16,807,190) (14,587,880) (13,067,191)
Net cash provided by financing activities 4,980,356 5,059,653 226,001
------------------ ---------------- ------------------
Net increase / (decrease) in cash and cash
equivalents 559,527 (214,570) (1,812,219)
Cash and cash equivalents, beginning of the
year 2,647,665 2,862,235 4,674,454
------------------ ---------------- ------------------
Cash and cash equivalents, end of the year 3,207,192 2,647,665 2,862,235
================== ================ ==================
New accounting pronouncements
The Financial Accounting Standard Board ("FASB") issued certain SFAS, FASB
Interpretation ("FIN"), minutes of Emerging Issue Task Force ("EITF") and
FASB Staff Position ("FSP") that are mandatory for the accounting periods
of the Company and its subsidiaries beginning on or after January 1, 2007
or later periods, but which the Company and its subsidiaries have not early
adopted. These are summarized as follows:
o SFAS 157 Fair Value Measurements
This SFAS formalizes definition and disclosure requirements of fair value.
It clarifies that the exchange price is the price in an orderly transaction
between market participants to sell the asset or transfer the liability in
the market in which the reporting entity would transact for the asset or
liability, i.e. the principal or most advantageous market for the asset or
liability (an exit price). Therefore, this SFAS does not permit fair value
be measured at price that would be paid to acquire the asset or received to
assume the liability (an entry price).
Such an SFAS will be effective for fiscal years beginning after November
15, 2007. Management is currently assessing the impact of this SFAS on the
accounting policies of the Company and its subsidiaries.
o SFAS 159 The Fair Value Option for Financial Assets and
Financial Liabilities-- Including an amendment
of FASB Statement No. 115
This SFAS permits entities to choose to measure many financial instruments
and certain other items at fair value that are currently required to be
measured at fair value at specified election date. It also establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar
types of assets and liabilities.
Such an SFAS will be effective for the fiscal year that begins after
November 15, 2007. Management is currently assessing the impact of this
SFAS on the accounting policies of the Company and its subsidiaries.
F-75
HUANENG POWER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in thousands of RMB unless otherwise stated)
38. US GAAP INFORMATION (CONT'D)
New accounting pronouncements (cont'd)
o FIN 48 Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109
FIN 48 prescribes the recognition threshold and measurement attribute for
the financial statement recognition of a tax position taken or expected to
be taken in a tax return. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosures and transition.
Such an interpretation will be effective for fiscal years beginning after
December 15, 2006. Management is currently assessing the impact of this
interpretation on the accounting policies of the Company and its
subsidiaries.
o EITF 06-2 Accounting for Sabbatical Leave and Other Similar
Benefits Pursuant to FASB Statement No. 43
This EITF requires an entity accruing compensation cost associated with a
sabbatical or other similar benefit arrangement over the requisite service
period should all of the other conditions of paragraph 6 of SFAS 43 are
met.
Such an EITF will be effective for fiscal years beginning after December
15, 2006. Management is currently assessing the impact of this EITF on the
accounting policies of the Company and its subsidiaries.
o FSP FIN46(R)-6 Determining the Variability to Be Considered in
Applying FASB Interpretation No. 46(R)
This FSP addresses how a reporting enterprise should determine the
variability to be considered in applying FIN 46(R) by using a two-step
approach. It requires an analysis of the design of the entity through (a)
analyzing the nature of the risks in the entity; and (b) determining the
purposes for which the entity was created and determining the variability
(created by the risks identified in (a)) the entity is designed to create
and pass along to its interest holders.
Such a FSP will be effective for reporting period beginning after June 15,
2006. Management is currently assessing the impact of this FSP on the
accounting policies of the Company and its subsidiaries.
F-76
Signature
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
Huaneng Power International, Inc.
By: /s/ Huang Long
Name: Huang Long
Title: Vice Chairman of the Board
of Directors
Date: April 16, 2007