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Netjoy Holdings Limited Interim / Quarterly Report 2004
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(Stock Code: 902)
2004 Interim Results Announcement
| Power generation: | 48.83 billion kWh |
| Consolidated net operating revenue: | Rmb12.964 billion |
| Net profit: | Rmb2.481 billion |
| Earnings per share: | Rmb0.21 |
The Board of Directors of Huaneng Power International, Inc. (the “Company”) is pleased to announce the unaudited operating results for the six months period ended 30th June, 2004 (the “Accounting Period”) and a comparison with the operating results for the same period of 2003. For the six months period ended 30th June, 2004, the Company recorded a net operating revenue of Rmb12.964 billion and a net profit of Rmb2.481 billion, representing increases of 23.30% and approximately 8.58% respectively as compared to the same period of 2003. Earnings per share was Rmb0.21 and net asset value per share was Rmb2.77.
The Board of Directors is satisfied with the above results. Please refer to the unaudited financial information below for details of the operating results.
BUSINESS REVIEW FOR THE FIRST HALF OF THE YEAR
During the first half of 2004, the PRC’s national economy continued to maintain rapid and steady growth with GDP growth rate reaching 9.7%, which led to a rapid increase in power demand, and power generation of the State increased 15.8% when compared to the same period last year. The macro-control policies and measures adopted by the State began to see their impact. However, there were still difficulties regarding the fuel transportation for power generation. The trend of overall tight power supply has not been eased, in particular the drastic increase in coal prices brought great pressure upon cost control efforts of the Company.
The Company’s management and staff made great efforts to seize the favourable opportunities as presented by substantial increase in power demand brought about by the rapid growth of the national economy, working hard to cope with the challenges of tight fuel supply, drastic coal price rise and declining coal quality. Facing the increasingly keen competition in the power market, the Company made its best endeavours to overcome the difficulties with every possible means, thus accomplishing generation and operation task in the first half of this year.
- POWER GENERATION
During the first half of this year, the power plants of the Company achieved power generation totalling 48.83 billion kWh on a consolidated basis, representing an increase of 18.87% over the same period last year. The growth of power generation mainly attributable to the power generation contributed by Yushe Power Plant and Xindian Power Plant acquired in 2003, and by the stable generation capacity created by generating units no. 5 and 6 of Jining Power Plant. On the other hand, continued rapid growth of power consumption in the regions where the Company’s power plants are located also created favourable conditions for the Company to increase its power generation.
The Company considers safe operation being fundamental to its operation and adheres to the policy of “ensuring safe operation being the Company’s first priority by way of prevention”. During the first half year, the power plants of the Company reinforced its management to improve the safety level of the generating units and enhanced the reliability of the equipment and overcame various adverse impacts and difficulties including tight fuel supply, declining coal quality, continuous high-load operation of the generating units, thereby ensuring their safe operation under tight power supply and demand.
In line with enhancement of safe operation, the Company has made rationalized arrangements for the maintenance of its generating units, thus enhancing their reliability and controllability, and improving their environmental protection performance.
2. COST CONTROL
The persistent rise in coal prices since the end of 2003 had brought about a significant impact on the generation and operation of the Company. Starting the second quarter this year, the increase in the coal prices became more drastic. Despite the relatively significant increase in power generation as compared to the same period last year and the implementation of various measures on cost control by the Company, the above still could not offset the increase in power generation costs brought about by the rise in coal prices. The unit fuel cost of the Company for the first half of the year increased by 25.85% when compared to the same period last year. Facing such unfavourable operation situation, the Company adopted measures in a timely manner to actively implement and enhance the planned realization rate of the State’s major coal contracts; increased the supply of coal with good quality and competitive prices through the amicable business relationship established with large-sized coal enterprises; entered into medium-to-long term coal supply agreements with major coal supply units; established stable long-term supply and demand relationship; actively and effectively commenced work on coal imports; reinforced the coordination with shipping companies, thereby relieving the delivery pressure. Besides, the Company continued to enhance its internal management and exert its full potentials, through coal blending burning, the price-rising pressure of the main coal and coal source could be eased. Through the process of up-grading the generating units, it reduced the unit coal consumption, and to a large extent minimized the adverse effect brought about by the increment in coal prices to the Company.
3. PROJECT DEVELOPMENT AND CONSTRUCTION
During the first half of this year, infrastructure construction progressed smoothly and the preparation work of the power projects made certain progress:
(1) The construction relating to Qinbei Phase I, Yushe Phase II, Huaiyin Phase II and Shantou Phase II progressed smoothly;
(2) The originally planned projects of the Company progressed smoothly.
4. ASSET ACQUISITION
On 16th April, 2004, the Company entered into a transfer agreement with China Huaneng Group (“Huaneng Group”), Huaneng International Power Development Corporation (“HIPDC”) and Jiangxi Provincial Investment Company. Pursuant to the transfer agreement, the Company acquired the following power assets for RMB4.575 billion: (1) 90% equity interest in Jinggangshan Huaneng Power Generation Limited Liability Company and 40% equity interest in Hebei Hanfeng Power Generation Limited Liability Company, both owned by Huaneng Group; (2) all the assets and liabilities of Yingkou Power Plant, 60% equity interest in Huaneng Chongqing Luohuang Power Generation Limited Liability Company and 55% equity interest in Huaneng Hunan Yueyang Power Generation Limited Liability Company, all owned by HIPDC; (3) 10% equity interest in Jinggangshan Power Plant owned by Jiangxi Provincial Investment Company. Currently, this acquisition has been completed and the power generation capacity on an equity basis of the Company increased by 3,096MW.
PROSPECTS FOR THE SECOND HALF OF THE YEAR
In the second half of year 2004, on the one hand, the macro-economy will continue to maintain a steady and rapid development and the growth of GDP will maintain at a relatively high level. The rapid development in the national economy provided strong power demand, and demand is still greater than supply in the power market. On the other hand, the tight coal supply and continued rise in coal prices have aroused great concern to the relevant departments of the State. The State Development and Reform Commission will exercise control over the coal price, and the Railway Department has recently strengthened the transportation of coal, thus creating conditions for the overall completion of production operation targets of the Company. Moreover, the policies on the adjustments of power tariffs and the restrictions regarding the maximum price fluctuation in respect of coal for power generation adopted by the State have created a favourable external operating environment for stable operation.
The management of the Company will continue to put optimization of shareholders’ interests as its business objective and work targets, seizing the opportunities and overcoming the difficulties. Accordingly, the management and all the staff of the Company will make joint efforts and overcome difficulties to ensure the achievement of the annual targets in terms of generation and operation as well as other aspects. The main tasks for the second half of the year include:
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to ensure safe operation of all power plants and to maintain the Company’s leadership positions in respect of safe production management and in respect of the advancement and reliability of the Company’s generating units;
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to strengthen internal management and cost controls: focusing on fuel cost control, and limiting the increase range of unit fuel costs;
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to reinforce the Company’s sales and marketing efforts: to further capture more market shares and to enhance the average settlement levels of power tariffs;
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to ensure the commencement of production of 1 X 600 MW coal-fired generating unit of Qinbei Power Plant Phase I and 2 X 300 MW coal-fired generating units of Yushe Power Plant Phase II according to schedule, and to continue to actively carry out the preparation work of other proposed projects; and
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to improve the quality of the staff by strengthening staff training.
OPERATING RESULTS
Comparison of operating results between the six months ended 30th June, 2004 and 30th June, 2003.
Summary
For the first half of 2004, there remained a shortage of supply in power in the PRC. The power generation and consumption maintained a rapid growth. During the first half of 2004, the power generation of the Company and its subsidiaries increased by 18.87% from 41.079 billion kWh to 48.830 billion kWh, when compared with the same period of the last year. The growth of power generation was mainly attributable to:
1) The power generation contribution from the Yushe Power Plant and the Xindian Power Plant, both of which were acquired in 2003;
2) The stable operation of new generation units No.5 and No.6 of the Jining Power Plant;
3) The rapid-growth of the power demand at the various regions where our power plants are located, such as Fujian, Liaoning and Jiangsu Province, which resulted in a stable increase of power generation for the Company.
On 16th April, 2004, the Company entered into an agreement with Huaneng Group, HIPDC and Jiangxi Provincial Investment Company, pursuant to which the Company acquired the following equity interests and assets at a consideration of Rmb4.575 billion:
1) 90% equity interest in Jinggangshan Huaneng Power Generation Limited Liability Company and 40% equity interest in Hebei Hanfeng Power Generation Limited Liability Company from Huaneng Group;
2) All the assets and liabilities of Yingkou Power Plant, 60% equity interest in Huaneng Chongqing Luohuang Power Generation Limited Liability Company and 55% equity interest in Huaneng Hunan Yueyang Power Generation Limited Liability Company from HIPDC;
3) 10% equity interest in Jinggangshan Power Plant from Jiangxi Provincial Investment Company.
After obtaining all the necessary government approvals on the acquisitions and the payment of the purchase considerations, the Company took over the control or obtained a significant influence of the above power companies and power plants in July 2004.
Net Operating Revenue
For the six months ended 30th June, 2004, the consolidated net operating revenue of the Company and its subsidiaries was Rmb12.964 billion, representing an increase of 23.30% from Rmb10.514 billion in the same period of last year.
The increase of net operating revenue was attributed to the increase of power output by 18.78% from the same period of last year. The Jining Power Plant, the Fuzhou Power Plant and the Dandong Power Plant had a relatively substantial increase in net operating revenue. The substantial increase of the operating revenue in the Jining Power Plant was due primarily to the fact that the Jining Power Plant Phase III commenced its commercial operation in the second half of the last year. Accordingly, its power output increased by 56.11% from the same period of the last year. The increase in the operating revenue of the Fuzhou Power Plant and the Dandong Power Plant was due primarily to the increase of their on-grid power output.
Operating Expenses
For the six months ended 30th June, 2004, the total operating expenses of the Company and its subsidiaries were Rmb9.771 billion, representing an increase of 31.57% from the same period of last year.
The primary operating expense of the Company and its subsidiaries is fuel cost. The coal price has been increasing since the end of 2003 and has increased significantly especially in the second quarter of this year. The average unit price of natural coal was Rmb290.22 per ton, representing an increase of Rmb52.44 from Rmb237.78 in the same period of last year. Excluding the Xindian Power Plant and the Yushe Power Plant acquired in the second half of the last year, the average unit price of natural coal increased by Rmb55.13 per ton. In order to manage the impact of increasing coal price, the Company promptly took measures to ensure the implementation of key coal supply contracts allocated by the State, clarified responsibilities and established long-term purchase contracts with key coal suppliers in order to build a stable demand and supply relationship. In addition, the Company is considering to import coal from overseas market. The Company reinforced the coordination with shipping companies to relieve the delivery pressure. Moreover, the Company continued to carry out the coal blending burning work so as to ease the price-rising pressure of the main coal and coal source. Through the process of up-grading the generating units, it reduced the unit coal consumption, and to a large extent minimized the adverse effect brought about by the increment in coal prices to the Company.
Financial expenses
The financial expenses of the Company and its subsidiaries were Rmb227 million, representing a decrease of 20.07% from Rmb284 million of the same period of last year. The decrease was due primarily to the decrease of the average balance of other loans when compared to the same period of last year, i.e. loans that are not used to finance the purchase and construction of property, plant and equipment.
Share of profit of associates
The share of profit of associates of the Company and its subsidiaries was Rmb109 million. This mainly represented the share of profit of Shenzhen Energy Group Co., Ltd, which was acquired in April 2003.
Income tax
There was no change in the preferential income tax treatment applied to the Company and its subsidiaries. During the first half of 2004, the weighted average effective tax rate for the Company and its subsidiaries was 17%.
Net profit
The consolidated net profit of the Company and its subsidiaries was Rmb2,481 million, representing an increase of approximately 8.58% from Rmb2,285 million of the same period of last year. The increase was mainly attributable to the increase in power output.
Comparison of Key Financial Ratios
| The Company and its subsidiaries | ||
| Items | 30th June, 2004 | 31st December, 2003 |
| Debt to equity ratio | 0.71 | 0.54 |
| Current ratio | 0.86 | 0.90 |
| Quick ratio | 0.78 | 0.81 |
| For the six months ended | ||
| 30th June, 2004 | 30th June, 2003 | |
| Multiples of interest earned | 9.66 | 10.10 |
The debt to equity ratio of the Company and its subsidiaries increased primarily because of the increase of the loans borrowed from financial institutions for construction projects.
As at 30th June 2004, the total balance of interest-bearing loans of the Company and its subsidiaries amounted to approximately Rmb19.129 billion, of which the current portion was about Rmb8.570 billion. The loans denominated in foreign currencies amounted to approximately US$741 million and Japanese Yen1,667 million, of which US$159 million and Japanese Yen238 million were repayable within one year.
The long-term loans of the Company and its subsidiaries were mainly fixed-rate loans. As at 30th June 2004, the floating-rate loans of the Company and its subsidiaries amounted to approximately US$175 million and Japanese Yen1,667 million in accordance with the original loan agreements. The Company has entered into interest rate swap contracts to reduce the floating interest rate risk.
As at 30th June 2004, the Company had guaranteed certain long-term bank loans of Rizhao Power Company amounting to Rmb327 million. The Company considered such guarantee had no significant financial impact on the Company’s operation.
Calculation formula of the financial ratio:
| Debt to equity ratio | = | balance of liabilities at the end of the period/balance of shareholders’ equity at the end of the period |
| Current ratio | = | balance of current assets at the end of the period/balance of current liabilities at the end of the period |
| Quick ratio | = | (balance of current assets at the end of the period - balance of inventories at the end of the period)/balance of current liabilities at the end of the period |
| Multiples of interest earned | = | (profit before tax + interest expenses)/interest expenditure (including capitalized interest) |
SHARE CAPITAL STRUCTURE
As at 30th June, 2004, the entire issued share capital of the Company amounted to 12,055,362,920 shares, of which 9,000,000,000 shares were domestic shares, representing 74.66% of the entire issued share capital, and 3,055,362,920 shares were foreign shares, representing 25.34% of the entire issued share capital. In respect of domestic shares, HIPDC owns a total of 5,169,680,000 shares, representing 42.88% of the entire issued share capital of the Company. Other domestic shareholders hold a total of 3,830,320,000 shares, representing 31.78% of the entire issued share capital of the Company.
The US$230 million convertible notes issued by the Company could be converted into foreign shares of the Company at a price of US$29.2 for each American Depository Share on or before 21st May, 2004. As stipulated in the terms of the notes, the Company issued 20,520 overseas listed shares of the Company to a noteholder as conversion of US$15,000 convertible notes on 5th June, 2004. As at 30th June, 2004, there were outstanding notes with a face value of US$100,000. The Company has repaid such loan in accordance with the terms of the convertible notes.
PURCHASE, SALE OR REDEMPTION OF SHARES
The convertible notes with an aggregate principal amount of US$230 million issued by the Company could be redeemed or converted on or before 21st May, 2004 at a price of US$29.20 for each American Depository Shares convertible into the foreign shares of the Company. According to the terms as stipulated in the convertible notes and at the application of a noteholder, the Company issued 20,520 overseas listed shares to a noteholder as a conversion of US$15,000 convertible notes on 5th June, 2004. As at 30th June, 2004, the Company has repaid all outstanding notes with a face value of US$100,000 in accordance with the terms of the notes. Save and except for the above, the Company did not sell any other types of securities and did not purchase or redeem its own shares or other securities in the first half of 2004.
SHAREHOLDING STRUCTURE
As at 30th June, 2004, the shareholding position of the Company was as follows:
| Total Shareholdings** | Percentage of total shares outstanding | |
| (in ‘000) | (%) | |
| Domestic Shares | ||
| Huaneng International Power Development Corporation* | 5,169,680 | 42.88 |
| Hebei Provincial Construction Investment Company | 904,500 | 7.50 |
| Fujian International Trust & Investment Company Limited | 669,700 | 5.56 |
| Jiangsu Provincial International Trust & Investment Company | 624,750 | 5.18 |
| Liaoning Energy Corporation | 459,370 | 3.81 |
| Dalian Municipal Construction Investment Company | 452,250 | 3.75 |
| Nantong Investment Management Centre | 135,750 | 1.13 |
| Shantou Electric Power Development Company | 38,000 | 0.32 |
| Guangdong Shantou City Power Development Company* | 33,000 | 0.27 |
| Dandong Energy Investment Development Centre | 13,000 | 0.11 |
| Public Shares | 500,000 | 4.15 |
| Sub-total | 9,000,000 | 74.66 |
| Overseas Listed Foreign Shares | 3,055,362.92 | 25.34 |
| TOTAL | 12,055,362.92 | 100.00 |
* On 12th May 2004, Guangdong Shantou City Power which held 46.5 million state-owned legal person shares of the Company transferred 30 million of them to Huaneng International Power Development Corporation. The transfer has been approved by State-Owned Asset Supervising and Management Committee of the State Council.
Owing to the dispute arising out of a loan agreement with Shantou Branch of The Bank of Communications, the Intermediate People’s Court of Shantou City, Guangdong Province, at the application of the bank, ordered to freeze the 33,000,000 State-owned legal shares of the Company held by Guangdong Shantou City Power Development Company. The freezing period would commence on 3rd June 2004 and expire on 2nd June 2005 (one year duration).
** On 24th May 2004, the Company declared bonus shares and adopted a scheme of conversion of reserve fund into share capital, i.e. to issue 5 bonus shares and 5 new shares for every 10 existing ordinary shares.
As at 30th June, 2004, so far as the Directors, chief executive officer and Supervisors of the Company are aware, each of the following persons, not being a Director, chief executive officer or Supervisor of the Company, had an interest in the Company’s shares which is required to be disclosed to the Company and The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) under the provisions of Divisions 2 and 3 of Part XV of the Securities and Future Ordinance (“SFO”):
Shares held/Approximate shareholding percentage
| Name of shareholder | Shares | Number of shares held | Interest Approximate percentage of shareholding in the Company’s total issued share capital | Approximate percentage of shareholding in the Company’s total issued domestic shares | Approximate percentage of shareholding in the Company’s total issued H shares | Short position |
| Huaneng International Power Development Corporation (Note 1) | domestic shares | 5,169,680,000 | 42.88% | 57.44% | - | - |
| Hebei Provincial Construction Investment Company | domestic shares | 904,500,000 | 7.50% | 10.05% | - | - |
| Fujian International Trust & Investment Company | domestic shares | 669,700,000 | 5.56% | 7.44% | - | - |
| Jiangsu Provincial International Trust & Investment Company | domestic shares | 624,750,000 | 5.18% | 6.94% | - | - |
| Liaoning Energy Corporation | domestic shares | 459,370,000 | 3.81% | 5.10% | - | - |
| Dalian Municipal Construction Investment Company | domestic shares | 452,250,000 | 3.75% | 5.03% | - | - |
| The Hongkong and Shanghai Banking Corporation Ltd. (Note 2) | H shares | 1,054,671,270 | 8.75% | - | 34.52% | - |
| Standard Chartered Bank (Hong Kong) Limited (Note 2) | H shares | 568,574,021 | 4.72% | - | 18.61% | - |
| Citibank N.A. (Note 2) | H shares | 170,558,495 | 1.41% | - | 5.58% | - |
Note 1: As at 30th June, 2004, China Huaneng Group holds 51.98% of the equity interest in Huaneng International Power Development Corporation.
Note 2: Such H shares were held through HKSCC Nominees Limited.
Save as disclosed above and so far as the Directors, chief executive officer and Supervisors of the Company are aware, as at 30th June, 2004, no other person had an interest or short position in the Company’s shares or underlying shares (as the case may be) which are required to be disclosed to the Company and the Hong Kong Stock Exchange under the provisions of Divisions 2 and 3 Part XV of the SFO, or was otherwise a substantial shareholder (as such term is defined in the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”)) of the Company.
DIRECTORS' AND SUPERVISORS' RIGHT TO PURCHASE SHARES
As at 30th June, 2004, none of the Directors, chief executive officer or Supervisors of the Company had any interest or short position in the shares, underlying shares and/or debentures (as the case may be) of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which was required to be notified to the Company and the Hong Kong Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interest and short position which any such Director, chief executive officer or Supervisor is taken or deemed to have under such provisions of the SFO) or which was required to be entered in the register required to be kept by the Company pursuant to Section 352 of the SFO or which was otherwise required to be notified to the Company and the Hong Kong Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies as contained in Appendix 10 to the Listing Rules.
DIVIDENDS
It was resolved by the Board of Directors not to distribute interim dividends for 2004.
MAJOR EVENTS
(1) On 16th April, 2004, the Company entered into a transfer agreement with Huaneng Group, HIPDC and Jiangxi Provincial Investment Company. Pursuant to the transfer agreement, Company acquired, at a consideration of RMB4.575 billion, the following power assets: (1) 90% equity interest in Jinggangshan Huaneng Power Generation Limited Liability Company and 40% equity interest in Hebei Hanfeng Power Generation Limited Liability Company, both owned by Huaneng Group; (2) all the assets and liabilities of Yingkou Power Plant, 60% equity interest in Huaneng Chongqing Luohuang Power Generation Limited Liability Company and 55% equity interest in Huaneng Hunan Yueyang Power Generation Limited Liability Company, all owned by HIPDC; and (3) 10% equity interest in Jinggangshan Power Plant owned by Jiangxi Provincial Investment Company. With the completion of these acquisitions, the generation capacity on an equity basis of the Company will increase by 3,096 MW.
(2) On 20th May, 2004, the Board of Directors of the Company convened the seventh meeting of the Fourth Session of the Board. It was resolved that due to operational need, Mr. Ye Daji and Mr. Hu Jianmin resigned from the position of President and Vice-President respectively of the Company, and Mr. Huang Yongda be appointed the President of the Company.
CODE OF BEST PRACTICE
Throughout the Accounting Period, the Company has been in compliance with the Code of Best Practice as set out in Appendix 14 of the Listing Rules.
The Company has adopted the required standard set out in Appendix 10 - Model Code for Securities Transactions by Directors of Listing Companies of the Listing Rules. The Directors have complied with such code of conduct throughout the Accounting Period.
The Company has an audit committee which was established in accordance with the requirements of Code of Best Practice, with written terms of reference, for the purpose of reviewing and providing supervision over the financial report process and internal control system of the Company. The audit committee comprises five members, among whom two are non-executive directors and three are independent directors. A meeting of the audit committee was held on 9th August, 2004 to review the Company’s interim result for the period ended 30th June, 2004 before they were presented to the Board of Directors for approval.
LEGAL PROCEEDINGS
As at 30th June, 2004, the Company was not involved in any material litigation or arbitration and no material litigation or claim was pending or threatened or made against the Company as far as the Company is aware of.
DOCUMENTS FOR INSPECTION
Besides this announcement, the interim report for the first half of 2004 of the Company containing all the information required by the Listing Rules will be published on the Hong Kong Stock Exchange’s website in due course. The Company will also file the interim report in Form 6-K with the US Securities and Exchange Commission. Copies of the interim report for 2004 will be available at the following addresses and website:
| PRC | Huaneng Power International, Inc. West Wing, Building C Tianyin Mansion 2C Fuxingmennan Street Xicheng District Beijing People's Republic of China |
| Telephone Number: (8610) 6649 1999 Fax Number: (8610) 6649 1860 Postal code: 100031 | |
| Hong Kong | Rikes Communications Limited Room 701, Wanchai Central Building 89 Lockhart Road Wanchai Hong Kong |
| Telephone No: (852) 2520 2201 Fax No: (852) 2520 2241 | |
| Website of the Company | http://www.hpi.com.cn |
| By Order of the Board Li Xiaopeng Chairman |
As at the date of this announcement, the directors of the Company are:
| Li Xiaopeng (Non-executive director) Wang Xiaosong (Non-executive director) Ye Daji (Non-executive director) Huang Jinkai (Non-executive director) Liu Jinlong (Non-executive director) Shan Qunying (Non-executive director) Yang Shengming (Non-executive director) Xu Zujian (Non-executive director) | Gao Zongze (Independent director) Zheng Jianchao (Independent director) Qian Zhongwei (Independent director) Xia Donglin (Independent director) |
Beijing, the PRC
10 August, 2004
A. FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”)
CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)
FOR THE SIX MONTHS ENDED 30TH JUNE, 2004
(Amounts expressed in thousands of Rmb, except per share data)
| For the six months ended 30th June, | |||
| Note | 2004 | 2003 | |
| Operating revenue, net | 12,963,871 | 10,514,107 | |
| Operating expenses: | |||
| Fuel | (6,026,598) | (4,031,851) | |
| Maintenance | (410,573) | (309,316) | |
| Depreciation | (2,124,463) | (2,046,390) | |
| Labor | (799,292) | (676,911) | |
| Service fees to HIPDC | (105,038) | (105,220) | |
| Others | (305,036) | (256,695) | |
| Total operating expenses | (9,771,000) | (7,426,383) | |
| Profit from operation | 3,192,871 | 3,087,724 | |
| Interest income | 27,893 | 32,329 | |
| Interest expense | (244,085) | (305,968) | |
| Bank charges and exchange losses, net | (10,500) | (10,439) | |
| Total financial expenses | (226,692) | (284,078) | |
| Share of profit of associates | 108,553 | 62,897 | |
| Gain from disposal of investments | 4 | 10,168 | |
| Other income, net | 28,577 | 10,035 | |
| Profit before tax | 3 | 3,103,313 | 2,886,746 |
| Income tax expenses | |||
| The Company and its subsidiaries | 4 | (502,686) | (512,522) |
| Associates | (27,473) | (11,476) | |
| Total income tax expenses | (530,159) | (523,998) | |
| Profit before minority interests | 2,573,154 | 2,362,748 | |
| Minority interests | (92,027) | (77,543) | |
| Net profit attributable to shareholders | 2,481,127 | 2,285,205 | |
| Basic earnings per share (Rmb) | 7 | 0.21 | 0.19 |
| Diluted earnings per share (Rmb) | 7 | 0.21 | 0.19 |
Notes
- Principal Accounting Policies
The accompanying condensed consolidated financial statements have not been audited but have been reviewed by the Audit Committee. These financial statements are prepared in accordance with International Accounting Standard 34 “Interim Financial Reporting” promulgated by the International Accounting Standards Committee and Appendix 16 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.
The principal accounting policies adopted for the preparation of the condensed consolidated financial statements as at and for the six months ended 30th June, 2004 are consistent with those adopted for the preparation of the financial statements as at and for the year ended 31st December, 2003.
- Appropriations and Distribution of Profit
For the six months ended 30th June, 2004, the Company and its subsidiaries did not make a provision for the statutory surplus reserve fund and the statutory public welfare fund.
- Profit Before Tax
Profit before tax in the condensed consolidated statement of income was determined after charging and (crediting) the following items:
| For the six months ended 30th June, | ||
| 2004 | 2003 | |
| ‘000 | ‘000 | |
| Total interest charges on borrowings | 358,258 | 316,096 |
| Less: capitalized in property, plant and equipment | (114,173) | (10,128) |
| Total interest expense | 244,085 | 305,968 |
| Depreciation of property, plant and equipment | 2,124,463 | 2,046,390 |
| Amortization of goodwill | 21,001 | 10,999 |
| Amortization of land use rights and other assets | 27,021 | 27,572 |
| Gain on interest rate swaps | (574) | (4,207) |
| Amortization of negative goodwill | (123,639) | (123,639) |
| Interest income | (27,893) | (32,329) |
- Taxation
Certain of the power plants, being located in specially designated regions or cities, are subject to preferential income tax rates. In addition, certain power plants are exempted from the PRC income tax for two years starting from the first profit-making year (after covering any accumulated deficits) followed by a 50% exemption of the applicable tax rate for the next three years (“tax holiday”). For the six months ended 30th June, 2004, the weighted average effective tax rate applicable to the Company is 17% (for the six months ended 30th June, 2003: 18%).
On 27th October, 2003, the Company acquired all of the assets and liabilities of Huaneng Xindian Power Plant (the “Xindian Power Plant”). Xindian Power Plant became a branch of the Company. As such, Xindian Power Plant is entitled to preferential tax treatment applicable to Sino-foreign enterprises investing in energy and is in the process of applying to the relevant tax bureau for such preferential tax treatment.
- Dividends Declared
On 11th May, 2004, the shareholders approved the declaration of cash dividends of Rmb0.5 per ordinary share (Rmb0.25 per adjusted ordinary shares after the common stock split as mentioned in Note 6), totalling Rmb3,014 million in their general meeting. As at 30th June, 2004, dividends of approximately Rmb3,006 million had been paid.
- Common Stock Split
On 11th May, 2004, the shareholders approved a ten-for-ten stock split of the Company’s common stock effected in the form of a) 5 bonus shares for every 10 existing ordinary shares, and b) 5 conversion shares for every 10 existing ordinary shares. The stock split had been completed as at 30th June, 2004.
The bonus shares amounting to approximately Rmb3,014 million were charged to retained earnings. The conversion shares issued, amounting to also approximately Rmb3,014 million, were charged to additional paid-in capital and statutory reserve fund in the amount of Rmb1,808 million and Rmb1,206 million respectively. The basic and diluted earnings per share included in this condensed consolidated financial statement have been adjusted retroactively to reflect the stock split (see Note 7).
- Earnings Per Share
When calculating the basic and diluted earnings per share, the number of ordinary shares outstanding before the common stock split (see Note 6), without a corresponding change in resources, have been adjusted for the proportional change in the number of ordinary shares outstanding as if the transaction had occurred at the beginning of the earliest period presented.
The calculation of basic earnings per share is based on the net profit attributable to shareholders of approximately Rmb2,481 million (for the six months ended 30th June, 2003: Rmb2,285 million) and the weighted average number of 12,055 million (for the six months ended 30th June, 2003: 12,021 million) outstanding ordinary shares during the period.
The calculation of diluted earnings per share is based on the adjusted net profit attributable to shareholders of Rmb2,481 million (for the six months ended 30th June, 2003: Rmb2,288 million) and the adjusted weighted average number of 12,056 million (for the six months ended 30th June, 2003: 12,056 million) outstanding ordinary shares during the period. The calculation assumes that the convertible notes had been fully converted at the beginning of the period.
- Related Party Transactions
The related parties of the Company and its subsidiaries that had transactions with the Company and its subsidiaries are as follows:
| Name of related parties | Nature of relationship |
| Huaneng International Power Development Corporation (“HIPDC”) | Parent company |
| China Huaneng Group (“Huaneng Group”) | Ultimate parent company |
| China Huaneng Finance Company (“Huaneng Finance”) | A subsidiary of Huaneng Group |
| Weihai Power Development Bureau (“WPDB”) | Minority shareholder of Weihai Power Company |
| Henan Construction Investment Company (“Henan Investment”) | Minority shareholder of Qinbei Power Company |
| China Huaneng International Trade Economics Corporation (“CHITEC”) | A subsidiary of Huaneng Group |
| Time Shipping Company (“Time Shipping”) | A Joint venture company of Huaneng Group |
| Shangdong Rizhao Power Company Ltd. (“Rizhao Power Company”) | An associate of the Company |
| Shenzhen Energy Group Co., Ltd. (the “SEG”) | An associate of the Company |
(a) The significant transactions and balances with HIPDC were as follows:
(i) Transactions during the six months ended 30th June, 2004:
| For the six months ended 30th June, | ||
| 2004 | 2003 | |
| ‘000 | ‘000 | |
| Service fees on transmission and transformer facilities | 105,039 | 105,220 |
| Rental charge on the land of Shidongkou II Power Plant | 3,000 | 3,000 |
| Rental charge on the land of Nanjing Power Plant | 667 | 667 |
| Rental charge on office space | 12,500 | 12,500 |
| Management service fee income | 8,653 | 8,653 |
(ii) Balances as at 30th June, 2004:
| As at 30th June, 2004 | As at 31st December, 2003 | |
| ‘000 | ‘000 | |
| Long-term loans guaranteed by HIPDC | 4,292,442 | 4,647,947 |
| Bank loans on-lent from HIPDC to the Company | 194,441 | 388,875 |
| Due from HIPDC (unsecured and non-interest bearing) | 93,184 | - |
| Due to HIPDC (unsecured and non-interest bearing) | - | 87,508 |
(b) The significant transactions and balances with other related parties were as follows:
(i) Transactions during the six months ended 30th June, 2004:
| For the six months ended 30th June, | ||
| 2004 | 2003 | |
| ‘000 | ‘000 | |
| Huaneng Group | ||
| Management service fee income | 16,647 | 16,647 |
| CHITEC | ||
| Coal purchased from CHITEC | 100,354 | 22,897 |
| Time Shipping | ||
| Coal purchased from Time Shipping and service fee paid for transportation | 212,585 | 165,867 |
(ii) Balances as at 30th June, 2004:
| As at 30th June, 2004 | As at 31st December, 2003 | |
| ‘000 | ‘000 | |
| Huaneng Group | ||
| Long-term loans guaranteed by Huaneng Group | 1,048,272 | 1,095,905 |
| Long-term loans borrowed from Huaneng Group** | 800,000 | - |
| Due from Huaneng Group | 6,991 | - |
| Huaneng Finance | ||
| Current deposits in Huaneng Finance* | 2,248,315 | 2,791,770 |
| Short-term loan borrowed from Huaneng Finance* | 1,005,000 | 1,130,000 |
| Long-term loan borrowed from Huaneng Finance* | 610,000 | 610,000 |
| Interest payable to Huaneng Finance | 18,607 | 1,419 |
| CHITEC | ||
| Payable for coal purchased from CHITEC | 6,450 | 14,484 |
| WPDB | ||
| Long-term loans borrowed from WPDB* | 106,609 | 106,389 |
| Long-term bank loans guaranteed by WPDB | 100,000 | 280,000 |
| Dividend payable to WPDB | 32,233 | - |
| Henan Investment | ||
| Long-term loan guaranteed by Henan Investment | 231,820 | 34,492 |
| Short-term loan borrowed from Henan Investment* | 1,300,000 | 1,300,000 |
| Time Shipping | ||
| Payable for coal purchase from and transportation service provided by Time Shipping | 10,691 | 11,434 |
| Rizhao Power Company | ||
| Guarantee on the long-term bank loan of Rizhao Power Company*** | 326,500 | 339,250 |
| Due from Rizhao Power Company | 1,652 | - |
| SEG | ||
| Due to SEG | 50,000 | - |
| Others | ||
| Due from the subsidiaries of Huaneng Group | 2,855 | 5,287 |
| Due from the subsidiaries of HIPDC | 575 | 575 |
* The interest rates have no material difference with the prevailing market interest rate. The terms of these loans have been disclosed in the financial statements as at 31st December, 2003.
** The long-term loans borrowed from Huaneng Group bear fixed interest rates, which ranged from 3.78% to 4.60% per annum for the six months ended 30th June, 2004 and are repayable before 2013, in accordance with the repayment schedules set by the contracts.
*** Guarantee on the long-term bank loan of Rizhao Power Company by the Company had no significant financial impact on the Company’s operation.
- Subsequent Event
On 16th April, 2004, the Company entered into an agreement with Huaneng Group under which the Company agreed to acquire from Huaneng Group 40% equity interest in Hebei Hanfeng Power Generation Limited Liability Company, 90% equity interest in Jinggangshan Huaneng Power Generation Limited Liability Company(“Jinggangshan Power Company”). The total consideration for the acquisition of the two power plants was Rmb1,949 million.
On the same date, the Company entered into an agreement with HIPDC under which the Company agreed to acquire from HIPDC 55% equity interest in Huaneng Hunan Yueyang Power Generation Limited Liability Company, 60% equity interest in Huaneng Chongqing Luohuang Power Generation Limited Liability Company and all of the assets and liabilities of Huaneng International Power Development Corporation Yingkou Branch. The total consideration for the acquisition of the three power plants was Rmb2,564 million.
In addition, on 16th April, 2004, the Company entered into an agreement with Jiangxi Provincial Investment Company and agreed to acquire the remaining 10% equity interest in Jinggangshan Power Company at a consideration of Rmb62 million.
After obtaining all the necessary government approvals on the acquisitions and the payment of the purchase considerations, the Company took over the control or obtained a significant influence of the above power companies and power plants in July 2004.
B. FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED FINANCIAL STATEMENTS PREPARED UNDER PRC ACCOUNTING STANDARDS
1. FINANCIAL HIGHLIGHTS AND FINANCIAL RATIOS (UNAUDITED)
(Amounts Expressed In Rmb)
| Item | Unit | 30th June, 2004 | 31st December, 2003 | Variance (%) |
| Current assets | Yuan | 11,216,427,811 | 8,302,872,165 | 35.09% |
| Current liabilities | Yuan | 12,066,061,652 | 8,246,573,763 | 46.32% |
| Total assets | Yuan | 58,206,299,070 | 53,276,965,016 | 9.25% |
| Shareholders’ equity (excluding minority interests) | Yuan | 34,304,353,277 | 34,787,100,203 | (1.39%) |
| Net assets per share (fully diluted) | Yuan /share | 2.85 | 5.77 | (50.61%) |
| Adjusted net assets per share (fully diluted) | Yuan /share | 2.84 | 5.76 | (50.69%) |
| Item | Unit | For the six months ended 30th June, 2004 | For the six months ended 30th June, 2003 | Variance (%) |
| Net profit | Yuan | 2,530,964,525 | 2,355,671,994 | 7.43% |
| Net profit (excluding non-recurring items) | Yuan | 2,528,469,630 | 2,352,763,782 | 7.47% |
| Earnings per share (fully diluted) | Yuan /share | 0.21 | 0.39 | (46.15%) |
| Earnings per share (weighted average) | Yuan /share | 0.21 | 0.39 | (46.15%) |
| Return on net assets (fully diluted) | % | 7.38 | 7.43 | (0.67%) |
| Return on net assets (weighted average) | % | 7.12 | 7.34 | (3.00%) |
| Net cash inflow from operating activities | Yuan | 4,105,929,198 | 4,569,732,050 | (10.15%) |
Note: Formula of key financial ratios:
| Earnings per share (fully diluted) | = | Net profit / Total number of ordinary shares as at the end of the period |
| Return on net assets (fully diluted) | = | Net profit / Shareholders’ equity as at the end of the periodx100% |
| Net assets per share (fully diluted) | = | Shareholder’s equity as at the end of the period/ Total number of ordinary shares as at the end of the period |
Note: Non-recurring items deducted
| Item | Amount |
| Gain from disposal of fixed assets assest | 1,076,961 |
| Write back of bad-debt provisions | 6,076,496 |
| Non-operating income | 409,420 |
| Non-operating expenses | (4,603,033) |
| Relevant tax impact | (464,949) |
| Total | 2,494,895 |
2. PROFIT AND LOSS ACCOUNTS (UNAUDITED)
FOR THE SIX MONTHS ENDED 30TH JUNE, 2004
(Amounts Expressed In Rmb)
| For the six months ended 30th June, | ||||
| Consolidated | The Company | |||
| 2004 | 2003 | 2004 | 2003 | |
| 1. Revenues from principal operations | 13,040,289,339 | 10,618,086,009 | 11,104,641,146 | 9,193,411,044 |
| Less: Cost of principal operations | (9,498,640,593) | (7,203,913,330) | (8,157,868,496) | (6,296,734,893) |
| Tax and levies on principal operations | (25,297,711) | (27,469,565) | (3,139,092) | (10,194,034) |
| 2. Profit from principal operations | 3,516,351,035 | 3,386,703,114 | 2,943,633,558 | 2,886,482,117 |
| Add: Profit from other operations | 13,054,772 | 22,836,671 | 12,316,201 | 22,581,519 |
| Less: General and administrative expenses | (210,090,841) | (202,878,405) | (156,908,707) | (158,816,205) |
| Financial expenses, net | (255,383,895) | (290,999,870) | (186,597,160) | (225,703,753) |
| 3. Operating profit | 3,063,931,071 | 2,915,661,510 | 2,612,443,892 | 2,524,543,678 |
| Add: Income from investment | 79,858,472 | 42,116,524 | 281,650,229 | 230,022,688 |
| Non-operating income | 1,428,338 | 10,611,425 | 1,433,597 | 1,324,530 |
| Less: Non-operating expenses | (4,544,990) | (5,295,816) | (3,194,339) | (4,528,775) |
| 4. Profit before taxation and minority interests | 3,140,672,891 | 2,963,093,643 | 2,892,333,379 | 2,751,362,121 |
| Less: Income tax | (510,203,778) | (521,882,186) | (361,368,854) | (395,690,127) |
| Minority interests | (99,504,588) | (85,539,463) | - | - |
| 5. Net profit | 2,530,964,525 | 2,355,671,994 | 2,530,964,525 | 2,355,671,994 |
3. NOTES TO THE FINANCIAL INFORMATION
Comparing with the latest annual report, there is no change to the Company and its subsidiaries’ accounting policies, accounting estimates, and there is no error correction on accounting method during the reporting period.
Comparing with the latest annual report, there is no change to the scope of consolidation during the reporting period.
4. NET INCOME RECONCILIATION AMONG PRC GAAP, IFRS AND US GAAP (UNAUDITED)
The financial statements, which are prepared by the Company and its subsidiaries in conformity with the Accounting Standards for Business Enterprises and Accounting Systems for Business Enterprises (“PRC GAAP”), differ in certain respects from International Financial Reporting Standards (“IFRS”) and generally accepted accounting principles in the United States of America (“US GAAP”). Major differences among PRC GAAP, IFRS and US GAAP, which affect the net income of the Company and its subsidiaries, are summarized as follows:
| Net Income | ||
| For the six months ended 30th June, | ||
| 2004 | 2003 | |
| Rmb | Rmb | |
| Net profit under PRC GAAP | 2,530,964,525 | 2,355,671,994 |
| Impact of IFRS adjustments: | ||
| Effect of recording deferred revenue (a) | (52,844,749) | (76,509,744) |
| Difference in the basis of determining the amount of materials and supplies (b) | 792,624 | 1,143,688 |
| Difference in the recognition policy on housing benefits to the employees of the Company (c) | (12,826,849) | (13,244,487) |
| Difference in accounting treatment of the convertible notes (d) | (17,268) | (3,206,700) |
| Difference in capitalization of borrowing costs (e) | 26,539,580 | 7,179,863 |
| Difference in the recognition of financial liabilities (f) | 573,746 | 4,206,206 |
| Applicable deferred tax impact on the above GAAP differences (k) | 4,823,755 | 6,451,513 |
| Others | (16,878,387) | 3,512,919 |
| Net profit under IFRS | 2,481,126,977 | 2,285,205,252 |
| Impact of US GAAP adjustments (Note 1): | ||
| Effect of acquisitions of Qinbei Power Company, Yushe Power Company and Xindian Power Plant (g) | 24,351,130 | 24,050,050 |
| Effect of acquisitions of Shidongkou I Power Plant, Taicang Power Company and Changxing Power Plant (g) | 56,402,683 | 61,087,689 |
| Effect of acquisition of 30% additional equity interests in Shidongkou I Power Plant, 5% additional equity interests in Taicang Power Company and 44.16% equity interests in Huaiyin Power Company (h) | 9,875,139 | 11,801,420 |
| Recording housing benefits provided by HIPDC (c) | (13,076,285) | (13,076,285) |
| Difference in accounting treatment for acquisition of Shandong Huaneng (i) | (43,146,120) | (43,545,380) |
| Difference in accounting treatment of convertible notes (d) | 8,652,855 | 14,309,597 |
| Difference in capitalization of borrowing costs (e) | 3,232,926 | (7,179,863) |
| Reversal of goodwill amortization | ||
| － Reversal of goodwill amortization of equity investment in SEG (j) | 40,979,557 | 13,995,651 |
| － Reversal of goodwill amortization of investment in Huaiyin Power Company (j) | 8,685,152 | 8,685,152 |
| Applicable deferred tax impact on the above GAAP differences (k) | (11,325,016) | (84,375,950) |
| Net profit under US GAAP (Note 1) | 2,565,758,998 | 2,270,957,333 |
(Note 1) Consistent with applying the accounting treatment under US GAAP as described in Note (g) below, the consolidated financial statements under US GAAP for prior periods presented have been retroactively restated as if the current structure and operations resulted from the acquisition of the Qinbei Power Company, the Yushe Power Company and the Xindian Power Plant had been in existence since the beginning of the earliest period presented.
(a) Recording of deferred revenue
Under the rate making process applicable to the Company and its subsidiaries except for certain power plants, major repair and maintenance expenses determined on the basis of 1% of the fixed asset cost is recovered through the current power rates. In a particular year, to the extent that the actual repair and maintenance expenses incurred is less than the amount determined on the above basis, the difference is recorded as deferred revenue under IFRS and US GAAP. For PRC statutory financial reporting purposes, in accordance with the requirements of PRC GAAP, no such amount is recorded and revenue is determined and recognized based on the actual amount of electricity transmitted to the grid and the prevailing approved power rates.
(b) Difference in the basis of determining the amount of materials and supplies
Under PRC GAAP, materials and supplies have been restated to the appraised value determined by independent valuer during the reorganization of the five original operating plants in 1994 and the appraised value has been used as the basis in determining the amount charged to operating expenses upon actual utilization. Under IFRS and US GAAP, materials and supplies are charged to operating expenses at cost based on actual utilization.
(c) Difference in the recognition policy on housing benefits to the employees of the Company
The Company and HIPDC provided housing benefits to certain qualified employees of the Company whereby the living quarters owned by the Company and HIPDC were sold to these employees at preferential prices. The housing benefits represent the difference between the cost of the staff quarters sold to and the net proceeds collected from the employees, which are borne by the Company and HIPDC.
For PRC statutory reporting purposes, in accordance with the relevant regulations issued by the Ministry of Finance, the total housing benefits provided by the Company are charged to non-operating expenses. Under IFRS, the housing benefits provided by the Company are recognized on a straight-line basis over the estimated remaining average service lives of the employees.
Under US GAAP, in addition to the recognition of the housing benefits provided by the Company on the above basis, the amount of housing benefits provided by HIPDC to the employees of the Company are also reflected as the Company’s operating expenses using the same amortization policy. The corresponding amount is recorded as an addition of capital contribution of HIPDC.
(d) Accounting treatment of convertible notes
Under PRC GAAP, the Company had accrued for the put premium liability together with the interest payable on the notes using the effective interest rate of 6.66% as at 21st May, 2002. As at 21st May, 2002, all accrued put premium of unredeemed notes was charged to the income statement as reversal of interest expense.
Under IFRS, the proceeds received on the issue of the convertible notes were allocated into liability and equity components. Upon initial recognition, the liability component represented the present value, at the issuance date, of the contractually determined stream of cash flows discounted at the market interest rate for instruments of comparable credit status providing substantially the same cash flows, on the same terms, but without the conversion option. The equity component was then determined by deducting the liability component from the proceeds received on the issue of the notes. Under PRC GAAP and US GAAP, the entire proceeds of the issue of convertible notes were recorded as liabilities without distinguishing between the equity and liability components.
In accordance with IAS 39, the put option of the convertible notes, which allowed the noteholders to redeem the convertible notes at a premium, was separated from the host contract and accounted for as an embedded derivative. This put option was recorded as a liability and measured at its fair value. When IAS 39 was initially applied in 2001, the difference between the previous carrying amount and the fair value of the put option was recognised as an adjustment to the opening retained earnings as at 1st January, 2001. In addition, the liability component was measured at amortized cost and the resulting difference with the previous carrying amount was recognised as an adjustment to the opening retained earnings as at 1st January, 2001. After initial recognition, subsequent changes in the value of the put option and the amortised cost of the liability component were charged or credited to the income statements.
Under US GAAP, it is permitted not to measure the put option separately at its fair value, as it represents a derivative embedded in a pre-1998 hybrid instrument. The Company continued to accrue for the put premium liability together with the interest payable on the notes using an effective interest rate of 6.66% up to the redemption date of 21st May, 2002. On 21st May, 2002, a portion of the convertible notes was not redeemed by the noteholders. Under US GAAP, the relevant portion of the accrued put premium attributable to the remaining convertible notes not redeemed was amortized as a yield adjustment over the remaining term of the convertible notes because the put price exceeded the market value of the ordinary shares of the Company at the time of the redemption.
(e) Capitalization of borrowing costs
Under PRC GAAP, the capitalization of interests is limited to specific borrowings. No interest can be capitalized on general borrowings. In accordance with IAS 23, the Company capitalized interests on general borrowings used for the purpose of obtaining a qualifying asset in addition to the capitalization of interests on specific borrowings. Under US regulatory accounting requirements, interests on funds borrowed generally and used for the purpose of obtaining a qualifying asset are not capitalized if such interests can not be taken into consideration when determining the recoverable rate base for tariff setting purposes.
(f) Accounting treatment of financial liability
The Company enters into interest rate swap agreements with local banks to convert certain floating rate debts of the same principal amounts and for the same maturities to hedge against interest rate risk. As at 30th June, 2004, the notional amount of the outstanding interest rate swap agreement was approximately US$10.3 million. For the period ended 30th June, 2004, there was a gain amounted to approximately Rmb0.6 million arising from changes in the fair value of the interest rate swaps. Under PRC GAAP, such interest swap contracts are considered and disclosed as off balance sheet items. Under IFRS and US GAAP, derivative instruments are recorded as either assets or liabilities in the balance sheet at fair value, which is determined based on market conditions at each balance sheet date. Changes in the fair value of derivatives are recorded each period in current earnings or recognized directly in equity through the statement of changes in shareholder’s equity, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. Since the hedging relationship does not meet all of the conditions required for special hedge accounting as set out in IAS 39 and Statement of Financial Accounting Standard (“SFAS”) 133, such gain was credited to the income statement in current period.
(g) Effect of acquisitions of entities under common control
Under PRC GAAP, the excess of the total cost of the acquisition over the book value of Shidongkou I Power Plant, Taicang Power Company, Qinbei Power Company and Yushe Power Company is recorded as an “equity investment difference”. Such equity investment difference is amortized on a straight-line basis over 10 years. In addition, all the assets and liabilities of Changxing Power Plant and Xindian Power Plant acquired are recorded at their purchase price.
Under IFRS, the Company and its subsidiaries adopted the acquisition method to account for the acquisition of 70% equity interest in Shidongkou I Power Plant, 70% equity interest in Taicang Power Company and all of the assets and liabilities of Changxing Power Plant in July, 2002 and the acquisition of 55% equity interest in Qinbei Power Company, 60% equity interest in Yushe Power Company and all of the assets and liabilities of Xindian Power Plant in October, 2003. 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 dates of the acquisitions. The difference between the purchase consideration and the fair value of the underlying net assets acquired is treated as goodwill and amortized on a systematic basis to the income statement over its useful economic life, being the remaining weighted average useful life of the acquired depreciable or amortizable assets.
As the Company and its subsidiaries, Shidongkou I Power Plant, Taicang Power Company, Changxing Power Plant, Qinbei Power Company, Yushe Power Company, and Xindian Power Plant were under common control of the Huaneng Group prior to the acquisition, under US GAAP, the acquisition is considered to be a transfer of businesses under common control and the acquired assets and liabilities are accounted for at historical cost in a manner similar to the pooling of interests method. Accordingly, the consolidated financial statements for all periods presented have been retroactively restated as if the current structure and operations resulting from the acquisition had been in existence since the beginning of the earliest period presented, with financial data of previously separate entities combined. The cash consideration paid by the Company is treated as an equity transaction in the year of the acquisitions for US GAAP purposes. Accordingly, the resulting impact of depreciation and amortization expenses on income is also different.
(h) Effect of acquisition of 30% Additional Equity interests in Shidongkou I Power Plant, 5% Additional Equity Interests in Taicang Power Company and 44.16% Equity Interests in Huaiyin Power Company
On 1st July, 2002, the Company acquired 44.16% equity interests of Huaiyin Power Company from Huaneng Group. In addition, the Company also acquired 30% equity interests of Shidongkou I Power Plant and 5% additional equity interests of Taicang Power Company from Huaneng Group on 31st December, 2002.
Under PRC GAAP, the excess of the total cost of the acquisition over the book value of Taicang Power Company and Huaiyin Power Company is recorded as an “equity investment difference”. Such equity investment difference is amortized on a straight-line basis over 10 years. As the Company has acquired all the equity interest in Shidongkou I Power Plant, the assets and liabilities of Shidongkou I Power Plant are recorded at their fair values.
Under IFRS, upon the completion of the above acquisitions, the relevant equity interests of net assets of Shidongkou I Power Plant, Taicang Power Company and Huaiyin Power Company are recorded at fair value. The excess of the total cost of the acquisition over the fair value of the relevant portion of net assets of power plants is recorded as goodwill. Such goodwill is amortized on a systematic basis to the income statement over its useful economic life, being the remaining weighted average useful life of the acquired depreciable or amortizable assets. Under US GAAP, upon completion of the above acquisitions, Huaneng Group’s proportionate share in the net assets of Shidongkou I Power Plant, Taicang Power Company and Huaiyin Power Company was recorded by the Company at the historical carrying value. The excess of the total cost of acquisition over the net assets acquired was recorded as a reduction of deemed capital contribution to the Company. Accordingly, the resulting impact of depreciation and amortization expenses on income is also different.
(i) Acquisition of Shandong Huaneng Power Development Company Limited (“Shandong Huaneng”)
Huaneng Group is the controlling parent company of HIPDC, which in turn is the controlling parent of the Company. Huaneng Group used to be one of the substantial shareholders of Shandong Huaneng, holding 33.09% equity interest in it before the Company’s acquisition of Shandong Huaneng. Under PRC GAAP and IFRS, upon the completion of the acquisition of Shandong Huaneng by the Company, the entire net assets of Shandong Huaneng were recorded at fair value. The excess of the fair value of the entire net assets acquired over the total cost of the acquisition was recorded as negative goodwill. Under US GAAP, upon completion of the acquisition of Shandong Huaneng, Huaneng Group’s proportionate share of 33.09% in the net assets of Shandong Huaneng that was sold to the Company was recorded at the historical carrying value. The excess of the proportionate share in the book value of the net assets acquired over the relevant portion of the cash consideration was recorded as a capital contribution to the Company. The book value of the remaining 66.91% of the net assets continues to be part of the recoverable rate base under the cost recovery formula of the tariff setting mechanism. Under US GAAP, the difference between these net asset values and the cash consideration was recorded as a reduction to the property, plant and equipment value of the respective power plants.
As the amount of negative goodwill under IFRS is different from the amount of the reduction to property, plant and equipment under US GAAP due to the 33.09% portion of the net assets previously owned by Huaneng Group as described above and also that the negative goodwill under IFRS is recognized as income over the remaining weighted average useful life of the acquired depreciable or amortizable assets whereas, for US GAAP purpose, the property, plant and equipment, after the reduction described above, are depreciated over the respective assets’ useful life, the net income under IFRS and US GAAP is different.
(j) Reversal of Goodwill Amortization
Under PRC GAAP and IFRS, goodwill is amortized using the straight-line method over its estimated useful life and recognized in the income statement as other operating expenses. Under US GAAP, in accordance with SFAS No.142 “Goodwill and Other Intangible Assets”, goodwill is not amortized but tested for impairment on an annual basis and between annual tests in certain circumstances.
(k) Deferred Tax Impact
This represents deferred tax effect on the above GAAP differences where applicable.
The 2004 interim results of the Company and its subsidiaries containing all the information required by paragraphs 45(1) to 45(3) of Appendix 16 of the Listing Rules will be published on the Stock Exchange of Hong Kong Limited's website in due course.
Please also refer to the published version of this announcement in South China Morning Post.