Huaneng Power International, Inc. - hpi.com.cn · PDF file2 HUANENG POWER INTERNATIONAL, INC....

Benefiting from China’s strong economic growth and the country’s rising demand for electricity, Huaneng Power has

been capitalizing on the development opportunities arising from an increasingly liberalized market. Led by a highly

experienced and capable management team, the Company is well prepared to tackle various challenges presented by

the electricity sector’s system reforms and endeavors to become an even stronger player amidst a more competitive

environment.

Like what it has been doing all these years, Huaneng Power will continue to emphasize both acquisition and greenfield

projects as a growth strategy, striving to enhance its earnings capability. We will continue to adopt flexible coal

purchase strategies to control fuel costs; maintain our leadership position through our management excellence; and

expand our financing channels to support long-term developments. And through technological innovation, we will

meet new challenges head-on and further strengthen ourselves to become an even more competitive enterprise.

With Tackling Challenges with Power as our approach towards the future, Huaneng Power is fully committed to

creating stable and increasing long-term returns for our shareholders and utmost benefits for our society.

Contents

2 Company Profile

5 Corporate Structure

6 Major Corporate Events in 2005

8 Financial Highlights

10 Letter to Shareholders

16 Management’s Discussion and

Analysis

36 Corporate Governance Report

52 Investor Relations

56 Human Resources

58 Corporate Citizenship

60 Report of the Board

of Directors

77 Report of the Supervisory

Committee

80 Profiles of Directors, Supervisors

and Senior Management

93 Corporate Information

95 Glossary

Financial statements prepared in

accordance with International

Financial Reporting Standards

96 Report of the Auditors

97 Consolidated Statement

of Income

98 Balance Sheets

101 Consolidated Statement

of Changes in Shareholders’

Equity

102 Consolidated Statement of

Cash Flows

104 Notes to the Financial

Statements

179 Supplemental Information for

North American Shareholders

Financial statements prepared in

accordance with PRC Accounting

Standards

194 Report of the Auditors

195 Balance Sheet

197 Profit and Loss Accounts

199 Statement of Income

Appropriation

200 Cash Flow Statement

203 Notes to the Financial

Statements

271 Supplemental Information

2 HUANENG POWER INTERNATIONAL, INC.

Company Profile

The Company was incorporated on 30th June 1994. It

completed its initial public offering of 1,250,000,000

overseas listed foreign shares (“foreign shares”) in October

1994 and such shares (represented by 31,250,000

American Depository Shares) were listed on the New York

Stock Exchange (NYSE: HNP). In January 1998, the foreign

shares of the Company were listed on The Stock Exchange

of Hong Kong Limited (the “Hong Kong Stock Exchange”)

by way of introduction (Stock Code: 902). Subsequently,

in March 1998, the Company successfully completed a

global placement of 250,000,000 foreign shares along

with a private placement of 400,000,000 domestic shares.

In November 2001, the Company successfully completed

the issue of 350,000,000 A shares in the PRC, of which

250,000,000 shares were domestic public shares.

Currently, the total share capital of the Company amounts

to approximately 12.06 billion shares.

Currently, the Company and its subsidiaries wholly own

16 operating power plants and have controlling interests

in 12 operating power plants and minority interests in 4

operating power companies. Its power plants have

advanced equipment with high efficiency and stability.

Their operations are widely located in those regions in

China where there are rapid economic growth and fast-

increasing power demand. The core business of the

Company is to develop, construct, and operate coal-fired

power plants by making use of modern technology and

equipment and financial resources available domestically

and internationally. The Company was the first to

introduce 600MW supercritical coal-fired generating units

in China while its Huaneng Dalian Power Plant was the

first one to be awarded with the honour of “First Class

Coal-fired Power Plant” in China. The Company was the

first power company in China to achieve listing status in

New York, Hong Kong and Shanghai. The planned

Huaneng Yuhuan Power P lant wi l l adopt the

internationally advanced technology to construct a

domestically built 1,000 MW ultra-supercritical coal-fired

power generating unit in China. The overall manpower

efficiency of the Company has been remaining at the

forefront in China’s power industry. In 2000, the Company

was conferred the honour of “First Class Power Company

in China” by the State Power Corporation.

Throughout the years, with efforts in seeking expansion

and operating the business in a prudent manner, the

Company has expanded gradually, with steady profit

growth and increasing competitive strengths. The success

of the Company is attributable to the following

competitive advantages: (1) advanced equipment, highly

efficient generating units and stable operation of power

plants; (2) high-qual ity staff and experienced

management; (3) a regulated corporate governance

structure and rationalised decision-making mechanisms;

(4) geographical advantages of the locations of the power

plants which present promising prospects in the power

market; and (5) good credit standing and reputation

domestically and internationally and rich experience in the

capital markets.

Huaneng Power International, Inc. (the “Company”) and its subsidiaries are engaged

in developing, constructing, operating and managing large-scale coal-fired power

plants throughout China. To date, the Company is China’s largest listed power

producer with equity-based generation capacity of 23,549MW and a total capacity

of 16,608MW under construction and planning.

32005 ANNUAL REPORT

As regards future development, the Company will

continue to explore development opportunities according

to the principle of “emphasising both development and

acquisition, both greenfield and expansion, both coal-fuel

and other applicable fuels, and both domestic and

overseas resources”. At the same time, the Company will

continue to focus on the improvement of management,

cost controls and enhancement of efficiency, so as to

increase shareholder value and maintain long-term stable

growth.

Huaneng International Power Development Corporation

(“HIPDC”), the Company’s parent company and

controlling shareholder, was incorporated as a Sino-foreign

joint venture enterprise in 1985. The Company was

incorporated by way of joint promotion by HIPDC and

local government investment companies in the regions

where the power plants are located.


2 3 4 51

6 7 8 9 10

11 12 13 14 15

16 17 18 19 20

21 22 23 24 25

Dandong Power Plant(700 MW)

Yingkou Power Plant(640MW)

Dailian Power Plant(1,400MW)

Shang‘an Power Plant(1,300MW)

Weihai Power Plant(850 MW)

Dezhou Power Plant(2,630 MW)

Yushe Power Plant(800 MW)

Xindian Power Plant(450 MW)

Jining Power Plant(545 MW)

Taicang Power Plant(1,800 MW)

Qinbei Power Plant(1,200 MW)

Huaiyin Power Plant(1,100 MW)

Nantong Power Plant(1,404 MW)

Nanjing Power Plant(640 MW)

Shanghai ShidongkouSecond Power Plant

(1,200 MW)

Shanghai ShidongkouFirst Power Plant

(1,220 MW)Luohuang Power Plant

(1,548 MW)Yueyang Power Plant

(1,025 MW)Changxing Power Plant

(260 MW)Jinggangshan Power Plant

(600 MW)

Shantou Coal-firedPower Plant(1,200 MW)

Shantou Combined CyclePower Plant(103 MW)

Pingliang Power Plant(1,200 MW)

Sichuan Hydropower(1,391 MW)

Fuzhou Power Plant(1,400 MW)

52005 ANNUAL REPORT

Corporate Structure

7

89

10

11

12

3

4

56

1213

14

1516

17

18

19

20

21

2223

25

24

Huaneng International PowerDevelopment Corporation

Hebei Provincial ConstructionInvestment Company

Jiangsu Provincial International Trust &Investment Corporation

Fujian Investment EnterpriseHoldings Company

Liaoning Energy Investment (Group)Limited Liability Company

Dalian Municipal ConstructionInvestment Company

Nantong InvestmentManagement Limited Company

Minxin Group Limited Company

Shantou Power DevelopmentJoint Stock Company Limited

Liaoning Guoneng Group (Holdings)Joint Stock Limited Company

Dandong Energy InvestmentDevelopment Centre

Shantou Electric PowerDevelopment Corporation

Domestic Public Shares

Foreign Shares

42.78%

7.50%

5.18%

4.66%

3.86%

3.75%

1.13%

0.90%

0.32%

0.28%

0.11%

0.04%

4.15%

25.34%

Major Corporate Events in 2005


January Huaneng Power announced that it obtained approval in the adjustments of tariffs

for excessive generation in respect of Shanghai Shidongkou First Power Plant,

Shanghai Shidongkou Second Power Plant, Nantong Power Plant, Nanjing Power

Plant, Huaiyin Power Plant, Taicang Power Plant and Changxing Power Plant.

Huaneng Power announced that its acquisition of interests and assets in Sichuan

Hydropower and Pingliang Power Plant was approved by the government.

Huaneng Power’s generating unit 3 of Huaiyin Power Plant commenced commercial

operation.

March The Asset published the poll results on the Best Corporate Governance, of which

Huaneng Power ranked 2nd in China.

Huaneng Power held the 2004 annual results press conference in Hong Kong,

announcing that its profit attributable to the equity holders of the Company

amounted to RMB5.324 billion under International Financial Reporting Standards

(“IFRS”).

Huaneng Power announced that the project of Shanghai Combined-Cycle-Gas-

Turbine had been approved.

Huaneng Power’s generating unit 4 of Huaiyin Power Plant commenced commercial

operation.

April Huaneng Power announced that its power generation in the first quarter of 2005

increased by 47% over the same period of the previous year.

Huaneng Power announced its first quarterly operating results for 2005. Its net

profit was RMB789 million under PRC Accounting Standards (“PRC GAAP”).

Huaneng Power was elected as “Second Best Managed Company in Asia” and

conferred the Top Award of “Commitment to Strong Dividend Payments” by

Finance Asia.

May Huaneng Power successfully issued an aggregate amount of RMB5 billion short-

term debentures.

Huaneng Power was included in the FTSE/Xinhua China 25 Index.

June Huaneng Power entered into a long-term coal supply agreement with Pingdingshan

Coal Group.

Huaneng Power announced its acquisition of 26.36% interests in Huaiyin Power

Plant Phase I from Jiangsu Yueda.

1st half yearMajor

CorporateEvents

72005 ANNUAL REPORT

July Huaneng Power announced its power generation for the first half of 2005 reached

71.843 billion kWh, an increase of 47.1% over the same period of the previous

year.

August Huaneng Power announced its interim results. The profit attributable to the equity

holders of the Company was RMB1.679 billion under IFRS.

Owing to its excellent performance, Huaneng Power was elected as “The Best 100

PRC Listed Companies of 2004”.

Huaneng Power was awarded “Grade A Enterprise” by the State-Owned Assets

Supervision and Administration Commission.

September Huaneng Power announced that it was ranked 20th in “China Enterprises 100” by

Fortune.

Huaneng Power announced that the reconstruction and expansion project of Xindian

Power Plant had been approved.

October Huaneng Power announced its power generation for the first three quarters of 2005

increased by 37.3% over the same period of the previous year.

Huaneng Power announced its operating results for the first three quarters of 2005

that its net profit was RMB3.050 billion under PRC GAAP.

Huaneng Power’s generating unit 3 of Shantou Power Plant commenced commercial

operation.

November Yazhou Zhoukan published the league table of “China Listed Enterprises 100”.

Huaneng Power ranked 6th, 8th, 3rd and 8th in market capitalization, turnover, net

profit and net assets, respectively.

The Economic Research Institute of Industrial Economics of China Academy of Social

Sciences published the “Report on Competitiveness of PRC Enterprises in 2005”.

Huaneng Power was regarded as one of the most 20 competitive enterprises.

December Huaneng Power announced that it agreed to acquire 20% interests in Huaneng

Finance and prepaid the consideration of RMB288 million.

Huaneng Power ranked 371th on the league table of “Asia Enterprises 1000”

published by Yazhou Zhoukan.

2nd half year Major

CorporateEvents


Financial Highlights

(Amounts expressed in thousands of RMB, except per share data)

INCOME STATEMENT (NOTE 1)

Year ended 31st December

2001 2002 2003 2004 2005

Operating revenue 15,816,656 18,512,585 23,433,572 30,150,602 40,190,004

Profit before taxation 4,237,109 5,052,833 6,712,161 6,529,663 6,592,208

Taxation (715,220) (975,795) (1,097,859) (948,734) (1,044,297)

Profit after taxation 3,521,889 4,077,038 5,614,302 5,580,929 5,547,911

Attributable to:

– Equitable holders of the Company 3,450,658 3,921,004 5,430,408 5,323,876 4,871,794

– Minority interests 71,231 156,034 183,894 257,053 676,117

Basic earnings per share (RMB/share) 0.31 0.33 0.45 0.44 0.40

Fully diluted earnings per share

(RMB/share) 0.30 0.33 0.45 0.44 0.40

BALANCE SHEET (NOTE 2)

As at 31st December

2001 2002 2003 2004 2005

Total assets 47,292,775 48,461,030 53,609,678 72,779,871 99,439,696

Total liabilities (18,512,984) (17,134,266) (18,499,126) (33,247,959) (53,295,509)

Net assets 28,779,791 31,326,764 35,110,552 39,531,912 46,144,187

Equity holders of the Company 28,293,530 30,416,060 33,955,355 36,265,519 40,037,474

Minority interests 486,261 910,704 1,155,197 3,266,393 6,106,713

Notes:

1. The results for the years ended 31st December 2001, 2002 and 2003 are derived from the historical financial statements of the

Company. The results for the years ended 31st December 2004 and 2005 are set out on page 97. All such information are

extracted from financial statements prepared under International Financial Reporting Standards (“IFRS”).

2. The balance sheets as at 31st December 2001, 2002 and 2003 are derived from the historical financial statements of the

Company. The balance sheets as at 31st December 2004 and 2005 are set out on pages 98 to 100. All such information are

extracted from financial statement prepared under IFRS.

92005 ANNUAL REPORT

112005 ANNUAL REPORT

To: All Shareholders,

TACKLING CHALLENGES WITH POWER.

As the largest listed power company in the PRC, Huaneng

Power is devoted to playing an active note in ensuring

continuous power supply for the development of the

economy of the PRC, providing clean and high efficiency

energy for its customers, and creating long-term, stable

and growing returns for its shareholders.

For the twelve months ended 31st December 2005, the

Company recorded operating revenues of Rmb 40.19

billion, representing an increase of 33.30% compared to

the previous year, and profit attributable to the equity

holders of the Company of Rmb 4.872 billion, representing

a decrease of 8.49% over 2004. Earnings per share

amounted to Rmb 0.40. In view of the fact that the

Company encountered great challenges on its heavy

operating tasks from increasing coal prices and keen

market competition, the Board is satisfied with the

Company’s performance last year. The Board of the

Company proposed to declare a cash dividend of Rmb

0.25 for each ordinary share of the Company held by

shareholders.

In 2005, the Company seized the opportunities arising

from the strong power demand as a result of growth in

the national economy and the rise of people’s living

standard to achieve a safe and stable increase in power

generation. By ensuring a safe supply of power to meet

demand, the Company has contributed to the national

economic development. Although the continuing increase

in coal prices in 2005 has had a negative impact on the

operating results, the significant increase in power

generation and the increase in the average tariff rate over

the previous year have resulted in a significant increase in

operating revenue. With various measures to control

operating costs, the Company was able to effectively

contain the rate of decline in net profit and achieved

relatively good operating results.

Maintaining Our Leadership Position through

Management Excellence

As a company listed concurrently in New York, Hong Kong

and Shanghai, the Company has always been stressing

the importance of corporate governance, establishing a

sound internal control system, reinforcing internal

management and effectively improving the precaution

mechanisms against risks. In 2005, aiming to act in

compliance with the relevant laws and regulations in the

jurisdictions where the shares of the Company are listed,

the Company further established and improved an

effective internal control system by promulgating a

“Handbook on Internal Control”, making encouraging

progress in corporate governance, financial reporting and

compliance of disclosure, thereby advancing a crucial step

on the road towards improving its internal control system.

The Company continued to make technological

advancements in operational management. The Company

was the first amongst power producers in the PRC to

establish a remote real-time monitoring system on its

production facilities, enabling the Company to carry out

real-time comparative analysis on operation data against

design specifications of all its coal-fired power generating

units with capacity over 200,000 kW and to make instant

adjustments optimizing the operation of its power plants.

Letter to Shareholders



In the development of hydropower in Sichuan, the

Company was the first of its kind to realize “centralized

operation, unmanned monitoring, labour-effective

guarding and remote operational control”.

The Company is actively developing the technology for

clean energy, implementing power generating units with

high capacity and parameters which are powered by clean

coal so as to optimize the coal-fired power generation.

Huaneng Qinbei Power Plant was the first power plant in

China that has established and operated two sets of

locally-manufactured, supercritical generating units with

generation capacity of 600MW. Huaneng Yuhuan Power

Plant will initially establish two sets of locally-

manufactured, ultra-supercritical generating units with

generation capacity of 1,000MW.

Likewise, the Company has thoroughly implemented the

accountability system for safety production through

enhancing safety training and professional management

as means of strengthening the management of

fundamentals. On the other hand, the quality of repair and

maintenance on power generating units has been further

enhanced through optimizing repair and maintenance

management. These measures have helped to maintain

stability in safety production of the Company. During the

year, there has been no occurrence of matters of adverse

effect or any mechanical failure of a material nature, nor

has there been any incident of cessation in operation due

to lack of coal or matters that might affect the reliability

and safety operation of the power grid. In 2005, the

operation power plants of the Company and its subsidiaries

completed a total generation power of 150.505 billion kWh

on a consolidated basis, representing an increase of 31.70%

over the previous year.

In 2005, the technical and economic indices of the

Company and its subsidiaries remained at the forefront

among all other power companies in the PRC. The average

availability factor of the power plants of the Company

and its subsidiaries was 92.93%, with an average capacity

factor of 70.68%; while weighted average coal

consumption rates for power sold and power generated

were 337.1 gram/kWh and 317.8 gram/kWh respectively.

The weighted average house consumption rate was 5.4%.

Strengthening Our Competitive Advantages

through Technological Innovation

In 2005, the Company had thoroughly implemented the

fundamental development strategy of “fast pace, high

quality and low cost” by reinforcing safety management

in construction works on the one hand and actively

improving the management system on infrastructure on

the other hand. During the year, the Company made

encouraging results in monitoring the quality, speed and

costs of construction, of which the construction

completion schedules on one generating unit at Huaiyin

Power Plan Phase II and another generating unit at

Shantou Power Plant Phase II had set new records for the

Company.

The Company achieved a phased progress in optimizing

design works. In 2005, design proposals on two air-

cooling, supercritical generating units with generation

capacity of 600MW at Shang’an Power Plant Phase III

were optimized, resulting in a significant reduction on

construction cost than that of the design specifications.

In addition, the Company achieved innovative

breakthroughs in technological advancement. The Yuhuan

construction project resolved the difficulties in the absence

of technical standards in the PRC for welding core steam-

pipes of the ultra-supercritical generating units. The

application of plasma-lighting technology in the

construction projects of Shantou Phase II and Taicang

Phase II achieved zero fuel consumption from initial pipe


inception to the completion of 168-hour trial run, not

only saving fuel during the trial-run period but also laying

the foundation for greatly reducing generation costs after

full operation.

During the process of development and construction, the

Company has reinforced quality management and

enhanced the level of operational commencement in all

respects, creating the conditions for a quick achievement

of reliable and satisfactory production capacity once a

generating unit is fully operational.

Enhancing Market Sales to Achieve Operating Cost

Efficiency

There has been a strong demand for electricity nationwide

in 2005, whilst the capacity of newly installed generating

units has also reached a record high. The substantial

increase in coal prices has placed a tremendous pressure

on the Company’s operation. Under such conditions, the

Company has strengthened sales and marketing work and

adopted various measures to realize the best economic

benefits: (i) the Company capitalized on market

opportunities and scientifically planned its operations,

which led to a well-exceeded completion on goals in the

annual plan, achieving an average utilization hour of 372

hours more than the national average; (ii) the Company

lobbied for the implementation of the coal-electricity price-

linkage mechanism and the abolition of (different) prices

charged on excess power generation for most of its power

plants, thus alleviating the pressure brought about by the

increase in coal price; and (iii) the Company actively

participated in the establishment of regional power

markets, formulating scientific pricing strategies in

response to market risks. Efforts made on tariff pooling

for three power plants of the Company located in Liaoning

Province led to the achievement of a 12.2% increase in

the average closing price over the same period of the

previous year.

Controlling Fuel Costs with Flexible Coal Purchase

Strategies

In 2005, although there were improvements in coal supply,

coal prices remained at a high level. Targeting to ensure

fuel supply and to curb the rise in fuel costs, the Company

put emphasis on carrying out the following major work:

For coal purchase, the Company has implemented

centralization in purchase, allocation and settlement of

coal. It strived to raise the fulfillment rate on major

contracts; committed mid-to-long-term coal contracts;

strengthened market analysis and procurement price

guidance; reinforced the planning on management of coal

purchase overseas; and optimized the structure of coal

sources, thereby reversing the trend of continuous price

increase and quality decline.

For coal transportation, the Company has strengthened

the communication with transportation enterprises in

order to ensure the capacity of transportation, thereby

reversing the year-long shortage of coal supply and

persistently low inventory.

For quality control on coal, the Company has carried out

stringent examination on coal quality, capitalizing on the

opportunities arising from a high inventory level of coal

in the second half of the year. The Company raised coal

quality through adoption of various measures. Through

the efforts made in the above areas, the Company made

an achievement at limiting the increase in the unit fuel

cost of not exceeding the annual target limit of 12%.



Expanding Our Financing Channels to Support

Long-term Developments

The Company actively explored channels for funding to

lower financing costs. During 2005, the Company issued

the “corporate short-term debentures” in an aggregate

amount of Rmb 5 billion in the bond market for banks, of

which the maturity rate was 1.63 percentage point lower

than the best lending rate offered by banks during the

same period. The successful issuance of short-term

debentures expanded the channels for the Company to

raise short-term working capital, providing an ample and

low-cost capital support to the Company for its reliable

and safe production and expansion of operating scale.

Building Our People Resources as an Impetus for

Sustainable Development

The Company put its first priority in securing human

resources, further optimizing the structure of manpower

of the Company. The Company strengthened the

establishment of its three core teams of senior

management, senior engineering professionals and senior

technicians, building a first-class workforce of the country

which fulfills the needs of the Company for future

development.

At the same time, the Company is putting efforts on

improving and regulating the Company’s policies on

salaries and benefits, thus formulating a comprehensive

and multi-leveled rewarding mechanism and creating a

stable and harmonious environment for talents to growth.

For the purpose of providing the talents to achieve the

strategic objectives of the Company, the Company takes

reforms and innovation as the impetus, continuously

upgrading the level of human resources management and

enhancing the quality of the whole workforce.

PROSPECTS FOR 2006

2006 is the first year of the Eleventh Five-year Plan.

Continued growth in the national economy and the on-

going improvement of the people‘s living standard will

continue to stimulate rapid growth in power demand,

thereby providing opportunities for the Company to grow

its power generation. However, as the supply and demand

of power will become more balanced, market competition

will be further intensified, thus creating new challenges

for the Company. The accelerated formation of regional

power markets adopting the tariff pooling system will offer

opportunities for the Company to utilize the strength of

its facilities to compete, yet another challenge arises as to

how to maintain and enhance the competitiveness of the

Company. The supply and demand of coal, in a trend of

reaching equilibrium this year, will offer a favourable

opportunity for the Company to ensure a safe and stable

supply of coal, but an effective control on the surge of

unit fuel cost will remain a challenge for the Company.

The Company’s main work objectives for year 2006 are

as follows:-

1. To strengthen production safety management and

to ensure safe, stable and increasing power

generation;

2. To strengthen sales and marketing work, optimize

the structure of power generation and actively

participate in competitive pooling in the regional

markets in order to maximize the Company’s overall

profits;

3. To strengthen coal purchase management to ensure

safe, stable and effective supply of coal;


4. To strengthen the management of projects under

construction to ensure the projects will be completed

in high quality, fast pace and low cost and in

accordance with schedules;

5. To enhance strategic planning to ensure a long-term,

stable and healthy development of the Company;

6. To strengthen operation management and risk

management, as well as to increase the capital

utilization rate and exercise stringent cost controls;

7. To encourage management innovation and to

effectively carry out internal controls.

The Company will continue to pursue a maximization of

shareholders’ interests as its operating objective and goal.

Given the continuous economic growth in China, good

opportunities provided by the power system reform and

strong support from the authorities at all levels and the

parent company, and especially the support and trust from

investors and shareholders, the Company will surely be

able to continue its healthy and steady growth, bringing

long-term, stable and increasing returns to its

shareholders.


Summary

The Company’s main business is investment, construction,

operation and management of power plants. We provide

stable and reliable electricity supply to customers through

the grid companies where our operating plants are located.

The Company insists on scientific development and

focuses on increasing economic efficiency, improving

return for shareholders, conserving resources and

protecting the environment.

Huaneng Power International, Inc. is China’s largest listed

power producer. The Company now wholly owns 16

operating power plants, have controlling interests in 12

operating power companies and minority interests in 4

power companies, the Company has 23,549 MW of

generation capacity on an equity basis, among which

97.7% is coal-fired generation capacity, and 2.3% is

hydropower generation capacity. The generation capacity

under construction is 7,040 MW. The Company’s electricity

generation business is widely located, covering the

Northeast China Grid, the North China Grid, the Northwest

China Grid, the East China Grid and the South China Grid.

Looking back on 2005, China’s national economy

continues to develop at a very fast pace. China’s electricity

industry thus had very good development opportunities

and gained significant development. Over the year, the

Company oversaw the overall operation of the Company

by using a scientific development view. The Company

actively opened up new markets, strived hard, caught

every opportunity that it came across and overcame various

difficulties. The Company reached its targets in various

areas, such as safe production, operation, management,

construction, facility renovation and environmental

protection. The Company’s corporate presence continued

to grow, its sales revenue continued to increase, its

competitiveness and its ability to generate profits and

manage resources effectively continued to improve, and

its environmental protection standards continued to

maintain at an advanced level when compared to its

competitors. Although the Company’s profit was lower

than the previous year because of high coal prices, the

Company’s cash flow was healthy, its financing channels

were readily available and its financial condition was very

good.

Looking forward to 2006, the electricity market and the

coal market, which have significant impact upon the

Company’s operation management and operating results,

are full of opportunities and challenges. In the electricity

market, the rapid development of the national economy

and the increase in residential electricity consumption will

cause China’s electricity industry to continue to develop

rapidly, providing opportunities for the Company to

expand and develop more projects, and for the Company’s

projects that are going to be completed to gain market

shares. However, because there are quite a number of

electricity projects going into operation in the coming

years, the short supply of electricity is going to ease, market

competition may be more fierce, and the power plants in

certain areas which currently have relatively high utilization

hours will be affected. In the coal market, coal supply

and demand is basically balanced, and it is hopeful that

the situation of short supply of coal resources and coal

transportation will be eased, hence providing a favourable

condition for the supply of coal for power plants. But the

coal price trend is not very predictable, hence bringing

challenges to the Company to control its fuel costs.

However, the Company is confident that it can seize the

opportunities, face challenges, enhance management and

Management’s Discussion and Analysis

Operating and Financial Reviews and Prospects



increase and enhance its competitiveness, thereby

generating profits, getting better return for its

shareholders and maintaining its good financial condition.

I. Operating Results

1. In 2005, the Company has achieved

expected operating results

(1) The overall safe production has protected

and increased the Company’s ability to

generate power, with productions

operation achieving exceptional results

again.

In 2005, the national economy developed

at a rapid pace and there was strong

demand for electricity. The rate of increase

of electricity production and consumption

exceeds the rate of increase of the GDP,

hence providing the external conditions

for the Company to generate more

electricity and increase its income.

However, under the context of a rapidly

developing national economy, demand for

coal was very strong. Lack of coal

resources, shortage of transportation

capacity, inadequate coal stock, high coal

prices and low coal quality have caused

considerable problems for the Company

to organize coal supply, generate

electricity safely and stably, control cost

or realize its profit target.

For the year ended 31st December 2005,

the total amount of power generated by

our operating power plants was 150.505

billion kWh, an increase of 31.70% from

the previous year.

(2) Construction projects exceeded the annual

plan. Completion of projects creates a

solid foundation for the Company to

expand its scale of operation, consolidate

and increase its market share, and increase

its revenue.

In 2005, two 300MW generating units of

Huaiyin Power Plant Phase II went into

commercial operation in January and

March respectively. A 600MW generating

units at Shantou Power Plant also went

into commercial operation in October.

The generation capacity that the Company

is currently constructing amounts to 7,040

MW, for which the work progress, quality

and related investment are all under

control.

(3) Capital utilization has gained new progress

In January 2005, the Company paid Rmb

2.025 billion in consideration for a 60%

shareholding in Huaneng Sichuan

Hydropower Co. , L td. (“Sichuan

Hydropower”) and a 65% shareholding

in Gansu Huaneng Pingliang Power

Generation Limited Liability Company

(“Pingliang Power Company”). These

acquisitions are a continuation of the

Company’s strategy of “Consolidating


coastal areas, developing central areas,

venturing into western areas”, it expands

the scale of operation of the Company

and improves the power structure of the

Company.

(4) Utilization of the Company’s resources and

environmental protection standards

remain at the forefront of the industry

The Company has always been very

concerned about social benefits and

harmonious development. In 2005, the

average consumption of coal for power

generation was 317.8 g/kWh, and

average self consumption rate of power

plants was 5.4%, both at an advanced

level when compared to the rest of the

electricity generation industry, hence

resources were utilized more efficiently

and energy was conserved. The Company

has always put strong emphasis on

environmental protection and we

effectively reduced the emission of sulphur

dioxide, nitrogen oxides, dust and other

pollutants by using advanced technology

and fac i l i t ies , such as insta l l ing

desulphurization facilities and other

facilities.

2. Comparative analysis of operating results

2.1 Operating revenue and sales tax

Operating revenue represents consideration

receivable or received from electricity sold net

of amounts received in advance. For the year

ended 31st December 2005, the consolidated

operating revenue of the Company and its

subsidiaries amounted to Rmb 40.190 billion,

representing an increase of 33.30% over the

Rmb 30.151 billion in the prior year. The

increase in operating revenue is mainly due to

the acquisition of power plants and newly

operated power plants, which increased the

scale of operation of the Company. The

acquired power plants (including the acquisition

project in mid-2004 and the acquisition project

in early 2005, the reference applies to below

as well) contributed Rmb 5.7 billion to the

increase in revenue, newly operated power

plants (including the Qinbei Phase II and Yushe

Phase II which went into operation in late 2004,

the Huaiyin Phase II and Shantou generating

unit No.3 which went into operation in 2005,

the reference applies to below as well)

contributed Rmb 3.8 billion to the increase in

revenue.



Tariff Rates

Average tariff rate

(VAT inclusive)

(Rmb/MWh)

Power Plant 2004 2005 Change

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 Combined Cycle 604.08 610.73 1.10%

Shantou Coal-fired 446.86 459.12 2.74%

Dandong 289.05 301.67 4.37%

Shidongkou II 342.56 357.60 4.39%

Nanjing 321.67 340.65 5.90%

Dezhou 332.58 349.56 5.11%

Weihai 394.06 398.93 1.24%

Jining 299.89 323.41 7.84%

Shidongkou I 285.43 320.30 12.22%

Taicang 341.10 360.00 5.54%

Changxing 351.94 392.83 11.62%

Huaiyin Phase I 330.88 346.43 4.70%

Huaiyin Phase II — 373.77 N/A

Xindian 320.83 337.25 5.12%

Yushe Phase I 293.09 319.37 8.97%

Yushe Phase II 250.01 256.00 2.40%

Yingkou 315.48 360.09 14.14%

Jinggangshan 325.67 353.49 8.54%

Luohuang 286.74 300.90 4.94%

Yueyang 316.52 341.34 7.84%

Qinbei 273.11 299.77 9.76%

Pingliang — 211.43 N/A

Sichuan Hydropower — 262.52 N/A

Consolidated average 327.88 331.41 1.08%


The average tariff rate of the Company and its

subsidiaries increased by approximately 1.08%

from Rmb 327.88 per MWh in 2004 to Rmb

331.41 per MWh. The major reason was the

implementation of the “Coal-electricity price

linkage mechanism” starting from May 2005,

the tariff of each power plant was adjusted

accordingly. However, the consolidated tariff is

lower for the Pingliang Power Company and

Sichuan Hydropower, which the Company

acquired in 2005, therefore, the effect of the

adjustment of the tariff was not very obvious

in the average tariff rate. If excluding Pingliang

Power Company and Sichuan Hydropower, the

average tariff rate would have increased by

4.24% to Rmb 13.89 per MWh.

Sales tax mainly consists of additional levies on

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 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 are approved by the

government, hence certain power plants of the

Company do not have to pay such taxes. In

2005, the sales tax increased 251.05%, from

Rmb 32 million of prior year to Rmb 113 million,

the main reason for the increase was increased

number of power plants that needed to pay

such taxes due to the acquired and newly

operated power plants.

2.2 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 attributable to the

expansion of the scale of operations and the

increase in fuel costs. The acquired power plants

accounted for Rmb 4.404 billion of the increase,

while newly operated power plants accounted

for Rmb 2.981 billion of the increase.

The growth of operating expenses outweighed

both the growth of power generation and

operating revenue. The significant increase in

fuel prices is considered to be the primary

reason for such outweighed growth of power

generation. At the same time, as the increase

of average tariff rate was lower than the

increase of unit fuel cost, the increase of

operating expenses were then higher than the

increase of the operating revenue.

2.2.1 Fuel

Fuel cost represented the major operating

expenses of the Company and its subsidiaries,

which has increased by 40.71%, up from Rmb

15.068 billion in 2004 to 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 2005, Rmb 3.896 billion or

25.84% of the increase in fuel cost was due to

the increase in the amount of electricity

generated; while the increase in fuel price

accounted for Rmb 2.239 billion or 14.99% of

the increase.



As the average price of natural coal increased

by 9.78%, from Rmb 307.92 in 2004 to Rmb

338.03 in 2005, the unit fuel cost hence

increased by 11.77% to Rmb 156.13.

2.2.2 Maintenance

The maintenance expense of the Company and

its subsidiaries amounted to Rmb 1.165 billion,

representing an increase of 44.28% from Rmb

808 million in the prior year. The increase in

the maintenance expense was mainly due to

the expansion of scale of operation of the

Company and the maintenance arrangements

and fees for existing machines are greater than

last year.

2.2.3 Depreciation

Depreciation expenses of the Company and its

subsidiaries have increased by 31.03%, from

Rmb 4.707 billion in 2004 to Rmb 6.168 billion

in 2005. The acquired power plants accounted

for Rmb 1.163 billion of the increase, while

newly operated power plants accounted for

Rmb 404 million of the increase. Depreciation

of the remaining power plants has decreased

by 2.54% from the prior year, representing a

decrease of Rmb 106 million.

2.2.4 Labour

Labour 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 main reason

for the increase in labour costs was because of

the acquisition of Yingkou Power Plant,

Luohuang Power Company, Yueyang Power

Company and Jinggangshan Power Plant into

the Company in July 2004 and Pingliang Power

Company and Sichuan Hydropower in January

2005, the number of employees and cost of

human resources increased as a result.

Moreover, as a result of newly operated power

plants, the expense which was originally

accounted for as salary for employees in

construction cost has now been charged into

labour cost, hence increasing the labour costs

as well.

2.2.5 Service fees to HIPDC

The service fees paid to HIDPC refer to fees paid

for use of its grid connection and transmission

facilities based on reimbursement of cost plus

a profit. The service fees that were paid to

HIPDC in 2005 did not have significant changes

when compared with the previous year.

2.2.6 Other operating expenses

Other operating expenses include expenses

such as environmental protection, insurance

fee, administrative expenses, and amortization.

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 2005. Because of

changes in accounting policies, there was no

negative goodwill amortization in 2005, hence

increasing the other operating expenses by

approximately Rmb 250 million (The negative

goodwi l l amor t i za t ion in 2004 was

approximately Rmb 250 million); the expansion

of scale of operation of the Company and the

increase in environmental protection fee

standards caused the environmental protection


fee to increase by Rmb 211 million. Besides

environmental protection, the main reasons for

the increase in other operating expenses were

the expansion of scale of operation as a result

of acquisition and new power plants going into

operation, which led to increase in electricity

generation and the corresponding increase in

expenses.

2.3 Financial expenses

Financial expenses include the net of interest

income, interest expenses, bank charges and

the net exchange differences.

2.3.1 Interest Expenses

The interest expenses of the Company and its

subsidiaries in 2005 amounted to Rmb 1.427

billion, a relatively large increase from Rmb 663

million in the previous year. This is because of

the increase in loans borrowed for acquisition

and increase in interest expenses arising from

financing of new power plants.

2.3.2 Bank charges and net exchange differences

Bank charges and net exchange differences of

the Company and its subsidiaries amounted to

Rmb 249 million in 2005, a relatively big change

from the net loss position of Rmb 119 million

in 2004. In 2005, 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 foreign

exchange gain, while in 2004, an exchange loss

of Rmb 93 million was resulted, giving rise to a

foreign exchange gain of Rmb 383 million.

2.4 Share of profit of associates

Share of profit of associates in 2005 was Rmb

644 million, a relatively large increase from Rmb

312 million in 2004. The increase of share of

profit of associates has benefited from the

increase in investment income from Shenzhen

Energy Group Co. Ltd. and investment income

from Hanfeng Power Company when the latter

entity being acquired since July 2004.

Furthermore, because of the change of

accounting policies, goodwill was no longer

amortized (and there was no impairment

identified from annual testings), which also

contributed to the increase of share of profit

of associates when compared with the prior

year.

2.5 Enterprise income tax (“EIT”)

The EIT of the Company and its subsidiaries

amounted to Rmb 1.044 billion, representing

an increase of 10.07% from Rmb 949 million

in 2004. The main reason for the increase in

EIT was the increase in ratio of profit from

power plants with higher applicable tax rates.



2.6 Profit for the year, profit attributable to

equity holders of the Company and

minority interests

The profit of the Company and its subsidiaries

amounted to Rmb 5.548 billion in 2005, similar

to the profit of Rmb 5.581 billion in 2004,

s h o w i n g t h a t t h e a c t u a l e f f e c t i v e

implementation of the Company’s acquisition

and development strategy plays a pivotal role

in increasing revenue and maintaining profit

level. However, the increase in revenue from

acquisition and newly operated power plants

was offset by the increase in cost as a result of

the rising coal price and so did the fuel cost.

Therefore, the 2005 profit did not grow at the

same pace with the revenue. Furthermore,

acquisition increased the proportion of minority

interests in the overall equity of the Company,

as a result, minority shareholding diluted the

contribution of the acquired projects to the

Company’s shareholders’ equity’s profit, hence

the profit for minority interests increased in

proportion, while the profit for the Company’s

shareholders’ equity decreased, from Rmb

5.324 billion in 2004 to Rmb 4.872 billion in

2005, representing a decrease of 8.49%.

2.7 Comparison of financial positions

Compared with prior year, the assets and

liabilities of the Company and its subsidiaries

had a larger change because of the increase in

spending on projects construction in 2005 and

the impact of acquisitions.

2.7.1 Comparison of asset items

As at 31st December 2005, the total assets of

the Company and its subsidiaries amounted to

Rmb 99.440 billion, representing an increase

of 36.63%, from Rmb 72.780 billion in 2004.

Non-current asset increased by 38.42%, to Rmb

87.377 billion, current asset increased by

24.96%, to Rmb 12.063 billion. The major

reason for the increase in total assets and non-

current asset was because of asset acquisition

and capital injection. Asset acquisition

contributed Rmb 14.496 billion to the total

asset, non-current asset increased by Rmb

13.275 billion. Besides that, because of the

change in accounting policies, there was a one

time credit of the unamortized balance of the

negative goodwill of Rmb 1.484 billion at the

beginning of 2005 to retained earnings at the

beginning of the year. Current assets increased

by Rmb 2.410 billion since the beginning of

2005. Among them, net increase of inventory

amounted to Rmb 880 million, the majority of

which was coal used for generating electricity;

net increase of accounts receivable amounted

to Rmb 1.049 billion, the majority of which was

receivable for electricity sold. The above

changes are all normal occurrence with the

expansion of the scale of operation of a

corporation.

As at 31st December 2005, the Company and

its subsidiaries carried out an assessment of the

carrying value of property, plant and

equipments that have impairment indicators

and discovered that an impairment provision is

required for the property, plant and equipment


of Dandong Power Plant. Although the

estimated useful lives of property, plant and

equipment of the Dandong Power Plant

remained the same, the value-in-use based on

a discounted cash flow analysis shows that

there is an impairment in the property, plant

and equipment of the Dandong Power Plant

of Rmb 30 million as a result of the external

operating conditions (including demand and

supply of electricity, pricing policy, coal market,

etc.) applicable to this plant.

2.7.2 Comparison of liability items

As at 31st December 2005, the total liabilities

of the Company and its subsidiaries amounted

to Rmb 53.296 billion, which represent an

increase of 60.30% from Rmb 33.248 billion

in the end of 2004. The increase in loans for

the financing of construction projects and

liabilities assumed during acquisition were the

main causes for the increases in liabilities. The

non-current liabilities of the Company and its

subsidiaries mainly consisted of bank loans and

shareholder’s loans with similar terms as bank

loans. The current liabilities at year end had a

relatively large increase when compared to the

beginning of the year, this is because the

Company issued Rmb 5 billion short-term

financing bonds in 2005, which have not

matured yet.

As at 31st December 2005, total interest-

bearing debts of the Company amounted to

Rmb 43.539 billion, which included long-term

loans (including long-term loans that would

mature within one year), short-term loans,

short-term bonds and certain notes payables.

Among these, liabilities denominated in foreign

currencies amounted to approximately Rmb

6.343 billion.

2.7.3 Comparison of shareholders’ equity items

Excluding the effect of current year profit and

dividend distribution, there was a relatively large

change in equity from the beginning to the end

of the year. This mainly includes: 1) Starting

from 2005, our available-for-sale investment

(investment in China Yangtze Power Co., Ltd.)

has gained the right to be traded in the stock

market subject to certain conditions. The

difference between the market value and the

net book value of the investment as at 31st

December 2005 of Rmb 749 million was

recorded as a fair value reserve with

corresponding decrease for deferred taxation

recognized; 2) Starting from 2005, the balance

of the unamortized negative goodwill, after

taking into account the deferred tax impact,

has been charged to opening retained earnings.



2.7.4 Major financial position ratio

2005 2004

Current ratio 0.52 0.58

Quick ratio 0.42 0.49

Ratio of liability and equity holders of the Company 1.33 0.92

Multiples of interest earned 3.77 7.23

Calculation formula of the financial ratios

Current ratio = balance of the current assets at the end of the year / balance of

current liabilities at the end of the year

Quick ratio = (balance of current assets at the end of the year - net amounts

of inventories at the end of the year) / balance of current liabilities

at the end of the year

Ratio of liabilities and shareholders’ = balance of liabilities at the end of the year / balance of

equity shareholders’ equity (excluding minority interests) at the end of

the year

Multiples of interest earned = (profit before tax + interest expenses) / interest expenditure

(including capitalized interest)

The current ratio and quick ratio remained at a

relatively low level and decreased at the year

end when compared to the beginning of the

year, which was mainly due to increase in

current liabilities as a result of issuance of short-

term bonds by the Company in 2005. The

significant increase in the ratio of liabilities and

shareholders’ equity at the year end when

compared to the beginning of the year was

mainly due to signif icant increases in

construction borrowings and the relatively high

ratio of liabilities and equity holders of the

Company of Sichuan Hydropower and

Pingliang Power Company which were acquired

into the Company in 2005. The multiples of

interest earned decreased significantly from that

of the same period of the prior year mainly due

to: 1) acquisitions enlarged the consolidated

liability scale and total interest expenses.

However, the profit before tax did not increase

along with the enlargement of scale due to the

coa l pr i ce factor. 2 ) The success i ve

commencement of construction projects led to

the continuous increase in construction

borrowings and total capitalized interest when

compared with the prior year. However, no

profit contribution will be available before

completion and operation of these construction

projects.



II. Liquidity and Cash Resources

1. Liquidity

2005 2004 Variance

Rmb billion Rmb billion (%)

Net cash provided by operating activities 8.681 8.163 6.35

Net cash used in investing activities (15.413) (13.650) 12.92

Net cash provided by financing activities 7.084 3.654 93.86

Net increase / (decrease) in cash and cash equivalents 0.352 (1.833) (119.21)

Cash and cash equivalents, beginning of year 2.296 4.129 (44.39)

Cash and cash equivalents, end of year 2.648 2.296 15.34

Net cash provided by operating activities is the

main source of cash for the Company. The net

cash provided by operating activities amounted

to Rmb 8.681 billion in 2005 which was higher

than that of the prior year mainly because of

an increase in the sale of operations. Net cash

used in investing activities mainly consisted of

capital expenditures for the purchase of

property, plant and equipment and cash paid

for the considerations of acquisitions. In 2006,

the Company will remain in a comparatively

concentrated period of capital expenditures for

construction projects with comparatively

substantial amounts.

As at 31st December 2005, the net current

liabilities of the Company and its subsidiaries

totalled Rmb 11.044 billion. Based on the

successful financing history of the Company,

the significant amount of undrawn banking

facilities available to the Company and the

stable operating results, the Company believes

that it will be able to meet their liabilities as

and when they fall due and meet the capital

required for operations. Moreover, the

Company will continue to minimize interest

expenses by issuing short-term bonds and asset-

backed bills of exchange. The Company is

confident in controlling the scale of liabilities

and the financial risks.

2. Capital expenditures and cash resources

2.1 Capital expenditures

2.1.1 Capital expenditures on acquisitions

In January 2005, the Company paid a

consideration of Rmb 2.025 billion to acquire

a 65% equity interest in Pingliang Power

Company and a 60% equity interest in Sichuan

Hydropower. These power plants are located

in Gansu and Sichuan Provinces in Western

China. The acquisition enables the Company

to enter a fast growing power market in

Western China, achieving the market


development strategy of “consolidating our

positions in the coastal regions, expanding into

Central China and entering into Western

China”. This is also one of the milestones of

the Company in realizing the development

strategy of “combining hydro and coal-fired

power”, and represents a continuation of the

established development strategy of a balance

between development and acquisitions.

Pursuant to an agreement, the Company paid

a consideration of Rmb 126 million to Huaneng

Group at the end of 2005 and advanced a

payment (which will represent an injection of

capital) of Rmb 162 million to Huaneng Finance

in order to acquire a totally 20% equity interest

in Huaneng Finance. As such shareholding

transfer and capital injection are still pending

approval by the regulatory departments at the

end of 2005, they are recorded as “other

receivables and assets, net” under current

assets.

The Company will continue to follow the

strategy of a balance between development

and acquisition by proactively seeking new

acquisition opportunities to ensure the

sustainable growth of profitability and

shareholders ’ va lue. S ince there are

uncertainties associated with asset acquisition

projects and scales, the amount of capital

expenditures required is also uncertain.

However, the significant cash flows from

operating activities, the available undrawn

borrowing facilities and the implementation of

a plan to issue of short-term financing bonds

and asset-backed bills of exchange which has

been approved at the shareholders’ meeting

should provide the Company with a sufficient

level of cash to support asset acquisition

projects.

2.1.2 Capital expenditures on construction and

renovation

The capital expenditures in 2005 amounted to

Rmb 13.984 billion, including Rmb 707 million

for the Huaiyin Phase II project, Rmb 647 million

for the Shantou Phase II project, Rmb 1.669

billion for the Taicang Phase II project, Rmb 938

million for the Yueyang Phase II project, Rmb

1.107 billion for the Shanghai Combined-Cycle

project, Rmb 995 million for the Luohuang

Phase III project, Rmb 494 million for the

Xindian Phase III project, Rmb 1.055 billion for

the Yingkou Phase II project and Rmb 2.975

bil l ion for the Yuhuan project. Other

expenditure consists mainly of Rmb 2.536

billion of prepaid construction and Rmb 861

million for routine renovation expenditure.

The Company will continue to incur significant

capital expenditures in 2006. The construction

projects of the Company in 2006 include two

1,000MW ultra-supercrit ical coal-fired

generating units (the first in the PRC) for the



Yuhuan Power Plant Phase I project, two

300MW coal-fired generating units for the

Yueyang Phase II project, three 390MW gas-

fired units for the Shanghai Combined Cycle

project, two 600MW coal-fired generating units

of the Taicang Power Plant Phase II project

(commence operation in the first quarter of

2006), two 600MW coal-fired generating units

for the Luohuang Phase III project, two 300MW

coal-fired project for the Xindian Phase III project

and two 600MW coal-fired generating units for

the Yingkou Phase II project. On such basis, the

Company will actively engage in new project

developments to lay the foundation for the

long-term development of the Company.

The Company expects to finance the above

capital expenditures through internal funding,

debt financing and cash flows provided by

operating activities.

2.2 Cash resources and anticipated financing

costs

The Company expects the cash resources for

capi ta l expenditures and acquis i t ion

expenditure to be principally generated from

internal funds, cash flow from operating

activities and future debt and equity financing.

Good operating results and good credit status

give the Company strong financing capabilities.

As at 31st December 2005, the Company and

its subsidiaries had available unsecured

borrowing facilities from banks of Rmb 34.857

billion which provided the Company with a

sufficient level of available cash and raised the

level of asset l iquidity and repayment

capabilities of the Company effectively.

As at 31st December 2005, the total short-term

borrowings of the Company and its subsidiaries

amounted to Rmb 6.581 billion with interest

charged between 4.3% and 5.51% per annum

(2004: Rmb 8.099 billion with interest charged

between 4.3% and 5.02% per annum); the

total amount of the short-term bonds of the

Company and its subsidiaries amounted to Rmb

4.938 billion.

As at 31st December 2005, the total long-term

bank borrowings of the Company and its

subsidiaries amounted to approximately Rmb

28.365 billion (2004: approximately Rmb

15.987 billion). These loans include bank

borrowings denominated in Renminbi of

approximately Rmb 22.241 billion (2004:

approximately Rmb 8.680 billion); US dollar of

approximately US$672 mil l ion (2004:

approximately US$778 million) and Euro of

approximately Euro 73 mil l ion (2004:

approximately Euro 77 million). Included in

these borrowings were approximately US dollar

60 million of floating-rate borrowings. For the

year ended 31st December 2005, the long-term

bank borrowings bore interest that ranged from

2.00% to 6.97% (2004: 1.225% to 6.97%)

per annum.

As at 31st December 2005, the total long-term

shareholder’s loans to the Company and its

subsidiaries amounted to Rmb 2.8 billion (2004:

approximately Rmb 800 million). For the year

ended 31st December 2005, these borrowings

bore interest that ranged from 4.05% to 5.02%

(2004: 3.78% to 4.60%) per annum.


As at 31st December 2005, other long-term

loans of the Company and its subsidiaries

amounted to approximately Rmb 864 million

(2004: approximately Rmb 712 million). These

loans include borrowings denominated in

Renminbi of approximately Rmb 647 million

(2004: approximately Rmb 435 million), US

dollar of approximately US$16 million (2004:

approximately US$19 million) and Japanese Yen

of approximately JPY1.31 billion (2004:

approximately JPY1.548 billion). The US dollar

and Japanese Yen borrowings were at floating

rates. For the year ended 31st December 2005,

these borrowings bore interest that ranged from

2.99% to 6.12% (2004: 1.67% to 5.8%) per

annum. The Company and its subsidiaries will

closely monitor changes in the exchange rate

and interest rate markets and cautiously assess

the exchange rate and interest rate risks.

Combining the current development of the

power industry and the growth of the

Company, the Company will make continuous

efforts to not only meet cash requirements of

daily operations, construction and acquisition,

but also establish an optimal capital structure

to minimize the cost of capital and manage

financial risks through effective financial

management activities thereby maintaining

sustainable and stable returns to the

shareholders.

2.3 Other financing requirements

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 pol icy. In 2006, 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 3.014 billion.

2.4 Maturity table of borrowings

Unit: Rmb billion

Item 2006 2007 2008 2009 2010

Principal proposed to be repaid 15.1 3.3 4.1 5.1 3.9

Interest proposed to be repaid 2.1 1.7 1.5 1.2 1.0

Total 17.2 5.0 5.6 6.3 4.9

Note: (1) This table is prepared according to the amounts in the contracts which have been entered into; (2)

the amount of the principal to be repaid in 2006 is relatively large because it includes short-term

borrowings and short-term bonds.



III. Trend Analysis

1. Impact of power demand and supply on the

Company

The tight power supply and demand in 2006 is

expected to be eased and there may be an

excess of production capacity in certain regions.

Accordingly, the utilization hours of the

generating units of the Company may decline.

However, as a result of good functionality of

the generating units, the Company is confident

in maintaining high utilization hours in the long-

term.

2. Impact of coal demand and supply on the

Company

In 2006, there will primarily be a balance of

coal demand and supply and the tense situation

of coal resources and coal transportation will

be eased when compared to the previous year,

thereby providing advantageous conditions for

the Company to manage coal supply. However,

as coal prices will still remain at a high level,

the Company will face challenges in controlling

fuel costs. The Company is confident about

maintaining the unit fuel cost at a competitive

level by improving coal quality and controlling

coal prices.

3. Impact of the financial foreign exchange

market on the Company

There are sufficient funds in the domestic

financial market and there are not much

fluctuations in funding costs. In addition, the

financial market successively launched new

financial products including short-term

financing bonds and asset-backed bills of

exchange, and usually the funding costs are

lower than ordinary commercial bank

borrowings. The Company is confident about

raising funds for construction of power plants

and daily operations by way of various financial

products on the basis of good debt service

capability and good credit status.

The reforms of the Renminbi exchange rate

formation 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

payment in servicing foreign currency

borrowings are not significant, it is anticipated

that the above will not have a significant impact

on the cash flow of the Company.


IV. Performance of SignificantInvestments and Their Prospects

On 22nd April 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 2005 under the

International Financial Reporting Standards.

Shenzhen Energy Group is the largest power

generation supplier in Shenzhen and its power plants

are located in one of the prosperous provinces —

Guangdong Province. With strong demand for

electricity in that region, such an investment will bring

stable returns to the Company in the future.

In July 2004, the Company paid Rmb 1.375 billion

to acquire a 40% equity interest in Hanfeng Power

Company. This investment brought the Company a

profit of Rmb 207 million in 2005 under the

International Financial Reporting Standards. The

Hanfeng Power Company is located in Hebei Province

in northern China and there is a strong demand for

electricity in that region. Through this acquisition,

the Company increased the equity share of

production capacity in Hebei Province from

1,300MW to 1,828MW or 40.6%. The Company

expects this investment will contribute stable returns

in the future.

V. Employee Benefits

As at 31st December 2005, the Company and its

subsidiaries had 23,531 employees. In 2005, total

staff costs incurred amounted to Rmb 2.487 billion.

The Company and its subsidiaries provided the

employees competitive remunerations and pegged

such remunerations to operating results as working

incentives for the employees. Currently, the Company

and its subsidiaries do not have any non-cash

remuneration packages.

Based on the development plans of the Company

and its subsidiaries and the requirements of individual

positions, together with consideration of specific

characteristics of individual employees, the Company

and its subsidiaries tailor-made various training

programs on management skills, technical skills,

marketing skills and incentives. These programs

enhanced both the knowledge of the employees and

the standards of operations.



VI. Related Party Transactions

The Company entered into various transactions with

Huaneng Group, HIPDC and their group companies

during daily operations, including operating leases

on land use rights and property, electricity

transmission and fuel purchases, etc. Such

transactions were for daily operations at prices no

different from transactions conducted with other

third parties and do not have a material impact on

the business and operations of the Company.

Moreover, Huaneng Group, HIPDC and the minority

shareholders of other subsidiaries have committed

or agreed through contracts to providing guarantees

on loans of the Company and its subsidiaries.

Pursuant to the relevant agreements, the Company

rendered management services to those power

plants owned by Huaneng Group and HIPDC at

standard fees covering its costs and a reasonable

profit. In 2005, such service fees amounted to Rmb

34.996 million which was below 1% of the operating

revenue of the Company.

Please refer to Note 8 to the financial statements

prepared under International Financial Reporting

Standards (“IFRS”) for details of related party

transactions.

VII. Guarantees on Loans andRestricted Assets

As at 31st December 2005, the balance of the

guarantees provided by the Company to its

subsidiaries and associated companies totalled Rmb

1.577 billion. These included guarantees granted to

Qinbei Power Company, Yushe Power Company and

Rizhao Power Company amounting to Rmb 740

million, Rmb 612 million and Rmb 225 million

respectively. The Company had no contingent

liabilities other than those described above.

As at 31st December 2005, certain assets of Sichuan

Hydropower, a controlling subsidiary of the

Company, were used to secure borrowings. The

original acquisition cost of such pledged assets was

approximately Rmb 1.10 billion.

As at 31st December 2005, restricted bank deposits

amounted to Rmb 201 million which were mainly

deposits for letters of credits.


VIII. Accounting standards having asignificant impact on the financialstatements of the Company andother matters

Please refer to Note 2(a) to the financial statements

prepared under IFRS for details on the changes in

accounting policies which have a significant impact

on the financial statements of the Company for the

year.

At an extraordinary general meeting of the Company

held on 18th January 2006, it was approved to issue

asset-backed debt financing products with a principal

amount totalling not more than Rmb 15 billion in

one or more phases inside the PRC and short-term

financing bonds with a principal amount totalling

not more than Rmb 5 billion in one or more phases.


The Company has been consistently stressing the

importance of corporate governance through promoting

innovation on the Company’s system management and

strengthening the establishment the Company’s system.

It strives to enhance the transparency of the Company’s

corporate governance standards and to maintain high-

quality corporate governance on an ongoing basis. The

Company insists on adopting the principle of “maximizing

the benefits of the Company and of all shareholders” as

the starting point and treats all shareholders fairly in order

to ensure the generation of long-term, stable and growing

returns for shareholders.

(A) CODE OF CORPORATEGOVERNANCE

In recent years the Company adopted the following

measures in order to strengthen corporate

governance and enhance the Company’s operation

quality:

(1) Except from complying with the provisions of

the applicable laws, as a public company listed

in three markets both domestically and

internationally, the Company is subject to the

regulations of the securities regulatory

authorities of the three listing places and the

supervision of investors at-large. Accordingly,

our fundamental principles are adopting a

corporate governance structure balancing and

coordinating the decision-making powers,

supervisory powers and operating powers,

acting with honesty and integrity, complying

with the law and operating in accordance with

the law.

In 2004 and 2005, we amended and added

certain clauses to the Articles of Association

according to the Company’s actual situation

of development and the requirements and

stipulations of the relevant regulations

including the Listed Companies Governance

Standards, and again made adjustments to

the memberships of the Company’s Board of

Directors (the “Board”), the Supervisory

Committee and the management team. The

Company’s Board has added a Vice Chairman

and the number of board members has been

adjusted from 12 to 15. The five independent

directors are experts in accounting, electricity,

law and management respectively, and all

members of the Audit Committee of the

Board comprise independent directors. The

Company’s independent directors have

ful f i l led thei r dut ies and expressed

independent opinions in all the proposals

involving the interests of minority shareholders

and have practically given full play to their

functions. The number of members of the

Supervisory Committee has been adjusted

from seven to six. At the same time, the Board

has also made rejuvenation adjustments to

the Company’s management team according

to work requirements.

Corporate GovernanceReport


Corporate Governance Report

Through the above adjustments, the Board

and the Supervisory Committee acted more

in line with the requirements of the relevant

laws and regulations in terms of scale of

operation and personnel composition, thereby

ensuring that the Board can make effective,

scientific and quick decisions and that the

Supervisory Committee can independently

and effectively exercise its supervisory and

inspection powers over the directors,

managers and other senior management

personnel as well as the Company’s finances.

At the same t ime, the re juvenat ion

adjustments to the management team have

effected an innovative and dynamic

deve lopment , ensur ing an integra l

implementation of the resolutions of the

Board and the Supervisory Committee and the

establishment of a scientific and highly

effective corporate governance structure.

Over the past years, the Company’s Board

formulated and implemented the Rules and

Procedures of the Board of Directors Meetings;

the Rules and Procedures of the Supervisory

Committee Meetings; the Detailed Rules on

the Work of the General Manager; the Detailed

Rules on the Work of the Strategy Committee

of the Board of Directors; the Detailed Rules

on the Work of the Audit Committee of the

Board of Directors; the Detailed Rules on the

Work of the Renumeration and Appraisal

Committee of the Board of Directors; the

Detailed Rules on the Work of the Nomination

Committee of the Board of Directors; and the

System on Work of Independent Directors. The

Board has also discussed and approved a

number of proposals on the amendments to

the Articles of Association. The Audit

Committee of the Company’s Board has

successfully held various meetings to discuss

financial management issues encountered

during the course of operation of the Company

in order to seek scientific resolutions to steadily

raise the Company’s governance level. The

Company has complied with the provisions of

the Code on Corporate Governance Practices

in Appendix 14 to the Hong Kong Listing Rules

in this accounting year.

(2) The Company has been stressing the

importance of external information disclosure.

The Company has established the Information

Disclosure Committee which comprises

managers of various departments and headed

by the Vice President and the Chief

Accountant, and is responsible for examining

the Company’s regular reports. The Company

has implemented the system of holding

regular information disclosure meetings every

Monday chaired by the Vice President and the

Chief Accountant who will report on the

Company’s important matters of the week,

thereby warrant ing the Company ’s

performance of the relevant information

disclosure. The Company has successively

formulated and implemented a series of rules

including the Provisions on the Management

of External Information Disclosure Work, the

Measures on Investor Relations Management,

the Provisions on Internal Reporting of

External Disclosure of Material Information,

the Detailed Rules on the Work of the

Information Disclosure Committee, the

Interim Provisions on the Work Procedures of

Capital Operation and the Rules and


Procedures for the Shareholders’ Meetings.

Relevant departments of the Company

compiled answers (and subsequent updates)

to questions regarding the hot topics of

market concerns, the Company’s production,

operation and operating results in a timely

manner, which shall become the basis of

external communication after being approved

by the Company’s management and the

authorized representatives of the Information

Disclosure Committee. Also, the Company

engages US, Hong Kong and mainland

lawyers to conduct professional training for

the personnel of the Company responsible for

information disclosure on an irregular basis

in order to continuously enhance their level

of professionalism. The implementation of the

above rules and measures ensures that the

Company completes various external

disclosure work effectively, thereby increasing

the transparency of the Company’s operation

and obtaining good social benefits.

(3) The credibility of a listed company, to a large

extent, relates to the quality of the preparation

of financial statements and a regulated

operation of financial activities. In order to

regulate its financial management, the

Company has completed a large amount of

specific and detailed work, including:

1. In order to strictly implement the

accounting rules, accounting standards

and accounting systems; to strengthen

accounts auditing and accounts

supervision; and to truly and fairly reflect

the financial position, operating results

and cash flow, the Company has

compiled the Measures on Accounts

A u d i t i n g , t h e M e a s u r e s o n

Infrastructure Accounts Auditing, the

Guidel ines on Fundamentals of

Infrastructure Accounts Auditing, the

Measures on Fixed Assets Management,

Lists of Fixed Assets and the Measures

on Cost Management. The Company’s

Board and the Audit Committee have

examined the Company’s financial

reports on a quarterly basis and the

Company has fulfilled the requirements

of making the Chairman, President and

Financial Controller responsible for the

authenticity and completeness of the

financial reports.

2. In order to safeguard the independence

of the listed company, the Comapny

realized the separation of personnel in

organizational structure and specifically

established the Accounts Auditing

Division and Funds Management

Division responsible for the entrusted

business (the business related to the

assets entrusted by the Group for

management) so that the Company

may realize the complete separation of

the listed company and the controlling

shareholder in terms of personnel,

assets and finances according to the

laws and regulations of the State and

the requirements of regulatory rules.

3. The Company has been stressing the

importance of establishing a sound

internal control system, in order to

strengthen internal management and to

effectively enhance the capability of risk

prevention, and in 2003 the Company



initiated to strengthen its work in this

regard. The Company has added and

amended various regulations relating to

internal control and produced the

Internal Control Handbook (Second

Edition). The Company has established

the Taskforce of Internal Control to

effectively advance the improvement

work on internal control. In 2005, it fully

l aunched the in te rna l cont ro l

governance work and obtained

significant results with completion of

the fo l l ow ing work : fo rma l l y

promulgated the Internal Control

Handbook, and continuously amended

i t i n a c co rdance w i th a c tua l

implementation; strengthened the

organization systems of internal control

work both at the company and power

plant levels; amended the management

regulations relating to internal control;

formally operated the internal control

testing and evaluation software system,

realised the internal control fi le

re co rd ing and on l i ne t e s t i ng

management. Practices prove that the

above work has enhanced and

s t re n g t h e n e d t h e C o m p a n y ’s

management level and laid a solid

foundation for the smooth passing of

internal control auditing in Section 404

of the Sarbanes-Oxley Act in 2006.

4. In regard to fund management, the

Company has successfully formulated

a number of management measures

including the Measures on Financial

Management, the Interim Measures on

the Management of Funds Receipts and

Expenses and the relevant examination

m e a s u r e s , t h e M e a s u r e s o n

Management of Fund Raising and the

Measures on the Management of Bills

of Exchange. The Company’s Articles of

Association also set out provisions

relating to loans, guarantees and

investment. In the annual reports and

semi-annual reports of the Company

over the previous years, the Company

has engaged registered accountants to

conduct auditing on the use of funds

by the controlling shareholders and

other related parties and issue individual

s t a t e m e n t s a c c o rd i n g t o t h e

requirements of the SFC and the

Shanghai Stock Exchange, and there

has not been any violation of rules

relating to the use of funds. Moreover,

the Company also conducted checking

and clearing with related parties in

timely manner in relation to the

operational fund transfers in order to

ensure the safety of funds. At the same

time, the Company has reported the

fund use position to the Beij ing

Securit ies Regulatory Bureau in

acco rdance w i th the re l evant

requirements and urged itself to comply

with the relevant provisions at any time.


The above systems and measures have

fo rmed a sound management

framework for our production and

operation. The timely formulation and

strict implementation of the above

regulations not only ensure the on-

going standardization of operations of

t h e C o m p a n y a n d g r a d u a l

enhancement of corporate quality, but

also enable the Company to win

honourable acclaims over the past years,

including: “The Best Corporate

Governance Award in China”; ranked

first in “The Overall Best Managed

Company in China”; ranked first in

“The Best Company in Corporate

Strategy and Best Operational Efficiency

in China”; ranked second in “Most

Concerned with Shareholders’ Value”;

“The Best Investor Relations Award”;

“The Best Utilities Company Award in

Asia”; “The Best Information Disclosure

Communication for Acquisitions and

Mergers Award”; and “The Best

Corporate Governance in China”. The

above awards were conferred by

authoritative publications in the

international capital industry including

Institutional Investors, Euromoney,

Asiamoney, Asia Finance, IR Magazine

and The Asset, thus establishing a good

overall image for the Company in both

the domestic and international capital

markets.

(B) SECURITIES TRANSACTIONS BYDIRECTORS

As the Company is listed in three places, the

Company has strictly complied with the relevant

binding clauses on securities transactions by

directors imposed by the regulatory authorities of

the US, Hong Kong and China and we insist on the

principle of complying with the strictest clause, that

is, implementing the strictest clause among three

places. We have adopted a set of standards not

lower than The Model Code for Securities

Transactions by Directors of Listed Issuers set out in

Appendix 10 to the Hong Kong Listing Rules as the

model code for securities dealings by directors of

the Company, that is, The Administrative Rules on

Securities Information and Transactions of

Companies, prohibiting informed personnel of the

insider information of securities transactions to

conduct securities dealing activities, and we have

formulated detailed regulations on the informed

personnel of insider information. Following a specific

enquiry on all the directors and senior management

of the Company, all the directors and senior

management personnel do not hold any shares in

the Company and there is no material contract in

which the directors directly or indirectly have

material interests.



(C) BOARD OF DIRECTORS

During the reporting period, the Company’s Board

of Directors comprised 15 members with Mr. Li

Xiaopeng as Chairman, and Mr. Huang Yonda and

Mr. Wang Xiaosong as Vice Chairmen of the Board

during the reporting period; the Executive Directors

of the Company are Mr. Li Xiaopeng (Chairman),

Mr. Huang Yongda (President), Mr. Na Xizhi (Vice

President) and Mr. Huang Long (Vice President);

other Non-executive Directors are: Mr. Wang

Xiaosong, Mr. Wu Dawei, Mr. Ding Shida, Mr. Shan

Qunying, Mr. Xu Zujian and Mr. Liu Shuyuan. The

Company has five Independent Non-executive

Directors comprising one-third of the members of

the Company’s Board of Directors, namely, Mr. Wu

Yusheng, Mr. Yu Ning, Mr. Qian Zhongwei, Mr. Xia

Donglin and Mr. Liu Jipeng.

The Board of Directors of the Company has held eight meetings during this financial year including regular meetings

and ad hoc meetings (including those with voting by communication). Details of the attendance of directors at the

board meetings are as follows:

Number of Number of Number of

meetings meetings meetings

to be attended attended Attendance

Name attended in person by proxy rate (%)

Executive Directors

Li Xiaopeng 8 8 0 100

Huang Yongda 8 5 3 62.5 (Attendance by

proxy rate: 37.5)

Na Xizhi 5 5 0 100

Huang Long 5 5 0 100

Non-executive

Directors

Wang Xiaosong 8 8 0 100

Wu Dawei 5 5 0 100

Shan Qunying 8 8 0 100

Ding Shida 1 1 0 100

Xu Zujian 8 7 1 87.5 (Attendance by

proxy rate: 12.5)

Liu Shuyuan 8 7 1 87.5 (Attendance by

proxy rate: 12.5)


Number of Number of Number of

meetings meetings meetings

to be attended attended Attendance

Name attended in person by proxy rate (%)

Independent

Non-executive

Directors

Qian Zhongwei 8 8 0 100

Xia Donglin 8 7 1 87.5 (Attendance by

proxy rate: 12.5)

Liu Jipeng 8 7 1 87.5 (Attendance by

proxy rate: 12.5)

Wu Yusheng 5 4 1 80 (Attendance by

proxy rate: 20)

Yu Ning 5 4 1 80 (Attendance by

proxy rate: 20)

Retiring Directors

Huang Jinkai 3 3 0 100

Liu Jinlong 3 3 0 100

Yang Shengming 5 4 1 80 (Attendance by

proxy rate: 20)

Gao Zongze 3 2 1 66.7 (Attendance by

proxy rate: 33.3)

Zheng Jianchao 3 2 1 66.7 (Attendance by

proxy rate: 33.3)



The Company’s Articles of Association set out in

detail the duties and operational procedures of the

Board (please refer to the Company’s Articles of

Association for details). The Board of the Company

holds regular meeting to hear the report on the

Company‘s operating results and makes decision.

Material decisions on operation shall be discussed

and approved by the Board. Ad hoc meetings may

be held if necessary. Board meetings include regular

meetings and ad hoc meetings. Regular meetings

of the Board include: annual meetings, half-yearly

meetings, first quarterly and third quarterly

meetings.

All arrangements for regular meetings have been

notified to all directors at least 14 days in advance

and the Company has ensured that each director

thoroughly understood the agenda of the meeting

and fully expressed his/her opinions, while all

Independent Non-executive Directors expressed

their independent directors’ opinions. Minutes have

been taken for all the meetings and filed at the

Office of the Board of Directors of the Company.

Moreover, the Independent Directors of the

Company have submitted their annual confirmation

letters in relation to their independence according

to the requirements of the Listing Rules.

The Board of the Company has made the following

important decisions in relation to the Company’s

operational management during this year:

1. Issuance of RMB5 bi l l ion short-term

debentures;

2. Ent rus ted management of S i chuan

Hydropower;

3. Transfer of Huaneng Nanjing gas-fired project;

4. Equity participation in Huaneng Finance.

Please refer to the relevant announcements of the

Company for details.

Apart from regular and ad hoc meetings, the Board

obtained information through the Chairman Office

in a timely manner in order to monitor the objectives

and strategies of the management, the Company’s

financial position and operating results and clauses

of material agreements. The Chairman Office

discharged the duties on behalf of the Board when

the Board was not in session.

The Chairman Office held meetings irregularly which

were attended by the Chairman, Vice Chairmen,

Secretary to the Board, President, relevant senior

management and personnel of re levant

departments, and they heard reports on the

operating conditions of the Company and made

decisions. The content of the meetings covered: (1)

examined and approved the establishment or

cancellation of proposals to develop construction

projects; (2) examined and approved proposals of

the President in relation to the appointment, removal

and transfer of managers of various departments

of the Company and managers external branches;

(3) examined and approved plans on the use of

significant funds; (4) examined and approved

proposals on the establishment or cancellation of

branch companies or branch organs; (5) studied

issues regarding the power market reforms and

power sales and marketing; (6) examined and

approved other major issues.


The management of the Company shall be in charge

of the production and operational management of

the Company according to the Articles of

Association; implement annual operation plans and

investment proposals; and formulate the Company’s

management system.

The Chairman of the Company shall sign the

management authorization letter to the President

of the Company on behalf of the Board, and confirm

the respective authorities and duties of the Board

and senior management. The Company’s senior

management reports on the actual implementation

of various authorizations each year.

(D) CHAIRMAN AND CHIEF EXECUTIVEOFFICER

The Board of the Company shall have a Chairman

and a President who shall perform their duties

respectively according to the Articles of Association.

During the reporting period, Mr. Li Xiaopeng acts

as Chairman of the Board and Mr. Huang Yongda

acts as President of the Company.

The division of duties of the Board and the senior

management is as follows:

The Board shall be accountable to the shareholders

at the general meeting and shall exercise the

following authorities:

(1) to be responsible for the convening of the

shareholders’ general meeting and to report

its work to the shareholders at the general

meetings;

(2) to implement the resolutions passed by the

shareholders at the general meetings;

(3) to determine the Company’s business plans

and investment organs;

(4) to formulate the Company’s annual financial

budgets and final accounts;

(5) to formulate the Company’s profit distribution

proposal and loss recovery proposal;

(6) to formulate the proposals for the increase or

reduction of the Company’s registered capital

and for the issue of the Company ’s

debentures;

(7) to draw up plans for the merger, division or

dissolution of the Company;

(8) to decide on the establishment of the

Company’s internal management organs;

(9) to appoint or remove the Company’s President

and to appoint or remove the Vice President

and Financial Controller of the Company

according to the recommendations of the

President and to decide on their remuneration;

(10) to fo rmula te the Company ’s bas i c

management system;

(11) to formulate proposals for any amendment

to the Company’s Articles of Association;

(12) to formulate proposals on amendments to the

Rules of Procedures of the shareholders’

meetings;

(13) to decide on the external guarantee matters

of the Company within the authorization

scope of the applicable laws and the Articles

of Association;



(14) to exercise any other authorities conferred by

the provisions of the Articles of Association

and the shareholders at the general meetings.

The President of the Company shall be accountable

to the Board of Directors and shall exercise the

following authorities:

(1) to be in charge of the Company’s production,

operation and management and to co-

ordinate the implementat ion of the

resolutions of the Board;

(2) to organize the implementation of various

departments of the Company’s annual

business plans and investment;

(3) to draft plans for the establishment of the

Company’s internal management organs;

(4) to propose the Company’s basic management

system;

(5) to formulate basic rules and regulations for

the Company;

(6) to propose the appointment or dismissal of

the Company’s Vice President and Financial

Controller;

(7) to appoint or dismiss management personnel

other than those required to be appointed or

dismissed by the Board;

(8) to sign loan agreements and other relevant

documents on behalf of the Company;

(9) other powers conferred by the Articles of

Association and the Board.

(E) NON-EXECUTIVE DIRECTORS

According to the provisions of the Articles of

Association, the term of office of members of the

Board of the Company shall not exceed three years

(including three years) and the members may be

eligible for re-election. However, the term of office

of Independent Non-executive Directors shall not

exceed six years (including six years) according to

the relevant provisions of the China Securities

Regulatory Commission.

The respective terms of office of the Non-executive

Directors are as follows:

Name of

Non-executive Director Term of office

Wang Xiaosong 2005.5.11-2006.3

Wu Dawei 2005.5.11-2008.5

Shan Qunying 2005.5.11-2008.5

Ding Shida 2005.11.17-2008.5

Xu Zujian 2005.5.11-2008.5

Liu Shuyuan 2005.5.11-2008.5

(F) DIRECTORS’ REMUNERATION

According to the provisions of the relevant laws of

the State and the Articles of Association, the Board

of the Company has established the Remuneration

and Appraisal Committee mainly responsible for

studying the appraisal standards of the directors and

senior management personnel of the Company,

conducting appraisals and making proposals;

responsible for studying and examining the

remuneration policies and proposals of the directors

and senior management personnel of the Company

and to be accountable to the Board. As the Executive

Directors of the Company are senior management

of the Company, their performance appraisals have


been reflected in the assessment and appraisal

conducted by the Board on the management team

(please refer to the working report of the Board).

At present, only Mr. Huang Long and Mr. Na Xizhi

have obtained remuneration of the Company in the

capacity of executive directors and their

remunerations are set out in the annual aggregate

wages and calculated according to the internal wage

system of the Company. The aggregate wages were

submitted to the Board after having been examined

by the Remuneration and Appraisal Committee. The

executive directors have complied with the

requirements of the Stock Exchange and entered

into directors’ service agreements by adopting the

Stock Exchange’s standard contract.

Members of the Remuneration and Appraisal

Committee of the Fourth Session of the Board

comprised five directors, namely Mr. Gao Zongze,

Mr. Liu Jinlong, Mr. Xu Zujian, Mr. Zheng Jianchao

and Mr. Xia Donglin; of whom Mr. Gao Zongze,

Mr. Zheng Jianchao and Mr. Xia Donglin were

Independent Non-executive Directors. Mr. Gao

Zongze acted as the Chief Member of the

Remuneration and Appraisal Committee. Members

of the Remuneration and Appraisal Committee of

the Fifth Session of the Board of Directors comprised

seven directors. Members of the Remuneration and

Appraisal Committee were Mr. Liu Jipeng, Mr. Na

Xizhi, Mr. Xu Zujian, Mr. Qian Zhongwei, Mr. Xia

Donglin, Mr. Wu Yusheng and Mr. Liu Shuyuan; of

whom Mr. Liu Jipeng, Mr. Qian Zhongwei, Mr. Xia

Donglin and Mr. Wu Yusheng were Independent

Non-executive Directors; Mr. Liu Jipeng acted as

Chief Member of the Remuneration and Appraisal

Committee.

The Company has formulated the Detailed Rules

on the Work of the Remuneration and Appraisal

Committee which have been approved by the Board

for implementation. The Remuneration and

Appraisal Committee held a meeting during this year

and discussed the aggregate wages for 2005 , ways

to commence its work and recent work plans. In

the new financial year, the Remuneration and

Appraisal Committee will commence work in a

timely manner pursuant to the above detailed rules

on work according to the actual situation.

During this financial year, the attendance of meetings of the Remuneration and Appraisal Committee of the

Company’s Board was as follows:

Members who Members who

attended attended

the meeting the meeting

Name of meeting Date of meeting in person by proxy

First meeting of 2005-3-14 Liu Jinlong, Gao Zongze,

the Fourth Session of Zheng Jianchao, Xu Zujian

the Remuneration Xia Donglin

and Appraisal

Committee in 2005



(G) NOMINATION OF DIRECTORS

According to the provisions of the relevant laws of

the State and the Articles of Association, the Board

of the Company has established the Nomination

Committee. The Committee is mainly responsible

for studying the selection standards and procedures

for candidates for directors and senior management

personnel of the Company according to the

requirements of the Company Law and Securities

Law and in relation to directors’ qualifications and

the needs of the operational management of the

Company, and making proposals thereon to the

Board; searching for qualified candidates for

directors and suitable persons for senior

management personnel on a wide basis; and

examining the candidates for directors and suitable

persons for senior management personnel and

making proposals thereon. At present, nomination

of directors of the Company is mainly made by the

shareholders of the Company and the names are

submitted to the Board after the Nomination

Committee has examined their qualifications; and

candidates for the Vice President and senior

management of the Company are nominated by

the President and the names are submitted to the

Board after the Nomination Committee has

examined their qualifications.

Members of the Fourth Session of the Nomination

Committee comprised five directors, namely, Mr.

Huang Jinkai, Mr. Gao Zongze, Mr. Yang

Shengming, Mr. Qian Zhongwei and Mr. Zheng

Jianchao; of whom Mr. Qian Zhongwei, Mr. Gao

Zongze and Mr. Zheng Jianchao are Independent

Non-executive Directors; Mr. Qian Zhongwei acted

as Chief Member of the Nomination Committee.

Members of the Nomination Committee of the Fifth

Session of the Board are Mr. Huang Long, Mr. Shan

Qunying, Mr. Ding Shida, Mr. Qian Zhongwei, Mr.

Xia Donglin, Mr. Liu Jipeng and Mr. Yu Ning; of

whom Mr. Qian Zhongwei, Mr. Xia Donglin, Mr. Liu

Jipeng and Mr. Yu Ning are Independent Non-

executive Directors; Mr. Qian Zhongwei acted as the

Chief Member of the Nomination Committee.

Currently the Company has formulated the Detailed

Rules on the Work of the Nomination Committee

which has been approved by the Board for

implementation. The Nomination Committee held

two meetings during this year. On 14th March 2005,

Mr. Li Xiaopeng, Mr. Huang Yongda, Mr. Wang

Xiaosong, Mr. Na Xizhi, Mr. Huang Long, Mr. Wu

Dawei, Mr. Shan Qunying, Mr. Xu Zujian, Mr. Liu

Shuyuan, Mr. Qian Zhongwei, Mr. Xia Donglin, Mr.

Liu Jipeng, Mr. Wu Yusheng, Mr. Yu Ning, Mr. Gao

Zongze and Mr. Yang Shengming were nominated

as Directors of the Company; Mr. Li Shiqi was

nominated as Vice President of the Company. On

9th August, Mr. Ding Shida was nominated as

Director of the Company and Mr. Yang Shengming

resigned as Director. In the new financial year, the

Nomination Committee will commence work in a

timely manner pursuant to the above detailed rules

on work according to the actual situation.


During the year, the attendance of meetings of the Nomination Committee of the Company’s Board of Directors

was as follows:


attended attended



First meeting of the 2005-3-14 Qian Zhongwei, Gao Zongze

Nomination Committee Huang Jinkai,

of the Fourth Session Yang Shengming,

of the Board of Zheng Jianchao

Directors in 2005

First meeting of the 2005-8-9 Qian Zhongwei, Yu Ning

Nomination Committee Huang Long,

of the Fifth Session Shan Qunying,

of the Board of Xia Donglin,

Directors in 2005 Liu Jipeng

(H) REMUNERATION OF AUDITORS

During the year, total remuneration to the auditors,

all related to audit services, amounted to

approximately Rmb 33.78 million.

(I) AUDIT COMMITTEE

According to the requirements of the regulatory

authorities of the jurisdictions where the Company

is listed and the relevant provisions of the Articles

of Association, the Board of Directors of the

Company has established the Audit Committee

mainly responsible for:-

(1) proposing to appoint or change external

auditing organizations;

(2) examining and supervising the Company’s

internal audit system and its implementation;

(3) communication between internal auditing

and external auditing;

(4) auditing the Company’s financial information

and its disclosure;

(5) any other matters required by the Company’s

Board.

Members of the Audit Committee of the Fourth

Session of the Board were comprised of five

directors, namely, Mr. Xia Donglin, Mr. Qian

Zhongwei, Mr. Wang Xiaosong, Mr. Shan Qunying

and Mr. Zheng Jianchao, of which Mr. Wang

Xiaosong, Mr. Xia Donglin, Mr. Qian Zhongwei and

Mr. Zheng Jianchao are Independent Non-executive

Directors; Mr. Xia Donglin acted as Chief Member

of the Audit Committee. Members of the Audit

Committee of the Fifth Session of the Board of

Directors comprised five directors, namely, Mr. Xia



Donglin, Mr. Qian Zhongwei, Mr. Liu Jipeng, Mr.

Wu Yusheng and Mr. Yu Ning; all the above

members are Independent Non-executive Directors;

Mr. Xia Donglin acted as Chief Member of the Audit

Committee.

The Company’s Audit Committee held five meetings

during the year and discussed the 2004 annual final

financial statements, the 2004 profit distribution

proposal, the 2004 quarterly financial reports, the

2005 budget reports, the appointment of auditors

and the report on management measures relating

to the internal control system, respectively, and

submitted examination reports to the Company’s

Board of Directors. Moreover, the Audit Committee

has conducted examination on the annual operating

results of the Company and has submitted an

examination report to the Board.

During this financial year, the attendance of meetings of members of the Audit Committee was as follows:-


attended attended



First meeting of the 2005-3-14 Xia Donglin, Nil

Audit Committee of Wang Xiaosong,

the Fourth Session of the Shan Qunying,

Board of Directors in 2005 Zheng Jianchao,

Qian Zhongwei

Second meeting of the 2005-4-14 Xia Donglin, Zheng Jianchao

Audit Committee of the Wang Xiaosong,

Fourth Session of the Shan Qunying,

Board in 2005 Qian Zhongwei

First meeting of the 2005-8-8 Xia Donglin, Liu Jipeng

Audit Committee of the Qian Zhongwei,

Fifth Session of the Wu Yusheng,

Board in 2005 Yu Ning

Second meeting of the 2005-10-18 Qian Zhongwei, Xia Donglin,

Audit Committee of the Liu Jipeng, Wu Yusheng

Fifth Session of the Board in 2005 Yu Ning

Third meeting of the 2005-12-29 Xia Donglin, Liu Jipeng,

Audit Committee of the Qian Zhongwei, Wu Yusheng

Fifth Session of the Board in 2005 Yu Ning


Currently, the Company has formulated the Detailed

Rules on the Work of the Audit Committee which

have been approved by the Board fo r

implementation. The Detailed Rules on the Work

of the Audit Committee wil l be amended

accordingly. In 2005, the Audit Committee was very

concerned with the progress of the Company’s

internal control work. It continuously acquired an

understanding of the progress of the internal control

work and examined the relevant internal control

system. During the new financial year, apart from

commencing work according to the detailed work

rules, the Audit Committee will further strengthen

its supervision on and guidance to internal control

work.

(J) LIABILITY ASSUMED BY THEDIRECTORS IN RELATION TO THEFINANCIAL STATEMENTS

The Directors confirm that they shall assume the

relevant liability in relation to the preparation of the

financial statements of the Company and ensure

that the preparation of the financial statements of

the Company complies with the relevant laws and

regulations and applicable accounting standards.

The Directors also warrant that the financial

statements of the Company will be published in a

timely manner.

The reporting liability statements made by the

auditors of the Company in relation to the financial

statements of the Company and its subsidiaries are

set out on pages 96 and 194 of this annual report.

In accordance with Rule 14C2.1 of the Hong Kong

Listing Rules, the Company has conducted self-

assessment on the sound establ ishment,

implementation and effective evaluation of the

internal control system, as well as on the existing

issues and measures of improvement. We report as

follows:

The Board and the senior management of the

Company have reviewed the Company’s internal

control system.

The Board shall be responsible for maintaining an

adequate internal system for monitoring the group

and reviewing its effect through the Audit

Committee. As a company listed in the US, the

Company is also required to establish a sound

internal control system and evaluate the

effectiveness of the design and operation of the

internal control system according to Section 404 of

the US Sarbanes-Oxley Act and the requirements

of the US Securities Commission and the US Listed

Companies Supervision Board (PCAOB).

At present, the Company has designed the Internal

Control Handbook in order to regulate the internal

control system of the Company. The Company has

conducted supervision and testing on the

implementation of the Internal Control Handbook

and further improved the Company’s internal control

system according to the relevant discoveries.


INVESTOR RELATIONS

As a result of the substantial increase in coal prices in

China since the fourth quarter of 2004 which brought

about a significant pressure on the Company‘s production

and generation, the Company also faced new challenges

relating to information disclosure and investor relations.

The workload and difficulties regarding information

disclosure, communication with and explanation to

investors increased remarkably.

In 2005, the Company disclosed the Company’s

information in a precise and timely manner through various

channels in order to ensure that the information disclosure

and the publicity met the regulatory requirements of the

jurisdictions in which the Company’s shares are listed, to

enable the investors to have an objective and

comprehensive understanding of the Company and the

power industry, and to safeguard and enhance the

Company’s reputation and image in the capital market.

During the year, the Company dispatched scores of press

releases, and held more than a hundred “one-to-one”

meetings with domestic and overseas investors through

roadshows and conferences. The Company has also

organized overseas investors to visit power plants and to

engage in direct communication with the management

of the power plants. During the year, the Company was

awarded “The Best Large Company in Investor Relations

among PRC A-Share Companies” by the first China IR

Annual Conference held by Securities Market Magazine

of China.

NOTICE TO SHAREHOLDERS

Dividend

The Board resolved to propose for the year ended 31st

December 2005 a cash dividend of Rmb 0.25 per ordinary

share.

Cash dividends will be denominated and declared in

Renminbi. Cash dividends on domestic shares will be paid

in Renminbi. Save for the dividends on foreign shares

traded on the Hong Kong Stock Exchange which will be

paid in Hong Kong dollars, cash dividends on foreign

shares will be paid in US dollars. Exchange rates for

dividends paid in US dollars and Hong Kong dollars are

USD1 to Rmb 8.0317 and HK$1 to Rmb 1.03505

respectively.

All the cash dividends will be paid to shareholders on or

before 30th June 2006, subject to approval at the annual

general meeting of the Company.

Annual General Meeting and Close of Register

Details regarding the book closure period of H Share

register, record date and date for convening annual general

meeting will be set out in the notice of annual general

meeting to be issued by the Company in due course.

Investor Relations


Investor Relations

QUESTIONS AND ANSWERS WITHINVESTORS

• What were the factors that affected the

fulfilment rate of major coal contracts in 2005?

(a) The impact of differential prices. Throughout

the whole year of 2005, the prices quoted by

the market for raw coal which the Company

purchased were higher by an average of

RMB84.24 per tonne when compared to our

major contracts for similar products, accounting

for 20% to 25% of the quoted prices for raw

coal.

(b) The impact of transportation capacity. Although

there had been an increase in transportation

capacity for railway and marine transportation

as compared to 2004, the transportation

capacity for railways at Shitai, Taijiao, Longhai

and Jingguang remained tight, thereby

impacting on the fulfilment rate of certain major

contracts.

(c) The impact of supply capability. The production

capabilities of some of the suppliers did not

correspond with their obligations to supply

under the terms of contracts. This impacted on

the fulfilment of actual supply.

• In view of an expected decrease in utilization

hours for the next two years, how will the

Company ensure a reliable inflow of income?

(a) To enhance market analysis and forecasting

work; to upgrade the timeless, accuracy and

completeness of collected information; and to

grasp the market pulse in a timely manner

under the increasingly competitive market

environment.

(b) To research on the operation modes of power

grid and the operation situation of power

plants, and to grasp all opportunities striving

for developing the power market.

(c) Pinpointing on the change from a tight supply

to a relative supply-demand balance and the

distinguishing feature of power shortage in

certain regions or for particular timeframes, to

focus on the fundamental work such as

planning on the annual generation volume for

each of the regions, and committing contracts

on sales of electricity and on electricity

transmission adjustments among power grids.

(d) To reinforce market risk analysis, to formulate

strategies on enhancing supply and sales that

are beneficial to the Company and to strive for

increasing the util ization hours of the

generating units.

(e) To actively participate in the development of

regional power markets and to diligently

research on market mechanisms. Likewise, to

reinforce the co-operation among power plants

of the Company within the same market; to

organize concisely and to quote prices using

scientific methods for maximizing the benefits

of the Company as a whole.


(f) To closely follow and analyze the policy for

power tariffs; to carry out power tariff work

with emphasis and focus so as to increase the

overall sales of electricity.

• How does the Company strike a balance

between protect ing the interest s of

shareho lder s and work ing w i th the

government’s policy on investing in more costly

environmental projects?

To abide by the laws has consistently been the

principle of the Company in undertaking any project

construction. All construction projects of the

Company are in compliance with the State’s

production and environmental policies.

The State ’s pol icy to intensify efforts on

environmental protection is beneficial to the society

and in accordance with the sustainable development

strategy, thereby guaranteeing the shareholders’

long-term benefits. The Company gives its full

support to the policy.

The Company will make concrete analysis on specific

projects, and adopt measures for effective

environmental protection. This will not be only for

satisfying the State’s environmental protection

requirements for electricity-related projects, but also

for preserving the interests of its shareholders.

• How does the Company arr ive at i t s

contemplated return on investment in relation

to power plants under proposed acquisitions or

power plants under construction?

The purpose of an acquisition by the Company is to

further enhance the advantage of economies of

scale, thereby increasing market share and enhancing

competitive strengths. Based on these criteria, the

Company will choose and assess projects based on

whether the acquired projects are commercially

feasible and on their abilities to enhance shareholder

value:

— in the short run, the acquired projects should

bring an increase in earnings per share for

shareholders; and

— in the long run, the acquired projects should

provide guaranteed growth in profits of the

Company in a continuous and reliable manner.


Human Resources

COMMUNICATION BETWEEN THECOMPANY AND STAFF

The Company encourages mutual understanding, mutual

trust, sincere cooperation, all-round communication and

harmonious relationships among its staff. Through the

Staff Handbook, the Company communicates to its entire

staff about its mission, values, strategic goals, operation

concepts and corporate spirit, thereby enhancing

employees’ sense of commitment to the Company. The

Company encourages its staff to participate in proposal

fine-tuning activities, and gives appropriate rewards to

the staff when their suggestions are being accepted. The

Company set up a special suggestion box to collect staff’s

opinions. When working on development planning and

other important matters, the Company invites its general

staff representatives to participate and listens to staff’s

opinions. When there is a dispute between the Company

and its staff, we encourage mutual communication and

negotiation to resolve the issues.

HUMAN RESOURCES SITUATION

The Company believe that human resources are the most

important asset of the Company. We put a strong

emphasis on nurturing talents with the establishment of

three core teams of senior management, senior

engineering professionals and senior technicians as the

focus, the strengthening of education and training as well

as exploration of potentials in internal human resources

as the foundation, and recruitment of external talents as

the supplement, thereby realizing a sustainable

development of the Company’s human resources.

For a long period of time, our human resources

management is closely knitted with the Company’s overall

development planning. By actively and appropriately

implementing a talent-based “strong corporation”

strategy, we have built a diligent, high quality and

experienced staff team.

At the end of 2005, the Company had 23,531 employees

in total. Among them, there were 11,944 production staff,

161 sales representatives, 7,880 technicians, 369 financial

personnel and 3,511 administrative staff.

There were 10,682 employees who had tertiary

qualifications or above, amounting to 45% of the

workforce. Among them, 6,528 employees held

specialized university degrees, 3,918 employees held

general university degrees and 236 employees held master

degrees or above.

DEVELOPMENT AND INCENTIVESCHEME

The Company believes in growing together with its staff,

we put strong emphasis on education and training. We

provide financial sponsorships and other assistance on staff

training, thereby increasing the staff ’s sense of

commitment to the Company, and motivating them to

develop their inner strengths, hence improving their career

development.

The Company encourages its staff to participate in training

programs in accordance with their personal needs and

career plans, guaranteeing their training time, so that they

can continuously improve their technical expertise and

become all-rounded employees, delivering better service

to the Company.

The Company put a strong emphasis on staff

development. In 2005, we provide various kinds of training

programs to our staff, including new staff entrance

training, job position qualification training, technical skill

training, international cooperation training, and on-the-

job continuing education. Besides, we also organize

business management training in association with other

tertiary education institutions.


In 2006, the Company will continue to develop various

levels and forms of training for our staff in accordance

with the Company’s development and staff’s career plan.

The Company will strive hard to enhance our staff’s

knowledge, technical expertise and management

efficiency.

STAFF SAFETY

Providing a safe working environment for our staff is the

Company’s top priority. The Company works hard to

improve the safety standards of our staff, prevents

accidents and minimizes occupational hazard.

1. To establish the safety and prevention concept of

“Safety as the first priority. Precaution as the major

measure” among staff, and to discover and

eliminate potential hazards on time, safeguarding

workplace safety, maintaining good working

environment and preventing occupational diseases.

2. To actively develop safety education. New staff at

power plants have to undergo safety education at

the plant level, workshop level and work team level

before going to work. This includes basic knowledge

of safety in the workplace, major hazards and risk

factors as well as safety issues, major preventive

measures against industrial accidents and

occupational diseases, case studies of typical hazards,

handling procedures on accidents, and functions and

correct usage of protective gears (equipment).

3. To establish the certificate-for-job system. Personnel

who are engaged in special operations have to

undergo special safety knowledge and safe

operation training, and pass through exams to

obtain a certificate before they can start working in

their job. We also implement safety education

specifically for staff who are going to handle new

work techniques, new technology, new equipment

and new materials.

4. To promote a safety culture and enhance staff’s

safety awareness in order to protect their own safety

by spreading safety knowledge around the

Company.


Corporate Citizenship

ENVIRONMENTAL PROTECTION

The Company has put a lot of efforts in environmental

protection and waste treatment to ensure that we meet

the national and regional environmental standards on

various waste disposal indicators. Our measures include

the following:

Various measures are implemented to control the emission

of dust and sulphur dioxide, such as using high-efficiency

electrostatic dust collectors to reduce dust emission; using

coal with low sulphide level , applying smoke

desulphurization technology and low nitrogen emission

combustion devices to reduce the emission of sulphur

dioxide and nitrogen oxides; equipping waste water

treatment facilities in all power plants to treat and dispose

waste water according to environmental standards;

putting strong emphasis on developing dust and residue

re-use projects by utilizing 70% of the coal residue

remained after burning to manufacture brick and other

materials. We have also constructed special dust and

residue collection sites to prevent them from polluting

the environment.

Since 2002, based on the PRC Atmospheric Pollution

Prevention Law, local governments started to regulate the

emission of carbon dioxide by charging emission fees in

terms of the actual emssion amounts instead of the

emission amounts above a certain level. In 2003, in relation

to waste disposal fees, the government published the

“Regulations on Collection and Usage of Waste Disposal

Fees” and the “Guidelines on the Charging Standards of

waste Disposal Fees”. Starting from 1st July 2003, all coal-

fired power plants have to pay a waste disposal fee

according to its emission of ash, waste water, solid waste

and noise level exceeding the standard, with the fee

gradually increasing in the next three years and various

waste disposal calculation methods being formulated: the

waste gas emission fee is calculated with reference to the

type and amount of waste gas produced, which is then

translated into a pollution equivalent unit by which the

government charges Rmb 0.6 for each pollution equivalent

unit; the waste water disposal fee is calculated with

reference to the type and amount of waste water

produced, which is then translated into a pollution

equivalent unit by which the government charges Rmb

0.7 for each unit. For sulphur dioxide, the disposal fee for

one pollution equivalent unit is Rmb 0.21 in the first year

(starting from 1st July 2003), Rmb 0.42 in the second

year (starting from 1st July 2004), and Rmb 0.63 in the

third year (starting from 1st July 2005), reaching the same

standard as other atmospheric pollutants. For nitrogen

oxides, there was no charge before 1st July 2004, and

starting from 1st July 2004, each pollution equivalent unit

was charged Rmb 0.63.

The Company believes that it has already implemented

enough measures to control the pollution generated by

the Company’s facilities. Besides the above measures, all

operating power plants have their own environmental

protection office or specialist to monitor and operate the

environmental protection facilities. The environmental

protection departments of local governments monitor the

amount of waste disposed by the Company and calculates

waste disposal fees according to the monitoring results.

The Company believes the environmental policy and

facilities of its operating power plants and construction

projects meet the current requirements of the laws and

regulations prescribed by the national and local

governments.


CONTRIBUTION TO SOCIETY

In 2005, the Company and its staff have been engaged in

charity donations (including money and goods), Helping

the Poor donations (including money and goods) and

Project Hope donations (including money and goods). The

Company also organized its employees to engage in

voluntary tree-planting activities, Helping the Poor activities

and Project Hope activities, trying its best and fulfilling its

duty to help people living in poor and rural areas of China.


The Directors take pleasure in submitting their annual

report together with the audited financial statements for

the year ended 31st December 2005.

BUSINESS REVIEW OF YEAR 2005

In 2005, the Company seized the opportunities arising

from the strong power demand as a result of growth in

the national economy and the rise of people’s living

standard to achieve a safe and stable increase in power

generation. By ensuring a safe supply of power to meet

demand, the Company has contributed to the national

economic development. Although the continuing increase

in coal prices in 2005 has had a negative impact on the

operating results, the significant increase in power

generation and the increase in the average tariff rate over

the previous year have resulted in a significant increase in

operating revenue. With various measures to control

operating costs, the Company was able to effectively

contain the rate of decline in net profit and achieved

relatively good operating results.

1. OPERATING RESULTS

For the twelve months ended 31st December 2005,

the Company recorded operating revenues of Rmb

40.190 billion, representing an increase of 33.30%

as compared to the same period of 2004, and a profit

attributable to equity holders of the Company of

Rmb 4.872 billion, representing a decrease of 8.49%

as compared to the same period of the previous year.

Earnings per share amounted to Rmb 0.40.

As at the end of 2005, the net asset per share was

Rmb 3.32 (not include Minority Interest), representing

an increase of 10.30% compared to 2004.

The Audit Committee of the Company has convened

a meeting on 27th March 2006 to review the annual

results of 2005.

2. POWER GENERATION

In 2005, the operating power plants of the Company

and its subsidiaries achieved power generation

totalling 150.505 billion kWh on a consolidated basis,

representing an increase of 31.70% over the same

period of the previous year.

The general growth in power generation benefited

from the strong increase in power demand in the

areas where the power plants of the Company are

located, driven by continuous rapid growth of the

national economy. On the other hand, the significant

increase in the Company’s generation capacity was

attributable to stable power generation as a result

of the commencement of commercial operation of

Yushe Power Plant Phase II and Qinbei Power Plant

in the second half of 2004, and the commercial

operation of Huaiyin Power Plant Phase II and

Shantou Power Plant Phase II in 2005. In addition,

the power plants acquired by the Company in 2004

and 2005, including Luohuang Power Plant, Yueyang

Power Plant, Yingkou Power Plant, Jinggangshan

Power Plant, Pingliang Power Plant and Sichuan

Hydropower, have a l so made s ign i f icant

contributions to the increase of the Company’s power

generation. At the same time, safe and stable

operation of the facilities of power plants owned by

the Company and its subsidiaries also created

favourable conditions for the increase in power

generation of the Company.

Report of the Boardof Directors


Report of the Board of Directors

In 2005, the average availability factor of the power

plants of the Company and its subsidiaries was

92.93%, with an average capacity factor of 70.68%;

while weighted average coal consumption rates for

power sold and power generated were 337.1 gram/

kWh and 317.8 gram/kWh respectively. The

weighted average house consumption rate was

5.4%. The Company’s technical and economic

indices remained at the forefront among all other

power companies in the PRC.

3. COST CONTROL

In 2005, the Company continued to implement

various measures for ensuring sufficient fuel supply.

The Company achieved better results in the purchase,

transportation, quality control and inventory of coal.

Along with contributions from newly acquired power

plants with relatively lower unit fuel costs, the

increase in the Company’s unit fuel cost was well

controlled and did not exceed the annual target of

12%.

4. ASSET OPERATION

On 26th May 2005, the Company entered into a

transfer agreement with Jiangsu Yueda Investment

Limited Company (“Jiangsu Yueda”), pursuant to

which the Company agreed to acquire from Jiangsu

Yueda its 26.36% equity interest in Huaiyin Power

Plant Phase I (2 X 220MW generating units). The

Company paid the consideration of Rmb 200.6

million from its internal cash surplus on 28th June

2005. Upon completion of the transaction, the

Company holds 90% equity interest in Huaiyin Power

Plant Phase I while its total generation capacity on

an equity basis has increased by 116MW. The

remaining 10% equity interest in Huaiyin Power Plant

Phase I is held by Jiangsu Power Development Joint

Stock Limited Company.

5. PROJECT CONSTRUCTION

(1) Under the dedicated organization of the

Company and the efforts of the relevant parties,

generating units No. 3 and No. 4 of Huaiyin

Power Plant commenced commercial operation

in January and March 2005 respectively.

Generating unit No. 3 of Shantou Power Plant

commenced commercial operation in October

2005 while generating units No. 3 and No. 4

of Taicang Power Plant commenced commercial

operation in January and February 2006

respectively. Generating unit No. 3 of Yueyang

Power Plant and an 80 MW generating unit of

Sichuan Hydropower commenced commercial

operation in March 2006 and December 2005

respectively. The construction periods of

generating units No. 3 and No. 4 of Huaiyin

Power Plant and generating unit No. 3 of

Shantou Power Plant have broken the records

of Huaneng Group. The commercial operations

of such new generating units contributed to


the increase in the Company ’s power

generation.

(2) The construction projects of the Company,

including the 1 X 300MW generating unit of

Yueyang Power Plant, 3 X 390MW generating

units of Shanghai Combined Cycle Power Plant,

2 X 300MW generating units of Xindian Power

Plant Phase III, 2 X 600MW generating units of

Luohuang Power Plant Phase III, 2 X 600MW

generating units of Yingkou Power Plant Phase

II, 2 X 1,000MW generating units of Yuhuan

Power Plant Phase I, 2 X 330MW generating

units of Huaiyin Power Plant Phase III and the

aggregated 570MW generation capacity

project of Sichuan Hydropower progressed

smoothly. The quality of the construction work

and investment were controlled effectively. The

projects progressed in accordance with the

schedules.

(3) In addition, as a result of closure and suspension

of small generating units and technological

upgrades on existing generating units, there has

been a change on the Company’s total

generation capacity on an equity basis, which

has currently reached 23,549 MW.

PROSPECTS FOR 2006

2006 is the first year of the Eleventh Five Year Plan.

Continued growth in the national economy and the on-

going improvement of the living standard will continue

to stimulate a rapid growth in power demand, thereby

providing opportunities for the Company to grow its

power generation. However, as the supply and demand

of power will become more balanced, market competition

will be further intensified, thus creating new challenges

for the Company. The accelerated formation of regional

power markets adopting tariff pooling offers opportunities

for the Company to utilize the strength of its facilities to

compete, yet another challenge arises as to how to

maintain and enhance the competitiveness of the

Company. The supply and demand of coal, in a trend of

reaching equilibrium this year, will offer a favourable

opportunity for the Company to ensure a safe and stable

supply of coal, but an effective control on the surge of

unit fuel cost will remain a challenge for the Company.

The Company’s main work objectives for year 2006 are

as follows:-

1. To strengthen production safety management and

to ensure safe, stable and increasing power

generation;

2. To strengthen sales and marketing work, optimize

the structure of power generation and actively

participate in competitive pooling in the regional

markets in order to maximize the Company’s overall

profit;

3. To strengthen coal purchase management to ensure

safe, stable and effective supply of coal;

4. To strengthen the management of projects under

construction to ensure the projects will be completed

in high quality, fast pace and low cost and in

accordance with schedules;

5. To enhance strategic planning to ensure a long-term,

stable and healthy development of the Company;

6. To strengthen operation management and risk

management, as well as to increase the capital

utilization rate and exercise stringent cost controls;

7. To encourage management innovation and to

effectively carry out internal controls.



The Company will continue to pursue a maximization of

shareholders’ interests as its operating objective and goal.

Given the continuous economic growth in China, good

opportunities provided by the power system reform and

strong support from the authorities at all levels and the

parent company, and especially the support and trust from

investors and shareholders, the Company will surely be

able to continue its healthy and steady growth, bringing

long-term, stable and increasing returns to its

shareholders.

SUMMARY OF FINANCIALINFORMATION AND OPERATINGRESULTS

Please refer to the Financial Highlights on page 8 for

summary of the operating results and assets and liabilities

of the Company and its subsidiaries as at 31st December

2005 and for the year then ended.

Please refer to pages 97, 190 and 197 of the financial

statements for the operating results of the Company and

its subsidiaries for the year ended 31st December 2005,

which have been reviewed by the Company’s Audit

Committee.

DISTRIBUTABLE RESERVE

Distributable reserve of the Company at 31st December,

2005, calculated in accordance with its articles of

association is set out in Note 22 to the financial statements

prepared under International Financial Reporting

Standards (“IFRS”).

DIVIDENDS

The Board resolved to propose for the year ended 31st

December 2005 a cash dividend of Rmb 0.25 (2004:

Rmb0.25) per ordinary share, totalling approximately

Rmb3.014 billion (2004: approximately Rmb 3.014 billion).

Cash dividends will be denominated and declared in

Renminbi. Cash dividends on domestic shares will be paid

in Renminbi. Save for the dividends on foreign shares

traded on the Hong Kong Stock Exchange which will be

paid in Hong Kong dollars, cash dividends on foreign

shares will be paid in United States dollars. Exchange rates

for dividends paid in United States dollars and Hong Kong

dollars are USD1 to Rmb 8.0317 and HK$1 to Rmb

1.03505 respectively.

All the cash dividends will be paid to shareholders on or

before 30th June 2006, subject to approval at the annual

general meeting of the Company.

PRINCIPAL BUSINESS

Currently, the Company and its subsidiaries wholly own

16 operating power plants and have controlling interests

in 12 operating power plants and minority interests in 4

operating power companies. Its power plants have

advanced equipment with high efficiency and stability.

Their operations are widely located in those regions in

China where there are rapid economic growth and fast-

increasing power demand. The core business of the

Company is to develop, construct, and operate large-scale

coal-fired power plants by making use of modern

technology and equipment and financial resources

available domestically and internationally.

SUBSIDIARIES AND ASSOCIATEDCOMPANIES

Please refer to Notes 13 and 12 to the financial statements

prepared under IFRS for details of subsidiaries and

associated companies respectively.


SHORT-TERM BONDS

During the year, the Company issued Rmb 5 billion

unsecured short-term zero-coupon bonds, in meeting its

operational needs.

BANK LOANS AND OTHERBORROWINGS

Please refer to Notes 24, 27 and 28 to the financial

statements prepared under IFRS for details of bank loans

of the Company and its subsidiaries as at 31st December

2005.

CAPITALIZED INTEREST


prepared under IFRS for details of the Company and its

subsidiaries capitalized borrowing costs during the year.

PROPERTY, PLANT AND EQUIPMENT


prepared under IFRS for changes in the property, plant

and equipment of the Company and its subsidiaries during

the year.

RESERVES

Please refer to consolidated statement of changes in

shareholders’ equity on page 101 for the reserves of the

Company and its subsidiaries during the year.

STAFF RETIREMENT SCHEME

The Company and its subsidiaries have implemented a

series of specified retirement contribution schemes as

prescribed by the places where the Company and its

subsidiaries have operations.

Pursuant to the specified retirement contribution schemes,

the Company and its subsidiaries have paid contributions

according to the terms and obligations set out in the jointly

managed retirement insurance plans. The Company has

no other obligations to pay further contributions. The

contributions paid from time to time will be regarded as

expenses in the period and counted as labour cost. Please

refer to Note 9 to the financial statements prepared under

IFRS for details of the charging in the current year.

PRE-EMPTIVE RIGHTS

According to the articles of association of the Company

and the laws of the PRC, there are no provisions for pre-

emptive rights requiring the Company to offer new shares

to the existing shareholders of the Company in proportion

to their shareholdings.

MAJOR SUPPLIERS AND CUSTOMERS

The five major suppliers of the Company for year 2005

were coal suppliers, namely Shenhua Coal Transportation

Company, Luan Environmental Protection and Energy

Development Joint Stock Limited Company, Yangquan

Coal Group, China Coal Import and Export Company and

Datong Coal Joint Stock Limited Company. The amount

of coal supplied by the five major suppliers was about

22.5% of the total coal consumption of the Company in

the year.

As a power producer, the Company sold the electricity

generated by its power plants through local operating

power grid enterprises and did not have other customers.

The five major customers of the Company and its

subsidiaries were Shandong Power Group Company,

Jiangsu Province Power Company, Liaoning Province Power

Company, Shanghai Power Company and Fujian Province

Power Company. The amount of operating revenue of

the five major customers and the largest customers,

Shandong Power Group Company, accounted for



approximately 63.67% and 18.36% of the total operating

revenue of the Company and its subsidiaries this year,

respectively.

None of the directors, supervisors or their respective

associates (as defined in the Rules Governing the Listing

of Securities on The Stock Exchange of Hong Kong Limited

(“Hong Kong Stock Exchange”)) had any interests in the

five largest suppliers or customers mentioned above of

the Company in 2005.

CONNECTED TRANSACTIONS

Please refer to Notes 5, 6 and 8 to the financial statements

prepared under IFRS in relation to the details of connected

transactions. The purposes of the Company to enter into

such connected transactions with connected persons was

to meet the operational need of the Company and to get

the most favourable terms and conditions from the market

from the Company’s perspective. The connected

transactions as set out in Note 5 is the connected

transactions as defined in Chapter 14A of the Listing Rules

and those set out in Notes 6 and 8 are continuing

connected transactions as defined in Chapter 14A of the

Listing Rules except for Note 8(a)(ii), (iii), (iv), (v), (vi), (vii)

and Note 8(c) . Except the transaction with Jingyuan, the

Company has complied with all disclosure requirements

under the Listing Rules.

The Independent Directors of the Company confirmed that

all connected transactions in 2005 to which the Company

and/or any of its subsidiaries was a party:

1. had been entered into by the Company and/or any

of its subsidiaries in the ordinary and usual course of

its business;

2. had been entered into either (a) on normal

commercial terms (which expression will be applied

by reference to transactions of a similar nature made

by similar entities within the PRC), or (b) where there

is no available comparison, on terms that are fair

and reasonable so far as the shareholders of the

Company are concerned, and

3. had been entered into either (a) in accordance with

the terms of the agreements governing such

transactions, or (b) where there is no such agreement,

on terms no less favourable than terms available to

third parties.

Based on the work performed, the auditors of the

Company have reviewed such transactions and reported

to the Directors that:

(a) the transactions have been approved by the

Directors;

(b) the management income transactions were in

accordance with the pricing policy of the Company;

(c) the transactions were made in accordance with the

terms of the related agreements governing such

transactions; and

(d) have not exceed the caps allowed by the Hong Kong

Stock Exchange in the previous waivers.

COMPETITION WITH CONTROLLINGSHAREHOLDERS

The ultimate controlling shareholder of the Company,

Huaneng Group also participates in the power industry in

China. HIPDC, the direct controlling shareholder of the

Company also engages in the power industry in China.

The Company, HIPDC (direct controlling shareholder) and

Huaneng Group (ultimate controlling shareholder) have

power plants located in certain same regions. Huaneng

Group and HIPDC have already entrusted the Company

to manage certain of their coal-fired power plants.


Currently, the Company has 14 directors and only 4 of them have positions in Huaneng Group and/or HIPDC. According

to the articles of association of the Company, in case of conflict of interest arises, the relevant directors shall abstain from

voting in the relevant resolutions. None of the senior management of the Company (except Mr. Na Xizhi) holds positions

in Huaneng Group and HIPDC. Therefore, the operation of the Company is independent from Huaneng Group and

HIPDC and the operation of the Company is conducted for its own benefit.

PURCHASE, SALE OR REDEMPTION OF SHARES

The Company and its subsidiaries did not sell any other types of securities and did not purchase or redeem its own shares

or other securities in 2005.

DIRECTORS OF THE COMPANY

The Directors of the Company in 2005 are:

Li Xiaopeng Chairman Appointed on 11th May 2005

Huang Yongda Vice Chairman Appointed on 11th May 2005

Wang Xiaosong Vice Chairman Appointed on 11th May 2005 (resigned from the positions

of Director and Vice Chairman on 7th March 2006)

Na Xizhi Director Appointed on 11th May 2005

Huang Long Director, Secretary to the Board Appointed on 11th May 2005 (elected as Vice Chairman

on 7th March 2006)

Wu Dawei Director Appointed on 11th May 2005

Shan Qunying Director Appointed on 11th May 2005

Ding Shida Director Appointed on 17th November 2005

Xu Zujian Director Appointed on 11th May 2005

Liu Shuyuan Director Appointed on 11th May 2005

Qian Zhongwei Independent Director Appointed on 11th May 2005

Xia Donglin Independent Director Appointed on 11th May 2005

Liu Jipeng Independent Director Appointed on 11th May 2005

Wu Yusheng Independent Director Appointed on 11th May 2005

Yu Ning Independent Director Appointed on 11th May 2005

Directors Resigned

Ye Daji Vice Chairman Resigned on 11th May 2005

Huang Jinkai Director Resigned on 11th May 2005

Liu Jinlong Director Resigned on 11th May 2005

Gao Zongze Independent Director Resigned on 11th May 2005

Zheng Jianchao Independent Director Resigned on 11th May 2005

Yang Shengming Director Resigned on 9th August 2005



In accordance with the requirements of the Hong Kong

Stock Exchange, the Company has entered into service

contracts with the Directors of the fifth session of the

Board of Company.

CODE FOR SECURITIES TRANSACTIONSBY DIRECTORS AND SUPERVISORS

The Company has adopted a code in relation to the

securities transactions by the Directors and Supervisors

with the standard not lower than that of the Model Code

for Securities Transactions by Directors of Listed Issuers as

set out in Appendix 10 to the Listing Rules. Equiry has

been made with all Directors and Supervisors and all of

them confirmed that they have complied with the code

throughout 2005.

DIRECTORS’ AND SUPERVISORS’ RIGHTTO PURCHASE SHARES

As at 31st December 2005, none of the Directors, chief

executive officer, Supervisors or other associates (as

defined in Part XV of the Securities and Futures Ordinance

(“SFO”)) had any beneficial interests in the securities or

debt instruments of the Company which were required

to be recorded in the register pursuant to Divisions 7 and

8 in Section 352 of the SFO or as otherwise notified to

the Company and the Hong Kong Stock Exchange

pursuant to the Model Code for Securities Transaction by

Directors of Listed Companies. The Company did not have

any arrangement during 2005 whereby the above persons

would acquire benefits by means of the acquisition of

shares in, or debentures of the Company or other

corporate body.

INDEPENDENT DIRECTORS’CONFIRMATION OF INDEPENDENCE

The Company has received independent confirmation

from each of the independent directors, namely Mr. Qian

Zhongwei, Mr. Xia Donglin, Mr. Liu Jipeng, Mr. Wu

Yusheng and Mr. Yu Ning, and considers them to be

independent.

EMOLUMENTS OF DIRECTORS ANDSUPERVISORS

Details of the emoluments of Directors and Supervisors

of the Company are set out in Note 10 to the financial

statements prepared under IFRS.

FIVE HIGHEST PAID STAFF

Details of the five highest paid staffs in the Company are

set out in Note 10 to the financial statements prepared

under IFRS.

PUBLIC FLOAT

As at the date of this annual report, the Company has

maintained the prescribed public float under the Listing

Rules and as agreed with the Stock Exchange, based on

the information that is publicly available to the Company

and within the knowledge of the directors of the

Company.


SHARE CAPITAL STRUCTURE

As at 31st December 2005, the total issued share capital

of the Company was 12,055,383,440 shares, of which

9,000,000,000 shares were domestic shares, representing

approximately 74.66% of the total issued share capital,

and 3,055,383,440 shares were foreign shares,

representing approximately 25.34% of the total issued

share capital. For domestic shares, HIPDC owns a total of

5,157,680,000 shares, representing 42.78% of the total

issued share capital of the Company. Other domestic

shareholders hold a total of 3,842,320,000 shares,

representing 31.87% of the total issued share capital. On

23rd March 2006, Huaneng Group completed the

acquisition of 1,114,106,667 shares of the Company from

other domestic shareholders, representing 9.24% of total

issued share capital of the Company. Other domestic

shareholders holds a total of 2,728,213,333 shares,

representing 22.63% of the total issued share capital of

the Company.

SHAREHOLDING OF THE COMPANY

The following table summarises the shareholding structure of the Company’s shares as at 31st December 2005:

No. of Shares Percentage of

outstanding Shareholding

(%)

Domestic Shares

Huaneng International Power Development Corporation 5,157,680,000 42.78

Hebei Provincial Construction Investment Company 904,500,000 7.50

Jiangsu Provincial International Trust & Investment Corporation 624,750,000 5.18

Fujian Investment Enterprise Holdings Company 561,700,000 4.66

Liaoning Energy Investment (Group) Limited Liability Company 465,787,290 3.86

Dalian Municipal Construction Investment Company 452,250,000 3.75

Nantong Investment Management Limited Company 135,750,000 1.13

Minxin Group Limited Company 108,000,000 0.90

Shantou Power Development Joint Stock Company Limited 38,000,000 0.32

Liaoning Guoneng Group (Holdings) Joint Stock Limited Company 33,582,710 0.28

Dandong Energy Investment Development Centre 13,000,000 0.11

Shantou Electric Power Development Corporation 5,000,000 0.04

Domestic public shares 500,000,000 4.15

Sub-total 9,000,000,000 74.66

Foreign Shares 3,055,383,440 25.34

TOTAL 12,055,383,440 100.00



1. On 15th June 2005, Fujian International Trust &

Investment Company Limited transferred its

108,000,000 shares of the Company to Minxin

Group Limited Company.

2. On 26th September 2005, HIPDC transferred its

40,000,000 shares of the Company to Liaoning

Energy Investment Company.

3. On 13th October 2005, Fujian International Trust &

Investment Company Limited was renamed as Fujian

Investment Enterprise Holdings Limited.

4. On 5th December 2005, Liaoning Energy Investment

(Group) Limited Liability Company transferred its

33,582,710 shares to Liaoning Guoneng Group

(Holdings) Joint Stock Limited Company.

5. On 22nd February 2006, Nantong Municipal

Investment Management Centre was renamed as

Nantong Investment Management Limited Company.

The shareholdings of the non-circulating shares of the

Company after the aforesaid transfer and assignment of

shares and the acquisition of shares by Huaneng Group

on 23rd March 2006.

Approximate

Percentage in

the Company’s

total issued

Shareholder Number of shares share capital

%

Huaneng International Power Development Corporation 5,157,680,000 42.78

China Huaneng Group 1,114,106,667 9.24

Hebei Provincial Construction Investment Company 603,000,000 5.00

Jiangsu Provincial Investment & Management Limited Liability Company 416,500,000 3.45

Fujian Investment Enterprise Holdings Limited 338,466,667 2.81

Liaoning Energy Investment (Group) Limited Liability Company 332,913,333 2.76

Dalian Municipal Construction Investment Company 301,500,000 2.50

Minxin Group Lmited 108,000,000 0.90

Nantong Investment & Management Limited Company 90,500,000 0.75

Shantou Power Development Joint Stock Company Limited 25,333,333 0.21

Dandong Energy Investment Development Centre 8,666,667 0.07

Shantou Electric Power Development Company 3,333,333 0.03


MATERIAL INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYINGSHARES OF THE COMPANY

As at 31st December 2005, the interests or short positions of persons who are entitled to exercise or control the exercise

of 5% or more of the voting power at any of the Company’s general meetings (excluding the Directors, Supervisors and

chief executive) in the shares and underlying shares of equity derivatives of the Company as recorded in the register

required to be kept under Section 336 of the Securities and Futures Ordinance (Hong Kong Law Cap. 571) (the “SFO”)

are as follows:

Percentage Percentage

Name of in the relevant in total

substantial Class of Number of Type of class of share

shareholder shares shares held Capacity interest share capital capital

Huaneng International Domestic Shares 5,157,680,000 (L) Beneficial owner Corporate 57.31% (L) 42.78% (L)

Power Development

Corporation

Hebei Provincial Domestic Shares 904,500,000 (L) Beneficial owner Corporate 10.05% (L) 7.50% (L)

Construction Investment

Company

Jiangsu Provincial Domestic Shares 624,750,000 (L) Beneficial owner Corporate 6.94% (L) 5.18% (L)

International Trust

& Corporation

Fujian Investment Domestic Shares 561,700,000 (L) Beneficial owner Corporate 6.24% (L) 4.66% (L)

Enterprise Holdings

Company

Liaoning Energy Domestic Shares 465,787,290 (L) Beneficial owner Corporate 5.18% (L) 3.86% (L)

Investment (Group)

Limited Liability Company

JP Morgan Chase H Shares 203,857,132 (L) Interest of Corporate 6.67% (L) 1.69% (L)

& Co. 100,299,624 (P) controlled 3.28% (P) 0.83% (P)

corporation,

Investment manager

and custodian

corporation/

Approved lending

agent




Name of in the relevant in total

substantial Class of Number of Type of class of share

shareholder shares shares held Capacity interest share capital capital

(shares)

UBS AG H Shares 343,983,303 (L) Beneficial owner, Corporate 11.26% (L) 2.85% (L)

69,548,000 (S) Interest of 2.27% (S) 0.58% (S)

controlled

corporation/Holder

of security interest

in shares

Credit Suisse Group H Shares 244,813,491 (L) Interest of controlled Corporate 8.01% (L) 2.03% (L)

201,153,541 (S) corporation/ 6.58% (S) 1.67% (S)

607,000 (P) Approved 0.02% (P) 0.005% (P)

lending agent

Hebei Provincial H Shares 452,250,000 (L) Beneficial owner Corporate 14.80% (L) 3.75% (L)

Construction

Investment Company

J.P. Morgan Chase Bank H Shares 108,190,980 (L) Investment manager Corporate 3.54% (L) 0.90% (L)

and custodian

J.P. Morgan Fleming Asset H Shares 83,918,000 (L) Investment manager Corporate 2.75% (L) 0.70% (L)

Management (Asia) Inc.

J.P. Morgan Fleming Asset H Shares 83,198,000 (L) Investment manager Corporate 2.72% (L) 0.69% (L)

Management Holding Inc.

JF Asset Management H Shares 80,298,000 (L) Investment manager Corporate 2.63% (L) 0.67% (L)

Limited

Jiangsu Provincial H Shares 312,375,000 (L) Beneficial owner Corporate 10.22% (L) 2.60% (L)

International

Investment Company

Note: The letter “L” denotes a long position. The letter “S” denotes a short position. The letter “P” denotes interest in a lending pool.


Save as stated above, as at 31st December 2005, in the

register required to be kept under Section 336 of the SFO,

no other persons were recorded to hold any interests or

short positions in the shares or underlying shares of the

equity dervatives of the Company.

DIRECTORS’ AND SUPERVISORS’INTEREST IN CONTRACTS ANDSERVICE CONTRACTS

Save for the service contracts mentioned below, as at the

end of 2005, the directors and supervisors of the Company

did not have any material interests in any contracts entered

into by the Company.

No director or supervisor has entered into any service

contract which is not terminable by the Company within

one year without payment of compensation (other than

statutory compensation).

Each and every Director and Supervisor of the Company

had entered into a service contract with the Company for

a term of three years commencing from the signing of

the contract.

REMUNERATION POLICY

In accordance with the overall development strategy of

the Company, the Company has formulated “Provisional

Regulatons on Remuneration Management” and

“Provisional Guidelines on Salary Management for

Branches and Subordinate Units”. Employees’ salaries are

calculated with reference to the complexity of their jobs,

the responsibilities they have to carry and their job

performance. The remuneration of Directors, Supervisors

and senior management mainly consists of the following:

(1) Basic salary and allowance

The basic salary is set by an evaluation of the job

position and a factor analysis, and with reference to

the salary level of the relevant position in the labour

market. It amounts to about 20% of the total

remuneration.

(2) Discretionary bonus

Discretionary bonus is based on the job performance

of Directors, Supervisors and senior management. It

amounts to about 60% of the total remuneration.

(3) Retirement contribution

The Company provides the Directors, Supervisors and

senior management with various social securities,

including basic retirement insurance, corporate

annuity and housing contribution fund. This amounts

to about 20% of the total remuneration.



According to the resolution at the shareholders’ meeting,

the Company pays each Independent Director a subsidy

amounted to Rmb 60,000 (after tax) each year. The

Company also reimburses to the Independent Directors

for the expenses they incur in attending board meetings

and shareholders’ meetings and other reasonable

expenses they incur while fulfilling their obligations under

the Company Ordinance and the Company ’s

Memorandum and Articles of Association (including travel

expenses and administrative expenses). Besides these, the

Company does not give the Independent Directors any

other benefit.

STAFF HOUSING

The Company made allocation to the housing common

reserve fund for its employees in accordance with the

relevant PRC regulations.

In 2005, the Company and its subsidiaries have not sold

quarters to its staff, nor did they have such plans.

STAFF MEDICAL INSURANCE SCHEME

According to the requirements as prescribed by the

relevant local governments, the Company and its

subsidiaries have established a medical insurance scheme

for its staff, and have taken measures for its

implementation according to planning.

GENERAL MEETINGS

During the period, the Company convened one annual

general meeting and two extraordinary general meetings.

1. The Company’s annual general meeting was held

on 11th May 2005. The resolutions passed at the

meeting were published in (Hong Kong) Wen Wei

Po, South China Morning Post, China Securities

Journal and Shanghai Securities News on 12th May

2005.

2. The Company’s first extraordinary general meeting

of 2005 was held on 28th July 2005. The resolutions

passed at the meeting were published in (Hong Kong)

Wen Wei Po, South China Morning Post, China

Securities Journal and Shanghai Securities News on

29th July 2005.

3. The Company’s second extraordinary general

meeting of 2005 was held on 17th November 2005.

The resolutions passed at the meeting were published

in (Hong Kong) Wen Wei Po, South China Morning

Post, China Securities Journal and Shanghai Securities

News on 18th November 2005.

In 2006:

The Company’s first extraordinary general meeting

of 2006 was held on 18th January 2006. The

resolutions passed at the meeting were published in

(Hong Kong) Wen Wei Po, South China Morning

Post, China Securities Journal and Shanghai Securities

News on 19th January 2006.


MAJOR EVENTS

(1) On 26th May 2005, the Company entered into a

transfer agreement with Jiangsu Yueda, pursuant to

which the Company agreed to acquire from Jiangsu

Yueda its 26.36% equity interest in Huaiyin Power

Plant Phase I (2 X 220MW generating units). The

Company paid the purchase price of Rmb 200.6

million from its internal cash surplus on 28th June

2005. Upon completion of the transaction, the

Company holds 90% equity interest in Huaiyin Power

Plant Phase I. The remaining 10% equity interest in

Huaiyin Power Plant Phase I is held by Jiangsu Power

Development Joint Stock Limited Company.

(2) The term of the fourth session of the Board of the

Company expired. Having been approved at the

meeting of the Supervisory Comimittee held on 14th

March 2005, the Board meeting held on 15th March

2005 and the annual general meeting held on 11th

May 2005, the fifth session of the Board consisted

of 15 members, including Mr. Li Xiaopeng, Mr. Huang

Yongda, Mr. Wang Xiaosong, Mr. Na Xizhi, Mr.

Huang Long, Mr. Wu Dawei, Mr. Shan Qunying, Mr.

Yang Shengming, Mr. Xu Zujian, Mr. Liu Shuyuan,

Mr. Qian Zhongwei, Mr. Xia Donglin, Mr. Liu Jipeng,

Mr. Wu Yusheng and Mr. Yu Ning. The fifth session

of the Supervisory Committee consisted of 6

members, including Mr. Ye Daji, Ms. Yu Ying, Mr.

Shen Weibing, Mr. Shen Zongmin, Ms. Zou Cui and

Mr. Wang Zhaobin.

Five members of fourth session of the Board,

including Mr. Ye Daji, Mr. Huang Jinkai, Mr. Liu

Jinlong, Mr. Gao Zongze and Mr. Zheng Jianchao,

retired and did not take up position on the new

session. Four members of the fourth session of the

Supervisory Committee, including Mr. Wei Yunpeng,

Mr. Li Yonglin, Mr. Pan Jianmin and Mr. Zhan Xisheng,

retired and did not take up position on the new

session.

(3) It was approved at the Board meeting held on 15th

March 2005 that Mr. Li Shiqi was appointed as the

Company’s Vice President, while Mr. Wu Dawei

resigned from the position of the Company’s Vice

President and Mr. Li Shiqi resigned as the Company’s

Chief Economist.

(4) On 8th August 2005, Mr. Shen Weibing resigned

from the position of Supervisor. On 9th August 2005

Mr. Yang Shengming resigned from the position of

Director. The appointments of Mr. Ding Shida as

Director of the Company and Mr. Gu Jianguo as

Supervisor of the Company were approved at the

general meeting held on 17th November 2005.

(5) On 30th November 2005, Mr. Ye Daji resigned from

the position of the Chairman of the Supervisory

Committee. On 18th January 2006, as approved by

the general meeting, Mr. Guo Junming was

appointed as Supervisor of the Company. He was

also elected the Chairman of the Supervisory

Committee by the Supervisory Committee.

(6) The fourth meeting of the fifth session of the Board

was held on 7th March 2006. Mr. Huang Long was

elected Vice Chairman of the fifth session of the

Board. The resignation of the Mr. Wang Xiaosong as

the Company’s Director and Vice Chairman was

accepted.

It was resolved to appoint Mr. Na Xizhi as President

of the Company and that he will no longer act as

Vice President of the Company. It was resolved to

accept the resignation of Mr. Huang Yongda as

President of the Company.



It was resolved to appoint Mr. Qu Xiaojun, Mr. Huang

Jian, Ms. Lu Dan and Mr. Fan Xiaxia as Vice Presidents

of the Company, and Ms. Zhou Hui as Chief

Accountant of the Company.

It was resolved to accept the resignation of Mr. Zhang

Hong, Mr. Huang Long and Mr. Li Shiqi as Vice

Presidents of the Company, and that Mr. Huang Jian

will no longer act as Chief Accountant of the

Company.

It was resolved to appoint Ms. Jia Wenxin as Securities

Representative of the Company and to accept the

resignation of Mr. Gu Biquan as Securities

Representative of the Company.

The Board of the Company is satisfied with the work

conducted by Mr. Huang Yongda, Mr. Wang Xiaosong,

Mr. Zhang Hong, Mr. Huang Long, Mr. Li Shiqi, Mr. Huang

Jian and Mr. Gu Biquan during their terms of office and

highly appraised their contributions towards the

Company’s development over the past years, and the

Board extends wholehearted thanks to them.

CODE OF CORPORATE GOVERNANCEPRACTICES

During the year, the Company has complied with the Code

of Corporate Governance Practices as set out in Appendix

14 of the Listing Rules. This annual report of the Company

contains a corporate governance report prepared in

accordance with the requirements of the Listing Rules.

DESIGNATED DEPOSIT


subsidiaries did not have any designated deposit with any

financial institutions within the PRC nor any overdue fixed

deposit which could not be recovered.

DONATIONS

During the year, the total amount of donation made by

the Company and its subsidiaries was approximately

RMB3.65 million (2004: approximately RMB1.39 million).

LEGAL PROCEEDINGS


subsidiaries were not involved in any material litigation or

arbitration and no material litigation or claim was pending

or threatened or made against the Company and its

subsidiaries.

AUDITORS

In the forthcoming annual general meeting for 2005, a

p roposa l rega rd ing the re - appo in tment o f

PricewaterhouseCoopers Zhong Tian CPAs Limited

Company as the PRC auditors of the Company and

PricewaterhuseCoopers as the international auditors of

the Company for 2006 will be tabled for shareholders

consideration and approval.

By Order of the Board

Li Xiaopeng

Chairman

Beijing, PRC

28th March 2006


To: All Shareholders

In 2005, all members of the Supervisory Committee of

the Company strictly complied with the laws and

regulations of the places where the Company is listed, as

well as the articles of association of the Company. They

have acted honestly and in good faith, and carried out

their work diligently so as to protect the interest of the

shareholders and the benefit of the Company. The

Committee paid close attention to the operational

situation and management of the Company for 2005 and

conducted review on the performance of duties of the

Directors of the Company and senior management.

I. WORK OF THE SUPERVISORYCOMMITTEE IN 2005

In accordance with the applicable laws and

regulations, and the practical needs of the Company,

the Supervisory Committee convened five meetings

(included resolutions in writing). Series of work,

including change of session and alterations of the

Rules of Procedures for the Supervisory Committee,

were completed as scheduled.

1. On 14th March 2005, the sixth meeting of the

fourth session of the Supervisory Committee

was convened in Beijing. The financial

statement of the Company for 2004, the profit

distribution plan of the Company for 2004, the

annual report of the Company for 2004 and

its extract, the Working Report of the

Supervisory Committee of the Company for

2004 and the proposal regarding change of

the session of the Supervisory Committee were

approved at the meeting.

2. On 14th April 2005, the fourth session of the

Supervisory Committee passed a resolution in

writing to approved the proposal regarding

alterations to the Rules of Procedures for the

Supervisory Committee.

3. On 11th May 2005, the first meeting of the

fifth session of the Supervisory Committee

was held in Beijing. The proposal regarding

the election of Chairman and Vice Chairman

of the fifth session of the Company’s

Supervisory Committee was considered and

approved that Mr. Ye Daji and Ms. Yu Ying

were elected Chairman and Vice Chairwoman

respectively.

4. On 9th August 2005, the second meeting of

the fifth session of the Supervisory Committee

was held in Beijing. The interim report of the

Company for 2005 and its extract and the

proposal to change supervisors were

considered and approved at the meeting. It

was agreed to the normination of Mr. Gu

Jianguo as candidate for Supervisor and the

resignation of Mr. Shen Weibing from the

position of Supervisor.

5. On 30th November 2005, the fifth session of

the Supervisory Committee resolved by

resolution in writing the nomination of Mr.

Guo Junming as candidate for Supervisor and

the resignation of Mr. Ye Daji from the position

of Chairman of the Supervisory Committee.

Report of theSupervisory Committee


Report of the Supervisory Committee

The Supervisors attended (or appointed proxy) all

of the aforesaid meetings. The convocation of the

meetings complied with the requirements of the

Company Law and the articles of association.

During the reporting period, the Supervisors of the

Company, attended all board meetings and

shareholders’ meetings of the Company’s.

II INDEPENDENT OPINION OF THESUPERVISORY COMMITTEE ONTHE RELEVANT MATTERS OF THECOMPANY IN 2005

1. The Supervisory Committee performed

effective supervision and examination on the

procedures for convening the shareholders’

meetings and Board meetings, the adoption

of resolutions, the implementation of the

resolutions of the shareholders’ meetings by

the Board of Directors, performance of duties

of the senior management of the Company

and the internal management system of the

Company according to the relevant laws and

regulations.

The Supervisory Committee is of the view that

the Board of Directors and the senior

management are capable of establishing a

model and conducting regulated operation in

strict compliance with the Company Law, the

Securities Law, the articles of association of

the Company and the relevant regulations and

rules of the jurisdictions in which the

Company’s shares are listed, and have

performed dutifully, diligently, and in good

faith. During the report period, the Company’s

management system further improved as a

result of the continuing establishment of the

internal system. The internal control system

became more all–rounded. The business

activities of the Company complied with the

requirement of the laws and regulations. In

the course of examining the financial position

of the Company and supervising the

performance of duties of the Directors and

senior management, the Supervisory

Committee has not found any of their

behavior which contravened any relevant

laws, regulations or the articles of association

of the Company or any issues that has caused

damage to the interests of the Company.

2. Examining the financial conditions of

the Company

The Supervisory Committee has carefully

examined and verified the financial reports of

the Company for 2005, the profit distribution

proposal of the Company for 2005 and the

2005 financial statements audited by the

domestic and international auditors without

any reservation.


2005 was the most difficult year for the year

in terms of the business environment. The

Company encountered rises of fuel costs, a

heavy burden of the infrastructure and

increasing market competition. Under the

right guidance by the board and as a result of

the hard work of all staff led by the

management, the Company has overcome

the difficulties and achieved good operating

results. The Company’s financial statements


of 2005 have accurately reflected the financial

conditions and operating results of the

Company during the reporting period. The

Supervisory Committee agreed to the

Company’s financial statements issued by the

auditors and the profit distribution plan for

2005.

3. Acquisition and disposal of assets and

connected transactions

During the reporting period, the Board of

Directors of the Company has, by way of

resolutions numbered 061, 062 and 066,

examined and approved the proposal of

entrusting China Huaneng Group to manage

the interest in Huaneng Sichuan Hydropower

Co., Ltd. (“Sichuan Hydropower”), the

proposal regarding the Nanjing Combined –

Cycle – Gas – Turbine Project and the proposal

regarding the investment in China Huaneng

Finance Corporation Ltd. (“Huaneng

Finance”). It was agreed that the Company

entrusted China Huaneng Group to manage

the production and operation matters of

Sichuan Hydropower, that the Nanjing

Combined – Cycle – Gas – Turbine Project was

jointly invested by HIPDC and Jiangsu

Provincial Guoxin Asset Management Group,

Nanjing Municipal Investment Company, that

the Company acquired certain newly enlarged

capital of Huaneng Finance and certain shares

in Huaneng Finance held by Huaneng Group.

The matters in the above resolutions are

connected transactions.


the arrangements involved in the above

resolutions did not involve any insider dealings

and the Supervisory Committee has not found

any issues which has damaged the interest of

the shareholders or caused the loss of the

Company’s assets or damaged the interest of

the Company. The connected transactions

were fair and the prices thereof were

determined reasonably.

In 2006, the Supervisory Committee will

continue to perform its duties assigned by the

laws, regulations and the articles of assocation

of the Company to safeguard and protect the

legal interest of the shareholders and the

Company.

Supervisory Committee

of

Huaneng Power International, Inc.

Beijing, PRC

28th March 2006


Profiles of Directors, Supervisors and SeniorManagement

Li Xiaopeng, aged 46, is a Senior Engineer. As at the end of the reporting period,

he was the Chairman of the Company and President of China Huaneng Group

(“Huaneng Group”) as well as Chairman and President of Huaneng International Power

Development Corporation (“HIPDC”). Mr. Li was Vice President, President and Vice

Chairman of the Company as well as Vice President, President and Vice Chairman of

HIPDC, Chairman of Huaneng Group and Vice President of State Power Corporation.

Before joining HIPDC, he had successively served as Engineer of the Power System

Research Division, as Deputy Division Chief of the Planning and Operations Division,

and as General Manager of the Power Technology and Economic Research Division,

Electric Power Research Institute. He graduated from the North China Institute of Electric

Power specializing in power plants and power systems.

Huang Yongda*, aged 48, is a senior accountant. As at the end of the reporting

period, he was the Vice Chairman and the President of the Company as well as the

Vice President of Huaneng Group. He was the Deputy Director of the Economic

Moderation and State Asset Supervision Office of Ministry of Power Industry, Deputy

Director of the General Office of the Ministry of Power Industry, Deputy Officer of the

Finance and Asset Management Department of State Power Corporation, Deputy

Director of the Power Department of the State Economic and Trade Commission,

President of Jiangxi Province Power Corporation, Vice President of HIPDC. Chairman of

Xi’an Thermal Industrial Research Institute Limited Company and Huaneng Capital

Services Limited Company. He graduated from China Renmin University, specializing in

industrial financial accounting.

* resigned from the position of President on 7th March 2006.

Wang Xiaosong*, aged 59, is a senior engineer. As at the end of the reporting

period, he was Vice Chairman of the Company, Vice President of HIPDC, and Vice

President of Huaneng Group. He was the Manager of the Securities Department of

HIPDC, Vice President of the Company, Vice President of HIPDC and Vice Chairman of

Huaneng Group Hong Kong Limited. Before joining the Company, he had served as

Deputy General Manager of Fushun Power Plant, General Manager of Yuanbaoshan

Power Plant and Chief of the Labour and Wages Division of Northeast Power

Administration. He graduated from Beijing Institute of Electric Power specializing in

thermal power engineering and is a senior engineer.

* resigned from the position of Director and Vice Chairman on 7th March 2006.

BIOGRAPHIES OF DIRECTORS AND SUPERVISORS(TILL 31ST DECEMEBR 2005):


Na Xizhi*, aged 52, is a senior engineer. As at the end of the reporting period,

he was the Director and Vice President of the Company, as well as Vice President

of Huaneng Group. He has served in Huaneng Group as Deputy Manager of the

Power Generation Department, General Manager of the Operation Department,

General Manager of the Power Safety and Production Department and Deputy

Chief Engineer of Huaneng Group. He graduated from Wuhan Hydroelectric

University, specializing in thermal power with a master degree in engineering.

* appointed by the Company as President on 7th March 2006.

Huang Long*, aged 52, is a senior engineer. As at the end of the reporting

period, he was the Director and Vice President of the Company as well as

Secretary of the Board of Directors. He has served as Deputy General Manager

and General Manager of the International Co-operation Department of the

Company. He graduated with a M.S. degree from North Carolina State University

in the U.S. specializing in communications and auto-control.

* elected as Vice Chairman and resigned as Vice President on 7th March 2006.

Wu Dawei, aged 52, is a senior engineer. As at the end of the reporting

period, he was the Director of the Company, Deputy Chief Engineer of Huaneng

group and President of Huaneng Group East China branch company. He has

served as Deputy General Manager of huaneng Shanghai Shidongkou Second

Power Plant, Deputy General Manager of Shanghai branch of the Company,

and the General Manager of Huaneng Shanghai Shidongkou Second Power

Plant. He has obtained a Master of Business Administration degree from the

Central Europe International Business School.


Profiles of Directors, Supervisors and Senior Management

Shan Qunying, aged 52, is a senior engineer. As at the end of the reporting period,

he was the Director of the Company and the Vice President of Hebei Provincial

Construction Investment Company. He had been the Division Chief of Hebei Provincial

Construction Investment Company. He graduated from Beijing Steel Institute specializing

in automation.

Ding Shida, aged 57, is a senior engineer. As at the end of the reporting period, he

was the Director of the Company, President of Fujian Investment Enterprise Group

Corporation, Chairman of Minxin Group Limited (a Hong Kong listed company), Director

and Executive Director of Xiamen International Bank, Director and Executive Director

of Macau International Bank and Chairman of Hong Kong Guixin Limited. He was the

General Manager of Fujian Provincial Construction Materials Corporation. He graduated

from the China Academy of Social Sciences, specializing in agricultural economics

management and was conferred a doctoral degree in management.

Xu Zujian, aged 51, is a senior economist. As at the end of the reporting period, he

was the Director of the Company, Director and Vice President of Jiangsu Province Guoxin

Asset Management Group Limited Company, and Chairman of Jiangsu Investment

Management Co. Ltd. He was Vice President of Jiangsu Provincial International Trust &

Investment Corporation, President of Jiangsu Provincial Investment & Management

Limited Liability Company, Director. He graduated from Liaoning Finance Institute

majoring in infrastructure finance.

Liu Shuyuan, aged 55, is a senior economist. As at the end of the reporting period,

he was the Director of the Company, and the President of Liaonign Energy Investment

(Group) Limited Liability Company. He has been the Vice President, Director and President

of Liaoning Provincial Trust and Investment Corporation, of Liaoning Chuangye (Group)

Limited Liability Company (Liaoning Energy Corporation). He is a postgraduate of PRC

Liaoning Province Communist Party School specializing in economic management.


Qian Zhongwei, aged 67, a senior engineer. As at the end of the reporting period,

he was the Director of the Company and has been the 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 44, is a certified public accountant (non-practising member). As

at the end of the reporting period, he was an Independent Director of the Company, a

Professor and Ph. D. tutor of the Economic and Management School of Tsinghua

University. He is also the Advisory Specialist of the Accounting Standard Committee of

the Ministry of Finance, Deputy Secretary of China Accounting Society, and Independent

Director of Zhejiang Zhongda companies and other companies. He was the Head of

Accounting Department of Economic and Management School of Tsinghua University.

He graduated from the Finance and Administration Science Research Institute of Ministry

of Finance, specializing in accounting and was awarded a Ph D. degree of Economics.

Liu Jipeng, aged 49, is a certified public accountant. As at the end of the reporting

period, he was the Director of the Company, the Chairman of Beijing Standard

Consulting Company, Professor of Capital Economic and Trade University, Adjunct

Professor of the Graduate School of China Academy of Social Science, mentor of

graduate students of the Centre for Financial Studies of the Ministry of Finance, senior

consultant of China Power Enterprises Union, China Securities Market Research and

Design Centre and Consultant of 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 49, is a senior engineer. As at the end of the reporting period,

he was the Independent Direct of the Company, Deputy Chief Engineer and Director of

Technology Department of State Grid Corporation of China. Mr. Wu has served as

Deputy Director and Senior Engineer of Electric Grid Department of China Electric

Power Research Institute and Deputy Chief Engineer Deputy Dean and Dean of China

Electric Power Research Institute. He graduated from Postgraduate School of China

Electric Power Research Institute socializing in electric power system and automation

with a master degree.



Yu Ning, aged 51, he was the Independent Director of the Company as at the end of

the reporting period. He was the President of All China Lawyers Association, part-time

Professor at Peking University, mentor of master postgraduates at Tsinghua University

Law School, practicing lawyer at Beijing Times Highland Law Firm. Mr. Yu served as

Deputy Director and of CCP Central Disciplinary Inspection Commission. He graduated

from Peking University specializing in economic law with a master degree.

Guo Junming, aged 40, is a senior accountant. As at the end of the reporting

period, he was the Supervisor of the Company (elected on 18th January 2006). Mr.

Guo served in Huaneng Group as Deputy Chief Accountant and Manager of Finance

Department. He was Deputy Manager of the Finance Department of Huaneng Group,

Vice President and President of China Huaneng Finance Limited Liability Company,

President of Huaneng Capital Services Limited Company. He graduated from Shanxi

Finance and Economic Institute specializing in business finance and accounting.

Yu Ying (Ms), aged 50, is a senior economist. As at the end of the reporting period,

she was the Vice Chairman of the Company’s Supervisory Committee and President of

Dalian Municipal Investment Corporation. Ms. Yu has served as Director of Social Affair

Department of Dalian Municipal Planning Commission and Director of Fixed Assets

Investment Department of Dalian Municipal Development and Planning Commission.

She graduated from Liaoning University of Finance and Economics, specializing in finance

and credit, with a master degree in Economics.

Gu Jianguo, aged 39, is an economist. As at the end of the reporting period, he

was the Supervisor of the Company and President of Nantong Investment &

Management Limited Company. He has served as Deputy Chief and Chief of General

Department, Investment Department, Finance Department and Foreign Economic Affairs

Department of the Nantong Municipal Planning Committee; Vice President of Nantong

Ruici Investment Limited Company; Executive Director of Ruici Hospital, President of

Ruici (Maanshan) Development Limited Company; Chairman and President of Nantong

Zhonghe Guarantee Limited Company and Chief Officer of Nantong Municipal

Investment Management Centre. He graduated from Nanjing Aviation University.


Shen Zongmin, aged 51 is a corporated culture specialist. As at the end of the

reporting period, he was the Supervisor of the Company and Manager of Shantou

Electric Power Development Corporation. He has been Deputy Manager of Shantou

Electric Power Development Corporation and Chairman of Shantou Power Development

Stock Company; Manager of Shantou Electric Corporation and Chairman of Shantou

Power Development Joint Stock Company. He graduated from Macau Technology

University and has a MBA degree.

Zou Cui (Ms)*, aged 52, is a senior engineer. As at the end of the reporting period,

she was the Supervisor of the Company, Manager of Supervision and Auditing Department

of the Company. She has served as Deputy Chief and Chief of Personnel Division of

Human Resources Department of HIPDC, Deputy Manager of Human Resources

Department and Deputy Manager of Supervision and Auditing Department of the

Company. She graduated from Xi’an Jiaotong University specializing in computer science.

* appointed as Manager of Human Resources Department of the Company (adjunct) on 10th

March 2006.

Wang Zhaobin*, aged 50, is a specialist in corporate culture. As at the end of the

reporting period, he was the Supervisor of the Company, Deputy Manager of Corporate

Culture Department of the Company. He served as Chief of Corporate Culture Division

of Human Resources Department, and Director of Retirement Department of HIPDC.

He graduated from China Beijing Municipal Communist Party School, specializing in

economic management.

* appointed by the Company on 10th March 2006 as Manager of Administration Department,

and no longer be the Manager of Corporate Culture Department.



RETIRED DIRECTORS AND SUPERVISORS

Ye Daji (retired from the position of Director by rotation on 11th May 2005 and

resigned as Chairman of the Supervisory Committee on 30th November 2005), aged

60, is a senior engineer. He is Chief Engineer of Huaneng Group. Mr. Ye served as

Deputy Manager of Shanghai branch company of Huaneng International Inc., President

of Huaneng Shanghai Shidongkou Second Power Plant. He also served as Vice President

and President of Company, Vice President of HIPDC and Director of Huaneng Group.

Before joining the Company, Mr. Ye served as Deputy Chief Engineer of Shanghai

Shidongkou Power Plant. He graduated from Department of Mechanical Engineering

Shanghai Jiao Tong University.

Huang Jinkai (retired from the position of Director by rotation on 11th May 2005),

aged 64, is a senior engineer. He served as Director (General Manager) of the Northeast

Power Administration Group Company, Chairman of HIPDC, General Manager (Director)

of North China Power Group Corporation (Power Administration) and Vice Chairman

of Huaneng Group. He graduated from Shenyang Agricultural University, specializing

in agricultural electrization.

Liu Jinlong (retired from the position of Director by rotation on 11th May 2005),

aged 64, is a senior engineer. He served as President of Central China Power Group

Corporation and Director of Central China Power Administration, Chairman, President,

and Vice Chairman of Huaneng Group. He graduated from Wuhan Hydroelectric

University, specializing in power generation and is a senior engineer.

Gao Zongze (retired from the position of Independent Director by rotation on 11th

May 2005), aged 66, is a class I lawyer. He is the Senior Partner at C&I Partners and an

approved arbitrator of China International Economic and Trade Arbitration Commission

and China Marine Affairs Arbitration Commission and President of All China Lawyers

Association. He graduated from Dalian Marine Institute and received a master’s degree

in law from the Law Department of the Graduate School of the Institute of China

Academy of Social Sciences.


Zheng Jianchao (retired from the position of Independent Director by rotation on

11th May 2005), aged 66, is a senior engineer. He is Honorary President of China

Electric Power Research Institute in China and Vice Chairman of its Academic Committee.

He is Vice President of China Electrical Engineering Institute, Editor-in-chief of the Journal

of Chinese Electrical Engineering and Chief of the Science and Technology Committee

of China Guangdong Nuclear Power Group Corporation. He was the Fellow of Chinese

Academy of Engineering. He graduated from Tsinghua University majoring in electrical

engineering and graduated from the Graduate School of Tsinghua University.

Yang Shengming (resigned as Director on 9th August 2005), aged 62, is a senior

economist. He is the Vice President of Fujian Investment Enterprise Holdings Limited,

Executive Director of Hong Kong Minxin Group Limited Company, Director of Yongcheng

Property Insurance Joint Stock Company and Executive Director of Xiamen International

Bank. He graduated from Beijing Light Industries Institute.

Wei Yunpeng (retired from the position of Chairman of the Supervisory Committee

by rotation), aged 63, is a certified public accountant, certified auditor and senior

accountant. He was Chief Accountant of Huaneng Group, Chief Accountant of HIPDC

and Chairman of China Huaneng Finance Limited Liability Company. He served as Chief

Accountant of the Company. He graduated from Hunan Institute of Electric Power,

specializing in Finance and Accounting.

Pan Jianmin (retired from the position of Supervisor by rotation on 11th May 2005),

aged 50, is a senior accountant. He was Deputy Chief Auditor and General Manager of

the Auditing Department of Huaneng Group. He has served as Deputy Chief and General

Manager of the Finance Department and Deputy General Manager of the Supervising

and Auditing Department of Huaneng Group, and Deputy General Manager of Beijing

Huaneng Real Estate Development Company. He graduated from Liaoning Economic

and Finance Institute specializing in infrastructure finance and credit.



Li Yonglin (retired from the position of Vice Chairman of the Supervisory Committee

by rotation on 11th May 2005), aged 60, is an engineer. He is Director of the Power

Department of Dalian Municipal Construction Investment Company. He was a researcher

of the Energy and Transportation Department of Dalian Municipal Planning Committee.

He graduated from Changchun Hydro-electric School of Ministry of Water Resources

and Electric Power, specializing in power plants, power grids and power system.

Zhao Xisheng (retired from the position of Supervisor by rotation on 11th May

2005), aged 62, is a senior accountant. He was then Senior Consultant of the Company.

He has served as Deputy General Manager of the Finance Department, General Manager

of the Management Department of the Company and the General Manager of the

Company’s Supervising and Auditing Department. Before joining the Company, he

served as Section Chief, Deputy Chief Accountant and Deputy General Manager of

Beijing Shijingshan Power Plant. He graduated from China Renmin University specializing

in industrial economics.

Shen Weibing (resigned from the position of Supervisor on 9th August 2005)

aged 38, is an economist. He is Deputy Director of Nantong Investment Management

Center. He served as Vice President and President of Nantong Municipal Oil Company,

Vice President of Nantong Construction Investment Limited Company, and Deputy

Chief Officer and Chief Officer of Nantong Investment Management Center. He

graduated from Nanjing University and received a master degree in business

administration.


Huang Yongda*, aged 48, is a senior accountant. As at the end of the reporting

period, he was the Vice Chairman and the President of the Company as well as the

Vice President of Huaneng Group. He was the Deputy Director of the Economic

Moderation and State Asset Supervision Office of the Ministry of Power Industry, Deputy

Director of the General Office of the Ministry of Power Industry, Deputy Officer of the

Finance and Asset Management Department of State Power Corporation, Deputy

Director of the Power Department of the State Economic and Trade Commission,

President of Jiangxi Province Power Corporation, Vice President of HIPDC. Chairman of

Xi’an Thermal Industrial Research Institute Limited Company and Huaneng Capital

Services Limited Company. He graduated from China Renmin University, specializing in

industrial financial accounting.

* resigned from the position of President on 7th March 2006.

Na Xizhi*, aged 52, is a senior engineer. As at the end of the reporting period, he

was the Director and Vice President of the Company, as well as Vice President of Huaneng

Group. He has served in Huaneng Group as Deputy Manager of the Power Generation

Department, General Manager of the Operation Department, General Manager of the

Power Safety and Production Department and Deputy Chief Engineer of Huaneng Group.

He graduated from Wuhan Hydroelectric University, specializing in thermal power with a

master degree in engineering.

* appointed by the Company as President on 7th March 2006.

Zhang Hong*, aged 59, is a senior engineer. He was Vice President of the Company

and Deputy Chief Engineer of Huaneng Group. Mr. Zhang has served as the General

Manager of Dandong branch of the Company, General Manager of Yingkou Branch of

HIPDC, General Manager of Power Construction Department and Planning Department

of Huaneng Group. Previously, Mr. Zhang was the Manager of the Fourth Engineering

Company of Northeast Power Administration Group.

* his resignation from the position of Vice President was approved by the Board on 7th March

2006.

SENIOR MANAGEMENT (PREVIOUS SESSION)



Huang Long*, aged 52, is a senior engineer. As at the end of the reporting period,

he was the Director and Vice President of the Company as well as Secretary of the

Board of Directors. He has served as Deputy General Manager and General Manager

of the International Co-operation Department of the Company. He graduated with a

M.S. degree from North Carolina State University in the U.S. specializing in

communications and auto-control.

* elected as Vice Chairman, and resigned as Vice President on 7th March 2006.

Liu Guoyue, aged 42, is a senior engineer, As at the end of the reporting period, he

was the Vice President of the Company. He has served as the 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.

Li Shiqi*, aged 49, was the Vice President of the Company. As at the end of the

reporting period, he has served as Chief Accountant of Beijing branch company of

HIPDC, Deputy General Manager and General Manager of the Finance Department of

the Company, and General Manager of the Marketing Department of Huaneng Group.

Before joining the Company, Mr. Li worked in Power Science Institute as Chief and

Deputy Chief Accountant, and in Beijing Power Research and Hi-Tech Business

Corporation as Chief Accountant.

* his resignation from the position of Vice President was approved by the Board on 7th March

2006.

Huang Jian*, aged 43, is a senior accountant. As at the end of the reporting period,

he was the Vice President of the Company. He has served as Deputy Chief and Chief of

the Finance Department of the Company, Chief Accountant of the beijing branch

company of HIPDC, Deputy General Manager of the Finance Department of the

Company, Deputy Chief Accountant of the Company.

* appointed by the Board as Vice President on 7th March 2006, and no longer be the Chief

Accountant.


Na Xizhi, aged 52 is a senior engineer. He is the Director, President of the Company

and Vice President of Huaneng Group. He has served in Huaneng Group as Deputy

Manager of the Power Generation Department, General Manager of the Operation

Department, General Manager of the Power Safety and Production Department. He

graduated form Wuhan Hydro-electric University, specializing in thermal power with a

master degree in engineering.

Liu Guoyue, aged 42, is a senior engineer and the Vice President of the Company.

He has served as the Deputy Manager (Deputy Director) and Manager (Director) of

Huaneng Shijiazhong branch company (Shang’an Power Plant) and Director of Huaneng

Dezhou Power Plant.

Qu Xiaojun, aged 47, is the Vice President of the Company. He was the Deputy

Manager and Manager of the Personnel and Labour Department, Manager of Human

Resources Department and Chief of the Discriplinary Division of the Company. Before

joining the Company, he was the Deputy Manager of Electricity Technology Research

Institute Services Company and Supervising Officer of the Supervisory Division of Energy

Department and Director of second Supervisory Division of Power Department.

Huang Jian, aged 43, is a senior accountant. He is the Vice President of the Company.

He has served as Deputy Chief and Chief of the Finance Department of the Company,

Chief Accountant of the Beijing branch company of HIPDC, Deputy General Manager

of the Finance Department of the Company, Deputy Chief Accountant and Chief

Accountant of the Company.

SENIOR MANAGEMENT (NEW SESSION)



Lu Dan, aged 49, is a senior engineer. She is the Vice President of the Company. She

was the Deputy Manager of the General Planning Department of Huaneng Power

Generation Company, Assistant to Manager of General Planning Department, Deputy

Manager of Planning Development Department, Deputy Manager of General Planning

Department of Huaneng Group, Manager of Planning Development Department of

the Company, and Assistant to President of the Company.

Fan Xiaxia, aged 43, is a senior engineer. He is the Vice President of the Company.

He has served as Deputy Chief of General Administration Division of Engineering

Department of HIPDC, Deputy Chief of Construction Management Department, Deputy

General Manager of the Company’s Nantong branch company, Deputy Manager of

Construction Management Department of HIPDC, Deputy Manager and Manager of

International Co-operation and Business Department of the Company. Manager of

Construction Management Department of the Company, Assistant to President of the

Company and General Manager of the Company’s Zhejiang branch company.

Zhou Hui, aged 42, is a senior accountant. She is the Chief Accountant and Manager

of the Finance Department of the Company. She has been the Deputy Chief of the

Financial Management Division of the Finance Department of HIPDC, Deputy Chief of

Price Management Division, Chief of Second Finance and Accounting Division of the

Finance Department of the Company, Deputy Manager and Manager of the Company’s

Finance Department, and Deputy Chief Accountant of the Company.


Corporate Information

Legal Address of the Company West Wing, Building C

Tianyin Mansion

2C Fuxingmennan Street

Xicheng District

Beijing

The People’s Republic of China

Company Secretary Huang Long

58, Xizhimenbei Street

Haidian District

Beijing


Authorised Representatives Na Xizhi

Huang Long

Hong Kong Share Registrar Hong Kong Registrars Limited

46th Floor, Hopewell Centre

183 Queen’s Road East

Hong Kong

Depository The Bank of New York

Investor Relations

P.O. Box 11258

Church Street Station

New York

NY 10286-1258

USA

Legal Advisers to the Company

As to Hong Kong law: Herbert Smith

23rd Floor, Gloucester Tower

11 Pedder Street, Central

Hong Kong

As to PRC law: Haiwen & Partners

Room 1016, Beijing Silver Tower

No.2, Dong San Huan North Road

Chaoyang District

Beijing


As to US law: Skadden, Arps, Slate, Meagher & Flom LLP

30th Floor, Peregrine Tower

Lippo Centre

89 Queensway

Hong Kong


Corporate Information

Domestic Auditors PricewaterhouseCoopers Zhong Tian CPAs Limited

Company

11th Floor, PricewaterhouseCoopers Center

202 Hu Bin Road

Shanghai, The People’s Republic of China

International Auditors PricewaterhouseCoopers

22nd Floor

Prince’s Building

Central, Hong Kong

Listing Information

H Shares: The Stock Exchange of Hong Kong Limited

Stock Code: 902

ADSs: The New York Stock Exchange, Inc.

Ticker Symbol: HNP

A Shares: Shanghai Stock Exchange

Stock Code: 600011

Publications

The Company’s interim and annual reports (China mainland version and Hong Kong version) were published in August

and April respectively. As required by the United States securities laws, the Company will file an annual report in Form 20-

F with the Securities and Exchange Commission of the U.S. before 30th June. As the Company’s A shares have already

been issued and listed, the Company shall, in compliance of the relevant regulations of the China Securities Regulatory

Commission and the Shanghai Stock Exchange, prepare quarterly reports. Copies of the interim and annual reports as

well as the Form 20-F, once filed, will be available at:

Beijing: Huaneng Power International, Inc.

West Wing, Building C

Tianyin Mansion

2C Fuxingmennan Street

Xicheng District

Beijing


Tel: (8610) 6649 1999

Fax: (8610) 6649 1860

Website: http://www.hpi.com.cn

Hong Kong: Rikes Communications Limited

Room 1312, Wing On Centre

111 Connaught Road Central

Hong Kong

Tel: (852) 2520 2201

Fax: (852) 2520 2241


Glossary

Equivalent Availability Factor (EAF): Percentage on deration of usable hours on generating units in period hour, i.e.

EAF =Available Hours (AH) – Equivalent Unit Derated Hours (EUNDH)

X 100%Period Hour (PH)

Gross Capacity Factor (GCF):

GCF =Gross Actual Generation (GAAG)

X 100%Period Hour (PH) X Gross Maximum Capacity (GMC)

Weighted Average The standard of measurement on average consumption of coal for the production of

Coal Consumption Rate every one kWh of electricity from a coal-fired generating unit. Unit: gram/kWh

for Power Sold:

Weighted Average The standard of measurement on average consumption of coal for the generation of

Coal Consumption Rate every one kWh of electricity from a coal-fired generating unit. Unit: gram/kWh

for Power Generated:

Weighted Average The rate of electricity consumption during power production versus power generating

House Consumption: unit: %

Average Utilization Hour: The operation hour coefficient converted from actual gross power generation of generating

units to maximum gross capacity (or fixed capacity)

Capacity Rate: Ratio between average capacity and maximum capacity which indicates the difference in

capacity. The larger the ratio, the more balanced the power production, and the higher the

utilization of facilities

Power Generation: Electricity generated by power plants (generating units) during the reporting period, or

“power generation”. It refers to the consumed generated electricity produced by generating

units with power energy being processed and transferred, or the product of actual consumed

electricity generated by generating units and actual operation hours of generating units

Electricity Sold: Electricity for consumption or production sold by power producers to customers or power-

producing counterparts

GW: = The unit of power generation, = 109W, gigawatt

MW: = The unit of power generation 106W, megawatt

kW: = The unit of power generation 103W, kilowatt

kWh: Unit of power generation, kilowatt per hour

Report of the Auditors


TO THE SHAREHOLDERS OF HUANENG POWER INTERNATIONAL, INC.

(Incorporated in the People’s Republic of China with limited liability)

We have audited the accompanying balance sheet of Huaneng Power International, Inc. (the “Company”) and consolidated

balance sheet of the Company and its subsidiaries as at 31st December 2005 and the related consolidated statements of

income, cash flows and changes in equity for the year then ended. These financial statements set out on pages 97 to 178

are the responsibility of the management of the Company and its subsidiaries. It is our responsibility to form an independent

opinion, based on our audit, on these financial statements and to report our opinion solely to you, as a body, and for no

other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this

report.

We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan

and perform the audit to obtain reasonable assurance about whether the financial statements are free of material

misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the

financial statements. An audit also includes assessing the accounting principles used and significant estimates made by

management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a

reasonable basis for our opinion.

In our opinion, the accompanying financial statements give a true and fair view of the Company’s financial position and

the financial position of the Company and its subsidiaries as at 31st December 2005, and of the results of their operations

and cash flows for the year then ended in accordance with International Financial Reporting Standards and have been

properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

PricewaterhouseCoopers

Certified Public Accountants

Hong Kong, 28th March 2006

Consolidated Statement of Income


For the year ended 31st December 2005

(Prepared in accordance with International Financial Reporting Standards)

(Amounts expressed in thousands of RMB, except per share data)

For the year ended31st December

Note 2005 2004Restated

(Note 2(a))

Operating revenue 40,190,004 30,150,602Sales tax (113,475) (32,324)

Operating expensesFuel (21,202,952) (15,068,188)Maintenance (1,165,374) (807,689)Depreciation (6,167,692) (4,706,992)Labour (2,487,098) (1,877,264)Service fees to HIPDC 8(b) (141,102) (133,609)Others (1,903,345) (606,346)

Total operating expenses (33,067,563) (23,200,088)

Profit from operations 7,008,966 6,918,190

Interest income 53,685 43,092Interest expenses (1,426,609) (663,424)Bank charges and exchange gain / (losses), net 248,533 (119,452)

Total financial expenses, net (1,124,391) (739,784)

Share of profit of associates 12 644,376 312,037Investment income, net 60,872 20,554Other income, net 6 2,385 18,666

Profit before tax 7 6,592,208 6,529,663Income tax expenses 32 (1,044,297) (948,734)

Profit for the year 5,547,911 5,580,929

Attributable to:Equity holders of the Company 4,871,794 5,323,876Minority interests 676,117 257,053

5,547,911 5,580,929

Dividends paid and proposed 6,035,942 6,019,432

Proposed dividend 23 3,013,846 3,013,846

Proposed dividend per share (expressed in RMB per share) 23 0.25 0.25

Earnings per share for profit attributable to the equity holdersof the Company during the year (expressed in RMB per share)- Basic 33 0.40 0.44

- Diluted 33 0.40 0.44

The notes on pages 104 to 178 are an integral part of these financial statements.

Balance Sheets


As at 31st December 2005


(Amounts expressed in thousands of RMB)

The Company and its subsidiaries The CompanyAs at 31st December As at 31st December

Note 2005 2004 2005 2004

Restated Restated

(Note 2(a))

ASSETS

Non-current assets

Property, plant and equipment, net 11 78,997,297 57,780,410 38,947,310 36,861,955

Investments in associates 12 4,593,984 4,328,307 3,884,659 4,018,641

Investments in subsidiaries 13 — — 8,849,746 5,332,727

Available-for-sale investment 14 1,033,225 254,990 1,033,225 254,990

Land use rights 15 1,679,765 1,546,026 1,133,130 1,091,128

Other non-current assets 336,379 225,890 101,534 115,060

Deferred income tax assets 29 64,075 97,539 13,261 12,536

Goodwill 16 671,796 376,726 108,938 108,938

Less: negative goodwill 16 — (1,483,670) — (1,483,670)

Total non-current assets 87,376,521 63,126,218 54,071,803 46,312,305

Current assets

Inventories, net 17 2,311,357 1,431,404 1,380,845 822,344

Other receivables and assets, net 18 855,952 723,316 556,245 327,865

Accounts receivable, net 19 6,022,426 4,973,103 3,802,559 3,090,071

Due from subsidiaries 8(a)(v) — — 23,715 20,256

Due from HIPDC 8(a)(v) 21,847 — — —

Due from other related parties 8(a)(v) — 14,970 — 14,970

Restricted cash 201,276 202,688 173,855 157,691

Temporary cash investments 20 2,652 12,641 2,652 12,641

Cash and cash equivalents 34(a) 2,647,665 2,295,531 713,396 1,211,178

Total current assets 12,063,175 9,653,653 6,653,267 5,657,016

Total assets 99,439,696 72,779,871 60,725,070 51,969,321


Balance Sheets





Note 2005 2004 2005 2004

Restated Restated

(Note 2(a))

EQUITY AND LIABILITIES

Capital and reserves attributable

to equity holders of the Company

8,500,000,000

(2004: 8,500,000,000)

domestic shares, par value of

RMB1.00 each, in form of legal

person shares 21 8,500,000 8,500,000 8,500,000 8,500,000

500,000,000 (2004: 500,000,000)

A shares, par value

of RMB1.00 each 21 500,000 500,000 500,000 500,000

3,055,383,440

(2004: 3,055,383,440)

overseas listed foreign shares,

par value of RMB1.00 each 21 3,055,383 3,055,383 3,055,383 3,055,383

Additional paid-in capital 8,988,107 8,972,184 8,972,184 8,972,184

Dedicated capital 22 4,899,429 4,065,970 4,899,429 4,065,970

Fair value gains from

available-for-sale investment,

net of tax 14 & 29 636,964 — 636,964 —

Retained earnings

Proposed dividend 23 3,013,846 3,013,846 3,013,846 3,013,846

Others 10,443,745 8,158,136 8,767,490 7,364,981

40,037,474 36,265,519 38,345,296 35,472,364

Minority interests 6,106,713 3,266,393 — —

Total equity 46,144,187 39,531,912 38,345,296 35,472,364

Non-current liabilities

Long-term loans from a shareholder 24 2,800,000 800,000 2,000,000 —

Long-term bank loans 24 25,711,255 14,761,271 7,475,460 6,485,209

Other long-term loans 24 351,009 394,018 — —

Deferred income tax liabilities 29 1,157,775 546,717 336,441 15,306

Other non-current liabilities 168,328 13,000 79,159 —

Total non-current liabilities 30,188,367 16,515,006 9,891,060 6,500,515


Balance Sheets





Note 2005 2004 2005 2004

Restated Restated

(Note 2(a))

Current liabilities

Accounts payable and

other liabilities 25 6,905,240 4,551,158 3,634,442 2,844,987

Dividends payable to shareholders

of the Company — 8,250 — 8,250

Taxes payable 26 1,131,284 999,792 506,983 547,545

Due to Huaneng Group 8(a)(v) 50,720 190 6,129 —

Due to HIPDC 8(a)(v) 53,230 1,258,799 53,230 1,258,518

Due to an associate 8(a)(v) — 3,799 — —

Due to other related parties 8(a)(v) 29,620 9,437 14,918 6,645

Staff welfare and bonus payables 251,949 259,291 129,207 175,355

Short-term bonds 27 4,938,250 — 4,938,250 —

Short-term loans 28 6,580,870 8,099,000 2,200,000 4,330,000

Current portion of long-term

bank loans 24 2,653,339 1,225,476 1,005,555 825,142

Current portion of other

long-term loans 24 512,640 317,761 — —

Total current liabilities 23,107,142 16,732,953 12,488,714 9,996,442

Total equity and liabilities 99,439,696 72,779,871 60,725,070 51,969,321

These financial statements have been approved for issue by the Board of Directors on 28th March 2006.

Na Xizhi Huang Long

Director Director


Consolidated Statement of Changes inShareholders’ Equity





Minorityinterests

Attributable to equity holders of the Company (Note 2(a)) Total equityAvailable-

for-sale EquityAdditional investment component of

paid-in revaluation convertible RetainedShare capital capital Dedicated capital reserve notes earnings

Statutory anddiscretionary Statutory

surplus reserve publicfunds welfare fund Sub-total

Balance as at 1st January 2005,as previously reported as equity 12,055,383 8,972,184 2,202,689 1,863,281 4,065,970 — — 11,171,982 — 36,265,519

Balance as at 1st January 2005,as previously separately reportedas minority interests — — — — — — — — 3,266,393 3,266,393

Effect of changes in accounting policy(Note 2(a)) — — — — — — — 1,261,120 — 1,261,120

Balance as at 1st January 2005, as restated 12,055,383 8,972,184 2,202,689 1,863,281 4,065,970 — — 12,433,102 3,266,393 40,793,032Minority interests arising on business

combinations (Note 5) — — — — — — — — 1,979,219 1,979,219Capital injection from minority shareholders

of subsidiaries — — — — — — — — 596,064 596,064Dividends waived by a shareholder

of an associate — 15,923 — — — — — — — 15,923Dividends relating to 2004 — — — — — — — (3,013,846) (196,992) (3,210,838)Dividends relating to 2005 — — — — — — — — (214,088) (214,088)Net profit for the year ended

31st December 2005 — — — — — — — 4,871,794 676,117 5,547,911Fair value gains from available-for-sale

investment – gross (Note 14) — — — — — 749,369 — — — 749,369Fair value gains from available-for-sale

investment – tax (Note 29) — — — — — (112,405) — — — (112,405)Transfer from statutory public welfare fund

to discretionary surplus reserve fund — — 3,473 (3,473) — — — — — —Transer to dedicated capital (Note 22) — — 476,262 357,197 833,459 — — (833,459) — —

Balance as at 31st December 2005 12,055,383 8,988,107 2,682,424 2,217,005 4,899,429 636,964 — 13,457,591 6,106,713 46,144,187

Balance as at 1st January 2004, as previouslyreported as equity 6,027,671 10,780,133 2,867,721 1,460,702 4,328,423 — 255 12,818,873 — 33,955,355

Balance as at 1st January 2004, as previouslyseparately reported as minority interests — — — — — — — — 1,155,197 1,155,197

Balance as at 1st January 2004, as restated 6,027,671 10,780,133 2,867,721 1,460,702 4,328,423 — 255 12,818,873 1,155,197 35,110,552Minority interests arising on business

combinations (Note 5) — — — — — — — — 1,342,872 1,342,872Capital injection from minority

shareholders of subsidiaries — — — — — — — — 677,034 677,034Dividends relating to 2003 — — — — — — — (3,013,836) (165,763) (3,179,599)Ordinary shares split 6,027,671 (1,808,301) (1,205,534) — (1,205,534) — — (3,013,836) — —Net profit for the year ended

31st December 2004 — — — — — — — 5,323,876 257,053 5,580,929Conversion of convertible notes to share

capital and redemption of convertible notes 41 352 (4) — (4) — (255) (10) — 124Transfer from statutory public welfare fund to

discretionary surplus reserve fund — — 1,600 (1,600) — — — — — —Transfer to dedicated capital (Note 22) — — 538,906 404,179 943,085 — — (943,085) — —

Balance as at 31st December 2004 12,055,383 8,972,184 2,202,689 1,863,281 4,065,970 — — 11,171,982 3,266,393 39,531,912


Consolidated Statement of Cash Flows





For the year ended

31st December

Note 2005 2004

Restated

CASH FLOWS FROM OPERATING ACTIVITIES

Profit before tax 6,592,208 6,529,663

Adjustments to reconcile profit before tax to net

cash provided by operating activities:

Depreciation 6,172,866 4,706,992

Impairment loss on property, plant and equipment 30,080 —

Amortization of land use rights 36,429 28,074

Amortization of goodwill and negative goodwill — (205,277)

Amortization of other non-current assets 54,555 39,731

Provision for / (Reversal of) doubtful accounts 49,869 (10,654)

Provision for inventory obsolescence 31,724 1,521

Investment income, net (60,872) (20,554)

Loss / (Gain) on disposals / write-off of property,

plant and equipment, net 145,762 (29,176)

Unrealized exchange (gain) / losses, net (294,281) 89,913

Gain on interest rate swaps — (925)

Share of profit of associates (644,376) (312,037)

Interest income (53,685) (43,092)

Interest expenses 1,426,609 663,424

Changes in working capital:

Inventories, net (831,622) (414,275)

Other receivables and assets, net 265,320 (206,873)

Accounts receivable, net (596,517) (742,005)

Due from HIPDC (21,847) —

Due from other related parties 14,970 (9,108)

Restricted cash 1,412 (23,108)

Other non-current liabilities 91,188 13,000

Accounts payable and other liabilities 574,654 243,524

Taxes payable (69,569) 3,796

Due to Huaneng Group 6,128 —

Due to HIPDC (1,205,569) (53,263)

Due to an associate (3,799) 3,799

Due to other related parties 20,183 (17,711)

Staff welfare and bonus payable (23,653) (17,728)

Interest paid (1,965,094) (974,879)

Interest received 52,475 43,895

Income tax paid (1,114,698) (1,123,966)

Net cash provided by operating activities 8,680,850 8,162,701


Consolidated Statement of Cash Flow




For the year ended

31st December

Note 2005 2004

Restated

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of property, plant and equipment (13,842,293) (9,877,553)

Proceeds from disposals of property, plant and equipment, net 32,098 27,768

Prepayments of land use rights (99,745) (154,754)

Decrease / (Increase) in other non-current assets 15,766 (3,680)

Decrease in temporary cash investments 9,989 132,355

Proceeds from disposals of investments — 548

Cash dividend received 429,589 172,542

Cash consideration paid for acquisitions 5 (2,528,300) (4,575,000)

Direct transaction costs paid for acquisitions 5 (16,698) (31,685)

Cash from the power plants acquisitions 5 566,704 659,174

Proceeds from disposal of Huaneng Nanjing Ranji Power

Generation Limited Liability Company (“Nanjing Ranji”) 8(b) 30,000 —

Cash outflow on disposal of Nanjing Ranji (10,479) —

Net cash used in investing activities (15,413,369) (13,650,285)

CASH FLOWS FROM FINANCING ACTIVITIES

Bonds issuance expense paid (22,500) —

Drawdown of short-term bonds 4,862,200 —

Drawdown of short-term loans 11,657,569 8,724,000

Repayments of short-term loans (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 8,297,018 4,944,000

Repayments of long-term bank loans (2,933,870) (3,192,843)

Drawdown of other long-term loans — —

Repayments of other long-term loans (351,118) (679,062)

Capital injection from minority shareholders of the subsidiaries 585,702 677,034

Dividends paid to shareholders of the Company (3,022,096) (3,005,586)

Dividends paid to minority shareholders of the subsidiaries (318,252) (167,125)

Redemption of convertible notes — (811)

Net cash provided by financing activities 7,084,653 3,654,467

NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS 352,134 (1,833,117)

Cash and cash equivalents as at beginning of the year 2,295,531 4,128,648

CASH AND CASH EQUIVALENTS AS AT END OF THE YEAR 34(a) 2,647,665 2,295,531


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 30th June 1994. The Company and its subsidiaries are principally engaged in

the generation and sale of electric power to the respective regional or provincial grid companies in the PRC.

The Directors consider that the parent company and ultimate parent company of the Company are Huaneng International

Power Development Corporation (“HIPDC”) and China Huaneng Group Corporation (“Huaneng Group”), respectively.

Both companies are incorporated in the PRC. Neither Huaneng Group nor HIPDC produced financial statements available

for public use.

2. PRINCIPAL ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies

have been consistently applied to all the years presented, unless otherwise stated.

(a) Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”).

The financial statements have been prepared under the historical cost convention, as modified by the revaluation of

available-for-sale investment.

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.

During 2005, a significant portion of the Company and its subsidiaries’ funding requirements for capital expenditures

were satisfied by short-term borrowings. Consequently, as at 31st December 2005, the Company and its subsidiaries

have a negative working capital balance of approximately RMB11 billion (31st December 2004: approximately RMB7

billion). The Company and its subsidiaries have significant undrawn available banking facilities amounting to

approximately RMB23 billion (31st December 2004: approximately RMB28 billion) and may refinance and/or restructure

certain short-term loans into long-term loans and will also consider alternative sources of financing, where applicable.

The Directors of the Company and its subsidiaries are of the opinion that the Company and its subsidiaries will be

able to meet its liabilities as and when they fall due within the next twelve months and have prepared these financial

statements on a going concern basis.






2. PRINCIPAL ACCOUNTING POLICIES (Cont’d)

(a) Basis of preparation (Cont’d)

In 2005, the Company and its subsidiares has changed certain of its accounting policies following its adoptation of

the revised / new IFRS, International Accounting Standard (“IAS”) and IFRIC Interpretations below, which are relevant

to its operations. The 2004 comparative have been reclassified / restated as required, in accordance with the relevant

requirements.

IAS 1 Presentation of Financial Statements

IAS 2 Inventories

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

IAS 10 Events after the Balance Sheet Date

IAS 16 Property, Plant, and Equipment

IAS 17 Leases

IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 24 Related Party Disclosures

IAS 27 Consolidated and Separate Financial Statements

IAS 28 Investments in Associates

IAS 32 Financial Instruments: Disclosure and Presentation

IAS 33 Earnings per Share

IAS 36 Impairment of Assets

IAS 38 Intangible Assets

IAS 39 Financial Instruments: Recognition and Measurement

IFRS 3 Business Combinations

IFRS 4 Insurance Contracts

IFRIC Interpretation 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities

Management assessed the relevance of the adoption of IASs 1, 2, 8, 10, 16, 17, 21, 32, 33, 38 and 39, IFRS 4 and

IFRIC Interpretation 1 with respect to the operations of the Company and its subsidiaries and concluded that they did

not result in substantial changes to the accounting policies of the Company and its subsidiaries. In summary:

IAS 1 has affected the presentation of minority interests, share of profit of associates and other disclosures.

IASs 2, 8, 10, 16, 17, 32, 33, 38 and 39, IFRS 4 and IFRIC Interpretation 1 had no material effect on the policies of the

Company and its subsidiaries.

IAS 21 had no material effect on the policy of the Company and its subsidiaries. The functional currency of each of

the entities of the Company and its subsidiaries has been re-evaluated based on the guidance to the revised standard.

All the entities used Renminbi (“RMB”) as their functional currency as well as their presentation currency.








IAS 24 has extended the identification and disclosure of related parties to include state-owned enterprises. Related parties

include Huaneng Group, HIPDC and their related parties, other state-owned enterprises and their subsidiaries directly or

indirectly controlled by the PRC government (other than those shown on the face of financial statements as other related

parties), other entities and corporations in which the Company is able to control, jointly control or exercise significant

influence and key management personnel of the Company, HIPDC and Huaneng Group as well as their close family

members.

The adoptions of IASs 27 and 28 have resulted in changes in accounting policies for investments in subsidiaries and

associates at company level. Until 31st December 2004, investments in subsidiaries and associates at company level are

accounted for using the equity method. Subsequent to that date, the Company and its subsidiaries, at the entity level,

restated such investments at cost less any accumulated impairment losses.

The adoption of IFRS 3 and IAS 36 results in changes in the accounting policies for goodwill and negative goodwill and the

assessment by management of asset impairment.

In accordance with the provisions of IFRS 3 (Note 2(f)):

• the Company and its subsidiaries ceased amortization of goodwill and negative goodwill from 1st January 2005;

• accumulated amortization as at 31st December 2004 has been eliminated with a corresponding decrease in the costs

of goodwill and negative goodwill; and

• from 1st January 2005 onwards, goodwill arising from all acquisitions is tested annually for impairment, as well as

when there are indications of impairment while negative goodwill is derecognized as at 1st January 2005 with a

corresponding adjustment to the opening balance of retained earnings.

All changes in the accounting policies have been made in accordance with the transition provisions in the respective

standards, wherever applicable. All of the revised / new standards adopted by the Company and its subsidiaries require

retrospective application other than:

• IAS 16 – the initial measurement of an item of property, plant and equipment acquired in an exchange of assets

transaction is accounted at fair value prospectively only to future transactions;

• IAS 39 – the derecognition of financial assets is applied prospectively;

• IFRS 3 – prospectively after 31st March 2004; and

• IFRS 4 – prospective application of the disclosure requirements of this standard except for disclosures required about

accounting policies, recognized liabilities and expenses.








The adoption of IAS 1 resulted in the following changes:


2005 2004

Decrease in share of profit of associates (109,295) (65,528)

Decrease in income tax expenses 109,295 65,528

The adoption of IFRS 3 resulted in an increase in opening retained earnings as at 1st January 2005 by approximately

RMB1,261 million. Changes to other items in the financial statements are as follows:

As at31st December

2005

Increase in investments in associates 81,959

Increase in goodwill 42,002

Decrease in negative goodwill 1,483,670

Increase in deferred income tax liability (185,459)

For the yearended

31st December

2005

Increase in operating expenses – others (205,277)

Decrease in income tax expense 37,091

Decrease in basic and diluted earnings per share (RMB) (0.01)








The adoption of IASs 27 and 28 resulted in the following changes at the company level:

As at 31st December

2005 2004

Decrease in investments in associates (690,348) (290,678)

Decrease in investments in subsidiaries (1,019,672) (502,477)

Decrease in additional paid-in capital 15,923 —

Decrease in opening retained earnings 793,155 532,538


2005 2004

Decrease in operating expense – others — 112,659

Decrease in investment income (900,942) (373,276)







(b) Consolidation

(i) Subsidiaries

Subsidiaries are all entities over which the Company and its subsidiaries have the power to govern the financial

and operating policies generally accompanying a shareholding of more than one half of the voting rights.

Subsidiaries are fully consolidated from the date on which control is transferred to the Company and its subsidiaries.

They are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Company and

its subsidiaries (including acquisitions from common control shareholders). The cost of an acquisition is measured

as the fair value of the assets given and liabilities incurred or assumed at the date of exchange, plus costs

directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed

in a business combination are measured initially at their fair values at the acquisition date, irrespective of the

extent of any minority interest. The excess of the cost of acquisition over the fair value of the share of the

Company and its subsidiaries on the identifiable net assets acquired is recorded as goodwill. If the cost of

acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized

directly in the statement of income (Note 2(f)).

Inter-company transactions, balances and unrealized gains on transactions between group companies are

eliminated. Unrealized losses are also eliminated but considered an impairment indicator of the asset transferred.

Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies

adopted by the Company and its subsidiaries.

At company level, investments in subsidiaries are stated at costs less any accumulated impairment loss. The

results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable.

(ii) Transactions with minority interests

The Company and its subsidiaries apply a policy of treating transactions with minority interests as transactions

with parties external to the Company and its subsidiaries. Disposals to minority interests result in gains and

losses for the Company and its subsidiaries that are recorded in the statement of income. Purchases from

minority interests result in goodwill, being the difference between any consideration paid and the relevant

share acquired of the fair value of net assets of the subsidiaries.







(b) Consolidation (Cont’d)

(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(f)).

The shares of the Company and its subsidiaries on post-acquisition profits or losses of associates are recognized

in the statement of income and their shares of post-acquisition movements in reserves are recognized in reserves.

The cumulative post-acquisition movements are adjusted against the carrying amounts of the investments.

When the shares of the Company and its subsidiaries on losses in an associate equals or exceeds their interest

in the associate, including any other unsecured receivables, the Company and its subsidiaries do not recognize

further losses, unless they have incurred obligations or made payments on behalf of the associate.

Unrealized gains on transactions between the Company and its subsidiaries and their associates are eliminated

to the extent of the interest of the Company and its subsidiaries in the associates. Unrealized losses are also

eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting

policies of associates have been changed where necessary to ensure consistency with the policies adopted by

the Company and its subsidiaries.

At company level, investments in associates are stated at costs less any accumulated impairment loss. The

results of associates are accounted for by the Company on the basis of dividends received and receivable.







(c) Foreign currency translation

(i) Functional and presentation currency

Items included in the financial statements of each entity of the Company and its subsidiaries are measured using

the currency of the primary economic environment in which the entity operates (the “functional currency”). The

financial statements are presented in Renminbi (“RMB”), which is the functional and presentation currency of


(ii) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at

the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions

and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign

currencies are recognized in the statement of income.

(d) Property, plant and equipment, net

Property, plant and equipment, net is stated at historical cost less accumulated depreciation and any accumulated impairment

loss. Historical cost includes expenditure that is directly attributable to the acquisition of the item.

Construction-in-progress (“CIP”) represents property, plant and equipment under construction and is stated at cost. This

includes the costs of construction, plant and machinery and other direct costs. CIP is not depreciated until such time as the

relevant asset is completed and ready for its intended use.

Subsequent costs are included in the carrying amount of the asset or recognized as a separate asset, as appropriate, only

when it is probable that future economic benefits associated with the item will flow to the Company and its subsidiaries

and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of

income during the financial period in which they are incurred.

Depreciation on property, plant and equipment is calculated using the straight-line method to write off their costs to their

residual values over their estimated useful lives as follows:

Dam 45 – 55 years

Buildings 8– 55 years

Electric utility plant in service 4 – 40 years

Transportation facilities 5 – 27 years

Others 2.5 – 18 years







(d) Property, plant and equipment, net (Cont’d)

The residual values, useful lives and depreciation method of the assets are reviewed, and adjusted if appropriate, at each

financial year-end.

The carrying amount of an asset is written down immediately to its recoverable amount if the carrying amount of the asset

is greater than its estimated recoverable amount (Note 2(g)).

Gains and losses on disposals are determined by comparing proceeds with carrying amounts. These are included in the

statement of income.

(e) Financial assets

The Company and its subsidiaries classify their financial assets in the following categories: loans and receivables, held-to-

maturity and available-for-sale. The classification depends on the purpose for which the financial assets were acquired.

Management determines the classification of its financial assets at initial recognition and re-evaluates this designation at

every reporting date.

(i) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not

quoted in an active market. They are included in current assets, except for maturities greater than 12 months

after the balance sheet date. These are classified as non-current assets. Loans and receivables are primarily

classified as ‘accounts receivable’, ‘other receivables and assets’ and ‘other non-current assets’ in the balance

sheets (Note 2(i)).

(ii) Held-to-maturity investments

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed

maturities that the management of the Company and its subsidiaries has the positive intention and ability to

hold to maturity. If the Company and its subsidiaries were to sell other than an insignificant amount of held-to-

maturity investments, the whole category would be tainted and reclassified as available-for-sale. Held-to-maturity

investments are included in non-current assets, except for those with maturities less than 12 months from the

balance sheet date, which are classified as current assets.

(iii) Available-for-sale investments

Available-for-sale investments are non-derivatives that are either designated in this category or not classified in

any of the other categories. They are included in non-current assets unless management intends to dispose of

the investment within 12 months of the balance sheet date.







(e) Financial assets (Cont’d)

(iv) Recognition and derecognition of financial assets

Regular purchases and sales of investments are recognized on trade-date – the date on which the Company and

its subsidiaries commit to purchase or sell the asset. Investments are initially recognized at fair value plus transaction

costs for all the above financial assets. Investments are derecognized when the rights to receive cash flows from

the investments have expired or have been transferred and the Company and its subsidiaries have transferred

substantially all risks and rewards of ownership. Available-for-sale investments are subsequently carried at fair

value. Loans and receivables and held-to-maturity investments are carried at amortized costs using the effective

interest method.

Changes in the fair value of monetary securities classified as available-for-sale are recognized in equity.

When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments

recognized in equity are included in the statement of income as ‘investment income, net’. Dividends on available-

for-sale equity instruments are recognized in the statement of income when the right of the Company and its

subsidiaries to receive payments is established.

The fair values of quoted investments are based on current bid prices.

The Company and its subsidiaries assess at each balance sheet date whether there is objective evidence that a

financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-

sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator

that the securities are impaired. If any such evidence exists for available-for-sale investments, the cumulative

loss – measured as the difference between the acquisition cost and the current fair value, less any accumulated

impairment loss on that financial asset previously recognized in statement of income – is removed from equity

and recognized in the statement of income. Impairment loss recognized in the statement of income on equity

instrument is not reversed through the statement of income. Impairment testing of receivables is described in

Note 2(i).







(f) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the share of the Company and its

subsidiaries on the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on

acquisitions of associates is included in ‘investments in associates’. Separately recognized goodwill is tested annually for

impairment and carried at cost less any accumulated impairment loss. Impairment losses on goodwill are not reversed.

Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Any excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities

over cost in any business combination, the Company and its subsidiaries will reassess the identification and measurement

of the acquiree’s identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination

and recognize immediately in profit or loss any excess remaining after that reassessment.

Goodwill is allocated to cash-generating units (“CGUs”) for the purpose of impairment testing. The allocation is made to

those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose.

The Company and its subsidiaries allocate goodwill to CGUs or groups of CGUs in each region in which they operate (Note

2(g)).

(g) Impairment of non-financial assets

Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate

that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the carrying

amount of the asset exceeds its recoverable amount. The recoverable amount is the higher of fair value of an asset less

costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which

there are separately identifiable cash flows (CGUs). Non-financial assets other than goodwill that suffered impairment are

reviewed for possible reversal of the impairment at each reporting date.

(h) Inventories

Inventories consist of fuel, materials and supplies. They are stated at the lower of cost and net realizable value. Cost is

determined using the weighted average cost method. The cost of inventories includes direct material cost and transportation

expenses incurred in bringing the inventories to the working locations. Net realizable value is the estimated selling price in

the ordinary course of business, less applicable variable selling expenses.







(i) Receivables

Receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest

method, less provision for doubtful accounts. A provision for doubtful accounts of receivable is established when there is

objective evidence that the Company and its subsidiaries will not be able to collect all amounts due according to the

original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy

or financial reorganization, and default or delinquency in payments are considered indicators that the receivable is impaired.

The amount of the provision is the difference between the carrying amount of the asset and the present value of estimated

future cash flows, discounted at the effective interest rate. The amount of the provision is recognized in the statement of

income within operating expenses – others.

(j) Related parties

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise

significant influence over the other party in making financial and operating decisions. Parties are also considered to be

related if they are subject to common control or common significant influence.

(k) Temporary cash investments

Temporary cash investments comprise cash invested in fixed-term deposits with original maturities ranging from more

than 3 months to one year. Temporary cash investments are classified as held-to-maturity investments and are carried at

amortized cost (see Note 2(e)).

(l) Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid

investments with original maturities of three months or less.

(m) Borrowings

Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at

amortized costs; any differences between the proceeds (net of transaction costs) and the redemption value is recognized

in the statement of income over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the Company and its subsidiaries have an unconditional right to defer

settlement of the liability for at least 12 months after the balance sheet date.







(n) Taxation

(i) Value-added tax (“VAT”)

Under the relevant PRC tax laws, the Company and its subsidiaries are subject to VAT. The Company and its

subsidiaries are subject to output VAT levied at 17% 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

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 1st January 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.







(n) Taxation (Cont’d)

(iii) Deferred income tax

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the

tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred

income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other

than a business combination that at the time of the transaction affects neither accounting nor taxable profit or

loss. Deferred income tax is determined using income tax rates (and laws) that have been enacted or substantially

enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is

realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be

available against which the temporary differences can be utilized.

(o) Employee benefits

(i) Pension obligations

The Company and its subsidiaries operate various defined contribution plans in accordance with the local

conditions and practices in the provinces in which they operate. A defined contribution plan is a pension plan

under which the Company and its subsidiaries pay fixed contributions into a separate publicly administered

pension insurance plan on mandatory and voluntary bases. The Company and its subsidiaries have no legal or

constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees

the benefits relating to employee service in the current and prior periods. The contributions are recognized as

employee benefit expenses when they are due.

(ii) Termination benefits

Termination benefits are payable when employment is terminated by the Company and its subsidiaries before

the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these

benefits. The Company and its subsidiaries recognize termination benefits when it is demonstrably committed

to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling

due more than 12 months after the balance sheet date are discounted to present value.







(p) Revenue and income recognition

Revenue and income are recognized when it is probably 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

As mentioned in Note 6, the Company provides management services to certain power plants owned by Huaneng

Group and HIPDC. The Company recognizes the service income as other income when service is rendered in

accordance with the management service agreement.

(iii) Interest income

Interest income is recognized on a time-proportion basis using the effective interest method.

(iv) Dividend income

Dividend income is recognized when the right to receive payment is established.







(q) Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as

operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the

statement of income on a straight-line basis over the period of the lease.

(r) Borrowing costs

Borrowing costs incurred for the construction of any qualifying assets (including in property, plant and equipment) are

capitalized during the period of time that is required to complete and prepare the asset for its intended use. Other

borrowing costs are expensed.

(s) Financial guarantee contracts

(i) Classification

The Company issues financial guarantee contracts that transfer significant insurance risk.

Financial guarantee contracts are those contracts that require the issuer to make specified payments to reimburse

the holders for losses they incur because specified debtors fail to make payments when due in accordance with

the original or modified terms of debt instruments.

(ii) Liability adequacy test

At each balance sheet date, liability adequacy tests are performed to ensure the adequacy of the contract

liabilities. In performing these tests, current best estimates of future contractual cash flows and related

administrative expenses are used. Any deficiency is immediately charged to statement of income.

(t) Dividend distribution

Dividend distribution to the shareholders of the Company and its subsidiaries is recognized as a liability in the financial

statements of the Company and its subsidiaries in the period in which the dividends are approved by the shareholders of


(u) Contingencies

Contingent liabilities are not recognized in the financial statements. They are disclosed unless the possibility of an outflow

of resources embodying economic benefits is remote. Contingent assets are not recognized in the financial statements but

disclosed when an inflow of economic benefit is probable.







(v) Standards, interpretations and amendments to published standards that are not yet effective

Certain new standards, amendments and interpretations to existing standards have been published that are mandatory

for the accounting periods of the Company and its subsidiaries beginning on or after 1st January 2006 or later periods but

which the Company and its subsidiaries have not early adopted. These are summarized as follows:

• IAS 39 (Amendment), The Fair Value Option and a complementary Amendment to IAS 32, Financial Instruments:

Disclosure and Presentation (effective from annual periods beginning on or after 1st January 2006). This amendment

changes the definition of financial instruments classified at fair value through profit or loss and restricts the ability to

designate financial instruments as part of this category. The Company and its subsidiaries believe that this amendment

should not have a significant impact on the classification of financial instruments, as the Company and its subsidiaries

should be able to comply with the amended criteria for the designation of financial instruments at fair value through

profit and loss. The Company and its subsidiaries will apply this amendment from annual periods beginning 1st

January 2006.

• IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts and a complementary Amendment to IAS 32, Financial

Instruments: Disclosure and Presentation (effective from annual periods beginning on or after 1st January 2006). This

amendment requires issued financial guarantees, other than those previously asserted by the entity to be insurance

contracts, to be initially recognized at their fair value and subsequently measured at the higher of (i) the unamortized

balance of the related fees received and deferred, and (ii) the expenditure required to settle the commitment at the

balance sheet date. Management considered this amendment to IAS 39 and concluded that it is not relevant to the

Company and its subsidiaries.

• IFRS 7, Financial Instruments: Disclosures and a complementary Amendment to IAS 1, Presentation of Financial

Statements – Capital Disclosures (effective from annual periods beginning on or after 1st January 2007). IFRS 7

introduces new disclosures to improve the information about financial instruments. It requires the disclosure of

qualitative and quantitative information about exposure to risks arising from financial instruments, including specified

minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. It

replaces IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure

requirements in IAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report

under IFRS. The amendment to IAS 1 introduces disclosures about the level of an entity’s capital and how it manages

capital. Management is currently assessing the impact of IFRS 7 and the amendment to IAS 1 on the operations of

the Company and its subsidiaries. The Company and its subsidiaries will apply IFRS 7 and the amendment to IAS 1

from annual periods beginning 1st January 2007.







(v) Standards, interpretations and amendments to published standards that are not yet effective

(Cont’d)

• IFRIC Interpretation 4, Determining whether an Arrangement contains a Lease (effective from annual periods beginning

on or after 1st January 2006). IFRIC Interpretation 4 requires the determination of whether an arrangement is or

contains a lease to be based on the substance of the arrangement. It requires an assessment of whether: (i) fulfillment

of the arrangement is dependent on the use of a specific asset or assets (the asset); and (ii) the arrangement conveys

a right to use the asset. Management is currently assessing the impact of IFRIC Interpretation 4 on the operations of


3. FINANCIAL AND INSURANCE RISKS MANAGEMENT

(a) Financial risk factors

The activities of the Company and its subsidiaries expose them to a variety of financial risks: market risk (including currency

risk, fair value interest rate risk and price risk), credit risk, liquidity risk and cash flow interest rate risk. The overall risk

management programme of the Company and its subsidiaries focuses on the unpredictability of financial markets and

seeks to minimize potential adverse effects on the financial performance of the Company and its subsidiaries.

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 companies 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 understand 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.






3. FINANCIAL AND INSURANCE RISKS MANAGEMENT (Cont’d)

(a) Financial risk factors (Cont’d)

(i) Market risk

(1) Foreign exchange risk

Foreign exchange risk arises from a significant portion of long-term bank loans and other loans denominated

in foreign currencies, including US dollar (“US$”), Euro (“€”) and Japanese yen (“JPY”) described in Note

24. Fluctuations of exchange rates of RMB against these foreign currencies could affect the operating

results of the Company and its subsidiaries.

(2) Price risk

The Company and its subsidiaries are exposed to equity security price risk because of investments held by

the Company and its subsidiaries and classified on the balance sheets as available-for-sale. The Company

and its subsidiaries have entered into several long-term coal purchase contracts (Note 36(a)(ii)) to reduce

its exposure to fluctuations in the price of coal.

(ii) Credit risk

The Company and its subsidiaries are exposed to significant concentrations of credit risk, in terms of cash and

cash equivalents, temporary cash investments and power sales respectively.

Significant portions of cash and cash equivalents and temporary cash investments of the Company and its

subsidiaries are deposited with certain large state-owned banks of the PRC and a non-bank financial institution

in the PRC which are related parties of the Company.

The power plants of the Company and its subsidiaries sell electricity generated to their sole customers, the

power grid companies of their respective provinces or regions where the power plants operate (Note 38).

The Company and its subsidiaries are also exposed to credit risks from financial guarantees provided to subsidiaries

and an associate. The risk exposure relates to the relevant subsidiaries and the associate being unable to settle

liabilities in full when due (Note 3(b)).







(a) Financial risk factors (Cont’d)

(iii) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents through an adequate

amount of committed credit facilities. Due to the dynamic nature of the underlying businesses, the Company

and its subsidiaries aim to maintain flexibility in funding by keeping committed credit lines available.

(iv) Cash flow and fair value interest rate risk

As the Company and its subsidiaries have no significant interest-bearing assets, the income and operating cash

flows of the Company and its subsidiaries are substantially independent of changes in market interest rates.

The interest rate risk of the Company and its subsidiaries arises from long-term loans. Loans issued at variable

rates expose the Company and its subsidiaries to cash flow interest rate risk. Bonds and loans issued at fixed

rates expose the Company and its subsidiaries to fair value interest rate risk. The Company uses derivative

instruments when considered appropriate, to manage exposures arising from changes in interest rates by entering

into interest rate swap agreements with PRC banks to convert certain floating rate bank loans into fixed rate

debts of the same principal amounts and for the same maturities to hedge against cash flow interest rate risk.

(b) Insurance risk

The Company and its subsidiaries issue contracts that transfer insurance risk.

The risk relates to the financial guarantees provided to banks by the Company on the borrowings of certain subsidiaries

and an associate. The risk under any one financial guarantee contract is the possibility that the insured event (default of a

specified debtor) occurs and the uncertainty of the amount of the resulting claims. By the nature of a financial guarantee

contract, this risk is predictable.

Experience shows credit risks from specified debtors are relatively remote. The Company and its subsidiaries maintain a

close watch on the financial position and liquidity of the subsidiaries and the associate for which financial guarantees have

been granted in order to mitigate such risks (Note 2(s)(ii)). The Company and its subsidiaries take all reasonable steps to

ensure that they have appropriate information regarding any claim exposures. Please refer to Note 37 for details of claim

history.







(c) Fair value estimation

The fair value of financial instruments traded in active markets (such as available-for-sale investments) is based on quoted

market prices at the balance sheet date. The quoted market price used for financial assets held by the Company and its

subsidiaries is the current bid price.

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques.

The Company and its subsidiaries use a variety of methods and makes assumptions that are based on market conditions

existing at each balance sheet date. Techniques, such as estimated discounted cash flows, are used to determine fair value

for long-term loans.

The nominal value less impairment provision of accounts receivable, accounts payable, other receivables and assets, other

liabilities and short-term loans are assumed to approximate their fair values. The fair value of financial liabilities for disclosure

purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available

to the Company and its subsidiaries for similar financial instruments.

The estimated fair value of long-term loans including current maturities was approximately RMB31.82 billion as at 31st

December 2005 (31st December 2004: approximately RMB17.05 billion). The aggregate book value of these liabilities was

approximately RMB32.03 billion as at 31st December 2005 (31st December 2004: approximately RMB17.50 billion).

4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including

expectations of future events that are believed to be reasonable under the circumstances.

The Company and its subsidiaries make estimates and assumptions concerning the future. The resulting accounting

estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant

risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are

discussed below.

(a) Estimated impairment of goodwill

The Company and its subsidiaries test annually whether goodwill has suffered any impairment, in accordance with the

accounting policy stated in Note 2(f). The recoverable amounts of CGUs have been determined based on value-in-use

calculations. These calculations require the use of estimates (Note 16). It is reasonably possible, based on existing knowledge,

that outcomes within the next financial year that are different from assumptions could require a material adjustment to

the carrying amount of goodwill.






4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Cont’d)

(b) Income tax expenses

The Company and its subsidiaries are subject to income tax expenses in various provinces and regions within the PRC.

Judgment is required in determining the income tax expenses. There are many transactions and calculations for which the

ultimate tax determination is uncertain during the ordinary course of business. The Company and its subsidiaries recognize

liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. When the final tax

outcome of these matters is different from the amounts that were initially recorded, such differences will impact the

income tax expenses and deferred income tax provisions in the period in which such determination is made. It is reasonably

possible, based on existing knowledge, that outcomes within the next financial year that are different from assumptions

could require a material adjustment to the carrying amounts of taxes payable, deferred income tax assets and liabilities.

(c) Useful lives of property, plant and equipment

The management of the Company and its subsidiaries determine the estimated useful lives and related depreciation

charges for its property, plant and equipment. This estimate is based on projected wear and tear incurred during power

generation. It could change significantly as a result of technical innovations on power generators. Management will adjust

the depreciation charge where useful lives vary with previously estimated lives, or they will write-off or write-down technically

obsolete or non-strategic assets that have been abandoned or sold. It is reasonably possible, based on existing knowledge,

that outcomes within the next financial year that are different from assumptions could require a material adjustment to

the carrying amount of property, plant and equipment.

(d) Estimated impairment of property, plant and equipment

The Company and its subsidiaries test annually whether property, plant and equipment suffered any impairment. In

accordance with the Note 2(g), an impairment loss is recognized for the amount by which the carrying amount of the asset

exceeds its recoverable amount. It is reasonably possible, based on existing knowledge, that outcomes within the next

financial year that are different from assumptions could require a material adjustment to the carrying amount of property,

plant and equipment.






5. MATERIAL ACQUISITIONS

During 2004 and 2005, the Company acquired a number of power plants from Huaneng Group, HIPDC as well as other

parties for business expansion purposes. These acquisitions have been accounted for under the purchase method of

accounting.

These acquisitions became effective when, amongst other things, the Company obtained minority shareholders’ approval,

where applicable, and all necessary government approvals, and paid the purchase consideration. The purchase consideration

for all of these acquisitions was in the form of cash.

Details of these acquisitions are shown in the table below:


Acquisitions of subsidiaries

60% equity interest in

Huaneng Sichuan 65% equity interest in 26.36% additional

Hydropower Co., Ltd. Gansu Huaneng equity interest in

(“Sichuan Hydropower”) Pingliang Power Jiangsu Huaneng

(formerly known as Generation Limited Huaiyin Power

Sichuan Huaneng Liability Company Limited Company

Equity interest Hydropower Development (“Pingliang Power (“Huaiyin Power

acquired Corporation, Ltd.) Company”) Company”)*

Original equity holder Huaneng Group Huaneng Group Jiangsu Yueda Investment

Co., Ltd. (“Jiangsu Yueda”)

Effective date of acquisition 5th January 2005 5th January 2005 30th June 2005

Consideration paid RMB1,219.00 million RMB806.00 million RMB200.60 million

Direct transaction costs of

acquisitions paid RMB10.05 million RMB6.65 million —

Fair value of net assets

acquired RMB1,099.32 million RMB704.91million RMB143.50 million

Goodwill RMB129.73 million RMB107.74 million RMB57.10 million

* The Company previously held equity interest of 63.64% in this entity.






5. MATERIAL ACQUISITIONS (Cont’d)

The above acquisitions contributed operating revenue, profit for the year and profit attributable to equity holders of the

Company of approximately RMB2,715 million, RMB617 million and RMB296 million for the period from the dates of their

acquisitions to 31st December 2005 respectively. If the acquisitions had occurred on 1st January 2005, there would have

been no material impact on operating revenue, profit for the year and profit attributable to equity holders of the Company

because the Sichuan Hydropower and the Pingliang Power Company acquisitions took place in early January 2005 and

Huaiyin Power Company was already a subsidiary of the Company prior to the acquisition of the additional interest and

therefore, its operating results were already consolidated.


Acquisition of

Acquisitions of subsidiaries and net assets an associate


Huaneng Hunan Yueyang

Power Generation Limited

Liability Company

(“Yueyang Power Company”),


Huaneng Chongqing Luohuang

Power Generation Limited

Liability Company 40% equity interest

(“Luohuang Power in Hebei Hanfeng

Company”) and all of All of the assets and Power Generation

the assets and liabilities liabilities of Huaneng Limited Liability

of Huaneng Yingkou Jinggangshan Power Company (“Hanfeng

Equity interest Power Plant (“Yingkou Plant (“Jinggangshan Power Company”)

acquired Power Plant”) Power Plant”) (Note 12)

Original equity holder HIPDC 90% equity interest from Huaneng Group

Huaneng Group and 10%

equity interest from

Jiangxi Province

Investment Company

Effective date of acquisition 1st July 2004 1st July 2004 1st July 2004

Consideration paid RMB2,564.00 million RMB635.53 million RMB1,375.47 million

Direct transaction costs of

acquisitions paid RMB12.57 million RMB3.12 million RMB6.74 million

Fair value of net assets acquired RMB2,475.66 million RMB627.85 million RMB1,089.14 million

Goodwill RMB100.91 million RMB10.80 million RMB293.07 million







The above acquisitions contributed operating revenue, profit for the year and profit attributable to equity holders of the

Company of approximately RMB2,559 million, approximately RMB472 million and net profit of approximately RMB397

million to the Company and its subsidiaries for the period from 1st July 2004 to 31st December 2004 respectively. If the

acquisitions had occurred on 1st January 2004, the operating revenue, profit for the year and profit attributable to equity

holders of the Company would have been approximately RMB32,604 million, approximately RMB5,749million and

approximately RMB5,660million on an unaudited basis respectively.

Goodwill arising from the acquisitions in 2004 and 2005 is attributable to the high profitability of the acquired businesses

and the significant synergies expected to arise after the acquisitions of the Company on the equity interests in the branches,

subsidiaries and an associate stated above.







The aggregated assets and liabilities arising from the acquisitions from Huaneng Group and minority interests of acquirees

in 2004 and 2005 were as follows:

2005 2004

Acquirees’ Acquirees’

carrying carrying

Fair value amounts Fair value amounts

Property, plant and equipment, net 12,061,897 10,652,359 1,919,401 1,854,174

Deferred income tax assets 33,475 33,475 — —

Long-term investment in an

associate (Note 12) — — 1,382,210 949,215

Other non-current assets 179,341 156,686 149,511 30,673

Inventories 54,801 54,801 31,438 31,438

Other current assets 176,237 176,238 29,876 29,876

Accounts receivable 569,672 569,672 85,905 85,905

Cash and cash equivalents 566,704 566,704 64,331 64,331

Minority interests (1,993,416) (1,385,875) — —

Long-term loans, unsecured (7,286,880) (7,286,880) (1,030,500) (1,030,500)

Long-term loans, secured (567,000) (567,000) — —

Due to HIPDC — — — —

Deferred income tax liabilities (404,205) (25,416) — —

Other non-current liabilities (75,466) (75,466) — —

Other current liabilities (1,367,429) (1,367,429) (622,114) (622,114)

Net assets acquired 1,947,731 1,501,869 2,010,058 1,392,998

Add: goodwill 294,567 10,803

Less: direct transaction costs

of acquisitions (16,698) (9,861)

Total consideration paid 2,225,600 2,011,000

Add: direct transaction costs of

acquisitions paid 16,698 9,861

Less: cash from the power plants

acquisitions (566,704) (64,331)

Net cash outflow for the acquisitions 1,675,594 1,956,530







The aggregated assets and liabilities arising from the acquisition from HIPDC in 2004 were as follows (cont’d):

Acquirees’

carrying

Fair value amounts

Property, plant and equipment, net 7,472,794 5,837,056

Deferred income tax assets 81,082 81,082

Long-term investment in an associate (Note 12) 18,029 18,029

Other non-current assets 602,907 188,433

Inventories 186,680 186,680

Other current assets 84,208 84,208

Accounts receivable 1,262,102 1,262,102

Cash and cash equivalents 594,843 594,843

Minority interests (1,336,936) (655,869)

Long-term loans, unsecured (3,670,196) (3,670,196)

Due to HIPDC (1,224,554) (1,224,554)

Deferred income tax liabilities (478,189) (67,826)

Other current liabilities (1,117,105) (1,117,105)

Net assets acquired 2,475,665 1,516,883

Add: goodwill 100,907

Less: direct transaction costs of acquisitions (12,572)

Total consideration paid 2,564,000

Add: direct transaction costs of acquisitions paid 12,572

Less: cash from the power plants acquisitions (594,843)

Net cash outflow for the acquisitions 1,981,729

6. OTHER INCOME, NET

Pursuant to a management service agreement entered into with Huaneng Group and HIPDC, the Company provided

management services to certain power plants owned by Huaneng Group and HIPDC in return for a service fee. Net other

income represented the management service fee income net of relevant expenses.






7. PROFIT BEFORE TAX

Profit before tax was determined after charging and (crediting) the following:

For the yearened 31st December

2005 2004

Interest expenses on long-term bank loans:- wholly repayable within five years 881,823 363,679- not wholly repayable within five years 1,021,467 521,654

Interest expenses on long-term loans from shareholders:- wholly repayable within five years — 16,551- not wholly repayable within five years 84,506 36,586

Interest expenses on other long-term loans:- wholly repayable within five years 44,262 43,865- not wholly repayable within five years 12,495 12,692

Interest expenses on short-term bonds 84,615 —Interest expenses on convertible notes — 26

Total interest expenses 2,129,168 995,053Less: amount capitalized in property, plant and equipment (702,559) (331,629)

1,426,609 663,424

Change in fair value on financial instruments:- Gains of interest rate swaps — (925)

Auditors’ remuneration 33,781 17,239

Loss / (Gain) on disposals / write-off of property, plant and equipment, net 145,762 (29,176)

Operating leases:- Property, plant and equipment 33,077 30,067- Land use rights 42,402 40,272

Depreciation of property, plant and equipment 6,172,866 4,706,992

Impairment loss of property, plant and equipment 30,080 —

Amortization of prepaid land use rights 36,429 28,074

Amortization of other non-current assets 54,555 39,731

Amortization of goodwill — 42,002

Amortization of negative goodwill — (247,279)

Cost of inventories consumed 21,580,927 15,302,929

Provision for / (Reversal of) doubtful accounts 49,869 (10,654)

Bad debts recovery (59,740) —

Provision for inventory obsolescence 31,724 1,521

Staff costs:- Wages and staff welfare 1,735,065 1,249,836- Retirement benefits (Note 9) 407,846 299,120- Termination benefits — 18,546- Staff housing benefits (Note 31) 147,479 100,751- Other staff costs 196,708 209,011






8. RELATED PARTY BALANCES AND TRANSACTIONS

The related parties of the Company and its subsidiaries that had transactions with the Company and its subsidiaries are as

follows:

Names of related parties Nature of relationship

Huaneng Group Ultimate parent

HIPDC Parent

China Huaneng Finance Corporation Ltd. A subsidiary of Huaneng Group

(“Huaneng Finance”)

Hebei Huaneng Jingyuan Coal Company Limited A subsidiary of Huaneng Group

(“Huaneng Jingyuan”)

China Huaneng International Trade Economics Corporation A subsidiary of Huaneng Group

(“CHITEC”)

Shanghai Time Shipping Company Ltd. (“Time Shipping”) A jointly controlled entity of Huaneng Group

Shandong Rizhao Power Company Ltd. An associate of the Company

(“Rizhao Power Company”)

Chongqing Huaneng Shifen Company Limited An associate of Luohuang Power Company

(“Shifen Company”)

Jiangsu Yueda A minority shareholder of Huaiyin Power Company

State-owned enterprises* Related parties of the Company

* Huaneng Group is a state-owned enterprise. In accordance with the revised IAS 24, “Related Party Disclosures”, state-owned

enterprises and their subsidiaries, other than entities under Huaneng Group, directly or indirectly controlled by the PRC government

are also defined as related parties of the Company and its subsidiaries.

The majority of the business activities of the Company and its subsidiaries are conducted with state-owned enterprises. For the

purpose of the related party transactions disclosure in accordance with IAS 24, the Company and its subsidiaries have established

procedures to determine, to the extent possible, the identification of the ownership structure of its customers and suppliers as to

whether they are state-owned enterprises. However, many state-owned enterprises have a multi-layered corporate structure and

the ownership structures change over time as a result of transfers and privatization programs. Nevertheless, management believes

that all material related party balances and transactions have been adequately disclosed.






8. RELATED PARTY BALANCES AND TRANSACTIONS (Cont’d)

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 at year end.

(a) Related party balances

(i) As at 31st December 2005, current deposits of approximately RMB1,768 million (31st December 2004: RMB1,363

million) were placed with a non-bank PRC financial institution, Huaneng Finance, which bore interest that ranged

from 0.72% to 1.62% (for the year ended 31st December 2004: from 0.72% to 1.44%) per annum.

(ii) As described in Note 24, certain loans of the Company and its subsidiaries were borrowed from Huaneng Group.

(iii) As at 31st December 2005, long-term loans (including current portion) from Huaneng Finance amounted to RMB80

million (31st December 2004: nil), with interest at 5.18% (for the year ended 31st December 2004: N/A) per annum.

(iv) As at 31st December 2005, short-term loans amounting to approximately RMB2,008 million (31st December 2004:

approximately RMB3,694 million) were borrowed from Huaneng Finance, which bore interest that ranged from

4.70% to 5.02% (for the year ended 31st December 2004: from 4.54% to 5.02%) per annum.

(v) As at 31st December 2005, balances with Huaneng Group, HIPDC, associates and other related parties are unsecured,

non-interest bearing and receivable / repayable within one year. As at 31st December 2005, no provision is made on

receivable balances from these parties (31st December 2004: approximately RMB12 million).

(vi) As at 31st December 2005, HIPDC had provided guarantees on certain accounts receivable balances of the Company

and its subsidiaries totaling approximately RMB77 million (31st December 2004: approximately RMB209 million).







(a) Related party balances (Cont’d)

(vii) Included in the balance sheets, the balances with state-owned enterprises are as follows:


2005 2004 2005 2004

RMB million RMB million RMB million RMB million

Non-current assets

Available-for-sale investment 1,033 255 1,033 255

Other non-current assets 50 — — —

Current assets

Other receivable and assets, net 195 216 111 121

Accounts receivable, net 5,333 4,067 3,108 2,752

Temporary cash investments 3 13 3 3

Cash at banks 851 752 814 461


Long-term bank loans 19,445 8,506 3,281 2,184

Other long-term loans 130 — — —

Current liabilities

Accounts payable and other liabilities 2,777 1,781 1,879 973

Short-term bonds 4,780 — 4,780 —

Short-term loans 4,973 3,921 2,100 2,100

Current portion of long-term bank loans 1,761 354 385 189

Current portion of other long-term loans 70 — — —

Except for available-for-sale investment, other non-current assets, temporary cash investments, cash at banks, loans and

short-term bonds stated above, all the balances of assets and liabilities are unsecured, non-interest bearing and receivable

or repayable within one year. Long-term receivables included in other non-current assets are unsecured, interest-bearing

at 5.508% (for the year ended 31st December 2004: N/A) per annum and receivable in accordance with specified repayment

schedules. Terms of the long-term loans are described in Note 24. As at 31st December 2005, approximately RMB58

million provision has been made on the receivable balances (31st December 2004: nil).

For the year ended 31st December 2005, the interest rates of short-term loans and long-term loans from state-owned

enterprises is from 4.54% to 5.76% and from 3.60% to 5.12% (for the year ended 31st December 2004: from 4.30% to

5.02% and from 3.60% to 5.76%) per annum respectively.







(b) Related party transactions


2005 2004

Huaneng Group

Management service fee income for management

services rendered to certain power plants 31,668 45,865

Less: related expenses (29,510) (30,987)

Management service fee income, net 2,158 14,878

Management service expense for management services

received on Sichuan Hydropower 2,420 —

Consideration paid for the acquisitions (Note 5) (2,025,000) (1,949,000)

HIPDC

Proceeds from disposal of Nanjing Ranji 30,000 —

Management service fee income for management services

rendered to certain power plants 3,328 11,678

Less: related expenses (3,101) (7,890)

Management service fee income, net 227 3,788

Service fees expenses on transmission and transformer facilities (141,102) (133,609)

Rental charge on land use rights of Huaneng Nanjing Power

Plant (“Nanjing Power Plant”) for 50 years from 1st January 1999 (1,334) (1,334)

Rental charge on office building (26,000) (25,000)

Compensation paid for doubtful accounts recoveries of

Luohuang Power Company (31,269) —

Huaneng Finance

Discounting of notes receivable 298,098 42,968

Discounting charges (2,415) (298)

Drawdown of short-term loans 2,127,700 3,694,000

Interest on short-term and long-term loans (140,250) (87,739)

CHITEC

Coal purchased from CHITEC (284,301) (214,941)

Equipment purchased from CHITEC (11,200) —

Time Shipping

Coal purchased from Time Shipping and service fee paid for transportation (606,753) (562,567)

Shifen Company

Lime purchased from Shifen Company (42,817) (25,563)







(b) Related party transactions (Cont’d)


2005 2004

Huaneng Jingyuan

Coal purchased from Huaneng Jingyuan (241,960) (16,355)

Jiangsu Yueda

Consideration paid for the acquisition of additional equity

interest in Huaiyin Power Company (Note 5) (200,600) —

Other related party

Reversal of provision for a doubtful account 11,639 —


2005 2004

RMB million RMB million

State-owned enterprises

Sales of electricity 40,977 32,546

Purchases of fuel 13,763 7,638

Acquisition of property, plant and equipment 5,578 5,110

Purchases of raw materials and spare parts 365 145

Subcontracting labor for

- construction and renovation 2,088 1,307

- maintenance 140 89

Interest income 20 30

Dividend income 35 23

Drawdown of short-term loans 6,650 2,375

Drawdown of long-term bank loans 9,465 2,713

Other charges

- interest expenses of loans and bonds to banks and

other financial institutions 881 289







(c) Guaranteed loans

As at 31st December

2005 2004

(i) Short-term loan guaranteed by a state-owned enterprise 400,000 600,000

(ii) Long-term loans guaranteed by

- Huaneng Group 7,343,525 3,798,074

- HIPDC 3,311,164 3,936,987

- State-owned enterprises 1,226,500 845,000

(iii) Certain long-term bank loans of Rizhao Power Company guaranteed

by the Company 225,250 305,250

(d) Key management personnel compensation


2005 2004

Salaries and other short-term employee benefits 6,049 7,367

Post-employment benefits 1,413 1,119

Total 7,462 8,486






9. RETIREMENT PLAN AND POST-RETIREMENT BENEFITS

All PRC employees of the Company and its subsidiaries are entitled to a monthly pension on their retirement dates. The

PRC government is responsible for the pension liability to these employees on retirement. The Company and its subsidiaries

are required to make contributions to the publicly administered retirement plan at a specified rate, currently set at 18% to

22% (for the year ended 31st December 2004: 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 31st December 2005 were approximately

RMB227 million (for the year ended 31st December 2004: approximately RMB167 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 31st December 2005 totaled approximately

RMB181 million (for the year ended 31st December 2004: approximately RMB132 million).

The Company and its subsidiaries have no further obligation for post-retirement benefits beyond the above annual

contributions made.






10. DIRECTORS’, SUPERVISORS’ AND SENIOR MANAGEMENT’ EMOLUMENTS

(a) Directors’ and Supervisors’ emoluments

The remuneration of every Director and Supervisor of the Company for the year ended 31st December 2005 is set out

below:

Employer’s

Basic contributions

salaries and Discretionary to pension

Fees allowances bonuses schemes Total

Name of Director

Mr. Li Xiaopeng1 — — — — —

Mr. Huang Yongda1 — — — — —

Mr. Wang Xiaosong1 — — — — —

Mr. Na Xizhi1 — 96 313 108 517

Mr. Ye Daji2 — 78 66 65 209

Mr. Huang Jinkai2 — 43 195 71 309

Mr. Liu Jinlong2 — — — — —

Mr. Huang Long3 — 91 375 109 575

Mr. Wu Dawei3 — — 147 — 147

Mr. Shan Qunying1 40 — — — 40

Mr. Yang Shengming5 20 — — — 20

Mr. Xu Zujian1 40 — — — 40

Mr. Liu Shuyuan1 40 — — — 40

Mr. Gao Zongze2 30 — — — 30

Mr. Zheng Jianchao2 30 — — — 30

Mr. Qian Zhongwei1 60 — — — 60

Mr. Xia Donglin1 60 — — — 60

Mr. Liu Jipeng1 60 — — — 60

Mr. Wu Yusheng3 60 — — — 60

Mr. Yu Ning3 60 — — — 60

Mr. Ding Shida5 20 — — — 20

Sub-total 520 308 1,096 353 2,277






10. DIRECTORS’, SUPERVISORS’ AND SENIOR MANAGEMENT’ EMOLUMENTS (Cont’d)

(a) Directors’ and Supervisors’ emoluments (Cont’d)

Employer’s

Basic contributions



Name of Supervisor

Mr. Wei Yunpeng2 — — — — —

Mr. Li Yonglin2 20 — — — 20

Mr. Pan Jianmin2 — — — — —

Mr. Zhao Xisheng2 — 35 128 45 208

Mr. Ye Daji3 and 4 — 155 165 132 452

Mr. Shen Weibing5 20 — — — 20

Mr. Shen Zongmin1 40 — — — 40

Ms. Yu Ying3 40 — — — 40

Ms. Zou Cui3 — 83 282 88 453

Mr. Wang Zhaobin3 — 80 259 77 416

Mr. Gu Jianguo5 20 — — — 20

Sub-total 140 353 834 342 1,669

Total 660 661 1,930 695 3,946








The remuneration of every Director and Supervisor of the Company for the year ended 31st December 2004 is set out

below:

Employer’s

Basic contributions



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








Employer’s

Basic contributions



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 Retired and re-appointed on 11th May 2005.

2 Retired on 11th May 2005.

3 Appointed on 11th May 2005.

4 Mr. Ye Daji resigned from the capacity of Supervisor on 30th November 2005.

5 Mr. Yang Shenming and Mr. Shen Weibing retired and re-appointed on 11th May 2005 in the capacities of Director and Supervisor

respectively. They resigned on 9th August 2005 and Mr. Ding Shida and Mr. Gu Jianguo filled their roles of Director and Supervisor

on 17th November 2005 respectively.

During the year, no option was granted to the Directors or the Supervisors (for the year ended 31st December 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 (for the year ended 31st

December 2004: nil).

No Director or Supervisors had waived or agreed to waive any emoluments during the years 2004 and 2005.







(b) Five highest paid individuals

The five individuals whose emoluments were the highest in the Company and its subsidiaries for the year include one (for

the year ended 31st December 2004: two) Director whose emoluments is reflected in the analysis presented above. The

emoluments payable to the remaining four (for the year ended 31st December 2004: three) individuals during the year are

as follows:


2005 2004

Basic salaries and allowances 510 370

Discretionary bonuses 2,233 1,499

Employer’s contributions to pension schemes 614 294

3,357 2,163

The annual emoluments paid to these individuals (excluding Directors) during the years 2004 and 2005 fell within the

range of nil to RMB1 million.






11. PROPERTY, PLANT AND EQUIPMENT, NET

The Company and its subsidiaries

Electric

utility plant Transportation Construction-

Dam Buildings in service facilities Others in-progress Total

As at 1st January 2004

Cost — 1,356,782 55,015,630 604,068 1,294,891 4,190,164 62,461,535

Accumulated depreciation — (332,300) (18,776,233) (145,094) (549,543) — (19,803,170)

Net book value — 1,024,482 36,239,397 458,974 745,348 4,190,164 42,658,365

Year ended 31st December 2004

Beginning of the year — 1,024,482 36,239,397 458,974 745,348 4,190,164 42,658,365

Reclassification — (13,102) 136,920 (142,150) 18,332 — —

Acquisitions (Note 5) — 259,253 8,372,033 444 217,547 542,918 9,392,195

Additions — 10,726 20,291 2,840 66,318 10,352,279 10,452,454

Transfer from CIP — 435,766 5,537,895 12,755 72,371 (6,058,787) —

Disposals — (617) (3,072) (13) (4,378 ) — (8,080 )

Depreciation charge — (75,004) (4,421,906) (30,469) (187,145) — (4,714,524)

End of the year — 1,641,504 45,881,558 302,381 928,393 9,026,574 57,780,410


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


Beginning of the year — 1,641,504 45,881,558 302,381 928,393 9,026,574 57,780,410

Reclassification — (313,831) 382,632 (186,118) 117,317 — —

Acquisitions (Note 5) 2,100,903 443,531 7,080,422 35,415 211,763 2,189,863 12,061,897

Additions — 9,032 64,715 676 94,217 15,451,757 15,620,397

Transfer from CIP 464,950 31,393 3,935,984 4,726 1,838,292 (6,275,345) —

Disposals / Write-off — (10,626) (117,592) — (11,047 ) (52,521) (191,786)

Disposal of a subsidiary — — — — (687 ) (59,342) (60,029 )

Depreciation charge (74,187) (99,905) (5,720,294) (16,328) (272,798) — (6,183,512)

Impairment charge — — (30,080) — — — (30,080 )

End of the year 2,491,666 1,701,098 51,477,345 140,752 2,905,450 20,280,986 78,997,297


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






11. PROPERTY, PLANT AND EQUIPMENT, NET (Cont’d)

The Company

Electric

utility plant Transportation Construction-

Buildings in service facilities Others in-progress Total


Cost 1,078,033 49,127,712 488,727 1,200,754 950,598 52,845,824

Accumulated depreciation (306,902) (17,573,848) (123,094) (551,469) — (18,555,313)

Net book value 771,131 31,553,864 365,633 649,285 950,598 34,290,511


Beginning of the year 771,131 31,553,864 365,633 649,285 950,598 34,290,511

Reclassification (139,778) 246,782 (123,104) 16,100 — —

Acquisitions (Note 5) 132,709 3,587,634 — 62,722 20,027 3,803,092

Additions 11,536 13,791 1,655 45,107 2,537,524 2,609,613

Transfer from CIP 25,090 86,449 65 36,634 (148,238) —

Disposals (342) (1,879) — (264) — (2,485)

Depreciation charge (45,452) (3,625,869) (24,940) (142,515) — (3,838,776)

End of the year 754,894 31,860,772 219,309 667,069 3,359,911 36,861,955


Cost 1,101,240 53,055,205 310,923 1,353,009 3,359,911 59,180,288


Net book value 754,894 31,860,772 219,309 667,069 3,359,911 36,861,955


Beginning of the year 754,894 31,860,772 219,309 667,069 3,359,911 36,861,955

Reclassification 72,009 (33,906) (126,754) 88,651 — —

Additions 1,657 41,509 676 55,941 6,164,694 6,264,477

Transfer from CIP 3,838 763,341 824 1,718,174 (2,486,177) —

Disposals / Write-off (6,826) (62,555) — (11,707) (52,278) (133,366)

Transfer to a subsidiary — — — (687) (59,342) (60,029)

Depreciation charge (53,332) (3,719,894) (12,112) (170,309) — (3,955,647)

Impairment charge — (30,080) — — — (30,080)

End of the year 772,240 28,819,187 81,943 2,347,132 6,926,808 38,947,310


Cost 1,148,389 53,524,140 177,193 3,170,730 6,926,808 64,947,260


Accumulated impairment loss — (30,080) — — — (30,080)

Net book value 772,240 28,819,187 81,943 2,347,132 6,926,808 38,947,310






11. PROPERTY, PLANT AND EQUIPMENT, NET (Cont’d)

Interest expenses of approximately RMB703 million (for the year ended 31st December 2004: approximately RMB332

million) arising on financing specifically entered into for the construction of power plants were capitalized during the year

and are included in ‘Additions’ in property plant and equipment. A capitalization rate of approximately 5.27% (for the

year ended 31st December 2004: approximately 4.38%) per annum was used, representing the interest expenses of the

loan used to finance the projects.

In 2005, there were impairment losses of certain property, plant and equipment recorded in Huaneng Dandong Power

Plant. The continuous increase in coal price and changes in the local power market contributed to such impairment losses.

The recoverable amount is determined based on value-in-use calculations. A discount rate of approximately 7.20% was

applied in arriving at the impairment loss amount for the power plant. The Company and its subsidiaries have also

reassessed the depreciation policies of their property, plant and equipment in this power plant and have determined that

the estimated useful lives will not be affected.

There was no impairment of any property, plant and equipment in 2004.






12. INVESTMENTS IN ASSOCIATES

2005 2004

Beginning of the year 4,328,307 2,766,031

Acquisition of 40% equity interest of Hanfeng Power Company (Note 5) — 1,382,210

Acquisition of 25% equity interest of Shifen Company (Note 5) — 18,029

Share of additional paid-in-capital 15,923 —

Share of profit before tax 753,671 377,565

Share of income tax expense (Note 2(a)) (109,295) (65,528)

Share of dividends (394,622) (150,000)

End of the year 4,593,984 4,328,307

Investment in associates as at 31st December 2005 included goodwill of approximately RMB976 million (31st December

2004: approximately RMB976 million).

As at 31st December 2005, the interest in associates of the Company and its subsidiaries, all of which are unlisted, were

as follows:

Registered and

Country and date Percentage of fully

Name of associates of incorporation equity interest held paid capital Principal activities

Direct Indirect

Rizhao Power Company PRC 25.5% — US$ Power generation

20th March 1996 150,000,000

Shenzhen Energy Group PRC 25% — RMB Power generation

Co. Ltd. (“SEG”) 16th July 1997 955,555,556

Hanfeng Power Company PRC 40% — RMB Power generation

28th October 1996 1,975,000,000

Shifen Company PRC — 25% RMB Lime production and sale

5th November1996 50,000,000






12. INVESTMENTS IN ASSOCIATES (Cont’d)

The gross amounts of operating results, assets and liabilities (excluding goodwill) of the associates of the Company and its

subsidiaries were as follows:

2005 2004

Assets 33,231,354 30,525,810

Liabilities 15,299,661 13,970,553

Operating revenue 14,515,393 10,100,102

Profit before allocation 2,934,693 2,214,292

Profit attributable to equity holders of the associate 2,224,783 1,411,933

13. INVESTMENTS IN SUBSIDIARIES

As at 31st December 2005, 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

type of equity and fully

Name of subsidiaries legal entity interest held paid capital Principal activities

Direct Indirect

Huaneng Weihai PRC 60% — RMB Power generation

Power Limited 22nd November 1993 761,838,300

Liability Company Limited liability company

Huaiyin Power PRC 90% — RMB Power generation

Company 26th January 1995 265,000,000

Limited liability company

Jiangsu Huaneng PRC 63.64% — RMB Power generation

Huaiyin II Power 22nd June 2004 774,000,000

Limited Company Limited liability company






13. INVESTMENTS IN SUBSIDIARIES (Cont’d)

As at 31st December 2005, the Company had equity interests in the following subsidiaries (cont’d):

Country, date of




Direct Indirect

Huaneng (Suzhou PRC 75% — RMB Power generation

Industrial Park) 19th June 1997 632,840,000

Power Limited Limited liability company

Liability Company

(“Taicang Power

Company”)

Huaneng Taicang PRC 75% — Registered Power generation

Power Co., Ltd. 18th June 2004 capital of

Limited liability company RMB

894,410,000

with total

paid-in

capital of

RMB

808,110,000

Henan Huaneng PRC 55% — RMB Power generation

Qinbei Power 12th July 1995 10,000,000

Limited Company Limited liability company

(“Qinbei Power

Company”)

Shanxi Huaneng PRC 60% — RMB Power generation

Yushe Power Limited 29th November 1994 615,760,000


(“Yushe Power

Company”)








Country, date of




Direct Indirect

Yushe Boyuan Power PRC — 75% RMB Property management

Industry Limited 25th July 2005 2,000,000 and leasing


Shandong Huaneng PRC 95% — RMB Power generation

Xindian Power Co., 14th March 2004 100,000,000

Ltd. (“Xindian II Limited liability company

Power Company”)

Yueyang Power PRC 55% — RMB Power generation

Company 16th December 2003 560,000,000


Luohuang Power PRC 60% — RMB Power generation

Company 16th December 2003 900,000,000


Huaneng Shanghai PRC 70% — RMB Power generation

Ranji Power 13th January 2005 50,000,000

Generation Limited Limited liability company

Liability Company

Sichuan Hydropower PRC 60% — RMB Investments holding

12th July 2004 800,000,000 and hydropower projects

Limited liability company development

Sichuan Huaneng PRC — 60% RMB Power generation

Taipingyi Hydropower 23rd April 1994 100,000,000

Limited Liability Limited liability company

Company








Country, date of




Direct Indirect


Baoxinghe Power 26th June 1994 516,100,000


Company

Sichuan Huaneng PRC — 59.33% RMB Power generation

Dongxiguan Hydropower 29th June 1994 156,725,000


Company

Sichuan Huaneng PRC — 55% Registered Power generation

Jialingjiang Hydropower 30th September 1998 capital of

Limited Liability Limited liability company RMB

Company 193,080,000

and fully paid

capital of

RMB

157,119,800


Kangding 14th April 1997 277,200,000

Hydropower Limited Limited liability company

Liability Company


Fujiang Hydropower 22nd March 2002 150,000,000


Company








Country, date of




Direct Indirect

Sichuan Huaneng PRC — 52.20% RMB Power generation

Mingtai Hydropower 8th September 1994 97,700,000


Company

Pingliang Power PRC 65% — RMB Power generation

Company 6th November 1996 623,000,000


14. AVAILABLE-FOR-SALE INVESTMENT

Available-for-sale investment represents a 1.82% (31st December 2004: 2.11%) equity interest in a power generation

company China Yangtze Power Co., Ltd. (“Yangtze Power”) incorporated and listed in the PRC.

2005 2004

Beginning of the year 254,990 254,990

Additions (Note) 28,866 —

Revaluation surplus transfer to equity (Note) 749,369 —

End of the year 1,033,225 254,990

Note: During the year, Yangtze Power has undergone a process of shareholding structure reform pursuant to related government

circulars issued by China Securities Regulatory Commission on implementation of shareholding structure reform of listed companies.

Upon the completion of the process, the legal person shares held by the Company were allowed to trade in the open market. The

additions represent the additional costs paid by the Company to effectively exchange for the right to trade in the open market.

Given that the shares held by the Company and its subsidiaries can be freely traded, they have been revalued at year end based on

the closing market rate.






15. LAND USE RIGHTS

Details of land use rights are as follows:


2005 2004 2005 2004

Outside Hong Kong, held on:

Leases of over 50 years 117,037 10,539 7,453 7,562

Leases of between 10 to 50 years 1,562,728 1,535,487 1,125,677 1,083,566

1,679,765 1,546,026 1,133,130 1,091,128






16. GOODWILL AND NEGATIVE GOODWILL

Goodwill and negative goodwill arose from acquisitions. The movements in the carrying amount of goodwill and negative

goodwill during the year are as follows:

The Company and its subsidiaries The Company

Negative Negative

Goodwill goodwill Goodwill goodwill


Cost 325,196 (2,472,784) 113,632 (2,472,784)

Accumulated amortization (26,320) 741,835 (6,401) 741,835

Net book value 298,876 (1,730,949) 107,231 (1,730,949)

Year ended 31st December 2004:

Beginning of the year 298,876 (1,730,949) 107,231 (1,730,949)

Acquisitions (Note 5) 111,710 — 10,803 —

Adjustment 8,142 — 2,206 —

Amortization charge (42,002) 247,279 (11,302) 247,279

End of the year 376,726 (1,483,670) 108,938 (1,483,670)


Cost 445,048 (2,472,784) 126,641 (2,472,784)

Accumulated amortization (68,322) 989,114 (17,703) 989,114

Net book value 376,726 (1,483,670) 108,938 (1,483,670)






16. GOODWILL AND NEGATIVE GOODWILL (Cont’d)


Negative Negative

Goodwill goodwill Goodwill goodwill


Cost, as previously reported 445,048 (2,472,784) 126,641 (2,472,784)

Effect of change in accounting policy (Note 2(a)) (68,322) 2,472,784 (17,703) 2,472,784

Cost, as restated 376,726 — 108,938 —

Accumulated amortization, as previously reported 68,322 (989,114) 17,703 (989,114)

Effect of change in accounting policy (Note 2(a)) (68,322) 989,114 (17,703) 989,114

Accumulated amortization, as restated — — — —

Year ended 31st December 2005:

Beginning of the year, as restated 376,726 — 108,938 —

Acquisitions 295,070 — — —

End of the year 671,796 — 108,938 —


Cost 671,796 — 108,938 —

Impairment tests for goodwill

Goodwill is allocated to the CGUs of the Company identified according to their operations in different regions.

The carrying amounts of significant portion of goodwill allocated to individual CGUs are as follows:

2005 2004

Huaneng Shanghai Shidongkou I Power Plant (“Shidongkou I Power Plant”) 33,854 33,854

Jinggangshan Power Plant 10,803 10,803

Huaneng Xindian Power Plant (“Xindian Power Plant”) 62,198 62,198

Huaiyin Power Company 118,596 61,493

Qinbei Power Company 97,552 97,552

Yueyang Power Company 100,907 100,907

Sichuan Hydropower 129,729 N/A

Pingliang Power Company 107,735 N/A

SEG1 682,993 682,993

Hanfeng Power Company1 293,070 293,070

1,637,437 1,342,870

1 Included in investments in associates.






16. GOODWILL AND NEGATIVE GOODWILL (Cont’d)

The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use cash flow

projections based on financial budgets approved by management covering a three-year period. The Company expects

cash flows beyond the three-year period will be similar to that of the third year based on existing production capacity.

Pre-tax discount rates used for value-in-use calculations:

Shidongkou I Power Plant 10.00% Yueyang Power Company 8.10%

Jinggangshan Power Plant 9.09% Sichuan Hydropower 12.32%

Xindian Power Plant 10.00% Pingliang Power Company 7.92%

Huaiyin Power Company 10.74% SEG 10.56%

Qinbei Power Company 7.67% Hanfeng Power Company 8.35%

Key assumptions used for value-in-use calculations:

Key assumptions applied in the impairment tests include the expected tariff rates, demands of electricity in specific regions

where these power plants are located and fuel cost. Management determined these key assumptions based on past

performance and its expectations on market development. The discount rates used are pre-tax and reflect specific risks

relating to individual CGUs. Management believes that any reasonably possible change in any of these key assumptions on

which recoverable amounts of individual CGUs are based may or may not cause carrying amounts of individual CGUs to

exceed their recoverable amounts (Note 4(a)).

No goodwill was impaired.

17. INVENTORIES, NET

Inventories comprised:


2005 2004 2005 2004

Fuel (coal and oil) for power generation 1,498,484 732,834 850,255 326,060

Material and spare parts 857,605 711,578 551,846 507,383

2,356,089 1,444,412 1,402,101 833,443

Less: provision for inventory obsolescence (44,732) (13,008) (21,256) (11,099)

2,311,357 1,431,404 1,380,845 822,344

As at 31st December 2005, approximately RMB670 million of the total carrying amount of inventories were carried at fair

value less cost to sell (31st December 2004: approximately RMB556 million).






17. INVENTORIES, NET (Cont’d)

Movements of provision for inventory obsolescence during the year are analyzed as follows:

The Company and its subsidiaries The CompanyFor the year ended 31st December For the year ended 31st December

2005 2004 2005 2004

Beginning of the year (13,008) (13,621) (11,099) (9,690)

Provision (31,924) (1,712) (10,356) (1,546)

Write-offs — 2,134 — —

Reversal 200 191 199 137

End of the year (44,732) (13,008) (21,256) (11,099)

18. OTHER RECEIVABLES AND ASSETS, NET

Other receivables and assets comprised:


2005 2004 2005 2004

Prepayments for inventories 163,435 328,181 74,417 196,948

Prepayments for contractors 137,505 168,616 98,289 92,001

Prepayment for acquisition of

Huaneng Finance (Note) 288,000 — 288,000 —

Receivable from a property developer 66,800 — — —

Others 233,435 268,781 118,379 59,682

889,175 765,578 579,085 348,631

Less: provision for doubtful accounts (33,223) (42,262) (22,840) (20,766)

855,952 723,316 556,245 327,865

Note: This represented the prepayment of the consideration to Huaneng Group and Huaneng Finance of RMB126 million and RMB162

million respectively to acquire a 20% equity interest in Huaneng Finance. As at 31st December 2005, the investment was still

subject to approvals from the relevant authorities. Please refer to Note 39 for details of subsequent event in relation to this

investment.






18. OTHER RECEIVABLES AND ASSETS, NET (Cont’d)

Movements of provision for doubtful accounts during the year are analyzed as follows:


2005 2004 2005 2004

Beginning of the year (42,262) (53,885) (20,766) (28,653)

Provision (3,242) (2,405) (2,920) (739)

Write-offs 475 969 475 581

Reversal 11,806 13,059 371 8,045

End of the year (33,223) (42,262) (22,840) (20,766)

19. ACCOUNTS RECEIVABLE, NET

Accounts receivable comprised:


2005 2004 2005 2004

Accounts receivable 4,963,326 3,730,431 3,180,097 2,407,134

Notes receivable 1,117,533 1,242,672 622,462 682,937

6,080,859 4,973,103 3,802,559 3,090,071

Less: provision for doubtful accounts (58,433) — — —

6,022,426 4,973,103 3,802,559 3,090,071

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.

Movements of provision for doubtful accounts during the year are analyzed as follows:


2005 2004 2005 2004

Beginning of the year — — — —

Provision (58,433) — — —

End of the year (58,433) — — —






19. ACCOUNTS RECEIVABLE, NET (Cont’d)

As at 31st December 2005, the aging analysis of accounts receivable was as follows:


2005 2004 2005 2004

Within 1 year 5,864,038 4,510,368 3,789,939 3,077,748

Between 1 to 2 years 3,624 96,808 297 6,203

Between 2 to 3 years 59,217 — 6,203 —

Over 3 years 153,980 365,927 6,120 6,120

6,080,859 4,973,103 3,802,559 3,090,071

As at 31st December 2005, HIPDC provided guarantees on certain accounts receivable balances of the Company and its

subsidiaries of approximately RMB77 million (31st December 2004: approximately RMB209 million).

As at 31st December 2005, the maturity period of the notes receivable ranged from one month to twenty-six months (31st

December 2004: one month to six months).

20. TEMPORARY CASH INVESTMENTS

Temporary cash investments consist of fixed-term deposits denominated in RMB with original maturities ranging from

more than three months to one year. The effective interest rate is 1.62% (for the year ended 31st December 2004: 1.98%

to 2.25%) per annum.

21. AUTHORIZED SHARE CAPITAL AND PAID-IN CAPITAL

As at 31st December 2005, the authorized share capital of the Company was RMB12,055,383,440 (31st December 2004:

RMB12,055,383,440), divided into 12,055,383,440 shares (31st December 2004: 12,055,383,440 shares) of RMB1.00

each (31st December 2004: RMB1.00 each). The issued and fully paid share capital of the Company as at 31st December

2005 was RMB12,055,383,440 (31st December 2004: RMB12,055,383,440) comprising of 9,000,000,000 domestic shares

(31st December 2004: 9,000,000,000 domestic shares) and 3,055,383,440 overseas listed foreign shares (31st December

2004: 3,055,383,440 overseas listed foreign shares). The holders of domestic shares and overseas listed foreign shares,

with minor exceptions, are entitled to the same economic and voting rights.






22. APPROPRIATION AND DISTRIBUTION OF PROFIT

The Board of Directors decides on an annual basis the percentages of the profit after tax, as determined under the PRC

accounting standards and regulations, to be appropriated to the statutory surplus reserve fund, the statutory public

welfare fund and, on an optional basis, the discretionary surplus reserve fund. When the balance of the statutory surplus

reserve fund reaches 50% 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 statutory public welfare fund can only be utilized on capital items for the

collective benefits of the Company’s employees. Titles of these capital items will remain with the Company. This fund is

non-distributable other than in liquidation. The discretionary surplus reserve fund can be provided and used in accordance

with the resolutions of the Directors and then approved by the shareholders.

For the year ended 31st December 2005, the Board of Directors resolved the following on 28th March 2006:

(a) to appropriate 10% and 7.5% (for the year ended 31st December 2004: 10% and 7.5%), respectively, of the profit

after taxation as determined under the PRC accounting standards and regulations to the statutory surplus reserve

fund and the statutory public welfare fund. The total amount of appropriation is approximately RMB833 million (for

the year ended 31st December 2004: approximately RMB943 million).

(b) to make no appropriation to the discretionary surplus reserve fund (for the year ended 31st December 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 31st December 2005 was approximately RMB3.93 billion (for the year ended 31st December 2004: approximately

RMB4.38 billion). The cumulative balance of distributable profit as at 31st December 2005 was approximately RMB13.32

billion (31st December 2004: approximately RMB11.17 billion).

23. DIVIDENDS

On 28th March 2006, the Board of Directors proposed a cash dividend of RMB0.25 per share, totaling approximately

RMB3,014 million. This proposal is subject to the approval of the shareholders at the annual general meeting. These

financial statements do not reflect this dividends payable, which will be accounted for in shareholders’ equity as an

appropriation of retained earnings for the year ending 31st December 2006.

On 11th May 2005, the shareholders approved the declaration of cash dividends of RMB0.25 per ordinary share, totaling

approximately RMB3,014 million in their annual general meeting.






24. LONG-TERM LOANS


As at 31st December 2005 As at 31st December 2004

Original Interest Original Interest

currency rate Amount currency rate Amount

’000 ’000

Shareholder’s loans

Unsecured

RMB

- Fixed rate 2,800,000 4.05% - 5.02% 2,800,000 800,000 3.78% - 4.60% 800,000

Bank loans

Secured

RMB

- Fixed rate 407,000 5.18% - 5.76% 407,000 — — —

Unsecured

RMB

- Fixed rate 21,833,838 3.60% - 6.12% 21,833,838 8,679,869 3.60% - 5.76% 8,679,869

US$

- Fixed rate 611,668 5.40% - 6.97% 4,936,284 712,0371.225% - 6.97%

5,893,180

- Variable rate 60,109 2.155% - 3.385% 485,096 66,437 549,864

€

- Fixed rate 73,319 2% 702,376 76,699 2% 863,834

27,957,594 15,986,747

28,364,594 15,986,747






24. LONG-TERM LOANS (Cont’d)





’000 ’000

Other loans

Secured

RMB

- Fixed rate 200,000 5.27% 200,000 — — —

Unsecured

RMB

- Fixed rate 446,847 4.94% - 6.12% 446,847 434,726 4.94% - 5.76% 434,726

US$

- Variable rate 15,714 2.99% - 3.93% 126,817 18,571 1.67% - 2.055% 153,706

JPY

- Variable rate 1,309,524 5.80% 89,985 1,547,619 5.80% 123,347

663,649 711,779

863,649 711,779

Certain loans totaling approximately RMB407 million (31st December 2004: nil) are secured by various property, plant and

equipment of the Company and its subsidiaries (Note 35) while an other long-term loan of RMB200 million (31st December

2004: nil) is secured by tariff collection right. Please refer to Note 8(c)(ii) for details of certain loans guaranteed by state-

owned enterprises.







The Company




’000 ’000

Shareholder’s loan

Unsecured

RMB

- Fixed rate 2,000,000 5.02% 2,000,000 — — —

Bank loans

Unsecured

RMB

- Fixed rate 4,287,018 3.60% - 5.63% 4,287,018 2,369,000 3.60% - 5.814% 2,369,000

US$

- Fixed rate 459,580 5.95% - 6.60% 3,708,901 530,5971.225% - 6.60%

4,391,487

- Variable rate 60,109 2.155% - 3.385% 485,096 66,437 549,864

8,481,015 7,310,351







The maturity of long-term loans is as follows:


Shareholder’s loans Bank loans Other loans

As at 31st December As at 31st December As at 31st December

2005 2004 2005 2004 2005 2004

One year or less — — 2,653,339 1,225,476 512,640 317,761

More than one year but not

more than two years — — 2,979,225 1,409,497 153,044 202,212

More than two years but not

more than three years — — 3,189,885 1,834,237 99,419 42,624

More than three years but not

more than four years — — 4,417,885 2,043,237 39,419 42,624

More than four years but not

more than five years — — 3,386,732 3,621,597 39,419 42,623

More than five years 2,800,000 800,000 11,737,528 5,852,703 19,708 63,935

2,800,000 800,000 28,364,594 15,986,747 863,649 711,779

Less: amount due within

one year included under

current liabilities — — (2,653,339) (1,225,476) (512,640) (317,761)

2,800,000 800,000 25,711,255 14,761,271 351,009 394,018






24. LONG-TERM LOANS (Cont’d)The Company

Shareholder’s loans Bank loansAs at 31st December As at 31st December

2005 2004 2005 2004

One year or less — — 1,005,555 825,142

More than one year but not more

than two years — — 1,105,555 921,521

More than two years but not more

than three years — — 1,085,555 1,021,470

More than three years but not more

than four years — — 1,205,555 821,470

More than four years but not more

than five years — — 1,587,574 1,009,469

More than five years 2,000,000 — 2,491,221 2,711,279

2,000,000 — 8,481,015 7,310,351

Less: Amount due within one year

included under current liabilities — — (1,005,555) (825,142)

2,000,000 — 7,475,460 6,485,209

The analysis of the above is as follows:


2005 2004 2005 2004

Shareholder’s loans

- Not wholly repayable within five years 2,800,000 800,000 2,000,000 —

Bank loans

- Wholly repayable within five years 8,429,132 3,926,907 2,887,018 491,724

- Not wholly repayable within five years 19,935,462 12,059,840 5,593,997 6,818,627

28,364,594 15,986,747 8,481,015 7,310,351

Other loans

- Wholly repayable within five years 686,265 434,726 — —

- Not wholly repayable within five years 177,384 277,053 — —

863,649 711,779 — —






25. ACCOUNTS PAYABLE AND OTHER LIABILITIES

Accounts payable and other liabilities comprised:


2005 2004 2005 2004

Accounts and notes payable 1,231,162 761,689 700,757 517,626

Amounts received in advance 1,196,352 1,129,598 1,196,352 1,129,598

Payable to contractors for construction 2,430,133 1,592,621 1,079,947 556,052

Other payables to contractors 778,488 237,513 113,609 120,774

Accrued interest 197,637 116,322 123,936 88,192

Others 1,071,468 713,415 419,841 432,745

6,905,240 4,551,158 3,634,442 2,844,987

As at 31st December 2005, the aging analysis of accounts and notes payable was as follows:


2005 2004 2005 2004

Within 1 year 1,223,004 754,406 696,921 513,922

Between 1 to 2 year 4,227 2,911 2,921 1,559

Over 2 years 3,931 4,372 915 2,145

1,231,162 761,689 700,757 517,626

26. TAXES PAYABLE

Taxes payable comprises:


2005 2004 2005 2004

VAT payable 576,488 527,292 290,200 306,679

Income tax payable 458,982 407,450 194,492 208,626

Others 95,814 65,050 22,291 32,240

1,131,284 999,792 506,983 547,545






27. SHORT-TERM BONDS

On 27th May 2005, the Company and its subsidiaries issued RMB4.5 billion and RMB0.5 billion unsecured short-term

zero-coupon bonds with maturity of one year and nine months and will be redeemed at par respectively. The unit face

value of such bonds was RMB100 each and issue prices were RMB97.16 and RMB98.00 respectively with effective interest

rates of 3.40% per annum and 3.32% per annum respectively.

28. SHORT-TERM LOANS

Short-term loans denominated in RMB are unsecured, bear interest from 4.30% to 5.51% per annum for the year ended

31st December 2005 (for the year ended 31st December 2004: 4.30% to 5.02% per annum) (Note 8(a)(iv) and (vii)).

29. DEFERRED INCOME TAXES

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets

against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The offset amounts

are as follows:


2005 2004 2005 2004

Deferred income tax assets:

- Deferred income tax assets to be

recovered after more than 12 months 51,874 93,941 12,640 11,981

- Deferred income tax assets to be

recovered within 12 months 12,201 3,598 621 555

64,075 97,539 13,261 12,536

Deferred income tax liabilities:

- Deferred income tax liabilities to be

recovered after more than 12 months (1,056,412) (491,122) (297,475) (14,304)

- Deferred income tax liabilities to be

recovered within 12 months (101,363) (55,595) (38,966) (1,002)

(1,157,775) (546,717) (336,441) (15,306)

(1,093,700) (449,178) (323,180) (2,770)






29. DEFERRED INCOME TAXES (Cont’d)

The gross movement on the deferred income tax accounts is as follows:


2005 2004 2005 2004

Beginning of the year,

as previously reported (449,178) (81,803) (2,770) (789)

Effect of changes in accounting

policy (Note 2(a)) (222,551) — (222,551) —

Beginning of year, as restated (671,729) (81,803) (225,321) (789)

Acquisitions (Note 5) (370,730) (399,313) — (2,206)

Charged to statement of income (Note 32) 61,164 31,938 14,546 225

Charged to equity (112,405) — (112,405) —

End of the year (1,093,700) (449,178) (323,180) (2,770)

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:


Amortization Amortization

of prepaid Provisions for of prepaid

land use doubtful Termination land use Termination

rights debts benefits Others Total rights benefits Others Total

As at 1st January 2004 13,239 3,219 — 4,853 21,311 13,239 — — 13,239

Acquisitions (Note 5) (2,206) 60,172 17,032 3,878 78,876 (2,206) — — (2,206)

(Charged) / Credited

to the statement of income (221) (2,215) 1,019 (1,231) (2,648) (221) 1,724 — 1,503

As at 31st December 2004 10,812 61,176 18,051 7,500 97,539 10,812 1,724 — 12,536

Acquisitions (Note 5) — 20,942 — 12,533 33,475 — — — —

(Charged) / Credited to

the statement of income (221) (13,466) (4,085) 39,240 21,468 (221) (334) 1,280 725

As at 31st December 2005 10,591 68,652 13,966 59,273 152,482 10,591 1,390 1,280 13,261







Deferred income tax liabilities:


Amortization Amortization

of goodwill Amortization of goodwill

Fair value and negative of land Fair value and negative

gains goodwill use rights Depreciation Others Total gains goodwill Depreciation Others Total

As at 1st January 2004 — — — (103,114) — (103,114) — — (14,028) — (14,028)

Acquisitions (Note 5) — — (53,172) (425,017) — (478,189) — — — — —


the statement of income — — — 34,586 — 34,586 — — (1,278) — (1,278)

As at 31st December 2004 — — (53,172) (493,545) — (546,717) — — (15,306) — (15,306)

Effect of changes in

accounting policy (Note 2(a)) — (222,551) — — — (222,551) — (222,551) — — (222,551)

As at 31st December 2004, as restated — (222,551) (53,172) (493,545) — (769,268) — (222,551) (15,306) — (237,857)

Acquisitions (Note 5) — — — (404,205) — (404,205) — — — — —


the statement of income — 36,330 358 10,372 (7,364) 39,696 — 36,330 (15,145) (7,364) 13,821

Charge to equity (112,405) — — — — (112,405) (112,405) — — — (112,405)

As at 31st December 2005 (112,405) (186,221) (52,814) (887,378) (7,364) (1,246,182) (112,405) (186,221) (30,451) (7,364) (336,441)

The deferred income tax charged to equity during the year represented the tax impact of a fair value reserve for an

available-for-sale investment recognized in shareholders’ equity (for the year ended 31st December 2004: nil).







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:


2005 2004 2005 2004

Year of expiry

2005 N/A 111,441 N/A 111,441

2006 177,197 177,197 177,197 177,197

2007 71,125 71,125 71,125 71,125

2008 — — — —

2009 12,970 — 12,970 —

2010 80,754 N/A 80,754 N/A

342,046 359,763 342,046 359,763

30. ADDITIONAL FINANCIAL INFORMATION ON BALANCE SHEETS

As at 31st December 2005, the net current liabilities of the Company and its subsidiaries amounted to approximately

RMB11,044 million (31st December 2004: approximately RMB7,079 million). On the same date, total assets less current

liabilities was approximately RMB76,333 million (31st December 2004: approximately RMB56,047 million).

As at 31st December 2005, the net current liabilities of the Company amounted to approximately RMB5,835 million (31st

December 2004: approximately RMB4,339 million). On the same date, total assets less current liabilities was approximately

RMB48,236 million (31st December 2004: approximately RMB41,973 million).






31. HOUSING SCHEMES

In accordance with the PRC housing reform regulations, the Company and its subsidiaries are required to make contributions

to the state-sponsored housing fund at 7%-15% (for the year ended 31st December 2004: 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 31st December 2005, the Company and

its subsidiaries contributed approximately RMB147 million (for the year ended 31st December 2004: approximately RMB101

million) to the fund.

In addition, the Company and its subsidiaries provided housing benefits to certain employees to enable them to purchase

living quarters from the Company and its subsidiaries at a substantial discount. Such housing benefits represent the

difference between the cost of the staff quarters sold to and the net proceeds collected from the employees. The provision

of housing benefits is expected to benefit the Company and its subsidiaries over the estimated remaining average service

life of the relevant employees. For the year ended 31st December 2005, the housing benefits provided by the Company

and its subsidiaries to the employees amounted to approximately RMB39 million (for the year ended 31st December 2004:

approximately RMB34 million) which is recorded as other non-current assets and amortized over the remaining average

service life of the relevant employees which is estimated to be about 10 years.

The Company and its subsidiaries have no further obligation for housing benefits.






32. INCOME TAX EXPENSES

Income tax expenses comprised:


2005 2004

Restated

Current income tax expense 1,105,461 980,672

Deferred income tax (Note 29) (61,164) (31,938)

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 (for

the year ended 31st December 2004: nil). The reconciliation of the effective income tax rate from the statutory income tax

rate in the PRC is as follows:


2005 2004

Average statutory tax rate 21% 18%

Effect of tax holiday (4%) (2%)

Others (1%) (1%)

Effective tax rate 16% 15%

The average statutory tax rate for the year ended 31st December 2005 represented the weighted average tax rate of the

head office and the individual power plants calculated on the basis of the relative amounts of net profit before tax and the

applicable statutory tax rates. The acquisitions of domestic enterprises in the current year contributed to the increase of

average statutory tax rate.

The aggregated effect of the tax holiday was approximately RMB255 million for the year ended 31st December 2005 (for

the year ended 31st December 2004: approximately RMB122 million). The granting of further preferential treatments to

existing power plants existed before 2005 and those acquired in 2005 contributed to such an increase in the percentage.






33. EARNINGS PER SHARE

For the year ended 31st December

2005 2004

Profit Profit

attributable attributable

to the to the

equity holders Weighted equity holders Weighted Per

of the average Per share of the average share

Company shares amount Company shares amount

’000 RMB ’000 RMB

Earnings per Share 4,871,794 12,055,383 0.40 5,323,876 12,055,368 0.44

Finance costs in relation to

convertible notes and

the relevant put option

(net of tax effect) — — 22 —

Effect of assumed

conversion — — — 121

Diluted Earnings per Share

Net profit attributable to

shareholders plus effect

of assumed conversion 4,871,794 12,055,383 0.40 5,323,898 12,055,489 0.44

Basic

The calculation of basic earnings per share is computed by dividing profit attributable to the equity holders of the Company

by weighted average number of outstanding ordinary shares during the year.

Diluted

Diluted earnings per share is calculated by adjusting both profit attributable to the equity holders of the Company and

weighted average number of ordinary shares outstanding assuming conversion of all dilutive potential ordinary shares at

the beginning of the year. In 2005, the Company had no potential ordinary shares (for the year ended 31st December

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.






34. NOTES TO CASH FLOW STATEMENT

(a) Analysis of cash and cash equivalents

As at 31st December 2005, cash and cash equivalents consisted of:


2005 2004 2005 2004

Cash in RMB 1,042 621 412 485

Current deposits

RMB 2,632,493 2,284,551 699,022 1,200,516

US$ 14,130 10,359 13,962 10,177

Total cash and cash equivalents 2,647,665 2,295,531 713,396 1,211,178

(b) Undrawn borrowing facilities

As at 31st December 2005, the Company and its subsidiaries had available unsecured borrowing facilities from banks of

approximately RMB34.86 billion (31st December 2004: approximately RMB30 billion) of which undrawn borrowing facilities

amounted to approximately RMB23 billion (31st December 2004: approximately RMB28 billion). Out of these available

undrawn borrowing facilities, approximately RMB10 billion (31st December 2004: approximately RMB20 billion) relates to

medium to long-term loan facilities, the drawdown of which is subject to application and approval procedures. Management

expects to drawdown the available facilities in accordance with the level of working capital and / or planned capital

expenditure of the Company and its subsidiaries.

(c) Non-cash transactions

During the year, there is no material non-cash transaction. In 2004, the principal non-cash transaction was the conversion

of convertible notes to share capital and the ordinary shares split.






35. PLEDGE OF ASSETS

As mentioned in Note 24, the Company and its subsidiaries have pledged various assets as collateral against certain loans.

A summary of the pledged assets is as follows:

As at31st December

2005

Dongxiguan Hydropower

- Dam 383,423

- Buildings 1,933

- Electric utility plant in service 190,306

- Others 10,485

Kangding Hydropower


Mingtai Hydropower


Total 667,339

As at 31st December 2004, the Company and its subsidiaries did not have any asset pledged as collateral.






36. COMMITMENTS

(a) Capital and operational commitments

(i) Commitments mainly relate to the construction of new power projects, certain complementary facilities and renovation

projects for existing power plants and the purchase of coal. Commitments outstanding as at 31st December 2005

not provided for in the balance sheet were as follows:


2005 2004 2005 2004

Contracted but not provided for

- purchase of inventories — 3,560,175 — 2,950,935

- construction 17,076,451 7,923,087 12,323,448 7,082,386

Sub-total 17,076,451 11,483,262 12,323,448 10,033,321

Authorized but not contracted for

- construction 11,983 236,501 10,810 41,377

Sub-total 11,983 236,501 10,810 41,377

Total 17,088,434 11,719,763 12,334,258 10,074,698

(ii) During 2004 and 2005, the Company entered into various long-term agreements subject to termination only under

certain limited circumstances for the procurement of coal from 2005 to 2009 for use in power generation. In most

cases, these contracts contain provisions for price escalations and minimum purchase level clauses. Purchases for the

years ended 31st December 2005 and 2004 were approximately RMB4,619 million and nil respectively. The future

purchase commitments under contracts are as follows:

As at 31st December

2005 2004

2005 N/A 5,768,657

2006 7,771,230 5,941,717

2007 7,771,230 6,119,968

2008 3,826,281 2,801,770

2009 3,826,281 2,801,770

23,195,022 23,433,882






36. COMMITMENTS (Cont’d)

(b) Operating lease commitments

The Company has various operating lease arrangements with HIPDC for land and buildings (see Note 8(b)). Some of the

leases contain renewal options and most of the leases contain escalation clauses. Lease terms do not contain restrictions

on the Company’s activities concerning dividends, additional debts or further leasing.

Total future minimum lease payments under non-cancellable operating leases are as follows:

As at 31st December

2005 2004

Land and buildings

- not later than one year 33,495 1,334

- later than one year and not later than two years 7,372 1,334

- later than two years and not later than five years 19,639 4,002

- later than five years 138,058 52,026

198,564 58,696

Including in the commitments above was the commitment on land use rights of Huaneng Dezhou Power Plant (“Dezhou

Power Plant”). The related operating lease agreement was signed by Dezhou Power Plant and the relevant land management

authorities for the land occupied by Dezhou Phase I and Phase II, annual rental is approximately RMB30 million effective

from June 1994 and is subject to revision of five years after the said date. Thereafter, the annual rental is subject to revision

once every three years. The increment for each rental revision is restricted to no more than 30 percent of the previous

annual rental amount. For the year ended 31st December 2005, the annual rental is approximately RMB30 million (for the

year ended 31st December 2004: approximately RMB29 million).






37. CONTINGENT LIABILITIES


2005 2004 2005 2004

Financial guarantees

- granted to an associate 225,250 305,250 225,250 305,250

- granted to subsidiaries — — 1,352,000 1,430,000

225,250 305,250 1,577,250 1,735,250

Based on historical experience, no claims have been made against the Company and its subsidiaries since the dates of

granting the financial guarantees described above.

38. BUSINESS RISK

The Company and its subsidiaries conduct their operations in the PRC and accordingly investing in the shares of the

Company and its subsidiaries are subject to the risks of, among others, political, economic and legal environment in the

PRC, restructuring of the PRC electric power industry and regulatory reform, new regulation pertaining to setting of power

tariff and availability of fuel supply at stable price.

For the year ended 31st December 2005, the Company and its subsidiaries sold electricity to four major customers (for the

year ended 31st December 2004: five), each of which amounted to approximately 10% or more of the operating revenue.

In aggregation, these customers accounted for approximately 57% (for the year ended 31st December 2004: approximately

79%) of the operating revenue of the Company and its subsidiaries.

39. EVENT AFTER THE BALANCE SHEET DATE

Subsequent to the year end, the Company and its subsidiaries completed its acquisition of 20% of the registered capital

of Huaneng Finance at a consideration of RMB288 million.

40. COMPARATIVES

Certain prior year comparative figures have been reclassified to conform to the current year presentation. Specifically,

certain bank loans have been reclassified as other long-term loans in the current year.

Supplemental Information for North AmericanShareholders



The consolidated financial statements of the Company and its subsidiaries prepared under IFRS differ in certain respects

from those prepared under generally accepted accounting principles in the United States of America (“US GAAP”). Significant

differences between IFRS and US GAAP, which affect the equity and net profit of the Company and its subsidiaries, are

summarized below:

(a) Effect of acquisitions of entities under common control

Huaneng Group is the controlling parent company of HIPDC, which in turn is the controlling parent of the Company.

Under IFRS, the Company and its subsidiaries adopted the acquisition method to account for the acquisition of:

(i) 70% equity interest in Shidongkou I Power Plant, 70% equity interest in Taicang Power Company and all of the

assets and liabilities of Huaneng Changxing Power Plant (“Changxing Power Plant”), in July 2002 from Huaneng

Group;

(ii) 55% equity interest in Qinbei Power Company, 60% equity interest in Yushe Power Company and all of the assets

and liabilities of Xindian Power Plant in October 2003 from Huaneng Group;

(iii) 60% equity interest in Luohuang Power Company, 55% equity interest in Yueyang Power Company, 90% equity

interest in Jinggangshan Power Plant and all of the assets and liabilities of Yingkou Power Plant in July 2004 from

HIPDC and / or from Huaneng Group; and

(iv) 60% equity interest in Sichuan Hydropower and 65% equity interest in Pingliang Power Company in January 2005

from Huaneng Group.

Under the acquisition method, the results of the acquired businesses are included in the results of operations of the

Company and its subsidiaries from the date of the acquisition. The difference between the purchase consideration and the

fair value of the underlying net assets acquired is treated as goodwill. In prior years, goodwill arising from the acquisitions

in (i) and (ii) above is amortized on a systematic basis to the statement of income over its useful economic life, being the

remaining weighted average useful life of the acquired depreciable or amortizable assets while goodwill arising from the

acquisition in (iii) above is tested annually for impairment and carried at cost less accumulated impairment losses. In the

current year, goodwill arising from all the acquisitions above is not amortized but is tested annually for impairment and

carried at cost less accumulated impairment losses.


Supplemental Information for North American Shareholders


(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

Companies and its subsidiaries, these acquisition transactions were considered common control transactions. Under US

GAAP, they are considered to be transfers of businesses under common control and the acquired assets and liabilities are

accounted for at historical cost in a manner similar to the pooling of interests method. Accordingly, the consolidated

financial statements for all years presented have been retroactively restated as if the current structure and operations

resulting from the acquisition had been in existence since the beginning of the earliest year presented, with financial data

of previously separate entities combined. The cash consideration paid by the Company is treated as an equity transaction

in the year of the acquisition for US GAAP purposes. Accordingly, the resulting impact of depreciation and amortization

expenses on income is also different.

(b) Effect of acquisitions of 44.16% equity interest in Huaiyin Power Company,30% additional equity interest in Shidongkou I Power Plant, 5% additionalequity interest in Taicang Power Company and 40% equity interest inHanfeng Power Company

The Company acquired from Huaneng Group:

(i) 44.16% equity interest of Huaiyin Power Company in July 2002;

(ii) 30% additional equity interest of Shidongkou I Power Plant and 5% additional equity interest of Taicang Power

Company in December 2002; and

(iii) 40% equity interest of Hanfeng Power Company in July 2004.

Under IFRS, upon the completion of the above acquisitions, the relevant equity interests of the net assets of the acquired

companies and power plants are recorded at fair value. The excess of the total cost of the acquisition over the fair value of

the relevant portion of net assets of power plant acquired is recorded as goodwill. In prior years, goodwill arising from the

acquisitions of Shidongkou I Power Plant, the Taicang Power Company and the Huaiyin Power Company was amortized

on a systematic basis to the statement of income over its useful economic life, being the remaining weighted average

useful life of the acquired depreciable or amortizable assets, while goodwill arising from the acquisitions of Hanfeng

Power Company was tested annually for impairment and carried at cost less accumulated impairment losses. In the

current year, goodwill arising from the acquisitions is not amortized and is tested annually for impairment and carried at

cost less accumulated impairment losses.

Under US GAAP, upon completion of the above acquisitions, Huaneng Group’s proportionate share in the net assets of

Huaiyin Power Company, Shidongkou I Power Plant, Taicang Power Company and Hanfeng Power Company being sold to

the Company was recorded at the historical carrying value. The excess of the total cost of acquisition over the net assets

acquired was recorded as a deemed distribution. Accordingly, the resulting impact of depreciation and amortization

expenses on income is also different.




(c) Housing benefits provided by HIPDC

HIPDC sold to certain qualified employees of the Company living quarters owned by HIPDC at preferential prices. The

difference between the cost of living quarters and the sales proceeds received from the employees is considered to be

housing benefits. Under IFRS, such housing benefits provided by HIPDC are not reflected in the financial statements of the

Company. Under US GAAP, the amount of housing benefits provided by HIPDC to the employees of the Company are

recognized as the Company’s operating expenses on a straight-line basis over the estimated remaining average service life

of the employees. The corresponding amount is recorded as an addition of capital contribution from HIPDC.

(d) Acquisition of Shandong Huaneng Power Development Company Limited(“Shandong Huaneng”)

Huaneng Group used to be one of the substantial shareholders of Shandong Huaneng, holding 33.09% equity interest in

it before the Company’s acquisition of Shandong Huaneng. Under IFRS, upon the completion of the acquisition of Shandong

Huaneng, the entire net assets of Shandong Huaneng were recorded at fair value. In prior years, the excess of the fair

value of the entire net assets acquired over the total cost of the acquisition was recorded as negative goodwill. In the

current year, the ending balance of negative goodwill brought forward from 2004 is offset against opening retained

earnings according to IFRS 3. Under US GAAP, upon completion of the acquisition of Shandong Huaneng, Huaneng

Group’s proportionate share of 33.09% in the net assets of Shandong Huaneng that was sold to the Company was

recorded at the historical carrying value. The excess of the proportionate share in the book value of the net assets acquired

over the relevant portion of the cash consideration was recorded as a capital contribution to the Company. The book value

of the remaining 66.91% 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 originally recognized under IFRS is different from the amount of the reduction to

property, plant and equipment under US GAAP due to the 33.09% portion of the net assets previously owned by Huaneng

Group as described above and that the negative goodwill under IFRS is offset against opening retained earnings in the

current year whereas, for US GAAP purposes, it was a reduction to the value of the property, plant and equipment, after

the reduction described above, are depreciated over the respective assets’ useful life, the net profit under IFRS and US

GAAP is different.




(e) Capitalization of borrowing costs

In accordance with IAS 23, the Company capitalized interest on general borrowings used for the purpose of obtaining a

qualifying asset in addition to the capitalization of interest on specific borrowings.

Under US regulatory accounting requirements, interest on funds borrowed generally and used for the purpose of obtaining

qualifying assets are not capitalized if such interests cannot be taken into consideration when determining the recoverable

rate base for tariff setting purposes. Consequently, under US GAAP, the Company did not capitalize interest on general

borrowings used for obtaining regulatory assets. An adjustment is made to reverse the capitalized interest on general

borrowings net of the related depreciation on property, plant and equipment.

(f) Reversal of goodwill amortization

In 2004, in accordance with IFRS 3, goodwill arising from acquisitions for which the agreement date was before 31st

March 2004 is amortized using the straight-line method over its estimated useful life and recognized in the statement of

income as other operating expenses and subject to an impairment review whenever events or changes in circumstances

indicate their carrying value may not be recoverable, and annually if the estimated useful life exceeds 20 years. Under US

GAAP, in accordance with Statement of Financial Accounting Standard Number 142 “Goodwill and Other Intangible

Assets”, goodwill arising from acquisition is not amortized but tested for impairment on an annual basis and between

annual tests in certain circumstances.

There is no such a GAAP difference in the current year.

(g) Deferred income tax impact

This represents the deferred income tax effect on the above GAAP differences where applicable.

(h) US regulatory accounting

Under US GAAP, Statement of Financial Accounting Standard (“SFAS”) No. 71 “Accounting for the Effects of Certain

Types of Regulation“ is applicable to utilities in the United States whose regulators have the power to approve and / or

regulate rates that may be charged to customers. SFAS 71 recognizes that the regulatory process produces economic

effects which should be reflected in the financial statements. Because revenues are based on costs, SFAS 71 governs the

year in which various costs are included in the statements of income with the objective of matching costs with revenues.

Provided that, through the rate setting process, the utility is substantially assured of recovering its allowable costs by the

collection of revenue from its customers, such costs not yet recovered are deferred as regulatory assets. The regulatory

process may also impose a liability on a rate-regulated enterprise, usually representing obligations to the enterprise’s

customers, which should be recognized as a regulatory liability.




(h) US regulatory accounting (Cont’d)

In order to apply SFAS 71, three criteria must be met. These criteria require that a) the power rates for regulated services

or products provided to customers be established by or are subject to approval by an independent, third-party regulator or

by an entity’s own governing board empowered by statute or contract to establish power rates that bind customers; b) the

regulated power rates are designed to recover the costs of providing the regulated services or products; and c) in view of

the demand for the regulated services or products and the level of competition, direct and indirect, it is reasonable to

assume that power rates, which are set at levels that will recover costs, can be charged to and collected from customers;

this criterion requires consideration of anticipated changes in levels of demand or competition during the recovery period

for any capitalized costs.

As at 31st December 2005, the Company and its subsidiaries believe that 10 of their power plants (31st December 2004

and 2003: 10 and 12 power plants respectively) meet these specific criteria of SFAS 71. Firstly, the power rates are

established by an independent regulator, the provincial or local price bureau. Secondly, the pricing policy applicable to the

power plants provides for rate-setting based on the specific costs of the power plants. This process has operated historically

and will continue under the pricing policy. Finally, based on the significant demand for electricity in the Company and its

subsidiaries’ service territory, it is reasonable to assume that the authorized power rates will be collected from customers.

In November 2004, in accordance with the issuance of a government circular on implementation of a full-scope tariff

bidding practice that is applicable to two of the Company’s power plants located in Northeast China, the Company has

discontinued the application of SFAS 71 for these two power plants as the criteria under SFAS 71 are no longer met.

Accordingly, these two power plants applied Statement of Financial Accounting Standard Number 101 “Regulated Enterprises

- Accounting for the Discontinuation of Application of FASB Statement No. 71” (“SFAS 101”). There was no elimination

of assets or liabilities as a result of the application of SFAS 101 as the Company and its subsidiaries did not have any assets

and / or liabilities pursuant to SFAS 71 that were not recognized as assets and / or liabilities under IFRS. The Company and

its subsidiaries have also performed an impairment review on the property, plant and equipment of the two relevant

power plants and have determined that no impairment provision is required.

With respect to the remaining power plants of the Company and its subsidiaries, which were acquired in 2002, 2003,

2004 and 2005, the SFAS 71 criteria mentioned above are not met and, therefore, SFAS 71 cannot be applied. Consequently,

these remaining power plants have adopted US GAAP without specific reference to the regulatory basis of accounting

provided for under SFAS 71.

Under IFRS, as there is no equivalent regulatory accounting standard, the policy of the Company and its subsidiaries is to

recognize regulatory assets established under SFAS 71 only where they comprise rights or other access to future economic

benefits as a result of past events; or to recognize regulatory liabilities only where they comprise a present obligation the

settlement of which is expected to result in an outflow of resources embodying economic benefits.




(i) Impairment of long-lived assets

Impairment of long-lived assets (excluding goodwill)

The carrying amount of long-lived asset (excluding indefinite lived assets and goodwill) under IFRS is reviewed periodically

in order to assess whether the recoverable amount has declined below the carrying amount. When such a decline occurs,

the carrying amount is reduced to the recoverable amount based on the expected future cash flow generated by the asset

discounted to their present value or the asset’s net selling price. A subsequent increase in the recoverable amount is

written back to the statement of income when circumstances and events that led to the write-down cease to exist.

Under US GAAP, long-lived assets (excluding goodwill) are reviewed for impairment whenever events or changes in

circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held

and used is evaluated by a comparison of the carrying amount of assets to future undiscounted net cash flows expected

to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured

by the amount by which the carrying amounts of the assets exceed the fair value of the assets. Subsequent reversal of

impairment is not permitted. Assets to be disposed of are reported at the lower of the carrying amount or fair value less

cost to sell.

Goodwill

Under IFRS, a one-step impairment test is performed. The recoverable amount of the CGU is compared to its carrying

amount. The impairment loss is recognized as the excess of the carrying amount over the recoverable amount.

Under US GAAP, goodwill is reviewed for impairment, at the reporting unit level, at least annually or whenever events or

changes in circumstances indicate that the recoverability of the carrying amount must be assessed.

Under US GAAP, a two-step impairment test is required:

(i) The fair value and the carrying amount of the reporting unit including goodwill should be compared. If the fair value

of the reporting unit is less than the book value, goodwill would be considered to be impaired, then

(ii) The goodwill impairment should be measured as the excess of the carrying amount of goodwill over its implied fair

value. The implied fair value of goodwill should be determined by allocating fair value to the various assets and

liabilities included in the reporting unit in the same manner as goodwill is determined in a business combination.




Differences between IFRS and US GAAP which affect the net assets and net profit of the Company and its subsidiaries are

summarized below:

Net AssetsAs at 31st December

Note 2005 2004

Net assets under IFRS 46,144,187 36,265,519

Minority interests as at 1st January as previously separately reported i — 3,266,393

Net assets under IFRS, as restated 46,144,187 39,531,912

Minority interests i (6,106,713) (3,266,393)

Impact of US GAAP adjustments (Note ii) :

Effect of acquisition of Sichuan Hydropower and

Pingliang Power Company (a) (1,014,585) 1,350,323

Effect of acquisition of Luohuang Power Company,

Yueyang Power Company, Jinggangshan Power

Plant and Yingkou Power Plant (a) (1,837,845) (2,007,383)

Effect of acquisition of Qinbei Power Company,

Yushe Power Company and Xindian Power Plant (a) (342,555) (369,252)

Effect of acquisition of Shidongkou I Power Plant,

Taicang Power Company and Changxing Power Plant (a) (472,473) (775,592)

Effect of acquisition of 40% equity interests in

Hanfeng Power Company, 30% additional equity

interests in Shidongkou I Power Plant, 5% additional equity

interests in Taicang Power Company and 44.16% equity

interests in Huaiyin Power Company (b) (251,615) (271,167)

Recording of capital contribution arising from

acquisition of Shandong Huaneng (d) 862,922 862,922

Difference in accounting treatment for

acquisition of Shandong Huaneng (d) (1,671,048) (348,364)

Difference in capitalization of borrowing costs (e) (109,227) (87,424)

Reversal of goodwill amortization

- Reversal of goodwill amortization of

equity investment in SEG (f) 136,599 136,599

- Reversal of goodwill amortization of

investment in Huaiyin Power Company (f) 34,740 34,740

Reversal of impairment loss on property, plant and equipment (i) 30,080 —

Applicable deferred income tax impact

on the above GAAP differences (g) 1,054,142 595,570

Net assets under US GAAP (Note ii) 36,456,609 35,386,491




Differences between IFRS and US GAAP which affect the net assets and net profit of the Company and its subsidiaries aresummarized below (Cont’d):

Net profitFor the year ended 31st December ,

Note 2005 2004 2003

Net profit under IFRS 5,547,911 5,323,876 5,430,408

Minority interests for the years ended 31stDecember 2004 and 2003, as previously separatelyreported as minority interest i — 257,053 183,894

Net profit under IFRS, as restated 5,547,911 5,580,929 5,614,302

Profit attributable to minority interests i (676,117) (257,053) (183,894)

Impact of US GAAP adjustments iiEffect of acquisition of Sichuan Hydropower and

Pingliang Power Company (a) 30,823 341,914 187,203Effect of acquisition of Luohuang Power Company,

Yueyang Power Company, Jinggangshan PowerPlant, and Yingkou Power Plant (a) 169,538 278,027 335,105

Effect of acquisition of Qinbei Power Company,Yushe Power Company and Xindian Power Plant (a) 26,697 48,116 13,109

Effect of acquisition of Shidongkou I Power Plant,Taicang Power Company andChangxing Power Plant (a) 303,119 110,524 112,636

Effect of acquisition of 40% equity interest inHanfeng Power Company, 30% additional equityinterest in Shidongkou I Power Plant,

5% additional equityinterest in Taicang Power Company and

44.16% equity interest inHuaiyin Power Company (b) 19,552 25,550 19,347

Recording housing benefits provided by HIPDC (c) (26,152) (26,152) (26,152)Difference in accounting treatment for acquisition of

Shandong Huaneng (d) 160,986 (87,091) (87,091)Difference in capitalization of borrowing costs (e) (21,803) 6,466 (5,478)Reversal of goodwill amortization

- Reversal of goodwill amortization ofequity investment in SEG (f) — 81,960 54,639

- Reversal of goodwill amortization ofinvestment in Huaiyin Power Company (f) — 17,370 17,370

- Reversal of impairment loss on property,plant and equipment (i) 30,080 — —

Applicable deferred income tax impact on theGAAP differences (g) (134,709) (89,783) (177,950)

Others — 8,652 25,434

Net profit under US GAAP 5,429,925 6,039,429 5,898,580




(Note i) Consistent with disclosure requirement of revised IAS 1 – Presentation of Financial Statements, minority interests in the

consolidated net assets and net profit under IFRS for prior year should be included as a portion of total equity and total profit

attributable to shareholders respectively.

(Note ii) Consistent with applying the accounting treatment under US GAAP as described in Note (a) above, the consolidated net

assets and net profit under US GAAP for prior years presented have been retroactively restated as if the current structure and

operations resulted from the acquisitions of Xindian Power Plant, Qinbei Power Company, Yushe Power Company, Jinggangshan

Power Plant, Yingkou Power Plant, Yueyang Power Company, Luohuang Power Company, Sichuan Hydropower and Pingliang

Power Company had been in existence since the beginning of the earliest year presented.

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 at 31st December 2004 and

2005, and the related condensed combined statements of income, changes in shareholders’ equity, cash flows and

comprehensive income for each of the years in the three-year period ended 31st December 2005, restated to reflect the

impact of the effect of the acquisition of entities under common control which is accounted for at historical cost in a

manner similar to the pooling of interests method, with financial data of previously separate entities combined, under US

GAAP and other differences between IFRS and US GAAP.




Condensed combined balance sheets

As at 31st December

2005 2004

ASSETS

Non-current assets

Property, plant and equipment, net 74,554,743 64,561,441

Investments in associates 4,314,634 4,037,852

Land use rights 1,150,420 1,029,167

Available-for-investment 1,033,225 254,990

Other non-current assets 336,379 382,077

Deferred income tax assets 200,076 219,525

Goodwill 136,053 78,448

Total non-current assets 81,725,530 70,563,500

Current assets

Inventories, net 2,311,357 1,486,206

Other receivables and assets, net 855,952 861,139

Accounts receivable, net 6,022,426 5,542,775

Due from HIPDC 21,847 —

Due from other related parties — 14,970

Current portion of deferred income tax assets 87,049 94,966

Restricted cash 201,276 202,688

Temporary cash investments 2,652 12,641

Cash and cash equivalents 2,647,665 2,862,235

Total current assets 12,150,224 11,077,620

Total assets 93,875,754 81,641,120




Condensed combined balance sheets (Cont’d)

As at 31st December

2005 2004

EQUITY AND LIABILITIES

Share capital 12,055,383 12,055,383

Additional paid-in capital and other additional capital 17,337,991 17,295,916

Retained earnings 6,426,271 6,035,192

Accumulated other comprehensive income 636,964 —

Shareholders’ equity 36,456,609 35,386,491

Minority interests 4,954,726 4,126,923


Long-term loans from a shareholder 2,800,000 800,000

Long-term bank loans 25,711,255 21,643,541

Other long-term loans 351,009 585,124

Deferred income tax liabilities 319,324 168,101

Other non-current liabilities 168,328 89,966

Total non-current liabilities 29,349,916 23,286,732

Current liabilities

Accounts payable and other liabilities 6,905,240 5,134,783

Dividends payable to shareholders of the Company — 8,250

Taxes payable 1,131,284 1,210,153

Due to Huaneng Group 50,720 62,919

Due to HIPDC 53,230 1,258,799

Due to other related parties 29,620 13,426

Staff welfare and bonus payables 251,949 275,602

Short-term bonds 4,938,250 —

Short-term loans 6,580,870 8,593,300

Current portion of long-term bank loans 2,653,339 1,971,021

Current portion of other long-term loans 512,640 312,721

Current portion of deferred income tax liabilities 7,361 —

Total current liabilities 23,114,503 18,840,974

Total equity and liabilities 93,875,754 81,641,120




Condensed combined statements of income

For the year ended 31st December ,

2005 2004 2003

Operating revenue 40,190,004 35,181,649 30,494,213

Sales tax (113,475) (72,933) (67,367)

Operating expenses

Fuel (21,202,952) (16,556,803) (11,403,228)

Maintenance (1,165,374) (1,035,045) (1,194,994)

Depreciation (5,696,142) (5,413,807) (5,626,729)

Labor (2,513,457) (2,178,940) (1,856,980)

Service fees to HIPDC (141,102) (133,609) (230,792)

Income tax expenses (1,179,007) (1,264,640) (1,408,125)

Others (1,438,635) (946,782) (1,111,246)

Total operating expenses (33,336,669) (27,529,626) (22,832,094)

Income before financial expenses 6,739,860 7,579,090 7,594,752

Interest income 53,685 58,986 68,060

Interest expenses (1,457,490) (1,235,426) (1,382,723)

Bank charges and exchange gain / (losses), net 241,691 (107,492) (198,257)

Total financial expenses, net (1,162,114) (1,283,932) (1,512,920)

Share of profit of associates 652,691 465,440 266,761

Minority interests (800,512) (721,169) (450,013)

Net profit attributable to the shareholders 5,429,925 6,039,429 5,898,580

Basic earnings per ordinary share

under US GAAP (RMB) (Notes i, ii) 0.45 0.50 0.49

Basic earnings per American Depository Shares

(“ADS”) under US GAAP (RMB) (Notes i, ii) 18.02 20.04 19.60

Diluted earnings per ordinary share

under US GAAP (RMB) (Notes i, ii) 0.45 0.50 0.49

Diluted earnings per ADS under US GAAP (RMB) (Notes i, ii) 18.02 20.02 19.57

(Note i ) Earning per ordinary shares and per equivalent ADS were calculated by dividing the net profit for the financial year under US

GAAP by the weighted average number of ordinary shares and ADS in issue during the financial year. On a diluted basis, both

net profit for the financial year and the weighted average number of ordinary shares and ADS outstanding for the financial

year were adjusted on the assumption that the convertible notes had been fully converted at the beginning of the year.

(Note ii) As the number of ordinary Shares and equivalent ADS outstanding increased as a result of a stock split in 2004, the computation

of basic and diluted earnings per share and equivalent ADS have been adjusted retroactively for the proportional change in

the number of ordinary shares and equivalent ADS outstanding for all the periods presented to reflect the stock split.




Condensed combined statements of changes in shareholders’ equity

Balance as at 1st January 2003 31,627,429

Dividends relating to 2002 (2,049,408)

Net profit attributable to shareholders for the year ended 31st December 2003 5,898,580

Conversion of convertible notes to new ordinary shares 165,548

Net deemed capital distribution to Huaneng Group arising from

the acquisition of the equity interests of Qinbei Power Company,

Yushe Power Company and Xindian Power Plant (506,664)

Contribution from Huaneng Group 198,327

Distribution to HIPDC 454,927

Capital contribution from HIPDC arising from housing benefits provided by HIPDC 26,152

Balance as at 31st December 2003 35,814,891



Conversion of convertible notes to new ordinary shares 124


the acquisition of Jinggangshan Power Plant (573,534)

Net deemed capital distribution to HIPDC arising from

the acquisition of Luohuang Power Company, Yueyang Power Company

and Yingkou Power Plant (2,564,000)

Contribution from Huaneng Group (354,470)

Contribution from HIPDC 11,735






the acquisitions of Sichuan Hydropower and Pingliang Power Company (2,025,000)


Dividend waived by a shareholder of an associate 15,923

Fair value gains from an available-for-sale investment, net of tax 636,964





Condensed combined statements of cash flows

For the year ended 31st December ,

2005 2004 2003

Net cash provided by operating activities 9,313,657 11,028,971 12,284,122

Net cash used in investing activities (14,587,880) (13,067,191) (7,708,774)

Net cash provided by / (used in) financing activities 5,059,653 226,001 (3,753,866)

Net (decrease) / increase in cash and cash equivalents (214,570) (1,812,219) 821,482

Cash and cash equivalents, beginning of the year 2,862,235 4,674,454 3,852,972

Cash and cash equivalents, end of the year 2,647,665 2,862,235 4,674,454

Statement of comprehensive income


2005

Net profit attributable to the shareholders 5,429,925

Unrealized holding gains arising during the year 749,369

Related income tax expense (112,405)

Other comprehensive income, net of tax 636,964

Comprehensive income 6,066,889

For the years ended 31st December 2004 and 2003, apart from net income, there was no other comprehensive income

which should be included in the statements of comprehensive income.




New accounting pronouncements

In 2004 and 2005, the Financial Accounting Standard Board (“FASB”) issued SFAS 153, Exchange of Nonmonetary Assets,

and SFAS 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No.

3.

SFAS 153 amends APB Opinion No. 29 on Accounting for Nonmonetary Transactions, to eliminate the exception for

nonmonetary exchanges of similar productive assets and replaces it with a general exception of exchanges of nonmonetary

assets that do not have commercial substance. It defines a nonmonetary exchange has commercial substance if the future

cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for nonmonetary

asset exchanges occurring in fiscal periods beginning after 15th June 2005. Management considered the effects of adoption

SFAS 153 and does not expect any material impact on the financial statements.

SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle and

applies to all voluntary changes in accounting principle instead of including in net income of the period of the change the

cumulative effect of changing to the new accounting principle governed previously by APB Opinion No. 20 and SFAS 3,

unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change, while SFAS

154 states the guidance for dealing with the impracticable situation above. SFAS 154 requires that retrospective application

of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting

principle should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation,

amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate

effected by a change in accounting principle. SFAS 154 shall be effective for accounting changes and corrections of errors

made in fiscal years beginning after 15th December 2005. Management considered the effects of adopting SFAS 154 and

does not expect any material impact on the financial statement.

Report of the Auditors


PwC Shen Zi (2006) No.903

To the Shareholders of Huaneng Power International, Inc.

We have audited the accompanying consolidated balance sheet of Huaneng Power International, Inc. (“the Company”)

and its subsidiaries as at 31st December 2005 and the consolidated profit and loss account and statement of income

appropriation and cash flow statement for the year then ended, and the balance sheet of the Company as at 31st

December 2005 and its profit and loss account and statement of income appropriation and cash flow statement for the

year then ended. 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 audit.

We conducted our audit in accordance with China’s Independent Auditing Standards. Those Standards require that we

plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material

misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the

financial statements. An audit also includes assessing the accounting policies used and significant accounting estimates

made by management, as well as evaluating the overall financial statement presentation. We believe that our audit

provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above conform with the Accounting Standards for Business Enterprises

and the Accounting System for Business Enterprises promulgated by the People’s Republic of China and present fairly, in

all material respects, the consolidated financial position of the Company and its subsidiaries at 31st December 2005 and

the consolidated results of their operations and their cash flows for the year then ended, and the financial position of the

Company as at 31st December 2005 and its results of operations and cash flows for the year then ended.

PricewaterhouseCoopers Zhong Tian Certified Public Accountant

CPAs Co., Ltd. Zhang Guojun

Certified Public Accountant

Xie Yanfeng

China • Shanghai

28th March 2006

Balance Sheet


(Prepared in accordance with PRC Accounting Standards)


(All Amounts are stated in Rmb Yuan unless otherwise stated)

Consolidated The Company

31st December 31st December 31st December 31st DecemberASSETS Notes 2005 2004 2005 2004

CURRENT ASSETSCash 5(1) 2,851,592,978 2,510,859,390 889,902,906 1,381,509,573Including: Cash &

Cash equivalents 5(1) 2,647,665,997 2,295,530,972 713,396,158 1,211,178,016Short-term investment 13,200 13,200 13,200 13,200Notes receivable 5(2) 1,117,533,416 1,242,671,845 622,462,278 682,937,156Interest receivable 3,086,294 1,734,452 3,052,633 1,734,452Accounts receivable 5(3), 6(1) 4,904,892,612 3,730,431,156 3,180,096,467 2,407,133,652Other receivables 5(3), 6(1) 597,773,628 292,845,939 420,624,141 126,090,716Advance to suppliers 5(4) 268,606,059 441,370,775 148,818,016 233,095,644Inventories 5(5) 2,311,356,766 1,431,403,605 1,380,845,041 822,343,887Deferred expenses 8,319,695 2,319,162 7,451,902 2,155,328Current portion of long-term

debt investments 5(6) — 5,000 — 5,000

Total current assets 12,063,174,648 9,653,654,524 6,653,266,584 5,657,018,608

LONG-TERM INVESTMENTSLong-term equity investments 5(6), 6(2) 6,479,002,579 5,886,238,518 14,454,590,885 10,382,796,256Long-term debt investments 5(6) 53,700 53,700 53,700 53,700

Total long-term investment 6,479,056,279 5,886,292,218 14,454,644,585 10,382,849,956

Including: Consolidateddifference in value 5(6) 1,810,484,726 1,331,850,487 — —

FIXED ASSETSFixed assets, cost 5(7) 97,895,004,782 80,565,305,102 58,299,821,850 56,178,137,905Less: Accumulated Depreciation 5(7) (41,694,498,618) (33,246,132,232) (25,971,327,299) (22,322,890,662)

Fixed assets, net 56,200,506,164 47,319,172,870 32,328,494,551 33,855,247,243Less: Provision for impairment

of fixed assets 5(7) (30,080,000) — (30,080,000) —

Fixed assets, net book value 5(7) 56,170,426,164 47,319,172,870 32,298,414,551 33,855,247,243

Construction materials 5(8) 6,289,151,847 3,876,065,407 2,841,684,052 1,367,377,823Construction-in-progress 5(9) 13,907,010,486 5,128,225,240 3,988,534,167 1,928,434,464

Total fixed assets 76,366,588,497 56,323,463,517 39,128,632,770 37,151,059,530

INTANGIBLE AND OTHER ASSETSIntangible assets 5(10) (177,780,256) (551,009,877) (368,916,945) (665,167,689)Long-term deferred expenses 61,386,622 12,577,696 5,468,353 6,227,106Share Floating Right 5(6)(d) 63,636,790 — 63,636,790 —Other long-term assets 5(11) 91,875,899 — — —

Total intangible and other assets 39,119,055 (538,432,181) (299,811,802) (658,940,583)

TOTAL ASSETS 94,947,938,479 71,324,978,078 59,936,732,137 52,531,987,511


Balance Sheet





LIABILITIES AND 31st December 31st December 31st December 31st DecemberSHAREHOLDERS’ EQUITY Notes 2005 2004 2005 2004

CURRENT LIABILITIESShort-term loans 5(12) 6,580,869,370 8,099,000,000 2,200,000,000 4,330,000,000Notes payable 87,239,523 29,000,000 — —Short-term bonds 5(13) 4,946,814,783 — 4,946,814,783 —Accounts payable 5(14) 1,151,850,940 738,762,443 708,685,787 523,267,513Salary payable 98,338,245 39,736,104 60,992,291 19,024,218Welfare payable 153,610,803 219,555,237 68,214,318 156,331,795Interest payable 197,637,488 121,270,836 123,936,169 88,192,171Dividends payable 5(15) 138,279,959 21,668,696 — 8,250,000Taxes payable 5(16) 1,131,284,360 999,792,185 506,983,238 547,544,918Other levies payable 42,350,052 37,477,764 18,756,496 18,123,901Other payables 5(17) 4,129,346,099 3,706,812,746 1,609,893,354 2,303,996,599Accrued expenses 90,859,085 43,572,392 50,617,043 43,502,856Current portion of long-term loans 5(18) 3,165,979,238 1,543,237,546 1,005,555,185 825,142,210Provisions 4,416,482 — — —

Total current liabilities 21,918,876,427 15,599,885,949 11,300,448,664 8,863,376,181

LONG-TERM LIABILITIESLong-term loans 5(18) 28,862,263,799 15,955,289,378 9,475,460,000 6,485,208,795Government Grant 86,457,662 13,000,000 61,427,662 —Other non-current liability 64,139,628 — — —

Total long-term liabilities 29,012,861,089 15,968,289,378 9,536,887,662 6,485,208,795

TOTAL LIABILITIES 50,931,737,516 31,568,175,327 20,837,336,326 15,348,584,976

MINORITY INTERESTS 4,934,649,003 2,573,400,216 — —

SHAREHOLDERS’ EQUITYShare capital 5(19) 12,055,383,440 12,055,383,440 12,055,383,440 12,055,383,440Capital surplus 5(20) 8,765,352,464 8,615,982,210 8,765,352,464 8,615,982,210Surplus reserves 5(21) 4,945,674,209 4,112,214,828 4,945,674,209 4,112,214,828Including: Statutory public

welfare fund 5(21) 2,217,003,964 1,863,280,308 2,217,003,964 1,863,280,308Undistributed profits 5(22) 13,315,141,847 12,399,822,057 13,332,985,698 12,399,822,057

Total shareholders’ equity 39,081,551,960 37,183,402,535 39,099,395,811 37,183,402,535

TOTAL LIABILITIES ANDSHAREHOLDERS’ EQUITY 94,947,938,479 71,324,978,078 59,936,732,137 52,531,987,511

The accompanying notes form an integral part of these financial statements.

Person in charge of Person in charge ofLegal representative: accounting function: accounting department:

Li Xiaopeng Zhou Hui Huang Lixin

Profit and Loss Accounts






Notes 2005 2004 2005 2004

1. Revenues from principal

operations 5(23), 6(3) 40,247,775,556 30,292,698,696 26,963,747,586 24,812,849,816

Less: Cost of principal

operations 5(23), 6(3) (31,374,075,751) (22,548,970,713) (21,656,318,652) (18,669,183,184)

Tax and levies on

principal operations 5(24) (113,475,364) (32,323,702) (5,627,882) (6,439,058)

2. Profit from principal

operations 8,760,224,441 7,711,404,281 5,301,801,052 6,137,227,574

Add: Profit from other

operations 62,994,748 65,310,314 44,673,969 61,068,713

Less: General and administrative

expenses (948,661,775) (543,097,354) (626,343,970) (403,851,618)

Financial expenses, net 5(25) (1,285,439,360) (799,170,559) (547,498,386) (500,109,803)

3. Operating profit 6,589,118,054 6,434,446,682 4,172,632,665 5,294,334,866

Add: Investment income 5(26), 6(4) 228,664,410 195,959,152 1,296,696,904 754,656,514

Subsidy income 27,836,622 8,000,000 27,836,622 8,000,000

Non-operating income 42,456,406 64,266,564 26,471,932 49,097,324

Less: Non-operating expenses (209,038,403) (10,830,991) (157,542,140) (7,770,192)

4. Profit before taxation and

minority interests 6,679,037,089 6,691,841,407 5,366,095,983 6,098,318,512

Less: Income tax (1,105,398,560) (996,457,462) (585,627,101) (709,261,465)

Minority interests (811,013,498) (306,326,898) — —

5. Net profit 4,762,625,031 5,389,057,047 4,780,468,882 5,389,057,047


Profit and Loss Accounts




SUPPLEMENTAL INFORMATION:


2005 2004 2005 2004

1. Profit from sale or disposal of

a business unit or investments — — — —

2. Loss due to natural disaster — — — —

3. Increase/(decrease) in profit before

taxation and minority interests

as a result of changes in

accounting policies — — — —

4. Increase/(decrease) in profit before

taxation and minority interests

as a result of changes in

accounting estimates — — — —

5. Loss on debt restructuring — — — —

6. Others — — — —


Person in charge of Person in charge ofLegal representative: accounting function: accounting department:


Statement of Income Appropriation






Note 2005 2004 2005 2004

1. Net profit 4,762,625,031 5,389,057,047 4,780,468,882 5,389,057,047

Add: Unappropriated profit

brought forward 5(22) 12,399,822,057 13,981,531,454 12,399,822,057 13,981,531,454

2. Unappropriated profit 17,162,447,088 19,370,588,501 17,180,290,939 19,370,588,501

Less: Transfer to statutory

surplus reserve fund 5(22) (476,262,503) (538,905,705) (476,262,503) (538,905,705)

Transfer to statutory

public welfare fund 5(22) (357,196,878) (404,179,279) (357,196,878) (404,179,279)

3. Profit distributable to

shareholders 16,328,987,707 18,427,503,517 16,346,831,558 18,427,503,517

Less: Dividends 5(22) (3,013,845,860) (3,013,835,600) (3,013,845,860) (3,013,835,600)

Bonus shares 5(22) — (3,013,845,860) — (3,013,845,860)

4. Unappropriated profit

carried forward 5(22) 13,315,141,847 12,399,822,057 13,332,985,698 12,399,822,057


Person in charge of Person in charge of

Legal representative: accounting function: accounting department:


Cash Flow Statement





Items Note Consolidated The Company

1. Cash flows from operating activities

Cash received from sale of goods and services 46,145,981,923 30,838,529,025

Cash received from refund of taxation other than

value-added tax 49,214,921 49,214,921

Other cash received relating to operating activities 158,563,899 93,928,543

Sub-total of cash inflows 46,353,760,743 30,981,672,489

Cash paid for goods and services (25,437,913,614) (17,943,289,254)

Cash paid to and on behalf of employees (2,460,605,258) (1,737,994,387)

Payment of all types of taxes (5,475,799,574) (3,355,748,305)

Other cash paid relating to operating activities 5(28) (2,449,325,580) (1,999,158,294)

Sub-total of cash outflows (35,823,644,026) (25,036,190,240)

Net cash flows from operating activities 10,530,116,717 5,945,482,249

2. Cash flows from investing activities

Cash received on disposals of investments 62,604,977 30,322,580

Cash received on investment income 429,589,398 797,465,276

Net cash received from disposals of fixed assets,

intangible assets and other long-term assets 58,926,437 18,562,054

Other cash received relating to investing activities 20,985,638 7,467,597

Sub-total of cash inflows 572,106,450 853,817,507

Cash paid to acquire fixed assets, intangible assets

and other long-term assets (13,984,242,630) (5,854,211,800)

Cash paid to acquire investments other than in

equity interest in subsidiaries (288,000,000) (288,000,000)

Capital injection to subsidiaries (215,300,000) (1,475,321,517)

Cash paid to acquire equity interest in subsidiaries 5(27) (1,458,296,346) (2,025,000,000)

Other cash paid relating to investing activities — (468,857)


Net cash flows used in investing activities (15,373,732,526) (8,789,184,667)

(To be continued)


Cash Flow Statement




Items Note Consolidated The Company

3. Cash flows from financing activities

Cash received from investments 585,702,000 —

Including: cash received from minority shareholders’ equity

investments in subsidiaries 585,702,000 —

Cash received from borrowings 21,954,587,671 11,523,018,301

Other cash received relating to financing activities 4,944,866,599 4,936,136,600

Sub-total of cash inflows 27,485,156,270 16,459,154,901

Cash paid on repayment of borrowings (16,954,988,277) (10,371,051,717)

Cash payments of interest expenses, dividends and

appropriation of profit (5,305,441,844) (3,712,947,692)

Including: Dividends paid to minority shareholders of subsidiaries (318,252,306) —

Other cash paid relating to financing activities (22,500,000) (22,500,000)


Net cash flows used in financing activities 5,202,226,149 2,352,655,492

4. Effect of foreign exchange rate changes on cash (6,475,315) (6,734,932)

5. Net increase/(decrease) in cash 5(1) 352,135,025 (497,781,858)


Cash Flow Statement




Supplementary Information Consolidated The Company

1. Reconciliation of net profit to cash flows from operating activities

Net profit 4,762,625,031 4,780,468,882

Add: Minority interests 811,013,498 —

Provision of asset impairment 51,880,605 39,348,316

Depreciation of fixed assets 5,831,395,519 3,950,552,247

Amortization of intangible assets (214,901,807) (220,199,907)

Amortization of long-term deferred expenses 11,093,159 2,879,238

Increase in deferred expenses (6,000,533) (5,296,574)

Increase in accrued expenses 33,913,540 6,695,419

Loss on disposal of fixed assets, intangible assets and

other long-term assets 138,883,566 110,502,331

Financial expenses 1,258,672,767 526,347,908

Gain arising from investments (228,664,410) (1,296,696,904)

Increase in inventories (831,577,542) (543,368,785)

Increase in operating receivables items (508,502,179) (1,865,730,518)

(Decrease)/Increase in operating payables items (579,714,497) 459,980,596

Net cash flows from operating activities 10,530,116,717 5,945,482,249

2. Investing and financing activities that do not involve cash

receipts or payments

Conversion of debt into capital — —

Reclassification of current portion of convertible notes to current liabilities — —

Fixed assets capitalized under finance leases — —

3. Net increase in cash

Cash at end of year 2,647,665,997 713,396,158

Less: cash at beginning of year (2,295,530,972) (1,211,178,016)

Cash equivalents at end of year — —

Less: cash equivalents at beginning of year — —

Net increase/(decrease) in cash 352,135,025 (497,781,858)


Person in charge of Person in charge of

Legal representative: accounting function: accounting department:







1. COMPANY BACKGROUND

Huaneng Power International, Inc. (the “Company”) was incorporated in the People’s Republic of China (the “PRC”) as a

Sino-foreign joint stock company on 30th June 1994.

The Company and its subsidiaries are principally engaged in the generation and sale of electric power to ultimate consumers

through the respective provincial or regional grid companies.

Five of the power plants had already been in commercial operations at time of incorporation of the Company in 1994

(hereinafter collectively referred to as the “five original operating plants”). The five original operating plants were previously

branches of Huaneng International Power Development Corporation (“HIPDC”), which is a Sino-foreign equity joint venture

established in the PRC. In accordance with the Reorganization Agreement dated 30th June 1994, the Company acquired

the assets, liabilities and businesses of the five original operating plants from HIPDC which in return received an equity

interest in the Company (the “Reorganization”). The other operating plants were either constructed or acquired by the

Company after the Reorganization.

The Company’s Overseas Listed Foreign Shares were listed on the New York Stock Exchange and The Stock Exchange of

Hong Kong Limited on 6th October 1994 and 4th March 1998, respectively. The A shares of the Company issued to the

public were listed on the Shanghai Stock Exchange on 6th December 2001.

The Company’s ultimate parent company is China Huaneng Group Corporation (“Huaneng Group”). Huaneng Group is a

state-owned enterprise registered in the PRC. For details, please refer to Note 7(1).

On 26th October 2004, the Company entered into an agreement with Huaneng Group pursuant to which the Company

acquired from Huaneng Group 60% equity interest in Huaneng Sichuan Hydropower Co., Ltd. (the “Sichuan Hydropower”,

formerly known as Sichuan Huaneng Hydropower Development Corporation) and 65% equity interest in the Gansu

Huaneng Pingliang Power Generation Limited Liability Company (the “Pingliang Power Company”) at considerations of

RMB1,219 million and RMB806 million respectively. After meeting all the necessary conditions, the payments of the

purchase considerations and the transfer of relevant ownership and control, the acquisitions were effective on 5th January

2005. Please refer to Note 5(27).

On 26th May 2005, the Company entered into an agreement with Jiangsu Yueda Investment Co., Ltd (the “Jiangsu

Yueda” ) pursuant to which the Company acquired from Jiangsu Yueda 26.36% equity interest in Jiangsu Huaneng

Huaiyin Power Limited Company (the “Huaiyin Power Company”) at a consideration of RMB200.6 million. After this

acquisition, the Company’s equity interest in Huaiyin Power Company is up to 90%. After meeting all the necessary

conditions, the payments of the purchase considerations and the transfer of relevant ownership, the Company obtained

the above mentioned interest on 30th June 2005.






2. PRINCIPAL ACCOUNTING POLICIES, ACCOUNTING ESTIMATES AND BASIS OFPREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of preparation

The financial statements have been prepared in accordance with the Accounting Standards for Business Enterprises and

Accounting Systems for Business Enterprises as promulgated by the PRC.

(2) Accounting year

The financial year of the Company and its subsidiaries starts on 1st January and ends on 31st December.

(3) Reporting currency

The Company and its subsidiaries use the Renminbi as reporting currency.

(4) Basis of accounting and measurement bases

Accrual method is used as the basis of accounting. Assets are initially recorded at their costs. Subsequently, if they are

impaired, impairment provisions are taken accordingly.

(5) Foreign currency translation

Transactions denominated in foreign currencies are translated into Rmb at the exchange rates stipulated by People’s Bank

of China (the “PBOC”) prevailing at the transaction dates. Monetary assets and liabilities denominated in foreign currencies

at the balance sheet date are translated into RMB at the exchange rates stipulated by the PBOC at the balance sheet date.

Exchange differences arising from these translations are taken to the profit and loss account, except for those attributable

to foreign currency borrowings that have been taken out specifically for construction of fixed assets, in which case, the

foreign exchange differences are capitalized as part of the fixed asset costs accordingly.

(6) Cash and cash equivalents

For the purpose of the cash flow statement, cash refers to all cash on hand and deposits held at call with banks. Cash

equivalents refers to short-term, highly-liquid investments with original maturities of three months or less that are readily

convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

For the purpose of the cash flow statement, restricted cash and time deposits with maturity beyond three months are not

considered as cash and cash equivalents. Their movements are considered as cash flow from investing activities.






2. PRINCIPAL ACCOUNTING POLICIES, ACCOUNTING ESTIMATES AND BASIS OFPREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(7) Receivables and provision for bad debts

Receivables include accounts receivable and other receivables. The Company and its subsidiaries make provision for bad

debts using the “allowance method”. Receivables are netted with the provision for bad debts.

Provisions for bad debts are made based on the assessment of the collectibility of the receivables. Based on the actual

circumstances and experiences, the Company and its subsidiaries made provisions against balances that have been assessed

to be uncollectible.

For balances where there are clear evidence that they cannot be recovered (e.g. creditor has been deregistered, declared

bankruptcy, unable to meet its liabilities as they fall due or having serious cash-flow issues), then bad debts are recognized

and the balances are written off against the provision.

The company and its subsidiaries discounting notes receivables without recourse to financial institutions is considered as

receiving cash from purchaser or service receiver, the difference between the received money and the carrying amount of

written-off notes receivable and related taxation should be charged to the period when they are incurred.

(8) Inventories

Inventories include fuel for power generation, materials and supplies for repairs and maintenance. Inventories at balance

sheet date are stated at lower of cost and net realizable values.

Inventories are recorded at actual cost and are charged to fuel costs or repairs and maintenance when used, or capitalized

to fixed assets when installed, as appropriate, using weighted average cost basis. Cost of inventories includes costs of

purchase and transportation costs.

Inventory provision is accrued according to the difference by which one single inventory item’s cost exceeds its net realizable

value. For those inventories which have multitudinous categories and low unit price, provision is accrued based on categories.

The net realizable value is the estimated selling price in the ordinary course of business, less the estimated sales expense

and related taxation.

The company and its subsidiaries implement perpetual inventory system.







(9) Long-term investments

Long-term investments are investments excluding short-term investments, which comprise equity investments in subsidiaries,

associates and other equity investments that the Company intends to hold for more than one year, bonds and other debt

investments that are not readily convertible into cash or the Company intends to hold for more than one year (excluding

one year).

(a) Equity investment

Subsidiaries are investees in which the Company has, directly or indirectly, an interest of more than 50% of the voting

rights, or otherwise has the power to govern the investees’ financial and operating policies and obtain benefits from

their operating activities. Associates generally represent investees in which the Company has an interest of between

20% to 50% of the voting rights or otherwise has significant influence over the financial and operating policies.

Long-term equity investments are recorded at the actual cost paid on acquisition less cash dividends which have been

declared but unpaid at the time of acquisition. The Company accounts for long-term equity investments in subsidiaries

and associates using the equity method of accounting. Other equity investments, which the Company intends to

hold for more than one year, are accounted for using the cost method of accounting.

When long-term equity investments acquired prior to 17th March 2003 are accounted for using the equity method

of accounting, the difference between the initial cost of investment and the proportionate share of the net assets of

the investee is amortized using the straight-line method over ten years. When long-term equity investments acquired

after 17th March 2003 are accounted for using the equity method of accounting, if the initial cost of investment is

less than the proportionate share of the net assets of the investee, the difference is accounted for as capital surplus.

If there is an excess of the initial cost of investment over the proportionate share of net assets of the investee, the

excess is amortized using the straight-line method over a certain period of not more than 10 years.

Under the equity method of accounting, the attributable share of the investees’ net profit or loss for the year is

recognized as an investment income or loss and the carrying amount of the investment is adjusted accordingly. Cash

dividends declared by an investee are accounted for as a reduction of the carrying amount of the investment. Under

the cost method of accounting, investment income is recognized when the investees declare dividends.







(9) Long-term investments (Cont’d)

(b) Debt investment

Long-term debt investments are initially recognized at the actual cost less any interests due but unpaid. The interest

receivable computed in the current period is recognized as interest income.

(c) Impairment of long-term investment

If the recoverable amount of an investment is lower than the carrying amount, as a result of a continuous decline in

market value or adverse changes in operating condition of the investee enterprise, the difference between the

recoverable amount and the carrying amount of the investment is recognised as a provision for impairment loss. The

recoverable amount is the higher of net selling price and value in use. Net selling price is the amount obtainable from

the sale of the asset in an arm’s length transaction between knowledgeable and willing parties, after deducting any

incremental direct disposal cost. Value in use is the present value of the estimated future cash flows expected to be

derived from continuing use of the asset and from its disposal at the end of its useful life.

When there is an indicator that the need for an impairment provision recorded in a prior year no longer exists or had

decreased, the provision for impairment is reversed. The increased carrying amount of the long-term investment

should not exceed the carrying amount that would have been determined had no impairment loss been recognized

for the long-term investment in prior years.







(10) Fixed assets and depreciation

Fixed assets are tangible assets that are used in power production or held for management purposes, which have useful

lives over one year and have relatively high unit price. Effective from 1st January 2001, when construction takes place

upon the Company’s land and the construction is for its own use, the carrying value of land use right is reclassified as part

of the cost of buildings within fixed assets.

Fixed assets purchased or constructed by the Company and its subsidiaries are recorded at cost. Fixed assets obtained

upon the Reorganization were initially recorded at their appraised value approved by relevant government authorities.

Fixed assets are depreciated using the straight-line method to allocate the cost of the assets to their estimated residual

values over their estimated useful lives. If land use rights used for buildings have longer estimated useful lives than those

of buildings, the excessive portion’s value is reflected in determination of the residual value of buildings. For the fixed

assets being provided for impairment loss, the related depreciation charge is prospectively determined based upon the

adjusted carrying amounts over their remaining useful lives.

The estimated useful lives, estimated residual value and depreciation rates of the fixed assets of the Company and its

subsidiaries are as follows:

Estimated Estimated

Categories useful lives residual value Depreciation rate

Dam 45-55 years 0% 1.82%-2.22%

Buildings 8-55 years 0%-11% 1.81%-12.50%

Electric utility plant in service 4-40 years 0%-11% 2.43%-25.00%

Transportation and transmission facilities 5-27 years 5%-11% 3.30%-19.00%

Others 2.5-18 years 0%-11% 5.56%-40.00%

When fixed assets are sold, transferred, disposed of or damaged, gains and losses on disposal are determined by comparing

the proceeds with the carrying amount of the assets, adjusted by related taxes and expenses, and are included in non-

operating income or expenses.

Repairs and maintenance of fixed assets are expensed as incurred. Subsequent expenditures for major reconstruction,

expansion, improvement and renovation are capitalized when it is probable that future economic benefits in excess of the

original assessment of performance will flow to the Company. Capitalized expenditures arising from major reconstruction,

expansion and improvement are depreciated using the straight-line method over the remaining useful lives of the fixed

assets. Capitalized expenditures arising from the renovation of fixed assets are depreciated over the expected beneficial

period.







(10) Fixed assets and depreciation (Cont’d)

Individual fixed assets for which there are indications that the carrying values are higher than their recoverable amounts,

arising from the occurrence of events or changes in circumstances are reviewed for impairment. If the carrying value of

such assets is higher than the recoverable amount, the excess is recognized as an impairment loss.

When there is an indicator that the need for an impairment provision recorded in a prior year no longer exists or had

decreased, the provision for impairment is reversed. The increased carrying amount of the fixed assets should not exceed

the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior

years.

(11) Construction-in-progress

Construction-in-progress represents fixed assets under construction or installation, which is recorded at the actual cost.

Cost comprises original cost of machinery and equipment, installation, construction and other direct costs which include

borrowing costs incurred on specific borrowings used to finance the fixed assets, prior to the date at which the asset

reaches the expected usable condition. Construction-in-progress is transferred to the fixed assets when the assets are

ready for their intended use, and depreciation begins from the following month.

Individual construction in process for which there are indications that the carrying values are higher than their recoverable

amounts, arising from the occurrence of events or changes in circumstances is reviewed for impairment. If the carrying

value of such assets is higher than the recoverable amount, the excess is recognized as an impairment loss. When there is

an indicator that the need for an impairment provision recorded in a prior year no longer exists or had decreased, the

provision for impairment is reversed. The increased carrying amount of the construction in process should not exceed the

carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years.

(12) Intangible assets and amortization

Intangible assets include land use rights, goodwill and negative goodwill.

(a) Land use rights

The land use rights acquired through payment of land use fees, are initially recorded at cost. They are recorded

as intangible assets and amortized using the straight-line method over the land use rights period of 20 to 70

years. Effective from 1st January 2001, when construction takes place on the land and the construction is for

the Company’s own use, the carrying value of the land use rights is transferred into the construction-in-progress

account . Land use rights acquired prior to 1st January 2001 on which construction of fixed assets has already

completed are not reclassified.







(12) Intangible assets and amortization (Cont’d)

(b) Good will and negative goodwill

Goodwill and negative goodwill arisen from acquisitions are amortized over 10 years on a straight-line basis.

(c) Intangible assets provision

Individual intangible assets for which there are indications that the carrying values are higher than their recoverable

amounts, arising from the occurrence of events or changes in circumstances are reviewed for impairment. If the

carrying value of such assets is higher than the recoverable amount, the excess is recognized as an impairment

loss. When there is an indicator that the need for an impairment provision recorded in a prior year no longer

exists or had decreased, the provision for impairment is reversed. The increased carrying amount of the intangible

assets should not exceed the carrying amount that would have been determined had no impairment loss been

recognized for the intangible assets in prior years.

(13) Long-term deferred expenses

Long-term deferred expenses include other deferred expenses that should be amortized over more than one year (exclude

one year). Long-term prepaid expenses are amortized on the straight-line basis over the expected beneficial periods and

are presented at cost net of accumulated amortization.

(14) Share floating right

Share floating right accounts for the various consideration paid for obtaining the floating right of non-tradable shares in

a stock exchange. As the holders of non-tradable shares, if the Company obtained such right through cash payment, that

cash consideration is recognized as an asset, i.e. share floating right. For the case of obtaining such right through shares

disposals, the Company, who accounts such investment in cost method, will reclassify the proportionate costs of disposed

shares to the original carrying amount of long-term equity investment to share floating rights. Such rights will proportionately

transfer to the income statement upon disposal. Generally, no provision is made for this account.







(15) Borrowing costs

Interests incurred in connection with specific borrowings obtained for the acquisition or construction of fixed assets are

capitalized as costs of the fixed assets when capital expenditures and borrowing costs are incurred and the activities have

commenced to enable the assets to be ready for their intended use. The capitalization of borrowing costs ceases when the

assets are ready for their intended use. Borrowing costs incurred thereafter are expensed.

The capitalization amount of interest for each accounting period is determined by using the weighted average amount of

accumulated expenditures incurred for the acquisition or construction of a fixed asset up to the end of the current period

and the relevant capitalization rate of the relevant borrowings. The amount of interest for each capitalization period shall

not exceed the actual amount of interest incurred on the specific borrowings during that period.

Interests incurred in connection with other borrowings are expensed as incurred.

(16) Provisions

Provisions for external guarantees and pending litigation are recognized when the Company has a present obligation as a

result of past transactions or events, and it is more likely than not that an outflow of resources will be required to settle the

obligation, and the amount can be reliably estimated. Provisions are determined using best estimates based on historical

experience.

(17) Short-term bonds

Proceeds received on issuance of short-term bonds are initially recorded as a liability. The difference (discount or premium)

between the proceeds received and the face value of the short-term bonds is amortized using the effective interest rate

method over the period of the bonds.

Interest on short-term bonds is accounted for on an accrual basis. Interest and issuance costs that do not meet the

capitalization requirements are expensed.







(18) Employee social security benefits

The Company and its subsidiaries participate in employee social security plans, including pension, medical, housing and

other welfare benefits, organised and administrated by the local government authorities in accordance with relevant

regulations. Except for the above social security benefits, the Company and its subsidiaries have no other substantial

commitments to employees.

According to the relevant regulations, the premiums and welfare benefit contributions that should be borne by the

Company are calculated based on percentages (47% to 62.5%) of the total salary of employees, subject to a certain

ceiling, and are paid to the labour and social welfare authorities. Contributions to the plans are charged to the profit and

loss account as incurred.

(19) Dividends appropriation

The cash dividends appropriation is recognized as a liability in the period in which the dividends are approved by the

general meeting of shareholders, the stock dividends appropriation is recognized as share capital in the period in which

the dividends are approved by the general meeting of shareholders.

(20) Revenue recognition

Revenue is recognized under the following methods:

(a) Operating revenue

Operating revenue represents amounts earned for electricity generated and transmitted to the ultimate consumers

through respective provincial or regional grid companies (net of Value Added Tax (“VAT”)). The Company and

its subsidiaries bill the respective grid companies based on the actual quantity of electricity transmitted or sold

to the power grid controlled and owned by the respective grid companies and recognize revenue at the end of

each month.

(b) Management service income

As mentioned in Note 7(5)(h), the Company provides management service to certain power plants owned by

Huaneng Group and HIPDC. The Company recognizes a management service income as other income when

service is rendered in accordance with the management service agreement.







(20) Revenue recognition (Cont’d)

(c) Other income

Interest income from deposits and entrusted lending is recognized on a time proportion basis that reflect the

effective yield on the assets.

Subsidies are recognized when received.

Rental income under operating leases is recognized on a straight-line basis over the relevant lease term.

(21) Lease

Leases of fixed assets where all the risks and rewards incident to ownership of the assets are in substance transferred to

the lessees are classified as finance leases. All other leases are operating leases. Payments made under operating leases are

expensed on a straight-line basis over the period of the lease.

(22) Accounting for income tax

The Company and its subsidiaries account for enterprise and local income taxes using the tax payable method. Tax expense

is recognized based on current period taxable income and tax rates.

(23) Consolidation of financial statements

The consolidated financial statements, including the financial statements of the Company and its subsidiaries, are prepared

in accordance with the CaiKuaiZi(1995)11 “Tentative Regulations for Consolidated Financial Statements”, “Accounting

System for Business Enterprises” and relevant regulations issued by the Ministry of Finance of the PRC.

The revenue, costs and profit of a subsidiary is consolidated from the date on which control is obtained by the Company

and should not consolidated once the control is lost. Major intercompany balances, transactions and unrealized gains

between the Company and its subsidiaries are eliminated upon consolidation. Minority interests in the consolidated financial

statements represent the portion of the shareholders equity of the subsidiaries that are not owned by the Company.

When the accounting policies adopted by subsidiaries are not consistent with those adopted by the Company and such

inconsistency created a material impact to the consolidated financial statements, accounting policies of subsidiaries are

adjusted to ensure consistency with the policies adopted by the Company.







(23) Consolidation of financial statements (Cont’d)

When preparing consolidated financial statements, the amount of the Company’s investments on subsidiaries using equity

method should be offset by the Company’s share in subsidiaries’ equity. Consolidated difference in value caused by

offsetting is separately shown as “Consolidated difference in value” item in long-term investment.

3. TAXATION

(1) Value added tax

The electricity sales of the Company and its subsidiaries are subjected to VAT. The applicable tax rate is 17%. Input VAT on

purchase of raw materials and other production materials are netted off against output VAT from sales.

(2) Income tax

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 (“EIT”) and 3% of local income tax). If these enterprises are located in certain specified

locations or cities, or are specifically approved by the State Tax Bureau, a lower tax rate would be applied. Effective from

1st January 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 branches after obtaining the

approval of the State Tax Bureau.






3. TAXATION (Cont’d)

(2) Income tax (Cont’d)

In accordance with Guo Shui Han [1994] No.381, the head office, the Shandong branch (the former headquarters of

Shandong Huaneng Power Development Company Limited (“Shandong Huaneng”)) and all the individual power plants

make their income tax payment to local tax bureau individually. The statutory income tax rates applicable to the head

office, the Shandong branch and the operating individual power plants and the Company’s subsidiaries after the expiration

of tax holiday are summarized as follows:

Income tax rate Tax holiday period

Head Office 15.0% None

Huaneng Dalian Power Plant (the “Dalian Power Plant”)* 18.0% Till 31st December 1994

Huaneng Dalian Power Plant Phase II (the “Dalian Power Plant Phase II”)* 18.0% Till 31st December 2006

Huaneng Shang’an Power Plant (the “Shang’an Power Plant”)* 18.0% Till 31st December 1996

Huaneng Shang’an Power Plant Phase II (the “Shang’an Power Plant Phase II”)* 18.0% Till 31st December 2003

Huaneng Nantong Power Plant (the “Nantong Power Plant”)* 15.0% Till 31st December 1996

Huaneng Nantong Power Plant Phase II (the “Nantong Power Plant Phase II”)* 15.0% Till 31st December 2007

Huaneng Fuzhou Power Plant (the “Fuzhou Power Plant”)* 15.0% Till 31st December 1995

Huaneng Fuzhou Power Plant Phase II (the “Fuzhou Power Plant Phase II”)* 15.0% Till 31st December 2007

Huaneng Shantou Oil-Fired Plant (the “Shantou Oil-Fired Power Plant”)* 15.0% Till 31st December 1994

Huaneng Shantou Coal-Fired Power Plant (the “Shantou Power Plant”)* 18.0% Till 31st December 2005

Huaneng Shantou Coal-Fired Power Plant Phase II (the “Shantou Power Plant Phase II”) 18.0% Applying

Huaneng Shanghai Shidongkou II Power Plant (the “Shidongkou II Power Plant”)* 16.5% Till 31st December 1998

Huaneng Dandong Power Plant (the “Dandong Power Plant”)* 18.0% Not commenced yet

Huaneng Nanjing Power Plant (the “Nanjing Power Plant”)* 15.0% Till 31st December 2004

Shandong Branch 17.0% None

Huaneng Dezhou Power Plant (the “Dezhou Power Plant”) 17.0% None

Huaneng Jining Power Plant (the “Jining Power Plant”) 15.0% None

Huaneng Changxing Power Plant (the “Changxing Power Plant”) 16.5% None

Huaneng Shanghai Shidongkou Power Plant (the “Shidongkou I Power Plant”) 18.0% None

Huaneng Xindian Power Plant (the “Xindian Power Plant”) 15.0% None

Huaneng Yingkou Power Plant (the “Yingkou Power Plant”)* 18.0% Not commenced yet

Huaneng Jinggangshan Power Plant (the “Jinggangshan Power Plant”)* 15.0% Till 31st December 2008

Huaneng Weihai Power Limited Company (the “Weihai Power Company”) 33.0% None

Huaneng (Suzhou Industrial Park) Power Limited Liability Company (the “Taicang Power Company”) 33.0% None

Huaiyin Power Company 33.0% None








Income tax rate Tax holiday period

Jiangsu Huaneng Huaiyin II Power Limited Company (the “ Huaiyin II Power Company”) 33.0% None

Shanxi Huaneng Yushe Power Limited Company (the”Yushe Power Company”) 33.0% None

Hunan Huaneng Yueyang Power Limited Company (the“Yueyang Power Company”) 33.0% None

Huaneng Chongqing Luohuang Power Limited Company (the“Luohuang Power Company”)* 15.0% Till 31st December 2007

Henan Huaneng Qinbei Power Limited Company (the”Qinbei Power Company”) 33.0% None

Pingliang Power Company 33.0% Till 31st December 2010

Sichuan Huaneng Taipingyi Hydropower Limited Liability Company (the “Taipingyi Hydropower”) 33.0% Till 31st December 2010

Sichuan Huaneng Baoxinghe Power Limited Liability Company (the “Baoxinghe Hydropower ”) 33.0% Till 31st December 2010

Sichuan Huaneng Dongxiguan Hydropower Limited Liability Company (the “Dongxiguan Hydropower”) 33.0% Till 31st December 2010

Sichuan Huaneng Kangding Hydropower Limited Liability Company (the “Kangding Hydropower”) 33.0% Till 31st December 2010

Sichuan Huaneng Mingtai Hydropower Limited Liability Company (the “Mingtai Hydropower”) 33.0% Till 31st December 2010

Sichuan Huaneng Fujiang Hydropower Limited Liability Company (the “Fujiang Hydropower”) 33.0% Till 31st December 2010

Sichuan Huaneng Jialingjiang Hydropower Limited Liability Company (the “Jialingjiang Hydropower”) 33.0% Till 31st December 2010

Sichuan Hydropower 33.0% None

* According to “Income Tax Law of the People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises”,

these 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 five years), followed by a 50% reduction of the applicable tax rate for the

next three years (“tax holiday”).








The statutory income tax rates applicable to the head office, the Shandong branch and the operating individual power

plants, after taking the tax holiday into consideration, are summarized as follow:

Approved File No. 2005 2004

Head Office (Note 1) Guo Shui Han [1997]368 — 15.0%

Dalian Power Plant Guo Shui Han [1994]381 18.0% 18.0%

Dalian Phase II (Note 2) Guo Shui Zhi Shui Han [2004]12& 10.0% 15.0%

Guo Shui Da Zhi Shui Han[2005]017

Shang’an Power Plant Guo Shui Han [1994]381 & Guo Shui Han [1999]604 18.0% 18.0%

Shang’an Phase II Guo Shui Han [1994]381 & Guo Shui Han [2000]194 18.0% 18.0%

Nantong Power Plant Guo Shui Han [1994]381 15.0% 15.0%

Nantong Phase II (Note 3) Su Guo Shui Han [2003]248 & Tong Guo 10.0% 7.5%

Shui Wai Zi [2003] 1 & Tong Guo Shui Wai Zi [2005] 1

Fuzhou Power Plant Guo Shui Han [1994]381 15.0% 15.0%

Fuzhou Phase II (Note 4) Min Guo Shui Han [2003]37& 10.0% 7.5%

Chang Guo Shui Han [2005]2

Shantou Oil-Fired Plant (Note 1) Guo Shui Han [1994]381 — —

Shantou Power Plant (Note 5) Approved by Shantou State Tax Bureau 10.0% 10.0%

Shantou Power Plant Phase II (Note 15) Not applicable 18.0% N/A

Shidongkou II Power Plant Approved by Shanghai State Tax Bureau 16.5% 16.5%

Dandong Power Plant ((Note 6) Dan Guo Shui She Wai [1999]7 — —

Nanjing Power Plant (Note 7) Ning Guo Shui Wai Zi [1997]039 15.0% 10.0%

Shandong Branch (Note 1) Guo Shui Han [2001]866 — —

Dezhou Power Plant Guo Shui Han [2001]866 17.0% 17.0%

Jining Power Plant Guo Shui Han [2002]1063 and Ji Guo Shui Han [2003]1 15.0% 15.0%

Changxing Power Plant Guo Shui Han [2002]1030 16.5% 16.5%

Shidongkou I Power Plant Hu Guo Shui Ba Shui [2003]31 18.0% 18.0%

Xindian Power Plant (Note 8) Lin Guo Shui Han [2004]123 15.0% 15.0%

Yingkou Power Plant (Note 6) Approved by Yingkou State Tax Bureau — —








Approved File No. 2005 2004

Jinggangshan Power Plant (Note 9) Ji An Shi Guo Shui Zhong Qi Fa [2004]20 — —

Weihai Power Company Not applicable 33.0% 33.0%

Taicang Power Company Not applicable 33.0% 33.0%

Huaiyin Power Company Not applicable 33.0% 33.0%

Huaiyin II Power Company Not applicable 33.0% 33.0%

Yushe Power Company Not applicable 33.0% 33.0%

Yueyang Power Company Not applicable 33.0% 33.0%

Luohuang Power Company(Note 10) Approved by Chongqing State Tax Bureau 7.5% —

Qinbei Power Company (Note 11) Not applicable 33.0% —

Pingliang Power Company (Note 12,13) Guo Shui Fa [2002]47 15.0% N/A

Taipingyi Hydropower (Note 12,13) Guo Shui Fa [2002]47 15.0% N/A

Baoxinghe Hydropower (Note 12,13) Guo Shui Fa [2002]47 15.0% N/A

Dongxiguan Hydropower (Note 12,13) Guo Shui Fa [2002]47 15.0% N/A

Kangding Hydropower (Note 12,13,14) Guo Shui Fa [2002]47 7.5% N/A

Mingtai Hydropower (Note 6,12,13) Guo Shui Fa [2002]47 — N/A

Fujiang Hydropower (Note 12,13,14) Guo Shui Fa [2002]47 — N/A

Jialingjiang Hydropower (Note 12,13) Guo Shui Fa [2002]47 15.0% N/A

Sichuan Hydropower (Note 1,12) Not applicable — N/A

Notes:

1 These entities encountered a tax-loss in 2005, so their effective income tax rates are zero.

2 In accordance with Guo Shui Zhi Shui Han 2004 No. 12, the tax holiday of the Dalian Power Plant Phase II is determined separately

from the Dalian Power Plant. Dalian Phase II is granted an exemption of local income tax of 3% from 1st January 1999 to 31st

December 2008. Pursuant to Guo Shui Da Zhi Shui Han 2005 No. 17, the Dalian Power Plant Phase II is also qualified as a foreign

invested advanced technology enterprise and is, therefore, entitled to a tax holiday for two years from 1st January 2005 to 31st

December 2006.The applicable income tax rate during this period is 10%.

3 In accordance with Su Guo Shui Han 2003 No. 248 and Tong Guo Shui Wai Zi 2003 No. 1, the tax holiday of the Nantong Power

Plant Phase II is determined separately from the Nantong Power Plant. The Nantong Power Plant Phase II is entitled to a 50%

reduction of the applicable tax rate from 1st January 2002 to 31st December 2004. In accordance with Guo Shui Wai Zi 2005 No.1,

as foreign invested advanced technology enterprise, the Nantong Power Plant Phase II is entitled to a tax holiday with 10% income

tax rate form 1st January 2005 to 31st December 2007.

4 In accordance with Min Guo Shui Han 2003 No. 37, the tax holiday of the Fuzhou Power Plant Phase II is determined separately

from the Fuzhou Power Plant. The Fuzhou Power Plant Phase II is entitled to a 50% reduction of the applicable tax rate from 1st

January 2002 to 31st December 2004. In accordance with Chang Guo Shui Han 2005 No. 2, as foreign invested advanced technology

enterprise, the Fuzhou Power Plant Phase II is entitled to a tax holiday with 10% income tax rate form 1st January 2005 to 31st

December 2007.








5 In accordance with the approval from Shantou State Tax Bureau Shewai Branch dated 16th January 2003, the Shantou Power Plant

is qualified as a foreign invested advanced technology enterprise and is, therefore, entitled to extend its tax holiday for three years

from 1st January 2003 to 31st December 2005. The applicable tax rate during the extension period is 10%.

6 These plants have not finished offsetting accumulated loss, so the tax rate for them in 2005 is zero. The tax holiday of Dandong

Power Plant and Yingkou Power Plant have not commenced yet.

7 In accordance with Ning Guo Shui Wai Zi 1997 No.39, the Nanjing Power Plant is qualified as a foreign invested advanced technology

enterprise and is, therefore, entitled to extend its tax holiday for three years from 1st January 2002 to 31st December 2004. The

applicable tax rate during the extension period is 10%. From 1st January 2005, the applicable income tax rate of the Nanjing Power

Plant is 15%.

8 In accordance with Lin Guo Shui Han 2004 No.123, the Xindian Power Plant is entitled to the preferential tax treatment applicable

to Sino-foreign enterprises investing in energy industry at a reduced income tax rate of 15%.

9 In accordance with Ji An Shi Guo Shui Zhong Qi Fa 2004 No. 20, the Jinggangshan Power Plant is entitled to a tax holiday from 1st

July 2004 to 31st December 2008. The applicable tax rate is zero during this period.

10 In accordance with the approval from Chongqing State Tax Bureau Shewai Branch, the Luohuang Power Company is entitled to a

tax holiday from 1st January 2003 to 31st December 2007 with income tax exemption for first two years and 50% tax rate for the

three years thereafter. The applicable income tax rate of Luohuang is zero in 2004 and 7.5% in 2005.

11 The effective tax rate in 2004 was zero as the Qinbei Power Company did not commence its commercial operations until November

2004 and no profit was made in 2004.

12 Not applicable in 2004 as they were not subsidiaries of the Company.

13 In accordance with Guo Shui Fa 2002 No.47 “The announcement about the opinion of carrying out specific taxation implementation

according to West Development Policy” issued by the State Tax Bureau, and the approval of the relevant local tax bureaus, these

plants are entitled to a 15% income tax rate from 1st January 2001 to 31st December 2010.

14 In accordance with Guo Shui Fa 2002 No.47 “The announcement about the opinion of carrying out specific taxation implementation

according to West Development Policy” issued by the State Tax Bureau, the new founded domestic electricity enterprises in West

region are entitled with tax holiday of income tax exemption for first two years and 50% tax rate for the three years thereafter.

Kangding Hydropower is in the 5th year of the above mentioned tax holiday. Therefore the applicable income tax rate is 7.5% in

2005. The tax rate was approved by the local tax bureau. Fujiang Hydropower is entitled to the above mentioned tax holiday from

1st January 2005. Therefore the applicable income tax rate is zero in 2005. Fujiang Hydropower’s approval of the tax holiday is still

in the application process.

15 Not applicable in 2004 as Shantou Power Plant Phase II did not commence its commercial operations until October 2005.






4. SUBSIDIARIES

As at 31st December 2005, the detailed information of the Company‘s subsidiaries are as follows:

Included in

Total investment Percentage of Consolidated

Place and date of contributed by equity Financial

Name incorporation Registered capital Principal activities the Company interest held Statements

Direct Indirect

Weihai Power Company No. 58 Haifu road, Economic RMB761,838,300 Power generation RMB474,038,793 60% — Yes

Development Zone,

Weihai, Shandong province

22nd November 1993

Taicang Power Company Jinjihupan, Sanxing Road, Suzhou, RMB632,840,000 Power generation RMB661,293,633 75% — Yes

Jiangsu province

19th June 1997

Huaneng Taicang Power Jinlanglanggang village, RMB894,410,000 Power generation RMB603,110,000 75% — Yes

Co., Ltd. Fuqiao town,

(“Taicang II Power Taicang, Jiangsu province

Company”) 18th June 2004

Huaiyin Power Company No. 291 Huaihai West Road, RMB265,000,000 Power generation RMB693,399,531 90% — Yes

Huai’an, Jiangsu province

26th January 1995

Huaiyin II Power Company No. 291 Huaihai West Road, RMB774,000,000 Power generation RMB492,573,600 63.64% — Yes

Huai’an, Jiangsu province

22nd June 2004

Qinbei Power Company Wulongkou town, Jiyuan city, RMB10,000,000 Power generation RMB471,556,956 55% — Yes

Henan province

12th July 1995

Yushe Power Company Dengyu village, Yushe county RMB615,760,000 Power generation RMB380,385,896 60% — Yes

Shanxi province

29th November 1994






4. SUBSIDIARIES (Cont’d)

Included in




Direct Indirect

Shandong Huaneng Xindian Dawu town, Linzi district, Zibo, RMB100,000,000 Power generation RMB251,100,000 95% — Yes

Power Co., Ltd. Shandong province

(“Xindian II Power 14th March 2004

Company”)

Yueyang Power Company ChengLingJi,Yueyang RMB560,000,000 Power generation RMB770,451,197 55% — Yes

Hunan Province

16th December 2003

Luohuang Power Company Luohuang County ,JiangJin city, RMB900,000,000 Power generation RMB1,624,301,221 60% — Yes

ChongQing

16th December 2003

Huaneng Shanghai No.298 Shengshi Road, RMB50,000,000 Power generation RMB380,060,000 70% — Yes

Ranji Power Generation Baoshan district, Shanghai

Limited Liability 13th Janunary,2005

Company (the “Shanghai

Ranji Power Company”)

Sichuan Hydropower No.47 division 4 Renmin South Road, RMB800,000,000 Investment RMB1,173,893,278 60% — Yes

Wuhou district, Chengdu, holding and

Sichuan province hydropower

12th July 2004 projects

development

Baoxinghe Hydropower No.18 Yanjiang North Road,Ya’an, RMB516,100,000 Power generation RMB350,948,000 — 68% Yes

Sichuan province

26th June 1994






4. SUBSIDIARIES (Cont’d)

Included in




Direct Indirect

Dongxiguan Hydropower Li’an town, Wusheng county, RMB156,725,000 Power generation RMB101,415,900 — 59.33% Yes

Sichuan province

29th June 1994

Taipingyi Hydropower Yingxiu town, Wenchuan county, RMB100,000,000 Power generation RMB60,000,000 — 60% Yes

Sichuan province

23rd April 1994

Kangding Hydropower Yuanyang dam, Kangding county, RMB277,200,000 Power generation RMB163,600,000 — 60% Yes

Ganzi, Sichuan province

14th April 1997

Mingtai Hydropower Donghe Road, RMB97,700,000 Power generation RMB50,999,400 — 52.20% Yes

Beiba Development zone,

Santai county, Sichuan province

8th September 1994

Jialingjiang Hydropower No.191 Liulin Road, Shunqing district, RMB193,080,000 Power generation RMB87,220,000 — 55% Yes

Nanchong city, Sichuan province

30th September 1998

Fujiang Hydropower Baima village, Pingwu county, RMB150,000,000 Power generation RMB153,630,000 — 95% Yes

Sichuan province

22nd March 2002

Pingliang Power Company No.7 Binhe middle Road, RMB623,000,000 Power generation RMB816,041,516 65% — Yes

Qilihe district, Lanzhou,

Gansu province

6th November 1996

Yushe Boyuan Power Industry Dengyu village, Yushe county, RMB2,000,000 Property RMB1,500,000 — 75% Yes

Limited Liability Company Shanxi province management

(the “Boyuan Company”) 25th July 2005 and leasing






5. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(1) Cash

31st December 2005 31st December 2004

Original Original

currency Exchange RMB currency Exchange RMB

amount rate equivalent amount rate equivalent

Cash - RMB 1,042,022 620,687

Bank deposit - RMB 2,689,625,707 2,350,491,735

- USD 19,940,669 8.0702 160,925,226 19,301,268 8.2765 159,746,942

- Japanese yen 331 0.0687 23 325 0.0797 26

Sub-total 2,850,550,956 2,510,238,703

Total cash 2,851,592,978 2,510,859,390

Cash as stated in the cash flow statement comprised the following:

31st December

2005

Cash 2,851,592,978

Less: Time deposit with maturity beyond 3 months (2,652,006)

Restricted cash (201,274,975)

Cash as at 31st December 2005 2,647,665,997

Less: Cash as at 31st December 2004 (2,295,530,972)

Net increase in cash 352,135,025

(2) Notes receivable

31st December 31st December

2005 2004

Banking notes receivable 519,813,416 430,181,845

Commercial notes receivable 597,720,000 812,490,000

1,117,533,416 1,242,671,845

As at 31st December 2005, all the notes receivable were unsecured notes receivable.






5. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(3) Accounts receivable and other receivables

(a) Accounts receivable


2005 2004

Accounts receivable 5,214,902,662 4,080,533,818

Less: Bad Debt Provision (310,010,050) (350,102,662)

4,904,892,612 3,730,431,156

The aging of accounts receivable and bad debt provision are as follows:


Percentage Bad debt Percentage Bad debt

Aging Amount (%) provision Amount (%) provision

Within 1 year 4,750,343,935 91 — 3,267,696,332 80 —

1-2 years 51,554,429 1 (10,000,000) 96,807,620 2 —

2-3 years 7,447,181 — (1,243,990) — — —

Over 3 years* 405,557,117 8 (298,766,060) 716,029,866 18 (350,102,662)

5,214,902,662 100 (310,010,050) 4,080,533,818 100 (350,102,662)

* As at 31st December 2005, the major portion of the receivables aged over 3 years but not provided for

was Yueyang Power Company’s account receivables due from local grid companies. According to the

acquisition agreement with HIPDC, HIPDC has agreed to compensate the Company’s equity portion in

Yueyang Power Company on any account of these receivable that remains uncollected by 31st December

2006. Therefore, the Comany and its subsidiaries has not fully provided bad debt provision for these

accounts receivables.

All accounts receivable balances represent receivables from the provincial or regional grid companies for the

sales of electric power.

As at 31st December 2005, there was no accounts receivable from shareholders who held 5% or more of the

equity interest in the Company (31st December 2004: Nil).

As at 31st December 2005, the five largest accounts receivable of the Company and its subsidiaries amounting

to RMB2,876,584,321 (31st December 2004: RMB2,315,793,777), representing 55.16% of the total accounts

receivable (31st December 2004: 56.75%).







(3) Accounts receivable and other receivables (Cont’d)

(b) Other receivables


2005 2004

Other receivables 676,907,866 341,953,996

Less: bad debt provision (79,134,238) (49,108,057)

597,773,628 292,845,939

Other receivables’ aging and bad debt provision are as follows:




Within 1 year 504,005,838 75 (1,889,527) 187,298,876 55 (5,618,966)

1-2 years 7,480,530 1 (434,830) 49,794,157 15 (1,493,825)

2-3 years 30,136,018 4 (551,900) 22,263,956 6 (667,919)

Over 3 years 135,285,480 20 (76,257,981) 82,597,007 24 (41,327,347)

676,907,866 100 (79,134,238) 341,953,996 100 (49,108,057)








(b) Other receivables (Cont’d)

Breakdown of other receivables is as follows:


2005 2004

Prepayment for acquisition of China Huaneng

Finance Company (the “Huaneng Finance”)* 288,000,000 —

Receivable from employees for sales of staff quarters 14,518,166 11,142,227

Social insurance funds 14,539,748 31,859,569

Petty cash 9,838,541 9,571,945

Receivable from Gansu Guangda Real Estate Company 66,800,000 —

Prepayments for constructions 4,197,500 12,086,529

Others 279,013,911 277,293,726

676,907,866 341,953,996

* This represented the prepayment of the consideration to Huaneng Group and Huaneng Finance of RMB126 million and

RMB162 million respectively to acquire a 20% equity interest in Huaneng Finance. As at 31st December 2005, the

investment was still subject to approvals from the relevant authorities, and was recorded as other receivables (Note 10).

As at 31st December 2005, there were no other receivables from shareholders who held 5% or more of the

equity interest in the Company except for RMB21,847,346 from HIPDC (31st December 2004: Nil).

As at 31st December 2005, the five largest other receivables of the Company and its subsidiaries amounted to

RMB422,637,262 (31st December 2004: RMB135,176,856), representing 62.44% of total other receivables

(31st December 2004: 39.53%).

See Note 7 for related party transactions.







(4) Advance to suppliers


2005 2004

Prepayments for coal 142,054,339 293,181,969

Prepayments for materials and spare parts 22,441,393 33,467,251

Prepayments for equipments 73,004,442 32,551,886

Prepayments for contractors 5,810,149 26,498,054

Others 25,295,736 55,671,615

268,606,059 441,370,775

Aging for advance to suppliers is as follows:



Aging Amount (%) Amount (%)

Within 1 year 239,576,900 90 434,116,293 98

1-2 years 26,691,042 9 5,512,106 2

2-3 years 1,905,613 1 208,500 —

Over 3 years 432,504 — 1,533,876 —

268,606,059 100 441,370,775 100

As at 31st December 2005, there were no advances paid to shareholders who held 5% or more of the equity interest in

the Company (As at 31st December 2005: Nil).







(5) Inventories


2005 2004

Fuel (coal and oil) for power generation 1,498,483,819 732,834,080

Materials and spare parts 861,257,627 715,249,762

2,359,741,446 1,448,083,842

Less: provision for inventory obsolescence-spare parts (48,384,680) (16,680,237)

2,311,356,766 1,431,403,605

Provision for inventory obsolescence during the year are analyzed as follows:

Spare parts

31st December 2004 (16,680,237)

Current year addition (31,956,590)

Current year deduction 252,147

31st December 2005 (48,384,680)

The cost of inventories recognized as expenses and included in cost of sales amounting to RMB21,580,927,262 in 2005

(2004: RMB15,310,808,468).







(6) Long-term investments

31st December Current year Current year 31st December

2004 additions deductions 2005

Long-term equity investments

Consolidated difference in value (a) 1,331,850,487 720,763,840 (242,129,601) 1,810,484,726

Associates (b) 3,217,902,086 669,062,977 (394,621,332) 3,492,343,731

Equity investment difference (c) 1,075,342,379 — (122,946,008) 952,396,371

Other long-term equity investments (d) 263,131,226 3,462,583 (37,865,815) 228,727,994

Less: impairment of long-term investments (1,987,660) (2,962,583) — (4,950,243)

Sub-total 5,886,238,518 1,390,326,817 (797,562,756) 6,479,002,579

Long-term debt investments 58,700 — (5,000) 53,700

Less: current portion of

long-term debt investments (5,000) — 5,000 —

Long-term debt investments 53,700 — — 53,700

Total long-term investments 5,886,292,218 1,390,326,817 (797,562,756) 6,479,056,279

As at 31st December 2005 and 31st December 2004, the Company’s total long-term investments accounted for 16.58%

and 15.83% of the Company’s net assets respectively.

The long-term investments of the Company and its subsidiaries are not subject to restriction on conversion into cash or

restriction on remittance of investment income because the Company and its subsidiaries have no investment abroad.








(a) Equity investment difference that resulted in consolidated difference in value

Consolidated difference in value mainly represents the difference between the considerations paid for the

acquisitions of Taicang Power Company, Huaiyin Power Company, Qinbei Power Company, Yushe Power Company,

Yueyang Power Company, Luohuang Power Company, Sichuan Hydropower, Pingliang Power Company and

Dongxiguan Hydropower, and the proportionate share of the net assets of these companies. Details are

summarized as follows:

Balance at Balance at

Original Amortization Accumulated 31st December Current year Current year 31st December

Name cost period amortization 2004 additions amortization 2005

Taicang Power Company 191,587,073 10 years (66,090,005 ) 144,655,775 — (19,158,707 ) 125,497,068

Huaiyin Power Company 211,580,733 10 years (51,508,951 ) 118,274,556 59,957,428 (18,160,202 ) 160,071,782

Qinbei Power Company 96,461,357 10 years (20,899,961 ) 85,207,532 — (9,646,136 ) 75,561,396

Yushe Power Company 5,936,001 10 years (1,187,200 ) 5,342,401 — (593,600 ) 4,748,801

Yueyang Power Company 393,716,359 7.5years (78,743,272 ) 367,468,602 — (52,495,515 ) 314,973,087

Luohuang Power Company 649,082,972 8.5years (114,544,054 ) 610,901,621 — (76,362,703 ) 534,538,918

Sichuan Hydropower 451,067,215 10 years (45,106,722 ) — 451,067,215 (45,106,722 ) 405,960,493

Pingliang Power Company 205,324,362 10 years (20,532,436 ) — 205,324,362 (20,532,436 ) 184,791,926

Dongxiguan Hydropower 4,414,835 10 years (73,580 ) — 4,414,835 (73,580 ) 4,341,255

2,209,170,907 (398,686,181 ) 1,331,850,487 720,763,840 (242,129,601 ) 1,810,484,726








(b) Investment in associates

Places and Total investment Percentage of

dates of Registered Principal contributed by equity interest

Name incorporation capital activities the Company held

Direct Indirect

Associates:

Shandong Rizhao Rizhao, Shandong US$150 million Power generation RMB231.87 million 25.5% —

Power Limited 20th March 1996

Liability Company

(the “Rizhao

Power Company”)

Shenzhen Energy Shenzhen, RMB955.56 million Development, RMB2,390 million 25% —

Group Co., Ltd. Guangdong production and sale

(the “SEG”) 16th July 1997 of energy, and

energy construction

project

Hebei Huaneng Handan, RMB1,975 million Power generation RMB1,241.49 million 40% —

Hanfeng Power Hebei

Co., Ltd (the 28th October 1996

“Hanfeng Power

Company”)

Chongqing Luohuang county, RMB50 million Lime production RMB12.5 million — 25%

Huaneng Lime Jiangjin city, and sale

Company Limited Chongqing

(the “Lime 5th November 1996

Company ”)








(d) Other long-term equity investments

Other long-term equity investments mainly represents a 1.82% (31st December 2004: 2.11%) equity investment

in China Yangtze Power Co., Ltd (the “Yangtze Power”), details are as follows:

Balance at

Stock 31st December

Name Investment period category Stock amount 2005

Yangtze Power Starting from Tradable 149.31Million 220,219,361

22nd August 2002, share

with no specific terms

Pursuant to the approved shareholding structure reform plan of Yangtze Power, the company transferred all of

the bonus shares received, part of its original shareholding and cash dividend income to the public shareholders

in order to obtain the share floating right of its remaining shareholding. As a result of disposing certain original

shareholding, the investment of the Company was decreased by approximatedly Rmb 34.77 million. The Company

also recognized an asset, “share floating right” amounting to approximately Rmb 63.64 million simultaneously

as a result of the above mentioned cash dividend and shares transfer transaction and recorded it as other assets.

As at 31st December 2005, based on the closing quotation of last transaction day of 2005 extracted from the

Shanghai Stock Exchange, the market value of the remaining shareholding amounted to 1.033 billion.







(7) Fixed assets and accumulated depreciation

Transportation

Electric and

utility plant transmission

Dam Buildings in service facilities Others Total

Cost

31st December 2004 — 2,554,360,403 75,380,590,710 540,248,325 2,090,105,664 80,565,305,102

Reclassification — (462,160,110) 630,742,409 (290,614,931) 122,032,632 —

Additions from acquisition 2,263,640,876 517,218,561 8,497,008,751 41,736,139 333,517,923 11,653,122,250

Transfer from

construction-in-progress 459,022,142 31,392,183 3,893,690,562 4,726,165 1,838,292,306 6,227,123,358

Current year additions — 13,005,569 35,650,104 31,000 94,208,059 142,894,732

Current year disposals — (15,753,522) (585,200,041) — (92,487,097) (693,440,660)

31st December 2005 2,722,663,018 2,638,063,084 87,852,482,495 296,126,698 4,385,669,487 97,895,004,782

Accumulated depreciation

31st December 2004 — 562,520,489 31,359,289,541 240,598,360 1,083,723,842 33,246,132,232

Reclassification — (35,038,294) 49,579,018 (92,530,776) 77,990,052 —

Additions from acquisition 447,917,938 65,522,202 2,494,930,505 12,240,890 145,050,004 3,165,661,539

Current year depreciation 55,804,704 100,794,674 5,402,332,715 15,507,682 268,406,014 5,842,845,789

Current year disposals — (5,402,787) (474,603,894) — (80,134,261) (560,140,942)

31st December 2005 503,722,642 688,396,284 38,831,527,885 175,816,156 1,495,035,651 41,694,498,618

Impairment provision

31st December 2004 — — — — — —

Current year additions — — (30,080,000) — — (30,080,000)

31st December 2005 — — (30,080,000) — — (30,080,000)

Net book value

31st December 2005 2,218,940,376 1,949,666,800 48,990,874,610 120,310,542 2,890,633,836 56,170,426,164

31st December 2004 — 1,991,839,914 44,021,301,169 299,649,965 1,006,381,822 47,319,172,870







(7) Fixed assets and accumulated depreciation (Cont’d)

As at 31st December 2005, the company and its subsidiaries have pledged various assets as collateral against Rmb407

million loans (See Notes 5(18)). The summary of the pledged assets is as follows:

31st December 2005

Original cost Net book value

Dongxiguan hydropower

- Dam 503,324,659 383,422,639

- Electric utility plant in service 405,201,454 190,305,425

- Buildings 2,907,922 1,933,414

- Others 47,880,703 10,484,548

Kangding hydropower


Mingtai hydropower


Total 1,078,847,841 667,338,619

As at 31st December 2004, there were no assets pledged as collateral assets.

(8) Construction materials


2005 2004

Dedicated material and equipment 1,074,875,425 576,521,801

Prepayment for major equipment 5,196,100,762 3,299,543,606

Tools and instrument for production 18,175,660 —

6,289,151,847 3,876,065,407







(9) Construction-in-progress

31st Additions 31st

December from Transfer to Other December Percent of Source of

Projects Budget 2004 acquisition Additions fixed assets deductions* 2005 completion financing

Yuhuan Power 9,669,320,000 868,047,247 — 1,839,890,737 — — 2,707,937,984 28.0% Funds borrowed from financial

Plant Project institutions and internal funds

Huaiyin II Power 2,382,480,000 1,800,342,979 — 493,682,144 (2,240,832,414 ) — 53,192,709 96.0% Funds borrowed from financial

Company project institutions and internal funds

Taicang II Power 4,612,820,000 655,869,433 — 2,804,059,777 — — 3,459,929,210 75.0% Funds borrowed from financial


Shantou Power Plant 2,242,850,000 592,197,112 — 1,086,782,870 (1,678,134,411 ) — 845,571 75.0% Funds borrowed from financial

Phase II project institutions and internal funds

Xindian II Power 2,431,930,000 92,853,529 — 223,759,785 — — 316,613,314 13.0% Funds borrowed from financial


Yushe Power Company 2,678,810,000 14,199,676 — 94,544,657 (58,590,039 ) — 50,154,294 85.0% Funds borrowed from financial

Phase II project institutions and internal funds

Qinbei Power 4,654,950,000 7,068,975 — 76,168,059 (72,678,509 ) — 10,558,525 86.0% Funds borrowed from financial


Yueyang Power 2,473,600,000 343,706,646 — 670,242,016 — — 1,013,948,662 41.0% Funds borrowed from financial

Company Project institutions and internal funds

Luohuang Power 4,483,660,000 217,892,046 — 895,881,157 — — 1,113,773,203 24.8% Funds borrowed from financial

Company Project institutions and internal funds

Yingkou power plant 4,539,960,000 10,848,075 — 289,649,277 — — 300,497,352 6.6% Funds borrowed from financial

phase II project institutions and internal funds

Shanghai ranji 3,319,690,000 27,853,497 — 827,776,521 — — 855,630,018 25.8% Funds borrowed from financial

power company institutions and internal funds

project

Baoxinghe qiaoqi 2,180,023,300 — 573,382,569 635,573,580 — — 1,208,956,149 55.5% Funds borrowed from financial

Hydropower institutions and internal funds

station project







(9) Construction-in-progress (Cont’d)

31st Additions 31st

December from Transfer to Other December Percent of Source of

Projects Budget 2004 acquisition Additions fixed assets deductions* 2005 completion financing

Kangding Xiaotiandu 1,293,183,800 — 336,104,951 395,801,729 (500,893,082 ) — 231,013,598 56.6% Funds borrowed from financial

Hydropower station institutions and internal funds

project

Fujiang Ziyili 667,000,000 — 483,974,054 56,219,944 (540,193,998 ) — — 81.0% Funds borrowed from financial

Hydropower station institutions and internal funds

project

Fujiang Shuiniujia 966,510,100 — 295,009,067 227,125,211 — — 522,134,278 54.0% Funds borrowed from financial

hydropower station institutions and internal funds

project

Fujiang Muzuo 654,164,100 — 71,318,837 101,618,738 — — 172,937,575 26.4% Funds borrowed from financial

hydropower station institutions and internal funds

project

Other projects 497,346,025 221,189,785 2,438,325,065 (1,135,800,905 ) (132,171,926 ) 1,888,888,044 Funds borrowed from financial

institutions and internal funds

5,128,225,240 1,980,979,263 13,157,101,267 (6,227,123,358 ) (132,171,926 ) 13,907,010,486

Include: Capitalized

borrowing cost 190,746,909 77,411,735 550,075,698 (162,540,719 ) — 655,693,623

* For the year ended 31st December 2005, other deductions are mainly due to that the company dispose a subsidiary located in

Nanjing.

For the year ended 31st December 2005, the interest capitalized for construction-in-progress was RMB550,075,698 and

the capitalized rate per annum was 5.24% (2004: RMB272,225,256, at 4.56% per annum).







(10) Intangible assets

31st 31st Remaining

December Addition from Current year Current year Accumulated December amortization

Original cost 2004 acquisition addition amortization amortization 2005 period Obtained through

Land use rights 1,147,903,066 887,735,778 — 142,378,945 (23,468,794 ) (141,257,137 ) 1,006,645,929 15 to 68.5 years Purchase

Negative goodwill (2,472,783,635 ) (1,483,670,180 ) — — 247,278,363 1,236,391,818 (1,236,391,817 ) 5 years Acquisition

Goodwill 39,036,491 36,104,680 — — (4,752,150 ) (7,683,961 ) 31,352,530 5.5 to 8.5 years Acquisition

Others 32,226,681 8,819,845 2,524,438 13,424,431 (4,155,612 ) (11,613,579) 20,613,102 2 to 16 years Purchase and acquisition

(1,253,617,397 ) (551,009,877 ) 2,524,438 155,803,376 214,901,807 1,075,837,141 (177,780,256 )

As at 31st December 2005 and 31st December 2004, there was no indication that the intangible assets of the Company

and its subsidiaries were impaired and therefore no provision for impairment loss was made. No intangible assets of the

Company and its subsidiaries were pledged.

(11) Other long-term assets

Other long-term assets represent the Company and its subsidiaries’ receivables due from Sichuan Power Grid Company

resulting from the transfer of transmission facilities. Sichuan Power Grid Company entered into an agreement with Baoxinghe

Hydropower, Dongxiguan Hydropower and Taipingyi Hydropower each on the transfer of transmission facilities from these

plants to Sichuan Power Grid Company, pursuant to which Sichuan Power Grid Company agreed to return the principal

and interest amount related to the construction of the transmission facilities over 12.5 years, 12.5 years and 9 years

respectively. The interest rate should be determined according to the prevailing bank loan’s interest rate while the principal

is repaid.







(12) Short-term loans


2005 2004

Credit loans 6,180,869,370 7,499,000,000

Guaranteed loans 400,000,000 600,000,000

Total 6,580,869,370 8,099,000,000

As at 31st December 2005, all of the short-term loans of the Company and its subsidiaries were dominated in RMB, with

interest rates ranging from 4.30% to 5.51% per annum (31st December 2004: 4.30% to 5.02% per annum).

As at 31st December 2005, short-term loans amounting to RMB2,007.7 million were borrowed from Huaneng Finance,

with interest rates ranging from 4.70% to 5.02% per annum. (31st December 2004: RMB3,694 million with interest rates

from 4.54% to 5.02% per annum).

As at 31st December 2005, short-term loans amounting to RMB40 million were borrowed from Sichuan Electric Power

Development Company (“Sichuan Power”), with interest rates 5.51% per annum. (31st December 2004: Nil).

As at 31st December 2005, short-term loans amounting to RMB400 million were guaranteed by the Beijing Branch of

Industrial and Commercial Bank of China with interest rates 4.30% per annum. (31st December 2004: RMB600 million

with interest rates 4.30% per annum).

(13) Short-term bond

On 27th May 2005, the Company issued short-term bonds in two batches and the face value were RMB4.5 billion (due in

1 year) and RMB0.5 billion(due in 9 months). These bonds were issued at a discount with per annum effective interest

rates of 2.92% and 2.70% respectively. The proceeds received by the Company and its subsidiaries were RMB4,372

million and RMB490 million respectively. As at 31st December 2005, the accrued interest payable on the above short-term

bonds was approximately RMB85 million.

(14) Accounts payable

Accounts payable mainly represents the amounts due to coal suppliers. As at 31st December 2005 and 31st December

2004, there was no accounts payable to any shareholder who held 5% or more of the equity interest in the Company, and

there were no accounts aged over three years.








(15) Dividends payable


2005 2004

Aba Hydro Power Development Co., Ltd. (the “Aba Hydro Power”) 47,284,752 —

Sichuan Ganzi Hydropower Development Company 22,975,176 —

Sichuan Power 17,527,232 —

Ya’an State-Owned Assets Operation Limited Liability Company 10,739,989 —

Yangtze River Water and Electricity Development Company 8,591,991 —

Jiangsu Huai’an Investment Company — 13,418,696

Shantou Electricity Power Development Company — 8,250,000

Others 31,160,819 —

138,279,959 21,668,696

The ending balance is the cash dividend that has not been drawn by shareholders.

(16) Taxes payable

Taxes payable comprised:


2005 2004

Income tax payable 463,314,061 407,449,828

VAT payable 576,488,301 527,292,394

Others 91,481,998 65,049,963

1,131,284,360 999,792,185







(17) Other payables

Other payables comprised:


2005 2004

Payable to contractors 1,255,887,833 889,096,823

Payable for purchase of equipments 946,895,495 703,714,020

Other payable to contractors 778,487,539 237,912,047

Payable for purchase of materials 227,349,256 195,987,380

Payable to HIPDC 53,230,133 1,258,799,490

Payable to Huaneng Group 50,720,038 189,963

Accruals 70,128,842 35,828,532

Payable of social insurance fund 67,107,126 71,458,881

Project saving bonus 65,719,185 62,098,336

Payable of housing maintenance fund 87,652,045 49,231,372

Payable to Henan Electricity Industry Bureau 58,536,766 21,808,244

Payables of environment protection

– exhaust emission fee 38,552,452 20,695,875

Others 429,079,389 159,991,783

4,129,346,099 3,706,812,746

As at 31st December 2005, there was no other payable due to any shareholder who held 5% or more of the equity

interest in the Company except for a payable due to HIPDC of RMB53,230,133 and a payable due to Huaneng Group of

RMB50,720,038 (31st December 2004: Due to HIPDC: RMB1,258,799,490, Due to Huaneng Group: RMB189,963) as

mentioned above. There was also no significant other payable aged over three years.








(18) Long-term loans


2005 2004

Long-term loans from ultimate parent company (a) 2,800,000,000 800,000,000

Long-term bank loans (b) 28,364,593,943 15,986,747,027

Other long-term loans (c) 863,649,094 711,779,897

32,028,243,037 17,498,526,924

Less: current portion of long-term loans (3,165,979,238) (1,543,237,546)

28,862,263,799 15,955,289,378

(a) Long-term loans from ultimate parent company

As at 31st December 2005, detailed information of the long-term loans from ultimate parent company was as

follows:

31st December Interest rate Current

Lender 2005 Loan period per annum portion Terms

Renminbi loans

Entrusted loans from 600,000,000 2004-2013 4.60% — Nil

Huaneng Group through

Huaneng Finance*

Entrusted loans from 200,000,000 2004-2013 4.05% — Nil


Huaneng Finance*

Entrusted loans from 2,000,000,000 2005-2015 5.02% — Nil


Huaneng Finance*

2,800,000,000 —

* As at 31st December 2005, these loans were not repayable within one year and therefore there was no current portion.







(18) Long-term loans (Cont’d)

(b) Long-term bank loans

31st December 2005

Less: current

portion of

Original Exchange long-term Interest rate

currency rate RMB bank loans Total per annum

Credit loans

– Renminbi bank loans 14,194,348,300 (804,500,000) 13,389,848,300 3.60%-5.63%

– United States

dollar bank loans 7,370,975 8.0702 59,483,482 (27,699,202) 31,784,280 5.40%-6.97%

– Euro dollar bank loans 73,319,218 9.5797 702,376,115 (67,544,896) 634,831,219 2.00%

Guaranteed loans*

– Renminbi bank loans 7,639,490,000 (621,390,000) 7,018,100,000 5.18%-6.12%

– US dollar bank loans 664,406,836 8.0702 5,361,896,046 (815,205,045) 4,546,691,001 2.16%-6.60%

Secured Loans**

– Renminbi bank loans 407,000,000 (317,000,000) 90,000,000 5.18%-5.76%

Total 28,364,593,943 (2,653,339,143) 25,711,254,800

* The bank loans amounting to approximately Rmb3.311 billion and 7.127 billion (31st December 2004: approximately

RMB3.937 billion and approximately RMB3.521 billion) were guaranteed by HIPDC and Huaneng Group respectively.

The bank loans of the subsidiaries of the Company were guaranteed by the Company amounting to approximately

RMB1.352 billion (31st December 2004: RMB1.43 billion).

** These loans are secured by various fixed assets of the Company and its subsidiaries with the net book value of

RMB667,338,619 (See Note 5(7)).








(c) Other long-term loans

The detailed information of other long-term loans was as follows (including current portion):

31st December 2005

Original Exchange

currency rate RMB

Renminbi loans 646,846,428

United States dollar loans 15,714,286 8.0702 126,817,428

Japanese Yen loans 1,309,523,810 0.0687 89,985,238

863,649,094

Less: current portion of other long-term loans (512,640,095)

351,008,999








(c) Other long-term loans (Cont’d)

As at 31st December 2005, the detailed information about other long-term loans was as follows:



Renminbi loans

Huaneng Finance 30,000,000 2003-2006 5.18% (30,000,000) Nil

Huaneng Finance* 20,000,000 2004-2007 5.18% — Nil

Huaneng Finance* 20,000,000 2004-2007 5.18% — Loans amounting

to Rmb

15,000,000 were

guaranteed

by Sichuan

Yong’an Hydro

Power

Joint-Stock

Limited

Company (the

“Sichuan

Yong’an”)

Huaneng Finance 10,000,000 2003-2006 5.18% (10,000,000) Nil

Loan by mandate of Weihai

Power Development

Bureau (the “ WPDB”) 40,000,000 2004-2006 5.02% (40,000,000) Nil

Loan by mandate of WPDB 26,388,822 2004-2006 5.02% (26,388,822) Nil

Loan by mandate of 66,000,000 2003-2006 5.18% (66,000,000) Nil

Shanxi International

Power (Group) Company

Limited (the “Shanxi

International”)

Loan by mandate of Shanxi 5,500,000 1994-2006 5.02% (5,500,000) Nil

International








(c) Other long-term loans (Cont’d)



Chongqing Construction 183,670,000 2004-2006 4.94% (183,670,000) Nil

and Investment Limited

Liability Company

Aba Hydro Power 38,037,606 1994-2006 5.51% (38,037,606) Nil

Gansa Provincial

Power Construction

Investment Corporation 7,250,000 1996-2007 6.12% (3,625,000) Nil

China Electric Power Finance 200,000,000 2003-2008 5.27% (70,000,000) Secured by

Co., Ltd-Northwest branch 50% tariff

collection

right of

Pingliang Power

Company

Subtotal of RMB loans 646,846,428 (473,221,428)

US dollar loan

On-lent foreign loans of the 126,817,428 1996-2011 LIBOR+0.43% (23,057,715) Guaranteed by

Ministry of Finance Huaneng Group

Japanese Yen loan

On-lent foreign loans of the 89,985,238 1996-2011 LIBOR+0.3% (16,360,952) Guaranteed by

Ministry of Finance Huaneng Group

Subtotal of foreign loans 216,802,666 (39,418,667)

Total 863,649,094 (512,640,095)

* As at 31st December 2005, these loans were not repayable within one year and therefore there was no current portion.







(19) Share capital

Par value 1 RMB per share


2004 2005

Unlisted shares

Promoters shares 8,500,000,000 8,500,000,000

Including: Domestic legal person shares 8,500,000,000 8,500,000,000

Sub-total of unlisted shares 8,500,000,000 8,500,000,000

Listed Shares

Domestic shares listed in the PRC 500,000,000 500,000,000

Overseas Listed Shares 3,055,383,440 3,055,383,440

Sub-total of listed shares 3,555,383,440 3,555,383,440

Total shares 12,055,383,440 12,055,383,440

(20) Capital surplus

31st December Current year 31st December

2004 addition 2005

Share premium 8,590,777,628 — 8,590,777,628

Equity investment provision* 21,734,582 136,011,317 157,745,899

Transfer from grants 3,470,000 13,358,937 16,828,937

8,615,982,210 149,370,254 8,765,352,464

* The addition of capital surplus in 2005 mainly accounts for the proportionate increase as the result of capital surplus changes of an

associate of the Company.







(21) Surplus reserves

31st December Current year Current year Current year 31st December

2004 appropriation addition deduction 2005

Statuary capital surplus reserve fund 2,229,832,058 476,262,503 — — 2,706,094,561

Statuary public welfare fund 1,863,280,308 357,196,878 — (3,473,222) 2,217,003,964

Discretionary surplus reserve fund 19,102,462 — 3,473,222 — 22,575,684

4,112,214,828 833,459,381 3,473,222 (3,473,222) 4,945,674,209

According to the Company Law of the PRC and the Company’s articles of association, the Company appropriates 10% of

each year’s net profit to the statutory surplus reserve fund until the fund balance reaches 50% of the registered share

capital. After obtaining the approval from the relevant authorities, this reserve can be used to make up any losses incurred

or to increase share capital. Except for setting off against losses incurred, any other usage may not result in this reserve

balance falling below 25% of the registered share capital. Pursuant to the decision of the Board of Directors, the Company

appropriated 10% of the profit after taxation to the statuary capital surplus fund amounting to RMB476,262,503 in 2005

(2004: 10%, amounting to RMB538,905,705).

Each year, the Company appropriates 5% to 10% of net profits to the statutory public welfare fund. The use of this

reserve is restricted to the provision of employees’ collective welfare benefits. The statutory public welfare fund is not

available for distribution to shareholders. When utilizing the statutory public welfare fund, the amount is transferred from

this account to the discretionary surplus reserve funds account. Any amounts utilized are capitalized in the Company’s

balance sheet or expensed in the Company’s profit and loss. For the year ended 31st December 2005, 7.5% of net profit

was provided for as statutory public welfare fund amounting to RMB357,196,878 (2004: 7.5%, amounting to

RMB404,179,279).

The Board of Directors, after obtaining approval from the shareholders, has the discretion to provide for discretionary

surplus reserve fund. This reserve can be used to make up any losses incurred or to increase the share capital after approval

is obtained from the Board of Directors. For the year ended 31st December 2005, no provision was made to the discretionary

surplus reserve fund (2004: nil).







(22) Unappropriated profit

2005 2004

Unappropriated profit brought forward 12,399,822,057 13,981,531,454

Add: Net profit for the year 4,762,625,031 5,389,057,047

Less: Appropriations to statutory capital surplus reserve (476,262,503) (538,905,705)

Appropriations to statutory public welfare fund (357,196,878) (404,179,279)

Dividends payable to ordinary shareholders-cash dividends of prior year

approved at the general meeting of the shareholders (3,013,845,860) (3,013,835,600)

Ordinary share dividend - bonus shares — (3,013,845,860)

Unappropriated profit carried forward 13,315,141,847 12,399,822,057

Pursuant to the resolution of the Board of Directors on 15th March 2005, on the basis of 12,055,383,440 ordinary shares

outstanding as at 31st December 2004, the directors proposed a cash dividend of RMB2.5 (including tax) for every 10

existing ordinary shares. On 11th May 2005 the shareholders approved the profit distribution plan and declared the cash

dividend amounting to 3,013,845,860 on the basis of 12,055,383,440 ordinary shares outstanding as at the distribution

date.

Pursuant to the resolution of the Board of Directors on 28th March 2006, on the basis of 12,055,383,440 ordinary shares

outstanding as at 31st December 2005, the directors proposed a cash dividend of RMB2.5 (including tax) for every 10

existing ordinary shares amounting to RMB3,013,845,860. This proposal is subject to the approval of the shareholders at

the annual general meeting. Proposed dividends plan had not been reflected in the financial statements. Once the distribution

plan is approved by the general meeting of the shareholders, the dividend distribution will be accounted for in the

financial statements for the year ended 31st December 2006.

The maximum amount available for distribution to the shareholders is the lower of the amounts (i.e. net profit in current

year plus undistributed profit brought forward from the beginning of the year, less any appropriations to the statutory

surplus reserve fund and the statutory public welfare fund) determined under the PRC accounting standards and the

amount determined under the International Financial Reporting Standards (“IFRS”).






5. NOTES TO THE CONSOLIDATED FINANCIAL (Cont’d)

(23) Revenues from principal operations and costs of principal operations

For the year ended For the year ended31st December 2005 31st December 2004

Revenues Costs of Revenue Costs of

from principal principal from principal principal

operations operations operations operations

Sales of electric power 40,247,775,556 31,374,075,751 30,292,698,696 22,548,970,713

The Company and its subsidiaries are principally engaged in the generation and sale of electric power in China.

For the year ended 31st December 2005, the revenue from the five largest customers of the Company and its subsidiaries

amounting to RMB25,623,899,911 (2004: RMB23,917,433,339), representing 63.67% (2004: 78.95%) of the total revenue,

respectively.

(24) Tax and levies on principal operations

For the For the

year ended year ended


2005 2004

City maintenance and construction tax 65,125,793 17,111,787

Education levies 48,349,571 15,211,915

113,475,364 32,323,702







(25) Financial expenses

For the For the



2005 2004

Interest expenses 1,579,092,793 722,810,744

Less: Interest income (53,685,310) (43,091,888)

Exchange losses 6,747,998 93,849,334

Less: Exchange gain (296,467,136) (737,890)

Others 49,751,015 26,340,259

1,285,439,360 799,170,559

(26) Investment income

For the For the



2005 2004

Investment income on bonds — 11,322

Share of profit of associates accounted for under the equity method 532,867,940 383,037,279

Dividends declared by investees accounted for under the cost method 63,834,662 23,078,308

Amortization of equity investment differences (365,075,609) (210,167,757)

Impairment loss on long-term investments (2,962,583) —

228,664,410 195,959,152

The long-term investments of the Company and its subsidiaries are not subject to restriction on remittance of investment

income because the Company and its subsidiaries have no investment abroad.







(27) Acquisition

As mentioned in Note 1, on 26th October 2004, the Company entered an agreement with Huaneng Group. According to

the agreement, the Company agreed to acquired 60% equity interest in Sichuan Hydropower, and 65% equity interest in

the Pingliang Power Company. After meeting all the necessary conditions, the payments of the purchase considerations

and the transfer of the relevant ownership and control, the acquisitions were effective on 5th January 2005 (the “effective

date”). At the effective date, assets, liabilities and cash flows related to the acquisitions of these subsidiaries were as

follows:

As at

5th January

2005

Current assets 1,328,999,525

Fixed assets 10,658,011,842

Intangible assets 2,524,438

Other long-term assets 154,162,257

Less: Current liabilities 2,068,018,662

Long-term liabilities 7,190,341,383

Minority shareholders interest 681,333,676

Net assets 2,204,004,341

Net assets acquired 1,368,608,423

Premiums (Consolidated difference in value) 656,391,577

Total consideration 2,025,000,000

Less: cash inflow from acquisition (566,703,654)

Net cash outflow for acquisition 1,458,296,346







(27) Acquisition (Cont’d)

The condensed income statements of these subsidiaries for the period from the effective date of acquisition to 31st

December 2005 are as follows:

For the

period from the

effective date to

31st December

2005

Revenue from principal operations 2,715,213,104

Cost and tax from principal operations (1,471,119,455)

Profit from principal operations 1,244,093,649

Net income before tax 811,792,590

Less: Income tax (117,382,295)

Minority shareholders interest (163,603,151)

Net profit 530,807,144

(28) Other cash paid relating to operating activities

For the

year ended

31st December

2005

Service fee paid to HIPDC 141,102,133

Payment of balance due to HIPDC 1,260,833,250

Others 1,047,390,197

2,449,325,580






6. NOTES TO THE COMPANY ONLY FINANCIAL STATEMENTS

(1) Accounts receivable and other receivables

(a) Accounts receivable


2005 2004

Accounts receivable 3,180,365,793 2,407,402,978

Less: Specific bad debt provision (269,326) (269,326)

3,180,096,467 2,407,133,652

The aging of accounts receivable and bad debt provision are as follows:




Within 1 year 3,167,773,343 99 — 2,394,810,528 99 —

1-2 years — — — 6,203,191 — —

2-3 years 6,203,191 — — — — —

Over 3 years 6,389,259 1 (269,326) 6,389,259 1 (269,326)

3,180,365,793 100 (269,326) 2,407,402,978 100 (269,326)

All accounts receivable represented receivables from the provincial or regional grid companies for the sales of

electric power.

As at 31st December 2005, there was no accounts receivable from any shareholder who held 5% or more of

the equity interest in the Company (31st December 2004: Nil).

As at 31st December 2005, the five largest accounts receivable of the Company amounting to RMB2,349,625,834

(31st December 2004: RMB1,908,721,219), representing 73.88% of total accounts receivable (31st December

2004: 79.29% ).






6. NOTES TO THE COMPANY ONLY FINANCIAL STATEMENTS (Cont’d)


(b) Other receivables


2005 2004

Other receivables 445,493,907 153,647,924

Less: bad debt provision (24,869,766) (27,557,208)

420,624,141 126,090,716

Other receivables’ aging and bad debt provision are as follows:




Within 1 year 375,398,636 84 (1,504,105) 80,738,203 53 (1,814,463)

1-2 years 781,531 — (57,415) 19,491,130 13 (584,734)

2-3 years 3,275,608 1 (64,238) 8,496,078 5 (254,882)

Over 3 years 66,038,132 15 (23,244,008) 44,922,513 29 (24,903,129)

445,493,907 100 (24,869,766) 153,647,924 100 (27,557,208)








(b) Other receivables (Cont’d)

Breakdown of other receivables is as follows:


2005 2004

Prepayment for acquisition of Huaneng Finance* 288,000,000 —

Receivables from employees for sales of staff quarters 14,518,166 11,142,227

Petty cash 4,719,499 5,790,247

Prepayments for constructions 839,800 12,086,529

Due from management fee of subsidiaries 3,677,462 20,256,116

Due from sales of steam to Jining Duojing Company 20,489,915 13,414,304

Others 113,249,065 90,958,501

445,493,907 153,647,924

* This represented the prepayment of the consideration to Huaneng Group and Huaneng Finance of RMB126 million and

RMB162 million respectively to acquire a 20% equity interest in Huaneng Finance. As at 31st December 2005, the

investment was still subject to approvals from the relevant authorities, and was recorded as other receivables (Note 10).

As at 31st December 2005, there were no other receivables from shareholders who held 5% or more of the

equity interest in the Company ( 31st December 2004: Nil).

As at 31st December 2005, the five largest other receivables of the Company amounting to RMB332,879,562

(31st December 2004: RMB37,899,319), representing 74.72% of total other receivables (31st December 2004:

24.67% ).








(2) Long-term Investments

31st December Current year Current year 31st December

2004 additions deductions 2005

Long-term equity investments

Subsidiaries (a) 4,515,546,857 3,883,752,617 (399,892,903) 7,999,406,571

Associates 3,198,912,967 667,417,989 (392,964,235) 3,473,366,721

Equity investment difference 2,407,192,866 716,349,005 (365,002,029) 2,758,539,842

Other long-term equity investments 263,131,226 2,962,583 (37,865,815) 228,227,994

Impairment of long-term investments (1,987,660) (2,962,583) — (4,950,243)

10,382,796,256 5,267,519,611 (1,195,724,982) 14,454,590,885

As at 31st December 2005 and 2004, the Company’s total long-term investment accounted for 36.97% and 27.92% of

the Company’s net assets respectively.

(a) Long-term equity investments in subsidiaries

Percentage of

Investment equity Investment cost Accumulated equity

period interest held movement pick-up movement Net carrying value

31st 31st 31st 31st 31st Current year 31st 31st 31st

December December December December December additions/ December December December

2004 2005 2004 2005 2004 (deductions) 2005 2004 2005

Weihai Power Company 30 years 60% 60% 474,038,793 474,038,793 186,142,793 (17,980,244) 168,162,549 660,181,586 642,201,342

Taicang Power Company No specific terms 75% 75% 469,706,560 469,706,560 251,715,687 (21,467,310) 230,248,377 721,422,247 699,954,937

Huaiyin Power Company No specific terms 63.64% 90% 341,176,226 481,818,798 39,883,679 (3,776,041) 36,107,638 381,059,905 517,926,436

Huaiyin II Power Company No specific terms 63.64% 63.64% 301,653,600 492,573,600 — 49,585,758 49,585,758 301,653,600 542,159,358

Yushe Power Company No specific terms 60% 60% 374,449,895 374,449,895 34,743,691 16,728,080 51,471,771 409,193,586 425,921,666

Qinbei Power Company 50 years 55% 55% 325,095,599 375,095,599 (9,902,420) 101,089,612 91,187,192 315,193,179 466,282,791

Xindian II Power Company 20 years 95% 95% 140,100,000 251,100,000 — — — 140,100,000 251,100,000

Taicang II Power Company No specific terms 75% 75% 335,410,000 603,110,000 — — — 335,410,000 603,110,000

Yueyang Power Company No specific terms 55% 55% 266,734,838 376,734,838 44,633,685 27,154,474 71,788,159 311,368,523 448,522,997

Luohuang Power Company No specific terms 60% 60% 820,218,249 975,218,249 119,745,982 217,734,617 337,480,599 939,964,231 1,312,698,848

Shanghai Ranji Power No specific terms — 70% — 380,060,000 — — — — 380,060,000

Company

Sichuan Hydropower 20 years — 60% — 767,932,785 — 165,975,281 165,975,281 — 933,908,066

Pingliang Power Company 23 years — 65% — 610,717,154 — 164,842,976 164,842,976 — 775,560,130

3,848,583,760 6,632,556,271 666,963,097 699,887,203 1,366,850,300 4,515,546,857 7,999,406,571







(3) Revenues from principal operations and costs of principal operations

For the year ended For the year ended31st December 2005 31st December 2004

Revenues Revenue

from Costs of from Costs of

principal principal principal principal

operations operations operations operations

Sales of electric power 26,963,747,586 21,656,318,652 24,812,849,816 18,669,183,184

The Company and its subsidiaries are principally engaged in the generation and sale of electric power in China.

For the year ended 31st December 2005 and 2004, the revenue from the five largest customers of the Company amounting

to RMB21,175,627,090 and RMB20,360,461,498, representing 78.53% and 82.06% of the total revenue of the company

respectively.

(4) Investment income

For the For the



2005 2004

Investment income on bonds — 11,322

Investment income on entrusted loans — 14,374,088

Share of profit of subsidiaries and associates accounted for under

the equity method 1,600,840,523 927,360,553

Dividend declared by investees accounted for under the cost method 63,820,993 23,078,308

Amortization of equity investment differences (365,002,029) (210,167,757)

Impairment loss on-long-term investments (2,962,583) —

1,296,696,904 754,656,514

The long-term investments of the Company are not subject to restriction on remittance of investment income because the

Company has no investment abroad.






7. RELATED PARTY TRANSACTIONS

(1) Related parties that control/are controlled by the Company:

Relationship

Registered with Type of Legal

Name address Principal activities the Company enterprise representative

Huaneng Group Jia 23 Fuxing Road, Investment in power stations, coal, Ultimate parent State-owned Li Xiaopeng

Haidian district, minerals, railways, transportation, company enterprise

Beijing petrochemical, energy-saving facilities,

steel, timber, and related industries

HIPDC Bing 2 Fuxingmen Investment in power plants, Parent company Sino-foreign Li Xiaopeng

South Road, development and investment equity limited

Xicheng district, in other export-oriented enterprises liability company

Beijing

Weihai Power Company No. 58 Haifu Road, Power generation A subsidiary Limited liability Huang Jian

Economic Development of the Company company

Zone, Weihai,

Shandong province

Taicang Power Company Jinjihupan, Power generation A subsidiary Limited liability Na Xizhi

Sanxing Road, Suzhou, of the Company company

Jiangsu province

Taicang II Power Company Jinlanglanggang village, Power generation A subsidiary Limited liability Na Xizhi

Fuqiao town,Taicang, of the Company company

Jiangsu province

Huaiyin Power Company No. 291 Huaihai West Power generation A subsidiary Limited liability Liu Guoyue

Road, Huai’an, of the Company company

Jiangsu province

Huaiyin II Power Company No. 291 Huaihai West Power generation A subsidiary Limited liability Liu Guoyue

Road, Huai’an, of the Company company

Jiangsu province

Qinbei Power Company Wulongkou town, Power generation A subsidiary Limited liability Zhang Hong

Jiyuan , Henan province of the Company company






7. RELATED PARTY TRANSACTIONS (Cont’d)

(1) Related parties that control/are controlled by the Company (Cont’d):

Relationship



Yushe Power Company Dengyu village, Power generation A subsidiary Limited liability Liu Guoyue

Yushe county, of the Company company

Shanxi province

Xindian II Power Company Dawu town, Power generation A subsidiary Limited liability Huang Jian

Linzi district, Zibo, of the Company company

Shandong province

Yueyang Power Company Cheng Lingji, Power generation A subsidiary Limited liability Zhang Hong

Yueyang , of the Company company

Hunan province

Luohuang Power Company Luohuang town, Power generation A subsidiary Limited liability Li Shiqi

Jiangjin , Chongqing of the Company company

Shanghai Ranji Power Company No.298 Sheng Shi Road, Power generation A subsidiary Limited liability Ye Daji

Baoshan district, of the Company company

Shanghai

Sichuan Hydropower No.47 Fourth south Investment holding and A subsidiary Limited liability Zhang Tingke

Renmin Road, hydropower project of the Company company

Wuhou district, development

Chengdu ,

Sichuan province

Baoxinghe Hydropower No.101 Yanjiang Power generation A subsidiary Limited liability Zhang Wei

North Road,Ya’an , of the subsidiary company

Sichuan province of the Company

Dongxiguan Hydropower Li’an Town, Power generation A subsidiary Limited liability Zhang Wei

Wusheng county, of the subsidiary company








(1) Related parties that control/are controlled by the Company (Cont’d):

Relationship



Taipingyi Hydropower Yingxiu Town, Power generation A subsidiary Limited liability Zhang Wei

Wenchuan county, of the subsidiary company


Kangding Hydropower Yuanyang dam, Power generation A subsidiary Limited liability Zhang Wei

Kangding county, of the subsidiary company

Ganzhi state, of the Company

Sichuan province

Mingtai Hydropower East river Road, Power generation A subsidiary Limited liability Zhang Wei

north dam district, of the subsidiary company

Santai county, of the Company

Sichuan province

Jialingjiang Hydropower No.191 Liulin Road, Power generation A subsidiary Limited liability Zhang Wei

Shunqing district, of the subsidiary company

Nanchong city, of the Company

Sichuan province

Fujiang Hydropower Baima village, Power generation A subsidiary Limited liability Zhang Wei

Pingwu county, of the subsidiary company


Pingliang Power Company No.7 Binhe Middle Power generation A subsidiary Limited liability Li Shiqi

Road Qilihe,Lanzhou city, of the Company company

Gansu province

Boyuan Company Dengyu village, Property management A subsidiary Limited liability Guo Zhanyuan

Yushe county, and leasing of the subsidiary company

Shanxi province of the Company







(2) Registered capital and changes in registered capital of related parties that control/are

controlled by the Company:

31st December Current year 31st December

Name Currency 2004 additions 2005

Huaneng Group RMB 20,000,000,000 — 20,000,000,000

HIPDC US$ 450,000,000 — 450,000,000

Weihai Power Company RMB 761,838,300 — 761,838,300

Taicang Power Company RMB 632,840,000 — 632,840,000

Taicang II Power Company RMB 894,410,000 — 894,410,000

Huaiyin Power Company RMB 265,000,000 — 265,000,000

Huaiyin II Power Company RMB 474,000,000 300,000,000 774,000,000

Qinbei Power Company RMB 10,000,000 — 10,000,000

Yushe Power Company RMB 80,000,000 535,760,000 615,760,000

Xindian II Power Company RMB 100,000,000 — 100,000,000

Yueyang Power Company RMB 560,000,000 — 560,000,000

Luohuang Power Company RMB 900,000,000 — 900,000,000

Shanghai Ranji Power Company RMB — 50,000,000 50,000,000

Sichuan Hydropower RMB 800,000,000 — 800,000,000

Baoxinghe Hydropower RMB 516,100,000 — 516,100,000

Dongxiguan Hydropower RMB 156,725,000 — 156,725,000

Taipingyi Hydropower RMB 100,000,000 — 100,000,000

Kangding Hydropower RMB 194,000,000 83,200,000 277,200,000

Mingtai Hydropower RMB 97,700,000 — 97,700,000

Jialingjiang Hydropower RMB 193,080,000 — 193,080,000

Fujiang Hydropower RMB 150,000,000 — 150,000,000

Pingliang Power Company RMB 623,000,000 — 623,000,000

Boyuan Company RMB — 2,000,000 2,000,000







(3) Equity shares and changes in equity shares held by parties that control/are controlled by the

Company:

Current period

Name 31st, December 2004 additions/(deductions) 31st, December 2005

Amount % Amount % Amount %

Huaneng Group* 1,675,660,547 51.98 — — 1,675,660,547 51.98

HIPDC** 5,197,680,000 43.12 (40,000,000) (0.34) 5,157,680,000 42.78

Weihai Power Company 457,102,980 60 — — 457,102,980 60

Taicang Power Company 474,630,000 75 — — 474,630,000 75

Taicang II Power Company 670,807,500 75 — — 670,807,500 75

Huaiyin Power Company 168,646,000 63.64 69,854,000 26.36 238,500,000 90

Huaiyin II Power Company 301,653,600 63.64 190,920,000 — 492,573,600 63.64

Qinbei Power Company 5,500,000 55 — — 5,500,000 55

Yushe Power Company 48,000,000 60 321,456,000 — 369,456,000 60

Xindian II Power Company 95,000,000 95 — — 95,000,000 95

Yueyang Power Company 308,000,000 55 — — 308,000,000 55

Luohuang Power Company 540,000,000 60 — — 540,000,000 60

Shanghai Ranji Power Company — — 35,000,000 70 35,000,000 70

Sichuan Hydropower — — 480,000,000 60 480,000,000 60

Baoxinghe Hydropower*** — — 350,948,000 68 350,948,000 68

Dongxiguan Hydropower*** — — 92,984,943 59.33 92,984,943 59.33

Taipingyi Hydropower*** — — 60,000,000 60 60,000,000 60

Kangding Hydropower*** — — 166,320,000 60 166,320,000 60

Mingtai Hydropower*** — — 50,999,400 52.20 50,999,400 52.20

Jialingjiang Hydropower*** — — 106,194,000 55 106,194,000 55

Fujiang Hydropower*** — — 142,500,000 95 142,500,000 95

Pingliang Power Company — — 404,950,000 65 404,950,000 65

Boyuan Company**** — — 1,500,000 75 1,500,000 75

* Huaneng Group holds 51.98% equity interest in HIPDC.

** In accordance with a shareholders’ agreement entered into by certain founding shareholders, during the operating period of the

Company, the voting rights of seven founding shareholders are given to HIPDC. Thus, HIPDC holds an effective 70.09% voting

rights in the shareholders’ meetings.

*** Sichuan Hydropower directly holds 68%, 59.33%, 60%, 60%, 52.2%, 55% and 95% equity interest in Baoxinghe Hydropower,

Dongxiguan Hydropower, Taipingyi Hydropower, Kangding Hydropower, Mingtai Hydropower, Jialingjiang Hydropower and Fujiang

Hydropower respectively.

**** Yushe Power Company holds 75% equity interest in Boyuan Company.







(4) Nature of related parties that do not control/are not controlled by the Company:

Name of related parties Relationship with the Company

Huaneng Finance A subsidiary of Huaneng Group

China Huaneng International Trade Economics A subsidiary of Huaneng Group

Corporation (“CHITEC”)

Shanghai Time Shipping Company (“Time Shipping”) A joint venture company of Huaneng Group

Rizhao Power Company An associate of the Company

SEG An associate of the Company

Hanfeng Power Company An associate of the Company

Hebei Huaneng Jingyuan Coal Company Limited A subsidiary of Huaneng Group

(the “Huaneng Jingyuan”)

Lime Company An associate of Luohuang Power Company

(5) Related party transactions

a. Pursuant to a service agreement entered into between the Company and HIPDC, HIPDC provides transmission

service and transformer facilities to some of the power plants of the Company and receives service fees. The

total amount of service fees paid to HIPDC for the year ended 31st December 2005 was approximately RMB141

million (2004: approximately RMB134 million).

b. Pursuant to a leasing agreement entered into amongst the Company, HIPDC and Nanjing Investment Company,

the land use right of Nanjing Power Plant is leased to the Company for 50 years from 1st January 1999 at an

annual rental payment of RMB1.334 million.

c. Pursuant to a leasing agreement between the Company and HIPDC, HIPDC renewed the lease of its office

building to the Company at an annual rental of RMB26 million for five years effective from 1st January 2005

(2004: RMB25 million).

d. As described in Note 5 (18)(a), certain long-term loans were on-lent from Huaneng Group through Huaneng

Finance, and as described in Note 5 (18)(c), certain loans of the subsidiaries of the company were drawn from

Huaneng Finance. In 2005, the interest paid by the Company and its subsidiaries to Huaneng Finance for these

loans amounting to RMB41,278,460 (2004: Nil).







(5) Related party transactions (Cont’d)

e. As at 31st December 2005, Huaneng Finance had granted short-term loans amounting to RMB2,008 million

(31st December 2004: RMB3,694 million) to the Company and its subsidiaries. The relevant interest rate ranges

from 4.70% to 5.02% (2004:4.54% to 5.02%) per annum. The interest rates for such loans have no material

difference with the prevailing market interest rate (see Note 5(12), 5(18)(c)). In 2005, the interest paid by the

Company and its subsidiaries to Huaneng Finance for these loans amounting to RMB98,971,631 (2004:

RMB87,739,224).

f. Pursuant to Note 5(18), the long-term bank loans of the Company and its subsidiaries were guaranteed by

HIPDC and Huaneng Group.

g. As described in Note 8, certain bank loans of Rizhao Power Company were guaranteed by the Company and its

subsidiaries.

h. On 6th November 2002, the Company entered into a management service agreement with Huaneng Group

and HIPDC. Pursuant to which, the Company provides management services to certain power plants owned by

Huaneng Group and HIPDC for five years. For the year ended 31st December 2005, the Company earned

service fees amounting to RMB31,667,760 from Huaneng Group (2004: RMB45,864,600) and didn’t pay expenses

on behalf of Huaneng Group’s power plants (2004: RMB2,317,194). In addition, the Company earned service

fees amounting to RMB3,328,340 from HIPDC (for the year ended 31st December 2004: RMB11,678,300). For

the year ended 31st December 2005, the related cost incurred for the management service provided was

approximately RMB32.61 million (2004: RMB38.88 million).

i. For the year ended 31st December 2005, the Company and its subsidiaries paid approximately RMB284 million

for coal purchased from CHITEC (2004: RMB215 million).

j. For the year ended 31st December 2005, the Company and its subsidiaries paid approximately RMB11.2 million

for equipment purchased from CHITEC (2004: Nil).

k. For the year ended 31st December 2005, the Company and its subsidiaries paid approximately RMB607 million

for the fuel purchased and transportation services received from Time Shipping (2004: RMB563 million), including

Rmb67.93 million for the fuel purchased and Rmb539 million for transportation services received.

l. For the year ended 31st December 2005, the Company and its subsidiaries paid approximately RMB242 million

for coal purchased from Huaneng Jingyuan (2004: RMB16.35 million).

m. For the year ended 31st December 2005, the Company and its subsidiaries paid approximately RMB42.82

million for lime products purchased from Lime Company.(2004: RMB25.56 million)







(5) Related party transactions (Cont’d)

n. As at 31st December 2005, HIPDC had provided guarantees on its equity portion of certain account receivable

balances of the subsidiaries of the company totaling approximately RMB77.23 million (2004: RMB209 million)

(see Note 5(3)(a)). In 2005, pursuant to the agreement the Company paid RMB31.27 million to HIPDC as

compensation for receiving some accounts receivables which had been provided provisions for(2004: Nil).

o. On 26th October 2004, the Company entered into an agreement with Huaneng Group pursuant to which the

Company acquired from Huaneng Group 60% equity interest in Sichuan Hydropower and 65% equity interest

in Pingliang Power Company at considerations of RMB1,219 million and RMB806 million respectively. After

meeting all the necessary conditions, the payments of the purchase considerations and the transfer of relevant

ownership and control, the acquisitions became effective on 5th January 2005.

p. On 11st April 2005, the Company entered into an agreement with Huaneng Group, pursuant to which Huaneng

Group provides management service to Sichuan Hydropower. The total amount of service fees is RMB2,420,100

per annum (2004: Nil).

q. For the year ended31st December 2005, the Company and its subsidiaries discounted approximately RMB298

million of notes receivable with Huaneng Finance. The discount charges of which were approximately RMB2.415

million (2004: 42.97 million, 0.298 million).

r. For the year ended 31st December 2005, the Company sold a subsidiary in Nanjing at its net book value of

RMB30 million to HIPDC (2004: Nil).

(6) Cash deposited with a related party


2005 2004

Deposited at Huaneng Finance:

– Current deposit 1,767,519,906 1,362,960,901

As at 31st December 2005, the interest rates per annum for the current deposits placed with Huaneng Finance ranged

from 0.72% to 1.62% ( 31st December 2004: 0.72% to 1.44%).







(7) Receivables from/ payables to related parties


Amount % Amount %

Advance to suppliers

Prepayment to CHITEC — — 5,000,000 1.13

Prepayment to Huaneng Jingyuan — — 6,000,000 1.36

Other receivables

Other receivables from HIPDC 21,847,346 3.65 — —

Other receivables from

Huaneng Group’s subsidiaries — — 2,317,194 0.79


Rizhao Power Company — — 1,652,353 0.56


Hanfeng Power Company 23,520 — — —

Accounts payable

Accounts payable to CHITEC (14,175,450) 1.23 — —

Accounts payable to Time Shipping (14,917,612) 1.30 (6,959,110) 0.94

Accounts payable to Lime Company — — (3,799,628) 0.51

Other Payables

Other payables to HIPDC (53,230,133) 1.29 (1,258,799,490) 33.96

Other payables to CHITEC (526,746) 0.01 (399,060) 0.01

Other payables to Huaneng Finance (6,000,000) 0.15 (117,461) —

Other payables to Huaneng Group (50,720,038) 1.23 (189,963) 0.01

Interest payables

Interest payables on loans

from Huaneng Finance (13,642,791) 6.90 (1,960,863) 1.62


from Huaneng Group (10,000,000) 5.06 — —

Other long-term payables*


from Huaneng Group (42,553,304) 66.34 — —

* Interest will be paid before 2010 as agreed with Huaneng Group.

The above payables and receivables with related parties were unsecured, non-interest bearing, and the balances except

the interest payables on loans from Huaneng Group, will be settled within one year.






8. CONTINGENT LIABILITY

31st December 2005

The Company

and its

Item subsidiaries The Company

Guarantee on the long-term bank loans of Rizhao Power Company 225,250,000 225,250,000

Guarantee on the long-term bank loans of Qinbei Power Company — 740,000,000

Guarantee on the long-term bank loans of Yushe Power Company — 612,000,000

225,250,000 1,577,250,000

Guarantees on the long-term bank loans of Rizhao Power Company, Qinbei Power Company and Yushe Power Company

by the Company had no significant financial impact on the Company’s operation.

9. OBLIGATION AND COMMITMENTS

Commitments mainly relate to the construction of new power projects, certain complementary facilities and renovation

projects for existing power plants. Expenditure which was contracted for but not incurred and thus was not recognized in

the financial statements as at 31st December 2005 amounting to approximately RMB17.076 billion (31st December 2004:

RMB11.483 billion).

In addition, during 2004, the Company entered into various long-term agreements for the procurement of coal from year

2005 to 2009, for power generation. These agreements are subject to termination only under certain limited circumstances.

In most cases, these agreements contain provisions for price escalation and minimum purchase level clauses. The future

commitments under these agreements are as follows:

Year 31st December 2005

2006 7,771,230,440

2007 7,771,230,440

2008 3,826,280,340

2009 3,826,280,340

23,195,021,560






9. OBLIGATION AND COMMITMENTS (Cont’d)

The Company had various operating lease arrangements with HIPDC for land and buildings. Total future minimum lease

payments under non-cancelable operating leases are as follows:


2005 2004

Land and buildings

- within 1 year 33,495,000 1,334,000

- 1-2 years 7,372,000 1,334,000

- 2-3 years 6,335,000 1,334,000

- after 3 years 151,362,000 54,694,000

198,564,000 58,696,000

In addition, in accordance with a 30-year operating lease agreement signed by the Dezhou Power Plant and Shandong

Land Bureau for the land occupied by Dezhou Power Plant Phase I and Phase II in June 1994, annual rental is approximately

RMB29,874,000 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 percent of the previous annual rental amount. For the year ended 31st December 2005, the rental was

RMB29,952,590 (for the year ended 31st December 2004: RMB29,079,725).

10. SUBSEQUENT EVENTS

As at December 31st, 2005, the Company had paid a total consideration of Rmb288 million in cash to acquire 20% equity

interest in Huaneng Finance. The transaction has been completed after the balance sheet date.






11. NET PROFIT AFTER DEDUCTING NON- RECURRING ITEMS


2005 2004

Net profit 4,762,625,031 5,389,057,047

Add (Less): non-recurring items

- Net loss / (profit) from disposal of fixed assets and construction-in-progress 138,883,566 (20,136,960)

- Reversal of bad debt provision (71,558,513) (15,096,637)

- Reversal of Inventory impairment provision (252,147) (14,102,245)

- Non-operating income (42,456,406) (42,909,340)

- Non-operating expense 70,154,837 9,610,726

- Subsidy income (27,836,622) (8,000,000)

tax impact on non-recurring items (2,577,665) 16,218,661

Net profit after deducting non-recurring items 4,826,982,081 5,314,641,252

Supplemental Information


NET PROFIT AND NET ASSETS RECONCILIATION BETWEEN PRC GAAP ANDINTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”)

The consolidated 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 IFRS. Major differences between PRC GAAP and IFRS, which affect the net income and net assets of

the Company and its subsidiaries, are summarized as follow:

Net Income

For the year ended

31st December

2005 2004

(Rmb) (Rmb)

(Note i)

Net profit under PRC GAAP 4,762,625,031 5,389,057,047

Impact of IFRS adjustments:

Minority interests (Note i) 811,013,498 306,326,898

Effect of recording the amounts received

in advance based on rate making process (a) (66,754,230) (142,097,658)

Difference in the recognition policy on housing

benefits to the employees of the Company

and its subsidiaries (b) (37,919,274) (34,497,807)

Difference in capitalization of borrowing costs (c) 141,072,575 52,937,838

Effect of recording negative goodwill and amortization (d) (247,278,363) —

Difference in accounting treatment for

issuance cost of short-term bonds (e) 8,564,674 —

Difference in recognition of professional fees

incurred on acquisitions (f) 16,698,000 16,471,468

Applicable deferred tax impact of the above GAAP differences (i) 63,697,954 35,999,710

Others 96,191,062 (43,269,252)

Net profit under IFRS 5,547,910,927 5,580,928,244



NET PROFIT AND NET ASSETS RECONCILIATION BETWEEN PRC GAAP AND IFRS (Cont’d)

Net Assets


2005 2004

(Rmb) (Rmb)

(Note i)

Net assets under PRC GAAP 39,081,551,960 37,183,402,535

Impact of IFRS adjustments:

Minority interests (Note i) 4,934,649,003 2,573,400,216

Effect of recording the amounts received in

advance based on rate making process (a) (1,196,352,010) (1,129,597,780)

Difference in the recognition policy on housing benefits

to the employees of the Company and its subsidiaries (b) 27,908,711 68,546,525

Difference in capitalization of borrowing costs (c) 280,164,117 156,286,117

Effect of recording negative goodwill and amortization (d) 1,236,391,819 —

Difference in accounting treatment for issuance cost of short-term bonds (e) 8,564,674 —

Difference in recognition of professional fees incurred on acquisitions (f) 59,510,756 42,812,756

Effect on minority interests of recording fair

value adjustments upon acquisitions (g) 1,636,361,612 843,853,614

Record the book value of Yangtze Power according to the fair value (h) 749,369,049 —

Applicable deferred tax impact of the above GAAP differences (i) (530,158,940) (44,583,779)

Others (143,773,947) (162,208,460)

Net assets under IFRS 46,144,186,804 39,531,911,744

Note i: Consistent with disclosure requirement of revised IAS 1-Presentation of Financial Statements, minority interests in the

consolidated net assets and net profit under IFRS should be included as a portion of total equity and total profit attributable

to shareholders respectively. Accordingly, the comparative figures have been restated to meet the disclosure requirement for

this or last year.




a) Recording of the amounts received in advance

In accordance with the tariff setting mechanism applicable to certain power plants, the Company and its subsidiaries

receive advance payment (calculated at 1% of the book value of fixed assets) as the major repair and maintenance

cost requirements of the relevant power plants. This payments received in advance are recognized as liabilities under

IFRS and are recognized as revenue when the repair and maintenance is performed and the liabilities extinguish. For

PRC statutory financial reporting purposes, this amount is not recorded as a liability and is recognized as revenue.

(b) Difference in the recognition policy on housing benefits to the employees of the Company

and its subsidiaries

The Company and its subsidiaries provided housing benefits to certain qualified employees of the Company and its

subsidiaries whereby the living quarters owned by the Company and its subsidiaries 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 its subsidiaries.

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 and its subsidiaries are charged to non-operating expenses as

incurred. Under IFRS, the housing benefits provided by the Company and its subsidiaries are recognized on a straight-

line basis over the estimated remaining average service lives of the employees.

(c) 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 interest on general borrowings used for the

purpose of obtaining a qualifying asset in addition to the capitalization of interest on specific borrowings.

(d) Effect of recording negative goodwill and amortization

Under PRC GAAP, the excess of the equity portion of the net assets acquired over the total cost of the acquisition

arising from the business combinations in prior years was recorded as negative goodwill and amortized over 10 years

on a straight-line basis.

In accordance with revised IFRS 3 - Business Combination, negative goodwill arising from the business combination

in prior years is derecognized in the beginning of this year and the effect is reflected in the beginning retained

earnings and any amortization under PRC GAAP is reversed.




(e) Difference in accounting treatment for issuance cost of short-term bonds

Under PRC GAAP, the issuance cost of short-term bonds is expensed when incurred. In accordance with IAS 39, an

entity generally amortizes issuance cost included in the computation of the effective interest rate over the expected

life of the short-term bonds.

(f) Difference in recognition of professional fees incurred on acquisition

Under PRC GAAP, the professional fees directly attributable to the acquisition of subsidiaries and associates should be

expensed when occurs. In accordance with IFRS 3, such professional fees should be included in the costs of the

combination and therefore capitalized.

(g) Effect on minority interests of recording fair value adjustments upon acquisitions

Under PRC GAAP, the acquired subsidiaries are recorded in the consolidated financial statements of the Company

and its subsidiaries at historical cost.

In accordance with IFRS 3, the acquiree’s identified assets, liabilities and contingent liabilities, except for non-current

assets that are classified as held for sale in accordance with IFRS 5, are recorded at their fair value on the acquisition

date. The differences between the fair value and historical cost of the acquiree’s such identifiable assets, liabilities and

contingent liabilities affect the acquiree’s net assets on the acquisition date and therefore, affect the minority interests

(shown as a portion of the net assets) in the consolidated financial statements of the Company and its subsidiaries.

(h) Recording investment in Yangtze Power at fair value

Under PRC GAAP, the Company’s long-term investment in Yangtze Power is accounted for using cost method. The

carrying amount of this long-term investment remains unchanged except for additions or withdrawal of investment.

After Yangtze Power’s shareholding structure reform during the year, the legal person shares held by the Company

were allowed to trade in the open market. In accordance with IAS 39, given that the shares held by the Company and

its subsidiaries can now be freely traded, they have been revalued at year end based on the closing market rate. A

gain or loss on the available-for-sale investment shall be recognized directly in equity, except for impairment losses

and foreign exchange gains and losses, until the investment is derecognized, at which time the cumulative gain or

loss previously recognized in equity shall be recognized in profit or loss.

(i) Deferred tax impact

This represents deferred tax effect on the above GAAP differences where applicable.

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