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RNS Number:9195W Zhejiang Southeast Elec Power Co Ld 25 March 2004 Zhejiang Southeast Electric Power Company Limited Annual Report 2003 March 2004 Important: The Directors of Zhejiang Southeast Electric Power Company Limited (ZSEPC) confirm that there are no false representations, misleading statements or material omissions in this Report, and jointly and severally accept full responsibilityfor the authenticity, accuracy and integrity of the information contained herein. The Board Chairman of ZSEPC Sun Yongsen and the management personnel in charge of accounting affairs including General Manager Shou Desheng, Chief Accountant Hu Senjian and Manager of Finance Department Yang Xiaodong affirm that the financial statements contained herein are true and complete. Contents I. About ZSEPC 1 II. Summary of Accounting Figures and Operating Figures 2 III. About Shareholders and Changes in Share Capital 5 IV. About the Directors, Supervisors, Senior Management and Employees 9 V. Corporate Governance Structure 12 VI. Shareholders' General Meeting 14 VII. Report of Board of Directors 16 VIII. Reportof Supervisory Committee 32 IX. Important Events 36 X. Financial Statements 1 47 XI. Financial Statements 2 48 XII. Documents Available for Inspection 56 I. About ZSEPC 1. Registered Name in Chinese: Zhejiang Southeast Electric Power Company Limited Registered Name in English: Zhejiang Southeast Electric Power Company Limited Abbreviation of the English Name of the Company: ZSEPC 2. Legal Representative: Sun Yongsen 3. Secretary to the Board of Directors: Xia Jinghan Address: 22-23 Floor, Biao Li Tower, 528 Yanan Road, Hangzhou, Zhejiang Province, the People!s Republic of China Tel: 0571-85774566 Fax: 0571-85774321 E-mail Address: xjh@zsepc.com 4. Registered Address and Office Location: 22-23 Floor, Biao Li Tower, 528 Yanan Road, Hangzhou, Zhejiang Province, P.R. China Postal Code: 310006 Website: http://www.zsepc.com/ 5. Designated Press for Information Release: Shanghai Securities News, China Securities Journal, South China Morning Post (Hong Kong), Wen Hui Bao (Hong Kong) Website for Publication of Annual Reports as designated by the China Securities Regulatory Commission (CSRC): http://www.sse.com.cn/ Venues for Inspection of the Annual Report: Head Office of ZSEPC, Herbert Smith Hong Kong Office and London Office 6. Information on Listing of Shares of ZSEPC Listing Place of B Shares: Shanghai Stock Exchange Abbreviation of B Shares: ZSEPC B Shares Code of B Shares: 900949 Listing place of GDRs: London Stock Exchange Code of GDRs: 0949QLT 7. Other Information (1) Initial Registration Date: 15 May 1997 Initial Registered Address: Fengqi Building, 451 Fengqi Road, Hangzhou, Zhejiang Province Re-registration Date: 8 July 2002 Re-registered Address: 22-23 Floor, Biao Li Tower, 528 Yanan Road, Hangzhou, Zhejiang Province (2) Registration No. of Business License: Qi Gu Zhe Zong Zi No.002189 (3) Taxation Registration No.: State Tax Registration No.330000142943450 Local Tax Registration No.330000142943450 (4) Names and Addresses of Domestic and International Accountants Appointed by ZSEPC: Domestic Accountant: Zhejiang Pan-China Certified Public Accountants Address: Qianjiang Sci-tech Building, 388 Wensan Road, Hangzhou, Zhejiang, China International Accountant: PricewaterhouseCoopers Zhong Tian CPAs Co., Ltd. Address: Ruian Plaza, 333 Mid-Huaihai Road, Shanghai, China II. Summary of Accounting Figures and Operating Figures 1. Main Accounting Figures (1) Accounting figures based on the Chinese accounting standards: Item Amount (RMB yuan) Principal Operating Income 4,738,196,944.73 Gross Profit 1,076,967,843.80 Net Profit 609,283,351.82 Net Profit After Deducting Non-recurring Gains/Losses (Note) 623,702,351.21 Principal Operating Profit 1,556,252,810.50 Other Operating Profit 759,658.17 Operating Profit 1,258,811,607.84 Returns on Investment -146,757,285.34 Subsidy Income 0.00 Net Value of Non-operating Income/Expense -35,086,478.70 Net Cash Flow Generated from Operations 1,416,710,611.72 Net Increase in Cash and Cash Equivalents -37,397,618.65 Note: Items and amounts of non-recurring gains/losses Item Amount (RMB yuan) Returns on Investment - Income from management of trusted fund 14,174,314.66 - Reversal of previous allocation of the 99,900.00 reserve for short-term investment devaluation Non-operating income 668,046.95 Less: non-operating expenses 35,754,525.65 Non-recurring gains/losses -20,812,264.04 Impact of income tax on non-recurring gains/losses -6,116,641.37 Impact of minority shareholders' equity on non-recurring gains/ -276,623.28 losses Non-recurring gains/losses after deducting income tax and minority -14,418,999.39 shareholders' equity (2) Difference between New Profits Based on Chinese and International Accounting Standards: Unit: RMB1000 yuan Net profit based on the Chinese Enterprise Accounting System 609,283 Adjustment made based on the international accounting standards: 1. Reversal of prepaid corporate income tax -3,123 2. Deferred income tax -9,056 3. Transferred to capital reserve 12,773 4. Offset against retroactive adjustment to corporate income tax - 5. Offset against other retroactive adjustment - Net profit based on the international accounting standards 609,877 2. Main Financial Indicators Unit: RMB Item Year 2003 Year 2002 Year 2001 Principal operating income 4,738,196,944.73 3,320,944,888.62 3,370,277,286.61 Gross profit 1,076,967,843.80 812,753,137.31 958,949,587.73 Net profit 609,283,351.82 545,515,105.11 707,945,727.20 Net profit after deducting 623,702,351.21 551,529,400.73 712,085,858.46 non-recurring gains/losses Earnings per share (diluted) 0.30 0.27 0.35 Earnings per share 0.30 0.27 0.35 (weighted average) Earnings per share after 0.31 0.27 0.35 deducting non-recurring gains/ losses Yield on net assets (diluted) 10.14 9.27 12.12 (%) Yield on net assets 9.84 8.92 11.95 (weighted average) (%) Yield on net assets after 10.08 9.02 12.02 deducting non-recurring gains/ losses (weighted average) (%) Item Year 2003 End of Year 2002 End of Year 2001 Total assets 8,680,084,385.48 8,602,419,267.42 7,816,313,776.25 Shareholders' equity (excluding 6,008,838,568.82 5,885,261,727.00 5,842,246,621.89 minority shareholders' equity) Net asset value per share 2.99 2.92 2.91 Adjusted net asset value per 2.97 2.91 2.90 share Net cash flow generated from 1,416,710,611.72 1,040,154,528.73 1,297,137,638.21 operating activities Net cash flow generated from 0.70 0.52 0.65 operating activities per share Annex to Statement of Profit in the current report period: Yield on Net Assets (%) Earnings per Share (yuan/share) Diluted Weighted Diluted Weighted Profit in Current Report period Average Average Principal Operating Profit 25.90 25.14 0.77 0.77 Operating Profit 20.95 20.34 0.63 0.63 Net Profit 10.14 9.84 0.30 0.30 Net Profit After Deducting 10.38 10.08 0.31 0.31 Non-recurring Gains & Losses 3. Changes in Shareholders' Equity in Current Report period Unit: RMB yuan Item Share Capital Capital Reserve Surplus Statutory Undistributed Shareholders' Reserve Welfare Profit Equity Reserve Beginning 2,010,000,000.00 1,863,272,079.51 763,152,307.26 381,576,153.63 1,248,837,340.23 5,885,261,727.00 Amount Increase 0.00 12,773,490.00 121,856,670.36 60,928,335.18 609,283,351.82 622,056,841.82 in Current Period Decrease 0.00 0.00 0.00 0.00 620,336,670.36 498,480,000.00 in Current Period Ending 2,010,000,000.00 1,876,045,569.51 885,008,977.62 442,504,488.81 1,237,784,021.69 6,008,838,568.82 Amount Reasons - Incoming 10% statutory 10% statutory Incoming Increase in net for transfer of the capital welfare fund transfer of net profit, capital Changes waived reserve and allocated from profit realized reserve and environmental 10% welfare the net profit in current year profit protection loan fund allocated realized in after allocating distribution in for the from the net current year statutory current year. desulfurization profit capital reserve, project of realized in statutory Xiaoshan Power current year welfare fund and Plant (after profit deducting income distribution tax payable) and payables unable to be paid III. About Shareholders and Changes in Share Capital 1. Changes in Share Capital (1) Table for Changes in Share Capital Unit : per share Before Change Increase/decrease in current year After Change (+, -) 1. Non-listed shares 1) Promoters' shares 1,320,000,000 0 1,320,000,000 Including: Shares held by the State 1,315,000,000 0 1,315,000,000 Shares held by domestic legal 5,000,000 0 5,000,000 persons Shares held by foreign legal persons Other shares 2) Legal person's shares by subscription 3) Internal employee shares 4) Preference shares and other shares Subtotal 1,320,000,000 0 1,320,000,000 2. Outstanding shares 1) RMB ordinary shares 2) Domestically listed foreign 690,000,000 0 690,000,000 investment shares 3) Offshore listed foreign investment shares 4) Other shares Subtotal 690,000,000 0 690,000,000 3. Total number of shares 2,010,000,000 0 2,010,000,000 (2) Issuance and Listing of Shares a. No issuance of shares was conducted in the last 3 years ending on 31 December 2003. b. There was no changes in the total number ofZSEPC's shares or the share structure in this report period. c. ZSEPC has no internal employee share. 2. Profile of Shareholders (1) Total Number of Shareholders Ending on 31 December 2003, ZSEPC has a total of 76,729 shareholders. (2) Profile of the top 10 shareholders as at end of the report period Full Name of Increase/ Number of Percentage of Type of Shares Number of Nature of Shareholder Shares Held Shareholding Shares in Shareholders Decease in at Year End Pledge or Current Year Freeze (degrees- +/- denotes decrease) Zhejiang 0 799,963,200 39.799 Non-listed Nil State-owned Provincial Shares Electric Power Development Company (ZPEPDC) China Huaneng 0 514,036,800 25.574 Non-listed Nil State-owned Group (CHNG) Shares NAITO SECURITIES 1,058,78215,306,586 0.762 Listed Unknown Foreign CO.LTD Investment Shares SCBHK A/C BROWN 5,031,000 14,143,918 0.704 Listed Unknown Foreign BROTHERS Investment HARRIMAN AND Shares COBOSTON S/A CMO EMERGING MARKETS FUND Hua Cong 7,230,514 14,038,339 0.698 Listed Unknown Foreign Investment Investment Company Limited Shares JPM IRE / GT PRC 9,290,364 10,996,764 0.547 Listed Unknown Foreign FUND Investment Shares TOYO SECURITIES 485,600 7,791,100 0.388 Listed Unknown Foreign ASIA LTD. A/C Investment CLIENT Shares MERRILL LYNCH 5,430,281 6,754,559 0.336 Listed Unknown Foreign INTERNATIONAL Investment Shares DEUTSCHE BANK 3,781,773 4,841,696 0.241 Listed Unknown Foreign LONDON Investment Shares SKANDIA GLOBAL 4,533,625 4,533,625 0.226 Listed Unknown Foreign FUNDS PLC Investment Shares Note: There is no connection between the state-owned legal person shareholders of ZSEPC. And ZSEPC is unaware whether the other shareholders have any inter-connection. Up to the end of this report period, the shareholders holding 5% and above of ZSEPC's stock are ZPEPDC and CHNG. (3) About Controlling Shareholders The controlling shareholder of ZSEPC is ZPEPDC. As approved by Zhejiang Provincial Government, the assets of ZPEPDC was wholly transferred to Zhejiang Provincial Energy Group Corp. (ZPEGC), making ZPEPDC a wholly-owned subsidiary of ZPEGC. Thus ZPEGC became the de facto controller of ZSEPC. ZPEPDC is a collectively owned enterprise. After being restructured, its staff and organization was merged into ZPEGC. Therefore, the rights and power of the first largest shareholder of ZSEPC is to be exercised directly by ZPEGC. ZPEGC was founded in March 2001, with its business scope covering state-authorized operations of the stated-owned assets and stocks of group corporations and enterprises, investment in industrial development and technical consulting service, its registered capital amounting to RMB 3.5 billion yuan, its legal representative Sun Yongsen. The controlling shareholders and the de facto controller of ZSEPC remained unchanged in this report period. (4) About Other Legal Person Shareholders Holding more than 10% of ZSEPC's Shares China Huaneng Group (CHNG) holds 514,036,800 shares of ZSEPC, accounting for 25.57% of ZSEPC's total shares. In the light of Document Ji Ji Chu (2002)2704 ' degreesThe State Planning Commission's Approval of the Plan for Restructuring of the Generation Assets of the State Power Corp.'+/- issued by the State Planning Commission, the 514,036,800 state-owned legal person shares of ZSEPC originally held by Zhejiang Provincial Electric Power Co. (ZPEPC) were decreed to be transferred to CHNG at no cost.Based on the Share Transfer Agreement between the two parties, the effective date of the transfer was 1 January 2003. After the share transfer, CHNG came into possession of 514,036,800 shares of ZSEPC, accounting for 25.57% of the total as the second largest shareholder of ZSEPC. Announcement of the above transfer was made on 23 April 2003. CHNG was founded in 1989, with its business scope covering industrial investment, operations and management; power plant development, investment, construction, operation and management; organization of electric power (heat) production and sales; and engagement in product development, investment, construction, production and sales in the fields of information, transportation, new energies and environmental protection, its registered capital amounting to RMB 20 billion yuan, its legal representative Li Xiaopeng. (5) Top 10 Shareholders of Listed Shares of ZSEPC at End of the Report period Full Name of Shareholder Increase/ Number of Percentage of Type of Share Decrease in Shares Held Shareholding#%#(c) Current Year (' at Year End degrees-'+/- denotes decrease) NAITO SECURITIES CO.LTD 1,058,782 15,306,586 0.762 Listed B shares SCBHK A/C BROWN BROTHERS HARRIMAN AND 5,031,000 14,143,918 0.704 COBOSTON S/A CMO EMERGING MARKETS FUND Hua Cong Investment Company Limited 7,230,514 14,038,339 0.698 Listed B shares JPM IRE / GT PRC FUND 9,290,364 10,996,764 0.547 Listed B shares TOYO SECURITIES ASIA LTD. A/C CLIENT 485,600 7,791,100 0.388 Listed B shares MERRILL LYNCH INTERNATIONAL 5,430,281 6,754,559 0.336 Listed B shares DEUTSCHE BANK LONDON 3,781,773 4,841,696 0.241 Listed B shares SKANDIA GLOBAL FUNDS PLC 4,533,625 4,533,625 0.226 Listed B shares SCBHK A/C NOMURA TB/NOMURA ITM 1,200,000 3,600,000 0.179 Listed B shares SHENYIN WANGUO NOMINEES (H. K) LTD. 3,081,561 3,512,561 0.175 Listed B shares Note: ZSEPC is unaware whether the top 10 shareholders of listed shares of ZSEPC have inter-connection. IV. About the Directors, Supervisors, Senior Management and Employees 1. Directors, Supervisors and Senior Management (1) Profile Name Position Sex Age Tenure Shareholding at Shareholding at Causes of Year Beginning Year End Changes Sun Yongsen Board Male 58 6/2003-6/2006 0 0 - Chairman Wang Vice Chairman Male 57 6/2003-6/2006 0 0 - Xiaosong Shou Desheng Director, Male 46 6/2003-6/2006 0 0 - General Manager Xie Guoxing Director Male 49 6/2003-6/2006 0 0 - Hu Genfa Director Male 48 6/2003-6/2006 0 0 - Cao Lu Director Male 38 6/2003-6/2006 0 0 - Liu Ranxing Director Male 41 6/2003-6/2006 0 0 - Xing JunjieDirector Male 45 6/2003-6/2006 0 0 - Li Hua Director Female 45 6/2003-6/2006 0 0 - Li Jianguo Director Male 45 6/2003-6/2006 0 0 - Qian Independent Male 65 6/2003-6/2006 0 0 - Zhongwei Director Wu Xianquan Independent Male 63 6/2003-6/2006 0 0 - Director Huang Independent Male 48 6/2003-6/2006 0 0 - Dongliang Director Mao Fugen Independent Male 40 6/2003-6/2006 0 0 - Director Huan Guocang Independent Male 54 6/2003-6/2006 0 0 - Director Huang Lixin Convener of Male 37 6/2003-6/2006 0 0 - Supervisory Committee Fu Muqing Supervisor Male 45 6/2003-6/2006 0 0 - Yang Supervisor Male 31 6/2003-6/2006 0 0 - Jianxiong Sun Chaoyang Supervisor Male 38 6/2003-6/2006 0 0 - Chen Xi Supervisor Male 31 6/2003-6/2006 0 0 - Wang Jiafu Supervisor Male 50 6/2003-6/2006 0 0 - Huang Supervisor Male 45 6/2003-6/2006 0 0 - Guanlin Wu Yaozhong Deputy Male 55 6/2003-6/2006 0 0 - General Manager Chen Juemin Deputy Male 50 6/2003-6/2006 0 0 - General Manager Xia Jinghan Deputy Female 34 6/2003-6/2006 0 0 General Manager, Secretary to Board of Directors Hu Senjian Chief Male 48 6/2003-6/2006 0 0 - Accountant Qiu Baoxing Director of Male 55 6/2003-6/2006 0 0 - Trade Union Committee (2) Directors/Supervisors Taking Office in Shareholder Organizations Name Shareholder Position Tenure Whether taking Organization remuneration or subsidy from ZSEPC Sun Yongsen Zhejiang Provincial Board Chairman 3/2003To date No Energy Group Corporation Wang China Huaneng Group Deputy General Manager 1/2000To date No Xiaosong Huaneng International Power Co.Ltd Vice Chairman Xie Guoxing Zhejiang Provincial Deputy Chief Engineer 7/2003 To date No Energy Group Corporation Hu Genfa Zhejiang Provincial Head of Finance Department. 7/2003To date No Energy Group Corporation Cao Lu Zhejiang Provincial Head of Asset Operation 7/2003To date No Energy Group Department Corporation Liu Ranxing Huaneng International Deputy Manager of Safety and 2/2002To date No Power Co. Ltd Production Department Xing Junjie Huaneng International Deputy Manager of Planning & 12/2002To date No Power Co. Ltd Development Department Li Hua Huaneng International Deputy Head of Stock 12/2002To date No Power Co. Ltd Management Department Huang Lixin Huaneng International Deputy Manager of Finance 8/2001To date No Power Co. Ltd Department Yang Zhejiang Provincial Deputy Head of Planning & 7/2003To date No Jianxiong Energy Group Development Department Corporation Sun Zhejiang Provincial Deputy Head of Finance 7/2003To date No Chaoyang Energy Group Department Corporation Chen Xi Huaneng International Deputy Head of General 12/2002To date No Power Co. Ltd Division, Finance Department Note: In accordance with Agreement on Trusted Management of Thermal Power Generating Assets between China Huaneng Group, Huaneng International Power Development Co. and Huaneng International Power Co. Ltd, China Huaneng Group authorized Huaneng International Power Co. Ltd to send independent directors, directors and supervisors on behalf of China Huaneng Group to limited liability generating companies and stock companies limited in which China Huaneng Group has controlling or non-controlling shares, the validity of the authorization spanning from 26 February 2003 to 6 November 2007. (3) Annual Remuneration The directors and supervisors not taking remuneration from ZSEPC will be paid by the shareholder companies or related parties of the shareholder companies that send them, without getting any additional salaries or welfare benefit from ZSEPC; the directors, supervisors and other senior management personnel taking remuneration from ZSEPC will get payment and welfare benefit in line with the salary system of ZSEPC. The annual remuneration of the independent directors is to be decided in the shareholders' general meeting. In accordance with the resolution adopted in the Shareholders' General Meeting 2001, the annual subsidy for the independent supervisors of ZSEPC amounts to RMB 50,000 yuan (excluding tax) (except Independent Supervisor Huan Guocang who does not take subsidy for independent supervisors). The expenses for their traveling and hotel rooms will be borne by ZSEPC Total annual remuneration RMB 2.5366 million yuan Sum of remuneration of top 3 highest-paid directors RMB 630,500 yuan Sum of remuneration of top 3 highest-paid senior RMB 884,700 yuan managers Subsidy for independent directors Annual subsidy of RMB 50,000 yuan/person-year (excluding tax) Other benefits for independent directors Traveling and hotel expenses borne by ZSEPC Names of directors and supervisors not taking Sun Yongsen, Wang Xiaosong, Xie Guoxing, He Genfa, remuneration or subsidy from ZSEPC Cao Lu, Liu Ranxing, Xing Junjie, Li Hua, Huang Lixin, Yang Jianxiong, Sun Chaoyang, Chenxi Remuneration range Below RMB 100,000 yuan 5 people Between 100,000 and 200,000 yuan 1 person Between 200,000 and 300,000 yuan 6 people More than 300,000 yuan 2 people (4) Names of Directors, Supervisors and Senior Managers Leaving Office in Current Report period and Reasons As stipulated in the Company Law and the Articles of Association of ZSEPC, the tenure of ZSEPC's directors and supervisors is 3 years. The 2nd Board of Directors of ZSEPC was elected and formed in the Shareholders' General Meeting 2000. So their tenure expired in 2003. The 3rd Board of Directors and Supervisory Committee of ZSEPC were elected and formed after being approved in the Shareholders' General Meeting 2002 held on 30 June 2003. A new management team of ZSEPC was elected and formed after being approved in the first meeting of the Board of Director of ZSEPC. The directors leaving office were Hu Jiangchao, Shen Zhiyun, Zhang Huaiyu, Li Yuan, Ke Jixin, Zhu Li, Fu Muqing, Dai Jiancheng, Wang Jiafu, Zhu Changrong and Gu Gongyun; the supervisors leaving office were Tang Xingen, Jiang Huadong, Hu Genfa, Zhu Haiming, Wu Hongfei and Wang Guoqiang; the senior managerial person leaving office was Dai Jiancheng. (5) Employees As of 31 December 2003, there are 4,081 employees in total in ZSEPC, of which 333 hold university bachelor or above degrees, 734 having senior non-degree education, 315 having medium non-degree education and 2,821 having technical training of various disciplines there are 2,514 production personnel accounting for 69.91% of the total, 39 financial personnel and 397 management personnel, with 23 holding senior technical titles, 310 holding medium technical titles,. There are 279 retirees. V. Corporate Governance Structure 1. Corporate Governance Structure In accordance with the Company Law, the Securities Law, relevant stipulations issued by CSRC and Rules for Listing of Shares in Shanghai Stock Exchange, ZSEPC constantly tries to refine the corporate legal person governance structure and regularizes its operations. Centered around the Articles of Association at its core, the corporate internal operating system was further consolidated. Clear definition of the duties and authorities of the Shareholders' General Meeting, the Board of Directors, the Supervisory Committee and the management team and the open well-spelt rules of procedure ensure the efficient operation of the corporate governance structure. Duringthe report period, the Shareholders' General Meeting was held in strict accordance with the prescribed procedure to ensure that the shareholders have ample time to communicate with ZSEPC effectively. The time, venue and the voting manner of the Meeting were so chosen as to allow as many as possible shareholders to attend the meeting. When taking a vote on related party transactions, the related shareholders were avoided to ensure fair and reasonable related party transactions. The Board of Directors were re-elected upon conclusion of their tenure of office in this report period. After the election, independent directors make up 1/3 of the Board. The staffing of the Strategic, the Auditing and the Remuneration & Appraisal Committees under the Board were adjusted, of which the Auditing and the Remuneration & Appraisal Committees are dominated by independent directors who also act as conveners. The Board meetings of ZSEPC were conducted in strict accordance with the Articles of Association and the Rules of Procedure for Board Meetings. The directors performed their duties in earnest and in good faith. The Supervisory Committee members were re-elected upon conclusion of their tenure of office in this report period. The Supervisory Committee meetings were held in strict accordance with the Articles of Association and the Rules of Procedure for Supervisory Committee Meetings. The Supervisory Committee is staffed and structured such that it can exercise its supervision independently and effectively. The Committee conducted effective supervision over the performance of the directors and the senior management personnel of ZSEPC. Information disclosure awareness was raised in ZSEPC and its holding subsidiaries. The internal communication system for information disclosure was further improved to make sure timely, accurate, true and complete disclosure of the information about ZSEPC. Methods for Management of Relations with Company Investors was formulated to ensure the communication between ZSEPC and the investors. It was closely followed in work to increase communication with the investors through multiple channels. Timely disclosure of information about ZSEPC and real time interaction with investors were realized through road shows and ZSEPC's website construction. 2. Performance of Independent Directors Qian Zhongwei, Wu Xianquan, Huang Dongliang, Mao Fugen and Huan Guocang were appointed as independent directors of ZSEPC in 2003. Since taking office , the independent directors have performed their duties and obligation in strict accordance with the relevant laws/regulations and the Articles of Association of ZSEPC, followed the operations of ZSEPC with great interest, attended the shareholders' general meeting, the board meetings and the ad hoc committee meetings, made serious examination of ZSEPC's regular reports, checked the office holding and remuneration of ZSEPC's management team, put forward their independent opinions on the various important matters of ZSEPC, came up with rational proposals for its normal operation and sustainable development, thus safeguarding the correctness and rationality of its Board decision and protecting the interest of its medium and small shareholders. 3. Relation between ZSEPC and its Controlling Shareholders The controlling shareholders of ZSEPC exercised their rights as investors prescribed by the law through Shareholders' General Meeting. ZSEPC and its controlling shareholders are independent of each other in terms of personnel, assets, finance, organization and business operations. The Board of Directors, the Supervisory Committee and the internal organs of ZSEPC can operate independently. (1) In respect of staff, ZSEPC iscompletely independent of its controlling shareholders in terms of management of labor, manpower and salary with sound labor management system. All the senior administrative staff of ZSEPC such as General Manager, Deputy General Managers, Chief Accountant and Secretary to the Board of Directors are full time employees and get paid from ZSEPC, none of them taking payment or holding important positions in controlling shareholder companies. (2) In respect of assets, ZSEPC owns independent production system, auxiliary production system and ancillary facilities. Such intangible assets as the land use rights, industrial properties, trade marks and non-patented technology belong to ZSEPC. (3) In respect of financial affairs , ZSEPC established an independent financial department, formulated independent accounting system and financial management system and opened an independent bank account. (4) In respect of organization, ZSEPC has an independent organization with the Board ofDirectors, the Supervisory Committee and the internal organs of ZSEPC operating independently without any affiliation with the functional departments of the controlling shareholders. (5) In respect of business operations, ZSEPC operates independently, responsible for its own gains or losses with self-contained operational structure. 4. Appraisal and Incentive Mechanism for Senior Management A preliminary performance appraisal criterion and incentive mechanism linking performance with targets for the senior management staff was established. The senior management staff of ZSEPC are directly responsible to the Board of Directors, subject to the appraisal and awards/penalties given by the Board of Directors and the Remuneration & Appraisal Committee under the Board. The senior management staff undertake to fulfill the responsibility targets of operations, management, production safety and clean administration laid down by the Board, who will measure profit and appraise their performance against the responsibility targets and the profit target to mete out awards or penalties accordingly. VI. Shareholders' General Meeting 1. Shareholders' General Meeting One annual shareholders' general meeting and two extraordinary shareholders' general meetings were held in 2003. (1) The Annual Shareholders' General Meeting for 2002 Notice on the Shareholders' General Meeting for 2002 was published in China Securities Journal, Shanghai Securities News, Hongkong-based South China Morning Post and Hongkong-based Wen Hui Bao dated 30 May 2003. The meeting was held at Da Hua Hotel in Hangzhou on 30 June 2003. The shareholders and shareholders' proxies present at the meeting held 1,328,941,887 shares, accounting for 66.12% of the total shares of ZSEPC, which conformed to the Company Law and the Articles of Association of ZSEPC. The meeting discussed and approved the following through vote casting: (1) the Work Report of the Board of Directors for Year 2002 (2) the Work Report of the Supervisory Committee for Year 2002 (3) the Final Accounting Statement for Year 2002 (4) the Profit Distribution Proposal for Year 2002 (5) the Budgetary Report for Year 2003 (6) the Proposal to Renew Appointment of the Accounting Firms (7) the Proposal to Amend the Articles of Association of ZSEPC (8) the Proposal to Re-elect the Board of Directors upon Conclusion of Tenure of Office (9) the Proposal to Re-elect the Supervisory Committee upon Conclusion of Tenure of Office The announcement of resolutions of the meetings were published in China Securities Journal, Shanghai Securities News, South China Morning Post (Hong Kong) and Wen Hui Bao (Hong Kong) dated 2 July 2003. (2) The First Extraordinary Shareholders' General Meeting in 2003 The notice to hold the first extraordinary shareholders' general meeting in 2003 was published in China Securities Journal, Shanghai Securities News, Hongkong-based South China Morning Post and HongKong-based Wen Hui Bao on 2 July 2003. The meeting took place at Da Hua Hotel, Hangzhou on 1 August 2003. The shareholders and the proxies of shareholders attending the meeting totaled 31, holding 1,344,169,292 shares of ZSEPC in total, accounting for 66.87% of the total, which conformed to the requirement of the Company Law and the Articles of Association. The meeting discussed and approved the Proposal to Invest in Tankeng Hydropower Station Project through vote casting. The resolution of the above meeting was announced in China Securities Journal, Shanghai Securities News, the Hongkong-based South China Morning Post and the HongKong-based Wen Hui Bao dated 2 August 2003. (3) The Second Extraordinary Shareholders' General Meeting in 2003 The notice to hold the second extraordinary shareholders' general meeting in 2003 was published in China Securities Journal, Shanghai Securities News, Hongkong-based South China Morning Post and HongKong-based Wen Hui Bao on 16 September 2003. The meeting took place at Zhejiang Grand Hotel, Hangzhou on 16 October 2003. The shareholders and the proxies of shareholders attending the meeting totaled 25, holding 1,361,088,090 shares of ZSEPC in total, accounting for 67.72% of the total, which conformed to the requirement of the Company Law and the Articles of Association. The meeting discussed and approved the Proposal to Solely Invest in Xiaoshan Power Plant Gas Turbine Generation Project through vote casting. The resolution of the above meeting was announced in China Securities Journal, Shanghai Securities News, the Hongkong-based South China Morning Post and the HongKong-based Wen Hui Bao dated 17 October 2003. 2. Re-election of Directors and Supervisors The Board of Directors and the Supervisory Committee of ZSEPC were re-elected upon expiry of tenure of office. It was approved in the shareholders' general meeting for 2002 that Sun Yongsen, Wang Xiaosong, Shou Desheng, Xie Guoxing, Hu Genfa, Cao Lu, Liu Ranxing, Xing Junjie, Li Hua and Li Jianguo were elected directors of the third Board of ZSEPC; that Qian Zhongwei, Wu Xianquan, Huang Dongliang, Mao Fugen, Huan Guocang were elected independent directors; and that Huang Lixin, Fu Muqing, Yang Jianxiong, Sun Chaoyang, Chen Xi, Wang Jiafu and Huang Guanlin were elected supervisors of the third Supervisory Committee of ZSEPC, of whom Wang Jiafu and Huang Guanlin represent the employees of ZSEPC. VII. Report of Board of Directors 1. Business Operations of ZSEPC (1) Scope of Principal Business and Status of Operations a. Scope of Principal Business The principal business of ZSEPC is investment in, development and operations of the power business. As of the end of this report period, the installed generating capacity owned by ZSEPC on consolidated statement basis amounts to 2,300 MW, of which the equity capacity of ZSEPC amounts to 2,090 MW. b. Status of Business Operations In 2003, with the lasting rapid development of the national economy, the power demand in Zhejiang registered a significant growth, both the social power consumption and the maximum load reaching a record high. Against the backdrop of the persistent power shortage, the generating units of ZSEPC sustained continuous high load operation in a safe and stable manner all year around. Based on the consolidated statements, the generation totaled 15.896 billion kwh, the electricity sales amounted to 14.813 billion kwh, increasing by 47.79% and 49.75% respectively in comparison with those in the previous year. In the same year, the operating records of ZSEPC saw rapid growth. Its annual principal operating income and principal operating profit went up by 42.68% and 43.68% to RMB 4.738 billion yuan and 1.556 billion yuan respectively. After allocating the devaluation reserve for long-term investment in China Southern Securities Co., Ltd ("degreesSouthern Securities"+/-) of RMB 180 million yuan, the profit realizedby ZSEPC in 2003 totaled RMB 1.076 billion yuan, rising by 32.51% compared with that of 2002. Deducting the minority shareholders' gains/ losses, the net profit realized amounted to RMB 609 million yuan, up by 11.69% compared with that of 2002. The earnings per share reached RMB 0.30 yuan. c. Composition of Principal Business 1) Principal Business by Sector All of the principal operating income and the principal operating profit of ZSEPC come from production and sales of electric power and energy. Compared with that of the preceding year, the composition of ZSEPC' principal business underwent no change. Sector or Principal operating Principal operating Gross Increase/ Increase/ Increase/ Product income cost profit decrease in decrease in decrease in rate principal principal gross profit (RMB yuan) (RMB yuan) operating income operating cost rate compared (%) compared with compared with with that in that in that in preceding year preceding year preceding year (%) (%) (%) Power 4,738,196,944.73 3,130,675,914.14 33.93 42.68 41.78 0.42 Generation Of which: 0.00 1,891,168,214.98 - -100.00 40.55 - related party transaction Pricing ZSEPC enters into Annual Coal Supply Contract with the coal supplier each year to set down the principles quality, specifications, quantity and price of the coal supply for that year. The coal supplier shall of the supply fuel to ZSEPC at aprice neither higher than the price at which it charges other power plants related for the same type of fuel, nor higher than the price at which ZSEPC can purchase the same type of party fuel in the open market at the time of the price negotiation between both parties. Otherwise, ZSEPC transaction shall have the right to purchase fuel at its own discretion. Necessity The coal supplier of ZSEPC enjoys preferential price of bulk purchase and stable supply/ and transportation channels, which ensure the normal operations of the power plants under ZSEPC. continuity Especially when the coal market price is on the rise, the long term cooperative relationship between of the ZSEPC and the coal supplier is of great importance. ZSEPC will continue the cooperation with the coal related supplier on the precondition that the pricing principles remain unchanged. party transaction 2) Principal Business by Area Area Principal Operating Income Increase/decrease in principal operating income compared with that in preceding (RMB yuan) year (%) East China Area (Note) 4,738,196,944.73 42.68 Note: Due to unified dispatch in the power grid, ZSEPC's power sales is entered into the East China power grid. (2) Operating Results of Controlling and Non-controlling Subsidiaries a. Zhejiang Changxing Power Generation Company Limited (ZCPGC) ZSEPC holds 65% of the equity interest of ZCPGC. As at the end of current report period, ZCPGC has a registered capital of RMB 610 million yuan, with its business scope covering generation and sale of electricity, derivative industries and auxiliary services. It has two 300 MW generating units, of which Unit 1 went into commercial operation on 15 December 2002, and Unit 2 went into commercial operation in May 2003. Now another two 300 MW generating units are under construction. ZCPGC achieved principal operating income of RMB 1.067 billion yuan and net profit of RMB 176 million yuan in 2003. b. Zhejiang Jiahua Power Generation Company Limited (ZJPGC) ZSEPC holds 24% of the equity interest of ZJPGC. As at the end of the current report period, ZJPGC has a registered capital of RMB 1,555.19 million yuan, with its business scope covering generation and sale of electricity, related derivative industries and ancillary services. ZJPGC has four 600 MW generating units under construction, of which Unit 1 will be commissioned in late 2004, and Unit 2, 3 and 4 to be commissioned each at an interval of half year later. ZJPGC yielded no profit yet in 2003. (3) Main Suppliers and Customer a. Main Suppliers Main Suppliers Percentage out of Total Purchase#%#(c) Ningbo Fuxing Electric Fuel CompanyLtd 49.53 Zhejiang Fuxing Electric Fuel Company Ltd 43.18 Changxing Changfeng Energy Company Ltd 2.46 Jingning Jingfeng Energy Company Ltd 1.96 Shanghai Steam Turbine Company Ltd 1.14 b. Customer Due to the inherent characteristics of the power industry, ZPEPC is the grid operator and single buyer in Zhejiang power grid. All the electricity generated by ZSEPC is sold to ZPEPC, with the sale income constituting 100% of the principal operating income of ZSEPC. (4) Operational Problems/Difficulties and Solutions a. Efforts to minimize the effect of coal price hike The coal cost makes up more than 50% of the principal operating cost of ZSEPC. In recent years, the coal price in China has risen continuously as the rapid development of the downstream industries led to mounting demand for coal products. ZSEPC attached great importance to the coal price hike and took a number of measures to control the coal cost. Firstly, the equipment was retrofitted to reduce the coal consumption for power generation; secondly, ZSEPC sought to cultivate long term cooperative relationship with the coal supplier to ensure smooth contract implementation and stable coal price so that the real coal price for ZSEPC was RMB 386 yuan/ton in 2003, on a par with that of 2002; thirdly, ZSEPC strengthened its internal management of coal consumption to raise coal weighing accuracy, reduce transportation loss and mixed coal burning so as to reduce the coal losses. b. Efforts to offset the adverse effect of the contractual power tariff drop in Taizhou Power Plant As approved by Document Zhe Jia Shang (2003)36 of Zhejiang Provincial Pricing Bureau (ZPPB), the contractual power tariff for Taizhou Power Plant under ZSEPC was lowered by RMB 5 yuan/MWh compared with that of 2002 to RMB 352.42 yuan/MWh (excluding tax), effective from 1 January 2003. At the same time, due to the synergic effect of some favorable factors such as the increase in utilization hours of the generating units, the commissioning of new generators, the suspension of Zhejiang Power Market and the raise of power tariff for excess generation, the principal operating income of ZSEPC increased substantially compared with that of 2002, of which the principal operating income of Taizhou Power Plant went up by RMB 347 million yuan compared with that of 2002 to RMB 3,161 million yuan, completely offsetting the adverse effect of the downward adjustment of its contractual power tariff. 2. Investment (1) Use of Proceeds Raised Through Share Listing The proceeds raised from the listing of ZSEPC's shares in 1997 totaled USD 230.59 million (equivalent to RMB 1,910.8759 million yuan). This fund has been used in accordance with the Prospectus as follows: Invested Projects Amount (in Completion Time Income millions yuan) Continued construction of 269.6475 Completed in 1998 Achieved sale income of Unit 8 of Taizhou Power Plant RMB 746.2831 million yuan in 2003 Acquisition of Xiaoshan Power 903.6985 Completed in 1997 Achieved sale income of Plant RMB 509.6481 million yuan in 2003 As approved in the extraordinary shareholders' meeting in 2001, the remaining amount of the proceeds raised from share listing was used to: a. make equity investment in Zhejiang Jiahua Power Generation Company Limited (ZJPGC); b. supplement the working capital of ZSEPC. ZSEPC holds 24% of the equity of ZJPGC. The equity investment in ZJPGC is injected in installments. Based on the Resolution on Increasing Registered Capital adopted in shareholders' general meeting 2002 of ZJPGC, the registered capital of ZJPGC would be increased to RMB 1,555,190,000 yuan (As of 31 December 2003, the registered capital of ZJPGC amounted to RMB 555.19 million yuan). Each shareholder would inject the additional amount in proportion to his equity investment ratio in conformity with ZJPGC's Equity Capital Injection Plan 2003 in 4 installments in 2003. ZSEPC injected equity capital totaling RMB 240 million yuan to ZJPGC in 2003. The registered capital of ZJPGC has been altered to RMB 1,555.19 million yuan. As at the end of the current report period, ZSEPC made cumulative equity capital injection to ZJPGC amounting to RMB 373.2456 million yuan. Jiaxing Power Plant Phase II to be built and operated by ZJPGC is now under construction. It is planned that Unit 1 will be put into operation in the second half of 2004, and the other 3 units to be commissioned by the end of June 2006. (2) Important Investment UsingCapital Not Raised from Share Listing a. Zhejiang Changxing Power Generation Co. Ltd (ZCPGC) ZSEPC holds 65% of the equity of ZCPGC. As at the end of the current report period, the registered capital of ZCPGC amounted to RMB 610 million yuan. In accordance with the shareholding ratio, ZCPGC made equity capital injection amounting to RMB 396.50 million yuan. (a) Phase I (2 x 300 MW) Unit 1 went into commercial operation on 15 December 2002; Unit 2 went into commercial operation on 22May 2003. In this report period, the total profit realized amounted to RMB 176 million yuan. In accordance with the shareholding ratio, the net profit reaped by ZSEPC based on the consolidated statements amounted to RMB 114 million yuan. (b) Phase II (2 x 300 MW) As deliberated and approved by the 5th meeting of the 2nd Board of Directors and the 2nd shareholders' general meeting of ZCPGC, ZCPGC decided to construct the extension project containing 2 x 300 MW generating units. As the controlling shareholder of ZCPGC, ZSEPC convened the 5th meeting of the 2nd Board of Directors on 21 November 2003 to deliberate and approve (by telecommunication) investment in the extension project. Based on the Feasibility Study Report for ZCPGC Project Phase II, the estimated total dynamic investment of Phase II will be RMB 2.585 billion yuan, including the project equity accounting for 20% of the total investment, i.e. about RMB 520 million yuan. The capital needed other than the equity will be sourced from the bank loans. After the project approval is given, the equity capital of the Project Phase II will be contributed by the shareholders in proportion to their shareholding ratio. It is estimated that ZSEPC will make a contribution of RMB 338 million yuan to the project equity capital based on its shareholding ratio, the final total project investment, project equity and the amount of ZSEPC's contribution to the equity being subject to the approval of the feasibility study report. As of the end of this report period, ZSEPC made no additional capital injection to ZCPGC yet. At present, the pre-construction preparation for Phase II is advancing fast. As at 31 December 2003, the cumulative expenses incurred for Phase II of ZCPGC amounted to RMB 154.3535 million yuan. b. Zhejiang Beihai (Tankeng) Hydropower Station Project As approved by the 1st meeting of the 3rd Board of Directors and the 1st extraordinary shareholders' general meeting of ZSEPC in 2003, Zhejiang Provincial Energy Group Corp., Lishui Municipal State-owned Assets Operation Co. Ltd and ZSEPC will make joint investment to construct Zhejiang Beihai (Tankeng) Hydropower Station Project, of which ZSEPC will hold 25% of equity capital. The Project will erect 3 x 200 MW units with a reservoir volume of 4.19 billion cubic meters. The Project Proposal has been approved by the relevant government departments. Based on the Feasibility Study Report for Tankeng Hydropower Station Project, the total budgetary project investment amounts to RMB 4.642 billion yuan, of which 30% equity will be contributed by the investors in proportion to their investment ratio, 70% will be financed with the bank loans. It is estimated that ZSEPC will make a contribution of RMB 325 million yuan to the project equity capital based on its investment ratio, the final total project investment, project equity and the amount of ZSEPC's contribution to the equity being subject to the approval of the feasibility study report. As of the end of this report period, ZSEPC made no capital injection to the Project yet. The pre-construction preparation for Tankeng Hydropower Station Project is now under way expeditiously. c. Xiaoshan Power Plant Gas Turbine Generation Project As approved by the 3rd meeting of the 3rd Board of Directors (by telecommunication) and the 2nd extraordinary shareholders' general meeting of ZSEPC in 2003, ZSEPC will solely invest in Xiaoshan Power Plant Gas Turbine Generation Project, which is also referred to as Xiaoshan Power Plant Phase II to erect 2 sets of 300 MW gas-steam combined cycle generating units combusting the natural gas from the East Sea, in addition to the existing 2 x 130 MW coal-fired generating units of Xiaoshan Power Plant Phase I wholly owned by ZSEPC. The Project is a downstream key gas consumption project to go with the East Sea gas development project. Its Project Proposal has been approved by the relevant government departments. Based on the Feasibility Study Report for Gas Turbine Generation Project, the planned project investment totals RMB 2.576 billion yuan, of which 25% equity will be paid in by ZSEPC solely, 75% will be financed with the bank loans. As of 31 December 2003, the project cost incurred by Xiaoshan Power Plant amounted to RMB 10.2483 million yuan. The pre-construction preparation for Xiaoshan Power Plant Gas Turbine Generation Project is now under way expeditiously. d. Zheneng Lanxi Power Generation Co. Ltd As approved by the 6th meeting of the 3rd Board of Directors (by telecommunication) and the 1st extraordinary shareholders' general meeting of ZSEPC in 2004, Zhejiang Provincial Energy Group Corp., Lanxi Municipal Power Development Investment Co. Ltd and ZSEPC will co-finance to establish Zheneng Lanxi Power Generation Co. Ltd to invest in construction and future operation of Zheneng Lanxi Power Plant, of which ZSEPC will hold 25% of equity capital. The Project will erect 4 x 600 MW units. Based on the Feasibility Study Report for Zhejiang Zheneng Power Plant Project, the total budgetary dynamic project investment amounts to RMB 11.025 billion yuan, of which 20% i.e. RMB 2.2 billion yuan will be equity capital, the rest will be financed with the bank loans. It is estimated that ZSEPC will make a contribution of RMB 550 million yuan to the project equity capital based on its investment ratio, the final total project investment, project equity and the amount of ZSEPC's contribution to the equity being subject to the approval of the feasibility study report. The registered capital of Zheneng Lanxi Power Generation Co. Ltd will be contributed by the shareholders in proportion to their investment ratio in installments consistent with the project progress. The initial registered capital of Zheneng Lanxi Power Generation Co. Ltd will be RMB 132 million yuan. So the first installment fo ZSEPC's contribution will be RMB 33 million yuan. As of the end of this report period, ZSEPC made no capital injection to the Project yet. The pre-construction preparation for Zheneng Lanxi Power Plant Project is now under way expeditiously 3. Analysis of Financial Position, Operating Results and Cash Flow (1) Analysis of Financial Position a. Total asset The total asset of ZSEPC in the current report period stands at RMB 8.680 billion yuan, which increased by RMB 780 million yuan in comparison with the amount of RMB 8.602 billion yuan in 2002, representing no significant changes. b. Shareholders' equity The shareholders' equity in the current report period amounts to RMB 6.009 billion yuan, which increased by RMB 124 million yuan as opposed to RMB 5.885 billion yuan in 2002. For detailed reasons of the change, refer to Item 3 of Section II herein entitled 'degreesChanges in Shareholders' Equity in Current Report period'+/-. (2) Analysis of Operating Results a. Principal Operating Income The principal operating income realized by ZSEPC grew by 42.68% to RMB 4.738 billion yuan in the current report period compared with that of the preceding year, due to an increase of 49.57% in the amount of electricity sale. The increase in the electricity sales resulted from the following factors: (a) ZCPGC's Unit 1 coming into operation on 15 December 2002 and Unit 2 coming into operation on 22 May 2003 increased ZCPGC's electricity sales by 3.427 billion kwh compared with that in the previous year; (b) Against the backdrop of continuous rapid economic development and lasting heat wave and drought giving rise to unprecedented power shortage in Zhejiang, ZSEPC seized the market opportunity to utilize the potential of the available generators for more power generation and sales to the extent that production safety is ensured. Power Plants wholly Electricity Sales (in billion kwh) Principal Operating Income owned or controlled by ZSEPC (in RMB billion yuan) 2003 2002 Increase/Decrease 2003 2002 Increase/Decrease Taizhou Power Plant 96.77 82.76 16.93% 31.61 28.14 12.33% Xiaoshan Power Plant 16.55 15.75 5.08% 5.10 4.89 4.29% ZCPGC 34.81 0.53 6467.92% 10.67 0.18 5827.78% (Note) (Note) Total 148.13 99.04 49.57% 47.38 33.21 42.68% Note: Unit 1 of ZCPGC went into commercial operation in December 2002 and Unit 2 in May 2003. b. Principal Operating Profit The principal operating profit of ZSEPC increased by 43.68% to RMB 1.556 billion yuan in the current report period compared with that of 2002, which is mainly attributable to the increase in the principal operating income. c. Returns on Investment The returns on investment of ZSEPC decreased by RMB 180 million yuan to RMB C147 million yuan in this report period compared with that of 2002, which is mainly due to the allocation of the devaluation reserve for long-term investment amounting toRMB 180 million yuan after Southern Securities was taken over by the government. d. In this report period, the non-principal operating profit and the net value of the non-operating gains/losses of ZSEPC underwent no significant changes. ZSEPC hadno subsidy income. e. Net Profit The net profit realized by ZSEPC in this report period increased by 11.69% to RMB 609 million yuan compared with that of 2002. The increase of the net profit is less than the increase of the principal operating profit mainly because of the allocation of the devaluation reserve for long term investment and the deduction of the minority shareholders' equity. (a) the lump-sum housing subsidy and the service length subsidy totaling RMB 50.44 million yuan were recorded as the current administrative expenses. (b) Zhejiang Changxing Power Generation Company's establishment cost of RMB 53.22 million yuan was recorded as the current administrative expenses. d. The non-operating cost increased by RMB 22.37 million yuan in the current report period compared with that of the preceding year, which is mainly attributable to the net losses on retirement and transfer of fixed assets. e. The increase in income tax payment is due to the fact that from 2002 onwards, ZSEPC no longer enjoys the preferential treatment of the local income tax refund in accordance with the relevant stipulations of Ministry of Finance. (3) Analysis of Cash Flow Net increase in cash and cash equivalents: The net increase in cash and cash equivalents amounted to RMB C37,397,618.65 yuan, of which the net cash flow generated from the operating activities was RMB 1,416,710,611.72 yuan, the net cash flow generated from the investment activities was RMB C905,770,778.89 yuan, and the net cash flow generated from the financing activities was RMB C548,244,426.03 yuan. 4. Loss of Corporate Assets (1) Allocation of Devaluation Reserve for Long-term Investment As approved in the 7th meeting of the 2nd Board of Directors of ZSEPC, ZSEPC made capital contribution of RMB 220 million yuan to acquire 200 million shares of Southern Securities, accounting for 5.78% of the total stock of the latter. As of the end of 2002, the book investment cost of ZSEPC amounted to RMB 220 million yuan. Due to its disorderly management, weak internal control and misoperation, the financial position of Southern Securities deteriorated so much that China Securities Regulatory Commission and Shenzhen Municipal Government issued a joint announcement to take over the administration of Southern Securities. In the light of the aforesaid situation, ZSEPC decided to allocate devaluation reserve for this long-term investment in accordance with the relevant accounting standards. As Southern Securities is now under thorough auditing and investigation, it is impossible to make accurate allocation of the devaluation reserve for long-term investment before release of the auditing result. For accounting soundness, it is decided for ZSEPC to allocate the devaluation reserve for long-term investment amounting to RMB 180.15 million yuan based on the auditing information provided by the auditor of Southern Securities. (2) Retirement and Inventory Loss of Corporate Assets In 2003, technical renovation and expiry of equipment service life led to net losses on retirement of fixed assets of ZSEPC amounting to RMB 29.4416 million yuan; equipment replacement and natural depletion led to net losses on retirement and inventory loss of current assets amounting to RMB 649,400 yuan. The above losses has been examined and confirmed by Zhejiang Pan-China Certified Public Accountants. 5. Changes in Accounting Policies and Accounting Assumptions (1)The cash dividends in the profit distribution proposal made by the Board of Directors between the balance sheet date of the reported year and the approval of the financial statements was previously treated by ZSEPC as post-adjustment and recorded as'degrees dividends payable'+/-. Now this will be disclosed separately in the notes to financial statements without accounting treatment in line with the relevant stipulations. Through retroactive adjustment, this accounting policy change led to adjustment of the beginning amount of retained earnings and other beginning amounts of relevant accounting items. The columns of the amount in previous year in the statement of profit and profit distribution were filled in with the adjusted figures. The cumulative impact of the above accounting policy change amounts to RMB 498,480,000.00 yuan. Due to this accounting policy change, the dividends payable at the end of 2002 was decreased by RMB 498,480,000.00 yuan; the retained earnings/undistributed profit at the beginning of 2003 was increased by RMB 498,480,000.00 yuan; the beginning amount of undistributed profit in the statement of profit and profit distribution for the previous year was increased by RMB 502,500,000.00 yuan. (3) In line with Document Cai Kuai (2003)10 of the Ministry of Finance, for the external investment after the issuance of this document, the difference by which ZSEPC's initial investment cost is less than its equity share of the investee is recorded as 'degreescapital reserve-equity investment reserve'+/-. For the external investment before the issuance of the aforesaid document that has been recorded as 'degreeslong-term equity investment-equity investment difference'+/-, no retroactive adjustment will bemade, with its balance being treated in line with the old accounting policy until the finish of amortization. The Board of Directors think that the above changes in the accounting policy and accounting assumptions were made based on the Chinese accounting standards, systems and related explanations, and that they have no substantive effect on the Company. 6. Impact of Changes in Operational Environment, Policies and Regulations on Production and Operations of ZSEPC (1) Zhejiang Power Market As Zhejiang province suffered severe power shortage, Zhejiang Power Market Dispatching and Trade Center suspended operation of the power market in accordance with the Market Code on 2 July 2003. Up to now, the market has not been re-opened. The electricity sale is settled at the contractual price. (2) East China Power Market The State Electricity Regulatory Commission (SERC) issued Notice on Pilot East China Power Market to carry out the pilot power market in East China, which will cover Shanghai, Jiangsu, Zhejiang, Anhui and Fujian. Subsequently, SERC issued Document Ban Shi Chang No.(2004)3 entitled Notice on Preparation for Mimic Operation of East China Power Market taking into account the realities of East China power grid and general arrangement for establishment of the pilot East China power market. In the light of the Notice, the mimic operation of East China Power Market will be commenced on 18 May 2004. The market code governing the market operation will be set forth before mid-April 2004. As all the power plants owned or controlled by ZSEPC are located in the area covered by East China power market, ZSEPC will closely follow and study the operating code of East China power market. In view of the power shortage in East China at present, it is forecasted that the establishment of East China power market will have minimal impact on ZSEPC in the near future. (3) Power Tariff Based on Document Zhe Jia Shang No.(2003)445 Notice on Adjustmentof Power Tariff Applicable to ZPEPC-dispatched Coal-fired Power Plants from ZPPB, the tariff rate applicable to the ZPEPC-dispatched coal-fired power plants will be raised by 0.007 yuan/kwh (including tax), effective from 1 January 2004. This applies to Taizhou Power Plant, Xiaoshan Power Plant and ZCPGC. This move will reduce the cost pressure brought about by the coal price hike. (4) Coal Price The market price of coal continues to rise with the mounting coal demand. It was proposed by the relevant governmental departments in the national coal order placing meeting in 2004 that the coal price should increase by RMB 12 yuan/ton on average nationwide. But the coal price rise sustained by ZSEPC is still greater than this amount. In addition, coal transportation cost went up by a wide margin, which contributed to coal purchase cost of ZSEPC ( based on coal price to power plant). Now ZSEPC is negotiating with the coal supplier about the coal price for 2004, with the agreement notyet signed. (5) Emission Charges Based on Emission Charges Standards Management Method jointly issued by the State Planning Commission, the Ministry of Finance and the State Agency of Environmental Protection, the emission charges of sulfur dioxide will be collected at a standard of RMB 0.2 yuan per one unit of pollutants for the first year, RMB 0.4 yuan per unit for the second year (effective from 1 July 2004) and RMB 0.6 yuan per unit for the third year (effective from 1 July 2005). The emission of NOx is not charged before 1 July 2004, but will be charged at RMB 0.6 yuan per one unit of pollutants after 1 July 2004. The raising of the charge standards will increase the cost expenditure of ZSEPC. 7. The financial statements of ZSEPC for 2003were audited by Zhejiang Pan-China Certified Public Accountants and PricewaterhouseCoopers Zhong Tian CPAs Co. Ltd. Both produced standard Auditor's Reports without reservations. The Chinese certified accountants Wang Yuehao, Chen Shu and Huang Yuanxi produced Auditor's Report No. Zhe Tian Kuai Shen (2003)383 in its standard form without reservations. 8. Day-to-day Work of Board of Directors (1) Board Meetings and Resolutions Nine board meetings were held in 2003. The subjects of the meetings and resolutions formed are as follows: a. The 24th meeting of the 2nd board of directors of ZSEPC was held on 26 March 2003. The meeting discussed and approved: (a) the Work Report of the Board of Directors 2002; (b) the General Manager's Work Report 2002; (c) the Final Accounting Statement 2002, and the Statement on Changes in Accounting Policies, Accounting Assumptions and Correction of Important Accounting Errors; (d) the Annual Report 2002 and itssummary; (e) the Profit Distribution Proposal for 2002; (f) the proposal to allocate four reserves; (g) the Financial Budget for 2003; (h) the proposal to renew appointment of the accounting firms; (i) the proposal to change shareholdersof Zhejiang Natural Gas Development Co. Ltd (ZNGDC), which agrees to let China Sea Oil Corp. transfer its 37% equity of ZNGDC to its wholly owned subsidiary C Zhonghai Oil Gas & Power Generation Co. Ltd; and (j) the proposal to change shareholders of ZCPGC, which agrees to let ZPEPDC transfer its 20% equity of ZCPGC to Zhejiang Hongfa Energy Co. Ltd. The resolutions formed in this board meeting were announced in China Securities Journal, Shanghai Securities News, Hongkong-based South ChinaMorning Post and Hongkong-based Wen Hui Bao dated 28 March 2003. b. The 25th board meeting of ZSEPC was held through telecommunication on 21 April 2003. The meeting discussed and approved the Quarterly Report for the first quarter of 2003, which was published in China Securities Journal, Shanghai Securities News, Hongkong-based South China Morning Post and Hongkong-based Wen Hui Bao dated 23 April 2003. c. The 26th board meeting of ZSEPC was held on 28 May 2003. The meeting discussed and approved the following: (a) the proposal to amend the Articles of Association of ZSEPC; Article 97 of the Articles of Association reads 'degreesthe Board of Directors is made up of 17 directors, of which 3 are independent directors'+/-. It is amended to read 'degreesthe Board of Directors is made up of 15 directors, of which 5 are independent directors'+/-. (b) the proposal to re-elect the Board of Directors upon expiry of tenure of office; Upon expiry of the tenure of the second Board of Directors of ZSEPC, the nomination and election procedure prescribed in the Articles of Association was followed and votes were taken to elect the following persons to be the candidates of the third Board of Directors of ZSEPC: Sun Yongsen, Wang Xiaosong, Shou Desheng, Xie Guoxing, Hu Genfa, Cao Lu, Li Hua, Xing Junjie, Liu Ranxing, Li Jianguo, Wu Xianquan, Qian Zhongwei, Huang Dongliang, Huan Guocang and Mao Fugen, of whom Wu Xianquan, Qian Zhongwei, Huang Dongliang, Huan Guocang and Mao Fugen are candidates of independent directors. (c) the proposal to hold the shareholders' general meeting for 2002. The resolutions formed in this board meeting were announced in China Securities Journal, Shanghai Securities News, Hongkong-basedSouth China Morning Post and Hongkong-based Wen Hui Bao dated 30 May 2003. d. The 1st meeting of the 3rd Board of Directors of ZSEPC was held on 30 June 2003. The meeting discussed and approved: (a) the proposal to elect Chairman of Board of Directors of ZSEPC, electing Sun Yongsen to be Board Chairman; (b) the proposal to elect Vice Chairman of Board of Directors of ZSEPC, electing Wang Xiaosong to be Vice Chairman; (c) the proposal to staff ad hoc committees under the 3rd Board of Directors as follows: Strategic Committee: Sun Yongsen (Director), Wang Xiaosong, Qian Zhongwei, Xie Guoxing, Wu Xianquan and Shou Desheng Auditing Committee: Huang Dongliang (Director), Mao Fugen, Hu Genfa, Xing Junjie and Huan Guocang Remuneration & Appraisal Committee: Qian Zhongwei (Director), Huang Dongliang, Wu Xianquan, Mao Fugen, Liu Ranxing, Cao Lu, Li Hua and Li Jianguo (d) the proposal to appoint General Manager of ZSEPC, appointing Shou Desheng as General Manager; (e) the proposal to appoint Deputy General Managers and Chief Accountant, appointing Wu Yaozhong, Chen Juemin and Xia Jinghan as Deputy General Managers and Hu Senjian as Chief Accountant of ZSEPC; (f) the proposal to appoint Secretary to Board of Directors of ZSEPC, appointing Xia Jinghan as Secretary to Board of Directors; (g) the proposal to invest in Tankeng Hydropower Station Project using ZSEPC's own capital to hold 25% of the equity of Tankeng Hydropower Station; and (h) the proposal to hold the first extraordinary shareholders' general meeting in 2003. The resolutions formed in this board meeting were announced in China Securities Journal, Shanghai Securities News, Hongkong-based South China Morning Post and Hongkong-basedWen Hui Bao dated 2 July 2003. e. The 2nd meeting of the 3rd Board of Directors was held through telecommunication on 8 August 2003. The following resolutions were formed in the meeting: (a) The Interim Report 2003 and its summary were discussed and approved for release to the public; (b) It is agreed that no interim profit distribution for 2003 will be made, nor conversion of common reserves into bonus shares. The Interim Report 2003 was published in China Securities Journal, Shanghai Securities News, Hongkong-based South China Morning Post and Hongkong-based Wen Hui Bao dated 12 August 2003. f. The 3rd meeting of the 3rd Board of Directors was held through telecommunication on 12 September 2003. The following resolutions were formed in the meeting: (a) It is agreed that ZSEPC will solely invest in Xiaoshan Power Plant Gas Turbine Generation Project; (b) It is agreed that the proposal to solely invest in Xiaoshan Power Plant Gas Turbine Generation Project will be referred to the second extraordinary shareholders' general meeting for review. The resolutions formed in this board meeting were announced in China Securities Journal, Shanghai Securities News, Hongkong-based South China Morning Post and Hongkong-based Wen Hui Bao dated 16 September 2003. g. The 4th meeting of the 3rd Board of Directors was held through telecommunication on 29 October 2003. The meeting discussed and approved (a) the Quarterly Report of ZSEPC for the 3rd quarter of 2003; (b) Stipulations on Management of Relationship between ZSEPC Investors The resolutions formed in this board meeting were announced in China Securities Journal, Shanghai Securities News, Hongkong-based South China Morning Post and Hongkong-based Wen Hui Bao dated 31 October 2003. h. The 5th meeting of the 3rd Board of Directors was held through telecommunication on 21 November 2003. The following resolutions were adopted in the meeting: (a) It is agreed for ZCPGC to construct Changxing Power Plant Phase II; (b) It is agreed for ZCPGC to pay for the pre-construction cost to ensure smooth progress of the pre-construction preparation including site leveling and supply of electricity, water, telecommunication and transportation facilities; (c) In view of the fact that the project equity of Phase II will be contributed by the same shareholders by adding their capital injection in proportion to their shareholding ratio, the Board of Directors of ZSEPC will review the additional capital injection again after the project approval is obtained. The resolutions formed in this board meeting were announced in China Securities Journal, Shanghai Securities News, Hongkong-based South China Morning Post and Hongkong-based Wen Hui Baodated 25 November 2003. i. The 6th meeting of the 3rd Board of Directors was held through telecommunication on 19 December 2003. The following resolutions were adopted in the meeting: (a) It is agreed that ZSEPC will invest in Zheneng Lanxi Power Generation Co. Ltd (ZLPGC) and contribute 25% of the equity of ZLPGC. (b) It is agreed that, in conformity with the resolution of the board meeting and the shareholders' general meeting of ZLPGC, the capital injection will be made in installments consistent with the project progress; and that the initial installment of ZSEPC will amount to RMB 33 million yuan as required by ZLPGC to put in place its initial registered capital. (c) It is agreed to refer this proposal to the shareholders' general meeting for review, with the details in relation to holding of the shareholders' general meeting to be determined by the Board Chairman. The resolutions formed in this board meeting were announced in China Securities Journal, Shanghai Securities News, Hongkong-based South China Morning Post and Hongkong-based Wen Hui Bao dated 23 December 2003. (2) Implementation of Resolutions of Shareholders' General Meeting by the Board of Directors In the current report period, the Board ofDirectors of ZSEPC carried out the various resolutions passed in the shareholders' general meeting in earnest, focusing their work on the various targets set by the shareholders' general meeting. Thanks to the joint effort of the whole staff, ZSEPC over-fulfilled the various targets laid down in the shareholders' general meeting, maintained production safety and workforce stability, and made breakthroughs in power project investment. All the cash dividends of ZSEPC have been distributed. Thedividends payable to the domestic investment shareholders were directly transferred to their designated accounts; the dividends payable to B share holders have been distributed by China Securities Registration & Settlement Company Ltd Shanghai Branch, the agent trusted by ZSEPC for distribution of dividends to B share holders. 9. Profit Distribution Proposal According to whichever is lower of the financial statements 2002 audited by the domestic or the international accounting firms, based on the after-tax profit of the Parent Company as audited by the domestic amounting firm amounting to RMB 545,474,480.11 yuan less allocation of 10% statutory surplus reserve and 10% statutory common welfare reserve totaling RMB 109,094,896.02 yuan,plus the Parent Company's beginning undistributed profit amounting to RMB 812,457,756.14 yuan, then the distributable profit of ZSEPC in 2002 is equal to RMB 1,248,837,340.23 yuan. Taking 2.01 billion shares at the end of 2002 as a base figure, ZSEPC proposed to distribute cash dividends of RMB 2.48 yuan per 10 shares (including tax), totaling RMB 498,480,000.00 yuan. 10. Other Matters XXXXX VIII. Report of Supervisory Committee 1. Meetings of Supervisory Committee Three supervisory committee meetings were convened in the current report period, as follows: (1) The 8th meeting of the 2nd supervisory committee was held on 26 March 2003, which discussed and approved: a. The supervisory committee's Work Report for 2002 b. The Annual Report 2002 and its summary The supervisory committee deems that the Annual Report 2002 and its summary are true, accurate and complete, free of false statement, material omissions or serious misleading information; that the Statement on Changes in Accounting Policies, Accounting Assumptions and Correction of Important Accounting Errors is agreeable; that the Auditor's Reports in their standard form without reservations produced by both the domestic and the international accounting firms give a true and fair account of the financial position and operating results of ZSEPC; and that ZSEPC has been operating by the law with no problem with its financial position, use of the proceeds raised from share listing, purchase of assets and related party transactions. The resolutions formed in this Supervisory Committee meeting were announced in China Securities Journal, Shanghai Securities News, Hongkong-based South China Morning Post and Hongkong-based Wen Hui Bao dated 28 March 2003. (2) The 9th meeting of the 2nd Supervisory Committee was held on 28 May 2003. The meeting discussed and approved the proposal to re-elect supervisory committee members upon conclusion of their tenure of office. Upon conclusion of the tenure of the second Supervisory Committee of ZSEPC, the following persons were elected to be the candidates of the third Supervisory Committee of ZSEPC representing shareholders and employees after taking votes in compliance with the nomination and election procedure prescribed in the Articles of Association: Huang Lixin, Yang Jianxiong, Sun Chaoyang, Fu Muqing, Chen Xi, Wang Jiafu and Huang Guanlin, of whom Wang Jiafu and Huang Guanlin are representatives of the employees. The resolutions formed in this Supervisory Committee meeting were announced in China Securities Journal, Shanghai Securities News, Hongkong-based South China Morning Post and Hongkong-based Wen Hui Bao dated 30 May 2003. (3) The 1st meeting of the 3rd Supervisory Committee of ZSEPC in 2003 was held on 30 June 2003. The meeting discussed and approved the proposal to elect convener of the Supervisory Meeting, electing Huang Lixin to be the convener of the Supervisory Committee meeting. The resolutions formed in this Supervisory Committee meeting were announced in China Securities Journal, Shanghai Securities News, Hongkong-based South China Morning Post and Hongkong-based Wen Hui Bao dated 2 July 2003. 2. Independent Opinionof Supervisory Committee (1) Supervision of ZSEPC's Operation Within the Law In 2002, with the power bestowed by the Company Law and the Articles of Association, the Supervisory Committee exercised supervision over the organizational structure of the board, the proceeding of the board meetings, the resolutions, the board's execution of the resolutions of the shareholders' general meeting and the performance of the senior management, and formed the opinion that ZSEPC carried out its operations in accordance with the relevant laws/ regulations and the administrative rules/systems. The Board of Directors of ZSEPC was re-elected in 2003 upon expiry of tenure. Three ad hoc committees, namely the Strategic Committee, the Auditing Committee and the Remuneration & Appraisal Committee under the new Board were established. Independent directors make up 1/3 of the Board. They predominate in the Auditing Committee and the Remuneration & Appraisal Committee and act as conveners. The organizational structure of the Board conforms to the Rules for Governance of Listed Companies, with its internal control mechanism further refined. The Supervisory Committee deems that the Board of Directors and the management team of ZSEPC the performed their duties in accordance with the law, regulations and the Articles of Association and carried out the various resolutions with the aim to maximize the interest of the shareholders. (2) Supervision of Financial Position of ZSEPC The Supervisory Committee deems examination of the corporate financial position as its first and foremost responsibility. It scrutinized the regular financial statements of ZSEPC, listened to the reports given by the management team and gained a full accurate knowledge of the financial position of ZSEPC. The Committee thinks that the rapid increase in the operating results of ZSEPC is not only due to the power shortage in Zhejiang. But more importantly, it is due to ZSEPC's serious efforts to adhereto production safety, focus on economic benefit, strengthen corporate management, further improve equipment health, expedite investment in power construction and asset expansion. The Supervisory Committee is of the opinion that the Financial Statements of ZSEPC for 2003 gives a true, accurate and complete account of the financial position and operating results of ZSEPC. Both Zhejiang Pan-China Certified Public Accountants and PricewaterhouseCoopers Zhong Tian CPAs Co. Ltd produced the Auditor's Reports in their standard forms with no reservations. (3) Supervision of Important Decisions The Supervisory Committee attended each Board meetings and shareholders' general meetings as observers to exercise pre-, mid- and post-supervisionof the important decisions with good effectiveness. In 2003, ZSEPC seized the opportunity to make external investment to hold controlling or non-controlling shares of power plants with good potential. The Supervisory Committee is of the opinion that power generation is the principal business of ZSEPC so extension of generating capacity is the main means for ZSEPC to increase income. Against the backdrop of rapid economic development and severe power shortage in Zhejiang, ZSEPC got hold of the favorable opportunity to participate in construction of new generators with good efforts so as to lay the foundation and provide potential for its future development. (4) Supervision of Use of Proceeds Raised from Share Listing As approved in the extraordinary shareholders' meeting in 2001, the remaining amount of the proceeds raised from share listing was used to: a. make equity investment in Zhejiang Jiahua Power Generation Company Limited (ZJPGC); b. supplement the working capital of ZSEPC. Based on the Resolution on Increasing Registered Capital adopted in shareholders ' general meeting 2002 of ZJPGC, ZSEPC injected equity capital totaling RMB 240 million yuan to ZJPGC in 2003 as per its investment ratio of 24%. As of the end of 2003, the registered capital of ZJPGC amounted to RMB 1,555.19 million yuan, to which ZSCPC has made cumulative capital contribution amounting to RMB 373.25 million yuan. The construction for 4 x 600 MW generating units of ZJPGC has been going ahead smoothly since commencement, thanks to the joint effort of the owner and the constructor to improve construction management and tap construction potential while ensuring safety, quality and cost control. The original plan to commission the first generating unit at the end of 2004 can be advanced, and so can the other generating units. The Supervisory Committee believes that commissioning of the 4 x 600 MW generating units one after another will be the new profit engines of ZSEPC. (5) Supervision of Related Party Transaction The Supervisory Committee is of the opinion that the related parties transactions between ZSEPC and the related parties in the past year were governed by the agreements or contracts between them. Both sides exercise their rights and fulfill their obligations in strict accordance with the agreement/ contract, to no detriment of the interest of ZSEPC and the interest of the medium and small shareholders of ZSEPC. There was no inside transactionsbetween them. (6) Explanation About Allocation of Long-term Investment Devaluation Reserve and Losses on Retirement of Corporate Assets a. Allocation of Long-term Investment Devaluation Reserve Southern Securities in which ZSEPC investedwas taken over by the government on 2 January 2004 due to its disorderly management, weak internal control and mis-operation leading to deteriorating financial position. The Supervisory Committee considers that ZSEPC' move to allocate devaluation reserve for this long-term investment amounting to RMB 180 million yuan before release of the auditing result conforms to the principle of accounting soundness. The Supervisory Committee further considers that ZSEPC should draw a lesson from the incident of Southern Securities, do thorough prior investigation and make prudent investment decisions so as to safeguard the interest of ZSEPC and its shareholders. b. Losses on Retirement of Corporate Assets In 2003, technical renovation and expiry of equipment service life led to net losses on retirement of fixed assets of ZSEPC amounting to RMB 29.4416 million yuan; equipment replacement and natural depletion led to net losses on retirement and inventory loss of current assets amountingto RMB 649,400 yuan. The Supervisory Committee considers that it is reasonable for ZSEPC to take stock of the fixed assets and the inventory items at year end and dispose of retired assets in accordance with the prevailing accounting system. The above losses has been examined and confirmed by Zhejiang Pan-China Certified Public Accountants. IX. Important Events 1. Major Events of Litigation or Arbitration ZSEPC was not subjected to any major events of litigation or arbitration during the current report period. 2. Purchase/Sale of Assets and Acquisition/Merger ZSEPC carried out no purchase/sale of assets or acquisition/merger in the current report period. 3. Important Related Party Transactions (1) Purchase of Goods Related Party Transaction Pricing Amount Settlement Method Percentage out Principle of Same Type of (RMB Yuan) Transaction Zhejiang Fuxing Coal purchase Note 1 880,824,043.31 Based on the 49.53% Electric Power actual volume of Fuel Company Ltd annual purchase Ningbo Fuxing Coal purchase Note 1 1,010,344,171.67 Based on the 43.18% Electric Power actual volume of Fuel Company Ltd annual purchase Changxing Purchase of Agreement 50,209,183.38 Based on the 2.46% Changfeng Energy fuel oil and price actual volume of Co. Ltd production annual purchase material (Note 2) Jingning Jingfeng Purchase of Agreement 39,933,021.49 Based on the 1.96% Energy Co.Ltd production price actual volume of material annual purchase (Note 2) Note 1: The fuel needed by ZSEPC for power generationis supplied by Zhejiang Fuxing Electric Power Fuel Company Limited (ZFEPFC) (of which ZSEP has non-controlling shares) and its subsidiary Ningbo Fuxing Electric Power Fuel Company Limited (NFEPFC), who entered into the Fuel Supply Agreement with ZSEPC in May 1997. The Agreement is valid for 20 years. Pursuant to the Agreement, both parties shall agree an Annual Coal Supply Contract each year to determine the quality, specifications, quantity and price of the coal supply for that year. ZFEPFC and NFEPFC shall supply fuel to ZSEPC at a price neither higher than the price at which it charges other power plants for the same type of fuel, nor higher than the price at which ZSEPC can purchase the same type of fuel in the open market at the timeof the price negotiation between both sides. Otherwise, ZSEPC shall have the right to purchase fuel at its own discretion. Note 2: ZCPGC signed Agreement on Trusted Purchase and Custody with Changxing Changfeng Energy Co. Ltd (whose day-to-day management involves ZCPGC) and Jingning Jingfeng Energy Co. Ltd (whose day-to-day management involves ZCPGC) on 28 December 2002 and 25 March 2003 respectively. Based on the Agreements, ZCPGC purchased fuel oil and production material from the two companies in this report period. The two agreements will be valid until 30 September 2003. Starting from 1 October 2003, ZCPGC will make purchase on its own. (2) Supply of Labor Service Related Party Transaction Pricing Amount Settlement Method Percentage out Principle of Same Type of (RMB Yuan) Transaction Taizhou City (Note 3) Agreement 32,009,871.00 Based on annual 23.09% Haitian Electric Price project Power Engineering construction Corp. completed Note 3: Taizhou Power Plant, Xiaoshan Power Plant and ZCPGC under ZSEPC paid RMB 32,009,871.00 yuan to Taizhou City Haitian Electric Power Engineering Corp. (whose day-to-day managementinvolves Taizhou Power Plant) for overhaul of auxiliary equipment and common facilities. (3) Credits and Debts a. Repayment of Long-term Liabilities ZSEPC signed a Liabilities Contract with the creditor, namely ZPEPDC in 1997, whereby ZSEPC borrowed a loan for construction of the Phase IV Project (Units 7 and 8) for 10 years. It is specified in the Contract that ZSEPC shall repay the principal and interest in installments to ZPEPDC after completion of the trial production of the new generating units. Then ZSEPC and the creditor made some amendment to the terms and conditions of Liabilities Contract in March 1999. And they signed Supplementary Agreement to Liabilities Contract subsequently on 22nd March 1999, which re-adjusted and confirmed the actual investment, the liability ratio and the amount of liabilities of the creditor. On 29 December 2000, ZSEPC, ZPEPDC and Shanghai Pudong Development Bank Hangzhou Branch entered into Trust Loan Contract, by which the remaining debt owing to ZPEPDC up to the end of 2000 was transformed to 4-year-term trust borrowing totaling RMB 317,892,000 yuan. After repayment, the amount of this long-term liability as at the end of 2001 was RMB 739,761,000.00 yuan. Based on Agreement on Liabilities Repayment in 2001 and Thereafter signed by the 3 parties on 28 February 2001, the amount of the repayment in 2003 and the changes are as follows: Item Amount (RMB yuan) Total amount of liabilities at end of 2001 238,419,000.00 Amount repaid in 2002 79,473,000.00 Amount repaid in 2003 79,473,000.00 Transferred to long-term liabilities due within 1 79,473,000.00 year Amount of long-term liabilities as at end of 2003 0.00 b. Trust loans (a) ZSEPC entrusted Industrial & Commercial Bank of China, Hangzhou Qingchunlu Branch to provide trust loans to Zhejiang Changxing Power Generation Company Limited. Time Loan Amount Term Repayment Time Annual Income Interest (RMB million yuan) Rate 30/01/2002 50 1 year 29/01/2003 5.85% Total income from trust 25/09/2002 50 1 year 24/09/2003 5.31% loan amounts to RMB 25/10/2002 50 1 year 24/10/2003 5.31% 13.1253 million yuan. 25/12/2002 50 1 year Advanced to 18/ 5.31% After deducting the bank 12/2003 loan income at the same 27/01/2003 50 1 year Advanced to 18/ 5.31% interest rate for the 12/2003 term, it amounts to RMB 29/01/2003 50 1 year Advanced to 18/ 5.31% 8.4 million yuan. The 12/2003 trust loan income is 04/03/2003 50 1 year Advanced to 18/ 5.31% canceled out in the 12/2003 consolidated statements. ZSEPC provided trust loan to ZCPGC because (a) ZCPGC needs a large amount of bank loan for construction of 2 x 300 MW generating units; (b) ZSEPC has surplus fund to provide its subsidiary with power construction fund in order to raise capital use efficiency while preserving capital safety. China Securities Regulatory Commission issued Notice on Regulating Capital Move between Listed Companies and Related Parties and External Guarantees by Listed Companies (Document Zheng Jian Fa (2003)56) in August 2003. In the light of the stipulation inthe Notice that 'degreesListed companies shall not provide trust loans to related parties through banks or non-bank financial institutions'+/-, ZSEPC terminated the agreement and recovered the trust loan in full in December 2003. (b) In the current report period, ZPEPDC provided trust loans in amount of RMB 26 million yuan and RMB 134 million yuan totaling RMB 160 million yuan through China Construction Bank Hangzhou Zhijiang Branch to ZCPGC, with the terms of the two loans being from 2 July2003 to 2 July 2004 and from 15 December 2003 to 14 December 2004 respectively. The trust loan in amount of RMB 320 million that ZPEPDC provided to ZCPGC in the previous period was recovered in this report period. (c) ZPEGC provided trust loan inamount of RMB 200 million yuan to ZCPGC through China Construction Bank Hangzhou Zhijiang Branch with the loan term being from 15 December 2003 to 21 December 2012. (4) Guarantees a. Providing ZCPGC with Shareholder's Guarantee In Proportion toShareholding Ratio ZCPGC is the project company responsible for construction and operation of ZCPGC Project Phase I 2 x 300 MW(originally called Changxing Power Plant Phase IV, commissioned on 22 May 2003) and Phase II 2 x 300 MW (under construction). ZSEPC holds 65% of its equity. The other shareholders of ZCPGC as at the end of this report period are Zhejiang Hongfa Energy Investment Co. and ZPEPDC. Based on Document Jing Mao Tou Zhi (2001)460 Approval of Feasibility Study Report for Changxing Power Plant Phase IV issued by the State Economic & Trade Commission, the planned total investment of ZCPGC Project 2 x 300 MW amounts to RMB 2.593 billion yuan, of which 25% is the project equity, 75% are the bank loans. ZCPGC and China Construction Bank Changxing County Branch signed Fixed Assets Loan Contract for the Project in December 2001, based on which China Construction Bank Changxing County Branch agreed to provide ZCPGC with a loan amounting to RMB 1.5 billion yuan (In addition, the shareholders provided trust loans amounting to RMB 300 million yuan). Since the amount of loan is substantial, the Bank required shareholders' guarantees to ensure security of the loan capital. So the shareholders of ZCPGC separately signed Guarantee Contract with China Construction Bank Changxing County Branch based on the principle of providing shareholders' guarantees for the project loan in proportion to their shareholding ratios without joint liability among shareholders. According to the Guarantee Contract, ZSEPC is to provide guarantee for the loan to ZCPGC up to a ceiling of RMB 1.07 billion yuan (which was obtained by multiplying ZCPGC's loan ceiling of RMB 1.8 billion by 65% minus ZSEPC's trust loan of RMB 100 millionyuan), with the term of guarantee being from 18 December 2001 to 17 June 2019. ZSEPC completed the formalities necessary for the guarantee provided to ZCPGC. In accordance with Rules for Listed Companies, the provision of this guarantee was endorsed in the 15th meeting of the second Board of Directors of ZSEPC. The resolution was announced in China Securities Journal, Shanghai Securities News, Hongkong-based South China Morning Post and HongKong-based Wen Hui Bao dated 10 November 2001. As of the end of this report period, the balance of ZCPGC's loan amounts to RMB 560 million yuan, of which the amount of RMB 392 million yuan is guaranteed by ZSEPC. In this report period, ZCPGC's balance of loan increased by RMB 110 million yuan, so ZSEPC's guaranteed amount increased by RMB 63 million yuan. The 2 x 300 MW generating units of ZCPGC Project Phase I were put into commercial operation on 15 December 2002 and 22 May 2003 separately. They are now in good operation. ZCPGC achieved principal operating income amounting to RMB 1,067 million yuan and net profit amounting to RMB 176 million yuan. As at the end of the current report period, there are no signs of anticipated joint liabilities. b. Providing ZJPGC with Shareholder's Guarantee In Proportion to Shareholding Ratio ZJPGC is the project company responsible for construction and operation of Jiaxing Power Plant Phase II 4 x 600 MW. ZSEPC holds 24% of its equity. The other shareholders of ZCPGC as at the end of this report period are ZPEPDC holding 53% of its equity, Beijing Guohua Electric Power Co. Ltd holding 20% and Zhejiang Provincial Electric Power Construction Co. holding 3%. Based on Document Ji Ji Chu (2002)2349 State Planning Commission's Approval of Adjustment to Construction Plan of Zhejiang Jiaxing Power Plant Phase II issued by the State Development Planning Commission, the adjusted dynamic investment of ZJPGC totals RMB 10.28 billion yuan. The adjusted project equity amounts to RMB 2.57 billion yuan, accounting for 25% of the total investment. The capital needed for the project other than the equity will be sourced from Industrial & Commercial Bank of China providing a loan of RMB 4.5 billion yuan and China Construction Bank providinga loan of RMB 3.21 billion yuan separately. Since the amount of loan is substantial, the Bank required shareholders' guarantees to ensure security of the loan capital. So ZSEPC and the other shareholders of ZCPGC signed Guarantee Contract with Industrial & Commercial Bank of China Zhejiang Branch and China Construction Bank Zhejiang Branch separately. The contract is up to a ceiling, with the actual guarantee based on the actual amount of principal and interest of the loan. According to the Guarantee Contract, ZSEPC is to provide guarantee for the 24% of the loan to ZJPGC without joint liability between shareholders, with the term of guarantee being from 17 December 2001 to 16 June 2026. ZSEPC completed the formalities necessary for the guarantee provided to ZJPGC. The provision of this guarantee was endorsed in the 15th meeting of the second Board of Directors and the extraordinary shareholders' general meeting of ZSEPC in 2001. The resolutions of the Board meeting and the shareholders' meeting were announced in China Securities Journal, Shanghai Securities News, Hongkong-based South China Morning Post and HongKong-based Wen Hui Bao dated 10 November 2001 and 11 December 2001 separately. As of 31 December 2003, the balance of ZCPGC's loan amounts to RMB 2,000 million yuan, of which the amount of RMB 480 million yuan or 24% of the total (i.e. ZSEPC's equity contribution ratio) is guaranteed by ZSEPC. During the period from January to December 2003, ZJPGC's balance ofloan increased by RMB 1,900 million yuan, so ZSEPC's guaranteed amount increased by RMB 456 million yuan. The 4 x 600 MW generating units of ZJPGC are now under construction. It is planned that Unit 1 will be put into operation in the second half of 2004. As at the end of the current report period, there are no signs of anticipated joint liabilities. c. The purpose of above guarantees provided by ZSEPC is to advance the development of the principal business of ZSEPC and protect the fundamental interest of the company and its shareholders, to no detriment of the interest of its medium and small shareholders. The guarantees are proportional to its investment ratios with proportional liabilities without inter-shareholder joint liabilityor related transactions. It can be regarded as ZSEPC providing guarantee for itself. So it is not in violation of the relevant stipulations in actuality. For details, please refer to 'degreesIndependent Directors' Specific Statement and Independent Opinion about ZSEPC's Guarantees'+/- under 'degrees Other Matters'+/- of Section VIII 'degreesReport of Board of Directors'+/-. (4) Other Related Party Transactions a. In the current report period, ZSEPC signed Labor Borrowing Agreement and Transportation Service Contract with Taizhou Power Plant Industrial Company and paid the latter for labor borrowing and commuting buses to/from work totaling RMB 22,658,017.28 yuan. Taizhou Power Plant is involved in the daily management of Taizhou PowerPlant Industrial Company. b. In the current report period, ZSEPC and its subsidiary ZCPGC paid for Unit 4 automation design, installation and testing as well as waste water treatment totaling RMB 23,601,639.50 yuan. ZSEPC is involved in the daily management of Hangzhou Dongfa Environmental Protection Engineering Co. Ltd . c. In the current report period, Xiaoshan Power Plant and ZCPGC under ZSEPC paid Hangzhou Xiaoshan Linjiang Industrial & Trade Company Limited in accordance with the signed Vehicle Transport Contract and Logistic Service Contract for rental and logistic service charges totaling RMB 20,134,581.45 yuan. Xiaoshan Power Plant is involved in the daily management of Hangzhou Xiaoshan Linjiang Industrial & Trade Company Limited. d. Based on Operators and Maintenance Personnel's Service Contract, Contract for Unit 2 Commissioning Test and Material Conveyance Service Contract signed between ZCPGC and Changxing Changfeng Energy Co. Ltd, ZCPGC paid the latter for operators and maintenance service fee and commissioning test fee totaling RMB 21,284,840.00 yuan. e. Based on Waste Ash and Slag Handling Contract signed between ZCPGC and Jingning Jingfeng Energy Co. Ltd, ZCPGC paid the latter for handling of waste ash/slag and landscaping totaling RMB 6,940,000.00 yuan. Based on Coal Transportation Contract for 2003 signed between ZCPGC and Jingning Jingfeng Energy Co. Ltd (who assigned the contractual service in November and December to Changxing Chengfeng Energy Co. Ltd), ZCPGC paid Jingfeng Co. for coal transportation totaling RMB 9,439,936.00 yuan and Changfeng Co. for coal transportation totaling RMB 2,582,096,00 yuan. f. ZSEPC rented the non-operating assets divested from Taizhou Power Plant at the time of restructuring from ZPEPDC. And ZCPGC rented warehouses and other assets from Changxing Changfeng Energy Co. Ltd. For details, refer to Paragraph 3 'degreesTrust Custody, Contracting and Renting'+/- of Item 5 'degreesImportant Contracts and Implementation'+/- of this section herein. 5. Important Contracts and Implementation (1) Sale of Electricity Owing to the special characteristics of the power sector, all the electricity generated by ZSEPC was sold to the single buyer in Zhejiang power grid, ZPEPC. Of the total electricity sales, the contractual amount was settled at the contract price approved by ZPPB; and the competitive bidding amount was settled at the market price on real time basis. As the power supply in Zhejiang is in serious shortage, the bidding in Zhejiang power market was suspended from 2 July 2003. So the bidding amount was settled at the contract price. In the current report period, ZSEPC completed electricity sale to ZPEPC amounting to 14.813 billion kwh and achieved principal operating income totaling RMB 4.738 billion yuan. (2) Construction of Xiaoshan Power Plant Desulfurization Project In line with the 10th National Environmental Protection Plan and the policy to encourage desulfurization of servicing coal-fired generating units, after competitive bidding, ZSEPC selected Zhejiang Tiandi Environmental Protection Engineering Co. to undertake construction of the flue gas desulfurization project for Xiaoshan Power Plant 2 x 130MW. The construction cost of Xiaoshan Power Plant Desulfurization Project will be entirely borne by ZSEPC. Based on Document Zhe Ji Ji Chu (2003)240 Approval of Xiaoshan Power Plant Desulfurization Project issued by Zhejiang Provincial Development Planning Commission, the planned total investment of the project amounts to RMB 183.18 million yuan. The project construction was commenced in December 2003. It is planned that it will be put into operation by the end of 2005. (3) Trust Custody, Contracting and Renting In the current report period, ZSEPC made no important trust custody, contracting or renting of other companies' assets, nor did other companies make any trust custody, contracting or renting of ZSEPC's assets. Based onthe Agreement on Rent of Divested Asset signed between ZSEPC and ZPEPC, ZPEPDC on 8 Nov.2000, the Company rented the non-operating assets divested from Taizhou Power Plant at the time of restructuring at a rental cost of RMB 1,058,581.44 yuan in thecurrent reporting period. Based on the Contract on Rent of Ash Silos and Contract on Rent of Assets signed between ZCPGC and Changxing Changfeng Energy Co. Ltd, the Company paid the latter for the rental cost of ash silos and other assets amounting to RMB 11,447,000.00 yuan in the current reporting period. (4) Important Guarantees ZSEPC provided no guarantees other than the guarantees proportional to its investment ratio for invested power projects as mentioned under the subheading ' degreesGuarantees'+/- of 'degreesImportant Related Party Tractions'+/- of this section herein. Based on the Guarantee Contract between ZPEPDC and China Construction Bank Changxing County Branch, ZPEPDC is to provide guarantee for the loan to ZCPGC up to a ceiling of RMB 430 million yuan (which was obtained by multiplying ZCPGC's loan ceiling of RMB 1.8 billion by 35% minus ZPEPDC's trust loan of RMB 200 million yuan), with the term of guarantee being from 18 December 2001 to 17 June 2019. (5) Trust fund Management In line with the resolution of the 1st meeting of the 2nd Board of Directors of ZSEPC, the management team was authorized to invest in state treasury bonds and other securities. ZSEPC signed Agreement on Trust Fund Management with Zhejiang International Trust Investment Corporation (ZITIC) up to a ceiling of RMB 300 million yuan for a term from the date of the trust fund arriving at the account designated by ZITIC to 21 January 2004. Based on this Agreement, ZSEPC provided three trust funds amounting to RMB 100 million, 50 million and 100 million yuan totaling RMB 250 million yuan. ZSEPC terminated the Agreement ahead of time and recovered the principal of RMB 250 million on 25 December 2003, receiving an investment income of RMB 14.1743 million yuan on the same date. (6) Trust loan Refer to Item 3 'degreesCredits and Debits'+/- under Paragraph 3 'degrees Important Related Party Transactions'+/- herein. 6. Commitment (1) ZSEPC will invest in Zhejiang Beihai (Tankeng) Hydropower Station Project to hold 25% of its equity. (2) ZSEPC will invest in Xiaoshan Power Plant Gas Turbine Power Generation Project a sole investor. (3) ZSEPC will invest in Zheneng Lanxi Power Generation Limited Liability Co. to hold 25% of its equity. (4) ZSEPC will invest in ZCPGC extension project Phase II to hold its majority shares. For the details of the above commitments, refer to Item 2 'degreesUse of Proceeds not Raised from Share Listing'+/- of Paragraph 2 'degreesInvestment'+/- of Section 7 'degreesReport of Board of Directors'+/- herein. 7. Appointment of Accountants In this report period, ZSEPC renewed appointment of Zhejiang Pan-China Certified Public Accountants as its domestic auditor and PricewaterhouseCoopers Zhong Tian CPAs Co. Ltd as its international auditor. Up to the end of this report period, Zhejiang Pan-China Certified Public Accountants and PricewaterhouseCoopers Zhong Tian CPAs Co. Ltd had provided their auditing service for ZSEPC for 7 consecutive years. The remuneration to the accounting firms in the past two years were as follows: Name of Accounting Firms Year 2003 Year 2002 Note Zhejiang Pan-China Certified RMB RMB ZSEPC borne no traveling Public Accountants expenses of the 1,000,000.00 yuan 950,000.00 accountants. yuan PricewaterhouseCoopers Zhong Tian RMB RMB ZSEPC borne no traveling CPAs Company Limited expenses of the 1,100,000.00 yuan 1,050,000.00 accountants. yuan 8. ZSEPC was free from any audit, administrative punishment or open criticism by CSRC, or open accusation by the stock exchanges in this report period. 9. Other Important Matters (1) Based on Document Zhe Jia Shang (2003)15 Approval of ZCPGC's Power Sale Tariff issued by ZPPB, the power tariff applicable to ZCPGC was RMB 0.38 yuan/ kwh (including tax), effective from the date of commissioning up to the end of 2003. (2) Based on Document Zhe Jia Shang (2003)36 Notice on Adjustment to Power Tariff of Taizhou Power Plant under ZSEPC issued by ZPPB, the power tariff applicable to Taizhou Power Plant was RMB 352.42 yuan/MWh (excluding tax) (as opposed to RMB 357.42 yuan/MWh for 2002) (3) Based on Document Zhe Jia Shang (2003)372 Notice on Power Tariff of Excess Generation by Coal-Fired Power Plant Under Unified Dispatch in 2003 issued by ZPPB, the power tariff for 80% of the excess generation over and above 6,000 generating hours in 2003 was RMB 0.205 yuan/kwh (as opposed to RMB 0.20 yuan/ kwh) for Taizhou Power Plant, and RMB 0.202 yuan/kwh (as opposed to RMB 0.197 yuan/kwh) for Xiaoshan Power Plant. The other 20%, i.e. the amount in bidding in the power market previously, was settled at the contractual rate due to suspension of the power market bidding. (4) Based on Document Zhe Jia Shang (2003)445 Notice on Power Tariff of Coal-Fired Power Plant Under Unified Dispatch in 2003 issued by ZPPB, the power tariff applicable to the coal-fired generating units was raised by RMB 0.007 yuan/kwh (including tax), effective from 1 January 2004. This applies to Taizhou Power Plant, Xiaoshan Power Plant and ZCPGC under ZSEPC. (5) It was endorsed in the 7th meeting of the 3rd Board of Directors of ZSEPC that the ZSEPC employees would be given a total bonus of RMB 20 million yuan for 2003. the amount of which was recorded as administrative expenses in 2003. Corresponding income tax adjustment was made. (6) CSRC and Shenzhen Municipal Government issued a joint announcement on 2 January 2004 to take over the administration of Southern Securities starting from the same date. During the administrative custody, an administrative taking-over group composed of CSRC, Shenzhen Municipal Government, the People's Bank of China and the Ministry of Public Security will be responsible for operation management and risk management of Southern Securities. The administrative taking-over group will exercise the corporate power of Southern Securities, with the group head assuming the rights and responsibility of the legal representative of the company. The responsibilities of the shareholders' general meeting, the board of directors and the supervisory committee of Southern Securities were suspended, so were the duties of its directors, supervisors and senior management staff. ZSEPC holds 200 million shares of Southern Securities, with the book investment cost amounting to RMB 220 million yuan. In the current report period, ZSEPC allocated long-term investment devaluation reserve amounting to RMB 180.15 million yuan based on the information providedby the auditor of Southern Securities. X. Financial Statements 1 (based on the Chinese Enterprise Accounting Standards) 1. Auditor's Report Zhe Kuai Tian Shen (2004) xxx To: The Shareholders of Zhejiang Southeast Electric Power Company Limited We have accepted the appointment to audit the Balance Sheet and the Consolidated Balance Sheet as at 31 December 2003, the Profit & Profit Distribution Statement and the Consolidated Profit & Profit Distribution Statement, and the Cash Flow Statement and the Consolidated Cash Flow Statement of ZSEPC for 2003. These accounting statements are prepared by ZSEPC. It is our responsibility to form audit opinion on these accounting statements. We conducted our audit in accordance with Independent Auditing Standards of the Certified Public Accountant in the People's Republic of China (PRC). In the course of audit, we have reviewed practical situations of ZSEPC and conducted audit procedures which we considered necessary including random examination of accounting records. In our opinion, the above accounting statements have complied with the Enterprise Accounting Standards and the relevant provisions of the Enterprise Accounting Systems. The statements givefair view, in all material respects, of the state of financial affairs of ZSEPC as at 31st December 2003 and of the operating results and cash flows of ZSEPC for 2003. The accounting policies are applied consistently. Zhejiang Pan-China Certified Public Accountants PRC Certified Public Accountant Wang Yuehao PRC Certified Public Accountant Chen Shu PRC Certified Public Accountant Huang Yuanxi Dated: 20 February 2003 XI. Financial Statements 2 a. Balance Sheet (attached hereafter) b. Statement of Profit and Profit Distribution (attached hereafter) c. Statement of Cash Flow (attached hereafter) Balance Sheet As at 31st December 2003 Prepared by: Zhejiang Southeast Electric Power Company Limited Unit: RMB Yuan Assets Consolidated Parent Company Note Ending Amount Beginning Amount Ending Amount Beginning Amount Current assets Monetary assets 1 1,279,205,146.47 1,316,602,765.12 1,268,177,544.16 1,275,444,909.15 Short term investments 2 42,074,980.00 45,066,100.00 42,074,980.00 245,339,100.00 Bills receivable Share dividends receivable Interests receivable Accounts receivable 3 259,777,666.62 189,310,963.44 119,040,954.43 101,911,910.02 Other receivables 4 26,071,484.65 34,892,310.31 22,575,971.02 34,336,919.77 Prepayments 5 11,912,907.66 12,461,180.00 11,780,907.66 12,461,180.00 Subsidy receivable Inventories 6 126,475,405.97 109,881,758.45 97,589,340.72 89,186,432.87 Deferred expenses Long term investments in bond due within 1 year Other current assets Total current 1,745,517,591.37 1,708,215,077.32 1,561,239,697.99 1,758,680,451.81 assets Long term investments: Long term equity investments 7 1,268,400,000.00 1,208,550,000.00 1,741,834,317.95 1,567,688,293.33 Long term debt investments Total long term investments 1,268,400,000.00 1,208,550,000.00 1,741,834,317.95 1,567,688,293.33 Including: consolidated price differences Including: equity investments differences Fixed assets: Costs of fixed assets 8 8,865,174,966.21 8,262,163,609.22 6,680,890,382.07 6,663,381,995.97 Less: Accumulated depreciation 9 3,785,806,165.46 3,315,214,904.61 3,629,538,867.45 3,313,017,453.44 Net value of fixed assets 10 5,079,368,800.75 4,946,948,704.61 3,051,351,514.62 3,350,364,542.53 Less: Reserve for fixed assets devaluation Net value of fixed assets 5,079,368,800.75 4,946,948,704.61 3,051,351,514.62 3,350,364,542.53 Project material 11 82,466,727.42 32,013,043.90 18,616,208.82 21,012,643.90 Construction in progress 12254,184,753.87 458,328,216.40 123,818,356.35 80,280,204.67 Disposal of fixed assets Total fixed assets 5,416,020,282.04 5,437,289,964.91 3,193,786,079.79 3,451,657,391.10 Intangible assets and other assets: Intangible assets 13 216,733,557.76 221,098,737.29 215,985,272.92 221,098,737.29 Long term deferred expenses 14 33,412,954.31 27,265,487.90 33,412,954.31 24,564,741.71 Other long term assets Total intangible and other 250,146,512.07 248,364,225.19 249,398,227.23 245,663,479.00 assets Deferred tax: Deferred tax debit Total assets 8,680,084,385.48 8,602,419,267.42 6,746,258,322.96 7,023,689,615.24 Liabilities and shareholders' equity Current liabilities: Short term borrowings 15 627,000,000.00 553,390,000.00 7,000,000.00 3,390,000.00 Bills payable 56,963,000.00 Accounts payable 16 422,716,632.11 456,384,684.26 183,341,484.44 144,452,442.30 Accounts received in advance Salaries payable 17 76,857,556.01 86,668,618.65 76,857,556.01 86,879,011.39 Welfare expenses payable 27,519,279.78 26,425,375.38 27,337,551.98 26,056,228.71 Dividends payable Tax payable 18 98,183,145.97 116,153,980.49 47,967,594.97 108,557,056.55 Other payments due 19 7,473,689.75 1,584,804.17 6,130,616.49 1,320,983.85 Other payables 20 68,904,368.51 122,446,669.53 62,724,950.25 115,652,165.44 Accruals 21 909,773.33 934,800.00 Anticipated liabilities Long term liabilities due 22 326,060,000.00 326,060,000.00 326,060,000.00 326,060,000.00 within one year Other current liabilities Total current 1,655,624,445.46 1,747,011,932.48 737,419,754.14 812,367,888.24 liabilities Long term liabilities: Long term borrowings 23 760,695,200.00 776,763,450.00 326,060,000.00 Bonds payable Long term payables Special payables Other long term liabilities Total long term 760,695,200.00 776,763,450.00 326,060,000.00 liabilities Deferred tax: Deferred tax credit Total liabilities 2,416,319,645.46 2,523,775,382.48 737,419,754.14 1,138,427,888.24 Minority shareholders' equity 254,926,171.20 193,382,157.94 Shareholders' equity Share capital 24 2,010,000,000.00 2,010,000,000.00 2,010,000,000.00 2,010,000,000.00 Less: investments paid back Net value of share capital 2,010,000,000.00 2,010,000,000.00 2,010,000,000.00 2,010,000,000.00 Capital reserve 25 1,876,045,569.51 1,863,272,079.51 1,876,045,569.51 1,863,272,079.51 Surplus reserve 26 885,008,977.62 763,152,307.26 885,008,977.62 763,152,307.26 Including: statutory common 26 442,504,488.81 381,576,153.63 442,504,488.81 381,576,153.63 welfare reserve Undistributed profits 27 1,237,784,021.69 1,248,837,340.23 1,237,784,021.69 1,248,837,340.23 Foreign currency statement conversion difference Total shareholders' equity 6,008,838,568.82 5,885,261,727.00 6,008,838,568.82 5,885,261,727.00 Total liabilities and owners' 8,680,084,385.48 8,602,419,267.42 6,746,258,322.96 7,023,689,615.24 equity Statement of Profit and Profit Distribution Year 2003 Prepared by: Zhejiang Southeast Electric Power Company Limited Unit: RMB Yuan Item Note Consolidated Parent Company Ending Amount Beginning Amount Ending Amount Beginning Amount 1. Income from principal 1 4,738,196,944.73 3,320,944,888.62 3,670,972,684.16 3,303,121,784.34 operating activities Less: Principal operating 1 3,130,675,914.14 2,208,191,596.44 2,440,007,934.01 2,197,760,669.91 costs Principal 2 51,268,220.09 29,631,064.15 39,821,558.24 29,518,549.61 operating tax and surtax 2. Profit from principal 1,556,252,810.50 1,083,122,228.03 1,191,143,191.91 1,075,842,564.82 operating activities Add: Profit from other 3 759,658.17 489,090.01 759,658.17 489,090.01 activities Less: Operating expenses Administrative 235,580,541.51 229,175,442.48 197,755,599.64 173,026,072.79 expenses Financial expenses 4 62,620,319.32 41,228,922.57 13,110,622.1240,081,923.83 3.Operating profit 1,258,811,607.84 813,206,952.99 981,036,628.32 863,223,658.21 Add: Investment income 5 -146,757,285.34 33,459,111.29 -19,335,916.62 2,552,849.05 Subsidy income Non-operating 6 668,046.95 399,756.67 668,046.95 399,756.67 income Less: Non-operating 7 35,754,525.65 34,312,683.64 34,578,096.95 34,295,269.99 expenses 4.Gross profit 1,076,967,843.80 812,753,137.31 927,790,661.70 831,880,993.94 Less: Income tax 406,140,478.72 287,355,874.26 318,507,309.88 286,406,513.83 Minority shareholders' 61,544,013.26 -20,117,842.06 gains and losses 5.Net profit 609,283,351.82 545,515,105.11 609,283,351.82 545,474,480.11 Add: Undistributed profit 1,248,837,340.23 1,314,917,131.14 1,248,837,340.23 1,314,957,756.14 at year beginning Profit transferred from others 6.Distributable profit 1,858,120,692.05 1,860,432,236.25 1,858,120,692.05 1,860,432,236.25 Less: Allocation of 60,928,335.18 54,547,448.01 60,928,335.18 54,547,448.01 statutory surplus reserve Allocation of statutory 60,928,335.18 54,547,448.01 60,928,335.18 54,547,448.01 common welfare reserve Allocation of employee bonus and welfare fund Allocation of reserve fund Allocation of corporate development fund Profit payback to investments 7.Profit Distributable to 1,736,264,021.69 1,751,337,340.23 1,736,264,021.69 1,751,337,340.23 shareholders Less: Preference share dividends payable Allocation of discretionary surplus reserve Ordinary share 498,480,000.00 502,500,000.00 498,480,000.00 502,500,000.00 dividends payable Dividends of ordinary shares converted to share capital 8.Undistributed profit 1,237,784,021.69 1,248,837,340.23 1,237,784,021.69 1,248,837,340.23 Supplementary information Income from sales/disposal of departments or invested organizations Loss caused by natural calamities Increase/decrease in total profit caused by accounting policy changes Increase/decrease in total profit caused by accounting assumption changes Loss on debt restructuring Others Statement of Cash Flow Year 2003 Prepared by: Zhejiang Southeast Electric Power Company Limited Unit: RMB Item Note Parent company Consolidated Ending Amount Ending Amount 1.Cash flow generated from operating activities Cash received from sale of goods andsupply of labor service 5,477,538,987.75 4,277,732,201.85 Cash received from refund of taxes Other cash received relating to operating activities 2,931,812.81 492,667.37 Sub-total of cash inflow 5,480,470,800.56 4,278,224,869.22 Cash paid for purchase of goods and labor services 2,602,546,997.48 2,001,740,713.31 Cash paid to and for the employee 402,373,731.76 348,647,474.23 Taxes paid 1,026,013,411.11 841,189,964.79 Other cash paid relating to operating activities 32,826,048.49 20,320,342.85 Sub-total of cash outflow 4,063,760,188.84 3,211,898,495.18 Net cash flow generated from operating activities 1,416,710,611.72 1,066,326,374.04 2.Cash flow generated from investment activities Cash received from investment recovery 350,000,000.00 Including: cash received from sale of subsidiaries Cash received from investment income 49,014,818.20 35,616,474.10 Net cash received from disposal of fixed assets, intangible 77,030,245.94 77,030,245.94 assets and other long-term assets Other Cash received relating to investment activities 41,897,228.53 41,152,153.62 Sub-total of cash inflow 167,942,292.67 503,798,873.66 Cash paid for purchase/building of fixed assets, intangible 833,704,461.56 345,354,406.81 assets and other long-term assets Cash paid for investment 240,008,610.00 390,008,610.00 Including: cash paid for purchase of subsidiaries Other cash paid relating to investment activities Sub-total of cash outflow 1,073,713,071.56 735,363,016.81 Net cash flow generated from investment activities -905,770,778.89 -231,564,143.15 3. Cash flow from financing activities Cash received by absorbing investment Including: cash received by subsidiaries absorbing minority shareholders' equity investment Cash received from borrowing 1,075,390,000.00 25,390,000.00 Other cash received in relation to financing activities Sub-total of cash inflow 1,075,390,000.00 25,390,000.00 Cash paid for debt service 999,450,000.00 329,450,000.00 Cash paid for distribution of dividend or profit or payment of 624,184,426.03 537,876,570.43 interest Including: distribution of dividend from subsidiaries to minority shareholders Other cash paid in relation to financing activities Including: cash paid to minority shareholders by subsidiaries decreasing equity in accordance with the law Sub-total of cash outflow 1,623,634,426.03 867,326,570.43 Net cash flow generated from financing activities -548,244,426.03 -841,936,570.43 4. Impact of foreign exchange fluctuation on cash -93,025.45 -93,025.45 5. Net increase in cash and cash equivalents -37,397,618.65 -7,267,364.99 Supplementary Information 1. Net profit converted to operating cash flow Net profit 609,283,351.82 609,283,351.82 Add: Minority shareholders' gains and losses 61,544,013.26 Allocated reserve for assets devaluation 185,906,443.25 182,314,244.41 Depreciation of fixed assets 580,986,371.40 426,916,524.56 Amortization of intangible assets 6,362,696.53 6,337,471.37 Amortization of long term deferred expenses 9,452,533.59 6,751,787.40 Decrease in deferred expenses (less: increase) Increase in pre-allocated expenses (less: decrease) Loss on disposal of fixed assets, intangible assets and 29,001,316.80 29,001,316.80 other long-term assets (less: income) Loss on retirement of fixed assets Financial expenses 61,220,727.29 11,741,349.22 Loss on investment (less: income) -35,214,314.66 -162,635,683.38 Deferred tax credit (less: debit) Decrease in inventory (less: increase) -16,593,647.52 -8,402,907.85 Decrease in operational receivables (less: increase) -60,518,620.31 -6,122,759.73 Increase in operational payables (less: decrease) -14,720,259.73 -28,858,320.58 Others Net cash flow generated from operating activities 1,416,710,611.72 1,066,326,374.04 2. Investment and financing activities not involving cash income and expenditure Debt transferred to capital Convertible corporate bonds due within 1 year Fixed assets leased in by financing lease 3. Net increase in cash and cash equivalents: Ending balance of cash 1,279,205,146.47 1,268,177,544.16 Less: Beginning balance of cash 1,316,602,765.12 1,275,444,909.15 Add: Ending balance of cash equivalents Less: Beginning balance of cash equivalents Net increase in cash and cash equivalents -37,397,618.65 -7,267,364.99 Supplementary Data 1. Reasons for Differences of Net Assets/Net Profits Based on Chinese Accountants and International Accountants: (1) Difference of Net Profits Unit: RMB'000 yuan Net profit based on the Chinese Enterprise Accounting System 609,283 Adjustment made based on the international accounting standards# 1. Reversal of prepaid corporate income tax -3,123 2. Deferred income tax -9,056 3. Transferred to capital reserve 12,773 4. Offset against retroactive adjustment to corporate income tax - 5. Offset against other retroactive adjustment - Net profit based on the international accounting standards 609,877 (2) Differences of Net Assets XII. Documents Available for Inspection 1. Financial Statements affixed therewith the signatures and stamps of the Legal Representative, Chief Accountant and Accounting Department Manager; 2. Originals of Financial Statements affixed therewith the stamps of the accounting firms, the signatures and stamps of the certified public accountants; 3. Originals of all the documents and announcements published on the press designated by CSRC during the report period; 4. Annual Report published on London Stock Exchange Board of Directors Zhejiang Southeast Electric Power Company Limited 26 March, 2003 This information is provided by RNS The company news service from the London Stock Exchange END ACSIIFFTVEIEFIS
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