Thursday, October 29, 2020
 
Columnist
Martin Hennecke
 
CLP HOLDINGS
HKEx Stock Code : 00002 
 
Corporate Profile
The principal activity of the Company is investment holding and those of the subsidiaries are the generation and supply of electricity.

Business Review - For the year ended December 31, 2012

Electricity Business in Hong Kong

Meeting Demand

As we have long said, the most important aspect of our performance remains our ability to meet the demand for electricity in Hong Kong, every day of every year. We achieved this again in 2012.

Local sales of electricity were 31,995GWh, representing an increase of 2.7% from 2011. This growth was mainly attributable to higher humidity in the first quarter and hotter weather in the second quarter of 2012. Strong growth was recorded for sales to the residential, infrastructure and public services sectors, whereas sales to the commercial sector showed only moderate growth. There was slight sales growth for the manufacturing sector.

Sales to the Chinese mainland decreased by 37.8% to 1,838GWh in 2012. Total electricity sales in 2012, which included both local sales and sales to the Chinese mainland, decreased by 0.9% to 33,833GWh.

Capital Investment

In 2012 we invested HK$8.6 billion in generation, transmission and distribution networks, as well as in customer services and supporting facilities. These investments enhance the reliability, stability and efficiency of our supply network and quality of our customer service. They also ensure the timely provision of electricity supplies for residential property developments and ongoing infrastructure projects in our supply territory, such as the Express Railway Link, Shatin to Central Link, Hong Kong-Zhuhai-Macau Bridge and the development of West Kowloon and Kai Tak. In addition, the construction of a new gas receiving station and modifications for equipment at the Black Point Power Station continued through 2012 to enable the plant to migrate from the gas received from the existing Yacheng field to the future gas supplies arriving from the Chinese mainland.

Gas Supply

In 1996, we secured a supply of natural gas at Yacheng with a 20-year contract. This helped us to supply Hong Kong with abundant, reliable power as well as supporting significantly enhanced environmental performance and a stable tariff regime. The Yacheng supply of natural gas is now depleting. The MOU signed between the HKSAR Government and the Central People's Government in 2008 provided for the long-term gas supply to Hong Kong from three new sources in the Mainland. Of these, the Second West-East Gas Pipeline (WEPII) is the earliest available source.

The approval of a Gas Supply Agreement (GSA) with PetroChina in December 2012 for the import of natural gas from PetroChina's WEPII was a major step forward in the implementation of the MOU. Natural gas to be supplied through this 9,000 km long pipeline arrived in Hong Kong before the year-end. This new gas resource is delivered through a newly constructed launching station at Dachan Island in Shenzhen, a subsea gas pipeline and the end-station at Black Point. These new facilities, collectively referred to as ˇ§The Hong Kong Branch Lineˇ¨ (HKBL), are jointly owned by PetroChina (60%) and CLP (40%). The new gas receiving station at Black Point is now complete. Modifications to the eight gas-fired generation units are scheduled for completion by mid-2013.

Under the approved GSA, the gas price will be set using a clear and transparent mechanism, based on a formula reflecting the cost of the commodity and the transportation elements, as well as being in accordance with PRC regulatory guidelines.

The HKBL project is an important step in the integration of Hong Kong with Guangdong's energy infrastructure and brings access to a vast gas supply resource from Central Asia. The total investment cost of the HKBL is around RMB4 billion, of which CLP will bear 40% in line with its shareholding. CLP's investment in the HKBL will not be included as an asset under the SoC. The investment return level is in line with the PRC's regulatory guidelines, and constitutes a reasonable and stable return which will be recovered through a transportation charge payable by CAPCO under the GSA starting from 2013.

Subject to the further development of the Hong Kong Government's energy, environmental and climate change policies, we expect the use of natural gas to increase. If so, gas supplies beyond the volume provided under the recent agreement with PetroChina are likely to be required in the second half of this decade. We are exploring new supply options, as contemplated under the MOU. These include PetroChina's proposed Shenzhen liquefied natural gas terminal, targeted for approval by the National Energy Administration in 2013, as well as gas from new fields in the South China Sea. Discussions on various long-term supply arrangements are on-going.

Reliability

CLP delivers one of the most reliable electricity services in the world. Since 2000, supply reliability has improved by nearly 80%. In the last three years, a typical CLP customer would have experienced an average of only 2.6 minutes of unplanned power interruptions per year, as compared to 19-40 minutes in New York, Sydney and London (between 2009 and 2011 ˇV the latest available data).

Tariff

Supply reliability, power quality, excellent customer service and environmental improvement come at a price, which must be reflected in the tariff paid by our customers for their electricity. We do everything possible to maintain tariffs at reasonable levels. Even so, a tariff increase for 2013 was unavoidable. CLP was able to keep its average 2013 basic tariff unchanged due to continued stringent cost management of capital and operating expenditures and the effect of higher than expected electricity sales due to warmer weather in 2012. However, because of the increase in fuel costs and an adjustment to the rent and rates special rebate, the Average Net Tariff increase in 2013 was 5.9%. Of this, 4.7% was due to the increase in the fuel clause charge as new natural gas supplies arrive through the WEPII. Whilst this gas is priced at the prevailing international market level, it will be around three times the price of that from the existing Yacheng field, which was contracted 20 years ago when energy prices were significantly lower.

CLP will also provide a rent and rates special rebate at 2.1 cents per unit to all customers in 2013. We expect that, by the end of 2013, this rebate will complete the return to CLP's customers of all the rent and rates payments overcharged by Government and subsequently refunded to CLP.

CLP introduced a new Energy Saving Rebate Scheme with effect from 1 January 2013. This scheme will assist low consumption customers and encourage energy efficiency. 35% of domestic customers and 44% of small business customers will bear no increase, or even enjoy a small reduction in their electricity bills depending on their consumption levels. To promote energy saving, the tariff structure for residential users has been adjusted in order to encourage high electricity consumption customers to consider energy saving (this will affect around 1% of domestic customers). At the other end of the scale, CLP introduced a one-off community care subsidy of HK$300 per eligible household as a way to alleviate tariff pressure for lower income households. This is expected to help over ten thousand low-income families across CLP's service area in 2013.

Even with the tariff adjustment in 2013, CLP's tariff is still highly competitive when compared with other major metropolitan cities. This is particularly striking since many of these cities do not benefit from the same level of supply reliability, power quality and customer service provided by CLP.

Energy Business in Australia

Corporate

CLP's wholly-owned subsidiary in Australia previously operated as "TRUenergy" . As TRUenergy we acquired the retail customer base of EnergyAustralia and the Delta Western GenTrader contracts from the NSW Government in March 2011. That acquisition more than doubled our customers and increased our generation capacity, and significantly expanded our presence in Australia’s largest energy market, NSW. As a consequence, in October 2012 TRUenergy was rebranded ?merging the best of the legacy brands in Victoria and NSW into a single, new and revitalised EnergyAustralia brand.

Retail

EnergyAustralia is one of Australia''s three largest energy retailers. We supply gas and electricity to households and businesses across four states and one territory: Victoria, NSW, Queensland, South Australia and the Australian Capital Territory with a total of 2.8 million customer accounts. In NSW and Victoria we hold market shares in excess of 25%, approximately 12% in South Australia and less than 5% in Queensland.

In September we launched our new Customer Care and Billing platform. This is easier and more efficient to use than its predecessor and materially improves the quality of retail data used in the business, positioning EnergyAustralia to offer a level of service to our customers which is far superior to that possible under the previous legacy system.

Retail electricity prices for both mass market and industrial customers in all States were increased on 1 July 2012 as a result of the introduction of a cost of carbon by the Australian Government. Prices in NSW, Queensland and South Australia were also increased at the same time in line with the annual price review process. The corresponding annual process for Victoria results in an increase in retail prices in the State with effect from 1 January each year.

When combined with the highly competitive retail energy market in Australia, such increases reinforce the need for EnergyAustralia to enhance customer service, whilst controlling cost, in order to retain existing customers and to attract new ones. EnergyAustralia defended its market position well in 2012. Our churn out rate, which measures customers switching from one energy retailer to another, was below the industry average in Victoria and only marginally above market in NSW despite the aggressive push for market share in the electricity market by non-incumbent retailers.

During 2012 we witnessed a decline of electricity usage across our customer base. For instance, in our legacy, predominantly Victorian customer base (previously serviced by the TRUenergy brand), we saw a decline of around 10% in average mass market electricity consumption from 6.5MWhs in 2011 to 5.8MWhs in 2012.

A number of factors contributed to the reduction in customer electricity consumption including the underlying demand changes of a more cost aware consumer, energy efficiency, weather and the impact of increased residential solar photovoltaic penetration.

Wholesale

EnergyAustralia's operated gas-fired power stations, at Tallawarra and Hallett, performed safely and reliably during the year. The energy produced by the Tallawarra Power Station was more cost competitive after the introduction of the carbon price and a decrease in the cost of gas which resulted in the power station performing well over the second half of the year. The Iona Gas Plant also performed well with high commercial availability.

On 6 June 2012 water from the Morwell River Diversion entered the Yallourn mine, following the collapse of a coal conveyor tunnel that runs beneath the diversion. This flood impacted coaling operations and reduced the output from Yallourn Power Station. No one was injured in the incident and work swiftly commenced to stem the flood and remove the water from the mine. Whilst this was a serious and costly event, the response from EnergyAustralia's staff, and those of the partner companies that work alongside them, was outstanding. Coal transport via conveyor was re-established from 11 July, allowing generation to increase from one to three units. All four units were available from early August. On 8 October the second coal conveyor was returned to service. An additional liner system and drainage in the river diversion is being installed to help prevent future breaches.

While the Yallourn Power Station was able to run all four generation units from August onwards, EnergyAustralia decided to scale back generation to only three units. Factors influencing this decision included the introduction of a carbon price on 1 July, combined with falling electricity demand and a suppressed wholesale electricity price environment. Planned maintenance operations were brought forwards for some units during this time. We returned to a four unit operating strategy in early January 2013 due to increased summer demand.

EnergyAustralia has a 20% equity stake in the Narrabri coal seam gas (CSG) project, located in the Gunnedah Basin, Northern NSW. This interest secures 500 PJ of 3P reserves and provides an alternative source of gas supply, further diversifying the forward gas supply portfolio. The project is operated by Santos, an experienced CSG developer and operator. In 2012, the project was delayed due to government review of regulations and community concerns. The regulatory framework is now issued and the key licences for the project have been renewed. Santos has implemented a broad programme to resolve legacy issues with integrity of equipment and water treatment facilities and raised safety, health and environment standards to its corporate standard.

The key programmes in 2013 will progress the project towards development with further exploration and appraisal drilling and gas production to expand and confirm reserves, engineering design and implementation, community engagement and preparation of an Environmental Impact Statement. EnergyAustralia has established a joint venture management team and we are developing our knowledge of the critical CSG sector.

Electricity Business in the Chinese Mainland

Coal-fired Power Stations

Fangchenggang is one of the most reliable power stations in Guangxi and has a competitive advantage through its use of imported coal. During 2012 we successfully completed trials with a wider range of coal types than originally assumed in the boiler design, thereby giving more choices in coal supply and scope for reducing fuel costs further. The National Energy Administration has given in-principle approval for the Fangchenggang II expansion, which would add two further 660MW units on the same site. Preparatory work is well underway and full-scale construction will start as soon as final approval has been issued by the National Development and Reform Commission. We hope this will be received in the first half of 2013.

Renewables ˇV Wind Energy

20 out of our 22 minority-owned wind projects were in commercial operation in 2012 without significant operational issues. Of the remaining two, the 48MW Chongming project in Shanghai was delayed by the construction of the related transmission infrastructure, and the 49.5MW Haifang project in Shandong was delayed by local land permitting issues. In line with CLP's focus on wholly-owned projects, we expect that further expansion of minority-owned projects will be limited to a second phase at Laizhou in Shandong Province.

We have previously explained that CLP and our partner, CGNPC have different views about the speed and scale of the expansion of the CGN Wind joint venture. CGNPC wishes to expand the business more quickly than originally expected, whereas CLP has been concerned that such growth might result in the development of projects that do not match our own investment criteria. In these circumstances, we agreed to a restructuring of the CGN Wind joint venture that reduces CLP's equity stake from 32% to 15.75%. Approval for this was granted by the Mainland authorities in January 2013.

CLP's second wholly-owned wind project, Penglai Phase I (48MW) in Shandong was commissioned in February 2012. Final approval was received for the wholly-owned Laiwu Phase I (49.5MW) project. Construction is expected to commence in early 2013 and commissioning targeted for early 2014.

Renewables ˇV Hydro, Biomass and Solar

Lower than average rainfall, particularly during the first half of the year, reduced output from Jiangbian and Dali Yang_er hydro stations. However, rainfall at Huaiji, in Guangdong Province, was above average and resulted in an increase in generation of around 50%, as compared to the previous year.

We continue our efforts to improve the performance of our biomass plant at Boxing in Shandong Province by optimising both operating procedures and the availability of biomass feedstock. However, operating losses were still recorded due to the high cost and low quality of the fuel. These issues are worsened by a regulatory framework that does not provide adequate tariff support and does not control the development of additional biomass generating capacity where feedstock supply is limited. In the circumstances we have recognised an impairment of HK$94 million in respect of the Boxing Biomass plant. Without substantial improvement in the business model for biomass projects in China, we do not envisage any further investment in this type of generation.

With the growing maturity of solar photovoltaic technology, the significant reduction in solar panel prices and China's feed-in tariff for solar power stabilising at a relatively attractive level, we have explored investment opportunities in solar projects with a focus on regions with good solar energy resources and strong local power demand.

On this basis, following a framework agreement in November 2012, CLP has now acquired a 51% equity interest in the Jinchang Solar Project (100MW) in Gansu Province. This is our first solar project in China and the country's largest tracking system solar farm to date. The final approval of the project was granted by Gansu Provincial Development and Reform Commission in December 2012 and the business registration of the joint venture was completed in January 2013. Construction is underway and targeted to complete in the second quarter of 2013.

Nuclear

The Daya Bay Nuclear Power Station achieved a utilisation rate of 92% in 2012, compared to 93% in 2011. The nuclear power station has continued to maintain smooth operation and its radiological releases into the environment are well within regulatory limits, without any adverse effect to nearby residents or the environment.

The PRC Government issued its findings and improvement measures in June 2012, following a comprehensive safety review of the nuclear installations in the Mainland after the Fukushima accident. This review concluded that operating nuclear power units in the Mainland have fully adopted the national nuclear safety standards and the latest International Atomic Energy Agency safety standards. Daya Bay Nuclear Power Station has been confirmed to have adequate guidelines in place to manage severe accidents, including the impact of a potential regional tsunami. Even so, a number of enhancements have been implemented at Daya Bay to reinforce the continuation of its longstanding, excellent safety record.

In January 2011, an enhanced public notification mechanism was introduced for non-emergency Licensing Operating Events (LOE) for Daya Bay Nuclear Power Station. There was a Level ˇ§0ˇ¨ LOE incident in April 2012. In line with this notification mechanism, the incident was reported within two working days, even though it had no nuclear safety significance nor any impact on external environment and public safety.

CLP continues to work with CGNPC, our longstanding partner in Daya Bay, to pursue regulatory approval for the acquisition of a 17% equity share in the Yangjiang Nuclear Power Station project (6 x 1,080MW) in Guangdong. The project is to be commissioned in phases, with the commissioning of Unit 1 expected in 2013 for supplying power to Guangdong.

Electricity Business in India

As a result of the coal supply problems, plant commercial availability over the period from August 2012 to January 2013 has only been 33%, compared to our forecast of about 86%. This severely impacts revenues under the PPA, including Jhajjar's ability to recover the full capacity charge. The difficulties in commissioning the plant during a period of inadequate coal supply, combined with unreliable and reduced electricity output have contributed to a number of issues with the off-takers. These cover matters such as the commencement date for payment of capacity charges, the treatment of coal handling agent charges and payment for coal losses in transit. Jhajjar is taking these issues to the Haryana Electricity Regulatory Commission for adjudication. The sums presently in issue amount to approximately HK$56 million. We intend to pursue these matters vigorously and in accordance with the terms of the PPA.

Recent months have seen some improvements in the operating performance at Jhajjar, notably as a result of the arrival of the imported coal and interim improvements to coal handling processes. We have also mastered the technical problems which arise on the commissioning of any new plant and which were exacerbated by a disjointed and disrupted commissioning process caused by inadequate and poor quality coal. Plant technical availability which was only 45% in August averaged 96% over the four month period to the end of January.

Our gas-fired power station at Paguthan in Gujarat performed well and continued to be our primary source of earnings in India. Plant availability remained in excess of 91%, reflecting the high standards of operation and maintenance which have long been in place at Paguthan. The station also continued achieving first-rate safety, health and environment standards. The longterm availability of reasonably-priced gas remains a challenge for Paguthan.

Wind Energy

Our Indian wind energy portfolio demonstrated significantly improved performance this year. The commissioning of an additional 77.6MW of wind energy capacity at Andhra Lake and Sipla, bringing the total capacity of our wind farms to 521MW, reinforced CLP India's position as the largest wind energy producer in India. In addition, we have a further 451MW of wind energy under development at Yermala in Maharashtra, Mahidad in Gujarat, Sipla, Bhakrani and Tejuva in Rajasthan, all of which we expect to commission by March 2014.

The increased earnings from our wind energy investment in India reflects not only the continued growth in this portfolio, but also our increased experience in assessing wind resources when deciding which projects to pursue. In broad terms, our early projects, such as Samana in Gujarat, have not met forecast wind resources, whereas our later projects have performed more closely to expectations. We have also made a series of detailed improvements to our operating and maintenance regimes which have contributed to higher output and availability. Whilst the operation and maintenance of our wind farms is contracted out on a long-term basis to the equipment suppliers, we have become a much more active, engaged and informed supervisor of the contractors.

Electricity Business in Southeast Asia and Taiwan

Ho-Ping continued to provide a reliable and economic power supply to the Taiwan grid, and has been dispatched at high levels of utilisation.

The 55MW Lopburi solar project in Thailand, in which CLP's 33% shareholding is held through Natural Energy Development Co., Ltd. (NED), achieved full operation in March 2012. This is the first industry-scale solar project in the CLP portfolio and was completed within budget and on schedule. Construction of an 8MW expansion at an adjacent site has commenced, with commercial operation scheduled for early 2013. CLP has provided management leadership and technical support for the development, construction and operation phases of this project.

CLP and Mitsubishi Corporation have been co-developing two coal-fired projects in Vietnam, both based on imported coal and to be developed on a build, operate and transfer basis. The 1,320MW Vung Ang II project has secured sufficiently firm pricing of capital and operating costs to enable tariff negotiations to be carried out with the Vietnam Government. The 1,980MW Vinh Tan III project is now the subject of negotiations with the Vietnam Government on key project documents. The results of both such negotiations should enable CLP to determine the viability of these projects.

Business Outlook - For the year ended December 31, 2012

Hong Kong

As noted above, the ongoing management of the interface with our regulator, the HKSAR Government, is a priority for this business. CLP has already reinforced the resources devoted to stakeholder management in Hong Kong. The effectiveness of this work is particularly important for the successful outcome of a number of issues, including:

ˇE Tariff management, including increases to basic tariff and the fuel clause charge. CLP will do everything possible to control costs and enhance business efficiency. However, further tariff increases are inevitable due to rising fuel costs and to avoid further substantial increase in the deficit in the fuel clause account (which arises when customers are billed less than the actual cost of the fuel paid by CLP to generate the electricity they consume).

ˇE The Development Plan 2014-2018 which will set out CLP's approved capital expenditure over the remainder of the current SoC. We expect close scrutiny of planned capital expenditure during the Development Plan period. As remarked in the Chairman's Statement, whilst Government will place significant weight on the tariff implications of additional investment, it is important that due regard is paid to system and operational needs, benefits or consequences.

ˇE Interim Review. The current SoC agreement provides for an Interim Review in 2013. Under this Review, changes to the SoC can be made by mutual agreement between CLP and Government. As with previous interim reviews, CLP will approach any discussions with Government in a constructive and open-minded spirit. We will not be ready to accept amendments which are unfair or one-sided and which run counter to the fundamental character of the SoC agreement as a binding contract between its parties.

ˇE The Government-to-Government MOU on Energy Cooperation signed in 2008 provided the basis on which CLP must enter into long-term commercial agreements and invest in the necessary infrastructure, within both the HKSAR and Guangdong Province, to support Hong Kong's transition to cleaner energy. Those agreements and the associated investments will need approval from the SAR Government.

ˇE Air Quality ˇV Government policy on improving local air quality will impact the emissions control targets set for power generation in Hong Kong, the fuel mix required to meet those targets and the capital expenditure on additional, replacement or improved generating capacity.

Aside from the effective management of the interface with the SAR Government, CLP's ˇ§social franchiseˇ¨ in Hong Kong depends on the continued quality of our operations and the recognition by Government and the community of CLP's performance on tariff, reliability, environmental impact and customer service levels. Supported by ongoing, targeted capital and operating expenditure we will improve the quality of our electricity service, wherever possible.

In March 2012, CLP announced that negotiations were taking place with ExxonMobil for the acquisition by CLP, in joint venture with China Southern Grid (CSG), of the entirety of ExxonMobil's 60% shareholding in CAPCO. The negotiations with ExxonMobil have been protracted and there has been a considerable gap between CLP/CSG and ExxonMobil on the valuation and terms of any such acquisition. At present I can add nothing to the announcement previously made nor offer any indication of whether or when an agreement might be reached with ExxonMobil. I would, nonetheless, emphasise that if any agreement did materialise, the terms of this will be openly disclosed to shareholders and must be such that the Board and I are satisfied will deliver future value to them.

Australia

It was an exceptionally challenging business environment, with a number of external market factors influencing the business during 2012. These included the introduction of a carbon tax, reduced wholesale energy prices, consumer concern about rising energy prices, declining energy demand and a significant downward revision of future demand projections, all combined with continuing high retail competition in our key markets and regulatory uncertainty around price setting by New South Wales (NSW) and Queensland. These factors impacted the industry as a whole, providing difficult trading conditions for ourselves and our major competitors alike.

Against this background, we focused on the fundamentals of the business while positioning ourselves to meet the future needs of our customers. We rebranded the business, implemented a new retail billing system, introduced new retail products, defended our market share and optimised the profitability of generation across our portfolio. We also continue to develop and deliver strong advocacy positions particularly around gas market transparency and retail price regulation. We responded with commitment, resourcefulness and ingenuity when faced with the breach of the Morwell River Diversion which temporarily disrupted operations at our Yallourn Power Station.

EnergyAustralia is placing particular emphasis on an ongoing programme of operational improvements, including:

ˇE a comprehensive review of costs and processes and a series of management initiatives intended to improve business performance across the portfolio;

ˇE managing the implications of reducing growth in energy demand leading to suppressed wholesale prices. This requires EnergyAustralia to pursue strategies which optimise the manner in which the availability of its generating capacity and energy trading activities are conducted;

ˇE completion of the long-term remediation works at Yallourn, in a cost-effective and durable manner, following the Morwell River Diversion failure in June 2012;

ˇE reducing delays in customer billing and collections;

ˇE maintaining retail customer accounts in a competitive market while improving efficiency; and

ˇE completion of the integration of the retail customer base acquired in the NSW privatisation with those of the legacy TRUenergy business. This includes the roll-off in early 2014 of the Transition Services Agreement (TSA) (under which Ausgrid, the NSW State-owned entity and previous owner of the retail business, continues to provide customer support) which should lead to significant reductions in the cost to serve the NSW retail customers.

Whilst no decision has been taken regarding the principle, timing or terms of any listing of EnergyAustralia, this was an option to which we gave serious consideration in 2012. We decided not to proceed as we believe that with the operational imperatives and general economic environment described above, the current earnings performance of the business falls short of the level which we believe the company can deliver on a longer term and sustainable basis. This suggested that a listing of the EnergyAustralia business in 2012 was unlikely to deliver full value to CLP's shareholders from their investment in Australia.

In the short term I do not envisage substantial investment in new assets or projects in Australia, with the exception of a limited amount of wind generating capacity and possible participation in the planned privatisation by the NSW Government of its remaining interests in State-owned power generation assets. We have strengthened the senior management resources and organisational capability of EnergyAustralia in the past two years. The organisation has the capability and clarity of focus to deliver improved performance.

Chinese Mainland

CLP's investments in conventional and renewable energy in the Chinese mainland performed well in 2012. This reflects the continuation of CLP's ˇ§nicheˇ¨ strategy of selective investments in coal-fired generation and renewable energy in China, accompanied by the divestment of minority stakes in joint ventures (predominantly coal-fired generation) where CLP has no significant measure of control and growth prospects appear limited. The timing of any such divestments is at our option and will be dependent on market conditions, as evidenced by satisfactory prices and terms.

The major investment which I foresee in the Mainland is the commencement and commissioning of an additional 1,320MW generating capacity at Fangchenggang II (in which CLP will hold a 70% interest). Fangchenggang I has proved a successful investment. Whilst the investment case of Fangchenggang II must be judged on its own merits, the performance of Fangchenggang I provides grounds for confidence in this expansion project, even taking into account the possibility of lower utilisation hours than has previously been the case at Fangchenggang I.

We aim for steady growth in CLP's wholly-owned wind energy portfolio. This will be characterised by a broad focus on projects in Southern China. Compared to Inner Mongolia and other northern provinces these are less affected by grid restrictions, even if the wind resource may be inferior. With the exception of a 45% shareholding in a 49.5MW project at Laizhou Phase II, CLP does not envisage additional investment in wind energy projects which are not wholly-owned.

CLP's move towards renewable energy will also include majority-owned solar energy projects, where CLP envisages to exploit the opportunity, which may be temporary, to benefit from the combination of reduced solar panel prices and tariff support that has not yet been adjusted downwards in line with the fall in project costs. Further investment in small to medium size hydro projects in China has been slowed by a tariff regime which is not supportive of such projects, relative to other renewable energy sources. CLP's successful experience at Huaiji and Jiangbian would allow us to pursue such projects if they came forward.

Nuclear

CLP has reached an agreement in principle with China Guangdong Nuclear Power Holding Company, Limited (CGNPC) for the acquisition of a 17% shareholding in the Yangjiang Nuclear Power Station. However, the completion of the six units at Yangjiang was delayed, awaiting the completion of the National Comprehensive Nuclear Safety Review Report following the Fukushima accident. Following the recent approvals by the State Council of the Plans for Nuclear Power Safety and Nuclear Power Development (2011ˇV20), CLP is assessing the overall cost impact of possible design changes for the Yangjiang Project and the technology choice for Units 5 and 6 before proceeding with the regulatory approval process to complete the acquisition of the 17% shareholding in Yangjiang. Although our decision remains open, my current expectation is that CLP's review of project costs, equipment choices and investment returns would confirm our in-principle decision to invest in Yangjiang, subject to the necessary approvals for that investment being forthcoming.

India

The poor operating and financial performance of the newly commissioned Jhajjar Power Station remains the major priority for CLP India. Each link in the project chain presents substantial challenges.

These challenges all result, directly or indirectly, from the problems of coal supply. There is no single step or ˇ§silver bulletˇ¨ which can rapidly and effectively cure the issues faced by this project. However, a series of measures are already underway, including the use of imported coal (initially of an amount representing 15% of plant requirements, with in-principle support obtained on 16 January 2013 and since confirmed in a meeting with the Chief Minister of Haryana, to increase this in the Indian fiscal year 1 April 2013 to 31 March 2014) and improvements to the coal handling equipment.

The technical performance of the plant has improved tremendously, despite a commissioning period which was badly disrupted by coal shortage. Technical plant availability in January 2013 was 96.7% ˇV if coal is delivered, we will generate electricity reliably and to the full capacity of the power station. Through intensive effort, CLP expects an improvement in the financial and operating performance of Jhajjar over the next 6 to 18 months, largely attributable to slow but steady increases to the level of coal supplied to Jhajjar from both domestic and international sources. It may, however, take two to three years before Jhajjar reaches a point where its operations might be regarded as stable and predictable and on track to deliver returns close to the investment case. In all the circumstances we have considered it appropriate to make a provision for Jhajjar in this year's financial statements in the amount of HK$350 million (HK$315 million after tax).

CLP's longstanding investment in the 655MW gas-fired power station at Paguthan continues to perform satisfactorily. Under the current Power Purchase Agreement (PPA), a substantial measure of protection is afforded against difficulties in both the volume and pricing of gas supplies. Efforts have been underway for some years to obtain secure, stable and competitivelypriced gas for Paguthan, failing which the economic performance of the plant risks to be adversely affected upon the conclusion of the existing PPA in 2018.

Against this background, I do not contemplate further investment by CLP India in thermal power generation for the time being. Our focus is on improving the performance of Jhajjar and securing the longer-term economic prospects of Paguthan.

The financial performance of the Indian wind portfolio has been improving as a result of:-

ˇE improved wind resource measurement of new projects;

ˇE higher output as a result of a series of improvements we have made in our oversight and active management of the operations and maintenance of the wind turbines by the suppliers; and

ˇE wind resources which have indicated some movement back to forecast levels.

New investment in India will centre on continued growth of CLP's wind energy portfolio. Some solar and hydro investments may be contemplated, having regard to the quality of the relevant projects, in the interests of a balanced renewable energy portfolio.

Southeast Asia & Taiwan

We do not contemplate additional investment in these markets, other than the possibility of one or both of the greenfield coal-fired power station development projects in Vietnam coming to fruition. Over the next 12 to 18 months, these projects, which have been under development for a number of years, may advance to a point where CLP will have to decide whether to proceed or to monetise the value of the development work which has been completed.

CLP's remaining 20% stake in the Ho-Ping Power Station in Taiwan might be regarded as a legacy investment, in the sense of being a minority shareholding with little expansion potential. However, Ho-Ping has provided a regular and stable contribution to Group earnings, whilst making few demands on management time and resources.

Funding

Over the past five years, CLP has invested substantially in the implementation of its strategy.

Whilst our balance sheet remained healthy, we needed to consider options to support the financing requirements of our business in light of:

ˇE investment opportunities across our various business streams in line with strategy;

ˇE the maintenance of a strong and stable dividend;

ˇE safeguarding our good investment credit rating; and

ˇE presenting a prudent capital position.

This led to a decision to proceed with a placement in December 2012 of new shares representing an additional 5% of CLP's existing issued share capital. The net proceeds from the placement of HK$7.56 billion will be used for expected investment needs across CLP's business, notably ongoing investment in the Hong Kong electricity business, such as in infrastructure related to gas supply from the Mainland and additional generating capacity in those markets where CLP is already present, such as the expansion of Fangchenggang and development of renewable energy projects.

Source: CLP Holdings (00002) Annual Results Announcement
Chairman Michael Kadoorie Issued Capital (shares) 2,526M
Par Value HKD 5 Market Capitalisation (HKD) 162,198M
 
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