Management’s Discussion and Analysis – Business Review

The purpose of this business review of Control became effective in is to explain the various business 1993 and runs until 2008. The streams within the CLP Group, the Scheme of Control obliges CLP major progress made during 2001 Power to meet electricity demand and outline objectives for the at the lowest reasonable cost. In coming year and the longer term. return, the Government recognises that CLP Power is entitled to receive a reasonable return on its investment. ELECTRICITY BUSINESS CLP Power does not directly own generation facilities, but purchases The CLP Group, through its power from Castle Peak Power its wholly-owned Company Limited (in which CLP subsidiary, CLP Power, Power owns a 40% interest) and Nuclear owns and operates the (in which CLP Holdings owns a 25% larger electric utility interest) at Daya Bay, Guangdong business in the Hong Province. These sources of power, together with CLP Power’s right to Kong Special use capacity at the Administrative Region. Pumped Storage Power Station, amount to a total installed capacity CLP Power supplies electricity to of 8,263MW. 2 million customers, representing a population of approximately 5.4 Business Strategy million in , the New The strategic vision of CLP Power is Territories, Lantau and a number of to be a world-class power company outlying islands. CLP Power’s providing excellent services to supply area covers approximately Hong Kong customers. CLP Power 1,000 square kilometres, through a is fulfilling that vision by delivering company-owned and operated reliable energy supplies and high 10,859 kilometres advanced quality services at competitive transmission and distribution prices to its customers, while network. In addition to sales to Hong meeting or exceeding all safety and Kong customers, approximately 6% environmental requirements for the of CLP Power’s electricity sales was community, and providing a for distribution to customers in challenging and rewarding work Guangdong Province. environment for its employees. CLP Centenary Substation in West Kowloon CLP Power’s electricity generation The long-term interests of our and supply business is regulated shareholders are best served by by the Hong Kong Government ensuring that CLP Power’s pursuant to a Scheme of Control customers receive value for Agreement. The current Scheme money and good service. If a

30 CLP Holdings Annual Report 2001 utility company consistently fails clause reduction to all its will offset costs for CLP’s Hong to meet its customers’ reasonable customers in 2002. This is the Kong customers and contribute expectations, it cannot expect to third time CLP Power has to shareholder earnings. continue to receive the support provided rebates to its • To meet rising customer of the community it serves. customers in three years. On top expectations, three larger Hence, customer satisfaction of the rebate and fuel clause customer services centres were is a cornerstone of CLP Power’s reduction package, all CLP acquired during the year to strategy for creating value non-residential customers will provide a comprehensive range to shareholders. receive additional benefit from a of value-added services, such as Business Relief Rebate of HK¢0.2 sales of energy-efficient electrical In fact, demand for CLP Power’s per unit of electricity appliances, in addition to the services is greater than ever. On a consumption for a period of 12 existing core services of bill typical working day, CLP Power lays months. This Rebate is provided payment and account enquiries. about two kilometres of in light of the difficult • In April, CLP Power achieved the distribution cable, installs one environment currently being highest rating in a public substation, processes 860 account faced by commercial and opinion survey. The overall rate applications and amendments, and business users. The entire rebate of satisfaction, based on handles more than 6,400 and reduction package is customers’ feedback on telephone enquiries. expected to amount to HK$560 restoration of supply, customer million and will be funded mainly centres, customer installation Achievements for 2001 by the Development Fund. inspection and customer 2001 was marked by significant • CLP Power has signed a second telephone services was 98.28%. accomplishments and supply arrangement with CLP Power’s efforts in customer developments of CLP Power. Guangdong that extends into services improvements and • Through its on-going drive for 2002. This will assist achievements were recognised efficiency and cost control, CLP Guangdong in meeting its by the Customer Service Grand Power was able to announce a electricity demand and provide Award under the Hong Kong package of rebates and fuel additional sales revenue that Awards for Services 2001

CLP Holdings Annual Report 2001 31 Management’s Discussion and Analysis – Business Review

Plans and Activities for 2002 Over the next year, CLP Power will build on this progress and focus on the following major strategies and initiatives: • CLP Power will benchmark its performance against other comparable utility companies and market leaders around the world to identify specific areas where it can further improve efficiency and drive down “Hand Talk” service for hearing-impaired customers operating costs. • In order to reduce pressure on organised by the Hong Kong CLP Power and the best fuel costs, CLP Power will look for Retail Management Association. performing utilities. fuel procurement synergy within • CLP Power has delivered a Improvement plans were the CLP Group. CLP Power will challenging capital works developed to keep CLP Power at closely manage its fuel suppliers programme, totalling HK$4.6 the forefront of world practice. to ensure good performance, and billion, including 132kV Tseung • CLP Power has actively managed complete improvements to the Kwan O Town Centre Substation, its fuel costs and achieved Castle Peak Coal Plant to provide 132kV Tin Shui Wai ‘B’ remarkably low costs despite the flexibility in burning a wider Substation, 132kV West Kowloon price escalation and volatile fuel range of coals. Substation and diversion market environment in recent • Although Hong Kong’s recent rate projects for West Rail. This years. The delivered coal price of growth has slowed down investment enhanced our supply for the year was lower than the significantly, on-going quality and reliability, as well as market by 35%. This was development projects and new provided for demand created by achieved through the infrastructure projects, mostly in new towns and infrastructure development of new coal CLP Power’s supply area, will development projects in CLP sources, operational changes to continue to require upgrades and Power’s supply area. Unplanned accommodate a wider variety of extensions to the transmission customer minutes lost per qualities and careful timing of and the distribution networks. annum (a standard measure of contract placement. Major work includes the supply reliability) have been • The strategic purchasing implementation of the reliability improved by about 50% within initiative achieved significant improvement plan to further the last four years. cost reductions in both capital reduce the customer minutes • A benchmark of CLP Power equipment and operating lost, the application of 11kV live operations showed that its expenses. CLP Power also line work to minimise the need performance, compared to explored possibilities offered by for power outages on these international power utilities, the “new economy” to improve circuits and the overhead line was well above average, with speed and efficiency of its improvement work. many areas at world-best procurement activities. CLP • CLP Power will continue its focus practices. However, through Power has used e-catalogues, on delivering high performance these benchmarking exercises, e-tendering and on-line bidding and flexibility from its generating gaps were identified between since September 2000. assets. Priority tasks for the

32 CLP Holdings Annual Report 2001 generation business are the REGIONAL power station at Daya Bay; completion of Castle Peak Power • 29.4% in Shandong Zhonghua Station refurbishment projects ELECTRICITY Power Company (SZPC) in and construction and BUSINESSES Shandong Province. SZPC owns commissioning of Black Point CLP Power China (CLP-PC) two existing operating power Power Station units 7 & 8 to stations, Shiheng I and II schedule and budget. leads the Group’s (totalling 1,200MW), and has two • In order to deliver a level of operations in the power stations under service that meets or exceeds Chinese mainland while construction, Liaocheng and our customers’ expectations, CLP Power International Heze II (totalling 1,800MW); CLP Power will continue to • 49% in CLP Guohua Power revamp its customer services (CLP-PI) undertakes our Company Limited, which owns centres and conduct a series of activities in the wider and operates three power customer reach initiatives to Asia-Pacific region. stations with a total generating collect feedback as the basis for capacity of 2,100MW in the further improvements and new Beijing-Tianjin-Tangshan area; CLP-PC and CLP-PI develop and services. CLP Power will • 49% of Shenmu II Power Station own power projects in the region cultivate relationships with (2 x 100MW coal-fired units), and serve as vehicles for growth in customers and provide total Shaanxi Province; the CLP Group to create energy solutions to them. • 49% of Hong Kong Pumped shareholder value. Storage Development Company, Medium to Longer-term CHINESE MAINLAND Limited (a joint venture with Perspectives ExxonMobil Energy Limited) which Our interests in the Mainland The key challenge for CLP Power is gives us the right to use 50% of include the following: the expiry in 2008 of the Scheme of the 1,200MW capacity of Phase I • 25% in Guangdong Control Agreement. CLP Power of the Guangzhou Pumped Joint Venture Company, Limited, welcomes a dialogue with the Storage Power Station; and which owns a 1,968MW nuclear Government, academics, legislators and its customers on the future structure of the electricity industry, Installation work at Heze II Power Station Unit 3, Shandong which is likely to start in 2002/ 2003. Irrespective of the outcome of the review process, CLP Power needs to strive for world-best practice in all aspects of its business activities so as to deliver value to customers, shareholders and employees alike.

CLP Holdings Annual Report 2001 33 Management’s Discussion and Analysis – Business Review

CLP delegation’s visit to Beijing Yire Power Station

• 41.5% in the Huaiji Power Project Corporation, CLP Guohua Power commissioned, some three months in Guangdong Province Company Limited (CLP Guohua), ahead of schedule. (comprising nine small hydro was established in January 2001. In power stations in operation or addition to owning and operating CLP-PC had identified the potential under construction amounting to its existing assets, CLP Guohua will for investment in the electricity a total of 98MW). develop greenfield projects and industry in the west of China prior acquire existing power assets. The to the Beijing authorities’ move to Business Strategy 49% interest in Shenmu Power actively promote economic CLP-PC intends to build on its Station acquired by CLP-PC in 2001 development in the west, including status as the largest external will be the first additional asset to the transmission of power investor in the Mainland electricity be injected into the joint venture. generated in the western provinces industry by: to the east. In 2001, CLP-PC • Developing a balanced portfolio Operation of the Guangdong Daya entered into a joint venture through acquisitions and Bay Nuclear Power Station was agreement with local state-owned greenfield development in satisfactory and high-levels of enterprises for the construction of targeted Mainland provinces; safety and production were a 600MW coal-fired power station • Establishing and reinforcing achieved. For the second year in at Anshun in Guizhou Province. In relationships with partners, succession, Daya Bay won the addition, CLP-PC is also government authorities and Nuclear Safety Award in the Annual undertaking a feasibility study on business associates; and Electricité de France Challenge the joint development of a • Actively participating in the Contest against all French nuclear 1,200MW coal-fired power station management of our power stations. at Diandong in Yunnan Province. investments to add value to our joint ventures, deliver the In Shandong, Shiheng I and II Plans and Activities for 2002 projected returns on investment Power Stations maintained their “Regulation 69” issued by the and meet safety, health and status of First Class Power Stations State Council in late November environmental objectives. from the State Power Corporation 2000 has placed a moratorium on of China. Good progress was made the sale of state-owned power Progress in 2001 in the construction of Liaocheng assets. “Document 701” issued by The joint stock company with and Heze II Power Stations. The the State Development Planning Beijing Guohua Electric Power first unit of Heze II is being Commission in April 2001 sets out

34 CLP Holdings Annual Report 2001 how electricity tariffs and rates of approved by the Central • 22.44% in Electricity return on power plant investment authorities will be honoured. Generating Public Company should be determined before (EGCO), Thailand; competition is introduced into the CLP-PC’s long-standing presence • 40% in a 1,434MW coal-fired generation sector. and experience in the Mainland BLCP power project to be power industry will be leveraged to developed at Map Ta Phut, Until the effect of these regulatory manage changing market Thailand; and initiatives and wider state conditions and to take up suitable • 5% in YTL Power International enterprise reforms becomes clearer, investment opportunities, notably Berhad (YTL Power), Malaysia. CLP-PC’s immediate focus will be on with regard to investment in the the effective management of its western part of China in line with Business Strategy existing joint ventures and the the Mainland policy. CLP-PI seeks to develop its position prudent exploration of business as a leading Asia-based opportunities with selected strategic ASIA-PACIFIC REGION independent power company, partners in target provinces. In the region, CLP-PI owns the growing its business through following interests: development projects and Medium to Longer-term • 40% in a 1,320MW project acquisitions in electricity Perspectives under commissioning at generation, transmission and Successful management of state Ho-Ping, ; distribution. To do this, CLP-PI: enterprise reform remains a major • 73.6% in a 1,450MW coal-fired • Focuses on selected countries in challenge for the Mainland plant and dedicated coal mine in the region where the business authorities. However, the Victoria, , owned by environment encourages Mainland’s accession to the World Yallourn Energy Pty Limited development of the private Trade Organisation and Beijing’s (Yallourn Energy); sector power industry; successful candidature for the • 70.4% in a 655MW combined • Adopts strategies appropriate 2008 Olympic Games are a cycle power station in Gujarat, to each country, including recognition of the Mainland’s India, owned by Gujarat through alliances with local stability and a spur to continued Powergen Energy Corporation companies with complementary transition from a planned to more Limited (GPEC); skills and knowledge; open socialist market economy.

In the electricity generation sector, the authorities are Dedicated coal mine in Victoria, Australia owned by Yallourn Energy planning to introduce competition in stages. It is expected that a “South China Power Pool” comprising generating plants in Guangdong, , Yunnan and Guizhou will be established in the next decade. Senior Mainland officials and “Document 701” have confirmed that, notwithstanding the introduction of competition, existing power purchase agreements properly

CLP Holdings Annual Report 2001 35 Management’s Discussion and Analysis – Business Review

Ho-Ping Power Station, Taiwan

• Intends to build a balanced • Acquisition of development rights The performance of CLP-PI’s portfolio through a combination in the BLCP power project; and investment in EGCO has not been of new projects and the • Progress to completion of the satisfactory. Through our acquisition of existing assets; acquisition of the shares in GPEC. representation on the board, we • Applies strong asset continue to push for improvements management disciplines to Construction of the Ho-Ping in EGCO’s performance and the maximise earnings, control risk Power Station progressed enhancement of the value of and meet safety, health and satisfactorily. The transmission our shareholding. environmental objectives; and line linking the power station to • Draws on industry knowledge the Taiwan grid has been In Australia, we will look for and experience available completed. Both units 1 and 2 are opportunities to build a balanced throughout the CLP Group. in the commissioning phase. portfolio of assets which will optimise value and manage risks Progress in 2001 Plans and Activities for 2002 within the Australian national The key task in 2001 was to take The continued implementation electricity market, building on forward the joint venture with of the joint venture with Powergen synergies with Yallourn Energy. Powergen UK plc (Powergen), remains a priority task. This signed in December 2000, whereby includes the integration of GPEC In India, strong local partnerships CLP-PI acquired an 80% interest in within CLP-PI and bringing our appear to offer a more secure route assets previously held within investment in Yallourn Energy to satisfactory performance in the Powergen’s Asian portfolio. Steps and GPEC to profitability. electricity sector. We will be taken included: Significant progress of BLCP is a exploring the use of local • Completion of the acquisition by further objective. partnerships to enhance our the joint venture of the shares in investment in GPEC and any Yallourn Energy held by Powergen At Ho-Ping, it is expected that broader presence in India. and other third parties; the two 660MW units will start • Completion of the refinancing of commercial operation in 2002 Medium to Longer-term Yallourn Energy in February 2001 and generate revenue. We will Perspective which will enable that company look for other development The challenges to electricity to operate effectively within the opportunities from which to businesses in Asia-Pacific region Australia market environment; expand our Taiwan operations. come largely from political,

36 CLP Holdings Annual Report 2001 economic and regulatory leveraging off CLP’s conditions, including heavy uncertainty, much of which occurs, existing assets and skills. competition and declining margins and must be managed and – there are currently approximately assessed, on a country-by-country 33 FTNS licences and 260 Internet During 2001, CLP TeleCom, the basis. Depending on local Service Provider licences granted in Group’s telecommunications circumstances, our ability to Hong Kong. In view of difficult subsidiary, launched a new retail manage risks and the financial market conditions and adverse brand “Oxygen” and started the viability of such investments, investment sentiment, CLP TeleCom marketing of narrowband and CLP-PI intends to build on its did not complete a proposed joint broadband Internet access. By the existing interests, market venture with Yes Television to end of 2001, over 8,000 customers knowledge and relationships in the launch a pay TV service in the Hong were making use of Oxygen’s region to develop meaningful Kong market. Internet service provision. market positions. CLP TeleCom’s objective for 2002 In June, CLP TeleCom was awarded is to review its business model to an External Fixed NON-ELECTRICITY ensure that it is financially Telecommunications Network ACTIVITIES IN viable, whilst preserving the Services (EFTNS) Licence by the opportunity to exploit any HONG KONG AND Government of Hong Kong Special competitive advantage from Administrative Region and through THE CHINESE CLP’s assets and skills. “ChinaLink”, now offers highly MAINLAND secure network service between CLP Enterprises is the Group’s CLP is exploring Hong Kong and the Mainland. vehicle for identifying and opportunities in Hong incubating energy-related and However, 2001 was a bleak year for Kong and the Chinese information technology (IT) the telecommunications industry in activities in Hong Kong and the mainland to develop non- Hong Kong. CLP TeleCom has faced Mainland. In May, CLP Enterprises, electricity activities by extremely challenging market in consortium with ExxonMobil China Gas Pipeline Limited, submitted a joint bid to Completion of ChinaLink optic fibre splicing between PetroChina Company Limited for Hong Kong and the Chinese mainland participation in the West-East Gas Pipeline Project. This project is intended to link upstream gas resources in western China with downstream end-users in the east. After being short-listed, the ExxonMobil/CLP consortium proceeded to the foreign participation negotiation process.

CLP Enterprises acquired a 27.3% interest in Precision Marketing Inc., a market research company, which will provide CLP with access

CLP Holdings Annual Report 2001 37 Management’s Discussion and Analysis – Business Review

Laguna Verde

to database management skills to grow its business in power Hong Kong which are no and technology. engineering, energy services and longer required for facility management, in addition to electricity purposes. In 2002, CLP Enterprises will its involvement in the public pursue opportunities in energy- lighting business and related businesses as well as IT infrastructure projects of Mass CLP’s major current project is the investments which provide a route Transit Railway Corporation and residential redevelopment of the to enriching the CLP Group’s Kowloon Canton Railway former power station at Hok Un, IT capabilities. Corporation. CLP Engineering is named . This joint also engaged in providing turnkey venture project, led by CLP The core business of CLP solutions to transmission and Property and Cheung Kong, Engineering in 2001 was lighting distribution projects to CLP Power comprises 4,735 flats, 1,692 car works, with the provision of at competitive rates. Further parks and 270,000 sq. ft. of contracting services to the Hong progress in energy services has commercial space. Kong Government, Airport Authority been made by securing contracts and other private sector clients. CLP involving the application of heat In 2001, the Occupation Permits for Engineering’s tender for the Public pump technology and provision of Phases 4 and 5 of the development Lighting Contract in the New power quality solutions. The were obtained. Pre-sales of flats in Territories West with Government recent award of a three-year Phase 5 were launched in June. was unsuccessful. Future revenue maintenance contract by the Approximately 87% of the from the lighting business will Airport Authority for electrical residential units in the entire depend on whether CLP Engineering services indicated that CLP redevelopment had been sold by succeeds in its bid for the coming Engineering is well-positioned for the end of 2001. public lighting contracts on Hong expansion in facility maintenance. Kong Island, and in Kowloon and the In order to ascertain the scope for New Territories East. PROPERTY any possible redevelopment of the REDEVELOPMENT site of CLP’s head office at Argyle With the decline of CLP IN HONG KONG Street, Kowloon, a set of residential Engineering’s public lighting work, building plans was submitted to a review of its strategy concluded CLP pursues the the Buildings Department and that CLP Engineering should seek redevelopment of sites in approved during 2001. CLP does

38 CLP Holdings Annual Report 2001 not presently have a timetable for • Anticipating economic, social any redevelopment of the site. and environmental trends which may impact on CLP and For 2002, CLP Property’s principal encouraging development of new initiative will be to take forward knowledge needed for CLP the redevelopment of Ellyridge, a Group’s positioning in the face surplus staff quarters building on of those trends. Ho Man Tin Hill Road in Kowloon. The intended redevelopment will In August 2001, Dr. Gail Kendall have about 130,000 sq. ft. of joined CLP from the residential space and is scheduled Massachusetts Institute of for completion in 2005. Technology to take up the post of Managing Director of CLP-RI. RESEARCH AND In 2002, CLP-RI will be aiming for DEVELOPMENT meaningful progress in ACTIVITIES environmental projects including The CLP Group is aware the Hong Kong Air Quality Study, of the potential impact Hong Kong schools solar education programme and, more on its business of broadly, sustainable development technology benchmarking for the CLP Group. developments as well as A second focus area for CLP-RI is new technology for competitive changing economic, electricity markets. CLP-RI will social and also be establishing relationships environmental values. in the academic research community in Hong Kong, the The mission of CLP Research Mainland and elsewhere in the Institute (CLP-RI) is to strengthen Asia-Pacific region to improve CLP’s innovation capabilities with links between CLP and academic the intent of increasing the work which can have a bearing on economic, social and our business and the capabilities environmental value of our of our workforce. products, services and businesses in the communities we serve. All managers within the CLP Group Further to this mission, CLP-RI is have a responsibility to manage for tasked with: the future. It is our aim that CLP-RI • Identifying technology will facilitate the effective Hybrid solar-wind renewable developments of strategic discharge of that responsibility energy system in Shek Kwu Chau, Hong Kong importance to the Group and through knowledge sharing, project promoting knowledge and know- collaboration, and joint how to enable the Group to development of the technical smartly adapt new technologies to competencies critical for our sustain and grow its business; and business future.

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