HUNGF Huaneng Power International (PK)

Unit: RMB100 million

Of which:

	Rf	=	Return on investment of risk-free assets
	ERP	=	Equity risk premium in which the risk premium of the market portfolio return is higher than the risk-free rate
	β	=	Beta coefficient, for the purpose of measuring the systemic risk of a particular asset for all risk investment portfolios
	α	=	Additional risk factor (“alpha”)

Upon the calculation of the after-tax discount rate, the pre-tax discount rate is determined through the iterative calculation loop in accordance with the assumption of "pre-tax cash flow present value = after-tax cash flow present value". After calculation, the Company adopted a pre-tax discount rate of 7.00% -10.90%.

We noted that other peers publicly disclosed the discount rate used in the 2019 impairment test. For example, Huadian Power International Corporation Limited used a pre-tax discount rate of 8.17%; Datang International Power Generation Co., Ltd. used a pre-tax discount rate of 8.05% -10.26%. The discount rate range used by peers for impairment test is relatively close to the Company's discount rate range.

The Company engaged KPMG Advisory (China) Limited and Yinxin Appraisal Co., Ltd. to independently estimate the recoverable amount of the asset group involved in the above impairment test and issue reports. The discount rate is an important parameter in the valuation calculation, which has been reflected in the above reports.

2. In relation to the impairment of assets to be scrapped with an amount of RMB1.437 billion, please further supplement and explain:

(1) For the scrapped losses of Huaneng Yunnan Diandong Energy Co., Ltd. Bailongshan Coal Mine Part I Area with an amount of RMB1.045 billion, please explain: the investment and construction of the mine, the reasons for not considering the relevant factors of the nature reserve when the project was put into construction, the release time of the government documents and the requirements to clean-up for the rectification; the assets constructed by the Company in the prohibited construction area and its investment amount; the approach in determining the scrapped amount of related assets; (2) For the scrapped assets of 4 companies (factories) including Huaneng Liaocheng Thermal Power Co., Ltd., please explain whether the scrapped assets have been used normally in the past 3 years, and the reasons for not being scrapped in the previous year, respectively.

Company’s Reply:

The Bailongshan Coal Mine No. 1 Well of Huaneng Yunnan Diandong Energy Co., Ltd. (the "Diandong Energy") commenced construction in April 2004 with a designed production capacity of 3 million tons per year and a budget investment of RMB9.338 billion. In July 2013, according to the "Reply from the People's Government of Yunnan Province on agreeing to the General Plan of the Eighteenth Mountain Provincial Nature Reserve in Yunnan Province" (Yun Zheng Fu [2013] No.55) issued by the People's Government of Yunnan Province, a total of 12.13 square kilometers of the Eighteenth Mountain Provincial Nature Reserve has been approved, of which the core area is 5.017 square kilometers and the experimental area is 7.113 square kilometers. Since Bailongshan Coal Mine commenced construction before the area of the nature reserve was officially approved, the relevant factors of the nature reserve were not taken into consideration when the project was put into construction.

The Bailongshan Coal Mine No. 1 Well has been suspended since January 2017 due to part of the area of Bailongshan Coal Mine No. 1 Well overlapping with the eighteen mountains nature reserve. The Company has been actively communicating with the local government to push forward the construction of the coal mine with a view to realizing profits and recovering costs. On 3 September 2019, Diandong Energy received the "Reply from the Qujing Energy Bureau on Resumption of Construction of the Bailongshan Coal Mine No. 1 Well" (Qu Energy Safety [2019] No.65). The document stipulated that only the shafting and drifting engineering outside the nature reserve is allowed to resume, and the construction of projects within the nature reserve is prohibited. In the fourth quarter of 2019, after checking the list of assets in the red line, Diandong Energy will accrue total amount reduced-value allowance of the book value of RMB342 million in the roadways and other facilities located in the red line.

In the fourth quarter of 2019, Diandong Energy prepared a working resumption plan based on the approval of the Qujing Energy Bureau. According to the working resumption plan, the mining equipment originally purchased for this coal mine cannot meet the technical and performance requirements, and its maintenance cost is high or the repair is extremely difficult; in addition, as the aforementioned equipment has been installed underground, the equipment is obsolete and aging, and has no disposal value. A total of RMB703 million of impairment is accrued. Before receiving the approval for resumption

of work, the Company could not confirm whether the above equipment could meet the requirements for resumption of work, so no impairment was provided in previous years.

The asset retirement status of Huaneng Liaocheng Thermal Power Co., Ltd. and other 4 companies is shown in the following table:

Unit: RMB100 million

3. Concerning the impairment of upfront fees with an amount of RMB530 million, please respectively explain: the names of the projects with the construction halt and projects with low possibility of continuing to advance; the time and reasons

of the construction halt, the estimated investment amount, the invested amount, the reasons for the impairment provision in the current period and the basis for determining the impairment amount; the reasons why it was estimated that possibility of continuing to advance was low, and the rationale of using the low possibility of continuing the advance as the basis for accruing the impairment, the period during which the factors that make it difficult to advance incurred, the reasons for accruing the impairment in the current period.

Reply:

The impairment provision of the upfront fees in 2019 is shown in the following table:

* Huaneng Shanxi Taihang Power Generation Co., Ltd. has accrued an impairment of RMB262 million in years before 2019.

The above-mentioned upfront fees are mainly the necessary pre-project expenditure for the Company to develop new thermal power and new energy power generation projects before the assets are ready for intended use, and will be consolidated together with the projects under construction after the project is ready for intended use. The Company regularly reviews the status, progress, possibility and plan for promotion of all pre-construction projects under suspension and postponement, and continuously invests in projects with development value to realize future profits. For projects that have been identified as less possible to continue to advance, due to the fact that they cannot generate cash flow in the future and there is no market for external disposal, impairment provision was fully accrued.

Please refer to the reply to Question II, “In relation to the Provision for Impairment of Capacity Quota” for the reasons of the low possibility of the expected advance of the capacity quota fee, the period during which it is difficult to advance and the reasons for impairment provision in this period of No.5 and No.6 Generation Units of Huaneng Shantou Haimen Power Generation Co., Ltd.

Huaneng Yangpu Thermal Power Co., Ltd.’s coal power unit project plans to build 2 350MW coal-fired units and 4 follow-up 660MW generation units, and was approved by Hainan Province to carry out preliminary work on 1 December 2015. In 2017, the Hainan Provincial CPC Committee issued the “Decision on Further Strengthening the Construction of Ecological Civilization and Building a Beautiful Hainan in China” (《關於進一步加強生態文明建設譜寫美麗中國海南篇章的決定》), which proposed “On the construction of a green energy island. We will vigorously promote “'coal removal and oil reduction' and speed up the construction dominated by clean energy system with clean

energy electricity and natural gas and supplemented by renewable energy”. We will ban new coal-fired power generation, safely promote nuclear power, and phase out existing coal-fired power plants." The project has been suspended since 2016. In view of the preliminary work prior to the documents issued in 2017, the Company has made multiple efforts to continuously promote the development of the project. Therefore, no impairment was accrued in previous years. On 16 September 2019, the Hainan Provincial Development and Reform Commission issued the "Hainan Provincial Industry Access Prohibition Restriction Catalogue (2019 Edition)" (《海南省產業准入禁止限制目錄(2019年版) 》), which clearly established a negative industrial access list system, and banned coal-fired power generation in new thermal power generation. In the fourth quarter of 2019, after analysis and discussion, the Company believed that the project has no possibility of promotion. In view of the fact that there was no market for external disposal of project expenditures incurred in the previous period, the Company fully accrued impairment provision of RMB38 million in 2019.

The Zuoquan low calorific value coal power generation project of Huaneng Shanxi Taihang Power Co., Ltd. was approved by the Shanxi Provincial Development and Reform Commission on 15 July 2015 to carry out preliminary work. On 26 July 2017, it was included in the list of projects to be suspended by the “Notice on issuing the ‘Opinions on Promoting Supply-side Structural Reform and Preventing and Defusing the Risk of Coal Power Overcapacity’” (Fa Gai Energy [2017] No. 1404) (《印發〈關於推進供給側結構性改革防範化解煤電產能過剩風險的意見〉的通知》(發改能源[2017]1404號) ) jointly issued by 16 ministries and commissions. It has been suspended since 2017. The Company began to negotiate with suppliers to resolve the outstanding contracts, and made impairment provision of RMB248 million and RMB14 million in 2017 and 2018 respectively according to the negotiations. The closing of contracts was completed in 2019 to determine the contract settlement amount. Among them, in 2019, the Company and Alstom Beizhong Power (Beijing) Co., Ltd. ("Beizhong Company") reached a "Major Equipment Contract Supplemental Agreement" through several rounds of negotiations, and both parties agreed to terminate the original contract and agreed that Taihang Power Plant should pay RMB28 million for the termination fee of Beizhong Company. Taihang Power Plant will temporarily include the amount into the project under construction, taking into account the possibility of no income in the future and

made provision for impairment. In 2019, the accumulative impairment provision was RMB30 million.

The extension project of Phase V in Tianjin Huaneng Yangliuqing Thermal Power Co., Ltd. was approved by Tianjin Development and Reform Commission to carry out preliminary work in August 2006. Affected by the gas source, gas price, gas turbine on-grid electricity sales price and heat price, the construction progress was slow and was temporarily shelved in 2014. In 2016, the gas turbine project was included in the Thirteenth Five-year Development Plan of Tianjin, and the Company made multiple efforts to continue to promote the development of the project, but the progress was slow due to the congenital deficiency in the "three prices and two quantities (三價兩量)" of the Tianjin gas turbine project, as well as the adjustment of the national energy policy, etc. In view of the fact that 2020 is the final year of the Thirteenth Five-year Plan, after comprehensive consideration, the Company made a decision in the fourth quarter of 2019 that the possibility of re-approval was extremely low, and there was no possibility for the project to move forward. In view of the fact that there is no market for external disposal of the previous project expenditure, the Company full accrued impairment provision of RMB22 million in 2019.

Mangdangyang project in Huaneng (Longyan) Wind Power Co., Ltd. was planned to install with a capacity of 44MW. The application for preliminary work of Phases I and II were approved by the Fujian Provincial Development and Reform Commission in December 2015 and December 2016, respectively, and the construction began on 25 December 2016. On 22 May 2017, the Leading Group Office of Key Projects in Fujian Province issued the “Letter on Further Research and Demonstration on the Feasibility of Longyan Mangdangyang Wind Power Project” (《關於請對龍巖茫蕩洋風電項目建設可行性 進行進一步研究論證的函》), requiring the suspension of Longyan Mangdangyang wind power project. After the project was suspended by the government, the Company repeatedly reported and communicated with the provincial government and the provincial development and reform commission to actively strive for the resumption of construction, but due to the firm attitude of Fujian Province in strictly controlling onshore wind power, it was always unable to change the government's decision on the suspension of the project. On 22 March 2019, Fujian Forestry Bureau issued a decision to cancel forestry administrative license for Mangdangyang wind power project. After

comprehensive consideration of the above factors in the fourth quarter of 2019, the Company considered that the Mangdangyang wind power project no longer met the resumption conditions, and there was no possibility for the project to move forward. In view of the fact that there is no market for external disposal of the previous project expenditure, the Company fully accrued impairment provision of RMB19 million in 2019.

Phase III Project in Huaneng Taicang Power Co., Ltd. plans to build two 1,260MW ultra-supercritical coal-fired generating units. As the project has been approved by the Provincial Development and Reform Commission, it has not yet started construction. In 2018, Jiangsu Provincial Development and Reform Commission and Jiangsu Energy Bureau issued the “Notice on Implementing the Relevant Work Requirements for the Opinions on Accelerating the Transformation and Upgrading of Chemical. Steel and Coal Power Industries of Jiangsu Province” (Su Fa Gai Gong Ye Fa [2018] No. 931) (《關於貫徹落實加快全省 化工鋼鐵煤電行業轉型升級高品質發展實施意見相關工作要求的通知》(蘇發改工業發〔2018〕931號) ), which states “In Principle, only the coastal areas in Jiangsu Province should deploy large-scale coal-fired power generation projects due to power balance.” After receiving the relevant documents, the Company reported and communicated with the provincial government and the provincial development and reform commission for many times, actively striving for approval, but did not make significant progress. In the fourth quarter of 2019, the Company decided to suspend the project. In view of the fact that there is no market for external disposal of the previous project expenditure, the Company fully accrued impairment provision of RMB15 million in 2019.

Baise Thermal Power Project in Huaneng Power International, Inc., Guangxi Branch (“Baise Power Plant”) plans to construct a coal-fired generating unit with a capacity of 4×660,000 KW, of which the Phase I will be constructed as a 2×660,000 KW ultra-supercritical coal-fired generating units. In December 2009, the Development and Reform Commission of Guangxi Autonomous Region issued a document numbered "Gui Fa Gai Neng Yuan Han [2009] No. 1393", which agreed that the Phase I of Baise Power Plant carry out preliminary work and be included in the “Twelfth Five-year” Energy Development Plan of Guangxi Autonomous Region. In June 2014, the People's Government of Guangxi Zhuang Autonomous Region, the People's Government of Yunnan Province and China Southern Power Grid Co., Ltd. entered into the "Medium-and

Long-Term Cooperation Framework Agreement for Yunnan-Guangxi Electricity Transmission" in Kunming, Yunnan Province. During the “Twelfth Five-year” period, 3 million KW has been transmitted, and during the “Thirteenth Five-year” period, we will strive to increase another 3 million KW. The Phase I of Baise Power Plant has no more capacity in the list of projects put into operation in 2017. On 20 May 2019, the Party Committee and the government office of the autonomous region continued to express their support for Baise Power Plant in the notice of "Implementation Plan for Guangxi to fully connect the Guangdong-Hong Kong-Macau Greater Bay Area (2019-2021)" (《廣西全面對接粵港澳大灣區實施方案(2019-2021) 》). In September 2019, the Energy Bureau of Guangxi Autonomous Region began to prepare the “Thermal Power Project Plan of the Fourteenth Five-year Plan of Guangxi Autonomous Region” (《廣西「十四五」火電專案規劃》), and the “Request on Incorporating Related Power Projects into Planning” (《關於 將有關電源專案納入規劃的請示》), which was reported to the National Energy Administration by the Development and Reform Commission of Guangxi Autonomous Region in December 2019, did not include the Phase I project of Baise Power Plant. As a result, there is no possibility of further promotion of the project, and provision for impairment of RMB15 million was fully accrued at the end of 2019.

Daning River Basin Hydropower Project in Chongqing Wuxi is planned to install 161,000 KW. In January 2013, Chongqing Development and Reform Commission issued the “Letter of Chongqing Development and Reform Commission on the Preliminary Work of Hydropower Resources Development in Daning River Basin” (Yu Fa Gai Neng Han [2013] No. 22) (《重慶市發展 和改革委員會關於大寧河流域水電資源開發前期工作的函》(渝發改能函[2013]22號) ) agreed to carry out preliminary work. In October 2013, Chongqing Branch commissioned Chongqing Surveying and Design Institute of Water Resources and Electric Power to carry out the survey and design of the basin in the pre-feasibility study phase and the compilation of special reports, and the relevant results report was completed in 2014, with a total upfront fee of RMB11 million. As the Daning River is one of the three alternative water intake schemes for the middle route of the South-to-North Water Transfer Project, the study of the water intake scheme for the middle route has not been concluded. According to the overall requirements of the South-to-North Water Transfer Project, the project development needs to be combined with it. Therefore, the project development (high dam or low dam) scheme has not been

determined. In 2019, “Notice on Strict Control of New Hydropower Projects” (Yu Fa Gai Energy [2019] No.517) (《關於 嚴控新建水電項目的通知》(渝發改能源〔2019〕517號) ), the joint document issued by four departments including Chongqing Development and Reform Commission Chongqing Water Conservancy Bureau, Chongqing Ecological Environment Bureau and Chongqing Energy Bureau, requires that, in addition to poverty alleviation projects coordinated with eco-environmental protection and approved by the State Council and its relevant departments and provincial people's governments, new commercially developed small hydropower projects shall be strictly controlled. As a result, there is no possibility of further promotion of the project, and provision for impairment will be fully accrued at the end of 2019, totaling RMB11 million.

4. In relation to the impairment of receivables, please explain: the electricity receivables of Shandong Ruyi and its period for the collection, the agreed time of the period and whether or not it should be entitled to a corresponding compensation, the criteria for the related impairment due to the delayed recovery; the entrusted loans and recovered amount for Shandong Long Island Wind Power Co., Ltd. and its de-registration time.

Reply:

Huaneng Shandong Ruyi (Pakistan) Energy (Private) Co., Ltd. (“Shandong Ruyi”) operates a thermal power project in Pakistan and sells all the electricity to the Pakistani Central Electricity Regulatory Authority. As of 31 December 2019, the accumulated balance of electricity receivable was RMB1.902 billion, and the Pakistani Central Electricity Regulatory Authority generally settles the electricity bills within 1-4 months. According to the electricity purchase and sale agreement, for electricity charges that have not been paid one month after the invoice as stipulated in the contract, the Pakistani Central Electricity Regulatory Authority shall pay deferred interest on electricity receivable to the Company at a rate of 200 basis points higher than the Pakistan interbank offered rate. By the end of 2019, the cumulative deferred interest on electricity charges recovered accounted for only 1.47% of the total deferred interest on electricity charges after commercial transmission, and as at 31 December 2019, the cumulative deferred interest receivable on electricity charges was RMB230 million. After negotiation with the Pakistan Central electricity Regulatory Authority, the repayment of deferred interest receivable on electricity charges will not be significantly accelerated in the future.

According to the “Accounting Standard for Business Enterprises No. 22 — Recognition and Measurement of Financial Instruments”, taking the risk of default as the weight, the Company estimates the expected credit loss by considering the present value of the difference between the cash flow receivable of the contract and the cash flow expected to be received. As part of the expected payback time is longer than 1 year, the time value calculated according to the expected payback time and the estimated discount rate of 14.55% of the loan interest rate in the same period affects the corresponding provision for impairment. An impairment with an aggregate amout of RMB68 million was accrued in 2019.

According to the request of the Changdao county government, Shandong Long Island Wind Power Co., Ltd. (“Long Island Wind Power”) completed the demolition of 33 turbines in the Long Island Conservation Area by the end of 2017. In 2019, shareholders of Long Island Wind Power will reach a unanimous resolution that it will establish a liquidation group to conduct liquidation in accordance with the law. By the end of December 2019, the liquidation had been completed and Huaneng International would no longer merge Long Island Wind Power. Long Island Wind Power has been de-registered on 12 December 2019 after Huaneng Shandong Power Generation Co., Ltd., a subsidiary of Huaneng International, recovered the entrusted loan of RMB16 million according to the liquidation results. The Company will make full provision for impairment of the unrecoverable entrusted loan with a balance of RMB22 million.

II. In relation to the Provision for Impairment of Capacity Quota

As disclosed in the annual report, subject to the market, policies and other objective constraints in 2019, the power generation has been unable to continue to advance, and therefore provided full impairment of the capacity quota of RMB303 million. Please disclose the period or time of the capacity quota and further explain the specific changes of the market and policies in 2019, which led to the power generation project being impossible to continue to advance and the provisions for impairment made in 2019.

Reply:

Huaneng International Power, Inc. Haimen Power Plant ("Haimen Power Plant") originally planned to build six generating units with a capacity of 1 million KW continuously, of which four out of six were continuously built in the Phase I, and all of

them have been put into production. In 2013, in accordance with the relevant requirements of the National Development and Reform Commission, in order to develop No.5 and No.6 Generation Units, Haimen Power Plant implemented the capacity target of 400,000 KW, and completed the preliminary feasibility study review in the same year. In June 2013, in order to support local economic development, the Company and the Shantou Municipal Government established Huaneng Shantou Haimen Power Generation Co., Ltd. ("Haimen Power Generation") according to the proportion of investment at 80:20, as the main development body of No.5 and No.6 Generation Units. From December 2013 to July 2014, Haimen Power Generation paid Shenzhen Nandian Energy Investment Co., Ltd. for a total of 400,000 KW capacity quota for replacing small-capacity units with large-capacity ones, with a total amount of RMB303 million.

Since 2016, the National Development and Reform Commission and the National Energy Administration have issued successively the "Notice on Further Eliminating Backward Capacity in the Coal Power Industry" (Fa Gai Energy [2016]No. 855) (《關於進一步做好煤電行業淘汰落後產能的通知》(發改能源[2016]855號)), "Notice on Promoting the Orderly Development of Coal Power in China" (Fa Gai Energy [2016] No. 565) (《關於促進我國煤電有序發展的通知》(發改能源[2016]565號)), "Notice of the National Energy Administration on Further Regulation of Coal Power Planning and Construction" (Guo Neng Dian Li [2016] No. 275) (《國家能源局關於進一步調控煤電規劃建設的通知》(國能電力[2016]275號)), "Letter on Linking Up the Scale of Coal Power Production in the Thirteenth Five-Year Plan of Guangdong Province" (《關 於銜接廣東省「十三五」煤電投產規模的函》) and other coal power capacity reduction policies, the State regulates coal power development, and the development process of No.5 and No.6 Generation Units of Haimen Power Generation has been affected due to policy guidance, resulting the suspension of the project. On 11 April 2018, the Guangdong Provincial Development and Reform Commission issued the “Guangdong Offshore Wind Power Development Plan (2017-2030) (revision)” (Yue Fa Gai Neng Xin [2018] No. 193) (《廣東省海上風電發展規劃(2017—2030年) (修編) 》(粵發改能新[2018]193號) ), which states that the installed capacity of thermal power in Guangdong Province in 2018 was 80.69 million KW, an increase of 2.9 million KW over the installed capacity of 77.79 million KW in 2017. Based on this, the Company judged that it is still possible for No.5 and No.6 Generation Units of Haimen Power Generation to be approved

for construction, and continued to coordinate efforts to promote the project. Therefore, no impairment has been made before 2019.

On April 2019, Guangdong Province issued the “Notice of Department of Industry and Information Technology of Guangdong Province on Initiating Guangdong Province to Promote the Withdrawal of Outdated Capacity in 2019” (Guangdong Industry and Information Technology Planning Department Policy Letter [2019] No. 830) (《廣東省工業和資訊化廳關於引發廣東省2019年推動落後產能退出工作方案的通知》(粵工信規劃部政策函[2019]830號) ) it is clear that it will be in accordance with the national unified deployment, combined with the actual industrial development and structural adjustment needs of Guangdong Province, 12 industries are adjusted to eliminate backward production capacity and shut down in accordance with the rules and regulations. In the second half of 2019, the Guangdong Provincial Government successively issued a public notice on the shutdown of four batches of small thermal power units, totaling 1.364 million KW. According to the analysis of the Company, from the direction of the current national policy on energy structure adjustment, the thermal power development is still under strict control, it is less likely that No.5 and No.6 Generation Units will be approved for new construction. In addition, the Company learned through open channels that there was no actual capacity quota replacement transaction in Guangdong Province in 2019, so we judged that No.5 and No.6 Generation Units is difficult to transfer due to the capacity quota of 400,000 KW. In summary, the Company believes that it is less likely that No.5 and No.6 Generation Units will continue to be approved, and the capacity quota cannot be sold. Therefore, impairment provision of RMB303 million was fully accrued.

III. In relation to Fund Solvency

The asset-liability ratio of the Company is 71.64%; the current ratio is 0.43; and the quick ratio is 0.37. Considering that the Company's fixed asset renewal rate is less than 50%, it is indicated that the fixed assets renewal and transformation have a large demand for funds. Meanwhile, the Company has plenty of projects under construction and there are many large investment projects with significant investment amounts but up-to-date the current investment progress is less than 30% of the large investment projects. In addition, the Company has debt obligation of nearly RMB100 billion which is due to be payable within a year, and the pressure

for fund by the Company, especially fund for short-term repayment, is relatively great. Please compare the main indicators of the solvency of similar companies, and by combining the Company's short-term and medium-term demands for funds, the Company's operating conditions and profitability, etc., explain the measures to be taken to improve the solvency, especially the ability to repay short-term loans, of the Company.

Reply:

Compared with the three listed power generation companies in the same industry, the Huadian Power international’s current ratio is 0.40 and the quick ratio is 0.35; GD Power’s current ratio is 0.39 and the quick ratio is 0.34; Datang Power Generation’s current ratio is 0.42 and the quick ratio is 0.37; while Huaneng International’s current ratio and quick ratio are in a relatively superior level. The power generation industry is a capital-intensive industry. Electricity revenue is settled every other month and cash is paid for fuel purchases in the month. As a result, the current ratio and quick ratio of listed companies in the power generation industry are mostly lower than the average of listed companies in other industries. The Company's current operating conditions are good; future profit expectations are positive; and it actively deals with short-term debt repayment risks. Specific measures include: 1) Strengthening the overall management of financing. The Company improves overall fund dispatching, optimizes the fund emergency guarantee mechanism, and ensures that the capital supply of all units of the system is in continuous chain and there is no risk of debt default. It also focuses on monitoring the units with financial difficulties and effectively solves their capital needs; 2) Optimizing the debt structure. The Company further reduces the financing cost and improves the risk resistance; 3) Ensuring the smooth flow of the main credit channels. The Company deepens cooperation between banks and enterprises, strengthens “Headquarter to Headquarter” strategic cooperation with large financial institutions to ensure the credit source. By putting emphasis on changing trend of the capital market, the Company actively expands cooperation with other financial institutions on the basis of consolidating the main financing channels, and makes comprehensive use of various financing methods such as financial lease. The Company also completes the bank credit in advance to ensure smooth loan channels and sufficient credit lines; 4) Actively carry out bond financing. The Company flexibly arranges the releasing and variety, striving to

release more and in a full way. Through the above measures, the Company can ensure repay principal and interest when the debt is due, and reduce the risk of cash liquidity.

IV. In relation to Operating Assets of the Company

1. As disclosed in the annual report, at the end of the reporting period, the daily working capital totaled at approximately RMB716 million was advanced by the receivables of Huangtai No.8 Generation Unit, while the Company only possesses 30% of its property rights. The Company is requested to make additional disclosures regarding: (1) the operation mode, current construction or operation status of the unit; (2) the way in which each holders of the property right get paid for the unit; (3) reasons for the large-amount advancement of daily working capital while the Company only possesses 30% of the property rights, and whether other property rights holders advance the working capital in the same proportion and/or the reasons for not advancing; (4) the recovery method of such advance and whether to collect the fund occupation fee; (5) shareholders' names and share ratios of other property rights holders, and whether they are related to the Company.

Reply:

Pursuant to the equity transfer contract entered into between Huaneng Shandong Power Generation Co., Ltd. ("Shandong Power Generation", a subsidiary of China Huaneng Group Co., Ltd. ("Huaneng Group")) and Shandong Luneng Development (Group) Co., Ltd. ("Shandong Luneng") in December 2008, and the relevant reply of the SASAC in February 2009 (Guo Zi Chan Quan [2009] No. 70), the 30% equity of Huangtai No.8 Generation Unit held by Shandong Power Generation were acquired from Shandong Luneng at a consideration of approximately RMB110 million. The other 70% equity is held by Shandong International Trust Co., Ltd. ("Shandong International Trust"). On 14 October 2016, Huaneng International and Huaneng Group entered into an “Agreement on the Transfer of Certain Equity of Companies Between China Huaneng Group Co., Ltd. and Huaneng Power International, Inc.”, Huaneng Group transferred 80% of its equity in Shandong Power Generation to Huaneng International. Since then, 30% equity of Huangtai No.8 Generation Unit have been consolidated into the scope of Huaneng International. Since the acquisition of Huaneng International in 2016, Huangtai No.8 Generation Unit has achieved a cumulative profit of RMB65 million.

Huangtai No.8 Generation Unit, with a capacity of 330,000 KW has been greatly improved its heating capacity upon completion of high back pressure transformation in 2014, which has become the main heat source of Jinan. On 19 January 2020, the Shandong Energy Supervision Office of National Energy Administration reissued the "Electric Power Business License", of which Huangtai No.8 Generation Unit’s useful life has been extended to June 2031.

Although Huangtai No.8 Generation Unit is independently accounted for, it does not have the qualification of legal person and does not form a developed corporate governance structure in accordance with the modern enterprise system. In addition, it is still in a cumulative loss since it was put into operation (RMB284 million by the end of 2019). The parties with property rights did not receive any remuneration such as dividends in No.8 Generation Unit.

Huaneng Jinan Huangtai Power Generation Co., Ltd. (“Huangtai Power Generation”), a subsidiary of Shandong Power Generation, actually carries out the operation and management of Huangtai No.8 Generation Unit. Huangtai No.8 Generation Unit has no independent bank account because it does not have the qualifications of legal person. It receives and disburses working capital through the bank account of Huangtai Power Generation to form current payment with Huangtai Power Generation. This part of the current payment can only be recovered through the daily operation of Huangtai No.8 Generation Unit, which is continuously recovered with the net cash inflow. In 2019, Huangtai Power Generation recovered a total of RMB41 million in advance funds. Since the acquisition of Huaneng International in 2016, it has accumulatively recovered RMB181 million in advance funds. The financial expenses and interest expenses incurred by Huangtai Power Generation are allocated to Huangtai No.8 Generation Unit at certain proportion. The capital occupation fee of RMB10 million is collected in 2019, and the accumulative occupation fee of advance funds of RMB43 million has been recovered since Huaneng International’s acquisition in 2016.

Due to historical reasons, Shandong International Trust believes that there is no evidence to prove that it has a property right relationship with Huangtai No.8 Generation Unit, so it will not advance working capital in accordance with the initial recognized investment proportion. The said current payment can only be recovered through the daily operation of Huangtai No.8 Generation Unit, which is continuously recovered with the net

cash inflow. In view of the Huangtai No.8 Generation Unit can operate for another 12 years, and is one of the main heat sources of Jinan, there is no risk of shutdown in the short term. It is expected that this part of the advance funds can be fully recovered.

Founded in March 1987, Shandong International Trust is a non-bank financial institution approved by the People’s Bank of China and the People’s Government of Shandong Province. It’s currently a councillorship of China Trustee Association and has no related relationship with Huaneng International.

2. As disclosed in the annual report, Huangtai Power, a subsidiary of Shandong Power, has shut down No.5 and No.6 Generation Units in the previous year, and its long-term capital occupancy of RMB261 million has been fully accrued for bad debt provisions. Please further disclose: (1) the relationship between the Company and No.5 and No.6 units; (2) the reason for the Company's large advance payment; (3) the relationship with No.8 unit and the differences in the operation mode; (4) considering the aforementioned situation, please clarify whether No.8 unit has a similar shutdown risk.

Reply:

The Huangtai No.5 and No.6 Generation Units were installed with 2×100 MW, whose construction started in March 1982 and put into operation in September and December 1983, respectively. It was managed by the former Shandong Power Industry Bureau before 2002. After the power reform in 2003, SASAC of Shandong Province clearly stated that it will be managed by Shandong Luhua Energy Company, a subsidiary of Shandong Luneng, and its actual operation has been managed by Huangtai Power Generation. At the end of 2008, Shandong Power Generation acquired part of Shandong Luneng’s power generation assets (including Huangtai Power Generation) in Shandong, and Huangtai No.5 and No.6 Generation Units continued to be managed by Huangtai Power Generation, which became a subsidiary of Shandong Power Generation as a result of the acquisition. Shandong Power Generation and Huangtai Power Generation do not have any interest in Huangtai No.5 and No.6 Generation Units.

Although Huangtai No.5 and No.6 Generation Units are independently accounted for, they do not have the qualification of legal person and do not have bank account. Like Huangtai No.8 Generation Unit, they receive and disburse working capital through the bank account of Huangtai Power Generation. Huangtai No.5 and No.6 Generation Units’

operating losses results in the occupation of funds for Huangtai Power Generation. According to the shutdown plan of small thermal power units in the “Eleventh Five-year” Plan of the State and Shandong Province, Huangtai No.5 and No.6 Generation Units were shut down in April 2010. With the shutdown, Huangtai Power Generation fully accrued provision for bad debts at the end of 2009 for the remaining capital balance of RMB261 million occupied by Huangtai No.5 and No.6 Generation Units. In 2016, Huaneng International acquired Shandong Power Generation, and the above impairment had no impact on the Company's financial statements.

Huangtai No.5 and No.6 Generation Units, like Huangtai No.8 Generation Unit, do not have the qualification of legal person and do not have bank account, as they receive and disburse working capital through the bank account of Huangtai Power Generation. Huangtai No.8 Generation Unit has been greatly improved its heating capacity upon completion of high back pressure transformation in 2014, which has become the one of main heat sources of Jinan. On 19 January 2020, the Shandong Energy Supervision Office of National Energy Administration reissued the "Electric Power Business License", of which Huangtai No.8 Generation Unit’s useful life has been extended to June 2031. There is no similar shutdown risk for Huangtai No.8 Generation Unit.

V. In relation to Target Company of the Previous Acquisitions and Goodwill

1. As disclosed in the annual report, the Company acquired 5 subsidiaries including Shandong Power from Huaneng Group in 2016. Due to the poor performance of the target companies, according to the profit compensation agreement, the Company shall be compensated based on the shortfall of accumulated actual net profit of RMB1.009 billion from year 2018 to 2019. By combining the changes in the main factors affecting the profit forecast and the operation of similar company with the target companies (in the same region, with the same type of business), please explain the reasons for the huge difference between the actual profit of the acquisition and the forecasted one. Based on the current operating conditions, external environment, and others of the target companies, explain the future operating trends of these companies, and whether the related party acquisition involves high pricing and prejudice the interests of listed companies.

Company’s Reply:

On 14 October 2016, the Company entered into an equity transfer agreement and the Profit Forecast Compensation Agreement with Huaneng Group. Pursuant to these agreements, Huaneng Group undertook to compensate the Company in cash for the difference between the accumulated actual net profit at the end of each year and the accumulated net profit forecast at the end of the year of five subsidiaries of Shandong Power during the compensation period, i.e. from 2017 to 2019. The following table set out the differences between actual profit and profit forecast in 2018 and 2019.

The main factors affecting the profits of thermal power plants include the volume of electricity sold, electricity price and fuel price.

In 2019, except for Canal Power, the actual completion on electricity sold and tariff indicators of other four companies were better than profit forecast. With electric power enterprises from other provinces tapping into Shangdong market, although Canal Power made achievements on striving for external system power, thermal coal, and peak load and frequency regulation reward under the circumstance that the government significantly

decreased the electric quantity at the beginning of the year, the actual completion of electricity sold and electricity revenue indicators lagged behind the profit forecast.

The main reason for the difference between the profit forecast and the actual profit in 2018 and 2019 was that the fuel price was significantly higher than expected when the profit forecast was prepared in 2016. In the first half of 2016, the thermal coal prices in Shandong were at a low level, and began to rise in the second half of the year. When preparing the profit forecast, the fuel price forecast was based on the actual situation in the first half of 2016 and the forecast for the whole year. It was considered that the possibility of a substantial increase in the future was unlikely. Therefore, from 2017 to 2019, the annual increase was calculated at 1%. But in fact, since 2017, major changes have taken place in national policies and fuel markets, leading to a sharp and rapid increase in fuel prices in 2017, and fuel prices maintained at a high level in 2018 and 2019. The main reasons for the sharp increase in fuel prices include: 1) With the deep implementation of supply-side reform of China in 2017, coal enterprises shut down outdated production facilities. Large coal enterprises have strengthened in terms of market control and concentration, making supply relatively short, and leading to a significant increase in coal prices; 2) Major changes occurred in transportation. Affected by the enhancement of China’s environmental protection policy, the overloading of transportation vehicles was strictly controlled, and the fuel price increased at the same time, resulting in the rise of freight costs; 3) With the rise of international coal prices, domestic fuel prices went up accordingly; 4) Although China has introduced measures such as the “green price range of thermal coal”, with an effort to adjust the price of thermal coal to a reasonable level, the performance was not ideal. The following table shows the differences between the estimated unit price of standard coal (tax exclusive) and the actual coal price when the Company prepared the profit forecast:

For the five power generation companies above, the actual unit price of standard coal consumed in 2018 rose by an average of RMB299 per ton than the predicted price, making the net profit of five power generation companies lower than the forecast by RMB1.597 billion. The actual unit price of standard coal consumed in 2019 rose by an average of RMB256 per ton than the predicted price, making the net profit of five power generation companies lower than the forecast by RMB1.403 billion.

The following table shows the thermal coal price index from 2017 to 2019. The fuel price change trends of the above five power generation companies are consistent with the changes in thermal coal price index.

Unit: RMB per ton

Data source: National Development and Reform Commission of the People's Republic of China (http://jgjc.ndrc.gov.cn/zgdmjgzs.aspx?clmId=syjgzs6)

The thermal coal price index is the delivery price converted according to the calorific value of 5,000 kcal/kg, therefore it is lower than the unit price of standard coal (converted according to the calorific value of 7,000 kcal/kg).

Since there are no publicly disclosed fuel prices of other power plants of the similar companies in the same region, the following table only lists some of the power plants of the Company in Shandong. The changes in the fuel prices of the above five power companies are consistent with these companies.

Unit: RMB per ton

When preparing the profit forecast in 2016, it was impossible to predict the unfavorable factors that caused the coal price to rise sharply, resulting in a large difference between the actual completion and the predicted value, but this price fluctuation was industry-wide. The coal price change in the five companies’ profit forecast unit was consistent with the trend of the similar enterprise.

In 2019, the net profit of Laiwu Power, Jiaxiang Power, Canal Power, Liaocheng Thermal Power and Yantai Power were RMB236 million, RMB56 million, RMB4 million, RMB7 million and RMB18 million, respectively. Based on the prediction of the electricity market and fuel prices, the Company believes that the profitability of the five power generation companies in 2020 is expected to improve as compared with that of 2019, for the following reasons:

1)          Demand for electricity: In 2020, electricity consumption in Shangdong will continue to grow steadily. It is expected that the electricity consumption of the whole society will grow by 4% year-on-year, an increase of 20.3 billion kWh year-on-year. However, due to factors such as the policy of transmission from outside to Shandong and the formal operation of the spot market, the utilization hours of thermal power units show a downward trend. In 2020, the Energy Administration of Shandong Province issues a provincial schedule to determine power by heat with the priority generation plan of 51.964 billion kWh. With the capacity unchanged, the power determined by heat supply units grows by 37.738 billion kWh year-on-year, an increase of 265.27% year-on-year. New heating facilities of Laiwu Power and Jiaxiang Power are put into production. Liaocheng Thermal Power, Yantai Power and Canal Power continue to develop the thermal market. The above-mentioned companies make full use of the advantages of thermal power and make up for the effect of external power and spot market operation on utilization hours, and also increase the heating efficiency.

2)          Fuel market: As for the expected supply of fuel in 2020, with the impact of “external power input to Shandong” and the rise of new energy power, the demand for

thermal coal in the Shandong market has decreased. Additional production capacity of China’s coal resources has been continuously released, and the railway transportation capacity is sufficient, with a loose situation of overall coal supply. The unit price of standard coal consumed by the five companies is expected to decrease by RMB20 to RMB50 per ton year-on-year.

The acquisition does not involve high pricing or prejudice the interests of listed companies after verification. The reasons are as follows:

1. The procedures of decision-making and approval on the acquisition are in compliance with laws and regulations.

The Proposal Regarding the Acquisition of the Equity Interests of Shandong Power, the Jilin Power, the Heilongjiang Power and the Zhongyuan CCGT was considered and passed at the 21th meeting of the eighth session of the board of directors of the Company convened on 14 October 2016, to agree the Company to acquire 80% equity interests in Shandong Power, 100% equity interests in Jilin Power, 100% equity interests in Heilongjiang Power and 90% equity interests in Zhongyuan CCGT held by Huaneng Group at a price of RMB15,113,825,800. Connected directors of the Company, being Cao Peixi, Guo Junming, Liu Guoyue, Li Shiqi, Huang Jian and Fan Xiaxia had abstained from voting on the resolution in respect of the acquisition pursuant to the Listing Rules of the Shanghai Stock Exchange and the Stock Exchange Listing Rules.

According to the relevant laws and regulations such as the Guidelines of the Shanghai Stock Exchange for the Implementation of the Connected Transactions of Listed Companies, income approach was adopted to value five subsidiaries of Shandong Power and the valuation results were over 100% of the book value. According to the Profit Forecast Compensation Agreement entered into between Huaneng Group and the Company, Huaneng Group undertook to compensate the Company in cash for the difference between accumulated actual net profit at the end of the period in each year and the accumulated forecast net profit at the end of the period of the aforementioned companies during the compensation period.

The board of directors (and independent directors) of the Company are of the view that the Transfer Agreement and the Profit Forecast Compensation Agreement are entered into: (1) on normal commercial terms (on arm’s length basis or on terms no less favourable to the Company than terms available from independent third parties); (2) on terms that are fair and reasonable and in the interests of the Company and its shareholders as a whole; and (3) in the ordinary and usual course of business of the Company. The transaction price of this transaction is determined based on the asset valuation results of Shandong Power, Jilin Power, Heilongjiang Power, and Zhongyuan CCGT as of 31 May 2016, and income approach valuation results are adopted for some subsidiaries of Shandong Power as the valuation conclusion and the basis for pricing this transaction. The board of directors (and independent directors) of the Company believe that, based on the valuation report and the description of the valuation approach provided by the valuation agency, the important valuation parameters and basis such as valuation value analysis principle, calculation model and expected revenue, revenue period, discount rate used by the valuation agency are correct, and the valuation method and valuation conclusion are reasonable.

The independent directors of the Company, being Li Zhensheng, Yue Heng, Geng Jianxin, Xia Qing and Xu Mengzhou have already approved the acquisition in advance and expressed their independent opinions: (1) the voting procedures of the Board of Directors of the Company in respect of the connected transactions under the Proposal Regarding the Acquisition of the Equity Interests of Shandong Power, the Jilin Power, the Heilongjiang Power and the Zhongyuan CCGT comply with the provisions of the Company’s articles of association and the Listing Rules of the Shanghai Stock Exchange; (2) transactions under the Proposal Regarding the Acquisition of the Equity Interests of Shandong Power, the Jilin Power, the Heilongjiang Power and the Zhongyuan CCGT are fair to the Company and the shareholders as a whole, and are in line with the Company’s interests; and (3) the Company has appointed an asset valuation agency with securities business qualification to evaluate the target assets. The asset valuation agency has no actual and expected interests or conflicts with the Company, China Huaneng Group and

the target company, and the valuations is in accordance with the principles and requirements of objectiveness, fairness, and independence, and is fully independent and professional. The premise and assumption of this valuation are reasonable. The selected valuation method fully considers the purpose of the transaction and the actual situation of the valuation object. The valuation method is appropriate, and the valuation results are fair and reasonable. The transaction price of the target assets in this transaction is based on the valuation results determined by the valuation report issued by an asset valuation agency with securities business qualifications, and is determined through negotiation between all parties. The pricing principles and methods of this transaction are appropriate and fair, and there is no situation that harms the interests of the Company and the minority shareholders.

The audit committee issued a written review opinion on the acquisition and considered that: (1) The pricing of the connected transactions under the Proposal Regarding the Acquisition of the Equity Interests of Shandong Power, the Jilin Power, the Heilongjiang Power and the Zhongyuan CCGT was based on the asset valuation results, and was determined through repeated negotiations between the parties to the transaction, which was fair to the Company and shareholders as a whole and in the interests of the Company; (2) it agreed with the connected transactions under the Proposal Regarding the Acquisition of the Equity Interests of Shandong Power, the Jilin Power, the Heilongjiang Power and the Zhongyuan CCGT and agreed to submit it to the Company’s board of directors for consideration.

According to the Stock Exchange Listing Rules, the Company appointed an independent financial advisor to issue an independent financial advisory opinion letter on the acquisition for reference by the independent board committee and independent shareholders.

The Company convened an extraordinary general meeting on 30 November 2016 and approved the relevant content of the acquisition.

To sum up, necessary decision-making and approval procedures have been performed for the acquisition in accordance with the relevant laws and regulations such as

the Listing Rules of Shanghai Stock Exchange, Stock Exchange Listing Rules, and the Guidelines of the Shanghai Stock Exchange for the Implementation of the Connected Transactions of Listed Companies.

2. The acquisition is reasonably priced.

The acquisition of part of Shandong Power’s equity interest by the Company implements Huaneng Group’s committment to avoid business competition with the Company. This is conducive to further expanding scale, increasing the market share and improving the competitiveness of the Company. In this acquisition, ZhongHe Appraisal Co., Ltd. was appointed to issue an asset valuation report for which state-owned asset valuation filing procedures have been fulfilled in accordance with the laws. In pricing this acquisition, factors such as the production and operation and financial status, and future development plans of the target assets, as well as strategic synergies with the Company were considered, and comprehensive consideration was given to capital market trends, valuation levels of companies in the same industry, and past transaction valuations, asset valuation results of each target company, etc. In addition, in accordance with the relevant laws and regulations such as the Guidelines of the Shanghai Stock Exchange for the Implementation of the Connected Transactions of Listed Companies, income approach was adopted to value the five subsidiaries of Shandong Power of which the valuation results were over 100% of the book value. According to the Profit Forecast Compensation Agreement entered into between Huaneng Group and the Company, Huaneng Group undertook to compensate the Company in cash for the difference between accumulated actual net profit and the accumulated forecast net profit at the end of the current period of the aforementioned companies during the compensation period.

(1) Explanation of rationale of assumptions for income approach valuation

According to the valuation report of ZhongHe Appraisal Co., Ltd., the core assumptions adopted in the income approach to value the 17 subsidiaries of Shandong Power are as follows:

1) On-grid tariffs

The on-grid tariffs applied in this revenue forecast are based on the latest benchmark of on-grid tariffs (before the date of the issuance of the report) as announced by Shandong Provincial Price Bureau, taking into account the effect of desulphurization, denitration, deducting tariff, and ultra clean emission tariff (each tariff subject to the prevailing national policies on the valuation base date) that obtained after reconstruction and acceptance during the income forecast period, and except the above factors, the effect of other factors on the tariffs will not be taken into consideration;

According to the “Notice in relation to Reducing the On-grid Tariffs for Coal Power Generation and the Price of Electricity for General Industrial and Commercial Use” (Fai Gai Jia Ge [2015] No. 3105) issued by the National Development and Reform Commission and the benchmark tariff for Shandong Province, since 2016, the benchmark on-grid tariff (including desulfuration, denitration and dust elimination) was RMB0.3729/KWhr (inclusive of tax). The price for the generators conforming to ultra-low emission standards was RMB0.3829/KWhr (inclusive of tax). The actual on- grid benchmark tariffs and green electricity tariffs of each power plant are based on the tariff approved by Shandong Provincial Price Bureau:

a) Notice Regarding Lowering the On-grid Tariffs and Retail Tariffs (Lu Jia Ge Yi Fa [2015] No. 131);

b) Notice Regarding the Implementation of Green Electricity Tariff for Coal-fired Generating Units with Environmental Protection Facilities Accepted in December 2015 (Lu Jia Ge Yi Han [2016] No. 4);

c) Notice Regarding the Implementation of Improving the Tariff Policy of Onshore Wind and Photovoltaic Power Generation (the document of Fa Gai Jia Ge [2015] No. 3044) (Lu Jia Ge Yi Fa [2016] No. 7);

d) Notice Regarding the Implementation of Green Electricity Tariff for Coal-fired Generating Units with Environmental Protection Facilities Accepted in January 2016 (Lu Jia Ge Yi Han [2016] No. 8);

e) Letter Regarding the Implementation of Ultra-low Emission Tariff for Certain Coal-fired Generating Units (Lu Jia Ge Yi Han [2016] No. 43);

f) Letter Regarding the Implementation of Ultra-low Emission Tariff for Coal-fired Generating Units Accepted by the Provincial Environmental Protection Authorities in the First Quarter of 2016 (Lu Jia Ge Yi Han [2016] No. 48);

g) Notice Regarding the Implementation of Green Electricity Tariff for Coal-fired Generating Units with Environmental Protection Facilities Accepted in February and March 2016 (Lu Jia Ge Yi Han [2016] No. 49);

h) Reply Regarding the On-grid Tariffs for Renewable Energy Generation Projects Including Yinan Linuo Solar Energy Power Engineering Co., Ltd. (Lu Jia Ge Yi Fa [2016] No. 59);

i) Reply Regarding the On-grid Tariffs for Coal-fired Generating Units Including No. 7 Generating Unit of Huaneng Laiwu Power Plant (Lu Jia Ge Yi Fa [2016] No. 97).

2) Utilization hours

The 500 KV Xin-Liao double-line completed on 1 March 2005 realized the interconnection between Shandong Power Grid and North China Power Grid, and that supply was greater than demand in the power industry, the power generation volume was reduced compared against 2014. According to the latest business directives for assessed companies, the power generation volume in 2016 is forecasted to continue to reduce. It is forecasted that the generation hours may reduce slightly in 2018 and gradually stabilise from 2019 onwards. The trend for the generation hours for each power plant is the same, save for variations as a result of partial grid adjustments etc.

3) Fuel cost

Coal consumption for power generation is one of the important assessment indicators for thermal power plants. Each power plant continuously conducts technical improvement, with a decrease in coal consumption each year in the past years. Some of the power plants have coal consumption levels better than the industry average and are in leading positions.

The forecast for the coal consumption during the forecast period for the assessed companies mainly made reference to the historical coal consumption levels.

Coal price is affected by market prices and fuel coal price. In recent years, the price of coal had continuously stayed low, and the procurement costs for power plants have been reducing each year. Affected by factors in 2016 such as the reduction in production capacity of the coal and charcoal industry, the prices of coal and charcoal showed a rising trend. This forecast is based on the financial forecasts from companies in recent years and recent procurement data, with the rise in coal and charcoal prices considered. The coal price during the forecast period of June 2016 to December 2016 is based on the coal prices upon arrival at each respective power plant during January 2016 to August 2016 and the loss on entering the furnace, and with an increase rate of 1% per year for the years following until stabilisation.

The forecast for other costs such as inspection and maintenance costs, management costs etc. all made reference to the historical levels of these companies.

Based on the above analysis, at the time of the acquisition, the valuation assumptions have been reasonably predicted based on the historical operation of the target companies and the upstream and downstream market conditions, and there is no case of deliberately raising the valuation results.

(2) The valuation level of the acquisition in line with that of comparable companies and comparable transactions

The comparison between the valuation level of the acquisition and that of comparable companies and comparable transactions is as follows:

Among them, the thermal power industry in the power sector under public utilities in the Shenwan industry classification is selected as the classification standard for the comparable companies, and except for the abnormal companies, a total of 21 listed companies in the same industry are obtained. The calculation is based on WIND’s stock prices on 30 September 2016 and the 2015 annual report data published by the companies.

Samples selected as comparable transactions are transaction cases of A-share listed companies acquiring thermal power assets from 2010 to the implementation of the acquisition. Acquisition of thermal power assets by the listed companies in thermal power classification under power sector in the public utilities in the Shenwan industry classification and the listed companies in the power, thermal production and supply industry under the CSRC industry classification are mainly selected. At the same time, cases of some non-electric power companies to acquire thermal power assets are supplemented to form the overall sample of this comparative analysis.

The P/E ratio and P/B ratio of the acquisition in 2015 were 10.0 and 2.4 times, respectively. The P/E ratio of the acquisition is basically the same as the range of P/E ratio of the previous comparable transactions, but is lower than that of comparable companies. The P/B ratio of the acquisition is higher than that of comparable transactions and comparable companies mainly attributable to the following reasons: 1) Shandong province has a developed economy and a power mix that mainly relies on thermal power, whose installed capacity secures a strong competitive edge in the market in terms of both scale and market share; 2) Shandong Power owns some important power plants under unified management within the Shandong power grid and over half of its installed capacities are cogeneration units, which makes it a major heat supplier with good economic benefits on the local market. The valuation results of income approach can more objectively reflect the market value of the entire equity interest of the shareholders of the assessed companies on the valuation base date; 3) The target of the acquisition is an unlisted company, with single financing channel, and relatively high financial leverage. It

has a lower proportion of equity capital than the mature listed power generation group and low level of net asset. Therefore, the valuation of the P/B ratio corresponding to the acquisition is relatively high.

Based on the above analysis, an appraisal agency has been appointed for the acquisition to issue an asset valuation report which has fulfilled the state-owned asset valuation filing procedures as required by laws. The relevant valuation assumptions are reasonable. The valuation level of the acquisition is basically in line with that of comparable companies and comparable transactions. There is no situation where the price of the connected acquisitions is too high and damages the interests of the listed company.

2. In 2008, the Company acquired Singapore Tuas Power, obtaining a lot of goodwill and intangible assets. As at the end of 2019, the balance of goodwill related to Tuas Power amounted to RMB11.191 billion; the balance of intangible assets was RMB4.149 billion. By combining the relevant valuation, profit forecast at the time of the Company's acquisition, and the actual operation and performance of the target company since the acquisition, please supplement and further disclose the process in which the Company makes the impairment test on goodwill, and explain the rationale of not impairing the goodwill by the Company.

Reply:

1) Explanation of the difference among the target valuation, profit forecast and actual operation and performance at the time of Tuas Power’s acquisition

In 2008, the Company participated in the international bidding for Tuas Power Limited project in Singapore on the basis of fulfilling the national approval process and the internal decision-making procedures of Huaneng Group. According to the results of due diligence, the enterprise value of Tuas Power Limited (“Tuas Power”) was estimated to be SGD3.8 to SGD4.35 billion with the update of gas units as the basic valuation plan. As the tight delivery time requirements of the seller Singapore Temasek Holdings (Private) Limited (“Temasek”) and the long approval process of the listed company, Huaneng Group acted as the acquirer for bidding upon study, therefore, SinoSing Power Pte. Ltd. (“SinoSing Power”) was specially established, and the acquisition of 100% equity interests in Tuas Power owned by Temasek was completed on 24 March 2008, at

the consideration of SGD4.235 billion. Upon approval by the Ministry of Commerce on 27 June 2008, Huaneng Group transferred the equity interests in Tuas Power to the Company at fair price.

Since the acquisition in 2008, Tuas Power has maintained a stable personnel, operation and production level, and achieved better operating results. As an important part of the Company’s asset portfolio, in addition to diversifying the geographical and fuel risks in respect of the Company’s operations, Tuas Power project also plays an important role in strengthening brand image of Huaneng, promoting the enhancement of the Company’s management, training international talents and boosting the development of the Company’s international businesses. From 2008 to 2014, Tuas Power project made continuous profits after the acquisition, which significantly improved the Company’s overall operating results. Since 2013, with the successive commissioning of new units in the power market of Singapore and the increase in supply capacity after the commissioning of the LNG terminals in Singapore, the power market in Singapore has entered an oversupply state, and the gross profit from electricity sales by power producers has decreased. Despite Tuas Power still maintains safe and stable production, due to the combined impact of lower-than-expected growth in power demand, excess natural gas contracts from producers and adjustments in power policy, the profitability of the project has declined, and started to report operating loss from 2015. However, the earnings before interest, taxes, depreciation and amortization (“EBITDA”) is always profitable. The following table set out the comparison between the forecasted profit in the future year and the realization of profit at the time of acquisition in 2008.

In recent years, Tuas Power’s actual profit is lower than profit forecasts mainly due to 1) the overall oversupply of the power market in Singapore. Affected by the high

returns of power producers at an earlier stage and the government’s stimulus policies on power investment, approximately 4 million KW of new units have been successively put into operation in Singapore since the second half of 2012. After the financial crisis, as the slow recovery of world economy, lower-than-expected growth in power demand and oversupply of the market, the power market would take time to achieve the rebalance of supply and demand; 2) adjustments in power market policy in Singapore. The Energy Market Authority of Singapore will gradually reduce the percentage of fixed contractual electricity quantity determined by the long run marginal cost (LRMC) from 55% in 2008 to 20% in the first half of 2019, and approximately 16% in the second half of 2019 to 2023; 3) an oversupply of natural gas contracts as a result of the lower-than-expected demand in the power market, and the limitation of the flexibility of power producers in bidding by the fixed-price pressure for natural gas contracts, resulting in a significant decrease in the profit margin contribution of electricity quantity from electricity pool and retail contracts.

2) Explanation on impairment test on goodwill

The aforesaid acquisitions obtained goodwill of SGD2.225 billion and intangible assets of power generation licenses with no fixed useful life of SGD802 million (as of 31 December 2019, equivalents of RMB4.149 billion). In 2013, the Company made a provision for impairment on goodwill of SGD62 million (equivalents of RMB392 million). As of 31 December 2019, the balance of goodwill was SGD2.163 billion (equivalents of RMB11.191 billion).

In accordance with the relevant provisions of the “Accounting Standards for Business Enterprises No. 8-Asset Impairment”, the Company allocates the goodwill obtained from the acquisition of Tuas Power to the asset group of Tuas Power Generation Pte. Ltd. (“Tuas Power Generation” or “TPG”), the power licenses included in the asset group, and carries out impairment tests on an annual basis. On 31 December 2019, the recoverable amount of asset group of Tuas Power Generation (SGD4.552 billion) was higher than the book value of the asset group (SGD3.823 billion, of which long-term assets such as equipment and facilities amounted to SGD858 million, goodwill amounted to SGD2.163 billion and power generation licenses amounted to SGD802 million), no provision of impairment is required. Under the current basic assumptions, there is no impairment on goodwill in Tuas Power Generation. The main parameters used in

estimating the recoverable amount of the asset group using the discounted future cash flow method include electricity sales volume, profit margin contribution of electricity sales, perpetual cash flow growth rate and discount rate.

The Energy Market Authority (“EMA”) of Singapore forecasted that power demand will increase by 1.5% to 2.1% over the next decade (2020-2030). The power market outlook report in Singapore released by the EMA on 29 October 2019 stated that, after considering the impact of population, climate and economy, it is expected that the power demand growth will increase by 1.50% to 2.1% in the next five years. According to the 2019 report of the EMA, the compound annual growth rate of the power market in 2008-2018 was approximately 2.4%. Tuas Power’s share of Singapore’s power market has remained basically stable, and the proportion of such share in 2017, 2018 and 2019 was 21.9%, 21.1% and 20.7%, respectively. As such, Tuas Power Generation expects its electricity sale volume from 2020 to 2024, and estimates the perpetual growth rate after five years will be 2%.

In 2019, the profit margin contribution of electricity sales of Tuas Power Generation was SGD12.41/ MWh. In the next five years, based on the judgment that the Singapore’s power market must have sustainable development capabilities, the power market will resume its reasonable return, the marginal contribution of electricity sales will steadily increase, for reasons including: 1) According to the requirements of the government of Singapore, Singapore’s power reserve requires 30% extra capacity to ensure power safety. According to the latest market outlook report of the EMA of Singapore (considering the decommissioning of units), and based on the statistics of power generating units reported by various power producers, from 2021, the power reserve capacity ratio will be lower than the requirement of 30% to 25%, and will continue to decline slightly during the next five years. In order to meet the requirements of Singapore’s power reserve capacity ratio, the market is required to restore long-term profit margin before and after 2024 (unit

construction usually takes 2 years) to attract investment. Considering that the market recovery is a gradual process, Tuas Power Generation believes that from 2020 to 2024, the profit margin contribution of electricity sales will gradually rise back to the reasonable standard (the current marginal standard of fixed contracts is at an average of SGD47/MWh); 2) the long-term natural gas contracts signed by major power producers in Singapore will expire in 2024, and the power producers will rationally sign the minimum purchase volume in the new long-term contract, since then the competition situation in the power market is expected to change in a positive manner; 3) The old oil engines and low-efficiency single-cycle gas turbines of Singapore’s power producers have been decommissioned year by year due to their lack of market competitiveness and the decline in number of spare units in the market. With the increase in the motor age of high-efficiency combined cycle units with a capacity proportion of 77% (approximately 97% of power generation proportion), the output of the units has declined slightly year by year. Based on the current supply and demand relationship in the power market and information from power producers, it is estimated that there will be no new large-scale combined cycle units are put into production from 2020 to 2024. Therefore, the oversupply of Singapore’s power market is gradually improved. It is estimated that the balance of supply and demand will be reached around 2022-2024, and the supply will gradually tighten, and the marginal contribution of the power pool will gradually recover, which will promote the increase in gross profit of retail tariff with proportion of 75-80%, its marginal contribution will gradually approaching the long-term marginal cost, that is, the marginal contribution of existing fixed contracts (approximately SGD47/MWh currently).

The Company estimates the after-tax discount rate based on the weighted average cost of capital (WACC) mentioned in (8) under the Reply I. The major parameters for the calculation of after-tax WACC consists of: 1) the risk-free return rate (at return rate of 30-year SGD Treasury bond rates due in 2046) is 2.21%; 2) the cost of debt capital is 4.03%; 3) the cost of equity capital is 8.74%. After calculating the after-tax discount rate, the pre-tax discount rate is determined through iterative loop calculation according to the assumption of "pre-tax cash flow present value = after-tax cash flow present value". After calculation, the Company adopted a pre-tax discount rate of 7.33%.

The EBITDA recorded by Tuas Power Generation in 2019 was outperformed the forecast for EBITDA in 2019 in conducting the impairment test in 2018.

According to the information disclosed in the 2018 annual report, in the impairment test for goodwill, another two power generation companies in Singapore (i.e. PowerSeraya Limited (“PowerSeraya”) and Senoko Power Pte. Ltd. (“Senoko”)) forecasted that the growth rate of electricity sales for PowerSeraya and Senoko would be 2% and 2.5%, respectively. For the pre-tax discount rate, PowerSeraya and Senoko used 5.9% and 6.5 %, respectively, which is basically consistent with the assumption used by Tuas Power.

VI. In relation to Related Party Procurement

As disclosed in the annual report, during the reporting period, among the five largest suppliers of the Company, the procurement of related parties amounted to RMB26.76 billion, accounting for 17.95% of the total procurement amount of the year with an increase of RMB11.5 billion or 43% compared to the same period last year. Meanwhile, the power generation decreased by 6% year-on-year. Combined with the Company's decline in power generation and total procurement during the reporting period, please explain the reasons for the large increase in related procurement year-on-year.

Company’s Reply:

In 2019, China Huaneng Group Fuel Co., Ltd. (“Huaneng Fuel Company”), a related party of the Company, increased its supply capacity and market competitiveness, and its supply price was lower than the market price. The Company has increased its cooperation with Huaneng Fuel Company from the perspective of further reducing fuel purchase prices and thus costs. The annual purchase amount from Huaneng Fuel Company has increased significantly year-on-year.

In 2019, the domestic power generation of the Company was 405.06 billion kWh, a year-on-year decrease of 5.91%; a total of 183 million tons of coal was purchased throughout the year, and the average purchase price of raw coal was RMB505.1 per ton, of which:

A total of 56.11 million tons of raw coal was purchased from Huaneng Fuel Company, with a purchase amount of RMB26.76 billion, within the annual cap for connected transactions as approved by the board of directors and the shareholders’ general meeting. The average raw coal price to the plant was RMB476.9 per ton, which was lower

than the Company’s average purchase price of RMB28.2 per ton, equivalent to the closing price of RMB517.2 per ton in the northern port, which was lower than the average value of the closing price of the northern port in 2019 (CCI index) of RMB74.9 per ton. This presented a great competitive advantage compared with the market price.

Prior to the foregoing, Huaneng Fuel Company established Huaneng Supply Chain Platform Technology Co., Ltd. in September 2018 to increase market influence and competitiveness. Since 2019, its coal supply capacity has increased significantly, with greater market influence and right of speech. In terms of pricing principle, the coal supply price is more favourable than the price offered by an independent third party for the Company’s purchase.

As one of the Company’s market suppliers, Huaneng Fuel Company enjoys the same treatment as other third-party suppliers, and participates in the Company’s fuel supply in accordance with the market principle of being open, equal and fair under the same market competition conditions.

VII. According to the annual report, the Company and its subsidiaries obtained their power generation licenses due to the acquisition of Tuas Power Limited, which was initially measured at the fair value at the time of acquisition. Tuas Power operates its power plants under a license issued by the Energy Market Authority of Singapore, with a term of 30 years (2003 to 2032). In 2011, the term of the license was extended to 2044 with minimal cost, and can be further extended. The Company and its subsidiaries are expected to abide by the relevant rules and regulations during the extension process based on the existing market framework. Based on the assessment of the useful life of the power generation license, the Company and its subsidiaries believe that the useful life is uncertain and therefore will not be amortized. In this regard, please explain: (1) The basis for the Company to consider that the useful life is uncertain (2) The basis for the Company to recognize the power generation license acquired as an asset, and the business nature of the acquisition.

Company’s Reply:

Relevant provisions of the standards

Article 16 of "Accounting Standards for Business Enterprises No. 6 - Intangible Assets" stipulates that "Enterprises shall analyze and estimate the useful life of intangible assets when acquired. As for the intangible assets with limited useful life, the enterprise shall estimate the years of its useful life, or the amount of the output or any other similar measurement unit, which constitutes its useful life. If it is unable to forecast when the intangible asset can bring economic benefits to the enterprise, it shall be regarded as an intangible asset with uncertain useful life”. Article 4 of the Guidelines for the Application of the Standards stipulates that "the useful life of intangible assets derived from contractual rights or other legal rights shall not exceed the duration of contractual rights or other legal rights; if the contractual rights or other legal rights are extended due to the expiration of the contract, and there is evidence that enterprises do not need to pay a large amount of cost for renewal, the renewal period shall be included in the useful life.”

Analysis of specific matters

In 2008, SinoSing Power, a subsidiary of the Company, acquired Tuas Power and obtained its power generation license, which was initially measured at the fair value at the time of acquisition, and the main basis for the power generation license to be regarded as intangible assets with uncertain useful life include:

●

When acquired by SinoSing Power, Tuas Power was one of the three largest power generation companies in the Singapore power market, and these three companies accounted for approximately 90% of the Singapore power market. The Singapore power market implemented a strict access system. The Energy Market Authority ("EMA") of Singapore restricts new power generation companies from entering the power generation market based on the issued power generation licenses. The failure to renew the licensed power generation licenses after expiration will greatly affect the stability of the power generation of the Singapore power market, so the power generation license of power generation company can be extended after the expiration according to the existing market management structure. Until 2019, there has been no substantial change in the management structure of the Singapore power market.

●

The initial term of the power generation license issued by EMA to Tuas Power is 30 years (i.e. 2003 to 2032). According to the supervision of the local electricity market in Singapore, the renewal of a power generation license requires only a programmatic

processing rather than a substantial approval, and the cost of renewal is low. In 2011, the expiration date of the power generation license of Tuas Power was successfully extended to 2044 without any renewal fees, and it can be further extended. The Company expects that, based on the existing market management structure, it will abide the relevant rules and regulations during the extension process, and will not need to pay a large amount of cost in the process of extending the expiration date of the power generation license, and there are no restrictions on the times of renewal.

●

When acquiring Tuas Power in 2008, the Company engaged an international independent third-party asset appraisal company, Vigers Appraisal & Consulting Limited, to conduct a fair value assessment on the acquired intangible assets (i.e. power licenses). The model used is also based on the fact that the power license can be renewed in the Singapore power market.

(2) The basis for the Company to recognize the power generation license acquired as an asset, and the business nature of the acquisition.

Relevant provisions of the standards

Rule 14 of the “Accounting Standards for Business Enterprises No. 20 – Business Combinations” provides: The" fair value of the identifiable net assets of the acquiree" refers to the balance of the fair value of the identifiable assets acquired from the acquiree in a business combination minus the fair value of the liabilities and contingent liabilities. The identifiable assets, liabilities and contingent liabilities which meet the following conditions shall be recognized separately: …… As for any intangible asset acquired in a combination, if its fair value can be measured reliably, it shall be separately recognized as an intangible asset and shall be measured in light of its fair value.

Meanwhile, the “Interpretation No. 5 of the Accounting Standards for Business Enterprises” has additional provisions for the acquirer to recognize the intangible assets acquired in the business combination: “In a business combination not under the common control, when the acquirer initially recognizes the acquiree's assets obtained in the business combination, it shall sufficiently identify and reasonably determine the intangible assets possessed by the acquiree but not confirmed in its financial statements, and the assets satisfying one of the following conditions shall be recognized as intangible assets: 1. Being derived from any contractual right or other statutory rights; 2. Being able to separate or divide from the acquiree and being able to be sold, transferred, licensed, rented or exchanged independently or along with the relevant contracts, assets or liabilities.”

Analysis of specific matters

The power generation license on the Company's book is a single intangible asset recognized when acquiring Singapore Tuas Power. SinoSing Power acquired Tuas Power in 2008, which constitutes a business combination not under common control of the “Accounting Standards for Business Enterprises No. 20 – Business Combination”. In the initial recognition of the relevant identifiable assets of Tuas Power acquired under the business combination not under common control, based on the analysis of the local electricity market and regulatory environment in Singapore, and fully identify and reasonably judge the intangible assets it owns but are not recognized in its financial statements, SinoSing Power identified that its power generation license should be recognized as a single identifiable asset. The relevant basis and business nature are analyzed as follows:

   ●        The power generation license of Tuas Power was issued by Singapore Energy Market Authority (EMA), Singapore's electricity market regulatory agency. According to the relevant policies of EMA and the access system of Singapore electricity market, EMA grants power generation license to power generation company, and only after obtaining power generation license can power generation company be allowed to carry out commercial operation of units and electricity sales, thereby realizing inflow of economic benefits. The power generation license is

derived from the EMA's statutory license as a regulatory agency and belongs to a certain legal right owned by Tuas Power.

  ●        In the electricity market management structure of Singapore, power generation license was issued to power generation company rather than individual units. When the generation units of the power generation company are retired due to the end of service, the power generation license will be inherited by the new generator units of the power generation company. Therefore, the power generation license is not attached to specific assets and liabilities, but can be separated from other identifiable assets and liabilities of the acquiree, and can be used in the future power generation business together with related assets and liabilities.

   ●       In the above acquisition, the Company appointed international independent third-party asset valuation company Vigers Appraisal & Consulting Limited to conduct a fair value assessment on the acquisition date of the identified intangible assets (i.e. power generation license), with an estimated value of SGD802 million. The part of the consideration that is higher than the fair value of the identifiable net assets (including the fair value of the power generation license) is recognized as goodwill formed by the acquisition.

Based on the above, Tuas Power’s power generation license meets the conditions for the recognition of single identifiable assets in the business combination standards as intangible assets, so it is accounted as intangible assets in the consolidated financial statements.

According to the requirements of the Letter of Enquiry, the annual audit accounting firm of the Company issued a special opinion on the above accounting related issues. For details, please refer to “Replies of Ernst & Young Hua Ming LLP to the Related Issues Requiring Accountants’ Opinions in the ‘Letter of Enquiry Regarding the Supervision of Information Disclosure of the 2019 Annual Report of Huaneng Power International, Inc.’” disclosed on the website of Shanghai Stock Exchange on the same day.

As at the date of this notice, the directors of the Company are:

Beijing, the PRC

22 April 2020

(Amounts: In RMB Yuan)

☑ Applicable    ◻ Not applicable

(Amounts: In RMB Yuan)

Unit: share

APPENDIX

HUANENG POWER INTERNATIONAL, INC.

UNAUDITED CONSOLIDATED AND THE COMPANY BALANCE SHEETS (PRC GAAP)

AS AT 31 MARCH 2020

Amounts: In RMB Yuan, Except as noted