Earnings from the Group’s Hong Kong operations were HKD7,008 million (2007:HKD6,727 million). Higher HEC sales revenue, lower depreciation due to extension of useful lives of certain categories of fixed assets and a deferred tax adjustment due to a change in the Hong Kong profits tax rate contributed to the higher earnings from the Group’s Hong Kong operations. Earnings from the Group’s international operations were HKD1,021 million (2007:HKD721 million). The higher international operations earnings in 2008 were primarily due to the inclusion of earnings from the Thai power plant business which commenced full operations in June 2008 and from the Canadian and New Zealand businesses.

Hong Kong Operations

Unit sales of electricity for 2008 were 0.2% lower than that for 2007. The lower unit sales were primarily due to the wetter and cooler summer in 2008 and to the effect of various energy saving initiatives. The number of domestic customers in 2008 recorded a slight increase and the number of commercial customers a slight decrease while the number of industrial sector customers continued their declining trend. Maximum Demand in 2008 was 2,589 megawatt (MW) compared with 2,552 MW in 2007.

During 2008, the Lamma Power Station’s coal-fired units generated around 83% of the electricity sent out while the gas-fired units generated around 17%. Both the coal-fired and gas-fired generating plants at Lamma performed satisfactorily in 2008 with no significant operational issues.

Lamma Winds, the 800 kW wind turbine on Lamma Island with its associated exhibition centre on renewable energy continued to attract public interest in renewable energy.

High coal prices continued to put pressure on fuel costs in 2008. Coal costs moderated somewhat toward the end of 2008 and into 2009 though they still remain high by historic standards. In order to mitigate in part the impact of higher coal costs we continued to source and use a variety of coal during the year.

Our emission reduction programme at the Lamma Power Station progressed well during 2008. Civil construction work is progressing on schedule for the flue gas desulphurisation (FGD) plant and low nitrogen oxide system retrofit works for the coal-fired Units 4 and 5. Engineering design has been substantially completed and construction work commenced for the coal-fired Unit 2 FGD retrofit work. Conversion of GT57 from an oil-fired combined cycle unit to a gas-fired unit has been completed and the unit commissioned. By the end of 2010, it is expected that over 95% of the electricity generated at the Lamma Power Station will be generated by gas and by coal-fired units fitted with FGDs and low nitrogen oxide burners resulting in lower emission levels.

In December, the Hong Kong Government approved HEC’s Development Plan for the period 2009-2013 which provided for HKD12.3 billion in capital expenditure over that period. This investment will be focused on additions to and maintaining the reliability of our transmission and distribution network and in furthering our emission reduction programme at the Lamma Power Station. We are continuing with our evaluation work for a 100 MW offshore wind farm with detailed environmental impact assessment studies in progress.

Supply reliability was maintained at over 99.999% in 2008 surpassing our pledged customer service standards. This world class supply reliability has been consistently maintained since 1997. Supply reliability was supported by the improvement and maintenance work carried out on the transmission and distribution network in 2008.

During 2008, we continued with our participation in environmental and community activities. A total of 70 visits from professional institutes and schools to the Lamma Power Station and Lamma Winds were organised in 2008. The HK Electric Clean Energy Fund continued its efforts in 2008 in promoting renewable energy. The HK Electric Volunteers which now has a membership of over 840 employees focuses its activities on care for the elderly and those in the community in need. During 2008, the volunteers undertook 68 service activities with a total of over 3,800 service hours. The HK Electric Centenary Trust continued to provide scholarships for secondary students and funding for self learning centres for senior citizens. The trust also funds the U3A (university of the third age) network which now includes 19 social services agencies. U3A courses promote life-long learning and volunteerism among the retired.

Chairman’s Statement

The Group reported solid operating results for 2008 from both its Hong Kong and international operations. In 2008, our shareholders have benefited from the Group’s strong financial position and conservative investment profile with the Company’s shares being one of the best performing shares in the Hang Seng Index for 2008.

The year 2008 was the last year under the previous 15-year Scheme of Control Agreement (SCA) under which The Hongkong Electric Co., Ltd. (HEC) operated. As reported last year, a new SCA was signed with the Hong Kong Government for ten years commencing January 1, 2009 at the lower rate of permitted return on average net fixed assets of 9.99%. The Government has an option to extend the SCA for a further term of 5 years. Shareholders will benefit over the next ten years from the certainty and stability of a long term regulatory framework for HEC that the new SCA provides; however, the lower rate of permitted return will impact the level of HEC’s earnings.

The company sought to increase the proportion of the Group’s earnings derived from its activities outside Hong Kong and good progress was made in this regard in 2008. In July 2008, the company has acquired a 50% interest in the Wellington electricity distribution network in New Zealand. In November 2008 we increased our interest in Northern Gas Networks in the UK from 19.9% to 35.1%. The increased interest has allowed us to increase our investment in one of our existing businesses which has performed well at a valuation that met our investment return parameters. A significant step was taken in February 2009 when we announced that we had agreed to purchase 45% equity interests in three joint ventures owning power plants in China, two of which are located in Zhuhai in Guangdong province adjacent to Hong Kong. The transaction, upon completion, will allow us to take a strategic stake in the electricity generation business in China at an attractive return and will enhance the earnings from the Group’s international operations. Shareholders approved the acquisition of the power station interests at an extraordinary general meeting held on March 16, 2009.