UNITED
STATES
  SECURITIES
AND EXCHANGE COMMISSION
  Washington,
D.C. 20549
  FORM
10-Q
  x           Quarterly
report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
fiscal quarter ended May 31, 2009
  o           Transition
report under Section 13 or 15(d) of the Securities
  Exchange
Act of 1934 for the transition period from ____ to______.
  Commission
file number: 000-52409
 CHINA ENERGY
CORPORATION
 (Name of
small business issuer in its charter)
 Nevada
                  
                  98-0522950(State
      or other jurisdiction of incorporation or organization)
                  
                  (IRS
      Employer Identification No.)No.
      57 Xinhua East Street
                    Hohhot,
      Inner Mongolia, People’s Republic of China
                  
                  010010(Address
      of principal executive offices)
                  
                  (Zip
      Code)+86-0471-466-8870(Issuer’s
      telephone number)
 
  Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.  Yes x  Noo
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o  No o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
 
 Large
      accelerated filer o
              Accelerated
      filer o
              Non-accelerated
              Smaller
      reportingfiler
      o
              company
      x(Do
      not check if a smallerreporting
      company)
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act. o
Yes      x No
  State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date:
 Class
              July
      21, 2009Common
      Stock, $ 0.001 par value
              45,000,000
      shares
  
 
  TABLE
OF CONTENTS
 PART
      I.
                          FINANCIAL
      INFORMATION
                          2ITEM
      1.
                          Financial
      Statements
                          2Consolidated
      Balance SheetsConsolidated
      Statements of Income For the Six months ended May 31, 2009 and May 31,
      2008 (Unaudited)
                          3Consolidated
      Statements of Changes For the Six months ended May 31, 2009
      (Unaudited)
                          5Consolidated
      Statements of Cash Flows (Unaudited)Notes
      to Consolidated Financial Statements
                          6ITEM
      2.
                          Management’s
      Discussion and analysis of Financial Condition and Results of
      Operations
                          14ITEM
      3.
                          Quantitative
      And Qualitative Disclosure About Market Risk
                          21ITEM
      4T.
                          Controls
      and ProceduresPART
      II.
                          OTHER
      INFORMATION
                          22ITEM
      1.
                          Legal
      Proceedings
                          22ITEM
      2.
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          22ITEM
      3.
                          Defaults
      Upon Senior Securities
                          22ITEM
      4.
                          Submission
      of Matters to a Vote of Security Holders
                          22ITEM
      5.
                          Other
      Information
                          22ITEM
      6.
                          Exhibits
                          22Signatures
                          23
   i
  FORWARD
  This
report contains forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934 (the “Exchange Act”). We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends affecting the financial condition of
our business. These forward-looking statements are subject to a number of risks,
uncertainties and assumptions, including, among other things:
 •
              general
      economic and business conditions, both nationally and in our
      markets,
 •
              our
      expectations and estimates concerning future financial performance,
      financing plans and the impact of
competition,
 •
              our
      ability to implement our growth
strategy,
 •
              anticipated
      trends in our business,
 •
              advances
      in technologies, and
 •
              other
      risk factors set forth herein.
  In
addition, in this report, we use words such as “anticipates,” “believes,”
“plans,” “expects,” “future,” “intends,” and similar expressions to identify
forward-looking statements.
  China
Energy Corporation undertakes no obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise after the date of this prospectus. In light of these risks
and uncertainties, the forward-looking events and circumstances discussed in
this prospectus may not occur and actual results could differ materially from
those anticipated or implied in the forward-looking statements.
 
 
  ITEM
1.  FINANCIAL
STATEMENTS
  CHINA
ENERGY CORPORATION
 CONSOLIDATED
BALANCE SHEETS
  
 May
      31,
                      
                      
                      November
      30,2009
                      
                      
                      2008(Unaudited)
                      
                      
                      (Audited)US$
                      
                      
                      US$ASSETSCurrent
      assets:Cash
                      
                      
                      1,697,846
                      
                      
                      
                      296,455Accounts
      receivables
                      
                      
                      6,038,580
                      
                      
                      
                      4,724,882Other
      receivables
                      
                      
                      2,057,693
                      
                      
                      
                      2,128,642Advance
      to suppliers
                      
                      
                      6,149,319
                      
                      
                      
                      4,637,041Inventories
                      
                      
                      578,766
                      
                      
                      
                      685,985Prepaid
      taxes
                      
                      
                      443,616
                      
                      
                      
                      -Total
      current assets
                      
                      
                      16,965,820
                      
                      
                      
                      12,473,005Fixed
      assets:Property,
      plant and equipment
                      
                      
                      33,966,632
                      
                      
                      
                      33,668,657Construction
      in progress
                      
                      
                      12,262,245
                      
                      
                      
                      10,710,32146,228,877
                      
                      
                      
                      44,378,978Less:
      accumulated depreciation and depletion
                      
                      
                      (5,858,547
                      )
                      
                      
                      (4,700,282
                      )Net
      fixed assets
                      
                      
                      40,370,330
                      
                      
                      
                      39,678,696Other
      assets:Investment
      property, net of depreciation of $143,485 and $120,686,
      respectively
                      
                      
                      1,958,565
                      
                      
                      
                      1,979,029Intangible
      assets, net of amortization of $1,095,009 and $940,055,
      respectively
                      
                      
                      3,313,952
                      
                      
                      
                      3,468,906Long
      term investment
                      
                      
                      -
                      
                      
                      
                      255,776Long
      term notes receivable
                      
                      
                      7,843,282
                      
                      
                      
                      2,832,107Long
      term prepaid expenses
                      
                      
                      330,560
                      
                      
                      
                      -Total
      other assets
                      
                      
                      13,446,359
                      
                      
                      
                      8,535,818TOTAL
      ASSETS
                      
                      
                      70,782,509
                      
                      
                      
                      60,687,519LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Short
      term bank loans
                      
                      
                      14,646,006
                      
                      
                      
                      5,558,888Accounts
      payable
                      
                      
                      6,709,564
                      
                      
                      
                      7,780,928Advance
      from customers
                      
                      
                      5,741,314
                      
                      
                      
                      4,675,139Accrued
      liabilities
                      
                      
                      238,010
                      
                      
                      
                      291,373Other
      payables
                      
                      
                      6,460,372
                      
                      
                      
                      5,958,701Shareholder
      loans
                      
                      
                      10,218,107
                      
                      
                      
                      10,208,965Total
      current liabilities
                      
                      
                      44,013,373
                      
                      
                      
                      34,473,994Deferred
      income
                      
                      
                      3,640,202
                      
                      
                      
                      3,018,568Total
      liabilities
                      
                      
                      47,653,575
                      
                      
                      
                      37,492,562Stockholders’
      equity:Common
      stock (authorized 200,000,000 shares of $0.001 par value; 45,000,000
      shares issued and outstanding, respectively)
                      
                      
                      45,000
                      
                      
                      
                      45,000Additional
      paid-in capital
                      
                      
                      8,655,805
                      
                      
                      
                      8,655,805Paid
      in capital – stock options
                      
                      
                      315,000
                      
                      
                      
                      315,000Retained
      earnings
                      
                      
                      9,339,560
                      
                      
                      
                      9,952,519Statutory
      reserves
                      
                      
                      2,335,468
                      
                      
                      
                      1,819,915Other
      comprehensive income
                      
                      
                      2,438,101
                      
                      
                      
                      2,406,718Total
      stockholders’ equity
                      
                      
                      23,128,934
                      
                      
                      
                      23,194,957TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                      
                      
                      70,782,509
                      
                      
                      
                      60,687,519
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 2
  CHINA
ENERGY CORPORATION
 CONSOLIDATED
STATEMENTS OF INCOME
 For
the Six Months Ended May 31, 2009 and May 31, 2008
 (Unaudited)
 
 For
      the six months ended May 31,
                                  
                                  
                                  For
      the three months ended May 31,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008US$
                                  
                                  
                                  US$
                                  
                                  
                                  US$
                                  
                                  
                                  US$Revenues
                                  
                                  
                                  9,183,134
                                  
                                  
                                  
                                  12,193,975
                                  
                                  
                                  
                                  3,603,374
                                  
                                  
                                  
                                  4,487,945Cost
      of revenues
                                  
                                  
                                  (8,142,477
                                  )
                                  
                                  
                                  (8,151,231
                                  )
                                  
                                  
                                  (3,158,727
                                  )
                                  
                                  
                                  (3,799,029
                                  )Gross
      profit
                                  
                                  
                                  1,040,657
                                  
                                  
                                  
                                  4,042,744
                                  
                                  
                                  
                                  444,647
                                  
                                  
                                  
                                  688,916Operating
      expenses:Selling
      and marketing
                                  
                                  
                                  (238,153
                                  )
                                  
                                  
                                  (211,577
                                  )
                                  
                                  
                                  (192,520
                                  )
                                  
                                  
                                  (52,948
                                  )General
      and administrative
                                  
                                  
                                  (950,632
                                  )
                                  
                                  
                                  (1,472,088
                                  )
                                  
                                  
                                  (513,731
                                  )
                                  
                                  
                                  (664,888
                                  )Options
      issued for services
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (315,000
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Total
      operating expenses
                                  
                                  
                                  (1,188,785
                                  )
                                  
                                  
                                  (1,998,665
                                  )
                                  
                                  
                                  (706,251
                                  )
                                  
                                  
                                  (717,836
                                  )(Loss)
      / income from operations
                                  
                                  
                                  (148,128
                                  )
                                  
                                  
                                  2,044,079
                                  
                                  
                                  
                                  (261,604
                                  )
                                  
                                  
                                  (28,920
                                  )Other
      income
                                  
                                  
                                  195,186
                                  
                                  
                                  
                                  153,047
                                  
                                  
                                  
                                  79,823
                                  
                                  
                                  
                                  55,855Investment
      income
                                  
                                  
                                  36,847
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  36,847
                                  
                                  
                                  
                                  -Finance
      expenses, net
                                  
                                  
                                  (196,077
                                  )
                                  
                                  
                                  (490,743
                                  )
                                  
                                  
                                  (96,624
                                  )
                                  
                                  
                                  (292,783
                                  )Non-operating
      expenses
                                  
                                  
                                  (9,824
                                  )
                                  
                                  
                                  (167,818
                                  )
                                  
                                  
                                  (5,219
                                  )
                                  
                                  
                                  (103,269
                                  )(Loss
      ) / income before income taxes
                                  
                                  
                                  (121,996
                                  )
                                  
                                  
                                  1,538,565
                                  
                                  
                                  
                                  (246,777
                                  )
                                  
                                  
                                  (369,117
                                  )Income
      taxes
                                  
                                  
                                  24,590
                                  
                                  
                                  
                                  (760,275
                                  )
                                  
                                  
                                  55
                                  
                                  
                                  
                                  (167,583
                                  )Net
      (loss) income
                                  
                                  
                                  (97,406
                                  )
                                  
                                  
                                  778,290
                                  
                                  
                                  
                                  (246,722
                                  )
                                  
                                  
                                  (536,700
                                  )Other
      comprehensive incomeIncome
      (loss) on foreign currency conversion
                                  
                                  
                                  31,383
                                  
                                  
                                  
                                  (1,982,125
                                  )
                                  
                                  
                                  68,819
                                  
                                  
                                  
                                  (1,009,575
                                  )Total
      comprehensive (loss) income
                                  
                                  
                                  (66,023
                                  )
                                  
                                  
                                  (1,203,835
                                  )
                                  
                                  
                                  (177,903
                                  )
                                  
                                  
                                  (1,546,275
                                  )(Loss)
      earnings per sharebasic
      and diluted
                                  
                                  
                                  (0.00
                                  )
                                  
                                  
                                  (0.02
                                  )
                                  
                                  
                                  (0.00
                                  )
                                  
                                  
                                  (0.01
                                  )Weighted
      average common shares outstandingbasic
      and diluted
                                  
                                  
                                  45,000,000
                                  
                                  
                                  
                                  45,000,000
                                  
                                  
                                  
                                  45,000,000
                                  
                                  
                                  
                                  45,000,000
  The
accompanying notes are an integral part of these consolidated financial
statements.
  3
  CHINA
ENERGY CORPORATION
 CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 FOR THE SIX
MONTHS ENDED MAY 31, 2009
 (UNAUDITED)
 
 Shares
                        
                        
                        Amounts
                        
                        
                        AdditionalPaid-in
                          capital
                        
                        
                        Paid-in
                            capitalStock
      options
                        
                        
                        Retained
      Earnings
                        
                        
                        Statutory
      Reserves
                        
                        
                        OtherComprehensive 
      income
                        
                        
                        TotalBalance
      as of December 1, 2008
                        
                        
                        45,000,000
                        
                        
                        $
                        45,000
                        
                        
                        $
                        8,655,805
                        
                        
                        $
                        315,000
                        
                        
                        $
                        9,952,519
                        
                        
                        $
                        1,819,915
                        
                        
                        $
                        2,406,718
                        
                        
                        $
                        23,194,957Net
      income for period
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (97,406
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (97,406
                        )Other
      comprehensive income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        31,383
                        
                        
                        
                        31,383Allocation
      of statutory reserve
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (515,553
                        )
                        
                        
                        515,553
                        
                        
                        
                        -
                        
                        
                        
                        -Balance
      as of May 31, 2009
                        
                        
                        45,000,000
                        
                        
                        $
                        45,000
                        
                        
                        $
                        8,655,805
                        
                        
                        $
                        315,000
                        
                        
                        $
                        9,339,560
                        
                        
                        $
                        2,335,468
                        
                        
                        $
                        2,438,101
                        
                        
                        $
                        23,128,934
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  4
  CHINA
ENERGY CORPORATION
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For
the Six month Ended May 31, 2009 and May 31, 2008
 (Unaudited)
 
 For
      the six months ended May 31,2009
                          
                          
                          2008US$
                          
                          
                          US$Cash
      flows from operating activities:Net
      (loss) income
                          
                          
                          (97,406
                          )
                          
                          
                          778,290Adjustments
      to reconcile net income to net cash used in operating
      activities:Depreciation
      and amortization
                          
                          
                          1,361,076
                          
                          
                          
                          1,089,047Decrease
      in deferred charges
                          
                          
                          -
                          
                          
                          
                          487Options
      issued for services
                          
                          
                          -
                          
                          
                          
                          315,000Changes
      in operating assets and liabilities:Gains
      arising from investments
                          
                          
                          (36,847
                          )
                          
                          
                          -(Increase)
      in accounts receivables
                          
                          
                          (1,313,698
                          )
                          
                          
                          (263,790
                          )Decrease
      (increase) in other receivables
                          
                          
                          70,949
                          
                          
                          
                          (209,616
                          )(Increase)
      in advance to suppliers
                          
                          
                          (1,256,888
                          )
                          
                          
                          (1,145,666
                          )Decrease
      (increase) in inventories
                          
                          
                          107,219
                          
                          
                          
                          (13,820
                          )Increase
      in deferred income
                          
                          
                          621,634
                          
                          
                          
                          538,771(Decrease)
      increase in accounts payable
                          
                          
                          (742,630
                          )
                          
                          
                          566,945Increase
      in advance from customers
                          
                          
                          738,091
                          
                          
                          
                          16,504Decrease
      in accrued liabilities
                          
                          
                          (53,363
                          )
                          
                          
                          (4,951
                          )Increase
      in other payables
                          
                          
                          58,055
                          
                          
                          
                          744,532Net
      cash used in operating activities
                          
                          
                          (543,808
                          )
                          
                          
                          2,411,732Cash
      flows from investing activities:Purchase
      of property, plant and equipment
                          
                          
                          (911,968
                          )
                          
                          
                          (231,167
                          )(Increase)
      in for construction in progress
                          
                          
                          (1,551,924
                          )
                          
                          
                          (1,035,380
                          )(Increase)
      decrease in notes receivable
                          
                          
                          (5,011,175
                          )
                          
                          
                          1,153,201Net
      cash used in investing activities
                          
                          
                          (7,475,067
                          )
                          
                          
                          (113,346
                          )Cash
      flows from financing activities:Proceeds
      from short term bank loans
                          
                          
                          12,012,850
                          
                          
                          
                          -Principal
      payments on short term bank loans
                          
                          
                          (2,925,732
                          )
                          
                          
                          (560,426
                          )Advance
      from shareholders
                          
                          
                          301,765
                          
                          
                          
                          396,681Net
      cash provided by financing activities
                          
                          
                          9,388,883
                          
                          
                          
                          (163,745
                          )Effect
      of exchange rate changes on cash
                          
                          
                          31,383
                          
                          
                          
                          (1,994,067
                          )Net
      increase in cash and cash equivalents
                          
                          
                          1,401,391
                          
                          
                          
                          140,574Cash
      and cash equivalents, beginning of period
                          
                          
                          296,455
                          
                          
                          
                          1,478,264Cash
      and cash equivalents, end of period
                          
                          
                          1,697,846
                          
                          
                          
                          1,618,838Supplemental
      disclosure of cash flow informationCash
      paid for interest
                          
                          
                          276,071
                          
                          
                          
                          483,926Cash
      paid for income taxes
                          
                          
                          -
                          
                          
                          
                          760,275
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  5
  CHINA
ENERGY CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MAY
31, 2009
 (Unaudited)
  1. Organization
and Business
  Organization
of the Company
  China
Energy Corporation (the “Company”) is a Nevada corporation, formed on October
11, 2002 under the name Omega Project Consultations, Inc.  The name was
changed to China Energy Corporation on November 3, 2004.  On November 30,
2004, the Company entered into a share exchange agreement with Inner Mongolia
Tehong Coal Group Co., Ltd. (“Coal Group”), and Inner Mongolia Zhunger Heat
Power Co. Ltd. (“Heat Power”) and their respective shareholders. The transaction
was accounted for as a reverse merger, a procedure that treats the transaction
as though Coal Group had acquired the Company. Under the accounting for a
reverse merger, the assets and liabilities of the Company, which were nil at the
time, were recorded on the books of Coal Group, the continuing company, and the
stockholders’ equity accounts of Coal Group were reorganized to reflect the
shares issued in this transaction.  At time of share exchange, certain
requirements under the then applicable PRC law were not
completed.  The Company is in the process of taking the necessary
actions to meet the current PRC legal requirements related to the acquisition of
Coal Group and Heat Power.
  Business
  The
Company’s business is made up of two segments: Coal Group and Heat
Power.
  Coal
Group
  Coal
Group was organized in China on August 8, 2000 as Inner Mongolia Zhunger Tehong
Coal Co., Ltd. The name was changed in December 2003 to Inner Mongolia Zhunger
Heat Power Co. Ltd. Coal Group owns a coal mine in the Inner Mongolia District
from which it produces coal. It also buys, sells, and transports coal, serving
the Inner Mongolia District. Coal Group has the capacity to produce
approximately up to 800,000 metric tons per year subject to enhancement of
productions lines in the next two years. The principal customer of the coal mine
is a nearby coking factory. The Company does not view this concentration as a
significant risk.
  Heat
Power
 
 During
2003, Heat Power was granted a license, which constitutes a monopoly, to supply
heating to the entire XueJiaWan area. To provide for this requirement,
construction began in 2004 on a thermoelectric plant, which was completed in
September 2006.  Heat Power supplies heating directly to users and supplies
electricity within the  XueJiaWan area through a government
controlled intermediary, Inner Mongolia Electric Power Group Co., Ltd.
(“Electric Power Group”).
 
 Heat
Power obtains its supply of powdered coal required to generate heat production
from Zhunger County Guanbanwusu Coalmine (“Guanbanwusu”), an unrelated,
unassociated third party. It also obtains its supply through various other coal
mines in the area. The Company does not believe this concentration constitutes a
significant risk. In the XueJiaWan area, hardly anyone owns a domestic
heating boiler.  Instead, water is heated in the thermoelectric plant
using boilers, to approximately 100C and piped directly to homes and public
buildings, including private dwellings, factories as well as municipal
facilities.
 
  2. Summary
of Significant Accounting Policies
  Basis
of Accounting and Presentation
 
 The
unaudited interim financial statements of the Company as of May 31, 2009 and
November 30, 2008 and for the six-month periods ended May 31, 2009 and 2008,
have been prepared in accordance with generally accepted accounting principles
in the United States of America and the rules and regulations of the Securities
and Exchange Commission (the “SEC”) which apply to interim financial statements,
including the accounts of the Company and its wholly owned subsidiary, Coal
Group.  In the opinion of management, such information contains all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results for the periods presented.  The
results of operations for the three and six months ended May 31, 2009 are not
necessarily indicative of the results to be expected for future quarters or for
the year ending November 30, 2009.
  6
  Certain
information and disclosures normally included in the notes to financial
statements have been condensed or omitted as permitted by the rules and
regulations of the Securities and Exchange Commission, although the Company
believes the disclosure is adequate to make the information presented not
misleading. The accompanying unaudited financial statements should be read in
conjunction with the financial statements of the Company for the year ended
November 30, 2008.
 
 Basis
of Consolidation
 
 The
consolidated financial statements include the accounts of the Company and Coal
Group and Heat Power. All significant intercompany accounts and transactions
have been eliminated in consolidation.
 
 Recently
Issued Accounting Standards
  December
2007, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 141 (revised 2007) “Business Combinations” (“SFAS
141R”).  The objective of SFAS 141R is to improve the relevance,
representational faithfulness and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and its effects.  To accomplish this, SFAS 141R establishes principles
and requirements for how the acquirer (a) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree, (b) recognizes and measures
the goodwill acquired in the business combination or a gain from a bargain
price, and (c) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination.  SFAS 141R is effective for fiscal years
beginning on or after December 15, 2008.  As the provisions of SFAS
141R are applied prospectively, the impact to the Company cannot be determined
until any such transactions occur.
  In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements–an amendment of ARB No.51” (“SFAS
160”).  SFAS 160 requires that non-controlling (or minority) interests
in subsidiaries be reported in the equity section of the company’s balance
sheet, rather than in a mezzanine section of the balance sheet between
liabilities and equity. SFAS 160 also changes the manner in which the net income
of the subsidiary is reported and disclosed in the controlling company’s income
statement. SFAS 160 also establishes guidelines for accounting or changes in
ownership percentages and for deconsolidation. SFAS 160 is effective for
financial statements for fiscal years beginning on or after December 15, 2008
and interim periods within those years. The Company’s adoption of SFAS 160 did
not to have a material impact on its consolidated financial
statements.
  In
February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2, which delays
the effective date of SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”), to fiscal years beginning after November 15, 2008 and interim
periods with those fiscal years for all nonfinancial assets and liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) until January 1, 2009 for
calendar year end entities. The Company has already adopted this Statement
except as it applies to nonfinancial assets and liabilities as noted in FSP
157-2. The adoption of FSP 157-2 did not have a material impact on the Company’s
consolidated financial statements.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”).  SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles.  SFAS 162 directs the hierarchy to the entity, rather than
the independent auditors, as the entity is responsible for selecting accounting
principles for financial statements that are presented in conformity with
generally accepted accounting principles.  SFAS 162 is effective 60
days following SEC approval of the Public Company Accounting Oversight Board
(“PCAOB”) amendments to remove the hierarchy of generally accepted accounting
principles from the auditing standards.  SFAS 162 is not expected to
have an impact on the Company's consolidated financial statements.
 
 In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments.” This FASB Staff Position (“FSP FAS 107-1”)
amends SFAS No. 107, ”Disclosures About Fair Value of
Financial Instruments,” to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion No.
28, “Interim Financial
Reporting,” to require those disclosures in summarized financial
information at interim reporting periods. This FSP is effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. The FSP does not require disclosures for
earlier periods presented for comparative purposes at initial adoption. In
periods after initial adoption, this FSP requires comparative disclosures only
for periods ending after initial adoption. The Company does not expect the
changes associated with adoption of this FSP will have a material effect on the
determination or reporting of its consolidated financial results.
  7
  In April
2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (“FSP FAS No. 115-2”). FSP FAS No.
115-2 provides additional guidance designed to create greater clarity and
consistency in accounting for and presenting impairment losses on
securities.   This FSP is effective for interim periods ending
after June 15, 2009, but early adoption is permitted for interim periods ending
after March 15, 2009.  The Company does not believe this guidance will
have a significant impact on its consolidated financial statements.
 
 In April
2009, the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS
No. 157-4”). FSP FAS No. 157-4 provides additional guidance in determining
whether the market for a financial asset is not active and a transaction is not
distressed for fair value measurement purposes as defined in SFAS No. 157,
“Fair Value
Measurements.” FSP FAS No. 157-4 is effective for interim periods ending
after June 15, 2009, but early adoption is permitted for interim periods ending
after March 15, 2009. The Company does not believe this guidance will have a
significant impact on its consolidated financial statements.
 
 Cash
 
 The
Company considers all demand and time deposits and all highly liquid investments
with an original maturity of three months or less as of the date of purchase to
be cash equivalents.
 
 Concentration
of Credit Risk
 
 The
Company is exposed to various types of risk in the normal course of business
including fluctuations in commodity prices, interest rates and foreign currency
exchange rates.
 
 Financial
instruments which potentially subject the Company to concentrations of credit
risk consist of cash, short term receivables, advances to suppliers, accounts
payable and accrued liabilities, advances from customers, and short term loans
payable. These instruments are denominated in the currency of
China.  All of the Company’s bank accounts are in banks located in
People’s Republic of China and are not covered by protection similar to that
provided by the FDIC on funds held in United States banks.
 
 Recognition
of Revenue
 
 Revenues
from sales of products are recognized when the products are delivered
and the title is transferred, the risks and rewards of ownership have been
transferred to the customer, the price is fixed and determinable and collection
of the related receivable is reasonably assured.
 
 Revenue
associated with sales of coal is recognized when the title to the goods has
been passed to customers, which is the date when the goods are delivered to
designated locations and accepted by the customers.
 
 Heat
Power supplies heat to users directly and supplies electricity through a
government controlled intermediary. Revenue from sales of heat and electricity
represents the amount of tariffs billed for heat and electricity generated and
transmitted to the users and government controlled intermediary,
respectively.
 
 Property,
Plant and Equipment
 
 Property,
plant and equipment are recorded at cost, less accumulated depreciation and
amortization.  Cost include the prices paid to acquire or construct
the assets, including capitalized interest during the construction period, and
any expenditures that substantially increase the assets  value or
extend the useful life of an existing asset.
 
 Depreciation
is computed using the straight line method basics over the estimated useful
lives of property, plant and equipment, which are approximately five years for
electrical and office equipment, ten years for transportation equipment, and 20
to 45 years for buildings.
 
 Leasehold
improvements are amortized over the lesser of their estimated useful lives or
the term of the lease.  Capitalized costs related to assets under
construction are not depreciated until construction is complete and the asset is
ready for its intended use.  Repairs and maintenance are expensed as
incurred.
 
 Depletion
of coal reserves and amortization of advance royalties is computed using the
units-of-production method utilizing only proven and probable reserves (as
adjusted for recoverability factors) in the depletion base.  Mine
development costs are principally amortized over the estimated lives of the
mines using the straight-ling method.  Costs include the original
purchase price of the mine plus cost of mine improvements, principally the cost
of road building.
  8
  Income
Taxes
 
 Coal
Group and Heat Power generate their income in China where Value Added Tax,
Income Tax, City Construction and Development Tax and Education Surcharge taxes
are applicable. The Company, Coal Group, and Heat Power do not conduct any
operations in the U.S.; therefore, are not subject to U.S. taxes.
 
 Deferred
income taxes are recorded to reflect the tax consequences or benefits to future
years of any temporary differences between the tax basis of assets and
liabilities and amounts recorded on the accounting records, and of net operating
loss carryforwards.
 
 Inventories
 
 Inventories
are valued at the lower of cost or market, with cost being determined on the
first in first out basis.  At May 31, 2009, inventories consisted solely of
operating supplies.
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimated.
 
 Net Income Per Share
 
 The
Company computes net income (loss) per common share in accordance with SFAS No.
128, “Earnings Per Share” and SEC Staff Accounting Bulletin No. 98 (“SAB
98”).  Under the provisions of SFAS No. 128 and SAB 98, basic and
diluted net income per common share are computed by dividing the amount
available to common shareholders for the period by the weighted average number
of shares of common stock outstanding during the period.  Accordingly,
the number of weighted average shares outstanding as well as the amount of net
income per share are presented for basic and diluted per share calculations for
all periods reflected in the accompanying financial statements.
 
 Foreign
Currency Translation
  All
Company assets are located in China.  These assets and related
liabilities are recorded on the books of the Company in the currency of China
(Renminbi).  Since the functional currency is the Renminbi, they are
translated into US dollars as follows:
 
 (a)
              Assets
      and liabilities, at the rates of exchange in effect at the applicable
      balance sheet dates;
 (b)
              Components
      of stockholders’ equity, at the exchange rates prevailing at the time
      respective equity transactions occurred;
and
 (c)
              Revenues
      and expenses, at the average rates of exchange for each year. Gains and
      losses arising from the translation of foreign currency are included in
      other comprehensive income.
 
 Statutory
Reserve
 
 The
Company is required by Chinese law to allocate a percentage of no lower than 10%
of the profits to a Statutory Reserve Fund.  The Company allocates 10%
of its after tax profits, if any, to a Statutory Reserve Fund, as determined
from year to year. The fund is allocated appropriately until reserves reaches
50% of paid-in capital.
 
 Stock
Options
  Stock
options are accounted for upon issuance at fair market value.  Such
value is determined at the date a commitment is made for issuance. The value of
options is included in a separate part of stockholders' equity.  Upon
exercise or cancellation, the value of such options is transferred to paid in
capital.
  9
  3. Segment
Reporting
  The
Company is made up of two segments of business: Coal Group which derives its
revenue from the mining and purchase and sale of coal, and Heat Power which
derives its revenue by providing heating and electricity to residents and
businesses of a local community.  Each of these segments is conducted
through a separate corporation and each functions independently of the
other.
 
 Except
for the loan to Heat Power by Coal Group in the principal amount of RMB93.2
million (US$13.65 million) as of May 31, 2009, during the periods reported
herein, there were no other transactions between the two
segments.  There also were no differences between the measurements
used to report operations of the segments and those used to report the
consolidated operations of the Company.  In addition, there were no
differences between the measurements of the assets of the reported segments and
the assets reported on the consolidated balance sheet.
 
 Six
      Months Ended May 31,2009
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            2008Heat
                                              Power
                                            
                                            
                                            CoalGroup
                                            
                                            
                                            Total
                                            
                                            
                                            HeatPower
                                            
                                            
                                            Coal
                                                Group
                                            
                                            
                                            TotalUS$
                                            
                                            
                                            US$
                                            
                                            
                                            US$
                                            
                                            
                                            US$
                                            
                                            
                                            US$
                                            
                                            
                                            US$Sales
      to external customers
                                            
                                            
                                            6,427,625
                                            
                                            
                                            
                                            2,755,509
                                            
                                            
                                            
                                            9,183,134
                                            
                                            
                                            
                                            4,780,099
                                            
                                            
                                            
                                            7,413,876
                                            
                                            
                                            
                                            12,193,975Interest
      expense(income), net
                                            
                                            
                                            698,209
                                            
                                            
                                            
                                            (502,132
                                            )
                                            
                                            
                                            196,077
                                            
                                            
                                            
                                            635,521
                                            
                                            
                                            
                                            (144,778
                                            )
                                            
                                            
                                            490,743Depreciation
      & depletion
                                            
                                            
                                            1,077,254
                                            
                                            
                                            
                                            234,735
                                            
                                            
                                            
                                            1,311,989
                                            
                                            
                                            
                                            849,796
                                            
                                            
                                            
                                            239,250
                                            
                                            
                                            
                                            1,089,046Segment
      profit
                                            
                                            
                                            (313,848
                                            )
                                            
                                            
                                            164,829
                                            
                                            
                                            
                                            (149,019
                                            )
                                            
                                            
                                            (237,104
                                            )
                                            
                                            
                                            2,596,183
                                            
                                            
                                            
                                            2,359,079Corporate
      items
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            315,000
 
 May
      31, 2009
                                    
                                    
                                    May
      31, 2008Heat
                                            Power
                                    
                                    
                                    CoalGroup
                                    
                                    
                                    Total
                                    
                                    
                                    HeatPower
                                    
                                    
                                    Coal
                                              Group
                                    
                                    
                                    TotalUS$
                                    
                                    
                                    US$
                                    
                                    
                                    US$
                                    
                                    
                                    US$
                                    
                                    
                                    US$
                                    
                                    
                                    US$Segment
      assets
                                    
                                    
                                    41,976,159
                                    
                                    
                                    
                                    28,806,350
                                    
                                    
                                    
                                    70,782,509
                                    
                                    
                                    
                                    31,678,165
                                    
                                    
                                    
                                    21,700,975
                                    
                                    
                                    
                                    53,379,140Construction
      in progress
                                    
                                    
                                    3,819,773
                                    
                                    
                                    
                                    8,442,472
                                    
                                    
                                    
                                    12,262,245
                                    
                                    
                                    
                                    3,065,735
                                    
                                    
                                    
                                    5,267,025
                                    
                                    
                                    
                                    8,332,760Other
      assets
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,958,565
                                    
                                    
                                    
                                    1,958,565
                                    
                                    
                                    
                                    542,009
                                    
                                    
                                    
                                    12,347,801
                                    
                                    
                                    
                                    12,889,810
 
 Three
      Months Ended May 31,2009
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            2008Heat
                                                Power
                                            
                                            
                                            CoalGroup
                                            
                                            
                                            Total
                                            
                                            
                                            HeatPower
                                            
                                            
                                            Coal
                                                      Group
                                            
                                            
                                            TotalUS$
                                            
                                            
                                            US$
                                            
                                            
                                            US$
                                            
                                            
                                            US$
                                            
                                            
                                            US$
                                            
                                            
                                            US$Sales
      to external customers
                                            
                                            
                                            2,485,266
                                            
                                            
                                            
                                            1,118,108
                                            
                                            
                                            
                                            3,603,374
                                            
                                            
                                            
                                            2,129,330
                                            
                                            
                                            
                                            2,358,615
                                            
                                            
                                            
                                            4,487,945Interest
      expense (income), net
                                            
                                            
                                            385,217
                                            
                                            
                                            
                                            (288,593
                                            )
                                            
                                            
                                            96,624
                                            
                                            
                                            
                                            326,100
                                            
                                            
                                            
                                            (33,317
                                            )
                                            
                                            
                                            292,783Depreciation
      & depletion
                                            
                                            
                                            550,050
                                            
                                            
                                            
                                            99,142
                                            
                                            
                                            
                                            649,192
                                            
                                            
                                            
                                            391,275
                                            
                                            
                                            
                                            139,200
                                            
                                            
                                            
                                            530,475Segment
      profit (loss)
                                            
                                            
                                            (928,284
                                            )
                                            
                                            
                                            665,789
                                            
                                            
                                            
                                            (262,495
                                            )
                                            
                                            
                                            (441,185
                                            )
                                            
                                            
                                            412,265
                                            
                                            
                                            
                                            (28,920
                                            )
 
 4. Related
Party Transactions
 
 Substantial portions of the cost of construction of the
thermoelectric plant and of the costs of expansion projects at Heat Power and
the coal mine were provided by shareholder loans. Balances, consisting of
principal and interests, and the related interest rates are detailed
below:
 
 Balance
                            
                            
                            Interest
      rateOrdos
      City YiYuan Investment Co., Ltd.
                            
                            $
                            1,704,852
                            
                            
                            
                            3.155
                            %Hangzhou
      Dayuan Group, Ltd.
                            
                            
                            5,367,677
                            
                            
                            
                            3.155
                            %Xinghe
      County Haifu Coal Transportation & Sales Co., Ltd.
                            
                            
                            1,784,793
                            *
                            
                            
                            3.155
                            %Wenxiang
      Ding
                            
                            
                            1,079,411
                            
                            
                            
                            0
                            %Wenhua
      Ding
                            
                            
                            281,374
                            
                            
                            
                            0
                            %Total
                            
                            $
                            10,218,107
 
 *Of
      the total amount, $489,296 is non- interest
  bearing.
  10
  5.
Accounts Receivable
 
 The
balance of accounts receivable has been reduced by a provision for doubtful
accounts in the amount of nil and $1,000 as of May 31, 2009 and November
30, 2008, respectively.
 
 6.
Advances to Suppliers
 
 As is
customary in China, the Company has made advances to its
suppliers.  At May 31, 2009, advances amounted to
$6,149,319.  There is no interest due on these advances; the advances
are offset against billings as they are made by the suppliers.
 
 7.
Other Accounts Receivable
 
 Other
accounts receivable consists of the following:
 
 Loans
      to suppliers and other associated firms
                  
                  
                  $
                  538,004Deposit
      funds to secure agreements
                  
                  
                  
                  1,266,313Employee
      expense advances
                  
                  
                  
                  253,376Total
                  
                  $
                  2,057,693
 
 8.
Short Term Bank Loans
 
 The
Company has four outstanding bank loans. The notes under the loans were
collaterized by the mining rights. Relevant terms of these debt obligations are
as follows:
 Bank
      loan, due 10/22/09, with interest at 8.316%
                  
                  $
                  2,636,281Bank
      loan, due 12/5/09, with interest at 6.696%
                  
                  
                  1,757,521Bank
      loan, due 3/15/10, with interest at 6.372%
                  
                  
                  8,787,604Bank
      loan, due 4/21/10, with interest at 6.372%
                  
                  
                  1,464,600Total
                  
                  $
                  14,646,006
 
 The
Company has unutilized bank credit facilities of $21,969,009 as of May 31, 2009.
Subsequent to May 31, 2009, the Company obtained additional short term bank loan
of $5,858,402.
 
 9.
Fair Value Measurement
 
 SFAS No.
157 specifies a hierarchy of valuation techniques based upon whether the inputs
to those valuation techniques reflect assumptions other market participants
would use based upon market data obtained from independent sources (observable
inputs).  In accordance with SFAS No. 157, the following summarizes
the fair value hierarchy:
 
 Level 1
Inputs – Unadjusted quoted market prices for identical assets and liabilities in
an active market that the Company has the ability to access.
 
 Level 2
Inputs – Inputs, other than the quoted prices in active markets that are
observable either directly or indirectly.
 
 Level 3
Inputs – Inputs based on prices or valuation techniques that are both
unobservable and significant to the overall fair value
measurements.
 
 SFAS No.
157 requires the use of observable market data, when available, in making fair
value measurements.  When inputs used to measure fair value fall
within different levels of the hierarchy, the level within which the fair value
measurement is categorized is based on the lowest level input that is
significant to the fair value measurement.
 
 The
Company did not identify any assets and liabilities that are required to be
presented on the balance sheet at fair value in accordance with SFAS
157.
  11
 
 10. Income Taxes
 
 The
Company is required to file income tax returns in both the United States and
China. Its operations in the United States have been insignificant and income
taxes have not been accrued. In China, the Company files tax returns for Heat
Power, Coal Group and, although it is part of Coal Group, a separate tax return
is required for the operations of the coal mine.  The laws of China
permit the carryforward of net operating losses for a period of five years. At
May 31, 2009, the Chinese entities had net operating losses of $5,086,050
available for future use. If not used, these carryforwards will expire as
follows:
 
 2009
                  
                  $
                  177,7782010
                  
                  
                  142,8432011
                  
                  
                  1,118,2262012
                  
                  
                  1,076,1722013
                  
                  
                  2,571,031
 
 Under
SFAS No. 109, “Accounting for
Income Taxes,” recognition of deferred tax assets is permitted unless it
is more likely than not that the assets will not be realized. The Company has
recorded deferred tax assets as follows:
  Deferred
      tax assets
                        
                        $
                        1,271,513Valuation
      allowance
                        
                        
                        1,271,513Balance
      recognized
                        
                        $
                        -
 
 The
amount of deferred tax assets increased during the six month period ended May
31, 2009 by $459,449.
 
 The
effective income tax rate is reconciled with the statutory rate in the following
table.
 
 Loss
      Before
                                Income
      Taxes
                              
                              
                              Tax
      Provision
                              
                              
                              Rate
      of TaxAmounts
      reported on the  statement of income
                              
                              
                              121,996
                              
                              
                              
                              24,590
                              
                              
                              
                              20.16
                              %Losses
      not used in  calculation of taxable  income on the tax
      returns
                              
                              
                              23,636
                              
                              
                              
                              -
                              
                              
                              
                              -Amount
      calculated at the statutory rate
                              
                              
                              98,360
                              
                              
                              
                              24,590
                              
                              
                              
                              25
                              %
 
 The
Company has adopted Financial Accounting Standards Board Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”).  FIN 48
prescribes a recognition threshold and measurement attribute for the recognition
and measurement of tax positions taken or expected to be taken in income tax
returns.  FIN 48 also provides guidance on de-recognition of income
tax assets and liabilities, classification of current and deferred income tax
assets and liabilities, and accounting for interest and penalties associated
with tax positions.
 
 The
Company does not have any accruals for uncertain tax positions as of May 31,
2009.  It is not anticipated that unrecognized tax benefits would
significantly increase or decrease within 12 months of the reporting
date.
 
 12
  11.
Fixed Assets
 
 Fixed assets, consisting principally of buildings and
equipment, are summarized as follows.
 
 Amount
                      
                      
                      Estimated
      Useful Lives
                        (Years)Buildings
                      
                      $
                      8,315,663
                      
                      
                      
                      20 - 45Machinery
      & equipment
                      
                      
                      23,593,167
                      
                      
                      
                      5Automotive
      equipment
                      
                      
                      656,681
                      
                      
                      
                      10Office
      Equipment
                      
                      
                      531,935
                      
                      
                      
                      5Other
      assets
                      
                      
                      124,793
                      
                      
                      
                      5Construction
      in progress
                      
                      
                      12,262,245Fixed
      assets to be disposed
                      
                      
                      744,39346,228,877Accumulated
      depreciation
                      
                      
                      (5,858,547
                      )Fixed
      assets, net
                      
                      $
                      40,370,330
 
 12.
Stock Options
 
 On
February 11, 2008 the Board of Directors approved the adoption of a stock option
plan (the “2008 Plan”) under which a total of 4,500,000 options to purchase
Company common stock may be granted to officers, employees, and consultants of
the Company. The full number of authorized options was granted in February 2008.
These options are fully vested and may be exercised at anytime before December
31, 2010 at an exercise price of $1 per share. The value of the options was
determined to be $315,000 using a Black Sholes valuation model. This value was
charged to expense during 2008. There were no options exercised or cancelled
during the six months ended May 31, 2009.
 
 The
outstanding options have not been included in the calculation of the weighted
number of shares outstanding which is used to calculate earnings per share
because the exercise price of the options is higher than the market price of the
stock.
 
 The
following table summarizes the assumptions used in the Black Sholes
calculation.
 
 Dividend
      yield
                0.0%Expected
      volatility
                196.73%Risk
      free interest rate
                2.13%Expected
      term (in years)
                2.38Weighted
      average value of stock options granted
                $0.07
 
 13.
Contingency
 
 As is
customary in China, except for auto coverage, Coal Group and Heat Power do not
carry sufficient insurance.  As a result the Company is effectively
self-insuring the risk of potential accidents that may occur in the
workplace.  Given the nature of the industry, the Company may be exposed to
risks that could have a material adverse impact on its financial
statements.
 
 14.  Subsequent
Events
 
 On July
13, 2009, the Company entered into a framework agreement which detailed the
actions contemplated for the restructuring of the Company, Coal Group and Heat
Power under a "variable interest entity" (“VIE”) structure to meet the current
requirements of applicable PRC law.
 
 The
framework agreement provides that (i) the Company will establish a newly-formed,
indirect subsidiary of the Company incorporated in the People’s Republic of
China (“CEC China”), (ii) CEC China will enter an exclusive service agreement
and option agreement with each of Coal Group and Heat Power (collectively, the
“Operating Companies”)  and a share pledge agreement with each of the
Operating Companies and certain of their respective PRC shareholders (“PRC
Shareholders”).  The framework agreement also requires the PRC
Shareholders to fully authorize CEC China to exercise all shareholder’s rights
that the PRC Shareholders can exercise in the Operating Companies. By entering
into the framework agreement and subsequently setting up the structure involving
the use of VIEs, the Company will have the control and the economic benefits and
costs of ownership of the Operating Companies.
 
 13
  ITEM
2.  MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  History
  The
Company was incorporated in the state of Nevada on October 11, 2002 for the
purpose of producing coal to meet the increasing demand in power and heating
industries and also to expand thermoelectric plants and networks in rural
developments. The Company operates its business through its operating companies,
Coal Group and Heat Power (each as defined below and collectively, the “Operating
Companies”).
  On
November 30, 2004, the Company entered into a share exchange agreement pursuant
to which the shareholders of 100% of the equity interests in the  Coal
Group and the shareholders of 49% of the equity interests in Heat Power
(collectively, the “PRC Shareholders”) acquired shares of the Company’s common
stock in  consideration for their exchange (the "Share Exchange") of
100% of their equity interests in the Operating Companies.   The
Share Exchange, however, was not effected in such a way that would permit, under
applicable PRC law, the share registration of the Operating Companies held by
the PRC Shareholders to be transferred on the records of applicable PRC
regulatory authorities to the name of China Energy
Corporation.  Accordingly, even though the Company and the PRC
Shareholders have taken certain steps to reiterate and reinforce the original
intent of the parties that the equity ownership of the Operating Companies be in
the name of the Company, the enforceability of the Company's claim to legal
ownership of the Operating Companies may be subject to risk under applicable PRC
law.  Initially,  the Company proposed and entered into an
agreement to commence a plan to convert the holding structure of the Operating
Companies into Foreign Invested Enterprises (“FIEs”) under PRC law. Upon
subsequent review of this plan, the Company determined that it could adequately
reduce any PRC regulatory risk by using an alternative structure involving the
use of “variable interest entities” (VIEs).  Pursuant to a VIE
strategy, the Company would forgo any right to registered ownership of the
Operating Companies contemplated by the Share Exchange, and would instead permit
registered ownership of the Operating Companies to continue to be held by all or
certain PRC Shareholders (the “VIE Shareholders”).  Using this
approach a newly-formed, indirect subsidiary of the Company incorporated in the
People’s Republic of China (“CEC China”) would enter into a series of
contractual arrangements with the VIE Shareholders so that control and the
economic benefits and costs of ownership of the Operating Companies would flow
directly to CEC China through a series of management and business cooperation
agreements.  CEC China would also have the option to purchase the
equity interests in the Operating Companies held by the VIE
Shareholders.  The VIE Shareholders would pledge their equity
interests in the Operating Companies as security for their agreement to comply
with provisions of the management and cooperation agreements and would provide
CEC China with a power of attorney to exercise all their shareholder rights in
the Operating Company.  The contractual arrangements under the VIE
structure are intended to comply with, and be enforceable under, applicable PRC
law, and would adequately reduce any PRC regulatory risk without the capital
contributions necessary under the initial FIE plan.  In connection
with the VIE plan, the Company and the PRC Shareholders have entered into the
Framework Contract  whereby the Company has agreed to form CEC China
within three months of the execution of the Framework Agreement, and the Company
and the PRC Shareholders have agreed to enter into the aforementioned
agreements.
  Operating
Companies
  Coal
Group
  We
produce coal through Inner Mongolia Tehong Coal Group Co, Ltd. (“Coal Group”) and
supply heating and electricity requirements throughout the XueJiaWan district
through Inner Mongolia Zhunger Heat Power Co., Ltd.(“Heat
Power”).
  Coal
Group produces coal from the LaiYeGou coal mine located in Erdos City, Inner
Mongolia, People’s Republic of China. Its trade consists of production and
processing of raw coal for domestic heating, electrical generation and coking
purposes for subsequent steel production. The principal sources of revenue are
generated from the local heating power industry.
  The raw
coal produced is noncaking coal and has a high ash melting point with high
thermal value used almost exclusively as fuel for steam-electric power
generation. It has low sulphur and low chemical emission which satisfies
government environmental protection standards with heating capability of 6,800
-7,000 Kilocalories (“Kcal”).
  14
  Heat
Power
  Heat
Power currently supplies heating requirements throughout the XueJiaWan district
in XueJiaWan Town, Zhunger County with its thermoelectric plant and 21 heat
transfer stations. These plants are operated by Heat Power employees. The
Autonomous Region Planning & Reform Committee appointed Heat Power in 2003
to establish a thermoelectric plant providing heating and electricity capable of
expanding coverage in the area serving a larger population base.
 
 Heat
Power obtains its supply of powdered coal required to generate heat production
from Zhunger County Guanbanwusu Coalmine (“Guanbanwusu”), an unrelated,
unassociated third party. It also obtains its supply through various other coal
mines in the area. The Company does not believe this concentration constitutes a
significant risk.  In the XueJiaWan area, hardly anyone owns a
domestic heating boiler.  Instead, water is heated in the
thermoelectric plant using boilers, to approximately 100°C and piped
directly to homes and public buildings, including private dwellings, factories
as well as municipal facilities.
  Heat
Power supplies heating to users directly and supplies electricity through a
government controlled intermediary, Inner Mongolia Electric Power Group Co.,
Ltd. Heat Power, therefore, operates two processes, one for heating and one for
co-generation of electricity supply.
 
  Results
of operations
  The
following is an analysis of our revenues and gross profit, details and analysis
of components of expenses, and variance for the six month periods ended May 31,
2009 compared to May 31, 2008.
 Six
      Months Ended May 31,2009
                              
                              
                              2008Revenue
                              
                              $
                              9,183,134
                              
                              
                              
                              100
                              %
                              
                              $
                              12,193,975
                              
                              
                              
                              100
                              %Cost
      of
      Sales
                              
                              
                              8,142,477
                              
                              
                              
                              89
                              %
                              
                              
                              8,151,231
                              
                              
                              
                              67
                              %Gross
      Margin
                              
                              $
                              1,040,657
                              
                              
                              
                              11
                              %
                              
                              $
                              4,042,744
                              
                              
                              
                              33
                              %
  Coal
Group
  For the
six month period ended May 31, 2009, revenues for Coal Group were $2,755,509
compared to $7,413,876 in the comparable six month period in 2008. The
$4,658,367 decrease was as a result of the temporary shut down of the LaiYeGou
coal mine for the purpose of installing the necessary fire safety
equipment.  Coal Group produced approximately 22,000 metric tons of
coal during the six month period ended May 31, 2009. In addition, Coal Group met
the demands of customers by supplementing coal mine production with outside
purchases.  Laiyegou resumed partial production operations earlier
this month and expects to achieve full operations by third quarter.
  Coal
Group faces transportation restraints with new routes being constructed and some
routes previously used were not operational. With these restraints, Coal Group
may not be able to optimize its levels of revenues as previously
projected.
  Coal
Group does not typically sign contracts to fix its prices per ton. This allows
Coal Group to sell its products at the going market rate which, to the best of
management’s knowledge, will continue its upward trend in price. Locking in a
fixed price does not allow Coal Group to capitalize on the increase in demand
for its products.
  Heat
Power
  For the
six month period ended May 31, 2009, revenues generated by Heat Power were
$6,427,625 compared to $4,780,099 in the comparable six month period
in  2008. The $1,647,526 increase was as a result of the increase in
the number of users as a result of expansion in the XueJiaWan area. It is
expected that this area will expand further in the next 2 fiscal
years.
  We expect
our revenues to increase during the next two fiscal years as a result of
retaining additional users while the XueJiaWan area is being further developed.
The increase in revenues will also be attributed to the increase in the prices
of heat supply in response to increased cost of raw materials. Revenues
generated are a function of Government regulation as the prices charged are
approved by the Government. The Government reviews the pricing of heating from
time to time as market conditions change. Also, the cost of raw materials, coal,
are also regulated by the Government as the price point which we obtain from
suppliers is controlled as the Government ensures that such prices are
affordable for utility companies. The incentive for the supplier to supply at
such prices is that transportation routes are guaranteed and arranged by the
Government, thereby saving transportation costs on part of the supplier. Such
savings outweigh the reduction in the selling price for the
supplier.
  15
 Heating
      Revenue Per UnitUser
                                                                                              
                                                                                              Unit
      Price
                                                                                              
                                                                                              
                                                                                              Area
      (square meter)
                                                                                              
                                                                                              
                                                                                              Revenue
      ($)Second
      Quarter2008
                                                                                              
                                                                                              
                                                                                              2009
                                                                                              
                                                                                              
                                                                                              2008
                                                                                              
                                                                                              
                                                                                              2009
                                                                                              
                                                                                              
                                                                                              2008
                                                                                              
                                                                                              
                                                                                              2009
                                                                                              
                                                                                              
                                                                                              VarianceResidential
                                                                                              
                                                                                              
                                                                                              2.21
                                                                                              
                                                                                              
                                                                                              
                                                                                              2.92
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,010,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,440,000
                                                                                              
                                                                                              
                                                                                              $
                                                                                              478,637
                                                                                              
                                                                                              
                                                                                              $
                                                                                              923,380
                                                                                              
                                                                                              
                                                                                              $
                                                                                              444,743Commercial
                                                                                              
                                                                                              
                                                                                              3.35
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.20
                                                                                              
                                                                                              
                                                                                              
                                                                                              240,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              350,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              172,433
                                                                                              
                                                                                              
                                                                                              
                                                                                              322,964
                                                                                              
                                                                                              
                                                                                              
                                                                                              150,531Government
                                                                                              
                                                                                              
                                                                                              3.63
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.20
                                                                                              
                                                                                              
                                                                                              
                                                                                              290,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              310,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              226,090
                                                                                              
                                                                                              
                                                                                              
                                                                                              286,059
                                                                                              
                                                                                              
                                                                                              
                                                                                              59,969Total
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,540,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              2,100,000
                                                                                              
                                                                                              
                                                                                              $
                                                                                              877,160
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,532,403
                                                                                              
                                                                                              
                                                                                              
                                                                                              655,243First
      QuarterResidential
                                                                                              
                                                                                              
                                                                                              2.21
                                                                                              
                                                                                              
                                                                                              
                                                                                              2.92
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,010,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,440,000
                                                                                              
                                                                                              
                                                                                              $
                                                                                              929,375
                                                                                              
                                                                                              
                                                                                              $
                                                                                              1,845,220
                                                                                              
                                                                                              
                                                                                              $
                                                                                              915,845Commercial
                                                                                              
                                                                                              
                                                                                              3.35
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.20
                                                                                              
                                                                                              
                                                                                              
                                                                                              240,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              350,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              334,829
                                                                                              
                                                                                              
                                                                                              
                                                                                              645,390
                                                                                              
                                                                                              
                                                                                              
                                                                                              310,561Government
                                                                                              
                                                                                              
                                                                                              3.63
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.20
                                                                                              
                                                                                              
                                                                                              
                                                                                              290,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              310,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              439,016
                                                                                              
                                                                                              
                                                                                              
                                                                                              571,627
                                                                                              
                                                                                              
                                                                                              
                                                                                              132,611Total
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,540,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              2,100,000
                                                                                              
                                                                                              
                                                                                              $
                                                                                              1,703,220
                                                                                              
                                                                                              
                                                                                              $
                                                                                              3,062,237
                                                                                              
                                                                                              
                                                                                              $
                                                                                              1,359,017
  Cost
of Sales
  For the
six month periods ended May 31, 2009, cost of sales decreased by $8,754 from the
comparable six month period in 2008, a result of change in the following
expenses:
 Six
      Months Ended May 31,2009
                  
                  
                  2008
                  
                  
                  VarianceCoal
      & freight
                  
                  
                  4,776,665
                  
                  
                  
                  6,158,896
                  
                  
                  
                  (1,382,231
                  )Utilities
                  
                  
                  539,511
                  
                  
                  
                  414,818
                  
                  
                  
                  124,693Salaries
                  
                  
                  394,168
                  
                  
                  
                  298,727
                  
                  
                  
                  95,441Operating
      supplies
                  
                  
                  261,827
                  
                  
                  
                  165,702
                  
                  
                  
                  96,125Repairs
                  
                  
                  28,160
                  
                  
                  
                  33,645
                  
                  
                  
                  (5,485
                  )Other
                  
                  
                  1,078,019
                  
                  
                  
                  78,114
                  
                  
                  
                  999,905Depreciation
      & depletion
                  
                  
                  1,064,127
                  
                  
                  
                  1,001,329
                  
                  
                  
                  62,798Total
                  
                  $
                  8,142,477
                  
                  
                  $
                  8,151,231
                  
                  
                  $
                  (8,754
                  )
  For the
six month period ended May 31, 2009 our gross margin was 11% compared with 33%
in the 2008 six month period. The decrease resulted from the increase in the
cost of coal, utilities and freight prices incurred by Heat Power. Included in
other expenses is a charge for approximately $1,008,000 for the sub contract of
heating to a nearby energy power plant. The contract was to provide heating
requirements to an area that is not currently covered under current operations.
We may explore constructing facilities to cover this area in the future and the
sub contract will provide a cost effective solution until such plans
materialize.
  Our gross
margin also decreased this quarter as a result of the temporary shut down of the
LaiYeGou coal mine for the purpose of installing the necessary fire safety
equipment. Despite the shut down, Coal Group continued to incur expenses for
usage fees for utilities and salaries.
 
 For the
three month period ended May 31, 2009, cost of sales decreased by $640,302 from
the comparable three month period in 2008, a result of change in the following
expenses:
  16
  Three
      Months Ended May 31,2009
                  
                  
                  2008
                  
                  
                  VarianceCoal
      & freight
                  
                  
                  1,614,725
                  
                  
                  
                  2,702,636
                  
                  
                  
                  (1,087,911
                  )Utilities
                  
                  
                  222,684
                  
                  
                  
                  248,845
                  
                  
                  
                  (26,161
                  )Salaries
                  
                  
                  206,411
                  
                  
                  
                  183,568
                  
                  
                  
                  22,843Operating
      supplies
                  
                  
                  91,126
                  
                  
                  
                  52,942
                  
                  
                  
                  38,184Repairs
                  
                  
                  14,650
                  
                  
                  
                  24,561
                  
                  
                  
                  (9,911
                  )Other
                  
                  
                  460,213
                  
                  
                  
                  32,696
                  
                  
                  
                  427,517Depreciation
      & depletion
                  
                  
                  548,918
                  
                  
                  
                  553,781
                  
                  
                  
                  (4,863
                  )Total
                  
                  $
                  3,158,727
                  
                  
                  $
                  3,799,029
                  
                  
                  $
                  (640,302
                  )
  The
decrease was primarily as a result of the decrease in coal and freight and
increase in other expenses as a result of factors discussed above.
  Salaries
are expected to vary as a result of bonus structures set for employees.
Operating supplies expenses are expected to increase in line with revenue of
Heat Power.
  Selling
Expenses
  For the
six month period ended May 31, 2009, selling expenses increased by approximately
$27,000 compared to the same period in 2008.
  Salaries
and wages are expected to remain at current levels and our sales tax and other
expenses will vary as a direct function of the variance in
revenues.
  Six
      Months Ended May 31,2009
                        
                        
                        2008
                        
                        
                        VarianceSalaries
      and wages
                        
                        
                        19,219
                        
                        
                        
                        19,073
                        
                        
                        
                        146Office
                        
                        
                        2,593
                        
                        
                        
                        935
                        
                        
                        
                        1,658Sales
      tax and other expenses
                        
                        
                        216,341
                        
                        
                        
                        191,569
                        
                        
                        
                        24,772Total
      Expenses
                        
                        $
                        238,153
                        
                        
                        $
                        211,577
                        
                        
                        $
                        26,576
  
 Three
      Months Ended May 31,2009
                        
                        
                        2008
                        
                        
                        VarianceSalaries
      and wages
                        
                        
                        10,666
                        
                        
                        
                        5,727
                        
                        
                        
                        4,939Office
                        
                        
                        2,593
                        
                        
                        
                        935
                        
                        
                        
                        1,658Sales
      tax and other expenses
                        
                        
                        179,261
                        
                        
                        
                        46,289
                        
                        
                        
                        132,972Total
      Expenses
                        
                        $
                        192,520
                        
                        
                        $
                        52,951
                        
                        
                        $
                        139,569
  General
and Administrative Expenses
  For the
six month period ended May 31, 2009, general and administrative expenses
decreased by $521,456 as a result of change in the following
expenses:
  17
  Six
      Months Ended May 31,2009
                        
                        
                        2008
                        
                        
                        VarianceSalaries
      and wages
                        
                        
                        251,844
                        
                        
                        
                        250,820
                        
                        
                        
                        1,024Professional
      and other fees
                        
                        
                        96,890
                        
                        
                        
                        255,219
                        
                        
                        
                        (158,329
                        )Office
                        
                        
                        166,684
                        
                        
                        
                        413,738
                        
                        
                        
                        (247,054
                        )Travel
                        
                        
                        85,151
                        
                        
                        
                        214,398
                        
                        
                        
                        (129,247
                        )Repairs
                        
                        
                        30,141
                        
                        
                        
                        29,934
                        
                        
                        
                        207Other
      expenses
                        
                        
                        70,831
                        
                        
                        
                        46,000
                        
                        
                        
                        24,831Depreciation
                        
                        
                        249,091
                        
                        
                        
                        261,979
                        
                        
                        
                        (12,888
                        )Total
      Expenses
                        
                        
                        950,632
                        
                        
                        $
                        1,472,088
                        
                        
                        $
                        (521,456
                        )
  
 Three
      Months Ended May 31,2009
                        
                        
                        2008
                        
                        
                        VarianceSalaries
      and wages
                        
                        
                        164,035
                        
                        
                        
                        126,584
                        
                        
                        
                        37,441Professional
      and other fees
                        
                        
                        27,008
                        
                        
                        
                        148,475
                        
                        
                        
                        (121,467
                        )Office
                        
                        
                        111,115
                        
                        
                        
                        138,128
                        
                        
                        
                        (27,013
                        )Travel
                        
                        
                        43,015
                        
                        
                        
                        58,920
                        
                        
                        
                        (15,905
                        )Repairs
                        
                        
                        23,534
                        
                        
                        
                        3,523
                        
                        
                        
                        20,001Other
      expenses
                        
                        
                        43,531
                        
                        
                        
                        38,302
                        
                        
                        
                        5,229Depreciation
                        
                        
                        101,503
                        
                        
                        
                        150,956
                        
                        
                        
                        (49,453
                        )Total
      Expenses
                        
                        $
                        513,731
                        
                        
                        $
                        664,888
                        
                        
                        $
                        (151,157
                        )
  Salaries and Wages.Salaries
and wages increased as a result of retaining additional staff in our
thermoelectric plant operations.
  Professional and other Fees.During the second quarter ended 2008, professional fees consisted of fees
paid to engineer professionals to evaluate the overall efficiencies of the
LaiYeGou coal mine. Fees were also incurred to retain environmental
professionals which assisted in the implementation of environmental protection
policies and procedures for the LaiYeGou Coal mine and also for our
thermoelectric plant operations. Fees paid to environmental professionals are
expected to be an ongoing expense. For the six month period ended May 31, 2009,
we did not retain engineering professionals for the LaiYeGou coal
mine.
  Office.During the 2008
quarter ended our office expense consisted of expenses paid for distributing
promotional materials to potential customers of Coal Group and Heat Power,
advertising in trade magazines and on billboards. During the 2009 quarter ended,
we did not incur these costs for Coal Group as a result of the temporary shut
down of the LaiYeGou coal mine for installation of fire safety equipment. We
expect such expenses to increase once the coal mine is operational.
  Travel.During the 2008
quarter, travel expense consisted of travel by engineering consultants to the
thermoelectric plant and also travel incurred by sales staff in their marketing
initiatives. During the 2009 quarter, we did not retain engineers and therefore
did not incur the related travel costs. We expect travel for marketing
initiatives to recur on an ongoing basis.
  Repairs.Repairs were made
mostly to Coal Group’s office building and minor repairs to equipment. We do not
expect to incur significant repair expenses in the future.
  Finance
Expense
  For the
six month period ended May 31, 2009 and May 31, 2008, finance expenses amounted
to $196,077, net and $490,743, net, respectively. The interest expense incurred
was a result of loans obtained by Coal Group. Please refer to “Sources of
Capital” below. Finance expenses decreased as a result of the significant
decrease in interest rate since the second half year of 2008. Finance expenses
also decreased this quarter as a result of the interest income from loans to
other companies was off-set against the interest expenses, but there was no such
income in 2008.
  18
  Current
trends in the Industry
  Given the
increase in demand for coal production for electricity and heating production,
the Central Government is encouraging sectors to build more power stations,
coking factories, calcium carbide factories and silicon iron factories across
the country. The coal industry is expected to grow at a rate of 9.5% per
year. A challenge in meeting this demand is transporting coal to nearby
regions, such as Shanxi and Hebei Provinces, as transportation routes are
currently inefficient or non existent. These routes are expected to be completed
in the next 5 years. As a result, sales to these regions during this period may
not be at levels we desire.
  For Coal
Group, methods of circumventing transportation challenges are to receive
contracts granted by the Government where transportation is guaranteed from
LaiYeGou coal mine to the final destination. Where contracts are privately
arranged, transportation is arranged through the hiring of third party
transporters or by customers. In some instances, coal is purchased by third
parties in close proximity to train stations where transportation to customer
destinations is more efficiently arranged. However, transportation to
destinations is limited to those for which routes are in place.
  For Heat
Power, transportation of coal to our facility is provided by its
supplier.
  Coal
Group does not have competition in the usual sense of the term that most other
businesses experience. There are approximately 30,000 coal mining companies
throughout China; however, since demand currently exceeds supply, competition is
not a variable which warrants concern in the operations of our
business.
  China’s
coal industry remains large and growing. Its customer base is chronically
under-supplied. There are pressures from the Government to use nuclear power
instead of coal due to environmental concerns; however, coal reserves in China
are abundant and less expensive and a switch to other forms of resources to
generate energy is unlikely.
  The
electricity and heating supply industry is also growing; however, the government
is taking steps to monitor and control economic growth in the rural areas to
ensure that the economy is developing at a stable rate.
  Liquidity
and Capital Resources
  As of May
31, 2009 we had a working capital deficit of $27,047,553.  We
anticipate that the combination of our sales and collection of accounts
receivables, customer deposits and proceeds from bank and shareholder
loans  will generate sufficient cash flow  to sustain our
working capital needs. However we may require other sources of
capital.
  We do not
know of any trends, events or uncertainties that are likely to have a material
impact on our short-term or long-term liquidity other than those factors
discussed below.
  Sources
of Capital
  If
additional capital is needed, we will explore financing options such as
shareholder loans. Shareholders loans are granted from time to time as required
to meet current working capital needs. We have no formal agreement that ensures
that we will receive such loans. We may exhaust this source of funding at any
time.  Shareholder loans are payable on demand and interest is
calculated at the range from zero to 3.155% per annum.
  Coal
Group obtained loans from the Agriculture Commercial Bank equally 100 million
RMB or $14,646,006 to assist in funding working capital needs.
  We may
also receive capital contributions from our shareholders.
  Cash
Flows
  Operating
Activities:
  Our cash
flows consumed by operating activities was $543,808 for the six month period
ended May 31, 2009 versus cash flows provided by operating activities of
$2,411,732 for the six month period ended May 31,2008. The following summarizes
the inflow and outflow of cash for these periods:
  19
 
 2009
                
                
                2008Net
      income(loss)
                
                
                (97,406
                )
                
                $
                778,290Options
      issued for services
                
                
                -
                
                
                
                315,000Increase
      in accounts receivable
                
                
                (1,313,698
                )
                
                
                (263,790
                )Increase
      (Decrease) in other receivables
                
                
                70,949
                
                
                
                (209,616
                )Increase
      in advances to suppliers
                
                
                (1,256,888
                )
                
                
                (1,145,666
                )Increase
      in advances from customers
                
                
                738,091
                
                
                
                16,504Decrease
      (Increase) in inventory
                
                
                107,219
                
                
                
                (13,820
                )(Decrease)
      Increase in accounts payable
                
                
                (742,630
                )
                
                
                566,945Increase
      in other payable
                
                
                58,055
                
                
                
                744,532Other
                
                
                1,892,500
                
                
                
                1,623,353Net
      Cash Provided (Consumed) By Operating Activities
                
                $
                (543,808
                )
                
                $
                2,411,732
  During
the quarter ended 2008, the Company issued 4,500,000 options to purchase common
stock to directors, officers, consultants, and employees and the value of such
options was $ 315,000 based on a Black Scholes valuation model.
  Accounts Receivable.The
increase in accounts receivables are mainly attributed to Heat Power’s user fees
made on account.
  Advances to Suppliers.Advances increased as a result of advances made to suppliers of materials
required for the LaiYeGou coal mine expansion and subsequent fire proofing
efforts. Prepayment is also a common business practice in China as it allows for
a determined price and in some instances will grant us discounts on
purchases.
  Advances from customers.The
majority of customer advances received were from Heat Power’s users as a result
of providing heat and hot water supply from the thermoelectric plant and boilers
converted from previous operations. Advances on sales of coal are also a normal
business practice that ensures that the customer obtains Coal Group’s Product at
the market price determined on the date of purchase. Coal Group’s advances
decreased as a result of the shut down of the coal mine for the purpose of fire
proofing its facilities.
  Inventory.Inventory mainly
consists of operating supplies used by Heat Power for heat generation such as
raw coal and boiler fittings.
  Accounts Payable.The
majority of accounts payable were for Heat Power’s purchase of raw materials for
production and constructions.
  Other Payable.These amounts
consist of accruals made for freight, repairs and maintenance of heating plants,
labor union fees, social insurance, and technical training for our
employees.
  Investing
Activities:
  Our cash
consumed by investing activities were $7,475,067 and $113,346  for the
six month period ended May 31, 2009 and May 31, 2008, respectively.
  Construction
in progress charges consist of expenses paid for enhancement of the LaiYeGou
coal mine and also Heat Power construction of additional boilers and conversion
of existing heating plants previously used in exclusive heat supply operations
prior to construction of the thermoelectric plant.
  The
Company granted additional notes of $5,011,175 to two vendors during the six
month period ended May 31, 2009.
  Financing
Activities:
  Our cash
flows provided by financing activities were $9,388,883 for the six month period
ended May 31, 2009 and cash flows consumed by financing activities were
$163,745  for the six month period ended May 31, 2008.
  The
outstanding balances and interest rate of shareholder loans at May 31, 2009,
were as follows:
 Balance
                      
                      
                      Interest
      rateOrdos
      City YiYuan Investment Co. Ltd.
                      
                      
                      
                      1,704,852
                      
                      
                      
                      3.155
                      %Wenhua
      Ding
                      
                      
                      
                      281,374
                      
                      
                      
                      0
                      %Wenxiang
      Ding
                      
                      
                      
                      1,079,411
                      
                      
                      
                      0
                      %Hangzhou
      Dayovan Group, Ltd.
                      
                      
                      
                      5,367,677
                      
                      
                      
                      3.155
                      %Xinghe
      County Haifu Coal Transportation & Sales Co., Ltd.
                      
                      
                      
                      1,784,793
                      *
                      
                      
                      3.155
                      %Total
                      
                      $
                      10,218,107
  *Of such
amount $489,296 is non-interest bearing.
  20
  Coal
Group had obtained additional loans from the Agriculture Commercial Bank with
net amount of 62 million RMB or $9,087,118 to assist in funding working capital
needs during the six month period ended May 31, 2009.
  Material
Commitments
  We are
committed to payment of bank loans, shareholder loans and payment of mining
rights as mentioned above. We have title to all our capital assets consisting of
production equipment, automobiles, and office equipment.
  Heat
Power’s offices are currently leased on a month to month basis and Coal Group
occupies space purchased in 1998. Coal Group holds title to this property in the
form of a 50 year lease from the Government. There are no amounts
owing.
  Heat
Power is obligated to make interest payments on a loan obtained through Coal
Group as mentioned above.
  Seasonal
Aspects
  Coal
Group’s business is seasonal in that sales are particularly low in February up
to mid March, due to the Chinese New Year holiday. During this time our business
is closed for two weeks. As a result, sales in March are usually
higher.
  Heat
Power sales level relating to heat generation decreases from April through
October as the climate in the region is high, reducing heating
requirements.
  Off
Balance Sheet Arrangements
  We have
no off balance sheet arrangements.
  ITEM
3.  QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  Financial
instruments which potentially subject the Company to concentrations of credit
risk consist primarily of cash. The Company does not believe that it is
significantly exposed to interest rate risk, foreign currency exchange rate
risk, commodity price risk, or equity price risk.
  ITEM
4T. CONTROLS AND PROCEDURES
  (A) Evaluation
of Disclosure Controls and Procedures
  As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s Chief
Executive Officer/Chief Accounting Officer of the effectiveness of the design
and operation of the Company’s disclosure controls and procedures. The Company’s
disclosure controls and procedures are designed to provide a reasonable level of
assurance of achieving the Company’s disclosure control objectives. The
Company’s Chief Executive Officer/Chief Accounting Officer has concluded that
the Company’s disclosure controls and procedures are, in fact, effective at this
reasonable assurance level as of the period covered. In addition, the Company
reviewed its internal controls, and there have been no significant changes in
its internal controls or in other factors that could significantly affect those
controls subsequent to the date of their last evaluation or from the end of the
reporting period to the date of this Form 10-Q.
  (B) Changes
in Internal Controls Over Financial Reporting
  In
connection with the evaluation of the Company’s internal controls during the
quarter ended May 31, 2009, the Company’s Chief Executive Officer/Chief
Accounting Officer has determined that there are no changes to the Company’s
internal controls over financial reporting that has materially affected, or is
reasonably likely to materially effect, the Company’s internal controls over
financial reporting.
  21
  PART
II.  OTHER
INFORMATION
  ITEM
1.  Legal Proceedings
  None.
  Item
1A.  Risk
Factors
  A
description of the risks associated with our business, financial condition, and
results of operations is set forth in our annual report on Form 10-K for the
year ended November 30, 2008 filed simultaneously with this Quarterly Report on
Form 10-Q.
  ITEM
2.  Unregistered
Sales of Equity Securities and Use of Proceeds
    ITEM
3.  Defaults
Upon Senior Securities
    ITEM
4.  Submission
of Matters to a Vote of Security Holders
    ITEM
5.  Other
Information.
  Change in Ceftifying
Accountant
  The
Company dismissed its principal independent accountant, Robert G. Jeffrey,
Certified Public Accountants (“Jeffrey & Co.”) from its engagement with the
Company in the second quarter of 2009.  Jeffrey & Co. was engaged
by the Company in 2004. The members of the Board of Directors approved the
Company’s decision to dismiss Jeffrey & Co. as the Company’s principal
independent accountant and approved sending written notification to Jeffrey
& Co. dated as of May 21, 2009.
  There
were no disagreements between the Company and Jeffrey & Co. on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, from the time of Jeffrey & Co.’s engagement up to the
date of dismissal which disagreements that, if not resolved to Jeffrey &
Co.’s satisfaction, would have caused Jeffrey to make reference to the subject
matter of the disagreement in connection with its report issued in connection
with the audit of the Company’s financial statements.  None of the
reportable events described under Item 304(a)(1)(v)(A)-(D) of Regulation S-K
occurred within the two fiscal years of the Company ended November 20, 2007 and
2008 and subsequently up to the date of dismissal.  The audit report
of Jeffrey & Co. on the financial statements of the Company as of November
30, 2008 did not contain any adverse opinion or disclaimer of opinion, and such
audit report was not qualified or modified as to uncertainty, audit scope or
accounting principles.  The Company expects that a letter from Jeffrey
& Co. addressed to the Securities and Exchange Commission stating that it
concurs with the statements made by the Company with respect to Jeffrey in this
Quarterly Report on Form 10-Q will be furnished separately within ten business
days of the filing of this Current Report on Form 10-Q.
  On May
21, 2009, the Company engaged Wei, Wei & Co., LLP (“Wei & Co.”) to serve
as its independent auditor.  The decision to engage Wei & Co. as
the Company’s principal independent accountant was approved by the members of
the Board of Directors of the Company.  During the two fiscal years of
the Company ended November 30, 2007 and 2008, and through the date of the Wei
& Co.’s engagement, the Company did not consult Wei & Co. regarding
either: (i) the application of accounting principles to a specified transaction
(either completed or proposed), or the type of audit opinion that might be
rendered on the Company’s financial statements; or (ii) any matter that was
either the subject of a “disagreement” or “reportable event” within the meaning
set forth in Regulation S-K, Item 304 (a)(1)(iv) or (a)(1)(v).
  Framework
Agreement
  On July
13, 2009, the Company entered into a framework agreement which detailed the
actions contemplated for the restructuring of the Company, Coal Group and Heat
Power under a "variable interest entity" (“VIE”) structure to meet the current
requirements of applicable PRC law.
 
 The
framework agreement provides that (i) the Company will establish a newly-formed,
indirect subsidiary of the Company incorporated in the People’s Republic of
China (“CEC China”), (ii) CEC China will enter an exclusive service agreement
and option agreement with each of Coal Group and Heat Power (collectively, the
“Operating Companies”)  and a share pledge agreement with each of the
Operating Companies and certain of their respective PRC shareholders (“PRC
Shareholders”).  The framework agreement also requires the PRC
Shareholders to fully authorize CEC China to exercise all shareholder’s rights
that the PRC Shareholders can exercise in the Operating Companies. By entering
into the framework agreement and subsequently setting up the structure involving
the use of VIEs, the Company will have the control and the economic benefits and
costs of ownership of the Operating Companies.
  ITEM
6.  EXHIBITS
  Exhibit
      Number
                  Description10.1
                  Framework
      Agreement dated July 13, 200931.1
                  CEO
      Section 302 Certification31.2
                  CAO
      Section 302 Certification32.1
                  CEO
      Section 906 Certification32.2
                  CAO
      Section 906
Certification
  
 22
 SIGNATURES
  In
accordance with the Securities Exchange Act of 1934, this Quarterly Report on
Form 10-Q has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
  
 CHINA
      ENERGY CORPORATIONDate:
      July 21, 2009By:
                  /s/
      WenXiang DingWenXiang
      DingPresident,
      Chief Executive Officer, Director &SecretaryBy:
                  /s/
      Fu XuFu
      XuChief
      Accounting Officer
  
 23