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 August 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      o No




State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date:




Class
            October
      15, 2009Common
      Stock, $ 0.001 par value
            45,000,000
      shares










TABLE
OF CONTENTS





PART
      I.
              FINANCIAL
      INFORMATIONITEM 1.
              Financial
      Statements
              2Consolidated
      Statements of Income For the Nine Months Ended August 31, 2009 and August
      31, 2008 (Unaudited)
              3Consolidated
      Statements of Changes For the Nine Months Ended August 31, 2009 and August
      31, 2008 (Unaudited)
              5Notes
      to Consolidated Financial Statements
              6


ITEM 2.
            Management’s Discussion and
      analysis of Financial Condition and Results of
      Operations
            14


ITEM 3.
            Quantitative And Qualitative
      Disclosure About Market Risk
            25PART
      II.
            OTHER
      INFORMATION
            25


ITEM 1.
            Legal Proceedings
      .
            25


ITEM 2.
            Unregistered Sales of Equity
      Securities and Use of Proceeds .
            25


ITEM 3.
            Defaults Upon Senior
      Securities.
            25


ITEM 4.
            Submission of Matters to a Vote
      of Security Holders
            25


ITEM 5.
            Other
      Information.
            25


ITEM 6.
            Exhibits and Reports on Form
      8-K
            25Signatures
            26




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 and its subsidiaries (“CEC,” the “Company,” “Coal Group” and
“Heat Power”) 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


(Unaudited




August
      31,
            
            
            November
      30,2009
            
            
            2008(Unaudited)
            
            
            (Audited)US$
            
            
            US$ASSETSCurrent
      assets:Cash
            
            
            8,362,280
            
            
            
            296,455Accounts
      receivables
            
            
            6,072,177
            
            
            
            4,724,882Other
      receivables
            
            
            3,122,986
            
            
            
            2,128,642Advance
      to suppliers
            
            
            8,380,962
            
            
            
            4,637,041Inventories
            
            
            4,311,084
            
            
            
            685,985Prepaid
      taxes
            
            
            894,453
            
            
            
            -Total
      current assets
            
            
            31,143,942
            
            
            
            12,473,005Fixed
      assets:Property,
      plant and equipment
            
            
            35,276,664
            
            
            
            33,668,657Construction
      in progress
            
            
            12,838,892
            
            
            
            10,710,32148,115,556
            
            
            
            44,378,978Less:
      accumulated depreciation and depletion
            
            
            (6,472,431
            )
            
            
            (4,700,282
            )Net
      fixed assets
            
            
            41,643,125
            
            
            
            39,678,696Other
      assets:Investment
      property, net of depreciation of $154,765 and $120,686,
      respectively
            
            
            1,946,639
            
            
            
            1,979,029Intangible
      assets, net of amortization of $1,179,438 and $940,055,
      respectively
            
            
            3,233,423
            
            
            
            3,468,906Long
      term investment
            
            
            -
            
            
            
            255,776Long
      term notes receivable
            
            
            7,125,765
            
            
            
            2,832,107Long
      term prepaid expenses
            
            
            332,113
            
            
            
            -Total
      other assets
            
            
            12,637,940
            
            
            
            8,535,818TOTAL
      ASSETS
            
            
            85,425,007
            
            
            
            60,687,519LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Short
      term bank loans
            
            
            19,033,954
            
            
            
            5,558,888Accounts
      payable
            
            
            11,715,156
            
            
            
            7,780,928Advance
      from customers
            
            
            13,319,916
            
            
            
            4,675,139Accrued
      liabilities
            
            
            261,632
            
            
            
            291,373Other
      payables
            
            
            5,751,208
            
            
            
            5,958,701Shareholder
      loans
            
            
            10,071,909
            
            
            
            10,208,965Total
      current liabilities
            
            
            60,153,775
            
            
            
            34,473,994Deferred
      income
            
            
            3,533,058
            
            
            
            3,018,568Total
      liabilities
            
            
            63,686,833
            
            
            
            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
            
            
            7,955,480
            
            
            
            9,952,519Statutory
      reserves
            
            
            2,335,468
            
            
            
            1,819,915Other
      comprehensive income
            
            
            2,431,421
            
            
            
            2,406,718Total
      stockholders’ equity
            
            
            21,738,174
            
            
            
            23,194,957TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            
            85,425,007
            
            
            
            60,687,519





The
accompanying notes are an integral part of these consolidated financial
statements.





2




CHINA
ENERGY CORPORATION


CONSOLIDATED
STATEMENTS OF INCOME





(Unaudited)





For
      the nine months ended August 31,
            
            
            For
      the three months ended August 31,2009
            
            
            2008
            
            
            2009
            
            
            2008US$
            
            
            US$
            
            
            US$
            
            
            US$Revenues
            
            
            19,835,776
            
            
            
            14,367,294
            
            
            
            10,652,642
            
            
            
            2,173,319Cost
      of revenues
            
            
            (17,427,519
            )
            
            
            (10,604,383
            )
            
            
            (9,285,042
            )
            
            
            (2,453,152
            )Gross
      profit
            
            
            2,408,257
            
            
            
            3,762,911
            
            
            
            1,367,600
            
            
            
            (279,833
            )Operating
      expenses:Selling
      and marketing
            
            
            (1,076,552
            )
            
            
            (234,315
            )
            
            
            (838,399
            )
            
            
            (22,738
            )General
      and administrative
            
            
            (2,106,683
            )
            
            
            (1,895,166
            )
            
            
            (1,156,051
            )
            
            
            (423,078
            )Options
      issued for services
            
            
            -
            
            
            
            (315,000
            )
            
            
            -
            
            
            
            -Total
      operating expenses
            
            
            (3,183,235
            )
            
            
            (2,444,481
            )
            
            
            (1,994,450
            )
            
            
            (445,816
            )(Loss)
      / income from operations
            
            
            (774,978
            )
            
            
            1,318,430
            
            
            
            (626,850
            )
            
            
            (725,649
            )Other
      income
            
            
            296,426
            
            
            
            216,885
            
            
            
            101,240
            
            
            
            63,838Investment
      income
            
            
            36,841
            
            
            
            -
            
            
            
            (6
            )
            
            
            -Finance
      expenses, net
            
            
            (467,721
            )
            
            
            (768,142
            )
            
            
            (271,644
            )
            
            
            (277,399
            )Non-operating
      expenses
            
            
            (123,276
            )
            
            
            (199,221
            )
            
            
            (113,452
            )
            
            
            (31,403
            )(Loss
      ) / income before income taxes
            
            
            (1,032,708
            )
            
            
            567,952
            
            
            
            (910,712
            )
            
            
            (970,613
            )Income
      taxes
            
            
            (448,778
            )
            
            
            (825,282
            )
            
            
            (473,368
            )
            
            
            (65,007
            )Net
      (loss) income
            
            
            (1,481,486
            )
            
            
            (257,330
            )
            
            
            (1,384,080
            )
            
            
            (1,035,620
            )Other
      comprehensive incomeIncome
      (loss) on foreign currency conversion
            
            
            24,703
            
            
            
            (2,559,012
            )
            
            
            (6,680
            )
            
            
            (576,887
            )Total
      comprehensive (loss) income
            
            
            (1,456,783
            )
            
            
            (2,816,342
            )
            
            
            (1,390,760
            )
            
            
            (1,612,507
            )(Loss)
      earnings per sharebasic
      and diluted
            
            
            (0.03
            )
            
            
            (0.01
            )
            
            
            (0.03
            )
            
            
            (0.02
            )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 NINE
MONTHS ENDED AUGUST 31, 2009


(UNAUDITED)




Additional
            
            
            Paid
      in
              capital
            
            
            
            
            
            
            
            
            OtherShares
            
            
            Amounts
            
            
            Paid
      in
              capital
            
            
            Stock
      options
            
            
            Retained
      Earnings
            
            
            StatutoryReserves
            
            
            Comprehensive
              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  loss
      for period
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,481,486
            )
            
            
            -
            
            
            
            -
            
            
            
            (1,481,486
            )Other
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            24,703
            
            
            
            24,703Allocation of
      statutory reserve
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (515,553
            )
            
            
            515,553
            
            
            
            -
            
            
            
            -Balance as of
      August 31, 2009
            
            
            45,000,000
            
            
            $
            45,000
            
            
            $
            8,655,805
            
            
            $
            315,000
            
            
            $
            7,955,480
            
            
            $
            2,335,468
            
            
            $
            2,431,421
            
            
            $
            21,738,174




The
accompanying notes are an integral part of these consolidated financial
statements.




4




CHINA
ENERGY CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
the Nine Month Ended August 31, 2009 and August 31, 2008


(Unaudited)







For
      the nine months ended August 31,2009
            
            
            2008US$
            
            
            US$Cash
      flows from operating activities:Net
      loss
            
            
            (1,481,486
            )
            
            
            (257,330
            )Adjustments
      to reconcile net income to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            2,139,567
            
            
            
            1,626,538Options
      issued for services
            
            
            -
            
            
            
            315,000Changes
      in operating assets and liabilities:
            
            
            
            
            
            
            -Gains
      arising from investments
            
            
            (36,841
            )
            
            
            -(Increase)
      decrease in accounts receivables
            
            
            (1,347,295
            )
            
            
            248,224Increase
      in other receivables
            
            
            (994,344
            )
            
            
            (384,345
            )Increase
      in advance to suppliers
            
            
            (3,743,921
            )
            
            
            (1,346,653
            )Increase
      in inventories
            
            
            (3,625,099
            )
            
            
            (105,675
            )Increase
      in deferred income
            
            
            514,490
            
            
            
            516,575Increase
      (decrease) in accounts payable
            
            
            7,161,950
            
            
            
            (769,217
            )Increase
      in advance from customers
            
            
            8,644,777
            
            
            
            2,297,524Decrease
      in accrued liabilities
            
            
            (29,741
            )
            
            
            (287,550
            )(Decrease)
      increase in other payables
            
            
            (1,101,946
            )
            
            
            830,753Net
      cash used in operating activities
            
            
            6,100,111
            
            
            
            2,683,844Cash
      flows from investing activities:Purchase
      of property, plant and equipment
            
            
            (5,353,867
            )
            
            
            (245,508
            )(Increase)
      in for construction in progress
            
            
            (2,128,571
            )
            
            
            (2,249,008
            )Decrease
      in deferred charges
            
            
            -
            
            
            
            487(Increase)
      decrease in notes receivable
            
            
            (4,293,658
            )
            
            
            4,233,229Cash
      received from disposal of fixed assets
            
            
            86,480
            
            
            
            -Return
      on long term investments
            
            
            -
            
            
            
            3,652,647Net
      cash used in investing activities
            
            
            (11,689,616
            )
            
            
            5,391,847Cash
      flows from financing activities:Proceeds
      from short term bank loans
            
            
            16,403,367
            
            
            
            129,216Principal
      payments on short term bank loans
            
            
            (2,928,301
            )
            
            
            (5,294,252
            )Advance
      from shareholders
            
            
            155,561
            
            
            
            86,412Net
      cash provided by financing activities
            
            
            13,630,627
            
            
            
            (5,078,624
            )Effect
      of exchange rate changes on cash
            
            
            24,703
            
            
            
            (2,559,012
            )Net
      increase in cash and cash equivalents
            
            
            8,065,825
            
            
            
            438,055Cash
      and cash equivalents, beginning of period
            
            
            296,455
            
            
            
            1,478,264Cash
      and cash equivalents, end of period
            
            
            8,362,280
            
            
            
            1,916,319Supplemental
      disclosure of cash flow information
            
            
            514,526
            
            
            
            483,926Cash paid for
      interestCash paid for
      income taxes
            
            
            263,336
            
            
            
            825,282




The
accompanying notes are an integral part of these consolidated financial
statements.




5




CHINA
ENERGY CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTH ENDED AUGUST 31, 2009 AND 2008


(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.




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.




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 Tehong Coal
Co., Ltd. The name was changed in April 2004 to Inner Mongolia Tehong Coal Group
Co., Ltd. and changed again in June 2006 to Inner Mongolia Tehong Coal &
Power Group 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 by the end of
2010.




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 theXueJiaWan areathrough 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.Water is
first heated in the Company’s thermoelectric plant by the high-temperature steam
used for generating electricity, and then piped directly to homes and public
buildings, including private dwellings, factories as well as municipal
facilities, and lastly the water is piped back to the thermoelectric plant to
repeat the process.





6




2.
            Summary
      of Significant Accounting Policies




Basis
of Accounting and Presentation





The unaudited interim financial
statements of the Company as of August 31, 2009 and November 30, 2008 and for
the nine-month periods ended August 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 China Energy Corporation 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 nine months ended August 31, 2009 are
not necessarily indicative of the results to be expected for future quarters or
for the year ending November 30, 2009.





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.





Basisof 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.




7




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.





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.





In May 2009, the FASB issued SFAS No.
165, “Subsequent Events” (“SFAS 165”).  SFAS 165 established standards
of accounting for and disclosure of subsequent events which occur after the
blance sheet date but before the financial statements are issued or are
available to be issued.  SFAS 165 requires the disclosure of the date
through which the subsequent events have been evaluated as well as whether that
date is the date the financial statement were issued or the date the financial
statements were available to be issued.  The Company does not believe
the adoption of this standared will have a significant impact on thie
consolidated financial statements.  The requisite evaluation of events
occurring subsequent to our quarter end of August 31, 2009 through October 7,
2009, the filling date of this Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2009 had been evaluated.





In June 2009, the FASB issued SFAS No.
168, “The FASB Accounting Standards Codification and Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS
168”). SFAS 168 established the FASB Accounting Standards Codification (“the
Codification”) as the sources for authoritative U.S. GAAP. The Codification will
supersede all existing non-SEC accounting and reporting standards under U.S.
GAAP for nongovernmental entities.  SFAS 168 is effective for interim
and annual periods ending after September 15, 2009  Accordingly, upon
the adoption of SFAS 168 effective September 1, 2009, the Company will begin to
reference the new Codification as the sole source of authoritative literature
when referring to U.S. GAAP in the Company’s Annual Report on Form 10-K for the
fiscal year ending November 30, 2009 and all subsequent public filings. The
Codification is not intended to nor does it change existing U.S. GAAP and
adoption will not have any impact on the Company’s financial position, results
of operations or cash flows.





Cash





The Company considers alldemand and time deposits and all highly
liquid investments with an
original maturityof three
months or lessas of the
date of purchaseto 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.




8





Recognition of
Revenue





Revenues from sales of products are
recognised 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
recognised 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 andEquipment





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.





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.  AtAugust
31, 2009, inventories consisted ofcoal andoperating 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 IncomePerShare





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.




9




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






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.




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
in a separate corporation and each functions independently of the
other.





Except
for the loan lent to Heat Power by Coal Group with the principal of Renminbi
93.2 million (equivalent to $13.65 million US dollars) as of August 31, 2009,
during the periods reported here in, 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.





Nine
      Months Ended August 31,2009
            
            
            
            
            
            
            
            
            2008Heat
            
            
            Coal
            
            
            Total
            
            
            Heat
            
            
            Coal
            
            
            TotalPower
            
            
            Group
            
            
            
            
            
            Power
            
            
            GroupUS$
            
            
            US$
            
            
            US$
            
            
            US$
            
            
            US$
            
            
            US$Sales
      to external customers
            
            
            7,024,882
            
            
            
            12,810,893
            
            
            
            19,835,776
            
            
            
            4,894,540
            
            
            
            9,472,754
            
            
            
            14,367,294Interest
      expense(income), net
            
            
            1,111753
            
            
            
            (644,032
            )
            
            
            467,721
            
            
            
            988,229
            
            
            
            (220,087
            )
            
            
            768,142Depreciation
      & depletion
            
            
            1,715,044
            
            
            
            397,871
            
            
            
            2,112,915
            
            
            
            1,265,757
            
            
            
            360,781
            
            
            
            1,626,538Segment
      profit
            
            
            (2,180,289
            )
            
            
            1,405,311
            
            
            
            (774,978
            )
            
            
            (1,354,223
            )
            
            
            2,987,653
            
            
            
            1,633,430Corporate
      items
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            315,000




Three
      Months Ended August 31,2009
            
            
            
            
            
            
            
            
            2008Heat
            
            
            Coal
            
            
            Total
            
            
            Heat
            
            
            Coal
            
            
            TotalPower
            
            
            Group
            
            
            
            
            
            Power
            
            
            GroupUS$
            
            
            US$
            
            
            US$
            
            
            US$
            
            
            US$
            
            
            US$Sales
      to external customers
            
            
            597,258
            
            
            
            10,055,384
            
            
            
            10,652,642
            
            
            
            114,441
            
            
            
            2,058,878
            
            
            
            2,173,319Interest
      expense (income), net
            
            
            413,544
            
            
            
            (141,900
            )
            
            
            271,644
            
            
            
            352,708
            
            
            
            (75,309
            )
            
            
            277,399Depreciation
      & depletion
            
            
            637,789
            
            
            
            163,136
            
            
            
            800,926
            
            
            
            415,961
            
            
            
            121,531
            
            
            
            537,492Segment
      profit (loss)
            
            
            (2,033,349
            )
            
            
            1,406,499
            
            
            
            (626,850
            )
            
            
            (1,117,119
            )
            
            
            391,470
            
            
            
            (725,649
            )





10





August
      31, 2009
            
            
            November
      30, 2008Heat
            
            
            Coal
            
            
            Total
            
            
            Heat
            
            
            Coal
            
            
            TotalPower
            
            
            Group
            
            
            
            
            
            Power
            
            
            GroupUS$
            
            
            US$
            
            
            US$
            
            
            US$
            
            
            US$
            
            
            US$Segment
      assets
            
            
            44,164,821
            
            
            
            41,260,186
            
            
            
            85,425,007
            
            
            
            33,111,586
            
            
            
            25,596,904
            
            
            
            58,708,490Assets
      not allocable to segments
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,979,029Construction
      in progress
            
            
            4,031,163
            
            
            
            8,807,729
            
            
            
            12,838,892
            
            
            
            3,609,608
            
            
            
            7,100,713
            
            
            
            10,710,321Other
      assets
            
            
            -
            
            
            
            1,946,639
            
            
            
            1,946,639
            
            
            
            3,823,371
            
            
            
            677,776
            
            
            
            4,501,147





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 are detailed below:





August
      31, 2009
            
            
            November
      30, 2008Ordos City
      YiYuan Investment Co., Ltd.
            
            $
            1,564,887
            
            
            
            1,535,992Hangzhou Dayuan
      Group, Ltd.
            
            
            5,396,309
            *
            
            
            5,101,839Xinghe
      County Haifu Coal Transportation &Sales
      Co., Ltd.
            
            
            1,795,576
            
            
            
            1,760,278Wenxiang
      Ding
            
            
            1,013,522
            
            
            
            1,810,156Wenhua
      Ding
            
            
            301,615
            
            
            
            --Total
            
            $
            10,071,909
            
            
            $
            10,208,965


__________________________


*Of such amount $489,145 is non-interest
bearing.





5. AccountsReceivable





The Company carries its accounts
receivable at cost, less an allowance for doubtful accounts.  On a
periodic basis, management evaluates accounts receivable balances and
establishes an allowance for doubtful accounts, based on history of past
write-offs and collections.  The balance of accounts receivable has
been reduced by a provision for doubtful accounts in the amount of nil and
$1,000 as of August 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 August 31, 2009 and November
30, 2008, advances amounted to $8,380,962 and $4,637,041,
respectively.  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:





August 31,
      2009
            
            
            November 31,
      2008Loans
      to suppliers and other associatedfirms
            
            
            993,922
            
            
            
            165,304Deposit funds
      to secure agreements
            
            
            1,862,322
            
            
            
            1,859,928Employee
      expense advances
            
            
            266,742
            
            
            
            103,410Total
            
            
            3,122,986
            
            
            
            2,128,642




11




8.Short TermBankLoans





The Company has five outstanding bank
loans. The notes under the loans were collaterized by the mining rights.
Relevant terms of these debt obligations are as follows:





August 31,
      2009
            
            
            November 31,
      2008Bank
      loan, due 3/30/2009, withinterestat
      8.964%
            
            
            ---
            
            
            
            1,462,866Bank loan, due
      4/23/2009, with interest at 8.964%
            
            
            ---
            
            
            
            1,462,866Bank loan, due
      10/22/09, with interest at 8.316%
            
            
            2,635,471
            
            
            
            2,633,156Bank loan, due
      12/5/09, with interest at 6.696%
            
            
            1,756,980Bank loan, due
      3/15/10, with interest at 6.372%
            
            
            8,784,902Bank loan, due
      4/21/10, with interest at 6.372%
            
            
            1,464,150Bank
      loan, due6/29/10,
      with interest at 6.138%
            
            
            4,392,451Total
            
            
            19,033,954
            
            
            
            5,558,888





The Company has unutilized bank credit
facilities of$47 millionand $nilas of August 31, 2009 and November 30,
2008, respectively.  Subsequent to August 31, 2009, the Companyhas notobtainedanyadditional short term bank
loanby this report
date.





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.





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
August 31, 2009, the Chinese entities had net operating losses of $4,119,585available for future use. If not used,
these carryforwards will expire as follows:





2009
            
            $
            177,7782010
            
            
            142,8432011
            
            
            1,118,2262012
            
            
            1,076,1722013
            
            
            1,604,566




12




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
            
            $
            1,029,896Valuation
      allowance
            
            
            1,029,896Balance
      recognized
            
            $
            -





The amount of deferred tax assets
increased during thenine
months ended August 31,
2009 by$217,832.





The effective income tax rate is
reconciled with the statutory rate in the following table.





LossBefore
              Income
      Taxes
            
            
            Tax
      Provision
            
            
            Rate of
      TaxAmounts
      reported on the statement of income
            
            
            (1,032,708
            )
            
            
            448,778
            
            
            
            (43.46
            %)Losses not used
      in calculation of taxable  income on the tax
      returns
            
            
            2,827,820
            
            
            
            -
            
            
            
            68.46
            %Amount
      calculated at the statutory rate
            
            
            1,795,112
            
            
            
            448,778
            
            
            
            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 August 31, 2009.  It is not
anticipated that unrecognized tax benefits would significantly increase or
decrease within 12 months of the reporting date.





11. Fixed Assets





Fixed assets,
consisting principally of buildings and equipment, are summarized as
follows.





Amount
            
            
            Estimated
      Useful Lives
              (Years)Buildings
            
            $
            9,356,527
            
            
            
            20-45Machinery
      &equipment
            
            
            23,907,594
            
            
            
            5Automotive
      equipment
            
            
            609,343
            
            
            
            10OfficeEquipment
            
            
            534,281
            
            
            
            5Other
      assets
            
            
            124,755
            
            
            
            5Construction in
      progress
            
            
            12,838,892Fixed assets to
      be disposed
            
            
            744,16448,115,556Accumulated
      depreciation
            
            
            (6,472,431
            )Fixed assets,
      net
            
            $
            41,643,125





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 nine months ended August 31,
2009.




13




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.







ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




History




CEC 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.




On
November 30, 2004, the Company entered into a share exchange agreement with the
shareholders (collectively, the “PRC Shareholders”) holding 100% of the equity
interests in Coal Group and holding 49% of the equity interests in Heat Power
(together with Coal Group, the “Operating Companies”) pursuant to which 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 entity” (“VIE”).  Pursuant to a VIE
strategy, the Company will 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
PRC (“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. The
Company is in the process of forming CEC China and certain immediate holding
companies, and intends to enter into agreements contemplated by the Framework
Agreement prior to the end of the calendar year.




14




Operating
Companies




We
operate our business through our operating subsidiaries located in the PRC:
we  produce coal through Inner Mongolia Tehong Coal & Power Group
Co., Ltd.  (“Coal Group”) and we supply heating and electricity
requirements throughout the XueJiaWan district through Inner Mongolia Zhunger
Heat Power Co., Ltd. (“Heat Power”). We acquired control over these operating
companies  on November 30, 2004.




Coal
Group




Coal
Group produces coal from the LaiYeGou coal mine located in Erdos City, Inner
Mongolia, PRC.  Coal Group has leased the land surrounding the mine
and the mine itself for a period of 50 years.  Coal Group produced
approximately 136,000 metric tons of coal for the three months ended August 31,
2009. Coal Group recently completed infrastructure improvements to the mine and
has the capacity to produce approximately up to 800,000 metric tons per year by
the end of 2010. 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.  Coal Group’s activities has been
coal production for the purpose of supplying raw materials to heating and power
industries and retail customers. We do not supply coal for the operations of
Heat Power.




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




Heat
Power has two distinct operations that services customers throughout the
XueJiaWan district in Ordos City, Inner Mongolia: it supplies steam heating
directly to end users and it also supplies electricity to end users through a
government controlled intermediary, Inner Mongolia Electric Power Group Co.,
Ltd. (“Electric Power Group”).  Heat Power supplies steam heat through
its thermoelectric plant and 21 heat transfer stations.  The
Autonomous Region Planning & Reform Committee appointed Heat Power in 2003
to establish a thermoelectric plant to provide heat 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.  In the XueJiaWan area, hardly anyone owns a
domestic heating boiler.  Water is first heated in the Company’s
thermoelectric plant by the high-temperature steam used for generating
electricity, and then piped directly to homes and public buildings, including
private dwellings, factories as well as municipal facilities, and lastly the
water is piped back to the thermoelectric plant to repeat the
process







Results
of operations – Three Months Ended August 31, 2009




Revenues




The
following is an analysis of our revenues and gross profit, details and analysis
of components of expenses, and variance; for the three months ended August 31,
2009 compared to August 31, 2008.




Three
      Months Ended August 31,2009
            
            
            2008Revenue
            
            
            10,652,642
            
            
            
            100
            %
            
            
            2,173,319
            
            
            
            100
            %Cost
      of
      Sales
            
            
            9,285,042
            
            
            
            87
            %
            
            
            2,453,152
            
            
            
            113
            %Gross
      Margin
            
            
            1,367,600
            
            
            
            13
            %
            
            
            (279,833
            )
            
            
            (13
            %)




Coal
Group




For the
three months ended August 31, 2009, revenues for Coal Group were $10,055,384
compared to $2,058,878 in the comparable three months in 2008. The
$7,996,506  increase was due to the commencement of the full
operations of the LaiYeGou coal mine in the third quarter in 2009 as compared to
the third quarter in 2008 when the LaiYeGou coal mine was temporarily shut down
for the purpose of installing necessary fire safety equipment. Coal Group
produced approximately 136,000 metric tons of coal during the three months ended
August 31, 2009.




15




New
transportation roads have been completed and there are no more transportation
constraints as in the prior quarter.




Heat
Power




There is
no heating revenue during the three months ended August 31, 2009 as this quarter
is not within the season requiring heat.   For the three months
ended August 31, 2009, revenues generated by Heat Power from its electricity
operations were $597,258 compared to $114,441 in the comparable three month
period in 2008. The $482,817 increase reflected the fact that in the third
quarter in 2008 there was a temporary shut down of operations in order to comply
with PRC Government regulations to improve the air quality during the 2008
Summer Olympics. Heat Power was instructed to temporarily shut down operations
from June 9, 2008until September
20, 2008.    Our revenue during the third quarter from our
electricity operations were as follows:





Electricity
      Revenue Per Unit for Quarter ended August 31,Month
            
            Unit
      Price
            
            
            Units
      of Power supplied (10000KW.h)
            
            
            Revenue
      (Ten thousand $)2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            VarianceJune
            
            
            0.03
            
            
            
            0.03
            
            
            
            381.33
            
            
            
            955.70
            
            
            
            11.44
            
            
            
            22.54
            
            
            
            11.10July
            
            
            0.03
            
            
            
            0.03
            
            
            __
            
            
            
            645.33
            
            
            __
            
            
            
            15.22
            
            
            
            15.22August
            
            
            0.03
            
            
            
            0.03
            
            
            __
            
            
            
            931.11
            
            
            __
            
            
            
            21.96
            
            
            
            21.96TOTALS
            
            
            
            381.33
            
            
            
            2,532.14
            
            
            
            11.44
            
            
            
            59.72
            
            
            
            48.28




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 the Government’s
guarantee and arrangement of transportation, thereby saving those costs for the
supplier. Such savings outweigh the reduction in the selling price for the
supplier.




16




Cost
of Sales




For the
three months ended August 31, 2009, cost of sales increased by $6,831,890 from
the comparable three months in 2008, as a result of changes in the following
expenses:




Three
      Months Ended August 31,2009
            
            
            2008
            
            
            VarianceCoal
      &
      freight
            
            
            7,939,531
            
            
            
            1,494,178
            
            
            
            6,445,353Utilities
            
            
            279,705
            
            
            
            165,672
            
            
            
            114,033Salaries
            
            
            138,562
            
            
            
            144,647
            
            
            
            (6,085
            )Operating
      supplies
            
            
            108,233
            
            
            
            72,355
            
            
            
            35,878Repairs
            
            
            109,135
            
            
            
            39,371
            
            
            
            69,764Other
            
            
            78,422
            
            
            
            7,717
            
            
            
            70,705Depreciation
      &
      depletion
            
            
            631,454
            
            
            
            529,212
            
            
            
            102,242Total
            
            
            9,285,042
            
            
            
            2,453,152
            
            
            
            6,831,890




For the
three months ended August 31, 2009 our gross margin was 13% compared with -13%
in the 2008 comparable three month period. The increase reflected the fact that
in 2008 the LaiYeGou coal mine was temporarily shut down for the purpose of
installing necessary fire safety equipment. Despite the shut down, Coal Group
continued to incur expenses for usage fees for utilities and salaries. The
LaiYeGou coal mine commenced full operations in August 2009.




Utilities,
operating supplies and repairs expenses are expected to increase in line with
revenue.




Selling
Expenses




For the
three months ended August 31, 2009, selling expenses increased by approximately
$816,000 compared to the same period in 2008.  Selling expenses are
expected to increase in line with revenue.




Three
      Months Ended August 31,2009
            
            
            2008
            
            
            VarianceSalaries
      and wages
            
            
            40,021
            
            
            
            4,255
            
            
            
            35,766Office
            
            
            5,816
            
            
            
            185
            
            
            
            5,631Sales
      tax and other expenses
            
            
            792,562
            
            
            
            18,298
            
            
            
            774,264Total
      Expenses
            
            
            838,399
            
            
            
            22,738
            
            
            
            815,661




17




General
and Administrative Expenses




For the
three months ended August 31, 2009, general and administrative expenses
increased by approximately $733,000 as a result of changes in the following
expenses:




Three
      Months Ended August 31,2009
            
            
            2008
            
            
            VarianceSalaries
      and
      wages
            
            
            138,697
            
            
            
            129,443
            
            
            
            9,254Professional
      and other
      fees
            
            
            86,757
            
            
            
            27,033
            
            
            
            59,724Office
            
            
            533,075
            
            
            
            38,674
            
            
            
            494,401Travel
            
            
            95,856
            
            
            
            59,663
            
            
            
            36,193Repairs
            
            
            10,064
            
            
            
            2,513
            
            
            
            7,551Other
      expenses
            
            
            123,359
            
            
            
            32,205
            
            
            
            91,154Depreciation
            
            
            168,243
            
            
            
            133,547
            
            
            
            34,696Total
      Expenses
            
            
            1,156,051
            
            
            
            423,078
            
            
            
            732,973




Salaries and
Wages.Salaries
and wages increased as a result of retaining additional staff in our
thermoelectric plant operations.




Professional and
other Fees.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.




Office.During the third
quarter of 2008 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 comparable period in 2009, these costs for Coal Group were much less than
2008 as a result of the temporary shut down of LaiYeGou coal mine for
installation of fire safety equipment. We expect such expenses to increase as
the coal mine has been operational once again since August 2009. The increase in
office expenses was also attributed to the purchase of some office equipment for
LaiYeGou coal mine during the third quarter of 2009 as a result of the
re-commencement of operations there in August 2009.




Travel.During the third
quarter of 2008, travel expenses consisted of amounts incurred by
engineering consultants to the thermoelectric plant and also amounts
incurred by sales staff in connection with their marketing initiatives. During
the third quarter of 2009, we incurred increased travel costs for
marketing initiatives as a result of commencement of operations of
LaiYeGou coal mine in August 2009.




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
three months ended August 31, 2009 and August 31, 2008, finance expenses
amounted to $271,644, and $277,399, respectively. The interest expense incurred
was a result of loans obtained by Coal Group. Please refer to “Sources of
Capital” below. Although the loan balances in the third quarter of 2009 was more
than the same period in 2008, finance expenses decreased as a result of the
significant decrease in interest rates since the second half of 2008. Finance
expenses also decreased this period because the interest income from loans to
other companies partially off-set interest expenses, but there was no such
income for an offset in the comparable period of 2008.




Results
of operations – Nine Months Ended August 31, 2009




Revenues




The
following is an analysis of our revenues and gross profit, details and analysis
of components of expenses, and variance; for the nine months ended August 31,
2009 compared to August 31, 2008.




Nine
      Months Ended August 31,2009
            
            
            2008Revenue
            
            
            19,835,776
            
            
            
            100
            %
            
            
            14,367,294
            
            
            
            100
            %Cost
      of
      Sales
            
            
            17,427,519
            
            
            
            88
            %
            
            
            10,604,383
            
            
            
            74
            %Gross
      Margin
            
            
            2,408,257
            
            
            
            12
            %
            
            
            3,762,911
            
            
            
            26
            %




18




Coal
Group




For the
nine months ended August 31, 2009, revenues for Coal Group were $12,810,893
compared to $9,472,754 in the comparable nine months in 2008. The
$3,338,139  increase was due to
the re-commencement of full operations LaiYeGou coal mine in the third quarter
of 2009 following the temporary shutdown which began in third quarter of
2008 as a result of LaiYeGou coal mine commenced full operations in
the third quarter after the temporary shutdown in August 2009  Coal
Group produced approximately 158,000 metric tons of coal during the nine months
ended August 31, 2009.  In addition, Coal Group met the demands of
customers by supplementing coal mine production with outside
purchases.




New
transportation roads have been completed and there are no more transportation
constraints as in the prior quarter.




Heat
Power




For the
nine months ended August 31, 2009, revenues generated by Heat Power were
$7,024,882 compared to $4,894,540 in the comparable nine month period in 2008.
The $2,130,342 increase was as a result of the increase in the number of heating
customers due to the expansion in the XueJiaWan area. It is expected that this
area will expand further in the next 2 fiscal years.  There is no
heating revenue during the three months ended August 31, 2009 as this quarter is
not within the season requiring heat.  The following table compares
our heating revenue for the nine month period in 2008 and 2009:




Heating
      Revenue Per Unit for Nine Months Ended August 31,User
            
            Average
      Unit Price
            
            
            Area
      (sq. meter range)
            
            
            Revenue
      (Ten thousand $)2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            VarianceResidential
            
            
            0.32
            
            
            
            0.43
            
            
            
            2,020,000
            
            
            
            2,880,000
            
            
            
            140.80
            
            
            
            276.86
            
            
            
            136.06Commercial
            
            
            0.49
            
            
            
            0.61
            
            
            
            480,000
            
            
            
            700,000
            
            
            
            50.73
            
            
            
            96.84
            
            
            
            46.11Government
            
            
            0.53
            
            
            
            0.61
            
            
            
            580,000
            
            
            
            620,000
            
            
            
            66.51
            
            
            
            85.77
            
            
            
            19.26Total
            
            
            
            
            
            
            
            
            
            
            3,080,000
            
            
            
            4,200,000
            
            
            
            258.04
            
            
            
            459.47
            
            
            
            201.43




19




Revenue
from our electricity operations during the nine month period in 2008 and 2009
were as follows:




Electricity
      Revenue Per Unit for Nine Months Ended August 31,Quarter
            
            
            Average
      Unit Price
            
            
            Units
      of Power supplied (10000KW.h)
            
            
            Revenue
      (Ten thousand $)2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            VarianceQ1
            
            
            
            0.03
            
            
            
            0.03
            
            
            
            3,556.06
            
            
            
            3,038.82
            
            
            
            106.63
            
            
            
            85.90
            
            
            
            (20.73
            )Q2
            
            
            
            0.03
            
            
            
            0.03
            
            
            
            3,779.78
            
            
            
            3,445.94
            
            
            
            113.34
            
            
            
            97.40
            
            
            
            (15.94
            )Q3
            
            
            
            0.03
            
            
            
            0.03
            
            
            
            91.95
            
            
            
            2,532.14
            
            
            
            11.44
            
            
            
            59.72
            
            
            
            48.28TOTALS
            
            
            
            
            
            
            
            
            
            
            
            7,427.79
            
            
            
            9,016.90
            
            
            
            231.41
            
            
            
            243.02
            
            
            
            11.61




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.




Cost
of Sales




For the
nine months ended August 31, 2009, cost of sales increased by $6,823,136 from
the comparable nine months in 2008, a result of change in the following
expenses:




Nine
      Months Ended August 31,2009
            
            
            2008
            
            
            VarianceCoal
      &
      freight
            
            
            12,716,196
            
            
            
            7,653,074
            
            
            
            5,063,122Utilities
            
            
            819,216
            
            
            
            580,490
            
            
            
            238,726Salaries
            
            
            532,730
            
            
            
            443,374
            
            
            
            89,356Operating
      supplies
            
            
            370,060
            
            
            
            238,057
            
            
            
            132,003Repairs
            
            
            137,295
            
            
            
            73,016
            
            
            
            64,279Other
            
            
            1,156,441
            
            
            
            385,360
            
            
            
            771,081Depreciation
      &
      depletion
            
            
            1,695,581
            
            
            
            1,231,012
            
            
            
            464,569Total
            
            
            17,427,519
            
            
            
            10,604,383
            
            
            
            6,823,136





For the
nine months ended August 31, 2009 our gross margin was 12% compared with 26% in
the 2008 comparable nine 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
subcontract 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.




20




Our gross
margin of Coal Group increased this quarter since in the comparable quarter in
2008 the LaiYeGou coal mine was temporaily temporary shut down for the purpose
of installing necessary fire safety equipment. Despite the shut down, Coal Group
continued to incur expenses for usage fees for utilities and salaries. LaiYeGou
coal mine commenced full operations in August 2009.




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
nine months ended August 31, 2009, selling expenses increased by approximately
$842,000 compared to the same period in 2008.




Our sales
tax and other expenses will vary as a direct function of the variance in
revenues.




NIne
      Months Ended August 31,2009
            
            
            2008
            
            
            VarianceSalaries
      and wages
            
            
            59,240
            
            
            
            23,328
            
            
            
            35,912Office
            
            
            48,409
            
            
            
            1,120
            
            
            
            47,289Sales
      tax and other expenses
            
            
            1,008,903
            
            
            
            209,867
            
            
            
            799,036Total
      Expenses
            
            
            1,076,552
            
            
            
            234,315
            
            
            
            842,237




General
and Administrative Expenses




For the
nine months ended August 31, 2009, general and administrative expenses increased
by $211,517 as a result of changes in the following expenses:




Nine
      Months Ended August 31,2009
            
            
            2008
            
            
            VarianceSalaries
      and
      wages
            
            
            390,541
            
            
            
            380,263
            
            
            
            10,278Professional
      and other
      fees
            
            
            183,647
            
            
            
            282,252
            
            
            
            (98,605
            )Office
            
            
            699,759
            
            
            
            452,412
            
            
            
            247,347Travel
            
            
            181,007
            
            
            
            274,061
            
            
            
            (93,054
            )Repairs
            
            
            40,205
            
            
            
            32,447
            
            
            
            7,758Other
      expenses
            
            
            194,190
            
            
            
            78,205
            
            
            
            115,985Depreciation
            
            
            417,334
            
            
            
            395,526
            
            
            
            21,808Total
      Expenses
            
            
            2,106,683
            
            
            
            1,895,166
            
            
            
            211,517




Salaries and
Wages.Salaries
and wages increased as a result of retaining additional staff in our
thermoelectric plant operations.




Professional and
other Fees.Professional fees
consisted of fees paid to engineering professionals to evaluate the overall
efficiencies of the LaiYeGou coal mine. Fees were also incurred to retain
environmental professionals who assisted in the implementation of environmental
protection policies and procedures for the LaiYeGou Coal mine and our
thermoelectric plant operations. Fees paid to environmental professionals are
expected to be an ongoing expense.




Office.During the nine months
ended August 31, 2008 our office expenses consisted of amounts paid for
distributing promotional materials to potential customers of Coal Group and Heat
Power, advertising in trade magazines and on billboards. During the comparable
period in 2009, these costs for Coal Group were much less than 2008 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 as the coal mine has
been operational once again since August 2009. The increase in office
expenses was also attributable to, the purchase of some office
equipment for the LaiYeGou coal mine during the third quarter of 2009 as a
result of the re-commencement of operations there in August
2009.




21




Travel.During the nine months
ended August 31, 2008, travel expenses consisted of amounts
incurred by engineering consultants to the thermoelectric plant and
also amounts incurred by sales staff in connection with their
marketing initiatives. During the comparable period in 2009, we incurred less
travel expenses by sales staff as a result of the temporary shut down of the
LaiYeGou coal mine for installation of fire safety equipment. We expect travel
for marketing initiatives to recur on an ongoing basis given the re-commencement
of operations of LaiYeGou coal mine in August 2009.




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
nine months ended August 31, 2009 and August 31, 2008, finance expenses amounted
to $467,721, and $768,142, 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 during this period because interest income from loans to other
companies partially off-set interest expenses, but there was no such income
for an offset in the comparable period of 2008.




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
August 31, 2009 we had a working capital deficit of $29,009,833.  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.




22




Coal
Group obtained loans from the Agriculture Commercial Bank and China Merchants
Bank equally 100 million RMB or $14,641,503 and 30 million RMB or $4,392,451,
respectively, to assist in funding working capital needs. In addition, Coal Grouphas unutilized bank credit facilities
of$47 millionas at August31, 2009.




We may
also receive capital contributions from our shareholders.




Cash
Flows




Operating
Activities:




Our cash
flows provided by operating activities was $6,100,111 for the nine months ended
August 31, 2009 as compared to cash flows provided by operating activities of
$2,683,844 for the nine months ended August 31, 2008. The following summarizes
the inflow and outflow of cash for these periods:




Nine
      Months Ended August 31,2009
            
            
            2008Net
      income(loss)
            
            
            (1,481,486
            )
            
            
            (257,330
            )Depreciation
      and amortization
            
            
            2,139,567
            
            
            
            1,626,538Options
      issued for
      services
            
            
            -
            
            
            
            315,000(Increase)
      Decrease in accounts receivable
            
            
            (1,347,295
            )
            
            
            248,224Increase
      in other
      receivables
            
            
            (994,344
            )
            
            
            (384,345
            )Increase
      in advances to
      suppliers
            
            
            (3,743,921
            )
            
            
            (1,346,653
            )Increase
      in advances from
      customers
            
            
            8,644,777
            
            
            
            2,297,524Increase
      in
      inventory
            
            
            (3,625,099
            )
            
            
            (105,675
            )Increase
      (Decrease) in accounts
      payable
            
            
            7,161,950
            
            
            
            (769,217
            )(Decrease)
      Increase in other payable
            
            
            (1,101,946
            )
            
            
            830,753Other
            
            
            447,908
            
            
            
            229,025Net
      Cash Provided (Consumed) By Operating Activities
            
            
            6,100,111
            
            
            
            2,683,844




During
the comparable period of 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 Heat Power expansion and advances with respect to
our purchase of coal and freight from third party suppliers. 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.Advances on sales of coal are the majority of customer advances received
and it is 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 increased significantly during the third quarter of 2009 given
that LaiYeGou coal mine re-commenced operations in August 2009. The
customer advances received from Heat Power’s users also increased as a result of
providing heat and hot water supply from the thermoelectric plant and boilers
converted from previous operations.




Inventory.Inventory mainly
consists of coal and operating supplies used by Heat Power for heat generation
such as raw coal and boiler fittings. The balance of coal increased
significantly during the third quarter of given that LaiYeGou coal mine
re-commenced operations in August 2009.




Accounts Payable.The
majority of accounts payable were for Heat Power’s purchase of raw materials for
production and constructions and for Coal Group’s purchase of coal from third
party suppliers for trading.




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.




23




Investing
Activities:




Our cash
flows consumed by investing activities were $11,689,616 for the nine months
ended August 31, 2009 and cash flows provided by investing activities were
$5,391,847 for the nine months ended August 31, 2008.




Construction
in progress charges relates to amounts paid for the enhancement of the
LaiYeGou coal mine and for Heat Power's construction of additional boilers
and conversion of existing heating plants previously used in exclusive heat
supply operations prior to the construction of the thermoelectric
plant.




The
Company granted additional notes of $5,081,811 to two vendors during the nine
months ended August 31, 2009.




Financing
Activities:




Our cash
flows provided by financing activities were $13,630,627 for the nine months
ended August 31, 2009 and cash flows consumed by financing activities were
$5,078,624 for the nine months ended August 31, 2008.




The
outstanding balances and interest rate of shareholder loans at August 31, 2009,
were as follows:




Balance
            
            
            Interest
      rateOrdos
      City YiYuan Investment Co. Ltd.
            
            
            1,564,887
            
            
            
            3.155
            %Wenhua
      Ding
            
            
            301,615
            
            
            
            0
            %Wenxiang
      Ding
            
            
            1,013,522
            
            
            
            0
            %Hangzhou
      Dayuan Group, Ltd.
            
            
            5,396,309
            *
            
            
            3.155
            %Xinghe
      County Haifu Coal Transportation & Sales Co., Ltd.
            
            
            1,795,576
            
            
            
            3.155
            %Total
            
            
            10,071,909




*Of such
amount $489,145 is non-interest bearing.




Coal
Group obtained loans from the Agriculture Commercial Bank and China Merchants
Bank equally 100 million RMB or $14,641,503 and 30 million RMB or $4,392,451,
respectively, to assist in funding working capital needs. In addition, Coal Grouphas unutilized bank credit facilities
of$47 millionas at August 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.




24




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 fiscal quarter 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 that information required to be disclosed by the
Company in the reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms.  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.




(B)
            Changes
      in Internal Controls Over Financial
Reporting




In
connection with the evaluation of the Company’s internal controls during the
quarter ended August 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.




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.




ITEM
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds -
  None.




ITEM
      3.
            Defaults
      Upon Senior Securities - None.




ITEM
      4.
            Submission
      of Matters to a Vote of Security Holders -
None




ITEM
      5.
            Other
      Information.  None




ITEM
      6.
            EXHIBITS




Exhibit
      Number
            Description31.1
            CEO
      Section 302 Certification31.2
            CAO
      Section 302 Certification32.1
            CEO
      and CAO Section 906 Certification




25





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:
      October 15, 2009By:
              /s/ WenXiang
      DingWenXiang
      DingPresident,
      Chief Executive Officer, Director &Secretary
 By:
                  /s/ Fu
      XuFu
      XuChief
      Financial Officer





26