China Energy 10-Q 2009 Q3 Quarterly report

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 No o

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 reporting
		filer  o	company  x
		(Do not check if a smaller
		reporting 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, 2009
Common Stock, $ 0.001 par value	45,000,000 shares

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
ITEM 1.	Financial Statements	2
	Consolidated Statements of Income For the Nine Months Ended August 31, 2009 and August 31, 2008 (Unaudited)	3
	Consolidated Statements of Changes For the Nine Months Ended August 31, 2009 and August 31, 2008 (Unaudited)	5
	Notes 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	25
PART 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	25
	Signatures	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$
ASSETS
Current assets:
Cash		8,362,280			296,455
Accounts receivables		6,072,177			4,724,882
Other receivables		3,122,986			2,128,642
Advance to suppliers		8,380,962			4,637,041
Inventories		4,311,084			685,985
Prepaid taxes		894,453			-
Total current assets		31,143,942			12,473,005
Fixed assets:
Property, plant and equipment		35,276,664			33,668,657
Construction in progress		12,838,892			10,710,321
		48,115,556			44,378,978
Less: accumulated depreciation and depletion		(6,472,431	)		(4,700,282	)
Net fixed assets		41,643,125			39,678,696
Other assets:
Investment property, net of depreciation of $154,765 and $120,686, respectively		1,946,639			1,979,029
Intangible assets, net of amortization of $1,179,438 and $940,055, respectively		3,233,423			3,468,906
Long term investment		-			255,776
Long term notes receivable		7,125,765			2,832,107
Long term prepaid expenses		332,113			-
Total other assets		12,637,940			8,535,818
TOTAL ASSETS		85,425,007			60,687,519
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short term bank loans		19,033,954			5,558,888
Accounts payable		11,715,156			7,780,928
Advance from customers		13,319,916			4,675,139
Accrued liabilities		261,632			291,373
Other payables		5,751,208			5,958,701
Shareholder loans		10,071,909			10,208,965
Total current liabilities		60,153,775			34,473,994
Deferred income		3,533,058			3,018,568
Total liabilities		63,686,833			37,492,562
Stockholders’ equity:
Common stock (authorized 200,000,000 shares of $0.001 par value; 45,000,000 shares issued and outstanding, respectively)		45,000			45,000
Additional paid-in capital		8,655,805			8,655,805
Paid in capital – stock options		315,000			315,000
Retained earnings		7,955,480			9,952,519
Statutory reserves		2,335,468			1,819,915
Other comprehensive income		2,431,421			2,406,718
Total stockholders’ equity		21,738,174			23,194,957
TOTAL 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			2008
	US$			US$			US$			US$
Revenues		19,835,776			14,367,294			10,652,642			2,173,319
Cost 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			63,838
Investment 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 income
Income (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 share
basic and diluted		(0.03	)		(0.01	)		(0.03	)		(0.02	)
Weighted average common shares outstanding
basic 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							Other
	Shares		Amounts		Paid in capital		Stock options		Retained Earnings			Statutory Reserves		Comprehensive  income		Total
Balance as of December 1, 2008		45,000,000	$	45,000	$	8,655,805	$	315,000	$	9,952,519		$	1,819,915	$	2,406,718	$	23,194,957
Net  loss for period		-		-		-		-		(1,481,486	)		-		-		(1,481,486	)
Other comprehensive income		-		-		-		-		-			-		24,703		24,703
Allocation 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			2008
	US$			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			1,626,538
Options issued for services		-			315,000
Changes in operating assets and liabilities:					-
Gains arising from investments		(36,841	)		-
(Increase) decrease in accounts receivables		(1,347,295	)		248,224
Increase 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			516,575
Increase (decrease) in accounts payable		7,161,950			(769,217	)
Increase in advance from customers		8,644,777			2,297,524
Decrease in accrued liabilities		(29,741	)		(287,550	)
(Decrease) increase in other payables		(1,101,946	)		830,753
Net cash used in operating activities		6,100,111			2,683,844
Cash 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	)		4,233,229
Cash received from disposal of fixed assets		86,480			-
Return on long term investments		-			3,652,647
Net cash used in investing activities		(11,689,616	)		5,391,847
Cash flows from financing activities:
Proceeds from short term bank loans		16,403,367			129,216
Principal payments on short term bank loans		(2,928,301	)		(5,294,252	)
Advance from shareholders		155,561			86,412
Net 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			438,055
Cash and cash equivalents, beginning of period		296,455			1,478,264
Cash and cash equivalents, end of period		8,362,280			1,916,319
Supplemental disclosure of cash flow information		514,526			483,926
Cash paid for interest
Cash 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 the XueJiaWan area through a government controlled intermediary, Inner Mongolia Electric Power Group Co., Ltd. (“Electric Power Group”).

Heat Power obtains its supply of powdered coal required to generate heat production from Zhunger County Guanbanwusu Coalmine (“Guanbanwusu”), an unrelated, unassociated third party. It also obtains its supply through various other coal mines in the area. The Company does not believe this concentration constitutes a significant risk.  In the XueJiaWan area, hardly anyone owns a domestic heating boiler.  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.

Basis of Consolidation

The consolidated financial statements include the accounts of the Company and Coal Group and Heat Power. All significant intercompany accounts and transactions have been eliminated in consolidation.

Recently Issued Accounting Standards

December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007) “Business Combinations” (“SFAS 141R”).  The objective of SFAS 141R is to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.  To accomplish this, SFAS 141R establishes principles and requirements for how the acquirer (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree, (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain price, and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS 141R is effective for fiscal years beginning on or after December 15, 2008.  As the provisions of SFAS 141R are applied prospectively, the impact to the Company cannot be determined until any such transactions occur.

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No.51” (“SFAS 160”).  SFAS 160 requires that non-controlling (or minority) interests in subsidiaries be reported in the equity section of the company’s balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. SFAS 160 also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company’s income statement. SFAS 160 also establishes guidelines for accounting or changes in ownership percentages and for deconsolidation. SFAS 160 is effective for financial statements for fiscal years beginning on or after December 15, 2008 and interim periods within those years. The Company’s adoption of SFAS 160 did not to have a material impact on its consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2, which delays the effective date of SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), to fiscal years beginning after November 15, 2008 and interim periods with those fiscal years for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until January 1, 2009 for calendar year end entities. The Company has already adopted this Statement except as it applies to nonfinancial assets and liabilities as noted in FSP 157-2. The adoption of FSP 157-2 did not have a material impact on the Company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”).  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles.  SFAS 162 directs the hierarchy to the entity, rather than the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with generally accepted accounting principles.  SFAS 162 is effective 60 days following SEC approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to remove the hierarchy of generally accepted accounting principles from the auditing standards.  SFAS 162 is not expected to have an impact on the Company's consolidated financial statements.

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 all demand and time deposits and all highly liquid investments with an original maturity of three months or less as of the date of purchase to be cash equivalents.

Concentration of Credit Risk

The Company is exposed to various types of risk in the normal course of business including fluctuations in commodity prices, interest rates and foreign currency exchange rates.

Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash, short term receivables, advances to suppliers, accounts payable and accrued liabilities, advances from customers, and short term loans payable.  These instruments are denominated in the currency of China.  All of the Company’s bank accounts are in banks located in People’s Republic of China and are not covered by protection similar to that provided by the FDIC on funds held in United States banks.

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 and Equipment

Property, plant and equipment are recorded at cost, less accumulated depreciation and amortization.  Cost include the prices paid to acquire or construct the assets, including capitalized interest during the construction period, and any expenditures that substantially increase the assets value or extend the useful life of an existing asset.

Depreciation is computed using the straight line method basics over the estimated useful lives of property, plant and equipment, which are approximately five years for electrical and office equipment, ten years for transportation equipment, and 20 to 45 years for buildings.

Leasehold improvements are amortized over the lesser of their estimated useful lives or the term of the lease.  Capitalized costs related to assets under construction are not depreciated until construction is complete and the asset is ready for its intended use.  Repairs and maintenance are expensed as incurred.

Depletion of coal reserves and amortization of advance royalties is computed using the units-of-production method utilizing only proven and probable reserves (as adjusted for recoverability factors) in the depletion base.  Mine development costs are principally amortized over the estimated lives of the mines using the straight-ling method.  Costs include the original purchase price of the mine plus cost of mine improvements, principally the cost of road building.

Income Taxes

Coal Group and Heat Power generate their income in China where Value Added Tax, Income Tax, City Construction and Development Tax and Education Surcharge taxes are applicable. The Company, Coal Group, and Heat Power do not conduct any operations in the U.S.; therefore, are not subject to U.S. taxes.

Deferred income taxes are recorded to reflect the tax consequences or benefits to future years of any temporary differences between the tax basis of assets and liabilities and amounts recorded on the accounting records, and of net operating loss carryforwards.

Inventories

Inventories are valued at the lower of cost or market, with cost being determined on the first in first out basis.  At August 31, 2009, inventories consisted of coal and operating supplies.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimated.

Net Income Per Share

The Company computes net income (loss) per common share in accordance with SFAS No. 128, “Earnings Per Share” and SEC Staff Accounting Bulletin No. 98 (“SAB 98”).  Under the provisions of SFAS No. 128 and SAB 98, basic and diluted net income per common share are computed by dividing the amount available to common shareholders for the period by the weighted average number of shares of common stock outstanding during the period.  Accordingly, the number of weighted average shares outstanding as well as the amount of net income per share are presented for basic and diluted per share calculations for all periods reflected in the accompanying financial statements.

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

included in other comprehensive income.

Statutory Reserve

The Company is required by Chinese law to allocate a percentage of no lower than 10% of the profits to a Statutory Reserve Fund.  The Company allocates 10% of its after tax profits, if any, to a Statutory Reserve Fund, as determined from year to year. The fund is allocated appropriately until reserves reaches 50% of paid in capital

Stock Options

Stock options are accounted for upon issuance at fair market value.  Such value is determined at the date a commitment is made for issuance.  The value of options is included in a separate part of stockholders' equity.  Upon exercise or cancellation, the value of such options is transferred to paid in capital.

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

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

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	August 31, 2009						November 30, 2008
	Heat		Coal		Total		Heat		Coal		Total
	Power		Group				Power		Group
	US$		US$		US$		US$		US$		US$
Segment assets		44,164,821		41,260,186		85,425,007		33,111,586		25,596,904		58,708,490
Assets not allocable to segments		-		-		-		-		-		1,979,029
Construction in progress		4,031,163		8,807,729		12,838,892		3,609,608		7,100,713		10,710,321
Other 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, 2008
Ordos City YiYuan Investment Co., Ltd.	$	1,564,887			1,535,992
Hangzhou Dayuan Group, Ltd.		5,396,309	*		5,101,839
Xinghe County Haifu Coal Transportation & Sales Co., Ltd.		1,795,576			1,760,278
Wenxiang Ding		1,013,522			1,810,156
Wenhua Ding		301,615			--
Total	$	10,071,909		$	10,208,965

__________________________

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

5. Accounts Receivable

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

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8. Short Term Bank Loans

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, 2008
Bank loan, due 3/30/2009, with interest at 8.964%		---		1,462,866
Bank loan, due 4/23/2009, with interest at 8.964%		---		1,462,866
Bank loan, due 10/22/09, with interest at 8.316%		2,635,471		2,633,156
Bank loan, due 12/5/09, with interest at 6.696%		1,756,980
Bank loan, due 3/15/10, with interest at 6.372%		8,784,902
Bank loan, due 4/21/10, with interest at 6.372%		1,464,150
Bank loan, due 6/29/10, with interest at 6.138%		4,392,451
Total		19,033,954		5,558,888

The Company has unutilized bank credit facilities of $47 million  and $nil as of August 31, 2009 and November 30, 2008, respectively.  Subsequent to August 31, 2009, the Company has not obtained any additional short term bank loan by 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 $4,119,585 available for future use. If not used, these carryforwards will expire as follows:

2009	$	177,778
2010		142,843
2011		1,118,226
2012		1,076,172
2013		1,604,566

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

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

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

	Loss Before  Income Taxes			Tax Provision		Rate of Tax
Amounts 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 - 45
Machinery & equipment		23,907,594			5
Automotive equipment		609,343			10
Office Equipment		534,281			5
Other assets		124,755			5
Construction in progress		12,838,892
Fixed assets to be disposed		744,164
		48,115,556
Accumulated 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.

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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)		2.38
Weighted 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.

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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				2008
Revenue		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.

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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, 2008 until 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		Variance
June		0.03		0.03		381.33		955.70		11.44		22.54		11.10
July		0.03		0.03	__			645.33	__			15.22		15.22
August		0.03		0.03	__			931.11	__			21.96		21.96
TOTALS						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.

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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		Variance
Coal & freight		7,939,531		1,494,178		6,445,353
Utilities		279,705		165,672		114,033
Salaries		138,562		144,647		(6,085	)
Operating supplies		108,233		72,355		35,878
Repairs		109,135		39,371		69,764
Other		78,422		7,717		70,705
Depreciation & depletion		631,454		529,212		102,242
Total		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		Variance
Salaries and wages		40,021		4,255		35,766
Office		5,816		185		5,631
Sales tax and other expenses		792,562		18,298		774,264
Total Expenses		838,399		22,738		815,661

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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		Variance
Salaries and wages		138,697		129,443		9,254
Professional and other fees		86,757		27,033		59,724
Office		533,075		38,674		494,401
Travel		95,856		59,663		36,193
Repairs		10,064		2,513		7,551
Other expenses		123,359		32,205		91,154
Depreciation		168,243		133,547		34,696
Total 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				2008
Revenue		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	%

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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		Variance
Residential		0.32		0.43		2,020,000		2,880,000		140.80		276.86		136.06
Commercial		0.49		0.61		480,000		700,000		50.73		96.84		46.11
Government		0.53		0.61		580,000		620,000		66.51		85.77		19.26
Total						3,080,000		4,200,000		258.04		459.47		201.43

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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		Variance
	Q1		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		48.28
TOTALS							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		Variance
Coal & freight		12,716,196		7,653,074		5,063,122
Utilities		819,216		580,490		238,726
Salaries		532,730		443,374		89,356
Operating supplies		370,060		238,057		132,003
Repairs		137,295		73,016		64,279
Other		1,156,441		385,360		771,081
Depreciation & depletion		1,695,581		1,231,012		464,569
Total		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.

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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		Variance
Salaries and wages		59,240		23,328		35,912
Office		48,409		1,120		47,289
Sales tax and other expenses		1,008,903		209,867		799,036
Total 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		Variance
Salaries and wages		390,541		380,263		10,278
Professional and other fees		183,647		282,252		(98,605	)
Office		699,759		452,412		247,347
Travel		181,007		274,061		(93,054	)
Repairs		40,205		32,447		7,758
Other expenses		194,190		78,205		115,985
Depreciation		417,334		395,526		21,808
Total 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.

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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.

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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 Group has unutilized bank credit facilities of $47 million as at August 31, 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			2008
Net income(loss)		(1,481,486	)		(257,330	)
Depreciation and amortization		2,139,567			1,626,538
Options issued for services		-			315,000
(Increase) Decrease in accounts receivable		(1,347,295	)		248,224
Increase 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			2,297,524
Increase 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	)		830,753
Other		447,908			229,025
Net 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.

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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 rate
Ordos 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 Group has unutilized bank credit facilities of $ 47 million as 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.

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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	Description
31.1	CEO Section 302 Certification
31.2	CAO Section 302 Certification
32.1	CEO and CAO Section 906 Certification

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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 CORPORATION
Date: October 15, 2009
	By:	/s/ WenXiang Ding
		WenXiang Ding
		President, Chief Executive Officer, Director &
		Secretary

By:	/s/ Fu Xu
	Fu Xu
	Chief Financial Officer

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