UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal quarter ended May 31, 2012

x		Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal quarter ended August 31, 2012.

¨		Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___________ to ____________.

¨ 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

(Exact name of Registrant ~~as specified~~ 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
(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 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 ¨☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate ~~Web site~~website, 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 x No ¨☐

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 ¨ ☐ Accelerated filer ¨ ☐ Non-accelerated filer ¨ ☐ Smaller reporting 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). ¨Yes x ☐ No x

~~State~~The ~~the~~issuer ~~number~~had of45,060,000 shares ~~outstanding~~ of ~~each~~Common ofStock, ~~the~~$ ~~issuer’s classes~~0.001 ~~of common equity~~par value, outstanding as of ~~the~~October ~~latest~~19, ~~practicable date:~~2012.

~~45,060,000 shares of Common Stock, $0.001 par value, outstanding~~TABLE asOF ~~of July 16, 2012~~CONTENTS

TABLE OF CONTENTS
			PAGE
PART I.	FINANCIAL INFORMATION		2
~~ITEM 1.~~	~~Financial~~ITEM ~~Statements~~1.	FINANCIAL STATEMENTS
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
		Consolidated Balance Sheets as of August 31, 2012 (Unaudited) and November 30, 2011	2
ITEM 3.	Quantitative And Qualitative Disclosure About Market Risk	13
		Consolidated Statements of Income and Other Comprehensive Income for the Three Months and Nine Months Ended August 31, 2012 and 2011 (Unaudited)	3
ITEM 4T	Controls and Procedures	13
		Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended August 31, 2012 (Unaudited)	4
PART II.	OTHER INFORMATION
		Consolidated Statements of Cash Flows for the Nine Months Ended August 31, 2012 and 2011 (Unaudited)	5
ITEM 1.	Legal Proceedings	13
		Notes to Consolidated Financial Statements for the Three and Nine-Month Periods Ended August 31, 2012 and 2011 (Unaudited)	6
ITEM 1A	Risk Factors	13
	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	13
	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	33
ITEM 3.	Defaults Upon Senior Securities.	13
	ITEM 4.	CONTROLS AND PROCEDURES	33
ITEM 4.	Mine Safety Disclosures	13
PART II.	OTHER INFORMATION
ITEM 5.	Other Information.	13
	ITEM 1.	LEGAL PROCEEDINGS	34
ITEM 6.	Exhibits	14
	ITEM 1.A.	RISK FACTORS	34
	Signatures	15
	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	34
	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	34
	ITEM 4.	(REMOVED AND RESERVED)	34
	ITEM 5.	OTHER INFORMATION	34
	ITEM 6.	EXHIBITS	34

SPECIAL NOTE REGARDING FORWARD -LOOKING STATEMENTS

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 (the “Company”) undertake 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~~PART 1I. ~~INTERIM~~ FINANCIAL ~~STATEMENTS.~~INFORMATION

~~CHINA~~ITEM ~~ENERGY~~1. ~~CORPORATION~~FINANCIAL STATEMENTS.

CHINA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED ~~FINANCIAL~~BALANCE ~~STATEMENTS~~SHEETS

FOR THE THREE AND SIX MONTH PERIODS ENDED

	August 31,		November 30,
	2012		2011
	(Unaudited)		(Audited)
	US$		US$
ASSETS
Current assets:
Cash and cash equivalents	$	33,027,738	$	31,007,269
Accounts receivable, net of allowance for doubtful accounts of $11,301 and $11,251, respectively		10,562,097		17,364,962
Other receivables		13,451,480		24,562,536
Inventories, net of reserve for write down to market of $667,200 and $0, respectively		13,186,414		10,096,645
Prepaid expenses		337,298		323,072
Advance to suppliers		38,920,307		27,566,516
Total current assets		109,485,334		110,921,000

Fixed assets, net		64,081,867		62,937,747

Other assets:
Investment property, net of accumulated depreciation of $606,733 and $475,649, respectively		5,545,804		5,730,169
Mining right, net of amortization of $1,938,172 and $1,635,072, respectively		2,809,386		3,091,565
Restricted cash		578,691		573,542
Other long term assets		5,972,870		3,889,144
Total other assets		14,906,751		13,284,420

TOTAL ASSETS	$	188,473,952	$	187,143,167

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short term bank loans	$	22,052,801	$	29,138,242
Accounts payable		16,978,287		21,716,148
Advance from customers		12,701,657		10,321,920
Accrued liabilities		815,192		629,016
Other payables		7,884,034		13,111,017
Stockholder loans		9,743,644		9,452,712
Current portion of finance obligations		3,122,029		1,695,944
Current portion of deferred income		1,466,449		1,333,695
Total current liabilities		74,764,093		87,398,694

Non-current liabilities:
Finance obligations, net of current portion		11,494,390		6,906,957
Deferred income, net of current portion		8,894,088		8,804,664
Total non-current liabilities		20,388,478		15,711,621

Total liabilities		95,152,571		103,110,315

Stockholders’ equity:
Preferred stock: no par value; 5,000,000 shares authorized; none issued and outstanding		-		-
Common stock: $0.001 par value; 195,000,000 shares authorized; 45,060,000 shares issued and outstanding at August 31, 2012 and November 30, 2011, respectively		45,060		45,060
Additional paid-in capital		10,625,225		10,620,368
Retained earnings		65,296,034		56,818,378
Statutory reserves		9,488,317		9,032,855
Accumulated other comprehensive income		7,866,745		7,516,191
Total stockholders’ equity		93,321,381		84,032,852

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	188,473,952	$	187,143,167

~~MAY~~The ~~31,~~accompanying notes are an ~~2012~~integral ~~AND~~part ~~2011~~of these consolidated financial statements.

~~CHINA ENERGY CORPORATION AND SUBSIDIARIES~~2

~~CONSOLIDATED~~CHINA ENERGY ~~BALANCE~~CORPORATION ~~SHEETS~~AND SUBSIDIARIES

	May 31,		November 30,
	2012		2011
	(Unaudited)		(Audited)
	US$		US$
ASSETS
Current assets:
Cash	$	34,285,849	$	31,007,269
Accounts receivable, net of allowance for doubtful accounts of $11,265 and $11,251, respectively		28,650,258		17,364,962
Other receivables		14,742,036		24,562,536
Inventories		20,542,245		10,096,645
Prepaid expenses		704,151		323,072
Advance to suppliers		42,422,506		27,566,516
Total current assets		141,347,045		110,921,000
Fixed assets, net		63,711,143		62,937,747
Other assets:
Investment property, net of accumulated depreciation of $563,185 and $475,649, respectively		5,646,832		5,730,169
Mining right, net of amortization of $1,906,131 and $1,635,072, respectively		2,826,518		3,091,565
Restricted cash		575,831		573,542
Other long term assets		5,963,098		3,889,144
Total other assets		15,012,279		13,284,420
TOTAL ASSETS	$	220,070,467	$	187,143,167
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short term bank loans	$	29,803,404	$	29,138,242
Accounts payable		24,750,164		21,716,148
Advances from customers		16,900,241		10,321,920
Accrued liabilities		970,607		629,016
Other payables		8,397,741		13,111,017
Stockholder loans		9,614,022		9,452,712
Current portion of finance obligations		3,059,834		1,695,944
Current portion of deferred income		1,487,186		1,333,695
Total current liabilities		94,983,199		87,398,694
Non-current liabilities
Finance obligations, net of current portion		12,256,272		6,906,957
Deferred income, net of current portion		9,447,352		8,804,664
Total non-current liabilities		21,703,624		15,711,621
Total liabilities		116,686,823		103,110,315
Commitments and contingencies		-		-
Stockholders’ equity:
Preferred stock: no par value; 5,000,000 shares authorized; none issued and outstanding shares		-		-
Common stock: $0.001 par value; 195,000,000 shares authorized; 45,060,000 shares issued and outstanding at May 31, 2012 and November 30, 2011, respectively		45,060		45,060
Additional paid-in capital		10,625,225		10,620,368
Retained earnings		75,328,995		56,818,378
Statutory reserves		9,916,340		9,032,855
Accumulated other comprehensive income		7,468,024		7,516,191
Total stockholders’ equity		103,383,644		84,032,852
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	220,070,467	$	187,143,167

CONSOLIDATED STATEMENTS OF operations And Other comprehensive income (LOSS) (UNAUDITED)

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

	For the three months ended August 31,						For the nine months ended August 31,
	2012			2011			2012			2011
	US$			US$			US$			US$

Revenues	$	22,415,720		$	46,989,141		$	146,703,801		$	101,533,393
Cost of revenues		(22,250,281	)		(31,300,833	)		(118,427,782	)		(67,227,722	)
Gross profit		165,439			15,688,308			28,276,019			34,305,671

Operating expenses:
Selling and marketing		(1,188,314	)		(2,631,709	)		(6,708,019	)		(5,227,511	)
General and administrative		(2,363,346	)		(1,150,090	)		(6,013,778	)		(4,633,401	)
Total operating expenses		(3,551,660	)		(3,781,799	)		(12,721,797	)		(9,860,912	)

(Loss) income from operations		(3,386,221	)		11,906,509			15,554,222			24,444,759

Other income and (expenses):
Interest expenses, net		(889,720	)		(757,114	)		(2,591,401	)		(1,706,818	)
Government subsidies		-			-			754,721			-
Non-operating income		519,463			602,720			1,126,216			1,365,769
Non-operating expenses		(32,587	)		(93,930	)		(182,930	)		(216,558	)
(Loss) income before income taxes		(3,789,065	)		11,658,185			14,660,828			23,887,152

(Provision for) income taxes		(407,049	)		(3,496,324	)		(5,727,710	)		(7,573,778	)

Net (loss) income		(4,196,114	)		8,161,861			8,933,118			16,313,374

Other comprehensive income:
Foreign currency translation adjustment		346,787			1,138,398			350,554			2,778,992
Total comprehensive (loss) income	$	(3,849,327	)	$	9,300,259		$	9,283,672		$	19,092,366

Net (loss) income per common share basic and diluted	$	(0.09	)	$	0.21		$	0.20		$	0.42

Weighted average common shares outstanding basic and diluted		45,060,000			45,060,000			45,060,000			45,060,000

~~F-3~~The accompanying notes are an integral part of these consolidated financial statements.

~~CHINA ENERGY CORPORATION AND SUBSIDIARIES~~3

~~CONSOLIDATED~~CHINA ~~STATEMENTS~~ENERGY OFCORPORATION ~~Income~~AND ~~And OTHER~~SUBSIDIARIES ~~comprehensive income (UNAUDITED)~~

	For the three months ended May 31,						For the six months ended May 31,
	2012			2011			2012			2011
	US$			US$			US$			US$
Revenues	$	86,540,087		$	32,191,523		$	125,227,238		$	54,544,252
Cost of revenues		(65,718,814	)		(21,572,903	)		(90,853,664	)		(35,926,889	)
Gross profit		20,821,273			10,618,620			34,373,574			18,617,363
Operating expenses:
Selling and marketing		(2,207,548	)		(1,351,996	)		(5,519,705	)		(2,595,802	)
General and administrative		(1,925,538	)		(2,366,181	)		(3,650,432	)		(3,483,311	)
Total operating expenses		(4,133,086	)		(3,718,177	)		(9,170,137	)		(6,079,113	)
Income from operations		16,688,187			6,900,443			25,203,437			12,538,250
Other income and expenses
Interest expense, net		(900,049	)		(628,762	)		(1,701,681	)		(949,704	)
Government subsidies		756,597			-			756,597			-
Non-operating income		428,854			329,845			606,753			763,049
Non-operating expenses		(50,070	)		(42,629	)		(150,343	)		(122,628	)
Income before provision for income taxes		16,923,519			6,558,897			24,714,763			12,228,967
Provision for income taxes		(3,831,632	)		(2,771,594	)		(5,320,661	)		(4,077,454	)
Net income		13,091,887			3,787,303			19,394,102			8,151,513
Other comprehensive income
Foreign currency translation adjustment		(1,184,162	)		832,589			(48,167	)		1,640,593
Total comprehensive income	$	11,907,725		$	4,619,892		$	19,345,935		$	9,792,106
Net income per common share, basic and diluted	$	0.26		$	0.08		$	0.43		$	0.18
Weighted average common shares outstanding, basic and diluted		45,060,000			45,060,000			45,060,000			45,060,000

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

~~The~~For the ~~accompanying~~Nine ~~notes~~months ~~are~~Ended anAUGUST ~~integral~~31, ~~part of these consolidated financial statements.~~2012

~~F-4~~(UNAUDITED)

CHINA ENERGY CORPORATION AND SUBSIDIARIES

	Common Stock				Additional		Retained			Statutory		Accumulated Other Comprehensive		Total Stockholders’
	Shares		Amount		Paid-in Capital		Earnings			Reserves		Income		Equity
Balance as of November 30, 2011		45,060,000	$	45,060	$	10,620,368	$	56,818,378		$	9,032,855	$	7,516,191	$	84,032,852
Net income		-		-		-		8,933,118			-		-		8,933,118
Other comprehensive income		-		-		-		-			-		350,554		350,554
Stock-based compensation		-		-		4,857		-			-		-		4,857
Appropriation of statutory reserves		-		-		-		(455,462	)		455,462		-		-
Balance as of August 31, 2012		45,060,000	$	45,060	$	10,625,225	$	65,296,034		$	9,488,317	$	7,866,745	$	93,321,381

~~CONSOLIDATED STATEMENTS~~The OFaccompanying ~~CHANGES~~notes INare ~~STOCKHOLDERS’~~an ~~EQUITY~~ integral part of these consolidated financial statements.

~~For the SIX Months Ended MAY 31, 2012~~4

~~(UNAUDITED)~~CHINA ENERGY CORPORATION AND SUBSIDIARIES

												Accumulated
					Additional							Other			Total
	Common Stock				Paid-in		Retained			Statutory		Comprehensive			Stockholders’
	Shares		Amount		Capital		Earnings			Reserves		Income (loss)			Equity
			US$		US$		US$			US$		US$			US$
Balance as of November 30, 2011		45,060,000	$	45,060	$	10,620,368	$	56,818,378		$	9,032,855	$	7,516,191		$	84,032,852
Net income		-		-		-		19,394,102			-		-			19,394,102
Other comprehensive (loss)		-		-		-		-			-		(48,167	)		(48,167	)
Stock-based compensation		-		-		4,857		-			-		-			4,857
Appropriation of statutory reserves		-		-		-		(883,485	)		883,485		-			-
Balance as of May 31, 2012 (unaudited)		45,060,000	$	45,060	$	10,625,225	$	75,328,995		$	9,916,340	$	7,468,024		$	103,383,644

CONSOLIDATED STATEMENTS OF CASH FLOWS

~~The accompanying notes are an integral part of these consolidated financial statements.~~(UNAUDITED)

F-5

	For the nine months ended August 31,
	2012			2011
	US$			US$
Cash flows from operating activities:
Net income	$	8,933,118		$	16,313,374
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Decrease in allowance for doubtful accounts		-			(44,926	)
Depreciation and amortization		6,265,683			4,475,517
Stock-based compensation		4,857			1,533,906
Interest accrued on shareholder loans		297,058			90,188
Loss on disposal of property, plant and equipment		12,874			-
Inventory markdown		667,200			-
Changes in operating assets and liabilities:
(Increase) in restricted cash		(5,149	)		(26,642	)
Decrease (increase) in accounts receivable		6,802,815			(5,308,874	)
Decrease in other receivables		11,111,056			1,478,748
(Increase) in prepaid expenses		(14,226	)		(418,317	)
(Increase) in advances to suppliers		(10,487,598	)		(28,231,613	)
(Increase) in inventories		(3,756,969	)		(15,911,961	)
Increase in deferred income		222,178			46,030
(Decrease) increase in accounts payable		(6,545,672	)		2,255,462
Increase in advances from customers		2,379,736			13,327,031
(Decrease) increase in accrued liabilities and other payables		(5,040,807	)		383,860
Net cash provided by (used in) operating activities		10,846,154			(10,038,217	)

Cash flows from investing activities:
Purchase of property, plant and equipment		(5,078,803	)		(5,357,230	)
Increase in construction in progress		(109,429	)		(91,783	)
Payments made on other long term assets		(724,485	)		(1,541,863	)
Payments received on notes receivable		-			14,679,099
Net cash (used in) provided by investing activities		(5,912,717	)		7,688,223

Cash flows from financing activities:
Proceeds from short term bank loans		22,105,729			26,043,262
Repayment of short term bank loans		(29,337,460	)		(9,804,522	)
Proceeds from lease finance obligation		5,684,330			7,306,098
Repayments of lease finance obligation		(1,589,327	)		(399,894	)
Repayment of shareholders loans		(47,369	)		-
Net cash (used in) provided by financing activities		(3,184,097	)		23,144,944

Effect of exchange rate changes on cash		271,129			1,047,955
Net change in cash and cash equivalents		2,020,469			21,842,905

Cash and cash equivalents, beginning of period		31,007,269			4,580,540

Cash and cash equivalents, end of period	$	33,027,738		$	26,423,445

Supplemental disclosure of cash flow information
Cash paid for interest	$	1,621,495		$	1,327,263
Cash paid for income taxes	$	7,695,137		$	7,542,919

Supplemental disclosure of non-cash financing and investing activities:
Value of shares issued/transferred for consulting services	$	-		$	1,507,800
Service fee and refundable deposit borrowed under financing leases	$	1,887,340		$	1,891,526

~~CHINA~~The ~~ENERGY~~accompanying ~~CORPORATION~~notes ~~AND~~are ~~SUBSIDIARIES~~an integral part of these consolidated financial statements.

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~ 5

~~(UNAUDITED)~~CHINA ENERGY CORPORATION AND SUBSIDIARIES

	For the six months ended May 31,
	2012			2011
	US$			US$
Cash flows from operating activities:
Net income	$	19,394,102		$	8,151,513
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Decrease in allowance for doubtful accounts		-			(44,641	)
Depreciation and amortization		4,354,907			3,007,127
Stock-based compensation		4,857			1,533,906
Interest accrued on shareholder loans		197,976			180,620
Loss on disposal of property, plant and equipment		12,906			-
Changes in operating assets and liabilities:
(Increase) in restricted cash		(2,289	)		(15,879	)
(Increase) in accounts receivable		(11,285,310	)		(7,743,155	)
Decrease in other receivables		9,820,500			2,091,373
(Increase) in prepaid expense		(381,079	)		-
(Increase) in advances to suppliers		(13,761,483	)		(15,461,740	)
(Increase) in inventories		(10,445,600	)		(8,923,265	)
(Increase) in other long term assets		-			(3,593,056	)
Increase in deferred income		796,179			100,248
Increase in accounts payable		1,197,528			1,646,061
Increase in advances from customers		6,578,320			1,806,317
(Decrease) in accrual liabilities and other payables		(4,371,685	)		(319,752	)
Net cash provided by (used in) operating activities		2,109,829			(17,584,323	)
Cash flows from investing activities:
Purchase of property, plant and equipment		(3,520,042	)		(4,283,784	)
Increase in construction in progress		(109,429	)		(117,547	)
Payments made on other long term assets		(528,170	)		-
Payments received on notes receivable		-			14,679,099
Net cash (used in) provided by investing activities		(4,157,641	)		10,277,768
Cash flows from financing activities:
Proceeds from short term bank loans		22,160,665			20,702,358
Repayment of short term bank loans		(21,527,503	)		(4,566,697	)
Proceeds from finance obligations		5,710,602			9,261,260
Repayments of lease finance obligations		(841,679	)		-
Repayments of stockholders loans		(47,487	)		(162,518	)
Net cash provided by financing activities		5,454,598			25,234,403
Effect of exchange rate changes on cash		(128,206	)		502,886
Net change in cash and cash equivalents		3,278,580			18,430,734
Cash and cash equivalents, beginning of period		31,007,269			4,580,540
Cash and cash equivalents, end of period	$	34,285,849		$	23,011,274

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~F-6~~FOR THE THREE AND NINE MONTH PERIODS ENDED AUGUST 31, 2012 AND 2011

~~CHINA~~(UNAUDITED) ~~ENERGY CORPORATION AND SUBSIDIARIES~~

~~CONSOLIDATED~~1. ~~STATEMENTS~~Organization OFand ~~CASH FLOWS~~ Business

~~(UNAUDITED)~~Organization of the Company

	For the six months ended May 31,
	2012		2011
	US $		US $
Supplemental disclosure of cash flow information
Cash paid for interest	$	1,123,830	$	837,541
Cash paid for income taxes	$	6,480,489	$	5,010,268
Supplemental disclosure of non-cash financing activities
Service fee and refundable deposit included with financing leases	$	1,887,340	$	-

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.

The ~~accompanying~~share ~~notes~~exchange ~~are~~agreement, anwhich ~~integral~~resulted in ~~part~~the Company’s acquisition of the Coal Group and Heat Power, was governed by and valid under Nevada law and was not perfected under the then People’s Republic of ~~these~~China ~~consolidated~~(“PRC”) ~~financial~~law. ~~statements~~It was not until certain changes in PRC law, which became definitive in 2006, made clear that a series of procedures of governmental approvals and certain additional corporate actions would be condition precedents to that perfection. The Company does not believe the lack of perfection impairs its ability to exercise control over the Coal Group and Heat Power as it continues to exercise control over them, consistent with the intent of the original shareholders.

~~F-7~~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.

~~CHINA~~On ~~ENERGY~~November ~~CORPORATION~~30, ~~AND~~2010, the Company entered ~~SUBSIDIARIES~~into a series of contractual arrangements pursuant to which the control and the economic benefits and costs of ownership of its two operating companies Coal Group and Heat Power (collectively, the “Operating Companies”) in the PRC would flow directly to Beijing Tehong Energy Technology Consulting Co., Ltd. (the “WFOE”), wholly owned through subsidiaries of the Company.

~~NOTES~~The TOCompany ~~THE~~first ~~CONSOLIDATED~~entered ~~FINANCIAL~~into a Termination ~~STATEMENTS~~And Restructuring Agreement with the Operating Companies, the WFOE, Pacific Projects Inc. (“PPI”) and the respective stockholders of the Operating Companies (collectively, the “PRC Shareholders”) dated November 30, 2010 pursuant to which the parties agreed (i) to terminate the Trust Agreement dated as of December 31, 2007 under which the PRC Shareholders agreed to hold their equity interests in the Operating Companies in trust for PPI, (ii) to the merger of PPI into the Company and (iii) to enter into Management and Control Agreements.

~~FOR~~On ~~THE~~November ~~THREE~~30, ~~AND~~2010, ~~SIX~~the ~~MONTH~~WFOE ~~PERIODS~~entered into ~~ENDED~~(i) an Exclusive Business Cooperation Agreement with Coal Group, (ii) an Equity Interest Pledge Agreement and an Exclusive ~~MAY~~Option 31Agreement with Coal Group and the stockholders of Coal Group and (iii) a Power of Attorney, ~~2012~~with ~~AND~~each ~~2011~~of the stockholders of the Coal Group. The WFOE also entered into (i) an Exclusive Business Cooperation Agreement with Heat Power, (ii) an Equity Interest Pledge Agreement and an Exclusive Option Agreement with Heat Power and the stockholders of Heat Power and (iii) a Power of Attorney with each of the stockholders of Heat Power. The foregoing agreements are herein collectively referred to as the “Management and Control Agreements.”

~~(UNAUDITED)~~The Management and Control Agreements described below allow the WFOE to exercise control over, and derive all economic benefits from Coal Group and Heat Power. Previously, the operating businesses were controlled pursuant to a trust arrangement which has been terminated as part of the restructuring described below.

1Exclusive Business Cooperation Agreements: Pursuant to the Exclusive Business Cooperation Agreements, the WFOE provides technical and consulting services related to the business operations of each of Coal Group and Heat Power. ~~Organization~~In consideration for such services, each of Coal Group and Heat Power has agreed to pay an annual service fee to the WFOE in an amount equal 100% of Coal Group and Heat Power’s annual net income, respectively. Each Exclusive Business Cooperation Agreement has a term of 10 years, which automatically renews unless terminated by the WFOE. The WFOE may terminate the agreements at any time upon 30 days’ prior written notice to Coal Group or Heat Power, as the case may be.

~~Organization of the Company~~ 6

~~China~~Exclusive ~~Energy~~Option ~~Corporation~~Agreements: ~~(the “Company”)~~Pursuant isto athe ~~Nevada~~Exclusive ~~corporation,~~Option ~~formed on October 11~~Agreements, ~~2002~~the ~~under~~WFOE ~~the~~has ~~name~~an ~~Omega~~exclusive ~~Project~~option ~~Consultations~~to purchase, ~~Inc.~~or ~~The~~to ~~name~~designate ~~was~~another ~~changed~~qualified person to ~~China~~purchase, ~~Energy~~to ~~Corporation~~the onextent ~~November~~permitted 3,by ~~2004.~~PRC Onlaw ~~November~~and ~~30,~~foreign ~~2004~~investment policies, ~~the~~part ~~Company~~or ~~entered~~all ~~into~~of athe ~~share~~equity ~~exchange~~interests ~~agreement~~in ~~with~~each ~~Inner~~of ~~Mongolia Tehong~~the Coal Group and ~~Co.,~~Heat ~~Ltd.~~Power (“held by the stockholders of Coal Group~~”),~~ and ~~Inner~~the ~~Mongolia~~stockholders ~~Zhunger~~of Heat Power, Corespectively. To ~~Ltd.~~the ~~(“Heat Power”)~~extent ~~and~~permitted ~~their~~by ~~respective~~the ~~shareholders.~~PRC ~~The~~laws, ~~transaction~~the ~~was~~purchase ~~accounted~~price for ~~as a reverse merger, a procedure that treats~~ the ~~transaction as~~entire ~~though~~equity ~~Coal~~interest ~~Group~~is ~~had acquired the Company~~RMB1.00 ~~Under~~or the ~~accounting~~minimum ~~for~~amount arequired ~~reverse~~by ~~merger,~~PRC ~~the~~law or ~~assets~~government ~~and~~practice. ~~liabilities~~Each of the ~~Company, which~~exclusive ~~were~~option ~~nil~~agreements athas ~~the~~a ~~time,~~term ~~were recorded on the books~~ of ~~Coal~~10 ~~Group~~years, ~~the~~with ~~continuing~~renewal ~~company,~~for ~~and~~an ~~the~~additional ~~stockholders’~~10 ~~equity~~years ~~accounts~~at ofthe ~~Coal~~option ~~Group~~of ~~were reorganized to reflect~~ the ~~shares issued in this transaction~~WFOE.

~~The~~Powers ~~share~~of ~~exchange~~Attorney: Each ~~agreement, which resulted~~of in the ~~Company’s~~stockholders ~~acquisition~~ of the Coal Group and Heat Power, ~~was~~respectively, ~~governed~~executed bya ~~and~~Power ~~valid~~of ~~under~~Attorney ~~Nevada~~that ~~law~~provides ~~and~~the ~~was~~WFOE ~~not~~with ~~perfected~~the power ~~under~~to ~~the~~act ~~then~~as ~~People~~such stockholder’s ~~Republic~~exclusive ofagent ~~China~~with ~~(“PRC”)~~respect ~~law.~~to Itall ~~was~~matters ~~not~~related ~~until~~to ~~certain~~such ~~changes~~stockholder’s inownership ~~PRC law, which became~~interest ~~definitive~~ in ~~2006,~~each ~~made clear that a series~~ of ~~procedures~~Coal ofGroup ~~governmental~~or ~~approvals~~Heat ~~and~~Power, ~~certain~~respectively, ~~additional~~including ~~corporate actions would be conditions precedents to that perfection. The Company does not believe~~ the ~~lack~~right ~~of perfection impairs its ability~~ to ~~exercise~~attend ~~control~~stockholders’ ~~over~~meetings ~~the Coal Group~~ and ~~Heat~~the ~~Power~~right ~~as it continues~~ to ~~exercise control over them~~ vote, ~~consistent~~dispose ~~with the~~or ~~intent~~pledge ofsuch ~~the original shareholders~~shares.

OnEquity ~~July~~Interest ~~13,~~Pledge ~~2009~~Agreements: Pursuant to such agreements, each of the ~~Company~~stockholders ~~entered~~of ~~into a~~Coal ~~framework~~and ~~agreement~~the ~~which~~Heat ~~detailed~~Power pledged their shares in Heat Power and Coal Group, respectively, to the ~~actions~~WFOE, ~~contemplated~~to ~~for~~secure the ~~restructuring~~obligations of ~~the~~each ~~Company,~~of Coal Group and Heat Power under the Exclusive Business Cooperation Agreements. In aaddition, ~~"variable~~the ~~interest~~stockholders ~~entity"~~of ~~(“VIE”)~~Coal ~~structure~~Group and the Heat Power agreed not to ~~meet~~transfer, ~~the~~sell, ~~current~~pledge, ~~requirements~~dispose of ~~applicable~~or ~~PRC~~create ~~law~~any encumbrance on any equity interests in Coal Group or Heat Power that would affect the WFOE’s interests. The Equity Interest Pledge Agreement expires when Coal Group and Heat Power, respectively, fully perform their obligations under the Exclusive Business Cooperation Agreements.

OnTermination ~~November~~of ~~30,~~Trust ~~2010~~Arrangements: Prior to entering into the Management and Control Agreements, the Company ~~entered into~~controlled Coal Group and Heat Power through a series of ~~contractual~~trust agreements ~~arrangements~~which ~~pursuant~~were toterminated ~~which~~contemporaneously with the ~~control~~execution ~~and~~of the ~~economic~~Management ~~benefits~~ and ~~costs~~Control ofAgreements. In ~~ownership~~connection with ofthe ~~its two~~termination ~~operating~~of ~~companies~~such ~~Coal~~trust ~~Group~~arrangements, ~~and~~ownership ~~Heat~~of ~~Power~~68% ~~(collectively,~~of the ~~“Operating~~shares ~~Companies”)~~of in the ~~PRC~~Company ~~would~~previously ~~flow~~held ~~directly to~~by ~~Beijing~~Georgia ~~Tehong~~Pacific Investments ~~Energy~~Inc. ~~Technology~~and ~~Consulting~~Axim ~~Co.,~~Holdings Ltd. ~~(the~~was ~~“WFOE”),~~transferred ~~wholly~~to ~~owned~~Fortune ~~through~~Place ~~subsidiaries~~Holdings ofLtd. ~~the~~(“Fortune ~~Company~~Place”).

~~The~~Entrustment ~~Company~~Agreement ~~first~~and ~~entered~~Share ~~into~~Option Agreement: aNinghua ~~Termination And~~Xu, ~~Restructuring~~owner ~~Agreement~~of ~~with~~100% ~~the~~equity ~~Operating~~interests ~~Companies~~of Fortune Place, entered into an entrustment agreement with WenXiang Ding, the ~~WFOE~~Chief Executive Officer, ~~Pacific~~pursuant ~~Projects~~to ~~Inc~~which Mr. ~~(“PPI”)~~Ding ~~and~~was ~~the~~entrusted ~~respective stockholders~~to ofmanage the Operating Companies ~~(collectively,~~and related entities as provided in the ~~“PRC~~agreement ~~Shareholders”)~~as ~~dated~~the ~~November~~agent ~~30,~~of ~~2010~~Mr. ~~pursuant~~Xu. The ~~to which~~agreement also appoints Mr. Ding as the ~~parties~~exclusive ~~agreed~~agent with ~~(i)~~respect to ~~terminate~~all ~~the~~matters ~~Trust~~concerning ~~Agreement~~100% ~~dated~~of asMr. ofXu’s ~~December~~equity ~~31,~~interest ~~2007~~in ~~under~~Fortune ~~which~~Place. ~~the~~In ~~PRC~~addition, ~~Shareholders~~Mr. ~~agreed~~Xu and Mr. Ding toentered ~~hold~~into ~~their~~a ~~equity~~share ~~interests~~option inagreement ~~the~~pursuant ~~Operating~~to ~~Companies~~which inMr. ~~trust~~Ding ~~for~~has ~~PPI,~~the ~~(ii)~~option to purchase all of the ~~merger~~shares of ~~PPI~~Fortune ~~into~~Place from Mr. Xu upon the ~~Company~~achievement ~~and~~of ~~(iii) to~~certain ~~enter~~performance ~~into~~targets ~~Management~~by the Operating Companies and ~~Control~~related ~~Agreements~~entities.

~~F-8~~7

~~CHINA~~Revised ~~ENERGY~~Corporate ~~CORPORATION~~Structure: ~~AND~~As ~~SUBSIDIARIES~~a result of the entry into the foregoing agreements, and the termination of the trust arrangements, the Company has a revised corporate structure which is set forth below:

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Business

~~FOR~~The ~~THE~~Company’s ~~THREE~~business ~~AND~~is ~~SIX~~made ~~MONTH~~up of ~~PERIODS~~two ~~ENDED MAY~~segments: ~~31,~~Coal ~~2012~~Group ~~AND~~and ~~2011~~Heat Power.

~~(UNAUDITED)~~Coal Group: Coal Group was organized in China on August 8, 2000 as Inner Mongolia Zhunger Tehong Coal Co., Ltd. The name was changed in December 2003 to Inner Mongolia Tehong Coal Group Co. Ltd. Coal Group has mining rights to a coal mine in the Inner Mongolia District from which it mines coal. It also buys, sells, and transports coal, serving the Inner Mongolia District.

OnHeat ~~November~~Power: ~~30,~~During ~~2010~~2003, ~~the~~Heat ~~WFOE entered~~Power ~~into~~was ~~(i)~~granted ana ~~Exclusive Business Cooperation Agreement with Coal Group~~license, ~~(ii)~~to ansupply ~~Equity~~heating ~~Interest~~to ~~Pledge~~the ~~Agreement~~entire ~~and~~XueJiaWan anarea. ~~Exclusive Option~~To ~~Agreement~~provide ~~with~~for ~~Coal~~this ~~Group~~requirement, ~~and~~construction ~~the~~began ~~stockholders~~in of2004 on ~~Coal Group and (iii)~~ a ~~Power~~thermoelectric ~~of Attorney~~plant, ~~with~~which ~~each~~was ofcompleted ~~the~~in ~~stockholders of~~September ~~the Coal Group~~2006. ~~The~~ ~~WFOE also entered into (i) an Exclusive Business Cooperation Agreement with~~ Heat Power, ~~(ii) an~~supplies ~~Equity~~heating ~~Interest~~directly ~~Pledge~~to ~~Agreement~~users and ansupplies ~~Exclusive~~electricity within ~~Option Agreement with Heat Power and~~ the ~~stockholders~~XueJiaWan ofarea ~~Heat~~through ~~Power and (iii)~~ a ~~Power~~government ofcontrolled ~~Attorney~~intermediary, ~~with~~Inner ~~each~~Mongolia ofElectric ~~the~~Power ~~stockholders~~Group ofCo., ~~Heat Power~~Ltd. ~~The~~ ~~foregoing agreements are herein collectively referred~~(“Electric toPower ~~as the “Management and Control Agreements.~~Group”).

The ~~Management~~Coal ~~and~~Group ~~Control~~does ~~Agreements~~not ~~described below~~sell ~~allow~~any ~~the~~coal ~~WFOE~~ to ~~exercise control over, and derive all economic benefits from Coal Group and~~ Heat Power. ~~Previously, the operating businesses were controlled pursuant to a trust arrangement which has been terminated as part of the restructuring described below.~~

Exclusive Business Cooperation Agreements: Pursuant to the Exclusive Business Cooperation Agreements, the WFOE provides technical and consulting services related to the business operations of each of Coal Group and Heat Power. In consideration for such services, Coal Group and Heat Power has agreed to pay an annual service fee to the WFOE in an amount equal 100% of Coal Group’s and Heat Power’s annual net income, respectively. Each Exclusive Business Cooperation Agreement has a term of 10 years, which automatically renews unless terminated by the WFOE. The WFOE may terminate the agreements at any time upon 30 days’ prior written notice to Coal Group or Heat Power, as the case may be.8

Exclusive Option Agreements: Pursuant to the Exclusive Option Agreements, the WFOE has an exclusive option to purchase, or to designate another qualified person to purchase, to the extent permitted by PRC law and foreign investment policies, part or all of the equity interests in each of the Coal Group and Heat Power held by the stockholders of Coal Group and the stockholders of Heat Power, respectively2. To ~~the~~Summary ~~extent permitted by the PRC laws, the purchase price for the entire equity interest is RMB1.00 or the minimum amount required by PRC law or government practice. Each~~ of ~~the~~Significant ~~exclusive~~Accounting ~~option agreements has a term of 10 years, with renewal for an additional 10 years at the option of the WFOE.~~Policies

~~Powers of Attorney: Each of~~Basis ~~the stockholders~~ of ~~the~~Accounting ~~Coal Group~~ and Heat Power, respectively, executed a Power of Attorney that provides the WFOE with the power to act as such stockholder’s exclusive agent with respect to all matters related to such stockholder’s ownership interest in each of Coal Group or Heat Power, including the right to attend stockholders’ meetings and the right to vote, dispose or pledge such shares.Presentation

~~Equity~~The ~~Interest~~unaudited ~~Pledge~~interim ~~Agreements:~~consolidated ~~Pursuant~~financial tostatements ~~such agreements, each~~ of the ~~stockholders~~Company as of ~~Coal~~August ~~Group~~31, 2012 and ~~Heat~~for ~~Power~~the ~~pledged~~three ~~their~~and ~~shares~~nine inmonths ~~Heat~~periods ~~Power~~ended ~~and~~August ~~Coal Group~~31, ~~respectively~~2012 and 2011, have tobeen ~~the~~prepared ~~WFOE,~~in toaccordance ~~secure~~with ~~their~~accounting ~~obligations~~principles ~~under~~generally accepted in the ~~Exclusive~~United ~~Business~~States ~~Cooperation~~of ~~Agreements. In~~America ~~addition,~~and the ~~stockholders~~rules and regulations of ~~Coal~~the ~~Group~~Securities and ~~Heat~~Exchange ~~Power~~Commission ~~agreed~~(the ~~not~~“SEC”) which apply to ~~transfer,~~interim ~~sell~~financial statements. In the opinion of management, ~~pledge~~such information contains all adjustments, ~~dispose~~consisting only of ornormal ~~create~~recurring ~~any~~adjustments, ~~encumbrance~~necessary onfor ~~any~~a ~~equity~~fair ~~interests~~presentation inof ~~Coal~~the ~~Group~~results orfor ~~Heat~~the ~~Power~~periods ~~that~~presented. ~~would~~The ~~affect~~results of operations for the ~~WFOE’s~~three ~~interests.~~and ~~The~~nine ~~Equity~~months ~~Interest~~ended ~~Pledge~~August ~~Agreement~~31, ~~expires~~2012 ~~when~~are ~~Coal~~not ~~Group~~necessarily ~~and~~indicative ~~Heat~~of ~~Power,~~the ~~respectively,~~results ~~fully~~to ~~perform~~be ~~their~~expected ~~obligations~~for ~~under~~future quarters or for the ~~Exclusive~~year ~~Business~~ending ~~Cooperation~~November ~~Agreements~~30, 2012.

~~F-9~~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 SEC, although the Company believes the disclosure is adequate to make the information presented not misleading. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended November 30, 2011.

~~CHINA~~All ~~ENERGY~~consolidated ~~CORPORATION~~financial ~~AND~~statements and ~~SUBSIDIARIES~~notes to the consolidated financial statements have been presented in US dollars.

~~NOTES~~Basis TOof ~~THE CONSOLIDATED FINANCIAL STATEMENTS~~Consolidation

~~FOR~~Pursuant ~~THE~~to ~~THREE~~Financial ~~AND~~Accounting ~~SIX~~Standards Board ~~MONTH~~(“FASB”) ~~PERIODS~~Accounting ~~ENDED~~Standards Codification (“ASC”) Topic 810, the Company is required to include ~~MAY~~in 31its consolidated financial statements, ~~2012~~the ~~AND~~financial ~~2011~~statements of variable interest entities. ASC Topic 810 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss for the variable interest entity or is entitled to receive a majority of the variable interest entity’s residual returns. Variable interest entities are those entities in which the Company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the Company is the primary beneficiary of the entity.

~~(UNAUDITED)~~The consolidated financial statements include the accounts of the Company’s WFOE and Coal Group and Heat Power since they are deemed variable interest entities and the Company is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

~~Termination of Trust Arrangements: Prior~~Recently toIssued ~~entering~~Accounting into the Management and Control Agreements, the Company controlled Coal Group and Heat Power through a series of trust agreements which were terminated contemporaneously with the execution of the Management and Control Agreements. In connection with the termination of such trust arrangements, ownership of 68% of the shares of the Company previously held by Georgia Pacific Investments Inc. and Axim Holdings Ltd. was transferred to Fortune Place Holdings Ltd. (“Fortune Place”).Standards

~~Entrustment~~In ~~Agreement~~May ~~and Share Option Agreement: Ninghua Xu~~2011, ~~owner~~the ofFASB ~~100%~~issued ~~equity~~ASU ~~interests~~No. ~~of Fortune Place~~2011-04, ~~entered into an entrustment agreement with WenXiang~~ ~~Ding,~~“Amendments ~~the Chief Executive Officer, pursuant~~ to ~~which~~Achieve ~~Mr.~~Common ~~Ding~~Fair ~~was~~Value ~~entrusted~~Measurement toand ~~manage~~Disclosure ~~the~~Requirements ~~Operating~~in ~~Companies~~U.S.GAAP and ~~related entities~~IFRSs” as(“ASU ~~provided~~2011-04”) inthat ~~the~~provides ~~agreement~~clarification asabout the ~~agent~~application of ~~Mr.~~existing ~~Xu. The~~fair ~~agreement~~value ~~also~~measurements ~~appoints Mr.~~and ~~Ding~~disclosure requirements asand ~~the~~expands ~~exclusive~~certain ~~agent with~~other ~~respect~~disclosure torequirements. ~~all~~ASU ~~matters~~2011-04 ~~concerning~~amends ~~100%~~U.S. ofGAAP ~~Mr.~~to ~~Xu’s~~provide ~~equity~~common ~~interest~~fair invalue ~~Fortune~~measurements and ~~Place.~~disclosure Inrequirements ~~addition,~~with ~~Mr.~~International XuFinancial ~~and~~Reporting MrStandards. ~~Ding entered~~The ~~into~~amendments ain ~~share~~this ~~option~~ASU ~~agreement~~are ~~pursuant~~effective toprospectively for ~~which~~interim ~~Mr.~~and ~~Ding~~annual ~~has~~periods ~~the~~beginning ~~option~~after toDecember ~~purchase~~15, ~~all~~2011, ofwith ~~the~~no ~~shares~~early ofadoption ~~Fortune~~permitted. ~~Place~~The ~~from~~adoption ~~Mr.~~of Xuthis ~~upon~~standard ~~the~~did ~~achievement~~not ofhave ~~certain~~a ~~performance~~material ~~targets~~impact byon ~~the~~its ~~Operating~~consolidated ~~Companies~~financial ~~and related entities~~statements.

~~Revised~~In ~~Corporate~~June ~~Structure:~~2011, Asthe FASB issued Accounting aStandards ~~result~~Update No. 2011-05, “Presentation of ~~the~~Comprehensive ~~entry~~Income” ~~into~~(“ASU 2011-05”), which improves the ~~foregoing~~comparability, ~~agreements~~consistency, and transparency of financial reporting and increases the ~~termination~~prominence of items reported in other comprehensive income (“OCI”) by eliminating the ~~trust~~option ~~arrangements,~~to present components of OCI as part of the ~~Company~~statement ~~has~~of changes in stockholders’ equity. The amendments in this standard require that all nonowner changes in stockholders’ equity be presented either in a ~~revised~~single ~~corporate~~continuous statement of comprehensive income or in two separate but consecutive statements. Subsequently, ~~structure~~in December 2011, the FASB issued Accounting Standards Update No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income” (“ASU 2011-12”), which isindefinitely ~~set~~defers ~~forth~~the ~~below:~~requirement in ASU 2011-05 to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income (loss) in the statement(s) where the components of net income (loss) and the components of OCI are presented.

FThe amendments in these standards do not change the items that must be reported in OCI, when an item of OCI must be reclassified to net income (loss), or change the option for an entity to present components of OCI gross or net of the effect of income taxes. The amendments in ASU 2011-1005 and ASU 2011-12 are effective for interim and annual periods beginning after December 15, 2011 and are to be applied retrospectively. The adoption of ASU 2011-05 and ASU 2011-12 did not have a material impact on the Company’s consolidated financial statements.

~~CHINA ENERGY CORPORATION AND SUBSIDIARIES~~9

~~NOTES~~In TODecember ~~THE~~2011, ~~CONSOLIDATED~~the ~~FINANCIAL~~FASB issued ASU No. ~~STATEMENTS~~2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU No. 2011-11”). The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect that the adoption of ASU No. 2011-11 will have a significant, if any, impact on its consolidated financial statements.

~~FOR~~Foreign ~~THE~~Currency ~~THREE AND SIX MONTH PERIODS ENDED MAY 31, 2012 AND 2011~~Translation

Substantially all Company assets are located in China. The functional currency for the majority of the Company’s operations is the Renminbi (~~UNAUDITED~~“RMB”). The Company uses the United States dollar (“US Dollar” or “US$” or “$”) for financial reporting purposes. The consolidated financial statements of the Company’s foreign subsidiaries have been translated into US dollars in accordance with FASB ASC 830, “Foreign Currency Matters.” All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transactions occurred. Consolidated statements of operations and comprehensive income (loss) amounts have been translated using the average exchange rate for the periods presented. Adjustments resulting from the translation of the Company’s consolidated financial statements are recorded as other comprehensive income.

~~Business~~The exchange rates used to translate amounts in RMB into US dollars for the purposes of preparing the consolidated financial statements were as follows:

The Company’s business is made up of two segments: Coal Group and Heat Power.

August 31, 2012

November 30, 2011

Balance sheet items, except for common stock, preferred stock, additional paid-in capital, statutory reserves and retained earnings, as of period end

US$1=RMB 6.3484

US$1=RMB 6.3765

Coal Group: Coal Group was organized in China on August 8, 2000 as Inner Mongolia Zhunger Tehong Coal Co., Ltd. The name was changed in December 2003 to Inner Mongolia Tehong Coal Group Co. Ltd. Coal Group has mining rights to a coal mine in the Inner Mongolia District from which it mines coal. It also buys, sells, and transports coal, serving the Inner Mongolia District.

	For the three months ended August 31		For the nine months ended August 31
	2012	2011	2012	2011

Amounts included in the statements of income, statements of changes in stockholders’ equity and statements of cash flows	US$1=RMB 6.3646	US$1=RMB 6.4865	US$1=RMB 6.3332	US$1=RMB 6.5276

~~Heat~~Foreign ~~Power:~~currency ~~During~~translation ~~2003, Heat Power~~adjustments ~~was~~of ~~granted~~$346,787and ~~a license~~$1,138,398 tofor ~~supply~~the ~~heating~~three tomonths ~~the~~ended ~~entire~~August ~~XueJiaWan~~31, ~~area.~~2012 Toand ~~provide~~2011, ~~for~~respectively, ~~this~~and ~~requirement~~$350,554 ~~construction~~and ~~began~~$2,778,992 infor ~~2004~~the onnine amonths ~~thermoelectric~~then ~~plant~~ended, ~~which~~respectively, ~~was~~have ~~completed~~been inreported ~~September~~as ~~2006.~~other ~~Heat~~comprehensive ~~Power~~income ~~supplies~~in ~~heating~~the ~~directly~~consolidated tostatements ~~users~~of operations and ~~supplies~~other ~~electricity within~~comprehensive ~~the~~income ~~XueJiaWan area through a government controlled intermediary, Inner Mongolia Electric Power Group Co., Ltd.~~ (~~“Electric Power Group”~~loss).

~~The~~Although ~~Coal~~government ~~Group~~regulations ~~does~~now ~~not~~allow convertibility ~~sell~~of ~~any~~RMB ~~coal~~for tocurrent account transactions, significant restrictions still remain. Hence, such translations should ~~Heat~~not ~~Power~~be construed as representations that the RMB could be converted into US dollars at that rate or any other rate.

~~F-11~~The value of RMB against the US dollars and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of the RMB may materially affect the Company’s financial condition in terms of US dollar reporting.

~~CHINA ENERGY CORPORATION AND SUBSIDIARIES~~10

~~NOTES~~Cash TOand ~~THE~~Cash ~~CONSOLIDATED FINANCIAL STATEMENTS~~equivalents

~~FOR~~The ~~THE~~Company ~~THREE~~considers ~~AND~~all ~~SIX~~demand ~~MONTH~~and ~~PERIODS ENDED~~time ~~MAY~~deposits ~~31,~~and ~~2012~~all ~~AND~~highly ~~2011~~liquid investments with an original maturity of three months or less as of the date of purchase to be cash equivalents.

~~(UNAUDITED)~~Accounts Receivable

2Accounts receivable is stated at cost, net of an allowance for doubtful accounts. ~~Summary~~The Company maintains an allowance for doubtful accounts for estimated losses resulting from the failure of ~~Significant~~customers ~~Accounting~~to ~~Policies~~make required payments. The Company reviews the accounts receivable on a periodic basis and makes allowances where there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s payment history, its current credit-worthiness and current economic trends. As of August 31, 2012 and November 30, 2011, the balance of the allowance for doubtful accounts was $11,301 and $11,251, respectively. For the periods presented, the Company did not write off any accounts receivable as bad debts.

~~Basis~~Accounts receivable include amounts due from an entity affiliated with the Company through a family member of ~~Accounting~~the Company’s Chairman of $0 and ~~Presentation~~$1,712,113 as of August 31, 2012 and November 30, 2011, respectively.

The unaudited interim financial statements of the Company as of May 31, 2012 and for three and six month periods ended May 31, 2012 and 2011, have been prepared in accordance with accounting principles generally accepted 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. In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The results of operations for the three and six months ended May 31, 2012 are not necessarily indicative of the results to be expected for future quarters or for the year ending November 30, 2012.Inventories

~~Certain~~Inventories ~~information~~consist ~~and~~of ~~disclosures~~coal ~~normally~~and operating ~~included~~supplies. inInventories ~~the~~are ~~notes~~valued toat the ~~financial~~lower ~~statements~~of ~~have~~cost ~~been condensed~~ or ~~omitted~~market, asusing ~~permitted~~the byweighted ~~the~~average ~~rules~~cost ~~and~~method. ~~regulations~~Provisions ofare ~~the~~made for ~~SEC~~excess, ~~although~~slow ~~the~~moving ~~Company~~and ~~believes~~obsolete ~~the~~inventory ~~disclosure~~as iswell ~~adequate~~as toinventory ~~make~~whose ~~the~~carrying ~~information~~value ~~presented~~is ~~not~~in ~~misleading~~excess of market. ~~The~~As ~~accompanying~~of August 31, 2012 ~~unaudited~~and ~~financial~~November ~~statements~~30, ~~should~~2011, bethe ~~read~~balance inof ~~conjunction~~reserve ~~with~~for ~~the~~write ~~consolidated~~down ~~financial~~to ~~statements~~market ofwas ~~the~~$667,200 and $0, respectively The Company did not make any inventory provisions for the ~~year~~ three and nine months periods ended ~~November~~August 3031, 2011.

~~All~~Fixed ~~financial statements and notes to the financial statements are presented in US dollars.~~Assets

~~Basis~~Fixed assets are recorded at cost, less accumulated depreciation. Cost includes the price paid to acquire or construct the asset, including capitalized interest during the construction period, and any expenditures that substantially increase the assets value or extend the useful life of ~~Consolidation~~an existing asset. Depreciation is computed using the straight line method 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 pipelines, 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. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. Maintenance and repairs are generally expensed as incurred. When property, plant and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.

~~Pursuant~~Costs toof ~~Financial~~mine ~~Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810~~development, ~~the~~expansion ~~Company is required to include~~of ~~in its consolidated financial statements~~ the ~~financial~~capacity ~~statements~~ of ~~variable~~or ~~interest~~extending ~~entities. ASC Topic 810 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of~~ the ~~risk~~life of ~~loss for~~ the ~~variable~~mine ~~interest entity~~(“Mining orStructures”) isare ~~entitled~~capitalized toand ~~receive~~amortized ausing ~~majority of~~ the ~~variable interest entity’s residual returns. Variable interest entities~~units-of-production ~~are~~(“UOP”) ~~those~~method ~~entities~~over ~~in which~~ the ~~Company,~~productive ~~through~~life ~~contractual~~of ~~arrangements,~~the ~~bears~~mine ~~the~~based ~~risk~~on ~~of,~~proven and ~~enjoy~~probable ~~the~~reserves. ~~rewards~~Mining ~~normally~~Structures ~~associated~~includes ~~with ownership of~~ the ~~entity,~~main and ~~therefore~~auxiliary ~~the~~mine ~~Company~~shafts, isunderground ~~the~~tunnels, ~~primary~~ramps, ~~beneficiary~~and ofother ~~the~~integrant ~~entity~~mining infrastructure.

~~The~~Investment consolidated financial statements include the accounts of the Company’s WFOE and Coal Group and Heat Power since they are deemed variable interest entities and the Company is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.Property

FInvestment property represents rental real estate purchased or constructed by the Company for investment purposes. Depreciation is computed using the straight line method over the estimated useful life of 45 years. The related rental income and expenses are included in non-12operating income in the accompanying consolidated statements of operations and other comprehensive income (loss).

~~CHINA ENERGY CORPORATION AND SUBSIDIARIES~~11

~~NOTES~~Mining ~~TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Right

~~FOR~~All ~~THE~~land ~~THREE~~in ~~AND~~China ~~SIX~~belongs ~~MONTH~~to ~~PERIODS~~the ~~ENDED~~government. ~~MAY~~To 31extract resources from the land, ~~2012~~the ~~AND~~Company ~~2011~~was required to obtain a mining right. The Company’s Coal Group acquired its mining right from the Provincial Bureau of National Land and Resource in November of 2005. The price of the mining right, which represents the acquisition cost of the mine, was assessed in 2005 by the Bureau to be $3,656,731. The mine acquisition cost was payable in installments over a six year period from the date the mining right was granted. The mine acquisition cost is amortized using the UOP method over the productive life of the mine based on proven and probable reserves.

~~(UNAUDITED)~~Restricted Cash

~~Recently~~Long-term restricted cash represents the ~~Issued~~bank ~~Accounting~~deposits ~~Standards~~placed as guarantee for the future payments of rehabilitation costs as required by the PRC government. The long-term deposits earn an interest rate of 0.50% per annum, which is determined by the PRC government.

InAdvance December 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-17, “Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”). The Company adopted ASU 2009-17, which requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. In addition, the required changes provide guidance on shared power and joint venture relationships, remove the scope exemption for qualified special purpose entities, revise the definition of a variable interest entity, and require additional disclosures. The Company has assessed the terms contained in the Management and Control Agreements between the Company and Coal Group and Heat Power and determined that Coal Group and Heat Power are VIEs, and accordingly, are consolidated in these financial statements.Customers

InAdvance ~~January~~from ~~2010,~~customers ~~the~~primarily ~~FASB~~consists ~~issued~~of ~~Accounting Standards~~payments ~~Update No. 2010-6, “Improving Disclosures about Fair Value Measurements” (“ASU No. 2010-06”).~~received ~~ASU No. 2010-06 amends ASC Topic 820, “Fair Value Measurements and Disclosures,” to require additional information to be disclosed principally regarding Level 3 measurements and transfers to and~~ from ~~Level~~customers 1by ~~and~~the 2.Coal InGroup ~~additional, enhanced disclosure is required concerning inputs~~ and ~~valuation~~Heat ~~techniques~~Power ~~used~~prior to determine Level 2 and Level 3 measurements. This guidance is generally effective for interim and annual reporting periods beginning after December 15, 2009; however, requirements to disclose separately purchases, sales, issuances, and settlements in the ~~Level~~delivery 3of ~~reconciliation~~goods ~~are effective for fiscal years beginning after December 15, 2010 (~~and ~~for interim periods within such years)~~services. ~~The update did not have a material impact on the Company’s consolidated results of operations or financial position.~~

InDeferred May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.GAAP and IFRSs” (“ASU No. 2011-04”) that provides clarification about the application of existing fair value measurements and disclosure requirements and expands certain other disclosure requirements. ASU 2011-04 amends U.S. GAAP to provide common fair value measurements and disclosure requirements with International Financial Reporting Standards. The amendments in this ASU are effective prospectively for interim and annual periods beginning after December 15, 2011, with no early adoption permitted. The Company does not believe that the adoption of this standard will have any material impact on its consolidated financial statements.Income

InDeferred ~~June~~income ~~2011,~~represents ~~the FASB issued ASU No. 2011-05,~~reimbursements ~~“Presentation~~received ofby ~~Comprehensive~~Heat ~~Income”~~Power ~~(“ASU~~from ~~No.~~various ~~2011-05”)~~real ~~that~~estate ~~improves~~development ~~the~~companies ~~comparability,~~for ~~consistency, and transparency of financial reporting and increases~~ the ~~prominence~~cost of ~~items~~constructing ~~reported~~pipelines into ~~other~~connect ~~comprehensive~~to ~~income by eliminating~~rural ~~the~~areas ~~option~~being ~~to present components of other comprehensive income as part of the statement of changes in stockholders’ equity~~developed. ~~ASU~~ ~~No.~~The ~~2011-05 requires that all nonowner changes in comprehensive~~ income ~~be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both methods, the entity~~ is ~~required~~recognized ~~to present~~ on ~~the face~~a ofstraight ~~the~~line ~~financial~~basis ~~statements~~over ~~reclassification adjustments for items that are reclassified from other comprehensive income to net income in~~ the ~~statement(s)~~estimated ~~where~~useful ~~the~~life ~~component~~ of ~~net income and~~ the ~~components~~pipelines of ~~other comprehensive income are presented.~~ten ~~ASU No. 2011-05 is effective for fiscal~~ years~~, and interim periods within those years, beginning after December 15, 2011 and is to be applied retrospectively, with early adoption permitted~~. ~~The Company does not believe that the adoption of this standard had a material impact on its consolidated financial statements.~~

FImpairment of Long-13lived Assets

~~CHINA~~The ~~ENERGY~~Company ~~CORPORATION~~utilizes ~~AND~~FASB ASC 360, “Property, ~~SUBSIDIARIES~~Plant and Equipment” (“ASC 360”), which addresses the financial accounting and reporting for the recognition and measurement of impairment losses for long-lived assets. In accordance with ASC 360, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that carrying amount of an asset may not be recoverable. The Company may recognize impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to these assets. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss, if any, is recognized for the difference between the fair value of the asset and its carrying value. No impairment of long-lived assets was recognized for the three and nine months periods ended August 31, 2012 and 2011.

~~NOTES~~Recognition TOof ~~THE CONSOLIDATED FINANCIAL STATEMENTS~~Revenue

~~FOR~~Revenues ~~THE~~from ~~THREE~~sales ~~AND~~of ~~SIX~~products ~~MONTH~~are ~~PERIODS ENDED~~recognized ~~MAY~~when 31the products are delivered and the title is transferred, ~~2012~~the ~~AND~~risks ~~2011~~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.

~~(UNAUDITED)~~Revenue associated with sales of coal is recognized when the title to the goods has been passed to customers, which is the date when the goods are delivered to designated locations and accepted by the customers and the previously discussed requirements are met.

InHeat ~~September~~Power ~~2011,~~supplies ~~the~~heat ~~FASB~~to ~~issued~~users ~~ASU~~directly ~~No.~~and ~~2011-08,~~supplies ~~“Testing~~electricity ~~Goodwill~~through ~~for~~a ~~Impairment”~~government ~~(“ASU~~controlled Nointermediary. ~~2011-08”)~~Revenue ~~that~~from ~~permits~~sales ~~an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value~~ of aheat ~~reporting~~and ~~unit~~electricity isrepresents ~~less than~~the ~~its carrying~~ amount asof atariffs ~~basis~~billed for ~~determining~~heat ~~whether~~and itelectricity isgenerated ~~necessary~~and transmitted to ~~perform~~ the ~~required~~users ~~annual goodwill impairment test. ASU No. 2011-08 is effective for annual~~ and ~~interim~~government ~~goodwill~~controlled ~~impairment tests performed for fiscal years beginning after December 15~~intermediary, ~~2011; however, early adoption is permitted. The Company does not believe that the adoption of this standard had a material~~ ~~impact on its consolidated financial statements~~respectively.

InResource ~~December~~Compensation 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU No. 2011-11”). The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect that the adoption of ASU No. 2011-11 will have a significant, if any, impact on its consolidated financial statements.Fees

~~Foreign~~In ~~Currency~~accordance ~~Translation~~with the relevant regulations in the PRC, a company that is engaged in the coal production business is required to pay a fee to the Inner Mongolia National Land and Resources Administration Bureau as compensation for the depletion of coal resources. Coal Group was required to pay a resource compensation fee of $25,689 and $137,339 for the three months ended August 31, 2012 and 2011 respectively, and $357,687 and $334,729 for the nine months then ended, respectively, which is included in cost of revenues in the consolidated statements of operations and other comprehensive income (loss).

Substantially all Company assets are located in China. The functional currency for the majority of the Company’s operations is the Renminbi (“RMB”). The Company uses the United States dollar (“US Dollar” or “US$” or “$”) for financial reporting purposes. The financial statements of the Company’s foreign subsidiaries have been translated into US dollars in accordance with FASB ASC 830, “Foreign Currency Matters.” All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transactions occurred. Statements of operations amounts have been translated using the average exchange rate for the periods presented. Adjustments resulting from the translation of the Company’s financial statements are recorded as other comprehensive income.12

~~The~~Environmental ~~exchange rates used to translate amounts in RMB into US dollars for the purposes of preparing the consolidated financial statements were as follows:~~Costs

			May 31, 2012				November 30, 2011
Balance sheet items, except for common stock, preferred stock, additional paid-in capital, statutory reserves and retained earnings, as of period end			US$1=RMB 6.3684				US$1=RMB 6.3765

The PRC has adopted extensive environmental laws and regulations that affect the operations of the coal mining industry. The potential environmental liabilities under proposed or future environmental legislation cannot be reasonably estimated at present, and could be material. Under existing legislation, however, Company management believes that there are no probable liabilities that will have a material adverse effect on the consolidated balance sheets of the Company.

~~F-14~~Fair Value of Financial Instruments

~~CHINA~~FASB ~~ENERGY~~ASC ~~CORPORATION~~820, ~~AND~~“Fair Value Measurements ~~SUBSIDIARIES~~and Disclosures,” 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 ASC 820, the following summarizes the fair value hierarchy:

~~NOTES~~Level 1 TOInputs ~~THE~~– ~~CONSOLIDATED~~Unadjusted ~~FINANCIAL~~quoted market prices for identical assets and liabilities in an active market that the Company has ~~STATEMENTS~~the ability to access.

~~FOR~~Level 2 ~~THE~~Inputs ~~THREE~~– ~~AND~~Inputs ~~SIX~~other ~~MONTH~~than ~~PERIODS~~the ~~ENDED MAY~~quoted ~~31,~~prices ~~2012~~in ~~AND~~active ~~2011~~markets that are observable either directly or indirectly.

~~(UNAUDITED)~~Level 3 Inputs – Inputs based on prices or valuation techniques that are both unobservable and significant to the overall fair value measurements.

For the three months ended May 31,

For the Six months ended May 31,

2012

2011

2012

2011

Amounts included in the statements of income, statements of changes in stockholders’ equity and statements of cash flows

US$1=RMB 6.3139

US$1=RMB 6.5219

US$1=RMB 6.3175

US$1=RMB 6.5693

ASC 820 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.

~~Foreign~~The ~~currency~~Company ~~translation~~did ~~adjustments of~~not ~~approximately~~identify ~~$(1,184,162)~~any ~~and~~assets or ~~$832,589~~liabilities ~~for~~that ~~the~~are ~~three~~required ~~months~~to ~~ended~~be ~~May~~presented ~~31,~~at ~~2012~~fair ~~and~~value ~~2011~~on ~~respectively,~~a ~~and~~recurring ~~$(48,167)~~basis ~~and~~at ~~$1,640,593 for~~August ~~the six months then ended~~31, ~~respectively,~~2012 ~~have been reported as other comprehensive (loss)income in the consolidated statements of income~~ and ~~comprehensive~~November ~~income~~30, 2011.

~~Although~~Income government regulations now allow convertibility of RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that RMB could be converted into US dollars at that rate or any other rate.Taxes

~~The~~Coal ~~value~~Group ofand ~~RMB~~Heat ~~against~~Power ~~the~~generate ~~US dollar~~their ~~and~~income ~~other~~in ~~currencies~~China ~~may~~where ~~fluctuate~~Value ~~and~~Added isTax, ~~affected~~Income byTax, ~~among~~City ~~other~~Construction ~~things,~~and ~~changes~~Development inTax ~~China’s~~and ~~political~~Education ~~and~~Surcharge ~~economic~~taxes ~~conditions~~are applicable. ~~Any~~The ~~significant~~Company, ~~revaluation~~Coal ofGroup ~~RMB~~and ~~could~~Heat ~~materially~~Power ~~affect~~do ~~the~~not ~~Company’s~~conduct ~~financial~~any ~~condition~~operations in ~~terms~~the ofU.S. USand ~~dollar~~therefore, ~~reporting~~are not subject to U.S. taxes.

~~Cash~~The Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes” (“ASC 740”), which requires the recognition of deferred income taxes for differences between the basis of assets and ~~Cash~~liabilities ~~equivalents~~for financial statement and income tax purposes. Deferred tax assets and liabilities represent the future tax consequence for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

~~The~~Use ~~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.~~Estimates

~~Accounts~~The ~~Receivable~~preparation of consolidated 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 estimates.

~~Accounts~~Net ~~receivable~~Income is(Loss) ~~stated~~Per at cost, net of an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and makes allowances where there is doubt as to the collectibility of individual balances. In evaluating the collectibility of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s payment history, its current credit-worthiness and current economic trends. As of May 31, 2012 and November 30, 2011, the balance of allowance for doubtful accounts was $11,265 and $11,251, respectively. For the periods presented, the Company did not write off any accounts receivable as bad debts.Share

~~F-15~~The Company computes net income (loss) per common share in accordance with FASB ASC 260, “Earnings Per Share” (“ASC 260”) and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of ASC 260 and SAB 98, basic net income (loss) per common share is computed by dividing the amount available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted income per common share is computed by dividing the amount available to common shareholders by the weighted average number of shares of common stock outstanding plus the effect of any dilutive shares or common stock equivalents outstanding during the period. Accordingly, the number of weighted average shares outstanding as well as the amount of net income (loss) per share are presented for basic and diluted per share calculations for all periods reflected in the accompanying consolidated financial statements.

~~CHINA ENERGY CORPORATION AND SUBSIDIARIES~~13

~~NOTES~~Statutory ~~TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Reserves

~~FOR~~Pursuant ~~THE~~to ~~THREE~~corporate ~~AND~~law ~~SIX~~of ~~MONTH~~the ~~PERIODS~~PRC, ~~ENDED~~the ~~MAY~~Company 31is required to maintain statutory reserves by appropriating from its after-tax profit before declaration or payment of dividends. The statutory reserves, ~~2012~~representing ~~AND~~restricted ~~2011~~retained earnings, consist of the following funds:

~~(UNAUDITED)~~Surplus Reserve Fund: The Company is required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing stockholders in proportion to their stockholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issuance is not less than 25% of the registered capital.

~~Accounts~~Common ~~receivable~~Welfare ~~included~~Fund: ~~amounts~~The ~~due~~common ~~from~~welfare anfund ~~entity~~is ~~affiliated~~a ~~with~~voluntary fund that the Company ~~through~~can aelect ~~family~~to ~~member~~transfer 5% to 10% of ~~the~~its ~~Company’s~~net ~~Chairman~~income, ofas $0determined under PRC accounting rules and $1regulations,~~712,113~~ asto this fund. This fund can only be utilized on capital items for the collective benefit of ~~May~~the Company’s 31employees, ~~2012~~such ~~and~~as ~~November~~construction 30of dormitories, ~~2011~~cafeteria facilities, ~~respectively~~and other staff welfare facilities. This fund is non-distributable other than upon liquidation.

~~Inventories~~Non-Surplus Reserve Fund (Safety and Maintenance): According to ruling No. 119 (2004) issued on May 21, 2004, and amended ruling No. 168 (2005) on April 8, 2005 by the PRC Ministry of Finance regarding “Accrual and Utilization of Coal Production Safety Expense” and “Criterion on Coal Mine Maintenance and Improvement,” the Company is required to set aside to a safety fund of RMB 6 per ton of raw coal mined, and RMB 10.5 per ton for a maintenance fund. As defined under US GAAP, a liability for safety and maintenance expenses does not exist at the balance sheet date because there is no present obligation to transfer assets or to provide services as a result of any past transactions. Therefore, for financial reporting purposes, this statutory reserve has been recorded as an appropriation of retained earnings.

~~Inventories~~The ~~consist~~statutory ofreserves ~~coal~~consist ~~and operating supplies. Inventories are valued at the lower~~ of ~~cost or market, using~~ the weighted average cost method. Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of market. The Company did not make any inventory provisions for the three and six month periods ended May 31, 2012 and 2011.following:

Fixed Assets

	August 31, 2012		November 30, 2011

Statutory surplus reserve and welfare fund	$	2,447,598	$	2,447,598
Safety and maintenance reserve fund		7,040,719		6,585,257
Total statutory reserves	$	9,488,317	$	9,032,855

~~Fixed~~Stock ~~assets~~Based are recorded at cost, less accumulated depreciation. Cost includes the price paid to acquire or construct the asset, 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 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 pipelines, 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. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. Maintenance and repairs are generally expensed as incurred. When property, plant and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.Compensation

~~Costs~~The ofCompany ~~mine~~records ~~development,~~stock ~~expansion~~based ofcompensation ~~the~~in ~~capacity~~accordance ofwith orFASB ~~extending~~ASC ~~the~~718, ~~life~~“Compensation of– ~~the~~Stock ~~mine~~Based ~~(“Mining Structures~~Compensation”) ~~are capitalized and amortized using the units-of-production~~ (“~~UOP~~ASC 718”), which ~~method~~requires ~~over~~ the ~~estimated~~measurement ~~productive~~and ~~life~~recognition of ~~the~~compensation ~~mine~~expense based on ~~proven~~the ~~and~~estimated ~~probable~~fair ~~reserves.~~values ~~Mining~~for ~~Structures~~all stock-based ~~includes~~awards ~~the~~made ~~main~~to employees and ~~auxiliary mine shafts~~directors, ~~underground~~including ~~tunnels,~~stock ~~ramps, and other integrant mining infrastructure~~options.

~~Investment~~FASB ~~Property~~ASC 718 requires companies to estimate the fair value of stock-based awards on the date of grant using an option-pricing model. The Company uses the Black-Scholes option-pricing model as its method of determining fair value. This model is affected by the Company’s stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected stock option exercise behaviors. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the consolidated statements of operations and other comprehensive income (loss) over the requisite service period.

~~Investment~~Asset ~~property~~Retirement ~~represents~~Costs rental real estate purchased or constructed by the Company for investment purposes. Depreciation is computed using the straight line method over the estimated useful life of 45 years. The related rental income is included in non-operating income in the accompanying consolidated statements of income and ~~other comprehensive income.~~Obligations

FThe Company has adopted FASB ASC 410, “Asset Retirement and Environmental Obligations” (“ASC 410”). ASC 410 generally requires that the Company’s legal obligations associated with the retirement of long-16lived assets are recognized at fair value at the time the obligations are incurred. Obligations are incurred at the time development of a mine commences for underground mines or construction begins for support facilities, refuse areas and slurry ponds. The obligation’s fair value is determined using discounted cash flow techniques and is accreted over time to its expected settlement value. Upon initial recognition of a liability, a corresponding amount is capitalized as part of the carrying amount of the related long-lived asset. The related asset is amortized using the UOP method over the productive life of the mine based on proven and probable reserves. The Company did not incur and does not anticipate incurring any material dismantlement, restoration and abandonment costs given the nature of its producing activities and the current PRC regulations surrounding such activities.

~~CHINA ENERGY CORPORATION AND SUBSIDIARIES~~14

~~NOTES~~Vulnerability TODue ~~THE~~to ~~CONSOLIDATED~~Operations ~~FINANCIAL~~in the ~~STATEMENTS~~PRC

~~FOR~~The ~~THE~~Company’s ~~THREE~~operations ~~AND~~may ~~SIX~~be ~~MONTH~~adversely affected ~~PERIODS~~by ~~ENDED~~significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing ~~MAY~~economic 31reform policies for more than twenty years, ~~2012~~no ~~AND~~assurance ~~2011~~can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRCs political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

~~(UNAUDITED)~~All of the Company’s businesses are transacted in RMB, which is not freely convertible into US dollars. The People’s Bank of China and other banks are authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.

~~Mining~~Since ~~Right~~the Company has its primary operations in the PRC, the majority of its revenues will be settled in RMB, not US dollars. Due to certain restrictions on currency exchanges that exist in the PRC, the Company’s ability to use profits generated in RMB to pay any dividends to its shareholders outside of China will be limited.

All ~~land~~of ~~in China belongs to~~ the ~~government. To extract resources from the land, the~~ Company ~~was required to obtain a mining right. The Company~~’s ~~Coal~~bank ~~Group acquired~~accounts ~~its~~are ~~mining~~in ~~right~~banks ~~from~~located ~~the~~in ~~Provincial~~PRC ~~Bureau of National Land~~ and ~~Resource~~are innot ~~November~~covered ofby ~~2005.~~protection ~~The~~similar ~~price~~to ofthat ~~the~~provided ~~mining right, which represents the acquisition cost of the mine, was assessed in 2005~~ by the ~~Bureau~~FDIC toon befunds ~~$3,656,731.~~held ~~The mine acquisition cost was payable~~ in ~~instalments~~United ~~over a six year period from the date the mining right was granted. The mine acquisition cost being amortized~~States ~~using the UOP method over the estimated productive life of the mine based on proven and probable reserves~~banks.

~~Restricted~~The ~~Cash~~Company's mining operations are subject to extensive national and local governmental regulations in China, which regulations may be revised or expanded at any time. Generally, compliance with these regulations requires the Company to obtain permits issued by government regulatory agencies. Certain permits require periodic renewal or review of their conditions. The Company cannot predict whether it will be able to obtain or renew such permits or whether material changes in permit conditions will be imposed. The inability to obtain or renew permits or the imposition of additional conditions could have a material adverse effect on the Company's ability to develop and operate its mines.

Long-term restricted cash represents the bank deposits held as a guarantee for the future payments of rehabilitation costs as required by the PRC government. The long-term deposits earn an interest rate of 0.50% per annum, which is determined by the PRC government.Reclassifications

~~Advances~~Certain ~~from~~accounts ~~Customers~~in the prior period’s financial statements have been reclassified for comparative purposes to conform to the presentation in the current period’s financial statements. These reclassifications had no effect on previously reported earnings.

~~Advances~~3. ~~from~~Segment ~~customers primarily consist of payments received from customers by the Coal Group and Heat Power prior to the delivery of goods and services.~~Reporting

~~Deferred~~The ~~Income~~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 variable interest corporation and each functions independently of the other.

Deferred income represents reimbursements received by Heat Power from various real estate development companies for the cost of constructing pipelines to connect to rural areas being developed. The income is recognized on a straight line basis over the estimated useful life of the pipelines of ten years.15

~~Impairment~~Except for the loans made to Heat Power by Coal Group in the principal amount of ~~Long-lived~~RMB 85 million (equivalent to U.S. $13.4 million) as ~~Assets~~of August 31, 2012, during the periods reported herein, there were no other transactions between the two segments. There also were no differences between the measurements used to report operations of the segments and those used to report the consolidated operations of the Company. In addition, there were no differences between the measurements of the assets of the reported segments and the assets reported on the consolidated balance sheets.

The Company utilizes FASB ASC 360, “Property, Plant and Equipment” (“ASC 360”), which addresses the financial accounting and reporting for the recognition and measurement of impairment losses for long-lived assets. In accordance with ASC 360, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company may recognize impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to these assets. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss, if any, is recognized for the difference between the fair value of the asset and its carrying value. No impairment of long-lived assets was recognized for the three and six month periods ended May 31, 2012 and 2011.

	Three Months Ended August 31,
				2012									2011
	Heat			Coal			Total			Heat			Coal		Total
	Power			Group						Power			Group
	US$			US$			US$			US$			US$		US$
Sales to external customers	$	442,139		$	21,973,581		$	22,415,720		$	662,011		$	46,324,632	$	46,986,643
Sales - government subsidies		-			-			-			2,498			-		2,498
Interest expense, net		426,692			463,028			889,720			303,110			454,004		757,114
Depreciation and amortization		1,478,233			432,543			1,910,776			838,557			629,833		1,468,390
Segment (loss) profit		(3,691,209	)		(376,613	)		(4,067,822	)		(985,487	)		9,288,889		8,303,402

F-17

	Nine Months Ended August 31,
				2012							2011
	Heat			Coal		Total		Heat			Coal		Total
	Power			Group				Power			Group
	US$			US$		US$		US$			US$		US$
Sales to external customers	$	12,261,393		$	132,291,778	$	144,553,171	$	12,317,052		$	88,822,809	$	101,139,861
Sales - government subsidies		2,150,630			-		2,150,630		393,532			-		393,532
Other income - government subsidies		-			754,721		754,721		-			-		-
Interest expense, net		1,109,476			1,481,925		2,591,401		682,457			1,024,361		1,706,818
Depreciation and amortization		4,488,621			1,777,062		6,265,683		2,905,915			1,569,602		4,475,517
Segment (loss) profit		(3,348,475	)		12,718,677		9,370,202		(345,213	)		18,273,270		17,928,057

CHINA ENERGY CORPORATION AND SUBSIDIARIES

	August 31, 2012						November 30, 2011
	Heat		Coal				Heat		Coal
	Power		Group		Total		Power		Group		Total

Segment assets	$	73,963,158	$	114,510,794	$	188,473,952	$	71,566,508	$	115,576,659	$	187,143,167
Construction in progress		2,884,542		18,115		2,902,657		2,801,159		18,035		2,819,194
Investment property, net		3,597,719		1,948,085		5,545,804		3,754,281		1,975,888		5,730,169

~~NOTES~~Reconciliation TOof ~~THE~~the ~~CONSOLIDATED FINANCIAL~~total ~~STATEMENTS~~segment profits to net income included in the consolidated financial statements is as follows:

FOR THE THREE AND SIX MONTH PERIODS ENDED MAY 31, 2012 AND 2011

	Three Months ended August 31,						Nine Months ended August 31,
	2012			2011			2012			2011

Total segment (loss) profit	$	(4,067,822	)	$	8,303,402		$	9,370,202		$	17,928,057
Unallocated corporate expenses		(128,292	)		(141,541	)		(437,084	)		(1,614,683	)
Net (loss) income	$	(4,196,114	)	$	8,161,861		$	8,933,118		$	16,313,374

~~(UNAUDITED)~~4. Stockholder Loans

~~Revenue~~Substantial ~~Recognition~~portions of the cost of construction of the thermoelectric plant and of the costs of expansion projects at Heat Power and the Coal Group were provided by stockholder loans. Balances are detailed below:

Revenues from sales of products are recognized when the products are delivered and the title is transferred, the risks and rewards of ownership have been transferred to the customer, the price is fixed and determinable and collection of the related receivable is reasonably assured.

	August 31, 2012		November 30, 2011
Ordos City YiYuan Investment Co., Ltd.	$	1,769,018	$	1,702,421
Hangzhou Dayuan Group, Ltd.		5,890,982		5,736,898
Inner Mongolia Duoyida Mining Co. Ltd.		2,083,644		2,013,393
Total	$	9,743,644	$	9,452,712

~~Revenue~~The ~~associated~~stockholder ~~with~~loans ~~sales of coal is recognized when the title to the goods has been passed to customers, which is the date when the goods~~ are ~~delivered~~due toon ~~designated~~demand ~~locations~~with ~~and~~interest ~~accepted~~as ~~by the customers and the previously discussed requirements are met.~~follows:

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 the government controlled intermediary, respectively.

	August 31, 2012			November 30, 2011
	Balance		Interest rate	Balance		Interest rate

Stockholder loans – interest bearing	$	6,962,384	5.31% and 7.32%	$	6,931,702		5.31	%
Interest payable		2,781,260			2,521,010
Total	$	9,743,644		$	9,452,712

~~Resource Compensation Fees~~16

In accordance with the relevant regulations in the PRC, a company that is engaged in the coal production business is required to pay a fee to the Inner Mongolia National Land and Resources Administration Bureau as compensation for the depletion of coal resources5. ~~Coal~~Lease Group was required to pay a resource compensation fee of $228,634 and $108,727 for the three months ended May 31, 2012 and 2011, respectively, and $331,998 and $197,390 for the six month then ended, respectively, which is included in cost of revenues in the consolidated statements of income and comprehensive income.Obligation

~~Environmental~~The ~~Costs~~Company leases an office under an operating lease expiring December 31, 2015. The minimum future annual rent payments under the lease as of August 31, 2012 are as follows:

The PRC has adopted extensive environmental laws and regulations that affect the operations of the coal mining industry. The potential environmental liabilities under proposed or future environmental legislation cannot currently be reasonably estimated, and could be material. Under existing legislation, however, Company management believes that there are no probable liabilities that will have a material adverse effect on the Company.

Year Ending	Annual
November 30,	Amount

2012	$	25,597
2013		102,388
2014		102,388
2015		102,388
2016		8,532
Total	$	341,293

~~Fair~~Rent ~~Value~~expense ofcharged ~~Financial~~to operations for ~~Instruments~~the three months ended August 31, 2012 and 2011 was $25,531 and $31,773, respectively, and was $76,975 and $77,440 for the nine months then ended, respectively.

FASB ASC 820, “Fair Value Measurements and Disclosures,” 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)6. In ~~accordance~~Other ~~with ASC 820, the following summarizes the fair value hierarchy:~~Payables

~~Level~~Included 1in ~~Inputs~~other –payables ~~Unadjusted~~are ~~quoted~~advances ~~market~~from ~~prices~~the ~~for~~Company’s ~~identical~~Chairman ~~assets~~ and ~~liabilities~~entities inaffiliated anto ~~active~~the ~~market~~Company ~~that~~through a family member of the Company’s ~~has~~Chairman totaling ~~the~~$4,838,045 ~~ability~~and $4,704,775 as of August 31, 2012 and November 30, 2011, respectively. These advances are non-interest bearing and payable on demand. At August 31, 2012 and November 30, 2011, other payables amounted to ~~access~~$7,884,034 and $13,111,017, respectively.

~~F-18~~7. Advances to Suppliers

~~CHINA~~As ~~ENERGY~~is ~~CORPORATION~~customary ~~AND~~in China, the Company has ~~SUBSIDIARIES~~made advances to its suppliers for coal purchases, utility payments and other purchases. At August 31, 2012 and November 30, 2011, advances amounted to $38,920,307 and $27,566,516, respectively. There is no interest due on these advances; the advances are offset against billings as they are made by the suppliers.

~~NOTES~~8. TOOther ~~THE CONSOLIDATED FINANCIAL STATEMENTS~~Receivables

~~FOR~~Other ~~THE~~receivables ~~THREE~~consist ~~AND~~of ~~SIX~~the ~~MONTH PERIODS ENDED MAY 31, 2012 AND 2011~~following:

(UNAUDITED)

	August 31, 2012		November 30, 2011

Loans to suppliers and other associated firms	$	8,360,885	$	20,529,996
Employee expense advances		3,336,934		709,015
Government subsidies receivable		209,485		2,368,440
Heat network access fee receivable		1,513,460		955,085
Rental fee receivable		30,716		-
Total	$	13,451,480	$	24,562,536

~~Level 2 Inputs – Inputs other than the quoted prices in active markets that are observable either directly or indirectly.~~17

~~Level~~Included 3in ~~Inputs~~loans –to ~~Inputs~~suppliers ~~based~~and onother ~~prices~~associated orfirms ~~valuation~~are ~~techniques~~advances ~~that~~to ~~are~~entities ~~both~~affiliated ~~unobservable~~to the Company through a family member of the Company’s Chairman totaling $6,515,185 and ~~significant~~$752,380 as of August 31, 2012 and November 30, 2011, respectively. $5,754,993 of the $6,515,185 as of August 31, 2012 was subsequently fully repaid in September 2012. In addition, included in loans to suppliers and other associated firms is also an advance to one of the ~~overall~~Heat ~~fair~~Power’s ~~value~~stockholders ~~measurements~~for fixed asset purchases of $371,747 as of August 31, 2012. Also included in loans to suppliers and other associated firms are advances to Heat Power’s Vice President and family members of the Company’s Chairman of $354,840 and $39,923 as of August 31, 2012 and November 30, 2011, respectively. Those advances are non-interest bearing and payable on demand.

~~ASC~~On ~~820~~a ~~requires~~periodic ~~the~~basis, ~~use~~management ~~of observable~~reviews ~~market~~the ~~data,~~other ~~when~~receivable ~~available,~~balances inand ~~making~~establishes ~~fair~~allowances ~~value~~where ~~measurements.~~there ~~When~~is ~~inputs~~doubt ~~used~~as to ~~measure~~the ~~fair~~collectability ~~value~~of ~~fall~~the ~~within~~individual ~~different levels~~balances. In evaluating collectability of the ~~hierarchy~~individual balances, the ~~level~~Company ~~within~~considers ~~which~~factors such as the ~~fair~~age ~~value~~of ~~measurement~~the isbalance, ~~categorized~~payment history, isand ~~based~~credit-worthiness onof the ~~lowest~~creditor. ~~level~~The ~~input~~Company ~~that~~considers isall ~~significant~~of these receivables at August 31, 2012 and November 30, 2011 to ~~the~~be ~~fair~~fully ~~value~~collectible ~~measurement~~and, therefore, did not provide for an allowance for doubtful accounts.

~~The~~9. ~~Company~~Fixed ~~did not identify any assets or liabilities that are required to be presented at fair value at May 31, 2012 and November 30, 2011.~~Assets

~~Income~~Fixed ~~Taxes~~assets are summarized as follows:

Coal Group and Heat Power generate their income in China where a 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. and therefore, are not subject to U.S. taxes.

	August 31, 2012			November 30, 2011

Buildings	$	10,830,993		$	10,777,208
Machinery & equipment		41,750,716			43,845,438
Transferred assets (a)		28,027,456			19,702,907
Automotive equipment		2,022,280			1,953,696
Office Equipment		1,440,837			1,379,812
Construction in progress		2,902,657			2,819,194
		86,974,939			80,478,255
Accumulated depreciation		(22,893,072	)		(17,540,508	)
Fixed assets, net	$	64,081,867		$	62,937,747

~~The Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes”~~ (~~“ASC 740”~~a), ~~which~~Real ~~requires~~estate ~~the~~with ~~recognition~~equipment ofsubject ~~deferred income~~to ~~taxes for differences between~~ the ~~basis~~finance ofobligation ~~assets~~as ~~and~~described ~~liabilities~~in ~~for~~Note ~~financial~~11 ~~statement~~under ~~and~~“Finance ~~income tax purposes~~Obligations. Deferred tax assets and liabilities represent the future tax consequence for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.”

~~Use~~Depreciation ofexpense ~~Estimates~~charged to operations for the three months ended August 31, 2012 and 2011 was $1,624,735 and $1,449,634, respectively and was $5,291,031 and $4,085,127 for the nine months then ended, respectively.

~~The~~Land ~~preparation~~use ofrights ~~financial statements in conformity with accounting principles generally accepted in the United States~~ of ~~America~~$246,404 ~~requires~~and ~~management to make estimates~~$245,318 ~~and~~at ~~assumptions~~August ~~that~~31, ~~affect~~2012 ~~certain~~and ~~reported~~November ~~amounts~~30, of2011, ~~assets~~respectively, ~~and~~are ~~liabilities~~included ~~and~~in ~~disclosures~~buildings ~~of contingent assets~~ and ~~liabilities at~~are ~~the~~depreciated ~~date~~over of the ~~consolidated~~useful ~~financial~~lives ~~statements~~along with ~~and~~ the ~~reported~~related ~~amounts of revenues and expenses during the reporting periods~~buildings. ~~Actual results could differ from those estimates.~~

~~Net Income (Loss) Per Share~~18

~~The Company computes net income (loss) per common share in accordance with FASB ASC 260, “Earnings Per Share” (“ASC 260”) and SEC Staff Accounting Bulletin No~~10. 98Short ~~(“SAB~~Term ~~98”).~~Bank Under the provisions of ASC 260 and SAB 98, basic net income (loss) per common share is computed by dividing the amount available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted income per common share is computed by dividing the amount available to common shareholders by the weighted average number of shares of common stock outstanding plus the effect of any dilutive shares or common stock equivalents 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 consolidated financial statements.Loans

~~F-19~~The Company has bank loans collateralized by mining rights and the real estate properties and guaranteed by the Company’s CEO and a stockholder. Relevant terms of these bank loans are as follows:

CHINA ENERGY CORPORATION AND SUBSIDIARIES

	August 31, 2012		November 30, 2011
Bank loan due 1/17/12, with interest at 6.94% (a)		-		12,546,068
Bank loan due 1/17/12, with interest at 6.94% (b)		-		8,782,247
Bank loan due 7/28/12, with interest at 7.22% (a)		-		7,809,927
Bank loan due 12/14/12, with interest at 7.22% (b)		12,601,601		-
Bank loan due 1/12/13, with interest at 7.22% (b)		9,451,200		-
Total	$	22,052,801	$	29,138,242

~~NOTES~~(a) TOLoan to ~~THE~~Coal ~~CONSOLIDATED~~Group, ~~FINANCIAL STATEMENTS~~collateralized by mining rights and the real estate properties of Coal Group.

~~FOR~~(b) ~~THE~~Loan ~~THREE~~to ~~AND~~Coal ~~SIX~~Group, ~~MONTH PERIODS ENDED~~collateralized ~~MAY~~by ~~31,~~mining ~~2012~~rights ~~AND~~of ~~2011~~Coal Group.

~~(UNAUDITED)~~Interest expense related to the bank loans amounted to $497,782 and $468,768 for the three months ended August 31, 2012 and 2011, respectively, and $1,574,125 and $1,143,791 for the nine months then ended, respectively.

~~Statutory~~At ~~Reserves~~August 31, 2012 the Company had a letter of intent with a bank to provide the Company an additional line of credit in the amount of RMB 60 million (US$9,451,200).

~~Pursuant to corporate law of the PRC, the Company is required to maintain statutory reserves by appropriating from its after-tax profit before declaration or payment of dividends~~11. ~~The~~Finance ~~statutory reserves, representing restricted retained earnings, consist of the following funds:~~Obligations

~~Surplus~~On ~~Reserve~~March ~~Fund:~~31, 2011, ~~The~~Heat ~~Company~~Power entered into a Finance Leasing Contract (“Contract 1”) with a leasing iscompany ~~required~~covering toits thermoelectric plants, heat transfer ~~10%~~stations, ofand ~~its~~machinery ~~net~~and ~~income~~equipment (“Transferred Assets 1”), ashaving ~~determined~~a ~~under~~gross ~~PRC~~value ~~accounting~~of ~~rules~~RMB ~~and~~125,635,589 ~~regulations~~(US$19,392,298). Pursuant to aContract ~~statutory~~1, ~~surplus~~Heat Power sold to the ~~reserve~~leasing ~~fund~~company ~~until~~its ~~such~~Transferred ~~reserve~~Assets ~~balance~~1 ~~reaches~~used ~~50%~~for ofits ~~the~~operation ~~Company’s~~in ~~registered~~exchange ~~capital~~for RMB 60,000,000 (US$9,261,260) in cash. ~~The~~Under ~~surplus~~Contract ~~reserve~~1, ~~fund~~Heat isPower ~~non-distributable other~~leased ~~than~~back ~~during~~the ~~liquidation~~Transferred ~~and~~Assets ~~can~~1 bewith ~~used~~a toquarterly ~~fund~~installment ~~previous~~payment of ~~years’~~RMB ~~losses~~3,555,163 if(US$548,755) ~~any~~until April 2016, ~~and~~when ~~may~~Contract be1 ~~utilized~~expires. ~~for~~Contract ~~business~~1 ~~expansion~~is guaranteed orby ~~converted~~Coal ~~into~~Group ~~share~~and ~~capital~~an byunrelated ~~issuing~~third ~~new~~party. ~~shares~~Upon tothe ~~existing~~repayment ~~shareholders~~of inall ~~proportion~~outstanding torental ~~their~~obligations, ~~shareholding~~Heat orPower bymay ~~increasing~~re-purchase the ~~par~~Transferred ~~value~~Assets 1 at a purchase price of RMB 900,000, or RMB 1 if Heat Power timely pays the ~~shares~~quarterly ~~currently~~installments. ~~held~~Upon the byexecution ~~them~~of Contract 1, ~~provided~~Heat ~~that~~Power ~~the~~paid ~~remaining~~a ~~reserve~~servicing ~~balance~~fee ~~after~~of ~~such~~RMB ~~issuance~~3,300,000 is(US$502,337) ~~not~~and ~~less than~~a ~~25%~~refundable deposit of RMB 9,000,000 (US$1,389,189) to the ~~registered~~leasing ~~capital~~company.

~~Common~~On ~~Welfare~~March ~~Fund:~~28, 2012, ~~The~~Heat ~~common welfare~~Power ~~fund~~entered isinto aanother ~~voluntary~~Finance ~~fund~~Leasing ~~that~~Contract ~~the~~(“Contract ~~Company~~2”) ~~can~~with a ~~elect~~leasing company related to its thermoelectric plants, heat transfer 5%stations, toand ~~10%~~machinery ofand ~~its~~equipment ~~net~~(“Transferred Assets ~~income~~2”), aswith ~~determined~~a ~~under~~gross ~~PRC~~value ~~accounting rules~~of ~~and~~RMB ~~regulations~~52,293,912 (US$8,211,468). Pursuant to ~~this~~Contract ~~fund.~~2, ~~This~~Heat ~~fund~~Power ~~can~~sold ~~only~~to bethe leasing ~~utilized~~company onits ~~capital~~Transferred ~~items~~Assets 2 used for ~~the~~its ~~collective~~operation ~~benefit~~in exchange of ~~the~~RMB ~~Company’s~~48,000,000 ~~employees~~(US$7,537,215) ~~such~~in ascash. ~~construction~~Under Contract 2, Heat Power leased back the Transferred Assets 2 with a quarterly installment payment of ~~dormitories~~RMB 2,868,777 ~~cafeteria~~(US$450,471) ~~facilities~~until April 2017, when Contract 2 expires. Contract 2 is guaranteed by Coal Group and ~~other~~an ~~staff~~unrelated ~~welfare~~third ~~facilities~~party. ~~This~~Upon ~~fund~~the isrepayment ~~non~~of all outstanding rental obligations, Heat Power may re-~~distributable~~purchase ~~other~~the ~~than~~Transferred ~~upon~~Assets ~~liquidation~~2 at a purchase price of RMB 720,000, or RMB 1 if Heat Power timely pays the quarterly installments. Included in the amount borrowed is a servicing fee of RMB 2,400,000 (US$379,897) and a refundable deposit of RMB 9,600,000 (US$1,507,443).

~~Non-Surplus Reserve~~Since ~~Fund~~Heat ~~(Safety~~Power ~~and~~has ~~Maintenance):~~the ~~According~~option to ~~ruling No. 119 (2004) issued on May 21, 2004, and amended ruling No. 168~~repurchase ~~(2005)~~its onTransferred ~~April 8~~Assets, ~~2005~~Heat byPower ~~the~~is ~~PRC~~considered ~~Ministry~~to ofhave ~~Finance regarding~~ “~~Accrual~~continuing ~~and~~involvement” ~~Utilization~~pursuant ofto ~~Coal~~ASC ~~Production~~840-40, ~~Safety Expense”~~“Sales-Leaseback ~~and~~Transactions”. ~~“Criterion on Coal Mine Maintenance and Improvement~~Accordingly,” the ~~Company~~lease isdid ~~required~~not toqualify ~~set~~as ~~aside~~ a ~~safety~~ ~~fund~~normal ofsale-leaseback 6transaction ~~RMB per ton of raw coal mined,~~ and ~~10.5~~is ~~RMB~~being ~~per~~accounted ~~ton~~ for under athe ~~maintenance~~financing ~~fund.~~method Asin ~~defined under~~which USHeat ~~GAAP,~~Power areports ~~liability~~the ~~for~~sales ~~safety~~proceeds ~~and~~as ~~maintenance~~a ~~expenses~~finance ~~does~~obligation, ~~not~~continues ~~exist~~to atreport the ~~balance~~Transferred Assets ~~sheet~~as ~~date~~its ~~because~~assets, ~~there~~and iscontinues ~~no present obligation~~ to ~~transfer~~depreciate ~~assets~~the orTransferred toAssets. ~~provide~~The ~~services~~lease aspayments aare ~~result~~being ofrecognized ~~any~~under ~~past~~the ~~transactions~~interest method. ~~Therefore, for~~The ~~financial~~effective ~~reporting purposes,~~interest rate of this ~~statutory~~transaction ~~reserve~~is ~~has~~6.70% ~~been~~and ~~recorded~~7.05% asfor anContract ~~appropriation~~1 ofand ~~retained~~Contract ~~earnings~~2, respectively.

~~The~~Future ~~statutory~~payments ~~reserves~~of ~~consist~~the finance obligations as of ~~the~~August ~~following~~31, 2012 are as follows:

	May 31, 2012		November 30, 2011
Year Ending
Surplus reserve and common welfare fund	$	2,447,598	$	2,447,598
November 30,	Amount
Safety and maintenance reserve		7,468,742		6,585,257
2012	$	1,009,934
Total statutory reserves	$	9,916,340	$	9,032,855
2013		4,047,596
2014		4,047,596
2015		4,047,596
Thereafter		3,825,458
		16,978,180
Less: amount representing interest		2,361,761
Finance obligations		14,616,419
Less: current portion of finance obligations		3,122,029
Finance obligation, net of current portions	$	11,494,390

~~F-20~~19

~~CHINA~~Interest ~~ENERGY~~expense ~~CORPORATION~~for ~~AND~~these finance obligations ~~SUBSIDIARIES~~amounted to $329,876 and $211,499 for the three months ended August 31, 2012 and 2011, respectively, and $815,445 and $318,320 for the nine months then ended, respectively. The refundable deposits are included in other long term assets in the consolidated balance sheets as of August 31, 2012 and November 30, 2011. The costs related to these Contracts of RMB 7,200,000 (US$1,134,144) are being amortized by the interest method over the life of the leases.

~~NOTES~~12. TORental ~~THE CONSOLIDATED FINANCIAL STATEMENTS~~Income

~~FOR~~The ~~THE~~Company ~~THREE~~entered ~~AND~~into ~~SIX~~rental ~~MONTH~~agreements with ~~PERIODS~~four ~~ENDED MAY~~unrelated ~~31,~~parties ~~2012~~to ~~AND~~lease ~~2011~~commercial space in its building under operating leases expiring through 2015.

~~(UNAUDITED)~~Future minimum rental income as of August 31, 2012 is as follows:

Stock Based Compensation

Year Ending
November 30,	Amount

2012	$	61,039
2013		208,714
2014		196,900
2015		36,886

	$	503,539

~~The~~Rental ~~Company records stock based compensation in accordance with FASB ASC 718~~income, ~~“Compensation~~under –operating ~~Stock Based Compensation” which requires the measurement~~leases, ~~and~~included ~~recognition~~in ~~of compensation expense based on estimated fair values for all stock~~non-~~based~~operating ~~awards~~income ~~made~~in ~~to employees and directors, including stock options. FASB ASC 718 requires companies to estimate~~ the ~~fair~~consolidated ~~value~~statements of ~~stock-based~~operations ~~awards~~and onother ~~the~~comprehensive ~~date~~income of(loss) ~~grant using~~for ~~an option-pricing model. The Company uses~~ the ~~Black-Scholes option-pricing model as its method of determining fair value.~~three ~~This~~months ~~model~~ended isAugust ~~affected~~31, by2012 ~~the~~and ~~Company’s~~2011 ~~stock~~was ~~price~~$104,012 asand ~~well~~$84,964, asrespectively ~~assumptions~~and ~~regarding~~was a$244,810 ~~number~~and ~~of subjective variables. These~~$303,404 ~~subjective~~for ~~variables include, but are not limited to~~ the ~~Company’s~~nine ~~expected~~months ~~stock~~then ~~price volatility over the term of the awards~~ended, ~~and~~ ~~actual and projected stock option exercise behaviours~~respectively. The ~~value~~related ofrent ~~the~~receivable ~~portion~~ of ~~the~~$30,716 ~~award~~at ~~that~~August is31, ~~ultimately~~2012 ~~expected to vest~~ is ~~recognized~~included ~~as an expense~~ in ~~the~~other receivables ~~statements~~on ~~of income over~~ the ~~requisite~~consolidated ~~service~~balance ~~period~~sheets.

~~Asset~~13. ~~Retirement~~Government ~~Cost and Obligation~~Subsidies

~~The~~Government ~~Company~~subsidies ~~has~~are ~~adopted~~primarily ~~FASB ASC 410, “Asset~~comprised ~~Retirement~~of ~~and~~financial ~~Environmental~~support ~~Obligations”~~provided ~~(“ASC~~by ~~410”).~~the ~~ASC~~local ~~410~~government ~~generally~~to ~~requires~~Heat ~~that~~Power ~~the~~to ~~Company’s legal~~ensure ~~obligations~~supply ~~associated~~of ~~with~~heat to the ~~retirement~~XueJiaWan ofarea ~~long-lived~~as ~~assets~~the ~~are~~price for ~~recognized~~heat atcharged ~~fair~~is ~~value~~regulated atand ~~the~~approved ~~time~~by the ~~obligations are incurred~~government. ~~Obligations~~The ~~are~~financial ~~incurred~~support atincludes ~~the~~revenue ~~time~~subsidies ~~development~~to ofcompensate ~~a mine commences~~ for lower ~~underground~~government ~~mines~~regulated orprices ~~construction~~charged ~~begins~~ for ~~support~~heat ~~facilities, refuse areas~~ and ~~slurry~~cost ~~ponds.~~subsidies ~~The~~for ~~obligation’s~~the ~~fair~~purchase ~~value~~of iscoal ~~determined~~used ~~using~~in ~~discounted~~providing ~~cash~~heat. ~~flow~~Government ~~techniques~~subsidies ~~and~~are isintended ~~accreted~~to ~~over~~be ~~time~~an toincentive ~~its~~for ~~expected~~Heat ~~settlement~~Power ~~value.~~to ~~Upon~~supply ~~initial~~heat ~~recognition~~at ofthe agovernment ~~liability,~~regulated aprices. ~~corresponding~~Government subsidies ~~amount~~amounted isto ~~capitalized~~$0 asand ~~part~~$2,498 offor the ~~carrying~~three ~~amount~~months ofended ~~the~~August ~~related~~31, ~~long-lived~~2012 and ~~asset.~~2011, ~~The~~respectively ~~related~~and ~~asset~~were is$2,150,630 ~~amortized~~and ~~using~~$393,532 ~~the~~for ~~UOP method over~~ the ~~productive~~nine ~~life~~months ofthen ~~the~~ended, ~~mine based on proven and probable reserves~~respectively. ~~The~~ ~~Company~~During ~~did~~the ~~not~~three ~~incur~~ and ~~does~~nine ~~not~~months ~~anticipate~~ended ~~incurring~~August ~~any~~31, ~~material dismantlement~~2012, ~~restoration~~Coal ~~and~~Group ~~abandonment~~received ~~costs given~~subsidies from the ~~nature~~government of ~~its~~$0 ~~mining activities~~ and ~~the~~$754,721, ~~current PRC regulations surrounding such activities~~respectively.

~~Vulnerability~~14. ~~Due~~Income ~~to Operations in PRC~~Taxes

The Company’s ~~operations~~is ~~may~~required beto ~~adversely~~file income ~~affected~~tax byreturns ~~significant~~in ~~political,~~both ~~economic~~the ~~and~~United ~~social~~States ~~uncertainties~~and ~~in the~~ PRC. ~~Although~~Its operations in the ~~PRC~~United ~~government~~States ~~has~~have been ~~pursuing economic~~insignificant ~~reform~~and ~~policies~~income ~~for~~taxes ~~more~~have not ~~than~~been ~~twenty~~accrued. ~~years~~In the PRC, nothe ~~assurance~~Company ~~can~~files betax ~~given~~returns ~~that~~for ~~the~~Heat ~~PRC~~Power ~~government~~and ~~will~~Coal ~~continue~~Group toand, ~~pursue such~~although ~~policies~~it oris ~~that~~part ~~such~~of ~~policies~~Coal ~~may~~Group, a ~~not~~separate betax ~~significantly~~return ~~altered,~~is ~~especially~~required infor the ~~event~~operations of athe ~~change~~coal inmine. ~~leadership,~~The ~~social or~~laws ~~political~~of ~~disruption~~the orPRC ~~unforeseen~~permit ~~circumstances~~the ~~affecting~~carry-forward ~~the~~of ~~PRCs~~net ~~political,~~operating losses ~~economic~~for ~~and~~a ~~social~~period ~~conditions.~~of ~~There~~five isyears. ~~also no~~At ~~guarantee~~November ~~that~~30, 2011, the PRC ~~government’s~~entities ~~pursuit~~had ofno ~~economic~~net ~~reforms~~operating ~~will~~losses beavailable ~~consistent~~for orfuture ~~effective~~use as confirmed by the local taxing authority.

~~All~~Under ofASC ~~the~~740, ~~Company’s~~recognition ~~businesses~~of ~~are~~deferred ~~transacted~~tax inassets ~~RMB, which~~ is ~~not~~permitted ~~freely~~unless ~~convertible~~it ~~into~~is ~~other~~more ~~currencies.~~likely ~~The~~than ~~People’s~~not ~~Bank~~that ~~of China and other banks are authorized to buy and sell foreign currencies at~~ the ~~exchange~~assets ~~rates~~will ~~quoted~~not bybe ~~the~~realized. ~~People’s~~There ~~Bank~~are ofno ~~China.~~deferred ~~Approval~~tax ~~of foreign~~assets ~~currency~~or ~~payments~~liabilities byas ~~the People’s Bank~~ of ~~China~~August ~~or other institutions requires submitting a payment application form together with suppliers’ invoices~~31, ~~shipping~~2012 ~~documents~~ and ~~signed~~November ~~contracts~~30, 2011.

~~F-21~~20

~~CHINA~~The ~~ENERGY~~following ~~CORPORATION~~tables ~~AND~~reconcile the effective income tax rate ~~SUBSIDIARIES~~with the statutory rate for the periods presented:

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Three months ended August 31, 2012	Tax Provision			Rate of Tax
As calculated with statutory rate	$	(947,735	)		25.00	%
Tax effect of loss of subsidiaries		2,228,328			(58.79	%)
Tax effect of eliminated intercompany profit (loss)		(873,544	)		23.05	%
Effective tax rate	$	407,049			(10.74	%)

FOR THE THREE AND SIX MONTH PERIODS ENDED MAY 31, 2012 AND 2011

Three months ended August 31, 2011	Tax Provision		Rate of Tax
As calculated with statutory rate	$	2,914,546		25.0	%
Tax effect of loss of subsidiaries		325,102		2.8	%
Tax effect of eliminated intercompany profit (loss)		256,676		2.3	%
Effective tax rate	$	3,496,324		30.1	%

(UNAUDITED)

Nine months ended August 31, 2012	Tax Provision			Rate of Tax
As calculated with statutory rate	$	3,665,207			25.00	%
Tax effect of loss of subsidiaries		2,377,933			16.22	%
Tax effect of eliminated intercompany profit (loss)		(316,644	)		(2.16	%)
Other		1,214			0.01	%
Effective tax rate	$	5,727,710			39.07	%

Since the Company has its primary operations in the PRC, its revenues will be settled in RMB, not US dollars. Due to certain restrictions on currency exchanges that exist in the PRC, the Company’s ability to use revenue generated in RMB to pay any dividend payments to its shareholders outside of China will be limited.

Nine months ended August 31, 2011	Tax Provision		Rate of Tax
As calculated with statutory rate	$	5,971,788		25.0	%
Tax effect of loss of subsidiaries		337,238		1.4	%
Tax effect of eliminated intercompany profit (loss)		1,264,752		5.4	%
Effective tax rate	$	7,573,778		31.8	%

~~All~~The ofCompany ~~the~~follows ~~Company’s~~ASC ~~bank~~740, ~~accounts~~“Accounting ~~are~~for Uncertainty in ~~banks~~Income ~~located~~Taxes in— ~~PRC~~an ~~and~~interpretation ~~are~~of ~~not~~SFAS ~~covered~~109.” byASC ~~protection~~740 ~~similar~~addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that ~~provided~~the tax position will be sustained on examination by the ~~FDIC~~taxing authorities, based on ~~funds~~the ~~held~~technical merits of the position. The tax benefits recognized in ~~United~~the ~~States~~financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent ~~banks~~likelihood of being realized upon ultimate settlement. ASC 740 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 for the periods presented.

The Company's mining operations are subject to extensive national and local governmental regulations in China, which regulations may be revised or expanded at any time. Generally, compliance with these regulations requires the Company to obtain permits issued by government regulatory agencies. Certain permits require periodic renewal or review of their conditions. The Company cannot predict whether it will be able to obtain or renew such permits or whether material changes in permit conditions will be imposed. The inability to obtain or renew permits or the imposition of additional conditions could have a material adverse effect on the Company's ability to develop and operate its mines.21

3The Company did not file its U.S. ~~Segment~~federal income ~~Reporting~~tax returns, including, without limitation, information returns on Internal Revenue Service (“IRS”) Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations” for the years ended November 30, 2002 through 2005. The Company was also late in filing for the years ended November 30, 2007 and 2008. Failure to furnish any information return with respect to any foreign business entity required, within the time prescribed by the IRS, subjects the Company to certain civil penalties. The Company is unable to determine the amount of any penalties that may be assessed at this time. Management is of the opinion that penalties, if any, that may be assessed would not be material to the consolidated financial statements.

~~The~~In addition, because the Company isdid ~~made~~not generate upany ofincome ~~two~~in ~~segments of~~the ~~business,~~United ~~Coal~~States ~~Group~~or ~~which~~otherwise ~~derives~~have ~~its~~any ~~revenue~~U.S. ~~from~~taxable income, the ~~mining~~Company ~~and~~does ~~purchase~~not ~~and~~believe ~~sale~~that ofit ~~coal,~~owes ~~and~~U.S. federal ~~Heat~~income ~~Power~~taxes ~~which~~in ~~derives~~respect to any transactions that the Company or any of its subsidiaries may have engaged in through August ~~revenue~~31, by2012. ~~providing~~However, ~~heating~~there ~~and~~can ~~electricity~~be tono ~~residents~~assurance ~~and~~that ~~businesses~~the ofIRS awill ~~local~~agree ~~community.~~with ~~Each~~the ofposition, ~~these~~and ~~segments~~therefore isthe ~~conducted~~Company ultimately could inbe aheld ~~separate~~liable ~~variable~~for ~~interest~~U.S. ~~corporation~~federal income taxes, interest and ~~each~~penalties. ~~functions~~The ~~independently~~tax ofyears ~~the~~ended ~~other~~November 30, 2002 to 2011 remain open to examination by tax authorities.

~~Except for the loans made to Heat Power by Coal Group in the principal amount of RMB 84 million (equivalent to U~~15.S. ~~$13.2~~Stock-Based ~~million)~~Compensation as of May 31, 2012, during the periods reported herein, there were no other transactions between the two segments. There also were no differences between the measurements used to report operations of the segments and those used to report the consolidated operations of the Company. In addition, there were no differences between the measurements of the assets of the reported segments and the assets reported on the consolidated balance sheets.

	Three Months Ended May 31,
	2012						2011
	Heat		Coal				Heat		Coal
	Power		Group		Total		Power		Group		Total
	US$		US$		US$		US$		US$		US$
Sales to external customers	$	5,450,053	$	80,178,867	$	85,628,920	$	5,558,737	$	26,241,752	$	31,800,489
Sales – government subsidies		911,167		-		911,167		391,034		-		391,034
Other income – government subsidies		-		756,597		756,597		-		-		-
Interest expense, net		385,048		515,001		900,049		234,505		394,257		628,762
Depreciation and amortization		1,304,963		785,318		2,090,281		1,044,027		576,749		1,620,776
Segment profit (loss)		750,661		12,967,917		13,718,578		77,266		4,950,527		5,027,793

On May 31, 2010, the Company granted to each of its three independent directors an option to purchase 20,000 shares of common stock at an exercise price of US$2.02 per share. The options vested over one year in equal, quarterly installments on the last day of the Company’s fiscal quarter, beginning with the fiscal quarter ending August 31, 2010, subject to their continued service as a director.

~~F-22~~On September 5, 2011, the Company granted another option to two of its three independent directors to purchase 20,000 shares of common stock and one of its three independent directors to purchase 15,000 shares of common stock at an exercise price of US$0.39 per share. The options vested over one year in equal, quarterly installments on the last day of the Company’s fiscal quarter, beginning with the fiscal quarter ending August 31, 2011, subject to their continued service as a director. The Compensation Committee of the Board of Directors has determined the performance conditions have been met.

~~CHINA~~The ~~ENERGY~~fair ~~CORPORATION~~value ~~AND~~of the options was estimated ~~SUBSIDIARIES~~using the Black-Scholes option pricing model. Expected volatility is based on historical volatility data of the Company’s stock. The expected term of stock options granted is based on historical data and represents the period of time that stock options are expected to be outstanding. The risk-free interest rate is based on a zero-coupon United States Treasury bond whose maturity period equals the expected term of the our options. The weighted average estimated grant date fair value for options granted to the independent directors was US$1.24 per share.

~~NOTES~~Weighted TOaverage ~~THE~~assumptions ~~CONSOLIDATED~~used ~~FINANCIAL~~to estimate ~~STATEMENTS~~the fair value of stock options on the date of grant are as follows:

FOR THE THREE AND SIX MONTH PERIODS ENDED MAY 31, 2012 AND 2011

		September 5, 2011
Expected dividend yield		-
Expected stock price volatility		182.07%
Risk free interest rate		2.00%
Expected life (years)		10 years

(UNAUDITED)

		May 31, 2010
Expected dividend yield		-
Expected stock price volatility		210.57%
Risk free interest rate		3.29%
Expected life (years)		10 years

	Six Months Ended May 31,
	2012						2011
	Heat		Coal				Heat		Coal
	Power		Group		Total		Power		Group		Total
	US$		US$		US$		US$		US$		US$
Sales to external customers	$	12,692,231	$	110,318,197	$	123,010,428	$	11,655,041	$	42,498,177	$	54,153,218
Sales - government subsidies		2,216,810				2,216,810		391,034		-		391,034
Other income – government subsidies		-		756,597		756,597		-		-		-
Interest expense, net		682,784		1,018,897		1,701,681		379,347		570,357		949,704
Depreciation and amortization		3,010,388		1,344,519		4,354,907		2,067,358		939,769		3,007,127
Segment profit		1,281,891		18,894,691		20,176,582		640,275		8,984,380		9,624,655

The stock-based compensation, included in general and administrative expenses in the consolidated statements of operations and other comprehensive income (loss), was $0 for the three month periods ended August 31, 2012 and 2011, respectively, and was $4,857 and $26,106 for the nine months then ended, respectively.

	May 31, 2012						November 30, 2011
	Heat		Coal				Heat		Coal
	Power		Group		Total		Power		Group		Total
	US$		US$		US$		US$		US$		US$
Segment assets	$	84,949,125	$	135,121,342	$	220,070,467	$	71,566,508	$	115,576,659	$	187,143,167
Construction in progress		2,916,210		18,058		2,934,268		2,801,159		18,035		2,819,194
Investment property, net		3,692,720		1,954,112		5,646,832		3,754,281		1,975,888		5,730,169

~~Reconciliation~~The ofCompany ~~the~~will ~~total~~issue ~~segment~~new ~~income to~~shares ~~net~~of ~~income~~common stock ~~included~~upon inexercise ~~the~~of ~~consolidated~~stock ~~financial~~options. ~~statements~~The following is asa ~~follows~~summary of option activity for the Company’s stock options:

	Three Months Ended May 31, 2012			Six Months Ended May 31, 2012
	Options			Weighted Average Exercise Price			Weighted- Average Remaining Contractual Life		Aggregate Intrinsic Value
Total segment profits	$	13,718,578		$	20,176,582
Outstanding at November 30, 2010		60,000		$	2.02			9.5 years		-
Unallocated corporate expenses		(626,691	)		(782,480	)
Granted		55,000			0.39			10 years		-
Net income	$	13,091,887		$	19,394,102
Exercised		-			-			-		-
Cancelled and expired		-			-			-		-
Forfeited		-			-			-		-
Outstanding at November 30, 2011		115,000		$	1.24			9.1 years		-
Vested and expected to vest at August 31, 2012		115,000		$	1.24			8.4 years		-
Exercisable at August 31, 2012		115,000		$	1.24			8.4 years		-

	Three Months Ended May 31, 2011			Six Months Ended May 31, 2011
Total segment profits	$	5,027,793		$	9,624,655
Unallocated corporate expenses		(1,240,490	)		(1,473,142	)
Net income	$	3,787,303		$	8,151,513

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock. There were no options that were exercised during the three and nine month periods ended August 31, 2012 and 2011.

~~F-23~~There was no unrecognized compensation cost related to these options as of August 31, 2012.

~~CHINA~~The ~~ENERGY~~Company ~~CORPORATION~~entered ~~AND~~into a Terms of Services ~~SUBSIDIARIES~~and Release Agreement with the Company’s CEO, a consulting firm, and Fortune Place Holdings Limited (“Fortune Place”), a British Virgin Islands corporation. The Company’s CEO is the sole director of Fortune Place. Pursuant to the terms of the agreement, the consulting firm would be entitled to receive equity consideration of 1,800,000 restricted shares of the Company held by Fortune Place for consulting services rendered to the Company, contingent upon the completion of all of the consulting services enumerated in the agreement. The filing of the Company’s Form 10-Q for the quarter ended February 28, 2011 represented the final item of the consulting services that the consulting firm was required to complete (“Completion Date”). As of the Completion Date, the fair value of shares transferred for the services rendered to the Company was valued at $1,386,000.

~~NOTES~~The TOCompany ~~THE~~issued ~~CONSOLIDATED~~60,000 ~~FINANCIAL~~shares of common ~~STATEMENTS~~stock to an investor relations firm in consideration for consulting services rendered through the period ended on March 14, 2011. The fair value of the stock was $121,800.

~~FOR~~16. ~~THE THREE AND SIX MONTH PERIODS ENDED MAY 31, 2012 AND 2011~~Contingencies

~~(UNAUDITED)~~As is customary in the PRC, 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 consolidated financial statements.

4The PRC has enacted legislation which appears to restrict the ability of entities considered foreign, like the Company, to have ownership interest in operating companies located in the PRC. ~~Stockholder~~The ~~Loans~~Company has taken steps to avoid any potential adverse impact of this legislation (See Note 1). However, the enacted legislation can be affected due to the PRC’s political, social and economic conditions.

AAs ~~substantial~~disclosed ~~portion~~in ofnote 14, the ~~funds~~Company ~~required~~was ~~for~~delinquent in filing certain tax returns with the ~~construction~~U.S. Internal Revenue Service. The Company filed the delinquent returns and sought waivers of any penalties under the ~~thermoelectric~~IRS ~~plant~~2011 Offshore Voluntary Disclosure Initiative. Under the program, the IRS has indicated that it will not impose a penalty for the failure to file delinquent information returns (Form 5471) if there are no underreported tax liabilities and the ~~costs~~information returns are filed by August 31, 2011. The Company is unable to determine the amount of ~~expansion~~any penalties ~~projects~~that may be assessed at ~~Heat~~this ~~Power~~time. ~~and~~Management is of the ~~coal~~opinion ~~mine~~that ~~were~~penalties, ~~provided~~if any, that may be assessed would not bybe ~~stockholder~~material ~~loans.~~to ~~Balances~~the ~~are~~consolidated asfinancial ~~follows:~~statements.

	May 31, 2012		November 30, 2011
Ordos City YiYuan Investment Co., Ltd.	$	1,696,474	$	1,702,421
Hangzhou Dayuan Group, Ltd.		5,860,904		5,736,898
Inner Mongolia Duoyida Mining Co. Ltd.		2,056,644		2,013,393
Total	$	9,614,022	$	9,452,712

The Company was late in filing the information reports for the years ended November 30, 2004 through 2008 concerning its interest in foreign bank accounts on form TDF 90-22.1, “Report of Foreign Bank and Financial Accounts” (“FBARs”). For not complying with the FBAR reporting and recordkeeping requirements, the Company is subject to civil penalties up to $10,000 for each of its foreign bank accounts. The Company is unable to determine the amount of any penalties that may be assessed at this time and believes that penalties, if any, that may be assessed would not be material to the consolidated financial statements.

~~The stockholder loans are due on demand with interest as follows:~~23

	May 31, 2012			November 30, 2011
		Balance	Interest rate		Balance	Interest rate
Stockholder loans – interest bearing	$	6,940,519	5.31% and 7.32%	$	6,931,702	5.31	%
Interest payable		2,673,503			2,521,010
Total	$	9,614,022		$	9,452,712

ITEM 2.

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

~~5. Lease obligation~~Overview

~~The Company leases office space under an operating lease expiring December 31, 2015. The minimum future annual rent payments under the lease as of May 31, 2012 are as follows:~~ Segments

Year Ending	Annual
November 30,	Amount
2012	$	51,033
2013		102,066
2014		102,066
2015		102,066
2016		8,506
Total	$	365,737

We are structured as a holding company that controls our two PRC Operating Companies: Coal Group, which operates our coal segment, and Heat Power, which operates our heating and electricity service segment. Through Coal Group, we produce coal using the long-wall method of mining at the Laiyegou coal mine located in the Dongsheng coal field in the Dongsheng District of Ordos City, Inner Mongolia.

~~Rent~~Coal ~~expense~~Group ~~charged~~is tothe ~~operations~~major ~~for~~revenue and profit driver of the ~~three~~Company. ~~months~~For the nine-month periods ended ~~May~~August 31, 2012 and 2011, ~~was~~Coal ~~$25,737~~Group contributed 91.5% and ~~$23~~87.8% to our total revenue,~~105,~~ respectively, ~~and~~with ~~$51~~the balance attributable to Heat Power. For the three-month periods ended August 31,~~444~~ 2012 and 2011, ~~$45~~Coal Group contributed 98% and 98.6% to our total revenue,~~667~~ ~~for~~respectively, with the ~~six~~balance ~~months~~attributable ~~then~~to Heat Power. While ~~ended~~the sales prices of heat and electricity units generated by Heat Power are regulated by the government, ~~respectively~~sales prices of coal are market driven to a significant extent.

~~F-24~~In addition to directly selling coal from our mine location, Coal Group also buys, sells and transports coal as part of its expanding proprietary coal trading business. Each year, the PRC government regulates the amount of coal we and other coal producers are able to sell in the open market at the port in Qinhuangdao by allocating rail space to coal mines in Inner Mongolia to ship their coal to the port. In order to capitalize on excess quota for rail space that we may have from time to time, commencing in 2009, we began to buy excess coal from other coal producers in Inner Mongolia and then paid to have that coal delivered by rail from the other producer’s mine to the Qinhuangdao port.

~~CHINA~~The ~~ENERGY~~source ~~CORPORATION~~of ~~AND~~the coal sold by our trading ~~SUBSIDIARIES~~business is either from our Laiyegou coal mine or from other local coal producers. Our business of buying and re-selling coal expanded in 2010 as a result of our receipt of additional quota from the local railway bureaus. Due to the increased quota, we were able to trade more coal. Parties are awarded additional quotas based on their successful use of the quota in the previous year. Occasionally the government grants a discretionary increase in the quota depending upon business conditions. Our ability to use any or all of our quota of 770,000 metric tons in 2012 will vary with market conditions and depends on our ability to source commercially acceptable coal purchases and subsequent trades. The coal that we produce and sell directly to our customers is customarily transported at the buyer’s expense and, therefore, does not count against our rail space quota.

~~NOTES~~Through TOHeat ~~THE~~Power, ~~CONSOLIDATED~~we ~~FINANCIAL~~use our thermoelectric ~~STATEMENTS~~plant to generate and provide heating and electricity to residential and commercial customers throughout Xuejiawan, the administrative center of Zhunger, one of the seven counties of Ordos City. Coal Group does not sell any coal to Heat Power.

~~FOR~~Recent ~~THE~~Significant ~~THREE AND SIX MONTH PERIODS ENDED MAY 31, 2012 AND 2011~~Changes

~~(UNAUDITED)~~Through Coal Group, we produced and sold 62,216 tons and 706,990 tons of coal in the three and nine-month periods ended August 31, 2012, respectively, at our Laiyegou coal mine, representing a 82% and 23% decrease, respectively, over the same periods in 2011. For the three-month period ended August 31, 2012, our coal trading volume was 284,627 tons, a 53% decrease compared to the same period in 2011. However, for the nine-month period ended August 31, 2012, we traded 1,761,799 tons of coal, representing a 73% increase over the same period in 2011. The dramatic drops in our coal production and coal trading in the three-month period ended August 31, 2012 were due to a rapid decline in the demand for our coal and a dramatic deterioration of the overall coal market in China during the months of June and July. Due to market conditions, we closed our Laiyegou coal mine for most of June and July and only partially resumed production in August.

6.The ~~Other~~dramatic ~~payables~~decline in our coal sales and coal trading business during the third quarter was primarily caused by (i) increased competition from imported coal, (ii) a slowing Chinese domestic economy resulting in a decrease in electricity demand, and (iii) increased competition from other coal mines in the Inner Mongolia area which were able to increase their production as a result of, among other things, an improvement in coal mining exploration technologies.

~~Included~~During in2011, ~~other~~Heat ~~payables~~Power ~~are~~increased ~~advances~~its coverage area from a3,300,000 ~~family~~square ~~member~~meters to approximately 4,000,000 square meters due to the development of the ~~Company’s~~Xuejiawan ~~Chairman~~area. ~~totalling~~We ~~$4,710,759~~anticipate that ~~and~~the $4heat supply coverage area will increase to approximately 5,~~704~~000,~~775~~000 assquare ofmeters ~~May~~in 2012. For the nine-month period ended August 31, 2012, ~~and~~our ~~November~~electricity ~~30,~~sales ~~2011, respectively.~~decreased ~~These~~to ~~advances~~approximately ~~are~~76 ~~non-interest~~million ~~bearing~~kWh, ~~and~~representing ~~payable~~a on15% ~~demand.~~reduction Atas ~~May~~compared ~~31,~~to ~~2012~~the ~~and~~same ~~November~~nine-month ~~30,~~period in 2011,. ~~other~~The ~~payables~~decrease ~~amounted~~was primarily due to ~~$8,397,741~~the longer down time caused by necessary repairs and ~~$13,111,017,~~maintenance in ~~respectively~~the plant and unexpected down time during this period.

~~7. Advances to Suppliers~~24

AsOur isoverall ~~customary~~revenues infor ~~China~~the three months ended August 31, 2012 compared to the ~~Company~~same ~~has made~~period ~~advances~~in 2011 decreased 52% from $46,989,141 to ~~its~~$22,415,720. ~~suppliers~~The ~~for~~reduction in revenues was mainly caused by the drop in coal ~~purchases~~produced and sold during this period, ~~utility~~which ~~payments~~in ~~and~~turn ~~other~~was ~~purchases~~mainly caused by the deterioration of the overall coal market in China. AtOverall ~~May~~revenues for the nine months ended August 31, 2012 ~~and~~compared ~~November~~to ~~30,~~the ~~2011,~~same period in ~~advances~~2011 ~~amounted~~increased to43% from $42101,~~422~~533,~~506~~393 ~~and~~to $27146,~~566~~703,~~516, respectively~~801. ~~There~~This isincrease nowas ~~interest~~primarily due onto ~~these~~an ~~advances~~increase ~~and~~in ~~they~~coal ~~are~~production ~~offset~~and coal ~~against~~trading ~~billings~~during asthe ~~they~~first ~~are~~two ~~made~~quarters in 2012 partially offset by the ~~suppliers~~decrease in coal production and coal trading in the third quarter.

~~8. Other Receivables~~Seasonality

~~Other~~Coal ~~receivables~~Group ~~consist~~experiences lower sales volume in the first fiscal quarter of each year due to the ~~following:~~Chinese New Year holidays, when most businesses are closed. Heat Power provides heating from October 15th each year to April 15th of the next calendar year, resulting in higher sales and profit in the first fiscal quarter, lower sales in the second and fourth fiscal quarters and no sales from heating in the third fiscal quarter of each year.

	May 31, 2012		November 30, 2011
Loans to suppliers and other associated firms	$	6,827,329	$	20,499,415
Employee expense advances		584,802		739,596
Government subsidies receivable		5,789,166		2,368,440
Heat network access fee receivable		1,508,707		955,085
Rental fee receivable		32,032		-
Total	$	14,742,036	$	24,562,536

Results of Operations

~~Included~~Results ~~in loans to suppliers and other associated firms are advances to an entity affiliated to the Company through a family member~~ of ~~the~~Operations ~~Company’s~~– ~~Chairman totalling~~Three-Month ~~$3,151,396~~Period ~~and~~Ended ~~$752,380~~August ~~as of May~~ 31, 2012 and November 30, 2011, respectively. In addition, included in loans to suppliers and other associated firms is also an advance to one of Heat Power’s stockholders for fixed assets purchases of $1,190,855 as of May 31, 2012. Also included in loans to suppliers and other associated firms are advances to Heat Power’s Vice President and family members of the Company’s Chairman of $541,115 and $39,923 as of May 31, 2012 and November 30, 2011, respectively. These advances are non-interest bearing and payable on demand.

On a periodic basis, management reviews the other receivable balances and establishes allowances where there is doubt as to the collectability of the individual balances. In evaluating collectability of the individual balances, the Company considers factors such as the age of the balance, payment history, and credit-worthiness of the creditor. The Company considers all other receivables at May 31, 2012 and November 30, 2011 to be fully collectible and, therefore, did not provide for an allowance for doubtful accounts.Revenues

FThe following is an analysis of our revenues and gross profit, details and analysis of components of expenses and variance for the three-25month period ended August 31, 2012 compared to August 31, 2011:

CHINA ENERGY CORPORATION AND SUBSIDIARIES

Coal Group	Three-month period ended August 31,
	2012		% of Total Revenue			2011		% of Total Revenue

Revenues	$	21,973,581		98	%	$	46,324,632		99	%
Cost of revenues		18,558,403		83	%		29,844,246		64	%
Gross profit (loss)	$	3,415,178		15	%	$	16,480,386		35	%

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Heat Power	Three-month period ended August 31,
	2012			% of Total Revenue			2011			% of Total Revenue

Revenues	$	442,139			2	%	$	664,509			1	%
Cost of revenues		3,691,878			16	%		1,456,587			3	%
Gross profit	$	(3,249,739	)		(14	%)	$	(792,078	)		(2	%)

~~FOR THE THREE AND SIX MONTH PERIODS ENDED MAY 31, 2012 AND 2011~~25

~~(UNAUDITED)~~Coal Group

9For the three-month period ended August 31, 2012, revenues for the Coal Group were $21,973,581 compared to $46,324,632 in the comparable three-month period in 2011. ~~Fixed~~The $24,351,051 ~~Assets~~decrease was mainly due to the decrease in the volume of coal produced and sold at our Laiyegou coal mine and the decrease in the volume of our proprietary coal trading from the corresponding period in 2011.

Fixed assets are summarized as follows:

Coal Trading	Three-month period ended August 31,
	2012		% of Total Revenue			2011		% of Total Revenue

Revenues	$	18,946,012		85	%	$	27,377,611		58	%
Cost of revenues		17,609,830		79	%		23,990,511		51	%
Gross profit	$	1,336,182		6	%	$	3,387,100		7	%

	May 31, 2012			November 30, 2011
Coal Production	Three-month period ended August 31,
Buildings	$	10,773,691		$	10,777,208
	2012			% of Total Revenue			2011		% of Total Revenue
Machinery & equipment		39,823,597			43,845,438
Revenues	$	3,027,569			13	%	$	18,947,021		41	%
Transferred assets (a)		27,939,435			19,702,907
Cost of revenues		948,573			4	%		5,853,735		13	%
Automotive equipment		2,015,929			1,953,696
Gross profit	$	2,078,996			9	%	$	13,093,286		28	%
Office Equipment		1,419,612			1,379,812
Construction in progress		2,934,268			2,819,194
		84,906,532			80,478,255
Accumulated depreciation		(21,195,389	)		(17,540,508	)
Fixed assets, net	$	63,711,143		$	62,937,747

~~(a)~~The ~~Real~~Coal ~~estate~~Group ~~with~~produced ~~equipment~~62,216 ~~subject~~metric tons of coal during the three-month period ended August 31, 2012, compared to 352,231 metric tons in the ~~finance~~comparable ~~obligation~~period asin ~~described~~2011, an 82% decrease. The volume of coal sold by our proprietary trading business was 349,797 metric tons during the three-month period ended August 31, 2012, compared to 603,981 metric tons in ~~Note~~the 11comparable ~~under~~period ~~“Finance~~in ~~Obligation~~2011, a 42% decrease.” We currently anticipate that the annual production volume for the fiscal year ending November 30, 2012 will decrease from that of 2011.

~~Depreciation~~Heat ~~expense charged to operations for the three months ended May 31, 2012 and 2011 was $1,673,277 and $1,380,039, and was $3,666,296 and $2,635,493 for the six months then ended, respectively.~~Power

~~Land~~For ~~use~~the ~~rights~~three-month ofperiod ~~$245,630~~ended ~~and $245,318~~August ~~at May~~ 31, 2012, ~~and~~revenues ~~November~~for ~~30,~~Heat ~~2011~~Power were $442,139 ~~respectively~~compared to $664,509 ~~are~~in ~~included~~the comparable period in ~~buildings~~2011. ~~and~~The ~~are~~decrease ~~depreciated~~was ~~over~~primarily due to the ~~useful~~longer ~~lives~~down ~~along with~~time caused by necessary repairs and maintenance in the ~~related~~plant ~~buildings~~and unexpected down time during this period.

~~10.~~Cost ~~Short~~of ~~Term Bank Loans~~Revenues

~~The~~For ~~Company has~~the ~~bank~~three-month ~~loans~~period ~~collateralized~~ended byAugust 31, ~~investment~~2012, ~~property~~cost ~~and~~of ~~guaranteed~~revenues decreased by a$9,050,552 ~~related~~from ~~party. Relevant~~the ~~terms~~comparable ofperiod ~~these~~in ~~bank~~2011, ~~loans~~as ~~are~~a asresult ~~follows~~of changes in the following expenses:

	May 31, 2012		November 30, 2011
	Three-month period ended August 31,
Bank loan due 1/17/12, with interest at 6.94% (a)	$	-	$	12,546,068
	2012		2011			Variance
Bank loan due 1/17/12, with interest at 6.94% (b)		-		8,782,247
Coal and freight	$	19,268,902	$	29,901,963		$	(10,633,061	)
Bank loan due 7/28/12, with interest at 7.22% (a)		7,819,860		7,809,927
Heat resource rental		--		(1,416,563	)		1,416,563
Bank loan due 12/14/12, with interest at 7.22% (b)		12,562,025		-
Depreciation and depletion		1,366,021		1,210,053			155,968
Bank loan due 1/12/13, with interest at 7.22% (b)		9,421,519		-
Operating supplies		333,012		881,081			(548,069	)
Total	$	29,803,404	$	29,138,242
Utilities		289,696		390,765			(101,069	)
Salaries		390,536		293,919			96,617
Repairs		404,656		125,963			278,693
Other		197,458		(86,348	)		283,806
Total	$	22,250,281	$	31,300,833		$	(9,050,552	)

FFor the three-26month period ended August 31, 2012, our overall gross margin was 1% compared with 33% in the 2011 comparable period. The decrease in gross margin was due to the dramatic drop of coal produced and sold and the volume of coal traded during the period while our costs to maintain coal production and trading operations did not drop as much proportionally.

~~CHINA ENERGY CORPORATION AND SUBSIDIARIES~~26

~~NOTES~~Coal TOand ~~THE~~freight. ~~CONSOLIDATED~~Coal ~~FINANCIAL~~and freight ~~STATEMENTS~~costs are comprised of (i) the production costs of the Laiyegou coal mine; (ii) the cost of coal purchased in the coal trading business; and (iii) cost of coal consumed by Heat Power. The decrease of these costs was mainly due to (i) the decreased production cost which dropped in line with the production volume, and (ii) the decreased coal purchases in connection with our coal trading business. The volume of coal sold at the Laiyegou coal mine and that sold by our proprietary trading business decreased by 82% and 53%, respectively, for the corresponding period in 2011.

~~FOR~~Heat ~~THE~~resource ~~THREE~~rental. ~~AND~~Since ~~SIX~~we ~~MONTH~~do not ~~PERIODS~~supply ~~ENDED MAY~~heat 31during this fiscal quarter, ~~2012~~we ~~AND~~did ~~2011~~not incur costs for heat resource rental.

~~(UNAUDITED)~~Depreciation and depletion. The increase in depreciation and depletion was mainly due to the expanded heating supply coverage area and the corresponding construction of additional pipelines.

~~(a)~~Operating ~~Loan~~Supplies. The reduction in operating supplies was mainly due to ~~Coal~~(i) ~~Group,~~the ~~collateralized~~much bylower ~~mining~~volume ~~rights~~of coal produced at our Laiyegou coal mine, and (ii) the ~~real~~longer breaking-down ~~estate~~periods ~~properties~~for repairs and maintenance of ~~Coal~~our ~~Group~~power plant, during which periods the need for operating supplies is substantially or completely eliminated.

~~(b)~~Utilities. ~~Loan~~The reduction in utilities was primarily due to ~~Coal~~the ~~Group,~~same ~~collateralized by~~reasons ~~mining~~as ~~rights~~those ofcaused ~~Coal~~the ~~Group~~reduction in operating supplies.

Salaries. At ~~May 31, 2012,~~ the ~~Company~~beginning ~~had~~of athe fiscal ~~letter~~year, ofwe ~~intent~~had ~~with~~an aoverall ~~bank~~increase toin ~~provide~~ the ~~Company~~salaries ~~an additional line~~ of ~~credit~~all ~~of RMB 10~~employees.~~2 million (US$1,601,658).~~

11Repairs. ~~Finance~~The ~~Obligations~~increase in repairs was primarily due to the major repairs to the power plant that were carried out in June and July this year. The plant is about ten years old and is entering into a period when major repairs are expected.

OnSelling ~~March 31, 2011, Heat Power entered into a Finance Leasing Contract (“Contract 1”) with a leasing company covering its thermoelectric plants, heat transfer stations,~~ and ~~related~~Marketing machinery and equipment (“Transferred Assets 1”), having a gross value of RMB 125,635,589 (US$19,392,298). Pursuant to Contract 1, Heat Power sold to the leasing company its Transferred Assets 1 used for its operation in exchange for RMB 60,000,000 (US$9,261,260) in cash. Under Contract 1, Heat Power leased back the Transferred Assets 1 with a quarterly installment payment of RMB 3,555,163 (US$548,755) until April 2016, when Contract 1 expires. Contract 1 is guaranteed by Coal Group and an unrelated third party. Upon the repayment of all outstanding rental obligations, Heat Power may re-purchase the Transferred Assets 1 at a purchase price of RMB 900,000, or RMB 1 if Heat Power timely pays the quarterly installments. Upon the execution of Contract 1, Heat Power paid a servicing fee of RMB 3,300,000 (US$502,337) and a refundable deposit of RMB 9,000,000 (US$1,389,189) to the leasing company. Expenses

OnFor ~~March~~the ~~28, 2012,~~three-month ~~Heat~~period ~~Power~~ended ~~entered into another Finance Leasing Contract (“Contract 2”) with~~August ~~a leasing company related to its thermoelectric plants~~31, ~~heat transfer stations~~2012, ~~and~~selling ~~machinery~~ and ~~equipment~~marketing ~~(“Transferred Assets~~expenses ~~2”),~~decreased ~~with~~by ~~a gross value of RMB 52,293,912 (US~~$81,~~211~~443,~~468).~~395 ~~Pursuant~~compared to ~~Contract 2, Heat Power sold to~~ the ~~leasing~~ ~~company~~same ~~its~~period ~~Transferred Assets 2 used for its operation~~ in ~~exchange~~2011 ofdue ~~RMB~~primarily ~~48,000,000 (US$7,537,215)~~to ~~in cash. Under Contract 2, Heat Power leased back the Transferred Assets 2 with~~ a ~~quarterly installment payment~~decrease ofin ~~RMB~~transportation ~~2,868,777~~and ~~(US$450,471)~~storage ~~until~~expenses ~~April~~and ~~2017,~~sales ~~when~~taxes ~~Contract~~which 2in ~~expires.~~turn ~~Contract~~were 2mainly iscaused ~~guaranteed~~ by ~~Coal Group and an unrelated third party. Upon~~ the ~~repayment~~reduction ofin ~~all~~coal ~~outstanding~~produced ~~rental~~and ~~obligations, Heat Power may re-purchase~~sold ~~the~~by ~~Transferred~~our ~~Assets~~Laiyegou 2coal atmine aand ~~purchase~~coal ~~price~~sold ofby ~~RMB~~our ~~720,000,~~proprietary orcoal ~~RMB~~trading ~~1 if Heat Power timely pays the quarterly installments~~division. ~~Included in the amount borrowed is a servicing fee of RMB 2,400,000 (US$379,897) and a refundable deposit of RMB 9,600,000 (US$1,507,443).~~

Since Heat Power has the option to repurchase its Transferred Assets, Heat Power is considered to have “continuing involvement” pursuant to ASC 840-40, “Sales-Leaseback Transactions” (ASC 840-40). Accordingly, the lease did not qualify as a normal sale-leaseback transaction and is being accounted for under the financing method in which Heat Power reports the sales proceeds as a finance obligation, continues to report the Transferred Assets as its assets, and continues to depreciate the Transferred Assets. The lease payments are being recognized under the interest method. The effective interest rate of these transactions are 6.70% and 7.05% for Contract 1 and Contract 2, respectively.

	Three-month period ended August 31,
	2012		2011		Variance
Transportation and storage	$	742,971	$	1,884,658	$	(1,141,687	)
Sales tax and other expenses		224,180		590,485		(366,305	)
Office		94,233		91,931		2,302
Salaries and welfares		119,523		58,188		61,335
Depreciation		7,407		6,447		960

Total	$	1,188,314	$	2,631,709	$	(1,443,395	)

~~F-27~~General and Administrative Expenses

~~CHINA~~For ~~ENERGY~~the ~~CORPORATION~~three-month ~~AND~~period ended August ~~SUBSIDIARIES~~31, 2012, general and administrative expenses increased by $1,213,256 as a result of the changes in the following expenses:

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

	Three-month period ended August 31,
	2012		2011		Variance
Professional and other fees	$	240,407	$	224,119	$	16,288
Salaries and wages		385,410		258,571		126,839
Office		286,866		184,616		102,250
Travel		85,920		148,157		(62,237	)
Depreciation		183,625		131,352		52,273
Repairs		277,999		16,032		261,967
Inventory price drop reserve		666,262		--		666,262
Tax		164,987		--		164,987
Other		71,871		187,243		(115,372	)

Total	$	2,363,346	$	1,150,090	$	1,213,257

~~FOR~~Repairs. ~~THE~~The ~~THREE~~increase ~~AND~~in ~~SIX~~repairs was ~~MONTH~~mainly ~~PERIODS~~due ~~ENDED~~to the major repairs to the power plant that were carried out in June and July this year. The plant is approximately ~~MAY~~ten ~~31,~~years ~~2012~~old ~~AND~~and ~~2011~~is entering into a period when major repairs are expected.

~~(UNAUDITED)~~Salaries and wages. At the beginning of the fiscal year, we had an overall increase of the salaries of all employees.

~~Future~~Inventory ~~payments~~price ofdrop ~~these~~reserve. ~~finance obligations~~We asbooked ofthis ~~May~~reserve ~~31,~~during the third quarter of 2012 ~~are~~due asto ~~follows:~~the dramatic price decrease in coal during the quarter.

Year Ending
November 30,	Amount
2012	$	2,012,487
2013		4,034,885
2014		4,034,885
2015		4,034,885
Thereafter		3,814,370
		17,931,512
Less: amount representing interest		2,615,406
Finance obligations		15,316,106
Less: current portion of finance obligations		3,059,834
Finance obligation, net of current portions	$	12,256,272

Interest Expenses

~~Interest~~For ~~expense for~~ the ~~finance obligations amounted to US$285,622 and US$106.821 for the~~ three-month ~~months~~periods ended ~~May~~ August 31, 2012 and ~~May~~August 31, 2011, ~~and~~ interest expenses amount to $~~485~~889,~~570~~720 and $~~106~~754,~~821 for the six months then ended~~114, respectively. The ~~refundable~~increase ~~deposits~~was ~~are included~~mainly indue ~~other~~to ~~long term assets in~~ the rise ~~consolidated~~of ~~balance~~interest ~~sheets~~rates asper ofannum ~~May~~from ~~31, 2012~~6.6% ~~The costs related~~ to ~~these Contracts of RMB~~ 7~~,200,000 (US$1,130,582) are being amortized by the interest method over the life of the leases~~.2%.

~~12. Rental Income~~27

~~The~~Results ~~Company~~of ~~entered~~Operations ~~into~~– ~~rental agreements~~Nine-Month ~~with~~Period ~~various~~Ended ~~unrelated~~August ~~parties~~31, ~~to lease commercial space in its building under operating leases expiring through 2015.~~2012

~~Future minimum rental income as of May 31, 2012 is as follows:~~Revenues

Year Ending
November 30,	Amount
2012	$	137,186
2013		239,042
2014		227,265
2015		40,643
	$	644,136

The following is an analysis of our revenues and gross profits, details and analysis of components of expenses and variance for the nine-month period ended August 31, 2012 compared to August 31, 2011:

F-28

Coal Group	Nine-month period ended August 31,
	2012		% of Total Revenue			2011		% of Total Revenue
Revenues	$	132,291,778		90	%	$	88,822,809		88	%
Cost of revenues		101,981,433		70	%		54,375,846		54	%
Gross profit	$	30,310,345		21	%	$	34,446,963		34	%

CHINA ENERGY CORPORATION AND SUBSIDIARIES

Heat Power	Nine-month period ended August 31,
	2012			% of Total Revenue			2011			% of Total Revenue
Revenues	$	14,412,023			10	%	$	12,710,584			12	%
Cost of revenues		16,446,349			12	%		12,851,876			13	%
Gross profit	$	(2,034,326	)		(1	)%	$	(141,292	)		(1	)%

~~NOTES~~Coal ~~TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Group

~~FOR~~For ~~THE~~the ~~THREE~~nine-month ~~AND~~period ~~SIX~~ended ~~MONTH~~August 31, ~~PERIODS~~2012, ~~ENDED~~revenues for the Coal Group were $132,291,778 compared to $88,822,809 in the comparable period in 2011. The $43,468,969 ~~MAY~~increase was mainly due to the increase in our proprietary trading of coal by 741,219 tons, a 73% increase of volume compared to the same period in 2011. However, the increase in revenues brought by the increased volume of coal traded by our proprietary coal trading business was partly offset by the decrease in the volume of coal produced and sold at our Laiyegou coal mine from the corresponding period in 2011. For the nine months ended August 31, 2012, ~~AND~~our Laiyegou coal mine produced and sold 706,990 metric tons of coal, a 23% decrease compared to the same period in 2011.

(UNAUDITED)

Coal Trading	Nine-month period ended August 31,
	2012		% of Total Revenue			2011		% of Total Revenue
Revenues	$	100,949,451		69	%	$	49,780,937		49	%
Cost of revenues		89,213,208		61	%		40,855,430		40	%
Gross profit	$	11,736,243		8	%	$	8,925,507		9	%

Rental income, under operating leases, included in non-operating income in the consolidated statements of income and other comprehensive income for the three months ended May 31, 2012 and 2011 was $70,190 and $130,072, respectively and was $140,798 and $218,440 for the six months then ended, respectively. The related rent receivable of $32,032 at May 31, 2012 is included in other receivables on the consolidated balance sheets.

Coal Production	Nine-month period ended August 31,
	2012		% of Total Revenue			2011		% of Total Revenue
Revenues	$	31,342,327		21	%	$	39,041,872		39	%
Cost of revenues		12,768,225		9	%		13,520,416		14	%
Gross profit	$	18,574,102		13	%	$	25,521,456		25	%

13The Coal Group produced approximately 706,990 metric tons of coal during the nine-month period ended August 31, 2012 compared to 806,439 metric tons for the comparable period in 2011. ~~Government~~The ~~Subsidies~~volume of coal sold by our proprietary trading business was approximately 1,761,799 metric tons during the nine-month period ended August 31, 2012 compared to 1,020,580 metric tons for the comparable period in 2011. We currently anticipate that the annual production volume for the fiscal year ending November 30, 2012 will decrease from that of 2011 by a substantial amount.

~~Government subsidies are primarily comprised of financial support provided by the local government to~~ Heat Power to ensure supply of heat to the XueJiaWan area as the price for heat charged is regulated and approved by the government. The financial support includes revenue subsidies to compensate for lower government regulated prices charged for heat and cost subsidies for the purchase of coal used in providing heat. Government subsidies are intended to be an incentive for Heat Power to supply heat at the government regulated prices. Government subsidies amounted to $1,667,764 and $391,034 for the three months ended May 31, 2012 and 2011, respectively and were $2,973,407 and $391,034 for the six months then ended, respectively. During the period ended May 31, 2012, Coal Mine also received subsidies from the Government totalled of $756,597.

For the nine-month period ended August 31, 2012, revenues for Heat Power were $14.,412,023 ~~Income~~compared ~~Taxes~~to $12,710,584 in the comparable period in 2011.

The Company is required to file income tax returns in both the United States and the PRC. Its operations in the United States have been insignificant and income taxes have not been provided or accrued. In the PRC, the Company files tax returns for Heat Power and 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 the PRC permit the carryforward of net operating losses for a period of five years. As of November 30, 2011, the PRC entities had no net operating losses available for future use which was confirmed by the local taxing authority.28

~~Under~~For ~~ASC~~the ~~740,~~nine-month ~~recognition~~period ofended ~~deferred~~August ~~tax~~31, ~~assets~~2012, isrevenues ~~permitted~~generated ~~unless~~by itHeat isPower ~~more~~from ~~likely~~its ~~than~~electricity ~~not~~operations ~~that~~were ~~the~~$2,800,732 ~~assets~~compared ~~will~~to ~~not~~$3,099,907 bein ~~realized.~~the ~~There are no deferred tax assets~~comparable orperiod ~~liabilities~~in ~~as of May 31, 2012 and November 30,~~ 2011.

~~The~~For ~~following~~the ~~tables~~nine-month ~~reconcile~~period ~~the~~ended ~~effective~~August 31, ~~income~~2012, ~~tax~~revenues ~~rate with~~generated ~~the~~by ~~statutory~~Heat ~~rate~~Power ~~for~~from its heating supply operations were $9,460,661 compared to $9,610,677 in the ~~periods~~comparable period ~~presented:~~in 2011.

Three months ended May 31, 2012	Tax Provision			Rate of Tax
As calculated at the statutory rate	$	4,230,880			25.0	%
Non deductible expenses		364			0	%
Tax effect of loss of subsidiaries		(156,294	)		(0.92	)%
Tax effect of eliminated intercompany profit		(243,319	)		(1.44	)%
Effective tax rate	$	3,831,631			22.64	%

Cost of Revenues

FFor the nine-29month period ended August 31, 2012, the cost of revenues increased by $51,200,060 from the comparable period in 2011, as a result of changes in the following expenses:

CHINA ENERGY CORPORATION AND SUBSIDIARIES

	Nine-month period ended August 31,
	2012		2011		Variance
Coal and freight	$	104,991,803	$	56,496,521	$	48,495,282
Depreciation and depletion		5,134,136		3,922,769		1,211,367
Utilities		5,278,550		4,167,144		1,111,406
Operating supplies		923,597		1,182,301		(258,704	)
Salaries		1,068,697		1,026,013		42,684
Repairs		651,254		211,439		439,815
Other		379,745		221,564		158,181

Total	$	118,427,782	$	67,227,722	$	51,200,060

~~NOTES~~For TOthe ~~THE~~nine-month ~~CONSOLIDATED~~period ~~FINANCIAL~~ended August ~~STATEMENTS~~31, 2012, our overall gross margin was 19% compared with 34% in the 2011 comparable period. The decrease in gross margin was mainly due to the increase in the costs of coal and freight because our proprietary coal trading business increased its portion in our overall operations.

~~FOR~~Coal ~~THE~~and ~~THREE~~freight. ~~AND~~Coal ~~SIX~~and ~~MONTH~~freight costs ~~PERIODS~~are ~~ENDED~~comprised of (i) the production costs of the Laiyegou coal mine; (ii) the cost of coal purchased in the coal trading ~~MAY~~business; ~~31,~~and ~~2012~~(iii) ~~AND~~the ~~2011~~cost of coal consumed by Heat Power. The increase of these costs was mainly due to the increase in the volume of coal sold by the proprietary trading business by 73%.

~~(UNAUDITED)~~Depreciation and depletion. Increase in depreciation and depletion was mainly due to our expanded heating supply area requiring us to build more pipelines to supply heat to these areas. With increased fixed assets, our depreciation and depletion costs increased accordingly.

Three months ended May 31, 2011	Tax Provision		Rate of Tax
As calculated at the statutory rate	$	1,639,724		25.0	%
Tax effect of loss of subsidiaries		86,978		1.3	%
Tax effect of eliminated intercompany profit (loss)		1,044,892		15.9	%
Effective tax rate	$	2,771,594		42.2	%

Utilities. The increase was mainly caused by the expansion of our heat supply area and the rising cost of water used to support our operations.

Six months ended May 31, 2012	Tax Provision			Rate of Tax
As calculated at the statutory rate	$	6,178,691			25.0	%
Non deductible expenses		1,214			0	%
Tax effect of loss of subsidiaries		(85,185	)		(0.34	)%
Tax effect of eliminated intercompany profit		(774,060	)		(3.13	)%
Tax at effective tax rate	$	5,320,660			21.53	%

Repairs. The increase in the costs of repairs was mainly caused by the major repairs and maintenance items done to our power plant, which is about ten years old and on schedule to have major repairs and services.

Six months ended May 31, 2011	Tax Provision		Rate of Tax
As calculated with statutory rate	$	3,057,242		25.0	%
Tax effect of loss of subsidiaries		12,136		0.1	%
Tax effect of eliminated intercompany profit (loss)		1,008,076		8.2	%
Effective tax rate	$	4,077,454		33.3	%

Selling Expenses

~~The~~For ~~Company~~the ~~has~~nine-month ~~adopted~~period ~~Financial~~ended ~~Accounting~~August ~~Standards~~31, ~~Board Interpretation No. 48~~2012, ~~“Accounting~~selling ~~for~~expenses ~~Uncertainty~~increased inby ~~Income Taxes — an interpretation of SFAS 109.” (“FIN 48”)~~$1,480,508 as ~~codified~~compared into ~~ASC 740. ASC 740 addresses~~ the ~~determination~~same ofperiod ~~whether tax benefits claimed or expected to be claimed on a tax return should be recorded~~ in ~~the~~2011 ~~financial~~because ~~statements.~~of ~~Under ASC 740,~~ the ~~Company~~expanding ~~may~~proprietary ~~recognize~~coal ~~the~~trading ~~tax~~business benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in ~~the financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement~~2012. ASC 740 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 for the periods presented.

F-30

	Nine-month period ended August 31,
	2012		2011		Variance
Transportation and storage	$	2,898,463	$	3,432,309	$	(533,846	)
Sales tax and other expenses		2,793,024		1,399,364		1,393,660
Office		452,438		210,463		241,975
Salaries and welfares		539,146		166,278		372,868
Depreciation		24,948		19,097		5,851

Total	$	6,708,019	$	5,227,511	$	1,480,508

~~CHINA ENERGY CORPORATION AND SUBSIDIARIES~~29

~~NOTES~~Transportation TOand ~~THE~~storage. Overall transportation ~~CONSOLIDATED~~and ~~FINANCIAL~~storage costs are down for the 9 months ended August 31, 2012. The decrease was mainly due to the fact that ~~STATEMENTS~~we used less storage at Qinhuangdao port and increased the volume of direct sales to customers. Direct sales require less storage since the coal is generally shipped directly to the customer.

~~FOR~~Sales ~~THE~~tax ~~THREE~~and ~~AND~~other ~~SIX~~expenses. ~~MONTH~~The increase ~~PERIODS~~in ~~ENDED MAY~~overall ~~31,~~sales ~~2012~~tax ~~AND~~and ~~2011~~other expenses was due to the increase in the volume of coal sold through our proprietary coal trading business.

~~(UNAUDITED)~~Office. During this period, we made extensive repairs to our office spaces. We also replaced office furniture and equipment that were due to be replaced. We also added new office space for a new sales division in our coal trading business.

~~The~~Salaries ~~Company~~and ~~did not file its U~~welfares.S. federal income tax returns, including, without limitation, information returns on Internal Revenue Service (“IRS”) Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations” for the years ended November 30, 2002 through 2005. The ~~Company was also late~~ increase in ~~filing~~salaries ~~for the years ended November 30, 2007~~ and ~~2008.~~welfares ~~Failure~~was tomainly ~~furnish~~caused ~~any information return with respect to any foreign business entity required, within the time prescribed~~ by ~~the~~(i) ~~IRS,~~an ~~subjects~~overall ~~the~~increase ~~Company to~~in ~~certain~~salaries ~~civil penalties. The Company is unable to determine the amount~~ of ~~any~~all ~~penalties~~employees ~~that may be assessed~~ at ~~this~~the ~~time.~~beginning ~~Management is~~ of the ~~opinion that penalties~~fiscal year, ifand ~~any,~~(ii) ~~that~~the ~~may~~creation beof ~~assessed~~a ~~would~~new ~~not~~sales bedivision ~~material~~in toour ~~the~~coal ~~consolidated~~trading ~~financial statements~~business.

InGeneral addition, because the Company did not generate any income in the United States or otherwise have any U.S. taxable income, the Company does not believe that it owes U.S. federal income taxes in respect to any transactions that the Company or any of its subsidiaries may have engaged in through May 31, 2012. However, there can be no assurance that the IRS will agree with the position, and ~~therefore~~Administrative ~~the Company ultimately could be held liable for U.S. federal income taxes, interest and penalties. The tax years ended November 30, 2002 to 2011 remain open to examination by tax authorities.~~Expenses

~~15.~~For ~~Stock~~the nine-~~Based~~month ~~Compensation~~period ended August 31, 2012, general and administrative expenses increased by approximately $1,380,377 as a result of changes in the following expenses:

	Nine-month period ended August 31,
	2012		2011		Variance
Professional and other fees	$	1,452,539	$	806,983	$	645,556
Salaries and wages		1,005,885		787,207		218,678
Office		995,642		554,564		441,078
Depreciation		478,245		336,854		141,391
Travel		395,018		295,882		99,136
Repairs		364,952		61,881		303,071
Inventory price drop reserve		668,801				668,801
Stock based compensation		4,857		1,533,906		(1,529,049	)
Other		647,838		256,124		391,714

Total	$	6,013,778	$	4,633,401	$	1,380,377

OnProfessional ~~September 5, 2011, the Company granted additional options to two of its three independent directors to purchase 20,000 shares of common stock~~ and ~~options to purchase 15,000 shares to the~~ other ~~independent director all at an exercise price of US$0~~fees.39 ~~per share.~~ The increase ~~options vest over one year~~ in ~~equal,~~ ~~quarterly~~professional ~~instalments~~fees onwas ~~the~~mainly ~~last~~due ~~day~~to of the ~~Company’s~~costs ~~fiscal~~associated ~~quarter, beginning~~ with the ~~fiscal~~services ~~quarter~~that ~~ending~~our ~~August 31,~~Laiyegou ~~2011,~~coal ~~subject~~mine toand ~~their~~Heat ~~continued~~Power incurred ~~service~~ as a ~~director.~~result ~~The~~of ~~Compensation~~an ~~Committee~~environmental ofimpact ~~the~~evaluation ~~Board~~and ofconsultation ~~Directors~~required ~~has~~by ~~determined~~ the ~~performance conditions have been met~~government.

~~The~~Office. ~~fair~~During ~~value~~this ofperiod, ~~the~~we ~~options is estimated~~made ~~using~~extensive ~~the~~repairs ~~Black-Scholes~~to ~~option~~our ~~pricing~~office ~~model~~spaces. ~~Expected~~We ~~volatility~~also isreplaced ~~based~~office onfurniture ~~historical volatility data of the Company’s stock. The expected term of stock options granted is based on historical data~~ and ~~represents~~equipment ~~the period of time~~ that ~~stock~~were ~~options are~~due ~~expected~~ to be ~~outstanding~~replaced. ~~The~~We ~~risk-free~~also ~~interest rate is based on a zero-coupon United States Treasury bond whose maturity~~added ~~period~~new ~~equals~~office ~~the~~space ~~expected term of the options. The weighted average estimated grant date fair value~~ for ~~options~~a ~~granted~~new ~~to the~~sales ~~independent~~division ~~directors~~in ~~was~~our ~~US$1.24~~coal ~~per~~trading ~~share~~business.

~~Weighted~~Inventory ~~average~~price ~~assumptions~~drop ~~used~~reserve. ~~to estimate~~We booked this reserve during the ~~fair~~third ~~value~~quarter of ~~stock~~2012 ~~options~~due onto the ~~date~~dramatic ofprice ~~grant~~decrease ~~are~~in ascoal ~~follows:~~during the quarter.

	September 5, 2011
Expected dividend yield		-
Expected stock price volatility		182.07	%
Risk free interest rate		2.00	%
Expected life (years)		10 years

Interest Expenses

FFor the nine-month periods ended August 31, 2012 and August 31, 2011, interest expenses amounted to $2,591,401 and $1,706,818, respectively. Interest expense increased mainly because of (i) the rise of interest rates per annum from 6.6% to 7.2%, and (ii) the Finance Leasing Contract entered into by Heat Power with a leasing company during this period. Interest expense related to the finance obligation amounted to approximately $2.7 million and $ 1.7 million the nine months ended August 31, 2012 and August 31, 2011, respectively.

~~CHINA ENERGY CORPORATION AND SUBSIDIARIES~~30

~~NOTES~~Liquidity TOand ~~THE~~Capital ~~CONSOLIDATED FINANCIAL STATEMENTS~~Resources

~~FOR~~As ~~THE~~of ~~THREE~~August ~~AND~~31, ~~SIX~~2012, ~~MONTH~~we ~~PERIODS~~had ~~ENDED~~a working ~~MAY~~capital 31surplus of $34,721,241, ~~2012~~compared ~~AND~~with a working capital surplus of $23,522,306 as of November 30, 2011. The improvement of liquidity was mainly due to the reduction in coal inventory, especially during the third fiscal quarter.

~~(UNAUDITED)~~We anticipate that the combination of our sales and collection of accounts receivables with our longer accounts payable cycle, customer deposits and proceeds from bank and shareholder loans will generate sufficient cash flow to sustain our working capital needs.

	May 31, 2010
Expected dividend yield		-
Expected stock price volatility		210.57	%
Risk free interest rate		3.29	%
Expected life (years)		10 years

Sources of Capital

~~The~~If ~~stock-based~~additional capital needed is in excess ~~compensation~~of our current capital resources, ~~included~~we inwill ~~general~~explore ~~and~~financing ~~administrative~~options ~~expenses~~such inas ~~the~~stockholder ~~accompanying~~loans. ~~consolidated~~Stockholder ~~statements~~loans ofhave ~~income~~been ~~and~~granted ~~comprehensive~~from ~~income,~~time-to-time ~~was~~as ~~$1,457~~required to meet current working capital needs. We have no agreement that ensures that we will receive such loans and ~~$7,832~~we ~~for~~cannot be certain that loans will be made available to us if or when required. We may exhaust this source of funding ~~the~~at ~~three~~any ~~month~~time. ~~periods~~Existing ~~ended~~stockholder ~~May~~loans ~~31,~~are ~~2012~~payable on demand and ~~2011,~~accrue ~~respectively~~interest ~~and~~of ~~$4,857~~5.31% and ~~$26,106~~7.32% per annum. The outstanding ~~for~~balance ~~the~~of ~~six~~our ~~months~~stockholder ~~then~~loans ~~ended~~as of August 31, ~~respectively.~~2012 was $6,962,384.

The ~~Company~~outstanding ~~will~~balances ~~issue~~and ~~new~~interest ~~shares of common~~rates ~~stock upon exercise~~ of ~~stock~~short-term ~~options.~~bank ~~The~~loans ~~following~~at isAugust a31, ~~summary~~2012, ofwere ~~option~~as ~~activity for the Company’s stock options~~follows:

	Options				Weighted Average Exercise Price				Weighted- Average Remaining Contractual Life			Aggregate Intrinsic Value
Bank Name	Due Date		Principal				Interest Rate				Security
Outstanding at November 30, 2010		60,000			$	2.02				8 years			-
Agricultural Bank of China	December 14, 2012		$	12,601,601				7.22	%		Secured
Granted		55,000				0.39				10 years			-
Agricultural Bank of China	January 12, 2013			9,451,200				7.22	%		Secured
Exercised		-				-				-			-
Cancelled and expired		-				-				-			-
Forfeited		-				-				-			-
Outstanding at November 30, 2011		115,000			$	1.24				9 years			-
Vested and expected to vest at May 31, 2012		100,000			$	1.37				9 years			-
Exercisable at May 31, 2012		100,000			$	1.37				9 years			-

~~The~~Cash aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock. There were no options that were exercised during the three and six month periods ended May 31, 2012 and 2011.Flows

~~F-32~~Operating Activities:

~~CHINA~~Cash ~~ENERGY~~provided ~~CORPORATION~~by ~~AND~~operating activities was ~~SUBSIDIARIES~~$10,846,154 for the nine-month period ended August 31, 2012, as compared to cash used in operating activities of $10,038,217 for the nine-month period ended August 31, 2011. The following summarizes the inflow and outflow of cash for these periods:

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

	Nine-month period ended August 31,
	2012			2011
Net income	$	8,933,118		$	16,313,374
Depreciation and amortization		6,265,683			4,475,517
(Increase) in restricted cash		(5,149	)		(26,642	)
Decrease (Increase) in accounts receivable		6,802,815			(5,308,874	)
Decrease in other receivables		11,111,056			1,478,748
(Increase) in advance to suppliers		(10,478,598	)		(28,231,613	)
(Increase) in prepaid expenses		(14,226	)		(418,317	)
(Increase) in inventories		(3,756,969	)		(15,911,961	)
Increase in deferred income		222,178			46,030
(Decrease) Increase in accounts payable		(6,545,672	)		2,255,462
Increase in advances from customers		2,379,736			13,327,031
(Decrease) Increase in accrual liabilities and other payables		(5,040,807	)		383,860
Other		981,989			1,579,168

Net cash (used in)/provided by operating activities	$	10,846,154		($	10,038,217	)

~~FOR~~Accounts ~~THE~~receivable. ~~THREE~~The ~~AND~~decrease in ~~SIX~~accounts ~~MONTH~~receivable ~~PERIODS~~is ~~ENDED MAY~~mainly ~~31,~~attributable ~~2012~~to ~~AND~~the ~~2011~~decrease of Coal Group’s receivables in the third fiscal quarter.

~~(UNAUDITED)~~Other receivables. Other receivables decreased mainly because the repayment of loans made to suppliers during the nine month period.

~~There is no unrecognized compensation costs related to these options as of May~~ 31~~, 2012.~~

~~The~~Advance ~~Company~~to ~~entered into a Terms of Services~~suppliers. Advances ~~and~~increased ~~Release~~for ~~Agreement with~~ the ~~Company’s~~purchase ~~CEO,~~of acoal ~~consulting firm,~~ and ~~Fortune~~freight ~~Place~~from ~~Holdings~~third ~~Limited~~party ~~(“Fortune Place”)~~suppliers, a ~~British~~along ~~Virgin~~with ~~Islands corporation. The Company’s CEO is~~ the ~~sole~~increase ~~director~~ of ~~Fortune~~sales ~~Place.~~volume ~~Pursuant to the terms of the agreement, the consulting firm would be entitled to receive equity consideration of 1,800,000 restricted shares of the Company held~~ by ~~Fortune~~our ~~Place for consulting services rendered to the Company, contingent upon the completion of all of the consulting~~coal ~~services~~trading ~~enumerated in the agreement~~business. The filing of the Company’s Form 10-Q for the quarter ended February 28, 2011 represented the final item of the consulting services that the consulting firm was required to complete (“Completion Date”). As of the Completion Date, the fair value of shares transferred for the services rendered to the Company was valued at $1,386,000.

~~The~~Inventory. ~~Company~~Inventory ~~issued~~mainly ~~60,000~~consists of ~~share~~coal offor ~~common stock~~trading topurposes. anOur ~~investor~~coal ~~relations~~trading ~~firm~~business involume ~~consideration~~increased ~~for~~from ~~consulting~~1,020,580 ~~services~~metric ~~rendered~~tons ~~through~~in the ~~period~~first ~~ended~~nine onmonths ~~March~~of 2011 14to 1,761,799 ~~2011~~metric tons during the first nine months of 2012. Normally we need to maintain a high level of inventory balance ~~The~~to ~~fair~~assure ~~value~~the stability of our coal trading business but due to the ~~stock~~dramatic ~~was~~deterioration ~~$121~~of the overall coal market in China,~~800~~ we reduced the level of our coal inventory to minimize our exposure to the further decline in the market price of coal.

16Accounts payable. ~~Contingencies~~Our account payable decreased mainly due to the volume of coal that we purchased and sold through our trading division decreased dramatically during the third quarter.

AsAdvances isfrom ~~customary~~customers. Advances on insales ~~the~~of ~~PRC,~~coal ~~except~~represent ~~for auto~~the ~~coverage,~~majority ~~Coal~~of ~~Group~~customer advances received and ~~Heat~~it ~~Power~~is doa ~~not~~normal ~~carry~~business ~~sufficient~~practice ~~insurance.~~that Asensures athat ~~result,~~the customer obtains Coal Group’s products at the ~~Company~~market isprice ~~effectively~~determined ~~self-insuring~~ on the ~~risk~~date of ~~potential~~purchase. ~~accidents~~Coal orGroup’s ~~loss~~advances decreased ~~that~~during ~~could~~the ~~occur~~third infiscal ~~the~~quarter ~~workplace.~~of ~~Given~~2012 ~~the~~as ~~nature~~a result of ~~the~~fewer ~~industry,~~orders for the ~~Company~~period. ~~may~~The ~~be exposed~~level toof ~~risks~~advances ~~that~~fluctuates depending ~~could~~upon ~~have~~how aquickly ~~material~~Coal ~~adverse~~Group ~~impact~~delivers oncoal ~~its~~to ~~consolidated financial statements~~customers.

~~The~~Accrued ~~PRC~~liabilities ~~has~~and ~~enacted~~other ~~legislation~~payables. ~~which~~These ~~appears~~include toaccruals ~~restrict~~made ~~the~~for ~~ability~~loan ofinterest, ~~entities~~repairs ~~considered~~and ~~foreign,~~maintenance ~~like~~of ~~the~~heating ~~Company~~plants, tolabor ~~have~~costs, ~~ownership~~union ~~interests~~fees, insocial ~~operating~~insurance, ~~companies located~~technical intraining ~~the~~for ~~PRC~~our employees. The ~~Company~~decrease ~~has~~in ~~taken~~accrued ~~steps~~liabilities toand ~~avoid~~other ~~any~~payables ~~potential~~was ~~adverse~~primarily ~~impact~~due ofto ~~this~~a ~~legislation.~~significant ~~(See~~tax payment ~~Note~~and 1)customer loan repayments during the period.

AsInvesting disclosed in note 14, the Company was delinquent in filing certain tax returns with the U.S. Internal Revenue Service. The Company filed the delinquent returns and sought waivers of any penalties under the IRS 2011 Offshore Voluntary Disclosure Initiative. Under the program, the IRS has indicated that it will not impose a penalty for the failure to file delinquent information returns (Form 5471) if there are no underreported tax liabilities and the information returns are filed by August 31, 2011. The Company is unable to determine the amount of any penalties that may be assessed at this time. Management is of the opinion that penalties, if any, that may be assessed would not be material to the consolidated financial statements.Activities:

~~The~~Cash ~~Company~~used ~~was late~~ in ~~filing~~investing ~~the~~activities ~~information reports~~was $5,912,717 for the ~~years~~nine-month period ended ~~November~~August 3031, ~~2004~~2012 ~~through~~compared ~~2008~~to ~~concerning~~cash ~~its~~provided ~~interest~~by ininvesting ~~foreign~~activities ~~bank~~of ~~accounts~~$7,688,223 onfor ~~form~~the ~~TDF 90~~nine-~~22.1,~~month ~~“Report~~period ofended ~~Foreign~~August ~~Bank~~31, ~~and Financial Accounts” (“FBARs”)~~2011. ~~For~~The ~~not~~change ~~complying~~was ~~with~~mainly ~~the~~due ~~FBAR~~to ~~reporting and recordkeeping requirements,~~ the ~~Company~~collection isof ~~subject~~notes toreceivable ~~civil~~for ~~penalties~~loans made up to ~~$10,000~~related ~~for~~parties ~~each~~ of ~~its foreign bank accounts~~$14. ~~The~~7 ~~Company~~million isin ~~unable to determine~~ the ~~amount~~first half of ~~any~~2011. ~~penalties~~Cash ~~that~~used ~~may~~in beinvesting ~~assessed~~activities atfor ~~this~~the ~~time~~nine ~~and~~months ~~believes~~ended August ~~that penalties~~31, ~~if any,~~2012 ~~that~~was ~~may~~mainly befor ~~assessed~~purchase ~~would~~of ~~not~~property, beand ~~material to the consolidated financial statements~~equipment.

~~F-33~~Financing Activities:

~~ITEM~~Cash 2used in financing activities was $3,184,097 for the nine-month period ended August 31, 2012 compared to cash provided by financing activities of $23,144,944 for the nine-month period ended August 31, 2011.~~MANAGEMENT’S~~ ~~DISCUSSION~~On ~~AND~~March ~~ANALYSIS~~28, OF2012, Heat ~~FINANCIAL~~Power entered ~~CONDITION~~into ~~AND~~a ~~RESULTS~~finance OFleasing contract ~~OPERATIONS~~with a leasing company in which the Company pledged certain assets to the leasing company in exchange for $7,157,318 which included a refundable deposit of $1,507,443. Net proceeds from finance obligation were $5,710,602.

~~Overview~~The outstanding balances and interest rate of shareholder loans at August 31, 2012 were as follows:

We are structured as a holding company that controls our two PRC Operating Companies: Coal Group, which operates our coal segment, and Heat Power, which operates our heating and electricity service segment. Through Coal Group, we produce coal using the longwall method of mining at the Laiyegou coal mine located in the Dongsheng coal field in the Dongsheng district of Ordos City, Inner Mongolia.

	Balance		Interest Rate
Hangzhou Dayuan Group, Ltd.	$	5,890,982	5.31% and 7.32%
Inner Mongolia Duoyida Mining Co., Ltd.		2,083,644	5.31%
Ordos City YiYuan Investment Co. Ltd.		1,769,018	5.31%

Total	$	9,743,644

~~Coal~~Seasonal Group is the major revenue and profit driver of the Company. For the six month periods ended May 31, 2012 and 2011, Coal Group contributed 88% and 78% to our total revenue, respectively, with the balance attributable to Heat Power. For the three month periods ended May 31, 2012 and 2011, Coal Group contributed 93% and 81% to our total revenue, respectively, with the balance attributable to Heat Power. While the sales prices of heat and electricity units generated by Heat Power are regulated by the government, sales prices of coal are market driven to a significant extent. Therefore, Coal Group enjoys a higher gross margin.Aspects

~~In addition to directly selling coal from our mine location,~~ Coal Group also buys, sells and transports coal as part of its expanding proprietary coal trading business. Each year the PRC government regulates the amount of coal we and other coal producers are able to sell in the open market at the port in Qinhuangdao by allocating rail space to coal mines in Inner Mongolia to ship their coal to the port. In order to capitalize on excess quota for rail space that we may have from time to time, commencing in 2009, we began to buy excess coal from other coal producers in Inner Mongolia and then paid to have that coal delivered by rail from the other producer’s ~~mine to the Qinhuangdao port. The source of the coal sold by our trading~~ business is ~~either from~~seasonal ~~the~~as ~~Laiyegou~~sales ~~coal~~are ~~mine~~particularly orlow ~~from other local coal producers. Our business of buying and re-selling coal expanded~~ in ~~2010 as a result of our receipt of additional quota from~~ the ~~local~~first ~~railway~~quarter ~~bureau. Due to the increased quota, we were able to trade more coal. Parties are awarded additional quotas based on their successful use~~ of the ~~quota in the previous~~ year~~. Our official confirmed quota increased 760~~,~~000~~ ~~metric~~due ~~tons~~to ~~in 2011 from 660,000 metric tons in 2010, and maintained at~~ the ~~same~~Chinese ~~level~~New inYear ~~2012~~holiday. In ~~addition,~~During ~~occasionally~~this ~~the government grants a discretionary increase in the quota depending upon business conditions. We believe that~~time, ~~given the demand for coal and~~ our ~~past track record of successfully filling our extra quota, we will be able to grow our coal trading~~ business ~~through increased quotas granted to~~ us by the local railway bureau; however, our ability to use any or all of our quota in 2012 will vary with market conditions and depends on our ability to source commercially acceptable coal purchases and subsequent trades. Coal that we produce and sell directly to our customers is ~~customarily~~closed ~~transported~~for atabout ~~the~~two ~~buyer’s expense and therefore does not count against our quota~~weeks.

~~Through~~Heat ~~Coal~~Power ~~Group,~~heating wesales ~~produced~~decrease ~~and sold 428,269 and 644,774~~from ~~metric~~April ~~tons~~through ofOctober ~~coal~~as in the ~~three~~climate ~~month and six periods ended May 31, 2012 at our Laiyegou coal mine, representing a 33% and 42% increase, respectively, over the same periods~~ in ~~2011.We increased our coal trading volume by selling 903,087 and 1,187,627 tons of coal in~~ the ~~three~~region ~~and~~is ~~six month periods ended May 31~~warm, ~~2012,~~reducing ~~representing~~heating ~~a 376% and 211% increase, respectively, over the same periods in 2011~~requirements. Going forward, we plan to leverage on the rich coal reserve in Inner Mongolia and acquire coal mine(s) if we can locate acceptable targets at reasonable prices, while continuing to increase our trading volume. We expect Coal Group to continue to be the key growth factor of the Company.

Through Heat Power, we use our thermoelectric plant to generate and provide heating and electricity to residential and commercial customers throughout Xuejiawan, the administrative center of Zhunger, one of the seven counties of Ordos.32

~~During~~ITEM ~~2011, Heat Power increased its coverage area from approximately~~ 3~~,300,000 square meters to approximately 4,000,000 square meters due to the development of the Xuejiawan area~~. ~~For~~ ~~the three~~QUANTITATIVE ~~month~~AND ~~period~~QUALITATIVE ~~ended~~DISCLOSURE ~~May~~ABOUT ~~31,~~MARKET ~~2012, we decreased electricity sales to approximately 25~~RISK.~~5 million kWh, representing a 31% decrease as compared to the same period of 2011.~~

3Not applicable to smaller reporting companies.

~~Seasonality~~ITEM 4. CONTROLS AND PROCEDURES.

~~Coal Group experiences lower sales volume in the first fiscal quarter of each year due to the Chinese New Year holidays, when most businesses are closed~~A. ~~Heat~~Evaluation ~~Power provides heating from October 15th each year to April 15th~~ of ~~the~~Disclosure ~~next~~Controls ~~calendar year, resulting in higher sales~~ and ~~profit in the first fiscal quarter, lower sales in the second and fourth fiscal quarter, and no sales from heating in the third fiscal quarter of each year~~Procedures.

~~Results~~As of ~~Operations~~the end of the fiscal quarter covered by this report, our management carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). 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 Securities and Exchange Commission’s rules and forms. As a result of outstanding significant weaknesses in internal controls over financial reporting, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were ineffective.

~~Results~~B. ofChanges ~~Operations~~in –Internal ~~Three~~Controls ~~Months~~Over ~~Ended~~Financial ~~May 31, 2012~~Reporting.

~~Revenues~~In connection with the evaluation of the Company’s internal controls during the quarter ended August 31, 2012, the Company’s principal executive officer and principal financial officer have determined that there are no changes to the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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 May 31, 2012 compared to the same period in 2011:33

Coal Group

Three Months Ended May 31,

PART II. OTHER INFORMATION

% of total

ITEM 1.

LEGAL PROCEEDINGS

2012

revenue

2011

revenue

None.

Revenues

80,178,867

26,241,752

ITEM 1A.

RISK FACTORS

Cost of revenues

60,729,053

15,694,770

Not applicable to smaller reporting companies.

Gross Profit

19,449,814

10,546,982

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

(a)

Exhibits

Heat Power		Three Months Ended May 31,
Exhibit No.	Document Description
				% of total				% of total
31.1	Certification of Chief Executive Officer (Principal Executive Officer) pursuant to Rules 13a-14(a) and15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
		2012		revenue		2011		revenue
31.2	Certification of the Chief Financial Officer (Principal Financial Officer) pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Revenues		$	6,361,220		7	$	5,949,771		19
32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
Cost of revenues			4,989,761		6		5,878,133		18
Gross Profit		$	1,371,459		1	$	71,638		1

~~Coal Group~~34

For the three months ended May 31, 2012, revenues for Coal Group were $80,178,867 compared to $26,241,752 in the comparable three months in 2011. The $53,937,115 increase was mainly due to the increase of in the volume of coal produced and sold at our Laiyegou coal mine and the increase in our proprietary trading business by 33% and 376%, respectively from the corresponding period in 2011.SIGNATURES

Coal Trading	Three Months Ended May 31,
			% of total				% of total
	2012		revenue		2011		revenue
Revenues	$	55,024,850		64	$	12,777,727		39
Cost of revenues		52,762,935		61		10,334,633		32
Gross Profit	$	2,261,915		3	$	2,443,094		7

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 date indicated.

Coal Production		Three Months Ended May 31,
	CHINA ENERGY CORPORATION
				% of total				% of total
Date: November 20, 2012	By:	/s/ Wenxiang Ding
		2012		revenue		2011		revenue
		Wenxiang Ding,
Revenues		$	25,154,017		29	$	13,464,025		42
		President, Chief Executive Officer,
Cost of revenues			7,966,118		9		5,360,137		17
		Director and Secretary
Gross Profit		$	17,187,899		20	$	8,103,888		25
	By:	/s/ Fu Xu
		Fu Xu,
		Acting Chief Financial Officer

Coal Group produced approximately 428,269 metric tons of coal during the three months ended May 31, 2012, compared to 321,826 metric tons in the comparable three months in 2011. Volume of coal sold by our proprietary trading business was approximately 903,087 metric tons during the three months ended May 31, 2012 as compared to 189,577 metric tons during the three months ended May 31, 2011. The increase in coal production volume in the second quarter was mainly due to permission granted by local government to increase the coal volume which is allowed to be produced and sold by the Company since the third quarter of 2011. Coal Group was selected by the Inner Mongolia Autonomous Region Coal Industry Bureau as one of the 44 major coal enterprises in the Inner Mongolia region to be promoted by the Inner Mongolia Government. The Company believes that this governmental decision to promote the Company is the reason behind the Company being permitted to produce and sell more coal than previously allowed.35

Heat Power

For the three months ended May 31, 2012, revenues for Heat Power were $6,361,220 as compared to $5,949,771 in the comparable three months in 2011.

For the three months ended May 31, 2012, revenues generated by Heat Power from its electricity operations were $1,039,778 compared to $1,263,767in the comparable three month period in 2011. Our revenue during the second quarter from our electricity operations was as follows:

Electricity Revenue for the Quarter Ended May 31,

					Units of
					power
					supplied				Revenue
	Unit Price* ($/kWh)				(1000kWh)				($)
Period	2012		2011		2012		2011		2012		2011		Variance
March		0.04		0.03		8,924		12,298		363,495		420,462		(56,967	)
April		0.04		0.03		7,177		13,029		292,359		445,472		(153,113	)
May		0.04		0.03		9,425		11,636		383,924		397,833		(13,909	)
Total						25,526		36,963		1,039,778		1,263,767		(223,989	)

For the three months ended May 31, 2012, revenues generated by Heat Power from its heating supply operations were $5,321,442 compared to $4,686,004 in the comparable three month period in 2011. The $635,438 increase was due to the expansion of heating supply area from approximately 3.3 million square meters to approximately 4.0 million square meters. Our revenue during the second quarter in 2012 from our heating supply operations were as follows:

Heating Revenue for the Quarter Ended May 31,

	Unit Price				Area (‘000)
	($/sq meters				sq meters					Revenue
	/month)				range)					($)
User	2012		2011		2012		2011			2012		2011			Variance
Residential	0.41		0.39		2,690		2,133		*	2,525,957		1,526,501			999,456
Non-residential		0.69		0.65		1,326		1,178	*		1,884,318		2,768,469			(884,151	)
Total						4,016		3,311			4,410,275		4,294,970	**		115,305

* Adjustment to revenue was made in the second quarter of 2011 to reflect the actual heating supply area verified by the local authority after the end of the 2010-2011 heating season.

** Government subsidies amounting to $911,167 and $391,034 in three months ended May 31, 2012 and 2011, respectively, to compensate for lower regulated residential heat price and non-residential heat prices was not included in this table.

Cost of Sales

For the three months ended May 31, 2012, cost of sales increased to $65,718,814, as compared to $21,572,903 in the comparable three months in 2011, as a result of changes in the following expenses:

	Three Months Ended May 31,
	2012		2011		Variance
Coal & freight	$	61,713,048	$	16,362,752	$	45,350,296
Depreciation & amortization		1,781,408		1,456,901		324,507
Heat resource rental		1,045,951		2,760,995		(1,715,044	)
Utilities		617,064		380,389		236,675
Operating supplies		222,492		135,040		87,452
Salaries and welfares		204,472		398,546		(194,074	)
Repairs		38,558		63,839		(25,281	)
Other		95,821		14,441		81,380
Total	$	65,718,814	$	21,572,903	$	44,145,911

For the three months ended May 31, 2012 our overall gross margin was 24% compared to 33% in the comparable three month period in 2011. The decrease in our overall gross profit margin was primarily attributable to the fact that Coal Group purchased more coal from third parties for its coal trading business during the first half year of 2012, which was less profitable than coal purchased from our Laiyegou coal mine in terms of gross margin.

Coal & freight: Coal & freight costs are comprised of (i) the production costs of the Laiyegou coal mine; (ii) the cost of coal purchased in the coal trading business and (iii) cost of coal consumed by Heat Power. The increase of these costs was mainly due to (i) increased production cost which rose in line with the production volume, and (ii) increased coal purchases in connection with our coal trading business.

Depreciation and amortization: The increase in depreciation and amortization was mainly due to the expanded heating supply area. We constructed more pipelines to supply heat to these areas. The increase in depreciation & amortization was also attributable to the increase of production volume in our Laiyegou coal mine.

Heat resource rental: The decrease in heat resource rental costs was mainly due to extremely higher costs accrued during the three months period ended May 31, 2011. However, we adjusted the heat resource rental fee in the third quarter of 2011 to reflect the actual cost confirmed by the supplier after the end of 2010-2011 heating season.

Utilities: Utilities mainly represented the cost of electricity consumed by heat transfer stations of Heat Power. Increase in utility costs was in line with the expanded heating supply area.

Salaries and welfares. Decrease in salaries and welfares was mainly due to the reversal of over accrued employee benefits, union fees and employee education expenses amounting to approximately $265,000. However, this decrease is mitigated by the 20% increase in pay to employees and additions to the Heat Power employee headcount.

Selling Expenses

For the three months ended May 31, 2012, selling expenses increased by $855,552 compared to the same period in 2011.

	Three Months Ended May 31,
	2012		2011		Variance
Transportation & Storage	$	1,191,736	$	748,700	$	443,036
Sales tax and other expenses		696,791		484,387		212,404
Office		178,800		55,684		123,116
Salaries and welfares		131,270		56,825		74,445
Depreciation		8,951		6,400		2,551
Total	$	2,207,548	$	1,351,996	$	855,552

Transportation & storage: Transportation & storage expenses increased as we expanded our proprietary coal trading business. Such expenses are expected to increase in line with coal trading volume.

Sales tax and other expenses. Increase in sales tax and other expenses was mainly due to the increase in volume of coal produced and sold by our Laiyegou coal mine and sold by the proprietary trading business by 33% and 376%, respectively from the corresponding period in 2011.

General and Administrative Expenses

For the three months ended May 31, 2012, general and administrative expenses decreased by $440,643 as a result of changes in the following expenses:

	Three Months Ended May 31,
	2012		2011		Variance
Professional and other fees	$	892,751	$	254,600	$	638,151
Office		306,255		104,703		201,552
Salaries and welfares		245,718		277,589		(31,871	)
Travel		164,433		51,965		112,468
Depreciation		127,143		115,297		11,846
Repairs		40,087		21,403		18,684
Tax		10,376		16,501		(6,125	)
Stock options		1,457		1,509,815		(1,508,358	)
Other		137,318		14,308		123,010
Total	$	$1,925,538	$	2,366,181	$	(440,643	)

Professional and other fees. Increase in professional and other fees was mainly due to the accrual of environmental protection fees for the Laiyegou coal mine and Heat Power amounting to $0.7 million in the second fiscal quarter of 2012.

Office. The increase in office expenses was mainly attributable to (i) conference and accommodation fees for 2011 annual meeting incurred in this quarter amounting to approximately $40,000; (ii) increased fuel cost in line with the climbing gasoline and diesel prices amounting to approximately $60,000; (iii) property insurance premiums amounting to approximately $40,000; and (iv) miscellaneous office charge increases in line with the business volume amounting to approximately $60,000.

Stock options. Stock-based compensation incurred in 2011 was mainly due to the transfer of 1,800,000 shares beneficially owned by Mr. Ding, Chairman of the Company, to Jessie International Inc. (“Jessie”), and issuance of 60,000 new shares to Hayden Communication International (“HCI”), for consulting service and IR services provided by them for the Company. Shares transferred/issued to Jessie and HCI were valued at approximately $1.4 million and $0.1 million, respectively. Such expenses were non-cash, one time, share-based payments.

Interest Expense

For the second quarter in 2012 and 2011, interest expenses amounted to $900,049 and $628,762, respectively. Interest expense increased mainly because of the rise of interest rates per annum from 6.6% to 7.2%, and (ii) the Finance Leasing Contract entered into by Heat Power with a leasing company in this quarter. Interest expense related to the finance obligation amounted to approximately US$0.3 million and US$0.1 million for the three months ended May 31, 2012 and May 31, 2011, respectively.

Results of Operations – Six Months Ended May 31, 2012

Revenues

The following is an analysis of our revenues and gross profit, details and analysis of components of expenses, and variances; for the six months ended May 31, 2012 compared to May 31, 2011:

Coal Group	Six Months Ended May 31,
			% of total				% of total
	2012		Revenue		2011		revenue
Revenues	$	110,318,197		88	$	42,498,177		78
Cost of revenues		78,099,193		62		24,531,600		45
Gross Profit	$	32,219,004		26	$	17,966,577		33

Heat Power	Six Months Ended May 31,
			% of total				% of total
	2012		Revenue		2011		revenue
Revenues	$	14,909,041		12	$	12,046,075		22
Cost of revenues		12,754,471		10		11,395,289		21
Gross Profit	$	2,154,570		2	$	650,786		1

Coal Group

For the six months ended May 31, 2012, revenues for the Coal Group were $110,318,197 compared to $42,498,177 in the comparable six months in 2011. The $67,820,020 increase was mainly due to the increase of in the volume of coal produced and sold at our Laiyegou coal mine and the increase in our proprietary trading business by 42% and 211%, respectively compared to the corresponding period in 2011.

Coal Trading	Six Months Ended May 31,
			% of total				% of total
	2012		revenue		2011		revenue
Revenues	$	70,488,672		56	$	22,403,326		41
Cost of revenues		66,279,541		53		16,864,919		31
Gross Profit	$	4,209,131		3	$	5,538,407		10

Coal Production	Six Months Ended May 31,
			% of total				% of total
	2012		revenue		2011		revenue
Revenues	$	39,829,525		32	$	20,094,851		37
Cost of revenues		11,819,652		9		7,666,681		14
Gross Profit	$	28,009,873		23	$	12,428,170		23

Coal Group produced approximately 644,774 metric tons of coal during the six months ended May 31, 2012, compared to 454,209 metric tons for the comparable six months in 2011. Volume of coal sold by our proprietary trading business was approximately 1,187,627 metric tons during the six months ended May 31, 2012, compared to 381,843 metric tons for the comparable six months in 2011.

Heat Power

For the six months ended May 31, 2012, revenues for Heat Power were $14,909,041 compared to $12,046,075 in the comparable six months in 2011.

For the six months ended May 31, 2012, revenues generated by Heat Power from its electricity operations were $2,326,862 compared to $2,437,896 in the comparable six month period in 2011.

For the six months ended May 31, 2012, revenues generated by Heat Power from its heating supply operations were $12,582,179 compared to $9,608,179 in the comparable six month period in 2011. The $2,974,000 increase was mainly due to the expansion of the heating supply area from approximately 3.3 million square meters to approximately 4.0 million square meters.

Cost of Sales

For the six months ended May 31, 2012, cost of sales increased by $54,926,775 from the comparable six months in 2011, as a result of changes in the following expenses:

	Six Months Ended May 31,
	2012		2011		Variance
Coal & freight	$	80,399,064	$	26,594,558	$	53,804,506
Heat resource rental		3,916,369		4,371,783		(455,414	)
Depreciation & amortization		3,768,115		2,712,716		1,055,399
Utilities		1,072,485		821,130		251,355
Salaries		678,161		732,094		(53,933	)
Operating supplies		590,585		301,220		289,365
Repairs		246,598		85,476		161,122
Other		182,287		307,912		(125,625	)
Total	$	90,853,664	$	35,926,889	$	54,926,775

For the six months ended May 31, 2012 our overall gross margin was 26% compared with 33% in the 2011 comparable six month period. The decrease in our overall gross profit margin was primarily attributable to the fact that Coal Group purchased more coal from third parties for its coal trading business during the first half year of 2012, which was less profitable than coal purchased from our Laiyegou coal mine in terms of gross margin.

Coal and freight. Coal and freight costs are comprised of (i) the production costs of the Laiyegou coal mine; (ii) the cost of coal purchased in the coal trading business; and, (iii) cost of coal consumed by Heat Power. The increase of these costs was mainly due to (i)increased production cost which rose in line with the production volume, and (ii) increased coal purchases in connection with our coal trading business.

Heat resource rental. The decrease in heat resource rental costs was mainly due to extremely higher costs accrued during the six months period ended May 31, 2011. However, we adjusted the heat resource rental fee in the third quarter of 2011 to reflect the actual cost confirmed by the supplier after the end of 2010-2011 heating season.

Depreciation and amortization. Increase in depreciation and amortization was mainly due to expanded heating supply area. We constructed more pipelines to supply heat to these areas. The increase in depreciation & amortization was also attributable to the increase of production volume in our Laiyegou coal mine.

Utilities. Utilities mainly represented the cost of electricity consumed by heat transfer stations of Heat Power. Increase in utility costs was in line with the expanded heating supply area.

Operating supplies. The increase in operating supplies was from the increase of the volume of limestone used in our heating supply business. We needed to mix raw coal with limestone to reduce sulfur emission. The volume of limestone used in the heating supply business increased in line with our growing heating service coverage area.

Selling Expenses

For the six months ended May 31, 2012, selling expenses increased by $2,923,903 as compared to the same period in 2011. Selling expenses are expected to increase in line with the expanding proprietary coal trading business and production volume of our Laiyegou coal mine in 2012.

	Six Months Ended May 31,
	2012		2011		Variance
Transportation & Storage	$	2,153,099	$	1,547,651	$	605,448
Sales tax and other expenses		2,572,227		808,879		1,763,348
Office		357,881		118,532		239,349
Salaries and welfares		419,012		108,090		310,922
Depreciation		17,486		12,650		4,836
Total	$	5,519,705	$	2,595,802	$	2,923,903

General and Administrative Expenses

For the six months ended May 31, 2012, general and administrative expenses increased by $167,122 as a result of changes in the following expenses:

	Six Months Ended May 31,
	2012		2011			Variance
Professional and other fees	$	1,214,221	$	582,864		$	631,357
Office		709,437		369,948			339,489
Salaries and welfares		620,538		528,636			91,902
Travel		309,537		147,725			161,812
Depreciation		294,647		205,502			89,145
Tax		269,837		96,282			173,555
Repairs		86,103		45,849			40,254
Stock options		4,857		1,528,089			(1,523,232	)
Other		141,255		(21,584	)		162,839
Total	$	3,650,432	$	3,483,311		$	167,121

Professional and other fees. Increase in professional and other fees was mainly due to accrual of environmental protection fee for the Laiyegou coal mine and Heat Power amounting to $0.7 million in the second fiscal quarter of 2012.

Office. The increase in office expenses was mainly attributable to (i) purchase of stationery which could be used for a long period; (ii) purchase of personal care items for all labors; and (iii) increased fuel cost amounting to $0.1 million in line with the climbing gasoline and diesel prices.

Tax. Tax expenses increased mainly attributable to the payment of urban land taxes on the goaf area of our Laiyegou coal mine for the past three years.

Stock-based compensation incurred in 2011 was mainly due to the transfer of 1,800,000 shares beneficially owned by Mr. Ding, Chairman of the Company, to Jessie International Inc. (“Jessie”), and issuance of 60,000 new shares to Hayden Communication International (“HCI”), for consulting and IR services provided by them for the Company. Shares transferred/issued to Jessie and HCI were valued at approximately $1.4 million and $0.1 million, respectively. Such expenses were non-cash, share-based payments.

Interest Expense

For the six months ended May 31, 2012 and May 31, 2011, interest expenses amounted to $1,701,681 and $949,704, respectively. Interest expense increased mainly because of (i) the rise of interest rates per annum from 6.6% to 7.2%, and (ii) the Finance Leasing Contract entered into by Heat Power with a leasing company in this quarter. Interest expense related to the finance obligation amounted to approximately US$0.5 million and US$0.1 million the six months ended May 31, 2012 and May 31, 2011, respectively.

Liquidity and Capital Resources

As of May 31, 2012 we had a working capital of $46,363,846. We anticipate that the combination of our sales and collection of accounts receivables with our longer accounts payable cycle, customer deposits and proceeds from bank and shareholder loans will generate sufficient cash flow to sustain our working capital needs. It is our view that, many of our current liabilities, which are included in the definition of working capital, do not impose strict and time sensitive cash repayment terms on us. For example, advances from customers to be repaid in coal (which we believe will be readily available), current portion of deferred income (which is the portion of pipeline construction reimbursement, already received by us) and shareholder loans (which we believe will not be called by a shareholder at a time adverse to the Company) amount to an aggregate of $28,001,449 of our current liabilities.

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 in excess of our current capital resources, we will explore financing options such as shareholder loans and bank loans. Shareholders loans have been granted from time to time as required to meet current working capital needs. We have no agreement that ensures that we will receive such loans and we cannot be certain that loans will be made available to us if or when required. We may exhaust this source of funding at any time. Existing shareholder loans are payable on demand and accrue interest at 5.31% and 7.32% per annum. The outstanding balance of our shareholder loans as of May 31, 2012 was $9,614,022.

The outstanding balances and interest rate of short-term bank loans obtained by the Company at May 31, 2012, were as follows:

Bank name

From

Principal

Interest rate

Security

Agricultural Bank of China

Jul.29, 2011

Jul.28, 2012

5,338,860

7.216

Secured

Agricultural Bank of China

Sep.20, 2011

Jul.28, 2012

1,570,253

7.216

Secured

Agricultural Bank of China

Sep.27, 2011

Jul.28, 2012

910,747

7.216

Secured

Agricultural Bank of China

Dec.15, 2011

Dec.14, 2012

12,562,025

7.216

Secured

Agricultural Bank of China

Jan.13, 2012

Jan.12, 2013

9,421,519

7.216

Secured

Cash Flows

Operating Activities:

Our cash flows provided by operating activities was $2,109,829 as compared to cash flows used in operating activities of $17,584,723 for the six months ended May 31, 2011. The following summarizes the inflow and outflow of cash for these periods:

	Six Months Ended May 31,
	2012			2011
Net income	$	19,394,102		$	8,151,513
Depreciation and amortization		4,354,907			3,007,127
(Increase) in restricted cash		(2,289	)		(15,879	)
(Increase) in accounts receivable		(11,285,310	)		(7,743,155	)
Decrease in other receivables		9,820,500			2,091,373
(Increase) in prepaid expenses		(381,079	)		-
(Increase) in advances to suppliers		(13,761,483	)		(15,461,740	)
(Increase) in inventories		(10,445,600	)		(8,923,265	)
(Increase) in other long term assets		-			(3,593,056	)
Increase in deferred income		796,179			100,248
Increase in accounts payable		1,197,528			1,646,061
Increase in advances from customers		6,578,320			1,806,317
(Decrease) in accrued liabilities and other payables		(4,371,685	)		(319,752	)
Others		215,739			1,669,885
Net cash provided by (used in) operating activities	$	2,109,829		$	(17,584,323	)

Accounts receivable. The increase in accounts receivable is mainly attributable to Coal Group’s receivables amounting to $7.2 million. This increase is in line with the expanded proprietary coal trading volume of 211% in the first half of 2012 as compared to the same period in 2011. The increase in accounts receivable was also due to the increase in Heat Power’s user fees made on account amounting to approximately $4.0 million, which increased in line with the heating supply area. The heating season is from October 15, 2010 to April 15, 2011. However, user fees will usually be collected after the end of current heating season.

Other receivables. The decrease in other receivables was mainly due to the repayment of loans made to suppliers in the first half of 2012.

Advance to suppliers. Advances increased for the purchase of coal and freight from third party suppliers, along with the increase of sales volume. The significant increase in volume of coal produced and sold by Coal Group was mainly due to the permitted increase in coal which was allowed to be produced and sold by the Company. Coal Group was selected by the Inner Mongolia Autonomous Region Coal Industry Bureau as one of the 44 major coal enterprises in the Inner Mongolia region to be promoted by the Inner Mongolia government. The Company believes that this decision to promote the Company is the reason behind the Company being permitted to produce and sell more coal than previously allowed. Our operating assets, especially advances to suppliers, increased in line with the increase in our coal trading business since 2011.

Inventory. Inventory mainly consists of coal for trading purposes. We have received more railway transportation quota this year. Our coal trading business volume was increased from 381,843 metric tons in the first half year of 2011 to 1,187,627 metric tons in the first half year of 2012. In order to assure the stability of the coal trading business, we maintained a higher level of inventory balance as compared to the prior year.

Accounts payable. As discussed above, our operating assets and liabilities, including accounts payable, rose in line with the expanding coal production and trading business.

Advances from customers. Advances on sales of coal represent the majority of customer advances received and it is a normal business practice that ensures that the customer obtains Coal Group’s products at the market price determined on the date of purchase. Coal Group’s advances increased during the first half year of 2012 as a result of more orders as of the last several days of the period. The level of advances fluctuates depending upon how quickly Coal Group delivers coal to customers.

Accrued liabilities and other payables. These amounts consist of accruals made for loan interest, repairs and maintenance of heating plants, labor costs, union fees, social insurance, technical training for our employees, etc. Decrease in accrued liabilities and other payables was mainly due to (i) payment of tax of $1.1 million and (ii) repayment of loans from customers of $3.1 million.

Investing Activities:

Cash flows used in investing activities were $4,157,641 for the six months ended May 31, 2012 as compared to cash flows provided by investing activities of $10,277,768 for the six months ended May 31, 2011 as the collection of notes receivable, represented amounts lent for strategic purposes to related parties affiliated to the Company through family members of the Chairman, of $14.7 million, in the first half year of 2011. Notes receivable were fully repaid in cash during 2011. Cash flow used in investing activities were mainly for purchase of property, plants, and equipments.

Financing Activities:

Our cash flows provided by financing activities were $5,454,598 for the six months ended May 31, 2012 as compared to $25,234,403 for the six months ended May 31, 2011. Cash flow provided by financing activities were mainly proceeds from finance obligations. On March 28, 2012, Heat Power entered into a Finance Leasing Contract with a leasing company to pledge its assets in exchange of RMB 48,000,000 (US$7,537,215) in cash. Included in the amount borrowed is a servicing fee of RMB 2,400,000 (US$379,897) and a refundable deposit of RMB 9,600,000 (US$1,507,443). Net proceeds from finance obligation were $5,710,602.

The outstanding balances and interest rate of shareholder loans at May 31, 2012, were as follows:

	Balance		Interest Rate
Ordos City YiYuan Investment Co., Ltd.	$	1,696,474		5.31	%
Hangzhou Dayuan Group, Ltd.		5,860,904		5.31% and 7.32	%
Inner Mongolia Duoyida Mining Co. Ltd.		2,056,644		5.31	%
Total	$	9,614,022

Material Commitments

We have commitments to payment for the bank loans and shareholder loans as mentioned above. We have title to all our capital assets consisting of production equipment, automobiles, and office equipment. The total amount of such commitments is $39,417,426.

Seasonal Aspects

Coal Group’s business is seasonal as sales are particularly low in the first quarter of the year, due to the Chinese New Year holiday. During this time our business is closed for about two weeks.

Heat Power heating sales decrease from April through October as the climate in the region is warm, reducing heating requirements.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

A. Evaluation of Disclosure Controls and Procedures

As of the end of the fiscal quarter covered by this report, our management carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). 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 Securities and Exchange Commission's rules and forms. As a result of outstanding significant weaknesses in internal controls over financial reporting, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were ineffective.

B. Changes in Internal Controls Over Financial Reporting

In connection with the evaluation of the Company’s internal controls during the quarter ended May 31, 2012, the Company’s principal executive officer and principal financial officer have determined that there are no changes to the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Not applicable to smaller reporting companies.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6 EXHIBITS

(a) Exhibits

Exhibit No.		Document Description
31.1		Certification of Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13A-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).

SIGNATURES

		CHINA ENERGY CORPORATION
Date: July 19, 2012
	By:	/s/ WenXiang Ding
		WenXiang Ding
		President, Chief Executive Officer, Director &
		Secretary
	By:	/s/ Fu Xu
		Fu Xu
		Acting Chief Financial Officer

Filing Compare · China Energy CORP