No. 13 of 2015 (General Serial No. 210)

No. 13 of 2015 (General Serial No. 210): The Audit Results of the Financial Revenues and Expenditures of Shenhua Group Corporation Limited for the Year 2013

(June, 28, 2015) In accordance with the stipulations of The Audit Law of the People’s Republic of China, in 2014 the National Audit Office conducted auditing on the situation of financial revenues and expenditures for the year 2013 of Shenhua Group Corporation Limited (hereinafter referred to as Shenhua Group). The auditing work was focused on Shenhua Group’s headquarters and four subunits including China Shenhua Energy Company Limited (hereinafter referred to as Shenhua LLC) Shenhua Ningxia Coal Industry Group Co., Ltd. (hereinafter referred to as Shenning Group), and conducted extended and retroactive audits on relevant matters.

I. Overview Shenhua Group was founded in October 1995, with a registered capital of RMB39.41 billion by the end of 2013, and possesses 387 wholly-owned or holding subsidiaries, 147 joint stock companies, and 1 public institution, The main business areas it engages in include coal production and sales, electricity production and supply, transport by railways, ports and ships, coal oil and coal chemical industry, etc..

As shown in the consolidated financial statements of Shenhua Group, by the end of 2013 the total assets amounted to RMB882.657 billion, the total liabilities reached RMB389.8 billion, and there was RMB492.857 billion worth of owners’ equity. The realized operating revenue of the same year was RMB367.817 billion and a net profit of RMB61.974 billion was earned. The asset- liability ratio was 44.16%, the return on equity was 13.14%, and the rate of the value maintenance and value increase of state-owned capital was 110.55%.

BDO China Shu Lun Pan Certified Public Accountants (LLP) audited the Group’s consolidated financial statements for the year 2013 and issued a standard and unqualified audit report.

The audit results conducted by the National Audit Office indicated that Shenhua Group has established developing strategies, strengthened corporate governance and the construction of internal control system, and improved its core competitiveness and ability of risk-resistance. The audit also found out that some irregular behaviors still existed in fields such as operating performance, development potential, and professional ethics.

II. Major Problems Found in the Audit (I) On operating performance 1. On financial revenue and expenditure (1) From 2009 to 2014, Shenhua Group and its 28 subunits including Shenning Group had confirmed sales income prematurely, paid bonuses and subsidies illegally, did not prepare consolidated financial statements according to regulations etc. Therefore, income was overstated by RMB2.027 billion, cost and expenses was overstated by RMB2.391 billion and understated by RMB1.494 billion, which resulted in an overstatement of RMB1.130 billion of profits over the six years among which the understated profits of 2013 amounted to RMB 1.015 billion. (2) From 2012 to 2013, Huangyuchuan coal mine of Shenhua Yili Energy LLC (hereinafter referred to as Huangyuchuan coal mine), a subunit, had paid RMB3.48 million of bonuses unlisted, among which those of the year 2013 amounted to RMB1.8 million.

2. On the enforcement and implementation of macroeconomic policies, decisions and arrangements of the state (1) From 2010 to 2012, Shenning Group illegally had approved of its subunit’s projects on hotel investment. By the end of 2013 RMB1.002 billion had been invested, among which RMB28.1 million was invested in 2013. (2) In 2009, Shendong Coal Branch of the subunit Shenhua Co., Ltd. entrusted an external enterprise to carry out geological exploration and paid RMB50 million of exploring fees without obtaining mine exploration rights.

3. On internal management (1) From 2012 to 2013, four subunits, including Shanxi Guohuajinjie Energy LLC (hereinafter referred to as Guohuajinjie Corporation), had put RMB2.846 billion less in the safe production fund than the state standard, without obtaining the approval of the relevant departments, among which that of the year 2013 amounted to RMB1.971 billion. (2) From 2010 to 2014, subunit Shenhuahangjin Energy LLC (hereinafter referred to as Hangjin Energy Corporation), in violation of regulations, had conducted sales of purchased coal and profited RMB221 million. (3) From 2009 to 2013, two subunits including Guohuajinjie Corporation had spent RMB480 million of maintenance cost and safety cost beyond the scope of use, among which RMB161 million was spent in 2013. (4) In 2013, subunit Shenning Group approved its owned real estate company of investing RMB94.9285 million overseas in violation of regulations. (5) From 2009 to 2013, problems including directly appointing engineering subcontractor and not tendering publicly according to regulations had existed in the project management of six subunits including Shenhua Ltd. and Shenning Group. 94 projects and RMB2.434 billion of contract amount were involved, among which those of the year 2013 amounted to 33 projects and RMB1.161 billion of contract amount. (6) By the end of February 2014, RMB765 million less of capital had been invested in the construction project of subunit Huangyuchuan mile coal, failing to reach stipulated proportion. (7) From 2011 to 2013, four subunits including Shenhua Materials Group Co., Ltd. had not examined the qualification of parts suppliers strictly, and signed 16 parts purchase and sales contracts with suppliers that provided forged proxy authorization. RMB80.8603 million was involved, among which that of the year 2013 amounted to RMB6.9936 million. (8) In 2011, subunit Haerwusu coal mine of Shenhua LLC paid RMB100 million of sponsorship to local government without reporting to or obtaining approval from State-owned Assets Supervision and Administration Commission (SASAC). (9) From 2010 to 2013, three subunits including Hangjin Energy Corporation had had problems including providing financial support to real estate companies of their own, making payment for housing projects funded by employees, and providing vehicles for external units free of charge. An amount of RMB1.439 billion yuan was involved.

(II) On development potential 1. From 2009 to 2013, Shenhua Group’s forty-eight affiliated coal mines had irregularly mined 484 million tons of coal over its approved production capacity among which 141 million tons were over-mined in 2013.

2. From 2009 to 2013, Shenhua Group’s ten affiliated coal mines had irregularly mined 202 million tons of coal without obtaining all licenses required for coal mining, among which 33 million tons were mined in 2013.

3. From 2009 to 2013, Shenhua Group’s eight projects had been irregularly started and constructed without approval. RMB10.149 billion has been invested by the end of 2013, among which RMB2.914 billion was invested in 2013. These projects still has not been approved by the end of June 2014.

4. From 2010 to 2014, for some coal mines and projects of Shenning Group’s two subunits, there had been problems including not rectifying environmental issues completely, not re-preparing and submitting environmental impact report and soil conservation scheme according to regulations, and starting construction without approval on environmental impact assessment.

(III) On professional ethics From 2012 to 2013, four executives of the subunit Shenhuaganquan Railway Co., Ltd. had flied first class 87 times in violation of internal regulations.

III. Rectification of Issues Found in Audits of Previous Years Among issues discovered through auditing on Shenhua Group by the National Audit Office in 2009, the issue that the subunit Shenning Group started the expansion and reconstruction project of Zaoquan coal mine without approval has yet to be rectified. Shenhua Group still has not reported to the National Development and Reform Commission, applied for approval, or gone through relevant approval procedures by rectification requirements.

IV. Audit Measures and Rectification In regard to issues discovered in the audit, the National Audit Office has issued audit reports and released letters of audit decisions in accordance with laws, and will notify the general public of the details of straightening and rectification of Shenhua Group. Clues related to issues in violation of laws and disciplines discovered through the audit have been legally transferred to departments concerned to be further investigated and dealt with.