China Shenhua Energy Company Limited

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China Shenhua Energy Company Limited

4th Fl. Zhouji Twr.
16 Ande Road
Dongcheng District
Beijing, 100011
China
Telephone: ( + 86 010) 5813 3355
Fax: ( + 86 010) 8488 2107
Web site: http://www.shenhuachina.com

Public Company
Incorporated: 1985 as Huaneng Refined Coal Company
Employees: 42,147
Sales: CNY 52.24 billion ($6.6 billion) (2005)
Stock Exchanges: Hong Kong
Ticker Symbol: 01088
NAIC: 212111 Bituminous Coal and Lignite Surface Mining; 212112 Bituminous Coal Underground Mining; 221122 Electric Power Distribution

China Shenhua Energy Company Limited (CSE) is the largest coal company in China and one of the top four coal producers in the world. The company produced 121.4 million tons of commercial coal in 2005 and holds nearly six billion tons of marketable coal reserves, enough to last nearly 50 years at current production levels. The company, created in 2004 as part of the restructuring of parent company Shenhua Group, operates a number of highly automated, state-of-the-art large-scale mines in the Erdos Coal Basin, making it one of the most efficient coal producers in the world, with operating profits of approximately 45 percent. The company's primary mining facility is at Shendong, in lower Mongolia, which has become the first Chinese mine to produce more than 100 million tons per year. In addition to its coal mining operations, CSE operates its own 1,300-kilometer rail transportation network to carry its coal to China's industrialized coastal regions. There, CSE operates port storage facilities, and, as part of its vertical integration model, supplies its own power generation operations. The company's total installed power plant capacity at the mid-2000s topped 6,560 megawatts (MW). While most of CSE's production targets the fast-growing domestic demand for coal, which remains the country's principal energy source, CSE also exports more than 23 million tons of coal each year. As such, the company is China's largest coal exporter. CSE has been listed on the Hong Kong Stock Exchange since 2005, while remaining under control of state-owned parent Shenhua Group. In 2005, the company posted revenues of more than CNY 52.24 billion ($6.6 billion).

RESTRUCTURING CHINA'S COAL
INDUSTRY

Coal played a dominant role in meeting China's energy needs from even before the creation of the People's Republic of China (PRC). However, the country's coal industry, as well as its energy industry in general, had been greatly disrupted by Chinese Civil War of 1949. With the launch of its first five-year plan, and with technological assistance from the Soviet Union, the PRC was able to rebuild and modernize much of its coal industry. In 1955, the Chinese government established a new Ministry of Fuel Industry, which functioned as the oversight body for the coal, petroleum, and electric power industries. The country's initial era of progress soon came to an end, however, with the launch of Mao Tse-tung's wildly unsuccessful "Great Leap Forward," which thrust the country into economic and industrial chaos.

China's break with the Soviet Union at the beginning of the 1960s further slowed the development of the coal industry, as the country entered a long period of self-reliance. The disastrous "Cultural Revolution" beginning in the mid-1960s and lasting through successive five-year plans until well into the 1970s brought new difficulties for the country's coal industry, which continued to struggle from the economic collapse brought on by the Great Leap Forward.

Adding to the coal industry's troubles were Mao Tse-tung's directives that the industry neglect the more abundant coal reserves in the country's northern territories in favor of exploration operations in the eastern and southern regions. Yet these efforts ended largely in failure. The drop in coal output and resulting shortages, which played a direct role in hampering the country's industrial progress, also became part of the Chinese government's economic reforms in the late 1970s.

The restructuring of China's energy sector began in earnest in 1982 under the economic and political reforms instituted by the government under Deng Xiaoping. As part of these reforms, the country's energy producers were transformed from state-run agencies into a series of national energy companies. These companies, which were contracted by the government for its energy supply needs and remained under government control, functioned in large part as independent companies, capable of making production management, personnel, and other decisions.

While the oil industry became the first to adopt this new corporate structure, the coal industry remained under the auspices of the Ministry of Coal Industry, which had been established in 1975 upon the breakup of the Ministry of Fuel Industry into separate ministries for the petroleum, coal, and electric power industries. The Ministry of Coal Industry continued to promote a policy that called for the establishment of many small coal mines operated at a local level. These mines, operated directly by a small town or village, were usually highly inefficient, requiring high levels of manpower, using antiquated technologies, and under extremely hazardous conditions. Into the 2000s, more than 20,000 small mines were still in operation around the country.

The emphasis on smaller mines helped delay the restructuring of China's coal industry into the mid-1980s. A first effort was made in 1982, however, with the creation of the China Coal Import and Export Corporation, later known as the China National Coal Group Corporation. Yet the discovery of the massive Erdos Coal Basin in 1982 provided a major impetus to the creation of a new corporate model for the industry. Geological surveys had revealed coal deposits estimated at nearly 90 billion tons, and later revised upward, over an area of nearly 8,000 square kilometers straddling Shanxi Province and Inner Mongolia.

The discovery of the Erdos basin led to the creation of a new company in 1984, called the China Refined Coal Company. This company, renamed Huaneng Refined Coal Company in 1985, was given the exploitation rights for much of the Erdos Basin.

SHENDONG MINING STARTUP IN
1985

Huaneng established its first mining operation in the Shenfu-Dongsheng coalfield, at the heart of the Erdos Coal Basin, that same year. The mine, known as the Shendong mine, differed sharply from the rest of the Chinese coal industry. Instead of labor-intensive, antiquated operations, the Shendong mine was constructed using state-of-the art, automated technology, placing the facility among the world's most modern mining operations. From the start, the company also sought to control its own transportation network in order to avoid the logistics bottlenecks that plagued much of the rest of the Chinese coal industry. In order to fulfill this objective, the company began building its own railway network, starting with the Baoshen Railway.

COMPANY PERSPECTIVES

China Shenhua Energy Company Limited is the leading integrated coal-based energy company focusing on the coal and power businesses in China. Our integrated coal, rail, port and power business model creates significant synergies and value for the company and demonstrates superior profitability and return profile for our shareholders.

By 1989, both the Shendong facility and the Baoshen line had been completed. Production was launched that same year, placing Huaneng among the top ranks of China's coal producers. By then, the Huaneng coal operation had been regrouped, along with a number of other Huaneng businesses, including power generation operations, into a single entity, Huaneng Group, created in 1988. As part of the Huaneng group, the Shendong mining operation had a built-in customer for much of its output. This effort became particularly important for the company after 1993, when the Chinese government relinquished pricing controls in the coal industry, placing the Shendong operation under intense competition from a myriad of small mines, as well as from its larger rivals.

China's rapid industrialization during the 1990s resulted in a corresponding increase in demand for fuels, and particularly for coal, which continued to cover some 70 percent of the country's energy needs. By the middle of the decade, the nation's coal producers were having difficulties meeting demand. In response to this situation, the government carried out a new reform of the sector. As part of that process, a new company, Shenhua Group, was created. Shenhua then took over much of the Huaneng coal mining business, including the operations of the Shendong mining complex, as well as other assets, including the railway and port facilities operations. Shenhua also engaged in long-term supply contracts for Huaneng's remaining power generation operations.

As the new government spearhead for the coal industry, Shenhua expanded strongly through the end of the decade. The company opened two new rail lines, the Shenshuo Rail Line in 1996, and the Dazhun Rail Line in 1997. Shenhua also began acquiring a number of other large-scale mining operations. These included Zhunge'er Energy Company, in 1998, which was subsequently renamed Shenhua Jinfeng Coal Company. Also that year, Shenhua took over the Wanli Mines. By 1999, the company had added a third mining operation, at Xisanju. The group's expansion was further aided by the Chinese government's decision to shut down many of the country's inefficient smaller mines, as well as allow a number of its poorly performing state-owned mines to declare bankruptcy.

GLOBAL COAL POWERHOUSE IN
THE NEW CENTURY

Shenhua also began building up the power generating operations it had taken over from Huaneng. These were expanded in 2000, with the creation of a dedicated subsidiary, Guohua Power. At the same time, the company continued to work on completing its railway grid, opening its fourth leg, the Shuohuang Rail Line, in 2001. By 2002, Shenhua had completed construction on its own port facilities, Huanghua Port, an important component in the group's strategy to develop integrated production, rail, and port operations. Shenhua's vertical integration model was further enhanced starting in 1999 as the group moved into power generation. The company's efforts in this area were crowned by the launch of its Guohua Plant in 2003, which helped the company reach a total output of 6,560 MW by the end of 2005.

Into the mid-2000s, Shenhua Group carried out a major reorganization of its holdings. Shenhua Group itself remained a state-controlled company; in 2004, however, Shenhua created a new entity, China Shenhua Energy Company (CSE), which took over nearly all of the parent company's mining, transportation, and power generation operations. The restructure quickly revealed itself as a prelude to a public listing of CSE, carried out in 2005 through one of the world's largest initial public offerings (IPOs) that year. Initial plans to list the company on both the Shanghai and Hong Kong exchanges fell through; nonetheless, the successful Hong Kong listing valued the company at some $3.3 billion.

KEY DATES

1982:: Vast coal deposits are discovered in Erdos Coal Basin in China's Shanxi and Inner Mongolia.
1984:: China Refined Coal Company is formed to exploit Erdos coalfields.
1985:: Company is renamed Huaneng Refined Coal Company; begins constructing Shendong mine.
1989:: Production at Shendong mine begins.
1995:: Shenhua Group is formed to take over coal mining, railway, and port operations of Huaneng Group.
1998:: Shenhua acquires mining group Zhunge'er Energy Company and takes over Wanli Mines.
1999:: Company acquires mining operation at Xisanju.
2001:: Shuohuang, the fourth leg in company's rail network, is completed.
2002:: Huanghua Port facility is completed.
2003:: Company begins production at Guohua power plant.
2004:: China Shenhua Energy (CSE) is created to take over most of the assets of Shenhua Group.
2005:: CSE takes listing on Hong Kong Stock Exchange.

As it entered the second half of the decade, CSE had earned prominence among the world's top coal producers, ranking in the global top four. With production levels of more than 120 million tons, including more than 100 million tons from the Shendong mine, CSE was also by far the largest coal producer in China. With domestic demand expected to continue to build strongly in the coming years, CSE was virtually assured of strong future growth. If all went according to the company's plans, CSE was set to become the world's single largest coal producer by the year 2010.

M. L. Cohen

PRINCIPAL SUBSIDIARIES

China Shenhua Coal Sales Centre; China Shenhua Guohua Power Branch; China Shenhua Rolling Stock Branch; China Shenhua Shendong Coal Branch; China Shenhua Shenshuo Railway Branch; China Shenhua Wanli Coal Branch; CLP Guohua Power Company Ltd.; CLP Guohua Shenmu Power Company Ltd.; Dazhun Rail Line and Zhunge'er Power Plant; Guangdong Guohua Yuedian Taishan Power Company Ltd.; Hebei Guohua Cangdong Power Company Ltd.; Inner Mongolia Guohua Zhunge'er Power Generation Company Ltd.; Shenhua Baoshen Railway Company Ltd.; Shenhua Beidian Shengli Energy Company Ltd.; Shenhua Huanghua Harbor Administration Company Ltd.; Shenhua Tianjin Coal Dock Company Ltd.; Shenhua Zhunge'er Energy Company Ltd.; Shuohuang Railway Development Company Ltd.; Suizhong Power Company Ltd.; Zhejiang Guohua Yuyao Gas-Fired Power Company Ltd.; Zhejiang Guohua Zheneng Power Company Ltd.

PRINCIPAL COMPETITORS

Datong Coal Mining Group Company; Xishan Coal and Electricity (Group) Co., Ltd.; Yankuang Group Company; China National Coal Group Corporation; Huainan Mining Group Co.; Pingdingshan Coal Group Co.; Kailuan Mining Group Co.; Yangquan Coal Group Co.; Huaibei Mining Group Co.