CONNECTED TRANSACTION ACQUISITION OF 70% EQUITY INTEREST IN JINJIE ENERGY CORPORATION

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1 The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this announcement, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement. (a joint stock limited company incorporated in the People s Republic of China with limited liability) (Stock Code: 1088) CONNECTED TRANSACTION ACQUISITION OF 70% EQUITY INTEREST IN JINJIE ENERGY CORPORATION Acquisition Agreement The Board announces that on 10 March 2006, the Company and the Vendor entered into the Acquisition Agreement, pursuant to which the Vendor agreed to sell, and the Company agreed to purchase, the Vendor s 70% equity interest in Jinjie. Jinjie will engage in coal production and power generation in Shaanxi Province, the PRC. Upon completion of the Acquisition Agreement, Jinjie will be owned in the following proportions: 70% by the Company and 30% by Shandong Luneng, which currently holds a 30% equity interest in Jinjie. Connected Transaction Shenhua Group is the sole promoter and a substantial shareholder of the Company. As at the date hereof, Shenhua Group is the holder of 81.21% of the issued Shares. The Vendor is a wholly owned subsidiary of Shenhua Group, and therefore a connected person of the Company. Accordingly, the Acquisition Agreement and the transactions contemplated thereunder constitute a connected transaction of the Company under the Listing Rules. As each of the percentage ratio(s) applicable to the Acquisition (as defined in Rule of the Listing Rules) is less than 2.5%, the Acquisition is subject to the reporting and announcement requirements set out in Rules 14A.45 and 14A.47 of the Listing Rules. The Board announces that on 10 March 2006, the Company and the Vendor entered into the Acquisition Agreement, pursuant to which the Vendor agreed to sell, and the Company agreed to purchase, the Vendor s 70% equity interest in Jinjie. Upon completion of the Acquisition Agreement, Jinjie will be owned in the following proportions: 70% by the Company and 30% by Shandong Luneng, which currently holds a 30% equity interest in Jinjie. Prior to completion of the Acquisition Agreement, Shandong Luneng is a third party independent of any connected person of the Company or any of its associates under the Listing Rules. Upon completion of the Acquisition Agreement, Shandong Luneng will become a connected person of the Company by virtue of its capacity as a substantial shareholder of Jinjie which will be a subsidiary of the Company. 1

2 ACQUISITION AGREEMENT Date 10 March 2006 Parties (i) (ii) the Vendor, as vendor; and the Company, as purchaser. Major Terms Subject to the terms of the Acquisition Agreement, the Company will acquire 70% of the equity interest in Jinjie, being the entire equity holding of the Vendor in Jinjie. The aggregate consideration for the Acquisition shall be RMB1,161,639,200 (equivalent to approximately HK$1,116,960,769), subject to an adjustment by an amount equal to the aggregate sum of capital contributions in Jinjie made by the Vendor (if any) at any time between 1 January 2006 and the Completion Date in accordance with the relevant resolutions of the shareholders in Jinjie to increase its registered capital, up to a maximum amount of RMB90 million (equivalent to approximately HK$86,538,461.54). The Total Consideration shall be paid by the Company within 10 business days following the Completion Date. The Company intends to pay the Total Consideration required for the Acquisition out of its working capital. The Acquisition Agreement is conditional upon the obtaining of the following: (i) (ii) (iii) (iv) all necessary approvals by the sole shareholder of the Vendor; all necessary approvals by the board of directors of the Company; approval of the transactions contemplated in the Acquisition Agreement at the shareholders meeting of Jinjie and a waiver of any pre-emption rights by the minority shareholder in Jinjie; and approvals from the relevant departments of the SASAC. If the above conditions are not satisfied on or before 31 December 2006, the Acquisition Agreement shall lapse. In addition, the Acquisition Agreement may be terminated: (i) by the Company and the Vendor by agreement; (ii) by the Company, upon the occurrence of an adverse event relating to Jinjie or the Vendor, or (iii) by the Company if any of the representations and warranties provided by the Vendor under the Acquisition Agreement is untrue, inaccurate and misleading. Completion of the Acquisition Agreement shall occur on 30 June 2006 or such other date as the parties may otherwise agree, subject to all the conditions of the Acquisition Agreement being satisfied. On Completion Date, the Vendor shall return the certificate of capital contributions to Jinjie and procure Jinjie to issue a new certificate of capital contributions to the Company. The Company shall pay to the Vendor the Total Consideration in cash within 10 business days from the Completion Date. 2

3 Basis of Determination of Consideration The consideration for the Acquisition was determined by the parties following arm s length negotiations and taking into account the results of the valuation of Jinjie as at 31 December 2005 as contained in the valuation report prepared by CEA. Pursuant to the laws and regulations of the PRC, CEA has been appointed by the parties to conduct a valuation of Jinjie. Based on the valuation report prepared by CEA adopting the cost replacement method, the value of the entire equity interest in Jinjie held by the Vendor is approximately RMB1,161,639,200 (equivalent to approximately HK$1,116,960,769.23) as at 31 December, The total cost of investment by the Vendor in obtaining its beneficial ownership of a 70% equity interest in Jinjie is approximately RMB511,000,000. Jinjie has not yet commenced commercial operations as at the date hereof. The principal assets of Jinjie include certain current assets, fixed assets such as real properties, operational machinery and equipment, construction in progress, general office equipment and transportation facilities, as well as intangible assets in the form of mining rights. INFORMATION RELATING TO THE COMPANY The Group operates an integrated coal-based energy business in the PRC, including coal production, transportation and sales as well as power generation. INFORMATION ON SHENHUA GROUP AND THE VENDOR Shenhua Group is the ultimate beneficial owner of the Vendor, and is also the Company s sole promoter and controlling shareholder. Shenhua Group and its subsidiaries are principally engaged in the coal liquefaction and coal based chemical processing business, as well as investment and finance activities. They also retain some coal production and power generation business following the restructuring of the Company in preparation for its H shares listing in Hong Kong. The Vendor is a company established under the laws of the PRC, and is engaged in the business of power generation, the investment, development and management of power projects and other energy projects, and other related businesses including the development of environmental protection technology and the provision of consultancy services. INFORMATION RELATING TO JINJIE Jinjie will engage in coal production and power generation in Shaanxi Province, the PRC. The commencement of Jinjie s production facilities is being conducted in three phases. Upon completion of all three phases of its development, which is currently expected to take place around 2010, Jinjie will have a planned installed capacity of 3,600MW and a maximum coal production capacity of 10 million tonnes. Jinjie has not yet commenced commercial operations, although it expects to do so in the second half of It is currently expected that the construction project of Jinjie will be financed through a combination of its own working capital, equity capital contributions by its shareholders and loan facilities from banking institutions. The construction of phase I of Jinjie s production facilities has been substantially completed, with a planned installed capacity of 1,200MW for power generation and coal production capacity of three million tonnes per annum, equivalent to approximately 18.3 % and 2.5% respectively of the Group s total installed capacity and coal production capacity for Jinjie s phase I production facilities will commence production in two stages. Power generation facilities with a planned installed capacity of 600MW are scheduled to commence operation during the second half of Power generation facilities with a further planned installed capacity of 600MW are scheduled to commence operation during the first half of Commercial coal production will commence in the second half of 2006, with a maximum production capacity of approximately three million tonnes per annum. Jinjie s phase II power generation facilities are currently scheduled to commence production in 2008, and the commercial coal production capacity can reach up to approximately six million tonnes per year. 3

4 As at the date hereof, all necessary PRC regulatory approvals for the construction of phase I facilities of Jinjie have been obtained. Application for the necessary PRC regulatory approvals, including the approval by the National Development and Reform Commission, have been submitted in respect of the construction of phase II facilities of Jinjie, and it is expected that such approvals will be obtained during Depending on the actual progress of construction of its phase II facilities, and the prevailing market conditions, Jinjie will apply for the PRC regulatory approvals, including the approval by the National Development and Reform Commission, in relation to the construction of its phase III facilities as appropriate in accordance with the relevant legal and regulatory requirements of the PRC. Jinjie will also apply for the operation permits for its power generation and coal mining businesses prior to commencing operation. Coal The Company has engaged John T. Boyd Company, an independent firm of technical consultants, to review the reserves of Jinjie s coal mines. According to the resource assessment conducted by John T. Boyd Company, Jinjie had marketable reserves of approximately 525 million tonnes, equivalent to approximately 9.1% of the total marketable reserves of the Group at the end of The reserves have generally favourable geological and mining conditions, including reasonably thick coal seams with good geological and suitable moisture contents. The primary coal product of Jinjie s coal mines will be thermal coal, with characteristics similar to the thermal coal produced by the Group, namely a medium to high degree of heat generation and a low ash and sulphur content. The coal mines of Jinjie are located at Shaanxi Province, Shenmu County. Jinjie previously obtained an exploration permit in respect of the coal mines in Jinjie and is currently applying for a mining right certificate from the relevant authorities for a total period of 30 years from the date of issuance of the certificate on an exclusive basis. It is expected that the mining rights certificate for Jinjie will be obtained by the first half of It is a condition to the Acquisition Agreement that the relevant approvals from SASAC must be obtained. It is also a condition to the granting of the approvals by SASAC that the mining rights certificate for Jinjie must be obtained. The coal produced by Jinjie s phase I coal mining operations will be supplied principally to its power generation business, although a small proportion of the production can be used for external sales. Power generation According to the national plan of power supply in the PRC, it is currently expected that all of the power produced by Jinjie s phase I power generation operations will be sold to the Hebei South Power Grid, an affiliate of the North China Power Grid. It is expected that the pricing for the power supply to Hebei South Power Grid will be determined by reference to the average price of power supply to Hebei South Power Grid by existing suppliers, subject to commercial negotiation by the parties and the approval by the relevant government authorities. Hebei South Power Grid is controlled by State Power Grid Corporation, a PRC state-owned enterprise which is also a substantial shareholder of a subsidiary of the Company. Hebei South Power Grid is therefore an associate of a connected person of the Company under the Listing Rules. Jinjie and Hebei South Power Grid have not yet commenced negotiation of the terms of the power supply agreement as of the date hereof. The Company will comply with the applicable requirements of the Listing Rules when a power supply agreement is entered into by Jnjie and Hebei South Power Grid. Jinjie s Phase I power generation operations will involve building two 600MW direct cooling, coal fired power units, and the installation onto them of de-sulphur contents processing facilities, which will meet the pollution discharge standards set by the PRC environmental rules and regulations. The coal production in Jinjie will be capable of supplying all of the coal requirements for the power generation plant, thereby ensuring a stable, sufficient and timely supply of coal for the power generation operations. Jinjie s integrated coal and power generation facilities further reduce the cost of production by reducing the cost of coal transportation to the power generation plant. 4

5 REASONS FOR AND BENEFITS OF THE ENTERING INTO THE ACQUISITION AGREEMENT As part of the preparation for the listing of the Company in June 2005, Shenhua Group transferred to the Group various assets and businesses comprising the core operations of the Group at the time of listing. At that time, Shenhua Group s equity interest in Jinjie was not transferred to the Group because the project was still at a start-up stage. However, pursuant to a non-competition agreement dated 24 May 2005 entered into between the Company and Shenhua Group, Shenhua Group granted the Company an option to acquire its equity interest in Jinjie at a later stage if the Company so desired. At the time of the restructuring of the Company in preparation for its H shares listing, the relevant PRC regulatory approvals required for the commencement of development of Jinjie s phase I facilities had not yet been obtained. Currently, the relevant regulatory approvals have been obtained and construction of the phase I facilities has also progressed. Jinjie s phase I operations are expected to commence during the second half of In order to avoid any competition between the Company and Shenhua Group, the Vendor and the Company have agreed to transfer the equity interest in Jinjie to the Company. The Company is one of the largest coal-based energy companies focusing on the coal and power businesses in China. As part of the Company s business strategies, the Company is constantly seeking opportunities to acquire new sources of high quality coal and power resources. The acquisition of Jinjie by the Company will be beneficial to the Group in terms of enhancing its business efficiency through business synergy of its coal operations, reducing its production costs and expanding its production capacity. Jinjie s power plant is expected to be an important contributor to the west-toeast power transmission programme launched by the PRC government to ease the pressure on power supply in the economically developed coastal regions. Within the area covered by the North China Power Grid, the Beijing-Tianjin-Hebei region has experienced rapid economic growth in recent years and is expected to maintain a strong rate of development. The acquisition of Jinjie will therefore enable the Group further to increase its supply capacity and market share within this important power grid. In view of the above, the Directors believe that the terms of the Acquisition Agreement are fair and reasonable and in the interests of the Shareholders as a whole. CONNECTED TRANSACTION Shenhua Group is the sole promoter and a substantial shareholder of the Company. As at the Latest Practicable Date, Shenhua Group was the holder of 81.21% of the Company s issued Shares. The Vendor is a wholly owned subsidiary of Shenhua Group, and therefore a connected person of the Company. Accordingly, the Acquisition Agreement and the transactions contemplated thereunder constitute a connected transaction of the Company under the Listing Rules. As each of the percentage ratios (as defined in Rule of the Listing Rules) is less than 2.5%, the Acquisition Agreement is subject to reporting and announcement requirements set out in Rules 14A.45 and 14A.47 of the Listing Rules. DEFINITIONS In this circular, the following expressions have the following meaning unless the context requires otherwise: Acquisition Acquisition Agreement the acquisition by the Company from the Vendor of a 70 per cent. equity interest in Jinjie pursuant to the terms set out in the Acquisition Agreement; an agreement dated 10 March 2006, entered into between the Vendor and the Company, in respect of the acquisition by the Company from the Vendor of 70 per cent. of the equity interest in Jinjie; 5

6 Adjusted Amount Associates Board Business day CEA Company Completion Date Director(s) Group HK$ and cents Hong Kong Jinjie Listing Rules marketable reserves North China Power Grid PRC RMB SASAC an amount equal to the aggregate sum of capital contributions in Jinjie made by the Vendor (if any) at any time between 1 January 2006 and the Completion Date in accordance with the relevant resolutions of the shareholders in Jinjie to increase its registered capital, up to a maximum amount of RMB90 million; shall have the meaning as defined in the Listing Rules; the board of Directors; any day (excluding a Saturday) on which banks in Hong Kong are generally open for business; (China Enterprise Appraisal), a state-approved independent PRC valuer appointed to assess the value of Jinjie; (China Shenhua Energy Company Limited), a joint stock limited company incorporated in the PRC with limited liability, the H shares of which are listed on the Stock Exchange; 30 June 2006, or such later date as the Company and the Vendor may otherwise agree; the director(s), including the independent non-executive directors of the Company; the Company and its subsidiaries; Hong Kong dollars and cents respectively, the lawful currency of Hong Kong; Hong Kong Special Administrative Region of the People s Republic of China; (Jinjie Energy Corporation), a limited liability company established in the PRC as of 16 February 2004; The Rules Governing the Listing of Securities on the Stock Exchange; marketable coal reserves are reported in terms of probable reserves or proved reserves; North China Power Grid, which is controlled by State Power Grid Corporation, a state-owned enterprise; the People s Republic of China; the lawful currency of the PRC; the PRC State-owned Assets Supervision and Administration Commission of the State Council; 6

7 Shandong Luneng Shareholder(s) Share(s) Shenhua Group Stock Exchange Total Consideration Vendor (Shandong Luneng Development Group Co., Ltd), an existing shareholder of Jinjie which owns a 30% equity interest in Jinjie. Shandong Luneng is principally engaged in the business of power generation, production and sale of power generation facilities and equipment and the provision of technical consultancy services; holder(s) of Share(s); share(s) of RMB1.00 each in the capital of the Company; (Shenhua Group Corporation Limited), the sole promoter of the Company; The Stock Exchange of Hong Kong Limited; RMB1,161,639,200 and the Adjusted Amount; and (Beijing Guohua Power Co. Ltd), a limited liability company incorporated in the PRC, which is wholly owned by Shenhua Group. For the purpose of this announcement, HK$1.00 is equivalent to RMB1.04. Beijing, the PRC, 10 March 2006 As at the date of this announcement, the Directors are: By Order of the Board Chen Biting Chairman Chen Biting, Wu Yuan, Ling Wen, Zhang Xiwu, Zhang Yuzhuo, Han Jianguo, Huang Yicheng*, Anthony Francis Neoh* and Chen Xiaoyue* * independent non-executive Directors Please also refer to the published version of this announcement in South China Morning Post 7