It is no longer appropriate to consolidate the performance of Huaheng Energy in the comprehensive financial statements of YUANHENG GAS (00332).

YUANHENG GAS (00332) has issued an announcement regarding the following situation of Guizhou Huaheng Energy Investment Co., Ltd. (Huaheng Energy) (a company established under Chinese law and an indirect non-wholly owned subsidiary of the company). Therefore, the company believes that it is no longer appropriate to consolidate the performance of Huaheng Energy when preparing the consolidated financial statements of the group. Huaheng Energy was established in June 2011 and is directly held by Guangzhou YUANHENG GAS Co., Ltd. (Guangzhou YUANHENG), Dazhou Huixin Energy Co., Ltd. (Dazhou Huixin), and Guizhou Gas Group Corporation in proportions of 49%, 1%, and 50% respectively. Dazhou Huixin is owned 69% by Guangzhou YUANHENG and is an indirect non-wholly owned subsidiary of Guangzhou YUANHENG. The purpose of creating Huaheng Energy was to utilize its supply and sales of liquefied natural gas and pipeline natural gas in Renhuai, Guizhou Province, a region famous for its liquor production. Guizhou Gas Group Corporation and Guangzhou YUANHENG have agreed to exercise their respective rights and obligations in Huaheng Energy according to their respective shareholding ratios. Guangzhou YUANHENG also holds the controlling interest in Huaheng Energy at the board of directors and shareholders' meetings. Since the completion of the acquisition of Guangzhou YUANHENG Group Corporation, consisting of Guangzhou YUANHENG, Dazhou Huixin, and Huaheng Energy by the company in May 2014, Guangzhou YUANHENG has become a wholly-owned subsidiary of the company, while Dazhou Huixin and Huaheng Energy have become non-wholly owned subsidiaries of the company. Huaheng Energy has been a major subsidiary of the company, operating the pipeline gas division for the company. Guizhou Gas Group Corporation's wholly-owned subsidiary, Renhuai City Gas Co., Ltd. (a subsidiary of Guizhou Gas Group Corporation), has taken over the supply and sales of pipeline natural gas to distillery customers. This arrangement has led to disagreements between the group and Guizhou Gas Group Corporation on matters related to the quantity of pipeline gas supplied to users through Huaheng Energy's pipeline and the related settlement amounts. The group (represented by Guangzhou YUANHENG as the plaintiff) has initiated legal action in the intermediate court of Guizhou Province in June 2024 against Guizhou Gas Group Corporation, its subsidiaries, and relevant individuals designated by Guizhou Gas Group Corporation (Chinese legal action). Following the legal action in China, Guizhou Gas Group Corporation has tightened information disclosure about Huaheng Energy. As of the date of this announcement, the group has not received financial information and interim reports from Huaheng Energy for the 2025 financial year. Despite repeated requests and follow-ups, Huaheng Energy has not provided the group with relevant information on the quantity of pipeline gas supplied to users and related settlement amounts through Huaheng Energy's pipeline. Despite prior commitments on the above matters, considering the current situation and the increasingly tense working relationships, the board believes that the company has lost control over Huaheng Energy from an accounting perspective and it is no longer appropriate to classify Huaheng Energy as a subsidiary of the company. On the date of losing control, the group will cease to recognize the assets, liabilities, and non-controlling interests of Huaheng Energy at their carrying amounts and recognize the retained interests in Huaheng Energy at fair value through profit or loss. Due to the financial guarantee provided by Guangzhou YUANHENG for loans obtained by Huaheng Energy from banks, and the default on these loans by Huaheng Energy, the group will recognize the related liability as a financial guarantee contract liability in the consolidated financial statements. As the performance of Huaheng Energy constitutes an independent operating division for pipeline gas, the pipeline gas business will be classified as a discontinued operation. Considering the above circumstances and based on available information (including unaudited management accounting information), the company estimates that it may recognize an unaudited loss of approximately RMB 47 million related to discontinued operations in the consolidated income statement. The loss is offset by a one-time gain of approximately RMB 51 million from the cancellation of the consolidation of Huaheng Energy and a loss of approximately RMB 98 million from the recognition of financial guarantee contract liabilities. For clarification, the accounting treatment of losing control over Huaheng Energy will not harm the legitimate interests of the group in Huaheng Energy. The group is doing everything possible to protect Guangzhou YUANHENG's legitimate rights in Huaheng Energy and will make further disclosures regarding the Chinese legal action at the appropriate time.