Raymond Industrial Limited - Proxy Solicitation & Information Statement 2016

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

This circular is for information only and does not constitute an invitation or offer to acquire, purchase or subscribe for any securities of the Company.

If you are in any doubt as to any aspect of this circular or as to the action you should take, you should consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Kunlun Energy Company Limited (the “Company”), you should at once hand this circular to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or the transferee.

==> picture [26 x 21] intentionally omitted <==

==> picture [246 x 39] intentionally omitted <==

==> picture [119 x 10] intentionally omitted <==

----- Start of picture text -----

(Stock Code: 00135.HK)
----- End of picture text -----

(1) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF PETROCHINA KUNLUN GAS CO., LTD. AND

(2) PROPOSED CONTINUING CONNECTED TRANSACTIONS

Financial Advisers

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

A letter from the Board is set out on pages 7 to 33 of this circular and a letter from the Independent Board Committee, containing its recommendation to the Independent Shareholders of the Company, is set out on page 34 of this circular. A letter from ING Bank N.V., Hong Kong Branch, an independent financial adviser, containing its advice to the Independent Board Committee and Independent Shareholders in respect of the Acquisition and the Revised Caps for certain continuing connected transactions is set out on pages 35 to 65 of this circular.

A notice of SGM to be held at President’s Suite, 38th Floor, World Trade Centre, 280 Gloucester Road, Causeway Bay, Hong Kong on 18 February 2016 (Thursday) at 10:00 a.m. is set out on pages SGM-1 to SGM-2 of this circular. A proxy form for use by the Shareholders at the SGM is enclosed with this circular. Whether or not you intend to attend and vote at the SGM in person, you are requested to complete the proxy form enclosed in accordance with the instructions printed thereon and return it to the principal office of the Company at 39th Floor, 118 Connaught Road West, Hong Kong as soon as practicable but in any event not later than 48 hours before the time for holding the SGM or adjourned meeting (as the case may be). Completion and return of the proxy form will not preclude you from attending and voting in person at the SGM should you so wish.

23 January 2016

CONTENTS

Page

DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
II. THE ACQUISITION AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
III. SHAREHOLDING STRUCTURE OF THE COMPANY AND
THE TARGET GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
IV. BUSINESS AND FINANCIAL INFORMATION OF KUNLUN GAS . .	12
V. FINANCIAL EFFECT OF THE ACQUISITION ON THE GROUP. . . .	14
VI. REASONS FOR AND BENEFITS OF THE ACQUISITION . . . . . . . . .	17
VII. CONTINUING CONNECTED TRANSACTIONS ARISING FROM
THE ACQUISITION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
VIII. LISTING RULES IMPLICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . .	30
IX. INFORMATION ON THE PARTIES. . . . . . . . . . . . . . . . . . . . . . . . . . .	31
X. SPECIAL GENERAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	31
XI. RECOMMENDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	32
XII. ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	33
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . .	34
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER . . . . . . . . . . . . . .	35
INDUSTRY OVERVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	66
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	69
APPENDIX I MANAGEMENT DISCUSSION AND ANALYSIS OF
THE GROUP AND THE TARGET GROUP. . . . . . . . . . . . . . . .	I-1
APPENDIX II FINANCIAL INFORMATION OF THE GROUP . . . . . . . . . . . .	II-1
APPENDIX III ACCOUNTANTS’ REPORT OF THE TARGET GROUP . . . . . .	III-1
APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF
THE ENLARGED GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-1
APPENDIX V VALUATION REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	V-1
APPENDIX VI GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . .	VI-1
NOTICE OF SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	SGM-1

– i –

DEFINITIONS

In this circular, unless the context otherwise requires, the following terms shall have the meanings set out below:

“Acquisition”
the acquisition by the Company of the entire equity interest in Kunlun Gas owned by PetroChina pursuant to the terms and conditions of the Acquisition Agreement;
“Acquisition Agreement”
the agreement dated 28 December 2015 and entered into between the Company and PetroChina in respect of the Acquisition;
“associates”
has the meaning ascribed thereto under the Listing Rules;
“Audited Financial Statements”
the consolidated financial statements of Kunlun Gas as at the Valuation Reference Date which have been audited by KPMG Huazhen LLP;
“Board”
the board of Directors of the Company;
“CNG”
compressed natural gas;
“CNPC”

中國石油天然氣集團公司 (China National Petroleum Corporation), a state-owned enterprise established under the laws of the PRC;

“CNPC Group”
CNPC and its subsidiaries, but excluding members of the Enlarged Group;
“Company”

Kunlun Energy Company Limited (Stock Code: 00135.HK), a company incorporated with limited liability in Bermuda and the shares of which are listed on the Stock Exchange;

“Completion”
completion of the Acquisition in accordance with the Acquisition Agreement;
“Completion Date”

the date of Completion, i.e. the last calendar day of the calendar month when all the conditions precedent specified in the Acquisition Agreement is satisfied or waived or such other date agreed by the Company and PetroChina in writing;

– 1 –

DEFINITIONS

“Completion Date Financial the consolidated financial statements of Kunlun Gas as at Statements” the Completion Date which will be reviewed by KPMG Huazhen LLP;
“connected person” has the meaning ascribed to it under the Listing Rules;
“Consideration” RMB14,827,093,900 (equivalent to approximately HK$17,998,414,600 or US$2,322,357,900), being the consideration for the Acquisition of the entire equity interest in Kunlun Gas owned by PetroChina pursuant to the Acquisition Agreement;
“Director(s)” the director(s) of the Company;
“Enlarged Group”
the Group as enlarged by the Acquisition after the Completion;
“Fifth Supplemental Agreement”
means the agreement dated 6 November 2014 entered into between the Company and CNPC amending certain terms of, and renewing the Master Agreement for the three years ending on 31 December 2017;
“Financial Advisers”
Goldman Sachs (Asia) L.L.C. and China International Capital Corporation Hong Kong Securities Limited;
“First Supplemental Agreement”
means the agreement dated 14 November 2006 entered into between the Company and CNPC amending certain terms of, and renewing, the Master Agreement;
“Fourth Supplemental Agreement”
means the agreement dated 14 November 2011 entered into between the Company and CNPC renewing the terms of the Master Agreement for the three years ending on 31 December 2014;
“Gain or Loss during the Transition Period”

the difference between the net asset value of Kunlun Gas set out in the Completion Date Financial Statements and the net asset value of the Kunlun Gas set out in the Audited Financial Statements as at the Valuation Reference Date after deducting the Special Dividend;

“GDP”

gross domestic product;

“Group”

the Company and its subsidiaries;

– 2 –

DEFINITIONS

“HK$”
Hong Kong dollars, the lawful currency of Hong Kong;
“Hong Kong”
the Hong Kong Special Administrative Region of the PRC;
“Independent Board Committee” the independent board committee of the Board, comprising of Dr. Lau Wah Sum, Mr. Li Kwok Sing Aubrey and Dr. Liu Xiao Feng, being all the independent non-executive Directors of the Company, established for the purpose of, among other things, advising the Independent Shareholders in respect of the Acquisition contemplated under the Acquisition Agreement and the Revised Caps Subject to Approval for the continuing connected transactions;
“Independent Financial Adviser”
ING Bank N.V., Hong Kong Branch, being the appointed independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the Acquisition contemplated under the Acquisition Agreement and the Revised Caps Subject to Approval for the continuing connected transactions;
“Independent Shareholders”
the shareholders of the Company other than CNPC and its associates (including PetroChina) and Mr. Zhang Bowen;
“Kunlun Gas”
PetroChina Kunlun Gas Co., Ltd, a limited liability company incorporated in the PRC, and a wholly-owned subsidiary of PetroChina;
“Latest Practicable Date”
20 January 2016, being the latest practicable date prior to the printing of this circular for ascertaining certain information of this circular;
“Listing Rules”
means the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited;
“LNG”
means liquefied natural gas;
“LOI on Integration”
means the letter of intent on Integration entered into by and between the Company and PetroChina on 25 November 2015;
“LPG”

means liquefied petroleum gas;

– 3 –

DEFINITIONS

“Master Agreement”
means the master agreement dated 19 November 2003 entered into between CNPC and the Company regarding provision by the CNPC Group to the Group, of a range of products and services from time to time, as amended and supplemented by the First Supplemental Agreement dated 14 November 2006, the Second Supplemental Agreement dated 25 March 2009, the Third Supplemental Agreement dated 19 May 2010, and the Fourth Supplemental Agreement dated 14 November 2011, where the context requires, as to be further amended and supplemented by the Fifth Supplemental Agreement;
“NDRC”
the National Development and Reform Commission or any of its local branches;
“Oil and Gas Products”
means such crude oil, natural gas, refined oil products, chemical products and other ancillary or similar products to be provided by the CNPC Group to the Group from time to time under the new category of additional products and services set out in the Second Supplemental Agreement;
“PetroChina”
PetroChina Company Limited, a joint stock limited company incorporated in the PRC and listed on the Stock Exchange (Stock Code: 00857.HK), whose shares are also listed on the Shanghai Stock Exchange and the Stock Exchange with American Depositary Receipts listed on the New York Stock Exchange;
“PRC” the People’s Republic of China;
“Prevailing Market Price”
means the price which is determined with reference to the price charged, by at least one independent third party where (a) such type of product of comparable scale and quality is provided and on normal terms; or (b) such type of service of comparable scale and quality is provided and on normal terms in the nearby areas where such service is being provided, at the relevant time;
“Rental Payments”
means the rental payments payable by the Group to the CNPC Group under the Master Agreement in respect of the properties leased from the CNPC Group;

– 4 –

DEFINITIONS

“Revised Caps”
the proposed revised maximum annual aggregate value(s) for the continuing connected transactions of the Company in respect of all categories of transactions for the two years ending 31 December 2017 set out in section VII(3) of the “Letter from the Board” of this circular;
“Revised Caps Subject to Approval”
the proposed revised maximum annual aggregate value(s) for the continuing connected transactions of the Company and not being exempt from Independent Shareholders’ approval requirements under the Listing Rules in respect of categories (a), (d) and (e) for the two years ending 31 December 2017 set out in section VII(3) of the “Letter from the Board” of this circular;
“RMB” Renminbi, the lawful currency of the PRC;
“Second Supplemental means the agreement dated 25 March 2009 entered into Agreement” between the Company and CNPC amending certain terms of, and renewing, the Master Agreement;
“SFO” the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong);
“SGM” the special general meeting of the Company proposed to be convened on 18 February 2016 for the Shareholders to consider and, if thought fit, approve the Acquisition contemplated under the Acquisition Agreement and the Revised Caps for the continuing connected transactions;
“Share(s)” the ordinary shares in the Company with par value of HK$0.01 each;
“Shareholder(s)” holder(s) of the Shares;
“Special Dividend” declaration of dividends on 27 December 2015 by Kunlun Gas to PetroChina in the amount of RMB1 billion;
“Stock Exchange” The Stock Exchange of Hong Kong Limited;
“subsidiaries” has the meaning ascribed to it under the Listing Rules; “Target Group” Kunlun Gas and its subsidiaries;

– 5 –

DEFINITIONS

“Third Supplemental Agreement”	means the agreement dated 19 May 2010 entered into
	between the Company and CNPC amending certain terms
	of the Master Agreement;
“US$”	United States dollars, the lawful currency of the United
	States of America;
“Valuation Reference Date”	30 September 2015, the reference date based on which
	the Valuer conducted the valuation of the Target Group
	and issued the Valuation Report;
“Valuation Report”	means the valuation report issued by the Valuer in respect
	of the Target Group which is set out in Appendix V to this
	circular;
“Valuer”	Beijing China Enterprise Appraisals Co. Ltd.

Notes:

(1) In this circular, unless the context otherwise requires, “connected person”, “connected transaction”, “controlling shareholder”, “subsidiary” and “associate” shall have the meanings ascribed to them in the Listing Rules as amended by the Stock Exchange from time to time.
(2) For the purpose of this circular, unless otherwise indicated, the exchange rate at HK$1.00 = RMB0.8238, US$1.00 = HK$7.75 has been used, where applicable, for purpose of illustration only and does not constitute a representation that any amount have been, could have been or may be exchanged.
(3) If there is any discrepancy or inconsistency between the Chinese names of the PRC entities and their English translations in this circular, the Chinese version shall prevail.

– 6 –

LETTER FROM THE BOARD

==> picture [26 x 21] intentionally omitted <==

==> picture [246 x 39] intentionally omitted <==

(Stock Code: 00135.HK)

Directors:

Mr. Wu Enlai (Chairman)

Mr. Zhao Yongqi (Chief Executive Officer)
Mr. Zhang Bowen (President)
Mr. Cheng Cheng (Senior Vice President)

Registered office: Clarendon House 2 Church Street Hamilton HM11 Bermuda

Dr. Lau Wah Sum, GBS, LLD, DBA, JP[#]

Mr. Li Kwok Sing Aubrey[#]

Dr. Liu Xiao Feng[#]

Independent Non-executive Directors

Principal office in Hong Kong: 39th Floor 118 Connaught Road West Hong Kong

23 January 2016

To the Shareholders

Dear Sir or Madam,

(1) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF PETROCHINA KUNLUN GAS CO., LTD. AND (2) PROPOSED CONTINUING CONNECTED TRANSACTIONS

I. INTRODUCTION

On 28 December 2015, the Company entered into the Acquisition Agreement with PetroChina, pursuant to which the Company has agreed to purchase, and PetroChina has agreed to sell, the entire equity interest in Kunlun Gas owned by PetroChina at a consideration of RMB14,827,093,900 (equivalent to approximately HK$17,998,414,600 or US$2,322,357,900) in accordance with the terms and conditions of the Acquisition Agreement.

– 7 –

LETTER FROM THE BOARD

II. THE ACQUISITION AGREEMENT

1. Date: 28 December 2015

2. Parties:

(i) Purchaser: the Company;
(ii) Vendor: PetroChina; and
(iii) Target Company: Kunlun Gas

3. Assets to be acquired

Pursuant to the Acquisition Agreement, PetroChina has agreed to sell and the Company has agreed to purchase the entire equity interest in Kunlun Gas owned by PetroChina.

4. Consideration

Pursuant to the Acquisition Agreement, the Consideration payable by the Company to PetroChina will be RMB14,827,093,900 (equivalent to approximately HK$17,998,414,600 or US$2,322,357,900), which has taken into account the RMB1 billion dividend (“ Special Dividend ”) declared to PetroChina by Kunlun Gas and will be satisfied by way of cash payments. The Consideration will be settled in RMB or a foreign currency (including US$and HK$) in equivalent amount subject to adjustment by the Gain or Loss during the Transition Period.

The Company will pay no less than 30% of the Consideration (hereinafter referred to as the “ First Tranche Consideration ”) to the bank account designated by PetroChina on the Completion Date, while the remainder of the Consideration (hereinafter referred to as the “ Deferred Payment ”) shall be settled in full by the Company within 12 months from the Completion Date in compliance with applicable laws, regulations and regulatory requirements (including settlement of no less than 60% of the Consideration within 6 months of the Completion Date). Any Deferred Payment will be charged an interest which shall be equivalent to the one-year benchmark RMB loan interest rate as published by the People’s Bank of China on the working day immediately preceding the relevant payment date.

The Gain or Loss during the Transition Period will be, regardless of whether distributed or not, entitled to or borne by PetroChina. According to the Acquisition Agreement, the Gain or Loss during the Transition Period will be determined and settled as follows:

(i) if the net book asset value of Kunlun Gas in the Completion Date Financial Statements is less than the net book asset value of Kunlun Gas in the Audited Financial Statements as at the Valuation Reference Date after deducting the Special Dividend, the Gain or Loss during the Transition Period will represent a loss in net assets, which will be borne by PetroChina and will be paid by PetroChina to the Company;

– 8 –

LETTER FROM THE BOARD

(ii) if the net book asset value of Kunlun Gas in the Completion Date Financial Statements is more than the net book asset value of Kunlun Gas in the Audited Financial Statements as at the Valuation Reference Date after deducting the Special Dividend, the Gain or Loss during the Transition Period will represent a gain in net assets, to which PetroChina will be entitled and shall be paid by the Company to PetroChina.

Save for the Special Dividend, if there is any increase or reduction in share capital, dividend distribution or asset disposal in respect of Kunlun Gas between the date of the signing of the Acquisition Agreement and the Completion Date, the Consideration shall be adjusted accordingly.

The Company plans to first consider funding this transaction through its internal funds and debt financing instruments. Whenever necessary and if market conditions allow, the Company will also consider other suitable external financing methods. When determining how to conduct the relevant external financing, the Company will take into account all the facts and circumstances, including but not limited to the credit limit, total costs, impact on the Company’s capital structure, debt structure and financial conditions, the available internal resources of the Company at the time, and, in particular, whether it will be in the interests of the Company and its shareholders as a whole.

5. Basis of Consideration Determination

The Consideration was determined after arm’s length negotiations between the Company and PetroChina, having taken into account, among others, the following factors:

(i) the valuation of the Target Group by the Valuer, as adjusted by the Special Dividend;
(ii) the current status and future development prospects of the related industries in which the Target Group operates; and
(iii) business profile, historical financial performance and future development potential of the Target Group.

The valuation of the Target Group by the Valuer using 30 September 2015 as the Valuation Reference Date was approximately RMB15,827,093,900 (equivalent to approximately HK$19,212,301,500 or US$2,478,987,300). The valuation of the Target Group was conducted using the market method approach which values the Target Group by comparing the trading multiples of comparable companies of similar business nature in the open market. Meanwhile, the Special Dividend has been taken into consideration.

– 9 –

LETTER FROM THE BOARD

6. Conditions Precedent

The completion of the Acquisition is subject to the satisfaction or waiver by the Company and/or PetroChina (as the case may be) of certain conditions precedent, including:

(i) the approval regarding the signing of the Acquisition Agreement and the transactions contemplated thereunder having been obtained at the SGM of the Company in accordance with the Listing Rules;
(ii) there is no material adverse change to the Target Group between the date of the Acquisition Agreement and the Completion Date; and
(iii) all the approval, consent, filing and waiver (if any) from any government authority or other third party in respect of the Acquisition Agreement and the transactions contemplated thereunder pursuant to the applicable laws and contractual requirements having been unconditionally and irrevocably obtained.

As at the Latest Practicable Date, to the best knowledge, information and belief of the Directors, save for the approvals of Independent Shareholders in relation to the Acquisition Agreement and the transactions contemplated thereunder at the SGM and the approvals by the relevant authorities, the Company and PetroChina have respectively obtained all necessary internal approvals. Any application for approval with the relevant regulatory authorities and the registrations and/or filings required by the laws in relation to the Acquisition in the PRC can only be carried out upon the Company having obtained the Independent Shareholders’ approval at the SGM.

If any of the conditions precedent of the Acquisition Agreement is not satisfied or waived by the Company and/or PetroChina (as the case may be) on or before 31 December 2016 or such other date as agreed between the Company and PetroChina, the Acquisition Agreement will be automatically terminated.

7. Completion

The completion of the Acquisition will take place on the last calendar day of the calendar month in which all the conditions precedent have been satisfied or such other day as agreed by the parties in writing. The Company will pay the First Tranche Consideration in accordance with the Acquisition Agreement at the Completion in order to obtain the entire equity interest in Kunlun Gas. Upon the Completion, Kunlun Gas will become a wholly-owned subsidiary of the Company and the assets, liabilities and the financial results of Kunlun Gas will be consolidated into the consolidated financial statements of the Company.

– 10 –

LETTER FROM THE BOARD

III. SHAREHOLDING THE TARGET GROUP

STRUCTURE OF THE

COMPANY AND

The following is the simplified shareholding structure chart of the Company and the Target Group as at the Latest Practicable Date:

==> picture [284 x 165] intentionally omitted <==

----- Start of picture text -----

CNPC
3.43%
86.35%
PetroChina
100% 58.33%
Target Group The Company
----- End of picture text -----

The following is the simplified shareholding structure chart of the Company and the Target Group immediately after the Completion:

==> picture [153 x 195] intentionally omitted <==

----- Start of picture text -----

CNPC
86.35%
PetroChina
3.43%
58.33%
The Company
100%
Target Group
----- End of picture text -----

– 11 –

LETTER FROM THE BOARD

IV. BUSINESS AND FINANCIAL INFORMATION OF KUNLUN GAS

1. Key Business Information of Kunlun Gas

Kunlun Gas was established under the reorganisation of CNPC Natural Gas Pipeline Investment Co., Ltd. (中石油天然氣管道燃氣投資有限公司), China Huayou Group Gas Unit (中國華油集團燃氣事業部) and China Oil And Gas Company Limited (中油燃氣有限責任公司) in August 2008. Its current registered capital is RMB8.56 billion. Prior to the Acquisition, Kunlun Gas is a wholly owned subsidiary of PetroChina. It is a subsidiary of PetroChina specially responsible for the city gas and LPG distribution businesses, the scope of business of which includes (i) sales and transportation, storage, CNG, LPG; (ii) wholesales of feed gas and sales of propylene, propane and butane; (iii) sales of chemical products and light industry materials; (iv) technical development, consultation and services for gas products; and (v) investments in city gas projects, transfer of technology, leasing of equipment etc.

Since its establishment under the reorganisation, Kunlun Gas has established its presence in more than 120 cities with business coverage across 29 provinces, municipalities and autonomous regions, including provincial capital cities such as Harbin, Lanzhou and Kunming, and taken over the LPG sales business from refining and oil field enterprises under PetroChina. Kunlun Gas enjoys various advantages in resource supply security, market development, human resources and technology management. As at the end of 2014, Kunlun Gas owned and controlled over 150 city gas concessions and had 18 branch network projects with city gas networks and branch networks covering more than 20,000 km in aggregate; operated approximately 200 CNG stations of various kinds, covering a total user base of more than 5 million comprising residential users, commercial users, industrial users and utilities users; and managed approximately 90 LPG distribution projects. In 2014, Kunlun Gas recorded natural gas sales of approximately 8.4 billion cubic metres, natural gas transmission volume of approximately 800 million cubic metres and LPG sales of approximately 5.91 million tonnes.

– 12 –

LETTER FROM THE BOARD

The natural gas and LPG business of Kunlun Gas have established a total of 152 city gas concessions, 194 CNG stations, 4 LNG projects, 90 LPG distribution projects and 18 branch network projects across 29 provinces, municipalities and autonomous regions in the PRC, with a gas supply capacity of nearly 10 billion cubic metres. As of 31 December 2014, the business coverage of Kunlun Gas was as follow:

==> picture [404 x 248] intentionally omitted <==

----- Start of picture text -----

ConcessionCity Gas (s) StationCNG(s) LNG Project(s) [LPG Distribution ] Project(s) NetworkBranch (s)
Anhui
Beijing
Heilongjiang Chongqing
Gansu
Guangdong
Inner Mongolia Jilin Guangxi
Guizhou
Liaoning
Xinjiang Beijing Hainan
Hebei
Ningxia Hebei Tianjin Henan
Shanxi Shandong Heilongjiang
Qinghai Gansu Henan Jiangsu Hubei
Shaanxi Hunan
Anhui Shanghai Jilin
Hubei
Sichuan Chongqing Zhejiang Jiangsu
Jiangxi
Hunan Jiangxi
Guizhou Liaoning
Inner Mongolia
Yunnan Guangxi Guangdong Ningxia
Qinghai
Shandong
City gas concession(s) Hainan Shanxi
Shaanxi
CNG station(s) Shanghai
LNG project(s) Sichuan
LPG distribution project(s) Tianjin
Branch network(s) Xinjiang
Yunnan
Zhejiang
----- End of picture text -----

2. Key Financial Information of Kunlun Gas

According to the financial statements of Kunlun Gas for the nine months ended 30 September 2015 which was prepared in accordance with Hong Kong Financial Reporting Standards, the consolidated net asset value of Kunlun Gas was RMB16,025 million and the consolidated net asset value attributable to owner of Kunlun Gas was RMB11,332 million as at 30 September 2015.

– 13 –

LETTER FROM THE BOARD

According to the financial statements prepared by Kunlun Gas in accordance with Hong Kong Financial Reporting Standards, the consolidated net asset value, the consolidated net asset value attributable to owner of Kunlun Gas as at 31 December 2013 and 2014 and 30 September 2015, the profit before income tax expense, the profit for the period/year and the profit for the period/year attributable to owner of Kunlun Gas for the two years ended 31 December 2014 and the nine months ended 30 September 2015 were as follows, respectively:

	Nine Months	Nine Months
		Ended
	30 September		Year Ended 31 December
		2015		2014	2013
	RMB ‘million		RMB ‘million		RMB ‘million
Consolidated net asset value		16,025		14,812	11,302
Consolidated net asset value
attributable to owner of
Kunlun Gas		11,332		10,510	7,349
Profit before income tax
expense		1,655		1,535	1,411
Profit for the period/year		1,185		1,125	1,011
Profit for the period/year
attributable to owner of
Kunlun Gas		822		723	692

V. FINANCIAL EFFECT OF THE ACQUISITION ON THE GROUP

After the completion of the Acquisition, Kunlun Gas will become a wholly owned subsidiary of the Company. The assets, liabilities and the financial results of Kunlun Gas will be consolidated into the consolidated financial statements of the Company.

Set out in Appendix IV of this circular is the “Unaudited Pro Forma Financial Information of the Enlarged Group” and the basis of preparation thereon.

Assets and Liabilities

As shown in the “Unaudited Pro Forma Financial Information of the Enlarged Group”, the respective unaudited pro forma total assets and pro forma total liabilities of the Enlarged Group following the Acquisition would amount to approximately HK$139,061 million and approximately HK$62,944 million as compared to the respective total assets and total liabilities of the Group amounting to approximately HK$122,476 million and approximately HK$47,373 million as at 30 June 2015 before the Acquisition, representing an increase of HK$16,585 million in total assets and HK$15,571 million in total liabilities from those set out in the unaudited consolidated interim financial report of the Company as at 30 June 2015.

– 14 –

LETTER FROM THE BOARD

Profit

For the year ended 31 December 2014, the profit before income tax expense of the Group was approximately HK$11,956 million. As set out in Appendix IV of this circular, assuming 1 January 2014 is the date of the Completion, the unaudited pro forma profit before income tax expense of the Enlarged Group for the year ended 31 December 2014 would be approximately HK$13,902 million.

For the year ended 31 December 2014, the profit for the year of the Group attributable to owners of the Company was approximately HK$5,610 million. As set out in Appendix IV of this circular, assuming 1 January 2014 is the date of the Completion, the unaudited pro forma profit for the year of the Enlarged Group attributable to owners of the Company for the year ended 31 December 2014 would be approximately HK$6,521 million.

Working Capital

The Directors are of the opinion that, after due and careful enquiry, taking into account the payment obligation of the Acquisition, the internal resources and financial facilities (including existing facilities in the amount of approximately HK$3,400 million and committed credit in the amount of RMB23 billion from China Petroleum Finance Company Limited) available to the Enlarged Group, the Enlarged Group will have sufficient working capital for its present requirements for the next twelve months from the date of this circular.

Indebtedness

As at 30 November 2015, being the latest practicable date for the purpose of this indebtedness statement prior to the date of this circular, the Enlarged Group had outstanding borrowings of approximately HK$27,246 million, comprising short-term bank loans of approximately HK$1,141 million, long-term bank loans of approximately HK$3,538 million, loans from China Petroleum Finance Company Limited, a fellow subsidiary of the Company and Kunlun Gas, of approximately HK$4,260 million, loans from an intermediate holding company of approximately HK$4,563 million, loans from immediate holding company of approximately HK$3,710 million, loans from other fellow subsidiaries of approximately HK$1,335 million, senior notes of approximately HK$7,661 million and other loans and debentures of approximately HK$1,038 million.

– 15 –

LETTER FROM THE BOARD

The following table illustrates the Enlarged Group’s borrowings at 30 November 2015:

Short-term borrowings
Bank loans
Loans from an intermediate holding company
Other loans and debentures
Current portion of long-term borrowings
Long-term borrowings
Bank loans
Loans from
– An intermediate holding company
– An immediate holding company
– China Petroleum Finance Company Limited
– Other fellow subsidiaries
Senior notes
Other loans and debentures
Less: Current portion of long-term borrowings

HK$ ‘million
1,141
800
364
2,305
6,344
8,649
- - - - - - - - - - - - - -
3,538
3,763
3,710
4,260
1,335
7,661
674
24,941
(6,344)
18,597
- - - - - - - - - - - - - -
27,246

As at 30 November 2015, the Enlarged Group had unsecured and guaranteed borrowings amounting to approximately HK$139 million, secured and unguaranteed borrowings amounting to approximately HK$149 million and unsecured and unguaranteed borrowings amounting to approximately HK$26,958 million. All unsecured and guaranteed borrowings of approximately HK$139 million was guaranteed by third parties or other state-controlled entities. Among secured and unguaranteed borrowings of approximately HK$149 million, the security of approximately HK$130 million was provided by third parties while the remaining approximately HK$19 million was provided by a subsidiary of Kunlun Gas.

As at 30 November 2015, the Enlarged Group had unguaranteed obligations under finance leases amounting to approximately HK$785 million in respect of equipment and machinery.

– 16 –

LETTER FROM THE BOARD

Save as disclosed above and apart from intra-group liabilities and normal trade payables, neither the Group nor the Target Group had, as at 30 November 2015, any outstanding loan capital issued or agreed to be issued, bank overdrafts, other loans, other hire purchase commitment or other similar indebtedness, liabilities under acceptances (other than normal trade bills), acceptance credits, bond certificates, mortgage, charges, guarantees or other material contingent liabilities.

Gearing Ratio

As at 30 June 2015, the gearing ratio of the Group was 29.55% (as calculated from the sum of total borrowings and obligations under finance leases divided by the sum of total equity and total borrowings and obligations under finance leases). As set out in Appendix IV of this circular, assuming 30 June 2015 is the date of the Completion, the pro forma total borrowings, obligations under finance leases and total equity of the Enlarged Group would be approximately HK$32,033 million, HK$915 million and HK$76,117 million respectively. Accordingly, the gearing ratio of the Enlarged Group would increase to 30.21%.

The Board has also considered the “Unaudited Pro Forma Financial Information of the Enlarged Group” as set out in Appendix IV of this circular, e.g. the factors that (i) the total liabilities will substantially increase due to the Acquisition and (ii) the gearing ratio will also increase from 29.55% to 30.21%. Taking into account that the Target Group will continue to have a stable income stream and the Enlarged Group will have sufficient working capital for its present requirement for the next twelve months from the date of this circular.

VI. REASONS FOR AND BENEFITS OF THE ACQUISITION

The Board believes that the Acquisition would be in the best interests of the Company for the following reasons:

The Acquisition will better define the Company’s business positioning and growth strategies.

Following the completion of the Acquisition, the Company will be the sole platform for PetroChina in the investment, financing and operation of natural gas distribution and comprehensive utilisation business, undertaking the important mission for PetroChina to develop the natural gas market and enhance the efficiency of distribution and comprehensive utilisation business. By fully utilising PetroChina’s strengths in upstream resources and mid-stream transmission, the Company will further seek new businesses and new opportunities in natural gas comprehensive utilisation, and strive to develop itself into a “domestically leading and internationally advanced” enterprise engaging in the natural gas distribution and comprehensive utilisation business.

– 17 –

LETTER FROM THE BOARD

On the basis of this positioning and strategic guidance, the Company will steadily and gradually divest the exploration and production business when suitable opportunities arise, focus on developing our core business such as natural gas distribution and comprehensive utilisation with a business coverage of city gas and the relevant natural gas branch pipeline networks, the utilisation and distribution of CNG, LNG and LPG and natural gas-fired power generation business, with a view to fulfilling the Company’s philosophy of “low-carbon economy and green development”.

The Acquisition will facilitate the Company’s establishment of an integrated investment, financing and operating entity for the natural gas distribution and comprehensive utilisation business and help avoid the horizontal competition between the Company and PetroChina.

Due to historical reasons, the businesses of the Company and Kunlun Gas, to a certain extent, overlap one another in respect of the natural gas distribution and comprehensive utilisation business. There are also certain overlapping infrastructure for the CNG stations, sub-stations and natural gas branch pipelines. This has resulted in considerable business competition between both parties in certain geographic areas. The acquisition of the entire equity interest in Kunlun Gas will help rationalise the management of the natural gas distribution and comprehensive utilisation business, which will effectively resolve the existing horizontal competition between the Company and PetroChina due to historical reasons.

The Acquisition will further improve our business structure and increase our business growth.

The acquisition of the entire equity interest in Kunlun Gas will be beneficial for the Company in increasing its geographic coverage in the natural gas distribution and comprehensive utilisation business, boosting the number of users and natural gas sales volume, further optimising the Company’s natural gas and LPG sales value chain, enabling us to expand into natural gas power generation business, and assisting us in realising stable growth in our natural gas business.

The Acquisition will generate synergies among the businesses, enhance operational efficiency and increase our market competitiveness.

Through the consolidation of the natural gas distribution and comprehensive utilisation business in terms of both the shareholding structure and management structure, the top-level design, coordination and intensification for market development, planning, investment, production, operations, logistics and information management can be implemented. This will generate positive synergies, thus promoting market competitiveness of the natural gas distribution and comprehensive utilisation business of the Company, enhancing its business management and market expansion capabilities, and further improving the management effectiveness and economic efficiency of our natural gas distribution and comprehensive utilisation business.

The Directors (including the independent non-executive Directors who will express their views after considering the advice provided by the Independent Financial Adviser), are of the view that the terms and transactions contemplated under the Acquisition Agreement are fair and reasonable, and are in the interest of the Shareholders and the Group as a whole.

– 18 –

LETTER FROM THE BOARD

VII. CONTINUING CONNECTED TRANSACTIONS ARISING FROM THE ACQUISITION

As at the Latest Practicable Date, PetroChina indirectly holds 4,708,302,133 Shares in the Company, representing approximately 58.33% of the issued share capital of the Company. In addition, CNPC, the controlling shareholder of PetroChina, indirectly holds additional 277,432,000 Shares in the Company, representing approximately 3.43% of the issued share capital of the Company. Accordingly, CNPC as the ultimate controlling shareholder of the Company will be deemed to have interests in 4,985,734,133 Shares of the Company, representing approximately 61.76% of the issued share capital of the Company. Both CNPC and PetroChina are the controlling shareholders of the Company, thus both CNPC and PetroChina are connected persons of the Company under Chapter 14A of the Listing Rules.

After the completion of the Acquisition, Kunlun Gas will become a wholly owned subsidiary of the Company, the continuing transactions between Kunlun Gas and CNPC or PetroChina and their respective associates will become continuing connected transactions of the Company under Chapter 14A of the Listing Rules.

Master Agreement and the subsequent supplemental agreements in relation to the provision of general products and services by the CNPC Group to the Enlarged Group and vice versa

References are made to the Company’s announcement dated 7 November 2014 and circular dated 11 November 2014 in relation to certain continuing connected transactions of the Group.

The Group entered into the Master Agreement with CNPC in 2003, which was subsequently amended in 2006 pursuant to the First Supplemental Agreement, in 2009 pursuant to the Second Supplemental Agreement, in 2010 pursuant to the Third Supplemental Agreement, in 2011 pursuant to the Fourth Supplemental Agreement and in 2014 pursuant to the Fifth Supplemental Agreement.

The Master Agreement provides a framework for the Group to procure a range of products and services from the CNPC Group in relation to its oil exploration and product projects. Pursuant to the Master Agreement (as amended), the range of products and services to be procured from the CNPC Group by the Group and vice versa include oil and gas products, general products and services and rental services. For details of the Master Agreement (as amended), please refer to the announcement dated 7 November 2014 and the circular of the Company dated 11 November 2014, respectively.

– 19 –

LETTER FROM THE BOARD

Set out below are the continuing connected transactions arising from the Acquisition which will be required to comply with reporting, announcement and Independent Shareholders’ approval requirements (where applicable) under the Listing Rules.

1. Provision of products and services by the CNPC Group to the Target Group

The CNPC Group has been providing the following products and services to Kunlun Gas and its subsidiaries:

(i) oil and gas products, including primarily natural gas and LPG;
(ii) general products and services, including primarily engineering services, production services and social and ancillary services;
(iii) financial services, including primarily loans (which are provided by the CNPC Group to the Target Group on normal commercial terms and hence fully exempted from reporting, announcement and Independent Shareholders’ approval requirements under the Listing Rules) and deposit services and the associated interest incomes and expenses; and

(iv) property leases.

After the completion of the Acquisition, Kunlun Gas will become a subsidiary of the Company, and the above transactions will be subject to the terms and conditions of the Master Agreement (as supplemented). Further, the annual expenditure incurred by Kunlun Gas for using the products and services from the CNPC Group will be aggregated with the Existing Caps for the relevant category under the Master Agreement (as supplemented). Thus, the annual expenditure to be incurred by Kunlun Gas for using the products and services by the CNPC Group will increase the annual cap figures for existing continuing connected transactions regarding the provision of products and services by the CNPC Group to the Group under the Master Agreement (as supplemented) and should therefore be subject to reporting, announcement and Independent Shareholders’ approval (where applicable) requirements.

– 20 –

LETTER FROM THE BOARD

For the three years ended 31 December 2014 and the nine months ended 30 September 2015, the costs incurred by Kunlun Gas for procuring products and services from the CNPC Group were approximately:

				Nine Months
				Ended
	Year	Ended 31 December		30 September
Transaction Category	2012	2013	2014	2015
	RMB	RMB	RMB	RMB
	‘million	‘million	‘million	‘million
Oil and gas products
procurement	29,718	34,070	32,512	18,880
General products and
services	181	650	269	96
Deposit services
(Maximum daily
outstanding balance of
deposits to be placed by
the Group with the
CNPC Group (including
interest accrued
thereon))	4,294	3,140	3,702	4,933
	RMB	RMB	RMB	RMB
	‘thousand	‘thousand	‘thousand	‘thousand
Property leases	2,046	896	6,771	3,572

2. Provision of products and services by the Target Group to the CNPC Group

The Target Group has been providing oil and gas products to the CNPC Group. The products provided by the Target Group to the CNPC Group mainly include natural gas and LNG provided to downstream end-user customers that are associates of CNPC. As city gas business is based on concession and requires the infrastructure such as branch pipeline networks and Kunlun Gas is a specialized company in fuel gas transmission and sale, the end-user customers (including those who are associates of CNPC) would purchase natural gas and LNG from the Target Group.

– 21 –

LETTER FROM THE BOARD

annual cap figures for existing continuing connected transactions regarding the provision of products by the Group to the CNPC Group under the Master Agreement (as supplemented) and should therefore be subject to reporting, announcement and Independent Shareholders’ approval requirements.

The revenue generated by Kunlun Gas for providing the oil and gas products to the CNPC Group was approximately RMB1,394 million, RMB2,872 million, RMB3,230 million and RMB839 million, respectively, for the three years ended 31 December 2014 and the nine months ended 30 September 2015.

3. Proposed Revised Caps in relation to the continuing connected transactions

The table below sets out the annual caps for the continuing connected transactions in relation to the Master Agreement (as amended):

				Year Ending 31 December	Year Ending 31 December
			2016		2017
Category of Continuing			Existing	Revised	Existing	Revised
Connected Transactions		Historical Amount	Cap	Cap	Cap	Cap
				(Note 1)		(Note 1)
			HK$	HK$	HK$	HK$
			‘million	‘million	‘million	‘million
(a)	Provision of products	For each of the two	14,708	17,252	10,424	13,232
	and services by the	years ended 31	(Note 4)		(Note 4)
	CNPC Group to the	December 2014 and
	Group under the Master	the six months ended
	Agreement, and for the	30 June 2015,
	avoidance of doubt	respectively and
	including those under the	approximately
	Second Supplemental	HK$6,783 million,
	Agreement but excluding	HK$8,218 million and
	the Oil and Gas Products	HK$4,000 million
	(Note 2)	respectively (Note 3)
	Including: deposit		4,005	5,739	5,440	7,174
	services (Maximum daily
	outstanding balance of
	deposits to be placed by
	the Group with the
	CNPC Group (including
	interest accrued thereon)

The proposed revised annual cap for the deposit services above are determined with reference to its relevant percentage ratios on an annual basis, which are set to be less than 5%. The deposit services and the proposed revised annual caps are therefore by themselves exempted from the Independent Shareholders’ approval requirement pursuant to Rule 14A.76 of the Listing Rules.

– 22 –

LETTER FROM THE BOARD

				Year Ending 31 December	Year Ending 31 December
			2016		2017
Category of Continuing			Existing	Revised	Existing	Revised
Connected Transactions		Historical Amount	Cap	Cap	Cap	Cap
				(Note 1)		(Note 1)
			HK$	HK$	HK$	HK$
			‘million	‘million	‘million	‘million
(b)	(Note 5)
(c)	Rental Payments under	For each of the two	18	37	19	39
	the Master Agreement	years ended 31
	(Note 2)	December 2014 and
		the six months ended
		30 June 2015,
		respectively and
		approximately HK$19
		million, HK$15
		million and HK$6
		million (Note 6)

The proposed revised annual cap for the property lease above are determined with reference to its relevant percentage ratios on an annual basis, which are set to be less than 5%. The property lease and the proposed revised annual caps are therefore by themselves exempted from the Independent Shareholders’ approval requirement pursuant to Rule 14A.76 of the Listing Rules.

(d)	Purchase of Oil and Gas	For each of the two	32,338	72,498	37,424	85,644
	Products by the Group	years ended	(Note 4)		(Note 4)
	under the Second	31 December 2014
	Supplemental Agreement	and the six months
	(Note 7)	ended 30 June 2015,
		respectively and
		approximately
		HK$12,514 million,
		HK$12,687 million
		and HK$5,415 million
		(Note 8)
(e)	Provision of products	For each of the two	21,935	25,369	22,080	26,080
	and services by the	years ended 31	(Note 4)		(Note 4)
	Group to the CNPC	December 2014 and
	Group under the Third	the six months ended
	Supplemental Agreement	30 June 2015,
	(Note 9)	respectively and
		approximately
		HK$6,361 million,
		HK$10,954 million
		and HK$4,868 million
		(Note 10)

– 23 –

LETTER FROM THE BOARD

Notes:

In relation to the above continuing connected transactions, the Directors estimated the annual transaction amounts as amended (i.e. the Revised Caps) for each of the two years ending 31 December 2017 according to the following basis:
(i) the continuing connected transactions will continue to be entered into in accordance with the provisions and conditions under the Master Agreement (as supplemented);
(ii) the continuing connected transactions will continue to be entered into during the daily and ordinary course of business of the Group according to normal commercial terms;
(iii) the existing annual caps for continuing connected transactions approved by the Independent Shareholders on 10 December 2014;
(iv) the transaction amounts of continuing connected transactions between Kunlun Gas and the CNPC Group and future growth potentials; and
(v) the anticipated future growth of the Group as a result of the reorganisation of the Group, the downstream distribution of natural gas and the diversification of application areas.
Considering the nature of the products and services provided by the CNPC Group, the products and services provided by the CNPC Group referred to under subparagraph 1(ii), (iii) and (iv) above in Part VII of this “Letter from the Board” are categorised under this category of continuing connected transactions.
Such historical amounts do not include the products and services provided by the CNPC Group to Kunlun Gas and its subsidiaries prior to the Acquisition.
The existing annual caps were approved by the Independent Shareholders at the special shareholders meeting held on 10 December 2014.
Category (b) is intentionally left blank to maintain consistency with categorisation in the circular published by the Company dated 11 November 2014.
Such historical amounts do not include the property leases provided by the CNPC Group to Kunlun Gas and its subsidiaries prior to the Acquisition.
Considering the nature of the oil and gas products, the oil and gas products provided by the CNPC Group referred to under subparagraph 1(i) above in Part VII of this Letter from the Board” are categorised under this category of continuing connected transactions.
Such historical amounts do not include the oil and gas products purchased by Kunlun Gas and its subsidiaries from the CNPC Group prior to the Acquisition.
Considering the nature of the products and services, the products provided the Group referred to under subparagraph 2 above in Part VII of this “Letter from the Board” are categorised under this category of continuing connected transactions.
Such historical amounts do not include the products and services provided by Kunlun Gas and its subsidiaries to the CNPC Group prior to the Acquisition.

4. Reasons for and benefits of the new continuing connected transactions

Kunlun Gas is a specialised company responsible for the sales of city gas and LPG. The CNPC Group, on the other hand, is a major oil and gas producer and supplier whose business operations cover a broad spectrum of upstream and downstream activities, domestic marketing and international trade, technical services, and equipment manufacturing and supply.

– 24 –

LETTER FROM THE BOARD

In view of the strengths and scope of the CNPC Group’s business activities and the strong favourable support that such continuing connected transactions would bring to business activities of the Enlarged Group, the Board considers it to be beneficial to continue to carry out the continuing connected transactions with the CNPC Group as these transactions have facilitated and are expected to continue to facilitate the operations of the Enlarged Group. The Board also notes the long smooth cooperation history between the Company, Kunlun Gas and the CNPC Group in relation to such transactions.

Further, the Board notes that the CNPC Group will become a customer of the Company as a result of the further expansion of the business scope and scale of the field of natural gas distribution. The Enlarged Group will be able to provide products and services to the CNPC Group leading to further development of business for the Enlarged Group.

The continuing connected transactions arising from the Acquisition are or will be entered into in the ordinary and usual course of business of the Group on normal commercial terms and the Board is of the general view that it is in the interests of the Company and the Shareholders as a whole to carry on the continuing connected transactions as those transactions have facilitated and will continue to facilitate the business operation of the Group (which will include Kunlun Gas after the Acquisition). The executive Directors and the non-executive Director are of the view that the Revised Caps for the continuing connected transactions are fair and reasonable, and are in the interests of the Company and the Shareholders as a whole.

5. Basis of determining of the Revised Caps

(i) Category (a) – Provision of products and services by the CNPC Group to the Group but excluding the Oil and Gas Products

In respect of the Revised Caps for the category (a) continuing connected transactions for the two years ending 31 December 2017, the Board has considered (among others) the additional capital expenditure that may be incurred due to certain planned major projects of the Target Group whose construction work is expected to commence in 2016 or 2017. If the CNPC Group, subject to fulfilment of the relevant public bidding requirements, provides design and construction services to the Target Group in relation to such projects, the connected transaction amount would increase significantly. It is anticipated that the provision of social and ancillary services by the CNPC Group should remain stable each year.

(ii) Category (c) – Rental Payments

In respect of the Revised Caps for the category (c) continuing connected transactions for the two years ending 31 December 2017, the Board has considered the historical rental payment amount and the growth potential of the Enlarged Group, in particular, following the Acquisition and the merge of regional offices of the Group and the Target Group that may significantly increase the needs for new office spaces which may be provided by the CNPC Group.

– 25 –

LETTER FROM THE BOARD

(iii) Category (d) – Oil and Gas Products

In respect of the Revised Caps for the category (d) continuing connected transactions for the two years ending 31 December 2017, the Board has considered (among others) the planned purchase amount of natural gas and LPG of the Target Group, the percentage of natural gas and LPG that may be purchased from the CNPC Group based on prior experience, the historical and estimated natural gas and LPG prices.

(iv) Category (e) – Provision of products and services by the Group to the CNPC Group under the Third Supplemental Agreement

In respect of the Revised Caps for the category (e) continuing connected transactions for the two years ending 31 December 2017, the Board has considered (among others) the historical amount of products and services provided by the Target Group and the Group to the CNPC Group, the price fluctuation of the relevant products and in particular, the completion of repair and maintenance of certain facilities of the CNPC Group which would restore its demand for the relevant services and products in 2016 and 2017.

6. Pricing determination

(i) Category (a) – Provision of products and services by the CNPC Group to the Group but excluding the Oil and Gas Products

The pricing for such general products and services to be provided by the CNPC Group to the Group under the Master Agreement shall be based on the following general principles:

(a) the price (the “ Relevant Market Price ”) should not exceed the best price among all the prices offered by all the independent third parties in similar conditions in the relevant market in the ordinary course of business (the “ Best Local Price ”). If the CNPC Group provides the relevant products or services at a price lower than the Best Local Price to independent third parties in the relevant market, such lower price shall be the Relevant Market Price; and
(b) in the absence of the Relevant Market Price, the price should not exceed the best price among all the prices as offered by all the independent third parties in similar conditions in the nearby market in the ordinary course of business (the “ Best International Price ”). If the CNPC Group provides the relevant products or services at a price lower than the Best International Price to independent third parties in the nearby market, such lower price shall be used.

To ensure that the actual pricing of the services/products will be in accordance with the stated pricing policies under the Master Agreement, prior to entering into of the individual agreements, the procurement team of each of the services/products under the Master Agreement will, so long as the market conditions allow, obtain quotation of such

– 26 –

LETTER FROM THE BOARD

services/products from at least two independent third parties in similar qualifications and compare the same with the terms offered by the CNPC Group. The procurement teams will not propose to enter into such transactions if the relevant terms are less favourable than those offered by independent third parties.

The pricing for the services to be provided by the CNPC Group to the Group under the Second Supplemental Agreement shall be based on the following:

(a) the price (the “ New Relevant Market Price (a) ”) should not exceed the best price among all the prices as offered by all the independent third parties in similar conditions in the relevant market or nearby market in the ordinary course of business (“ Best Market Price (a) ”). If the CNPC Group provides the relevant services at a price lower than the Best Market Price (a) to independent third parties in such markets, such lower price shall be the New Relevant Market Price (a); and
(b) in the absence of the New Relevant Market Price (a), the price shall be set at the agreed contractual price, being the aggregate value of the actual costs of all services to be provided under the Master Agreement which are required to be priced at agreed contractual prices during the relevant year plus an additional margin of not more than 3% (“ Pricing Margin (a) ”). Given (i) the cost plus basis shall only be adopted in the scenario where the New Relevant Market Price (a) is not available and was therefore seldom actually applied in the past; (ii) according to the financial information of CNPC for the year ended 31 December 2014, the Pricing Margin (a) was substantially lower than the margin of the core business of CNPC, the Directors consider that such margin is reasonable to cover any administrative costs and handling charges incurred by the CNPC Group in providing such products and services. The Directors have reviewed the relevant margins every three years when the Master Agreement was refreshed and will continue to do so to make sure such profit margin (even if seldom applied) is not detrimental to the Company and minority Shareholders.

If interest is to be incurred under the financial services, the interest rate should be no less favourable than the prevailing interest rate as prescribed by the People’s Bank of China at the relevant time.

The relevant market as referred to in the pricing policy under category (a) continuing connected transactions means the market comprised by a group or a category of goods or services which, so long as the market conditions allow, the Group deems to have a relatively close substitution relationship within a certain geographical area based on various factors including the origin, characteristics, competition and use of the services or goods involved.

Internal controls in relation to the financial service transactions

There are stringent internal control policies with regard to financial service transactions. The finance department of the Group would compare the deposit rates, loan rates and services charge fees quoted from the counterparties with the terms from other

– 27 –

LETTER FROM THE BOARD

independent third parties to ensure that the most favourable terms are obtained. In addition, the transactions will be reported to and approved by the head of the finance department of the Group. The internal control policies will also be applied to the transactions with the CNPC Group to ensure:

(a) for deposit services, the interest rate of the deposits available to the Group from the CNPC Group shall not be less than (i) the minimum interest rate prescribed by the People’s Bank of China; and (ii) the interest rate available to the Group from other major domestic commercial banks;
(b) for loan services, the interest rate of the loans to be granted by the CNPC Group to the Group shall not be higher than (i) the maximum interest rate prescribed by the People’s Bank of China; and (ii) the interest rate charged against the Group by other major domestic commercial banks in respect of the same type of loans; and
(c) for entrustment services and other financial services which the CNPC Group may from time to time offer, the fee which the CNPC Group will charge the Group for the further financial services (i) will comply with any requirements of the People’s Bank of China and the China Banking Regulatory Commission in respect of the charges for the same type of financial services; and (ii) will not exceed the fees charged by other onshore commercial banks to the Group or the fees charged by the CNPC Group to other members of the Group in respect of the same type of financial services.

(ii) Category (c) – Rental Payments

The Rental Payments for the properties to be leased from the CNPC Group should be fair and reasonable with reference to Prevailing Market Prices of similar properties in the same regions or areas and the conditions of the property. The terms and conditions on which properties are to be leased should be no less favourable than those (i) offered by the CNPC Group to independent third parties and (ii) offered by independent third parties to the Group, for similar properties. Tenancy agreements to be negotiated on an arm’s length basis will be entered into between the CNPC Group and the Target Group based on normal commercial terms.

(iii) Category (d) – Oil and Gas Products

The pricing for the Oil and Gas Products to be provided by the CNPC Group to the Group shall be based on the following general principle: the Relevant Market Price should not exceed the Best Local Price offered by all the independent third parties in similar conditions in the relevant market in the ordinary course of business. If the CNPC Group provides the relevant products at a price lower than the Best Local Price to independent third parties in similar conditions in the relevant market, such lower price shall be the Relevant Market Price.

– 28 –

LETTER FROM THE BOARD

The relevant market as referred to in the pricing policy under category (d) continuing connected transactions means to the market comprised by the supply of oil and gas products which, so long as the market conditions allow, the Group deems to have a relatively close substitution relationship within a certain geographical area based on various factors including the origin, characteristics, competition, regulatory environment and use of the oil and gas products involved.

In addition, the purchase of natural gas from upstream suppliers involves the price guidance or cap price requirement as may be promulgated or published by the relevant central and local price control authorities. For instance, the price at city gate is promulgated by the NDRC and refreshed from time to time depending on market conditions.

(iv) Category (e) – Provision of products and services by the Group to the CNPC Group under the Third Supplemental Agreement

The pricing for such general products and services to be provided under the Third Supplemental Agreement shall be based on the following general principles:

(a) the price (the “ New Relevant Market Price (e) ”) shall not exceed the best price among all the prices as offered by all the independent third parties in the relevant market or nearby market in the ordinary course of business (“ Best Market Price (e) ”). If the Group provides the relevant products or services at a price lower than the Best Market Price (e) to independent third parties in such markets, such lower price shall be the New Relevant Market Price (e); and
(b) in the absence of the New Relevant Market Price (e), the price shall be set at the agreed contractual price, being the aggregate value of the actual costs of all products and services to be provided under the Master Agreement which are required to be priced at agreed contractual prices during the relevant year plus an additional margin of not more than 3% (“ Pricing Margin (e) ”). Given (i) the cost plus basis shall only be adopted in the scenario where the New Relevant Market Price (e) is not available and was therefore seldom actually applied in the past; (ii) the margin is reasonable to cover any administrative costs and handling charges incurred by the Group in providing the relevant products and services as stated herein; and (iii) the same percentage is adopted for the Pricing Margin (a) under Category (a), the Directors consider the Pricing Margin (e) to be appropriate. The Directors have reviewed the relevant margins every three years when the Master Agreement was refreshed and will continue to do so to make sure such profit margins (even if seldom applied) are not detrimental to the Company or minority Shareholders.

The relevant market as referred to in the pricing policy under category (e) continuing connected transactions means to the market comprised by a group or a category of goods or services which the Group deems to have a relatively close substitution relationship within a certain geographical area based on various factors including the origin, characteristics and use of the services or goods involved.

– 29 –

LETTER FROM THE BOARD

In addition, the sale of fuel gas to downstream end users involves the price guidance or cap price requirement as may be promulgated or published by the relevant central and local price control authorities. For city gas, the sale price to end users shall be jointly determined by the local price control authorities taking into account the procurement cost, transmission cost as well as the local living standard and there will be a relatively fixed price (with progressive adjustment) for residential households and guidance price for non-residential users.

The Directors considered that the above pricing policies for continuing connected transactions would ensure the connected transactions between the Company and CNPC Group to be entered into based on normal commercial terms, and will not be detrimental to the interests of the Company and the minority shareholders. The Company will (where applicable) review the reasonableness of the above market pricing policies for connected transactions from time to time based on market conditions.

The Group will, where applicable, (i) review, from time to time, the terms offered by the independent third parties and compare with the terms of each of the continuing connected transactions to ensure that they are no less favourable than those offered by the independent third parties; (ii) review the Prevailing Market Price of natural gas and LPG prescribed by the PRC government and based on the price list published by the CNPC Group; (iii) review, from time to time, rental information of similar properties in the same regions or areas from various market reports, estate agents and/or terms applicable to the tenants of the CNPC Group, including the independent third parties; and (iv) review the relevant actual cost to apply the pricing margin. In addition, the independent non-executive Directors and the auditor of the Company will conduct annual reviews, among others, on the continuing connected transactions in accordance with the Listing Rules.

VIII. LISTING RULES IMPLICATIONS

Accordingly, the Acquisition constitutes a connected transaction of the Company. As one or more of the applicable percentage ratios referred to in Chapters 14 and 14A of the Listing Rules for the Acquisition exceed 100%, the Acquisition constitutes a very substantial acquisition and connected transaction of the Company under Chapters 14 and 14A of the Listing Rules respectively and is subject to requirements for reporting, announcement and approval by the Independent Shareholders at the SGM.

– 30 –

LETTER FROM THE BOARD

Both CNPC and PetroChina are the controlling shareholders of the Company, thus both CNPC and PetroChina are connected persons of the Company under Chapter 14A of the Listing Rules. As soon as Kunlun Gas becomes a wholly owned subsidiary of the Company, the continuing transactions between Kunlun Gas and CNPC or PetroChina and their respective associates will become continuing connected transactions of the Company under Chapter 14A of the Listing Rules.

As the applicable percentage ratios for the Revised Caps for categories (a), (d) and (e) (the “ Revised Caps Subject to Approval ”) continuing connected transactions exceed 5% on an annual basis, the Revised Caps Subject to Approval are subject to reporting, announcement and Independent Shareholders’ approval requirements under the Listing Rules.

IX. INFORMATION ON THE PARTIES

1. Information on the Group

The Company is an investment holding company. The principal activities of its subsidiaries, associates and joint ventures are the exploration and production of crude oil and natural gas in the PRC, the Republic of Kazakhstan, the Sultanate of Oman, the Republic of Peru, the Kingdom of Thailand and the Azerbaijan Republic, the sales of natural gas, LNG processing, LNG terminal business and transmission of natural gas in the PRC.

2. Information on the Target Group

For information of the Target Group, please refer to Section IV ( Business and Financial Information of Kunlun Gas ) of this “Letter from the Board”.

3. Information on PetroChina

PetroChina and its subsidiaries mainly engage in petroleum and natural gas-related activities, including (i) the exploration, development, production and sale of crude oil and natural gas; (ii) the refining, transportation, storage and marketing of crude oil and petroleum products; (iii) the production and sale of basic petrochemical products, derivative chemical products and other petrochemical products; and (iv) the transmission of natural gas, crude oil and refined products, and the sale of natural gas.

X. SPECIAL GENERAL MEETING

The SGM will be held on 18 February 2016 for the Shareholders (including the Independent Shareholders) to consider and, if thought fit, to approve, among other things:

the Acquisition Agreement and the transactions contemplated thereunder; and
the continuing connected transactions and the Revised Caps Subject to Approval for the continuing connected transactions.

– 31 –

LETTER FROM THE BOARD

To the best knowledge, information and belief of the Directors, having made all reasonable enquiries, no Shareholder apart from CNPC and PetroChina and their respective associates and Mr. Zhang Bowen shall abstain from voting on the resolutions approving (i) the Acquisition Agreement and the transactions contemplated thereunder; and (ii) the continuing connected transactions and the Revised Caps Subject to Approval for the continuing connected transactions. Each of CNPC, PetroChina and Mr. Zhang Bowen is entitled to control all voting rights in respect of its/his Shares as at the Latest Practicable Date.

The votes to be taken at the SGM in relation to the above proposed resolutions will be taken by poll.

An Independent Board Committee comprising all the independent non-executive Directors has been established to advise the Independent Shareholders in relation to the Acquisition and the Revised Caps Subject to Approval for the continuing connected transactions.

ING Bank N.V., Hong Kong Branch, has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

A notice convening the SGM is set out on pages SGM-1 to SGM-2 of this circular. A proxy form for use at the SGM is enclosed. At the SGM, ordinary resolutions will be proposed to approve, among other things, (i) the Acquisition Agreement and the transactions contemplated thereunder; and (ii) the continuing connected transactions and the Revised Caps Subject to Approval for the continuing connected transactions.

XI. RECOMMENDATION

Based on the relevant information disclosed herein including, the industry overview, the operation of the Target Group, risk factors and legal and regulatory environment, the Directors believe that the terms of the Acquisition Agreement are fair and reasonable and the entering into of the Acquisition Agreement is in the interests of the Company and the Shareholders as a whole. The Directors further believe that the Revised Caps Subject to Approval for the continuing connected transactions are fair and reasonable. Accordingly, the Directors recommend the Independent Shareholders to vote in favour of the resolutions to be proposed at the SGM in relation to (i) the Acquisition Agreement and the transactions contemplated thereunder; and (ii) the continuing connected transactions and the Revised Caps Subject to Approval for the continuing connected transactions.

As each of Mr. Wu Enlai and Mr. Zhang Bowen is also directors and/or senior management of certain subsidiaries of CNPC, they have abstained from voting on the board resolutions approving the Acquisition and the Revised Annual Caps Subject to Approval. Save for the above, none of the Directors have any material interest in the matters mentioned above for which they shall be required to abstain from voting on the resolutions to be considered at the board meeting.

– 32 –

LETTER FROM THE BOARD

Your attention is drawn to the letter from the Independent Board Committee which is set out on page 34 of this circular. The Independent Board Committee, having taken into account the advice of the Independent Financial Adviser, considers that the Acquisition is fair and reasonable and is in the interests of the Company and its Shareholders as a whole and the continuing connected transactions and the Revised Caps Subject to Approval for the continuing connected transactions are fair and reasonable and in the interests of the Company and its Shareholders as a whole. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the relevant resolutions to be proposed at the SGM.

XII. ADDITIONAL INFORMATION

A letter of recommendation from the Independent Board Committee is set out on page 34 of this circular, which contains its recommendation to the Independent Shareholders, and the letter of advice from the Independent Financial Adviser is set out on pages 35 to 65 of this circular, which contains its advice to the Independent Board Committee and the Independent Shareholders. Your attention is also drawn to the financial and general information set out in the appendices to this circular.

By Order of the Board Wu Enlai Chairman

– 33 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [26 x 21] intentionally omitted <==

==> picture [246 x 39] intentionally omitted <==

==> picture [273 x 42] intentionally omitted <==

----- Start of picture text -----

(Stock Code: 00135.HK)
23 January 2016
----- End of picture text -----

To the Independent Shareholders

Dear Sir or Madam,

(1) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF PETROCHINA KUNLUN GAS CO., LTD. AND

(2) PROPOSED CONTINUING CONNECTED TRANSACTIONS AND REVISED CAPS SUBJECT TO APPROVAL

We refer to the circular dated 23 January 2016 of the Company (the “ Circular ”) of which this letter forms part. Terms defined in the Circular shall have the same meanings herein unless the context otherwise requires.

We have been appointed as members of the Independent Board Committee to advise the Independent Shareholders in respect of the Acquisition and the Revised Caps Subject to Approval for the continuing connected transactions, details of which are set out in the “Letter from the Board” in the Circular to the Shareholders.

Having taken into account the advice of the Independent Financial Adviser, we consider that (1) although the Acquisition is not in the ordinary or usual course of business of the Company, it is on normal commercial terms; and (2) the terms of the Acquisition contemplated under the Acquisition Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Furthermore, we are of the opinion that the continuing connected transactions and the Revised Caps Subject to Approval for the continuing connected transactions are (1) on normal commercial terms and in the ordinary and usual course of business of the Company; and (2) fair and reasonable and in the interests of the Company and its Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to approve the Acquisition contemplated under the Acquisition Agreement and the continuing connected transactions and the Revised Caps Subject to Approval for the continuing connected transactions as set out in the notice of the SGM to be held on 18 February 2016.

Yours faithfully,

Independent Board Committee

Li Kwok Sing Aubrey

Lau Wah Sum

Liu Xiao Feng

– 34 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the text of the letter prepared by ING Bank N.V., Hong Kong Branch setting out its advice to the Independent Board Committee and the Independent Shareholders for inclusion in this circular.

==> picture [133 x 34] intentionally omitted <==

36/F One International Finance Centre, 1 Harbour View Street, Central, Hong Kong

23 January 2016

To the Independent Board Committee and Independent Shareholders of Kunlun Energy Company Limited

Dear Sirs,

(1) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF PETROCHINA KUNLUN GAS CO., LTD AND (2) PROPOSED CONTINUING CONNECTED TRANSACTIONS

You, the Independent Board Committee (as defined herein) of Kunlun Energy Company Limited (“ Kunlun Energy ” or the “ Company ”, together with its subsidiaries, the “ Group ”), have asked us, the Corporate Finance Division of ING Bank N.V., Hong Kong Branch, pursuant to an engagement (the “ Engagement ”) set out in an Engagement letter dated 14 December 2015, to give our opinion (the “ Opinion ”) with respect to the fairness and reasonableness of the terms of Acquisition Agreement (as defined herein) and the transactions contemplated under the Acquisition Agreement (the “ Transactions ”).

In arriving at our Opinion, we have reviewed and considered Kunlun Energy’s circular to its shareholders dated 23 January 2016 (“ Circular ”), the annual and interim reports of Kunlun Energy. We have also discussed with the management of Kunlun Energy in respect of the business operation and future prospects of the company.

We have also compared the data provided to us with similar publicly available data for various other companies in your business sector, and we have considered, to the extent publicly available, the financial terms of certain other business combinations and other transactions which have recently been effected by such companies. We also considered such other information, financial studies, analyses and investigations and financial, economic and market criteria which we deemed relevant for the purposes of producing our Opinion.

– 35 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

INTRODUCTION

On 28 December 2015, the Company and PetroChina Company Limited (“ PetroChina ”) entered into the agreement (the “ Acquisition Agreement ”), pursuant to which PetroChina has agreed to sell and the Company has agreed to purchase the entire equity interest in PetroChina Kunlun Gas Co., Ltd. (“ Kunlun Gas ” or the “ Target ”, together with its subsidiaries, the “ Target Group ”) owned by PetroChina pursuant to the terms and conditions of the Acquisition Agreement (the “ Acquisition ”). Pursuant to the Acquisition Agreement, the Consideration payable by the Company to PetroChina will be RMB14,827,093,900 (equivalent to approximately HK$17,998,414,600[1] or US$2,322,357,900[1] ), which will be satisfied by way of cash payments.

As at 20 January 2016 (the “ Latest Practicable Date ”), PetroChina indirectly holds 4,708,302,133 ordinary shares in the Company with par value of HK$0.01 each (“ Shares ”), representing approximately 58.33% of the issued share capital of the Company. In addition, China National Petroleum Corporation (“ CNPC ”, and together with its subsidiaries but excluding the Group as enlarged by the Acquisition after the Completion, “ CNPC Group ”), the controlling shareholder of PetroChina, indirectly holds additional 277,432,000 Shares in the Company, representing 3.43% of the issued share capital of the Company. Accordingly, CNPC as the ultimate controlling shareholder of the Company will be deemed to have interests in 4,985,734,133 Shares of the Company, representing approximately 61.76% of the issued share capital of the Company. Both CNPC and PetroChina are the controlling shareholders of the Company, thus both CNPC and PetroChina are connected persons of the Company under Chapter 14A of the Rules governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “ Stock Exchange ”) (the “ Listing Rules ”).

As soon as Kunlun Gas becomes a wholly owned subsidiary of the Company, the continuing transactions between Kunlun Gas and CNPC or PetroChina and their respective associates will become continuing connected transactions (“ CCT ”) of the Company under Chapter 14A of the Listing Rules. As the applicable percentage ratios for the Revised Caps Subject to Approval (as defined herein) for the relevant continuing connected transactions exceed 5% on an annual basis, the Revised Caps Subject to Approval are subject to reporting, announcement and Independent Shareholders’ approval requirements under the Listing Rules.

Notes:

1 The Consideration is translated at the exchange rates of HK$1.00 = RMB0.8238 and US$1.00 = HK$7.75.

– 36 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Kunlun Energy has appointed ING Bank N.V., Hong Kong Branch (“ ING ”) as the independent financial advisor (“ IFA ”) to the independent committee of the board established on 22 December 2015 (“ Independent Board Committee ”) and shareholders of the Company other than CNPC and its associates (including PetroChina) and Mr. Zhang Bowen (the “ Independent Shareholders ”).

This letter forms part of the Circular which provides, inter alia, further details of the Transactions and the Revised Caps Subject to Approval, the recommendation of the Independent Board Committee to the Independent Shareholders in relation to the Transactions and the Revised Caps Subject to Approval and the notice of the SGM to be convened by the Company to consider the Transactions and the Revised Caps Subject to Approval. Unless otherwise defined or where the context otherwise requires, capitalised terms used in this letter shall have the same meaning as defined in the Circular.

TERMS OF REFERENCE

In accordance with the terms of our Engagement, in formulating our Opinion and recommendation with regards to the Transactions:

We have not assumed any responsibility for independent verification of, and we have not independently verified, any of the foregoing information and have relied on all such information as being sufficient, complete and accurate and not misleading in all material respects, without any additional check being undertaken to verify the completeness and accuracy of such disclosure. For the avoidance of doubt, we have assumed that no information has been withheld from us that could have an impact on this Opinion;
We have not assumed any responsibility for any aspect of the work that any professional advisors have produced regarding the Transactions and we have assumed as true and accurate and not misleading any work produced by such advisors. We have not provided, obtained or reviewed any legal, tax, regulatory, accounting, actuarial or other advice and as such assume no liability or responsibility in connection therewith. Accordingly, in providing this Opinion, we have not taken into account the possible implications of any such advice;
We have assumed that all corporate and other action required by the Group to complete the Transactions and carry out your obligations thereunder has been or will be duly taken, that the Transactions documentation will constitute a valid and legally binding obligation of you, that you have sufficient financial resources to honour all of your financial obligations in respect of the Transactions without any breach of covenants or other negative financial impact, and that the execution, delivery and performance by you of the Transactions will not violate or be prohibited by either your internal constitution or by any provision of any existing law applicable to you or any agreement or instrument binding on you or any of your assets or constitute a default or termination event (however described) under any such agreement or instrument;

– 37 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

In addition, we have not been requested to make (and therefore have not made) an independent evaluation or appraisal of your assets and liabilities (contingent or otherwise), nor have we been furnished with any such evaluations or appraisals. Our Opinion is necessarily based upon publicly available information collated by us up to the Latest Practicable Date, and the financial, economic, political and social market and other relevant conditions to the Opinion as they exist and can be evaluated, as at the Latest Practicable Date;
We do not express an opinion herein as to the prices at which the shares of Kunlun Energy may trade or the future value, financial performance or condition of Kunlun Energy and/or the Group, upon or after completion of the Transactions. ING has not conducted due diligence with respect to Kunlun Energy other than its review of certain publicly available information related to Kunlun Energy. Accordingly, for the purposes of its Opinion, ING has assumed that there is no non-public information with respect to Kunlun Energy and/or the Group made available to ING that would, or would reasonably be likely to, have an adverse impact on the price of the Kunlun Energy Shares.
We have assumed that you are complying in all material respects with all relevant applicable laws and regulations and promptly disclose to the extent required under applicable laws and regulations any price sensitive information to the public;
We have assumed that all consents and approvals of regulatory bodies, shareholders, exchanges, creditors and others which are required under any applicable law, regulation, agreement or instrument to consummate the Transactions will be obtained with no detriment in any aspect which may be material for our analysis. Subsequent developments may affect this Opinion and the assumptions made in its preparation; and
We have assumed that the Transactions will not constitute an event of default or a potential event of default under any of your debt obligations and that, following completion of the Transactions, you will continue to be able to meet all of your debts and other obligations as they fall due.

We consider that we have reviewed sufficient information to reach an informed view, to justify our reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our recommendation. We also consider that we have performed all reasonable steps as required under Rule 13.80 of the Listing Rules (including the notes thereto) to formulate our opinion and recommendation.

We have been engaged by Kunlun Energy to act as IFA for the purpose of producing this Opinion and recommendation and we will receive a fee from Kunlun Energy for our services. This fee is not contingent on the consummation of the Transactions.

In the ordinary course of business, ING Bank N.V. (of which we, the Corporate Finance Division of ING Bank N.V., Hong Kong Branch forms part) and its affiliates may actively trade your debt and equity securities for its own account and for the accounts of clients and accordingly, may at any time hold a long or short position in such securities.

– 38 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

This Opinion and recommendation is supplied to you, the Independent Board Committee and Independent Shareholders, on the understanding that it has been produced solely for your benefit as part of the information you require in your contemplation of the Transactions. We do not otherwise express any views on the Transactions, or its effect on Kunlun Energy’s business or any part of it.

This Opinion and recommendation exclusively focuses on the fairness and reasonableness of the Transactions and does not address any other issues such as the underlying business decision to recommend the Transactions or its commercial merits, which are matters solely for the management of Kunlun Energy. Subsequent developments in the aforementioned conditions may affect this Opinion and recommendation and the assumptions made in preparing this Opinion.

This Opinion is confidential and may not be quoted or referred to, in whole or in part, in any registration statement, prospectus or proxy statement, or in any other document used in connection with the Transactions or Engagement, nor shall this Opinion be used for any other purposes, without our prior written consent.

This Opinion is issued in the English language and reliance may only be placed on this Opinion as issued in the English language. If any translations of this Opinion are delivered they are provided only for ease of reference, have no legal effect and ING makes no representation as to (and accepts no liability in respect of) the accuracy of any such translation.

We do not accept any responsibility for the contents of this Opinion and recommendation to any party (including Shareholders, creditors, regulators, exchanges and other interested parties) other than Kunlun Energy. In addition, our liability to Kunlun Energy will be limited and in particular, we shall not have any direct or indirect liability of any kind to Kunlun Energy, or to any of Kunlun Energy’s directors (the “ Directors ”), employees, shareholders or creditors, arising out of or in connection with the Engagement, except for losses, claims, damages or liabilities incurred by Kunlun Energy to the extent they are found in a final judgment by a court to have resulted from a deliberate omission or gross negligence on the part of us or our affiliates and sub-contractors.

This Opinion, the recommendation and ING’s contractual and non-contractual obligations to Kunlun Energy hereunder shall be governed by and construed in accordance with Hong Kong law and any claims or disputes arising out of, or in connection with, this letter shall be subject to the exclusive jurisdiction of the Hong Kong courts.

– 39 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating our opinion and recommendation regarding the Transactions, we have taken into account the following principal factors and reasons:

1. Overview of the Transactions

A. Background

According to the announcement of the Company dated 28 December 2015 in relation to the Transactions, on 28 December 2015, the Company and PetroChina entered into the Acquisition Agreement, pursuant to which PetroChina has agreed to sell and the Company has agreed to purchase the entire equity interest in Kunlun Gas owned by PetroChina. Pursuant to the Acquisition Agreement, the consideration for the Acquisition payable by the Company to PetroChina will be RMB14,827,093,900 (equivalent to approximately HK$17,998,414,600 or US$2,322,357,900) (the “ Consideration ”), which will be satisfied by way of cash payments.

Chart 1: Simplified shareholding structure chart of the Company and the Target Group immediately after the Completion

==> picture [163 x 204] intentionally omitted <==

----- Start of picture text -----

CNPC
86.35%
PetroChina
3.43%
58.33%
The Company
100%
Target Group
----- End of picture text -----

B. Kunlun Energy

Kunlun Energy is an investment holding company and was listed on the Stock Exchange on 1 June 1988. The Group is principally engaged in the exploration and production of crude oil and natural gas in the People’s Republic of China (the “ PRC ”), the Republic of Kazakhstan, the Sultanate of Oman, Peru, the Kingdom of Thailand and, the Azerbaijan Republic, the sales of natural gas, liquefied natural gas (“ LNG ”) processing, LNG terminal business and transmission of natural gas in the PRC.

– 40 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Exploration and production business was the Group’s major source of revenue, profit and cash flow prior to 2010. The Group has started to develop the end-user sale and utilization of natural gas business since 2009 through equity acquisition, capital injection and the formation of new wholly-owned company or joint ventures. The following table summarises the revenues generated from different business segments of the Group during the two years ended 31 December, 2013 and 2014 and the six months period ended 30 June 2015:

Table 1: Business segmentation of the Group

	Six Months
	Ended	Year Ended 31 December
	30 June 2015	2014	2013
	(HK$ million)	(HK$ million)	(HK$ million)
Exploration & production	1,386	5,336	5,660
Natural gas distribution	19,493	42,708	37,770
Total revenue	20,879	48,044	43,430

C. The Target Group

Business overview

Kunlun Gas was established under the reorganisation of CNPC Natural Gas Pipeline Investment Co., Ltd. (中石油天然氣管道燃氣投資有限公司), China Huayou Group Gas Unit (中國華油集團燃氣事業部) and China Oil And Gas Company Limited (中油燃氣有限責任公司) in August 2008. Its current registered capital is RMB8.56 billion. Prior to the Acquisition, Kunlun Gas is a wholly owned subsidiary of PetroChina. It is a subsidiary of PetroChina specially responsible for the city gas and liquefied petroleum gas (“ LPG ”) distribution businesses, the scope of business of which includes (i) sales and transportation, storage, compressed natural gas (“ CNG ”), LPG; (ii) wholesales of feed gas and sale of propylene, propane and butane; (iii) sales of chemical products and light industry materials; (iv) technical development, consultation and services for gas products; and (v) investments in city gas projects, transfer of technology, leasing of equipment and others.

Kunlun Gas has established its presence in more than 120 cities with business coverage across 29 provinces, municipalities and autonomous regions and taken over the LPG sales business from refining and oil field enterprises under PetroChina. As at the end of 2014, Kunlun Gas owned and controlled over 150 city gas concessions and had 18 branching network projects with city gas networks and branching networks covering more than 20,000 km in aggregate; operated approximately 200 CNG refilling stations of various kinds, covering a total user base of more than 5 million comprising residential users, commercial users, industrial users and utilities users; and managed approximately 90 LPG distribution projects. In 2014, Kunlun Gas recorded natural gas sales of approximately 8.4 billion cubic metres, natural gas transmission volume of approximately 800 million cubic metres and LPG sales of approximately 5.91 million tonnes.

– 41 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Financial information

A summary of the consolidated financial information of the Target Group, extracted from the Accountants’ Report of the Target Group, is as follows:

Table 2: Consolidated financial information of the Target Group

	Nine Months
	Ended
	30 September	Year Ended 31 December
	2015	2014	2013
	(RMB million)	(RMB million)	(RMB million)
Consolidated net asset value	16,025	14,812	11,302
Net asset value attributable to
owner of Kunlun Gas	11,332	10,510	7,349
Revenue	32,173	54,180	53,404
EBITDA(1)	2,470	2,554	2,225
EBIT(2)	1,582	1,454	1,321
Profit before income tax
expense	1,655	1,535	1,411
Profit for the period/year	1,185	1,125	1,011
Profit for the period/year
attributable to owner of
Kunlun Gas	822	723	692

Source: The “Letter from the Board” and Appendix III in the Circular

Notes:

EBITDA means profit before income tax expenses, excluding interest income, interest expenses, depreciation, depletion and amortisation
EBIT means profit before income tax expenses, excluding interest income and interest expenses

2. Reasons for the Transactions

Reasons for and benefits of the Transactions to the Company are set out in the “Letter from the Board” in the Circular. As stated in “Letter from the Board”, the Directors believe that the Acquisition would be in the best interests of the Company to:

better define the Company’s business positioning and growth strategies;
facilitate the Company’s establishment of an integrated investment, financing and operating entity for the natural gas distribution and comprehensive utilisation business and help avoid the horizontal competition between the Company and PetroChina;

– 42 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

further improve its business structure and increase its business growth; and
generate synergies among the businesses, enhance operational efficiency and increase its market competitiveness.

We note that the Company and Kunlun Gas, being fellow subsidiaries of PetroChina, are both involved in the natural gas distribution business. The Transactions will put the downstream business of PetroChina into one single entity, minimize internal competition and facilitate future development. We further note that the Transactions would increase the geographic coverage, boosting the number of users and natural gas sales volume of the Company as well as expand the Company’s natural gas distribution and comprehensive utilisation business to areas like natural gas power generation business.

The Group will benefit from the Acquisition given the enlarged business as we note that there are supportive policy and plans which will lead to continual growth in natural gas consumption. As stated in the “Industrial Review” in the Circular, in November 2014, the General Office of State Council of the People’s Republic of China issued the Notice on Issuance of The Energy Development Strategy Action Plan (2014-2020), which called to firmly stick to the simultaneous development of non-fossil energy and efficient and clean utilisation of fossil energy, to reduce the proportion of coal consumption step by step, and to increase the proportions of natural gas consumption, so that in 2020 the share of coal consumption across China could be reduced to less than 62% and that of natural gas consumption over 10%. In November 2014, The National Development and Reform Commission of the PRC released China’s National Plan on Climate Change (2014-2020), which reiterated the objective by 2020 of reducing the rate of carbon dioxide emission to unit GDP by 40-45% from the amount recorded in 2005, thus fully accomplishing the target of controlling greenhouse gas emission.

As stated in the “Letter from the Board”, the Company will steadily and gradually divest the exploration and production business when suitable opportunities arise. We note that both revenue and profit before income tax expense from exploration and production business has steadily declined in the three years ended 31 December 2014. For the year ended 31 December 2014, exploration and production business accounted for 11.1% and 19.3% of the Company’s revenue and profit before income tax expense. We further note that for the six months ended 30 June 2015, exploration and production business had a negative contribution to the Company’s profit before income tax expense, with a loss before income tax expense of HK$159 million, mainly due to lower crude oil selling price. The Transactions would path a way for the Company to focus on its core business of natural gas distribution and comprehensive utilisation business.

– 43 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

3. Consideration

A. Consideration and payment terms

The Consideration will be settled in RMB or a foreign currency (including US$ and HK$) in equivalent amount subject to adjustment by the difference between (i) the net asset value of Kunlun Gas set out in the consolidated financial statements of Kunlun Gas as at the date of completion of the Transactions (being the last calendar day of the calendar month when all the conditions precedent specified in the Acquisition Agreement is satisfied or waived or such other date agreed by the Company and PetroChina in writing) (the “ Completion Date ”) and (ii) the net asset value of Kunlun Gas set out in the consolidated financial statements as at 30 September 2015 (the reference date based on which Beijing China Enterprise Appraisals Co. Ltd. (the “ Valuer ”) conducted the valuation of the Target Group and issued the Valuation Report) (the “ Valuation Reference Date ”) after deducting the Special Dividend (as defined herein).

The Company will pay no less than 30% of the Consideration (the “ First Tranche Consideration ”) to the bank account designated by PetroChina on the Completion Date; and the remainder of the Consideration (the “ Deferred Payment ”) will be settled in full by the Company within 12 months of the Completion Date (with no less than 60% of the Consideration settled within six months of the Completion Date). Any Deferred Payment will be charged an interest which shall be equivalent to the one-year benchmark RMB loan interest rate as published by the People’s Bank of China (the “ One-year RMB Loan Interest Rate ”) on the working day immediately preceding the relevant payment date. As at the Latest Practicable Date, the One-year RMB Loan Interest Rate is 4.6%.

– 44 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

B. Basis of Consideration determination

As stated in the “Letter from the Board”, the Consideration was determined after arm’s length negotiations between the Company and PetroChina, having taken into account, among others, the following factors:

(i) the valuation of the Target Group by the Valuer, as adjusted by the declaration of dividends on 27 December 2015 by Kunlun Gas to PetroChina in the amount of RMB1 billion (the “ Special Dividend ”);
(ii) the current status and future development prospects of the related industries in which the Target Group operates; and
(iii) business profile, historical financial performance and future development potential of the Target Group.

We note that the fair value of 100% equity interest of the entire share capital of the Target, as at the Valuation Reference Date, is RMB15,827,093,900 (the “ Valuation ”). The Consideration is at par to the Valuation as adjusted by the Special Dividend.

We have reviewed and discussed with the Valuer the methodology of, and basis and assumptions adopted for, the Valuation as contained in the Valuation Report. Based on our discussion with the Valuer, we have not identified any major factors which cause us to doubt the fairness, reasonableness and completeness of the assumptions used in arriving at their Valuation. We have also performed work as required under note (1)(d) to the Listing Rule 13.80 in relation to the Valuer including interviewing the Valuer and examining the Valuer’s previous relevant experience.

As stated in the “Letter from the Board”, the Valuation was conducted using the market method approach which values the Target Group by comparing the trading multiples of comparable companies of similar business nature in the open market.

We set out the comparable companies analysis and comparable transaction analysis in paragraphs 4 and 5, respectively. Comparable companies analysis and comparable transaction analysis are commonly used methods under the market approach.

– 45 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

4. Comparable companies

In our assessment of the valuation of the Transactions, we have considered the following commonly used valuation multiples:

Enterprise value[2] -to-EBITDA ratio (“ EV/EBITDA ”);
Enterprise value-to-EBIT ratio (“ EV/EBIT ”);
Price-to-earnings ratio (“ P/E ”); and
Price-to-book ratio (“ P/B ”);

We have selected a list of comparable companies (the “ Comparable Companies ”) of the Target Group for our comparison analysis based on the selection criteria that these companies: (a) are primarily engaged in natural gas sales and distribution in PRC and (b) had a market capitalisation of not less than approximately US$300 million as at Latest Practicable Date. The selection criteria have provided us with reasonably sufficient samples for comparison purpose. Although the Comparable Companies have principal operations in different parts of the country, we consider them to be operating in similar business environment given that PRC adopts a similar and consistent natural gas policy throughout the country.

While comparable companies analysis reflect current market sentiments towards the sector and provide guidance on valuation, our analysis does not take into account differences in accounting policies and standards, different interim financial reporting periods as well as differences in business models and/or tax treatments, nor does it take into account any possible unique characteristic(s) of different companies and no adjustments have been made to account for such differences. We note the financial information of the Comparable Companies, which are all listed on the Stock Exchange, is prepared on the basis of Hong Kong Financial Reporting Standards (“ HKFRS ”) in all material respects.

We have conducted our analysis and identified nine companies based on the abovementioned selection criteria which we consider to be the closest comparables (after taking into consideration the factors as set out in our selection criteria) to the Target Group’s business. We set out in the table below these Comparable Companies based on their respective market trading prices. The valuation multiples of the Comparable Companies are based on their respective share prices as at Latest Practicable Date, their respective financial positions of balance sheet items as at 30 June 2015 and the financial information for the 12-month period ended 31 December 2014, unless otherwise noted, for all Comparable Companies.

2 Enterprise values are calculated based on the market capitalisation plus net debt (or less net cash) plus minority interests

– 46 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Table 3: Comparable Companies

Market capitalisation (US$ million)(1)(8) Binhai Investment Company Limited 353 China Gas Holdings Limited 5,965 China Oil And Gas Group Limited 339 China Resources Gas Group Limited 5,272 China Tian Lun Gas Holdings Limited 809 ENN Energy Holdings Limited 4,507 Kunlun Energy Company Limited 5,331 Towngas China Company Limited 1,235 Zhongyu Gas Holdings Limited 581 *Average* *Median* The Target Group Source: Bloomberg, Capital IQ, Company announcements Notes:	EV/ EBITDA(2) EV/ EBIT(3) 14.4x 17.9x 14.4x 17.1x 6.7x 9.6x 9.4x 11.5x 16.3x 19.5x 7.6x 9.1x 4.5x 6.4x 8.1x 10.0x 10.9x 13.0x 10.2x 12.6x 9.4x 11.5x 6.9x 12.2x	P/E(4) 14.4x 18.2x 8.0x 16.1x 18.7x 12.5x 7.4x 9.0x 13.9x 13.1x 13.9x 20.5x	P/B(5) 2.9x 2.6x(6) 0.8x 2.4x 2.3x 2.2x 0.8x 0.7x 2.1x
			1.9x 2.2x
			1.4x(7)

(1) Market capitalisation of the Comparable Companies are based on the closing share prices on the Latest Practicable Date
(2) EV/EBITDA multiples are calculated based on the market capitalisation (using the respective share prices as at the Latest Practicable Date in the case of the Comparable Companies) and the Consideration in the case of the Target Group plus net debt (or less net cash) plus minority interests, divided by the respective EBITDA for the 12-month period ended 31 December 2014
(3) EV/EBIT multiples are calculated based on the market capitalisation (using the respective share prices as at the Latest Practicable Date in the case of the Comparable Companies) and the Consideration in the case of the Target Group plus net debt (or less net cash) plus minority interests, divided by the respective EBIT for the 12-month period ended 31 December 2014
(4) P/E multiples are calculated based on the market capitalisation (using the respective share prices as at the Latest Practicable Date in the case of the Comparable Companies) and the Consideration in the case of the Target Group, divided by the respective consolidated profit attributable to shareholders for the 12-month period ended 31 December 2014 except China Gas Holdings Limited P/E multiple which is calculated based on the market capitalisation divided by the respective consolidated profit attributable to shareholders for the 12-month period ended 31 March 2015
(5) P/B multiples are calculated based on market capitalisation (using the respective share prices as at the Latest Practicable Date in the case of the Comparable Companies), divided by the respective shareholders’ equity as at 30 June 2015 unless noted otherwise
(6) P/B multiple is calculated based on shareholders’ equity as at 30 September 2015
(7) P/B for the Target Group is calculated based on (i) the Consideration divided by (ii) equity attributable to owner of the Target Company as at 30 September 2015 adjusted by the Special Dividend
(8) Foreign exchange assumptions: US$/HK$: 7.8308 as published on Bloomberg as at the Latest Practicable Date

– 47 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(1) EV/EBITDA Approach

The average and median EV/EBITDA multiples of the Comparable Companies are 10.2 times and 9.4 times, respectively, for the year ended 31 December 2014. The EV/EBITDA multiple of the Target Group implied by the Consideration is lower than both the average and median EV/EBITDA multiples of the Comparable Companies.

(2) EV/EBIT Approach

The average and median EV/EBIT multiples of the Comparable Companies are 12.6 times and 11.5 times, respectively, for the year ended 31 December 2014. The EV/EBIT multiple of the Target Group implied by the Consideration is lower than the average but higher than the median EV/EBIT multiple of the Comparable Companies.

(3) P/E Approach

The average and median P/E multiples of the Comparable Companies are 13.1 times and 13.9 times, respectively, for the year ended 31 December 2014. The P/E multiple of the Target Group implied by the Consideration is higher than both the average and median P/E multiples of the Comparable Companies.

We note that the leverage of the Target Group is significantly lower than that of the Comparable Companies, with total debt-to-equity attributable to owner of approximately 10% for the Target Group compared to approximately 119% for the Comparable Companies. We consider that EV/EBITDA and EV/EBIT multiples are more relevant for analysis in this case as compared to P/E multiple as EV/EBITDA and EV/EBIT multiples are not distorted by the difference in the use of leverage between the Target Group and the Comparable Companies. EV/EBITDA and EV/EBIT approaches are also more relevant in evaluating an operation company.

(4) P/B Approach

The Consideration is approximately 1.4 times the equity value of the Target Group attributable to the equity holders as at 30 September 2015.

The average and median P/B multiples of the Comparable Companies are 1.9 times and 2.2 times respectively as at 30 June 2015 (except for China Gas Holdings Limited, which is as at 30 September 2015). The P/B multiple of the Target Group is lower than both the average and median P/B multiples of the Comparable Companies.

As mentioned above, the Directors determines the Consideration with reference to the Valuation which was conducted using the market method approach. Based on the analysis in this paragraph, the valuation multiples of the Target Group implied by the Consideration are generally lower than the valuation multiples of the Comparable Companies. We are therefore of the view that the Consideration compares reasonably with the valuation that would have been derived from the Comparable Companies analysis.

– 48 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

5. Comparable Transactions

Regarding the comparable transactions, we have considered the following commonly used valuation multiples in our assessment of the valuation of the Transactions:

EV/EBITDA;
P/E; and
P/B;

We have selected a list of comparable transactions (the “ Comparable Transactions ”) of the Transactions for our comparison analysis based on the selection criteria that these transaction targets: (a) were primarily engaged in the distribution of natural gas and/or operation of natural gas pipelines, based on the historical published annual report or other regulatory filings; (b) at least 50% stake acquisition; (c) deal value of at least US$100 million, which we consider as a sensible benchmark as the business of the respective companies are similar to the business of the Target Group and the Comparable Transactions involve substantial stake acquisition. We include the Comparable Transactions for four years between 2012 and 2015 as they are considered to be relatively recent. The benchmark also gives reasonably sufficient samples for comparison purpose.

Whilst comparable transactions analysis can reflect historical market sentiment towards the sector and provide guidance on valuation, we note that the analysis does not take into account differences in accounting policies and standards, different interim financial reporting periods as well as differences in business models and/or tax treatments, nor does it take into account any possible unique characteristic(s) of different companies and no adjustments have been made to account for such differences.

We have conducted our analysis and identified 16 transactions based on the abovementioned selection criteria that we consider to be the closest comparables (after taking into consideration the factors as set out in our selection criteria) to the Target Group’s business. We note that the target companies of 10 of 16 Comparable Transactions were located in other countries, which are different from the Target Group’s business environment. The Comparable Transactions are for illustration of valuation multiples of transactions of companies with businesses similar to that of the Target Group. We set out in the table below these Comparable Transactions and their relevant valuation multiples based on their respective transaction values.

– 49 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Table 4: Comparable Transactions

				Implied
				Equity
Completion			Target	Value(1)
Date	Acquiror	Target	Nationality	(US$ million)	EV/EBITDA(2)	P/E(3)	P/B(4)
30-Mar-15	China Tianlun	Beijing Hui Ji	China	140	11.9x	38.8x	3.3x
	Gas Holdings	Tai Zhan
	Limited	Investment
		Company
		Limited
Note (5)	China Gas	Beijing Gas	China	266	13.8x	108.5x	1.4x
	Holdings	Group
	Limited	Development
		Limited
27-Feb-15	Targa	Atlas Pipeline	United States	4,000	35.0x	(43.7x)	1.7x
	Resources	Partners, L.P.
	Partners LP
27-Feb-15	Targa	Atlas Energy,	United States	1,869	15.8x	(24.8x)	5.4x
	Resources	L.P.
	Corp.
26-Nov-14	Kinder	El Paso	United States	10,318	13.8x	27.0x	2.3x
	Morgan, Inc.	Pipeline
		Partners, L.P.
26-Nov-14	Kinder	Kinder	United States	33,993(6)	10.8x	n.m.(7)	3.4x
	Morgan, Inc.	Morgan
		Energy
		Partners, L.P.
4-Sep-14	Cheung Kong	Envestra	Australia	2,215	11.1x	16.9x	2.9x
	(Holdings)	Limited
	Limited;
	Power Assets
	Holdings
	Limited;
	Cheung Kong
	Infrastructure
	Holdings
	Limited
20-Dec-13	Shanghai Lian	Shanxi	China	570	n.a.	17.6x(8)	3.8x(9)
	Hua Fibre	Natural Gas
	Corporation	Company
		Limited
12-Nov-13	China Gas	Fortune Gas	China	400	n.a.	19.7x(10)	2.3x(11)
	Holdings	Investment
	Limited	Holdings
		Limited
12-Jun-13	Gujarat State	Gujarat Gas	India	725	11.6x	15.8x	4.5x(12)
	Petroleum	Company
	Corporation	Limited
	Limited
1-May-13	Kinder	Copano	United States	3,721	30.9x	(26.8x)(13)	3.8x
	Morgan, Inc.	Energy LLC

– 50 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Completion Date Acquiror Target Target Nationality 6-Nov-12 Cosan S.A. Indústria e Comércio Companhia de Gás de São Paulo SA- Comgás Brazil 16-Oct-12 China Resources Gas Group Limited China Resources Petrochem Gas Group Limited China 3-Jul-12 China Resources Gas Group Limited AEI China Gas Limited China 24-May-12 Kinder Morgan, Inc. El Paso Corp United States 26-Mar-12 Energy Transfer Equity, L.P. Southern Union Company United States Average Median PRC Transactions(21) Average Median The Target Group	Implied Equity Value(1) (US$ million) 2,962(14) 311 238 22,954 5,461	EV/EBITDA(2) n.a. n.a. n.a. 11.3x 13.5x 14.9x 13.5x 12.9x 12.9x 6.9x	P/E(3) 20.9x 86.6x(15) 18.5x(17) 44.2x(19) 22.7x 31.3x 19.7x 48.3x 29.2x 20.5x	P/B(4) 4.1x 1.8x(16) 0.9x(18) 4.9x(20) 2.1x 3.0x 3.1x 2.3x 2.0x 1.4x(22)

Source: Dealogic, company filings

Note:

(1) Implied Equity Value is calculated based on the consideration of the transaction divided by percentage stake acquired
(2) EV/EBITDA multiples are calculated based on the implied equity value plus net debt (or less net cash) plus minority interests, divided by the respective EBITDA for the previous 12-month period prior to the transactions
(3) P/E multiples are calculated based on the implied market value, divided by the respective profit attributable to shareholders from continuing operations for the previous 12-month period prior to the transactions, unless otherwise stated; negative P/Es have been excluded in deriving average
(4) P/B multiples are calculated based on the implied market value, divided by the respective shareholders equity as at the previous period end prior to the transactions, unless otherwise stated
(5) The transaction is still pending fulfillment or waiver of certain conditions. Independent shareholders of the company approved the transaction in March 2015

– 51 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(6) Derived based on company filing
(7) “n.m.” represents not meaningful. Not included in the calculation of average and median as the transaction was specific to a specific class of unitholders and there was no available breakdown in net income which was specific to the corresponding class of unitholders
(8) P/E multiple is calculated based on the implied market value, divided by the profit attributable to shareholders for the full-year ended 31 December 2012
(9) P/B multiple is calculated based on the implied market value divided by the shareholders equity as at 31 December 2012
(10) P/E multiple is calculated based on the implied market value divided by the net profit attributable to shareholders for the full year ended 31 December 2011
(11) P/B multiple is calculated based on the implied market value divided by the shareholders equity as at 30 June 2012
(12) P/B multiple is calculated based on the implied market value divided by the shareholders equity as of 30 June 2012
(13) Not included in the calculation of average and median as the P/E multiple is negative
(14) Derived based on company filing
(15) P/E multiple is calculated based on the implied market value divided by the net profit attributable to shareholders for the full year ended 31 December 2011; it is not included in the calculation of average and median as the multiple is significantly deviated from those shown by other Comparable Transactions
(16) P/B multiple is calculated based on the implied market value divided by the shareholders equity as at 31 July 2012
(17) P/E multiple is calculated based on the implied market value divided by the net profit attributable to shareholders for the full year ended 31 December 2011
(18) P/B multiple is calculated based on the implied market value divided by the shareholders equity as at 31 December 2011
(19) P/E multiple is calculated based on the implied market value divided by the net profit attributable to shareholder for the 12-month period prior to 30 June 2011 as there was a substantial loss on deconsolidation of subsidiary for the previous 12-month period prior to the transaction
(20) P/B multiple is calculated based on the implied market value divided by the shareholders equity as at 30 June 2011
(21) PRC Transactions refer to transactions involving target whose nationality is Chinese
(22) P/B for the Target Group is calculated based on (i) the Consideration divided by (ii) equity attributable to owner of the Target Company as at 30 September 2015 adjusted by the Special Dividend

– 52 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(1) EV/EBITDA Approach

The average and median EV/EBITDA multiples of the Comparable Transactions are 14.9 times and 13.5 times, respectively. The EV/EBITDA multiple of the Target Group implied by the Consideration is lower than both the average and median EV/EBITDA multiples of the Comparable Transactions.

The average and median EV/EBITDA multiples of the PRC Transactions are 12.9 times and 12.9x times, respectively. The EV/EBITDA multiple of the Target Group implied by the Consideration is lower than both the average and median EV/EBITDA multiples of the PRC Transactions.

(2) P/E Approach

The average and median P/E multiples of the Comparable Transactions are 31.3 times and 19.7 times, respectively. The P/E multiple of the Target Group implied by the Consideration is lower than the average but higher than the median P/E multiple of the Comparable Transactions.

The average and median P/E multiples of the PRC Transactions are 48.3 times and 29.2 times, respectively. The P/E multiple of the Target Group implied by the Consideration is lower than both the average and median P/E multiples of the PRC Transactions.

(3) P/B Approach

The Consideration is approximately 1.4 times the equity value of the Target Group attributable to the equity holders as at 30 September 2015.

The average and median P/B multiples of the Comparable Transactions are 3.0 times and 3.1 times, respectively. The P/B multiple of the Target Group implied by the Consideration is lower than both the average and median P/B multiples of the Comparable Transactions.

The average and median P/B multiples of the PRC Transactions are 2.3 times and 2.0 times, respectively. The P/B multiple of the Target Group implied by the Consideration is lower than both the average P/B and median multiples of the PRC Transactions.

Based on the analysis above, the valuation multiples of the Target Group implied by the Consideration are generally lower than the valuation multiples of the Comparable Transactions. We are therefore of the view that the Consideration compares reasonably with the valuation that would have been derived from the Comparable Transactions analysis.

– 53 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

6. Financial impact of the Acquisition on the Enlarged Group

Set out below and in the paragraph headed “Debt-to-equity ratio” are the summary of the unaudited pro forma financial information of the Enlarged Group. The unaudited pro forma financial information of the Enlarged Group have been prepared for the purpose of illustrating the financial effect of the Acquisition as if the Acquisition had been completed on 30 June 2015 for the unaudited pro forma consolidated statement of financial position and on 1 January 2014 for the unaudited pro forma consolidated statement of comprehensive income and the unaudited pro forma consolidated statement of cash flows. For further details, please refer to Appendix IV of the Circular – Unaudited pro forma financial information of the Enlarged Group.

Table 5: Financial impact of the Acquisition

	The	Group	The Enlarged	Group
	(HK$ million)		(HK$ million)
As at 30 June 2015:
Total assets	122,476		139,061
Total liabilities		47,373		62,944
For the year ended 31 December 2014:
Profit before income tax expense		11,956		13,902
Profit attributable to owners of
the Company		5,610		6,521
*Assets and Liabilities*

As shown in the “Unaudited Pro Forma Financial Information of the Enlarged Group”, the respective pro forma total assets and pro forma total liabilities of the Enlarged Group following the Acquisition would amount to approximately HK$139,061 million and approximately HK$62,944 million as compared to the respective total assets and total liabilities of the Group amounting to approximately HK$122,476 million and approximately HK$47,373 million as at 30 June 2015 before the Acquisition, representing an increase of HK$16,585 million in total assets and HK$15,571 million in total liabilities from those set out in the unaudited consolidated financial information of the Company as at 30 June 2015.

Profit

– 54 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Debt-to-equity ratio

Table 6: Net debt and equity of the Group and the Enlarged Group

As at 30 June 2015: Short-term and long-term borrowings plus obligations under finance leases Less: cash and cash equivalents Net debt Equity attributable to owners of the Company	The Group (HKD million) 31,498 (15,700) 15,798 53,158	The Enlarged Group (HKD million) 32,948 (1,441) 31,507 48,245

As at 30 June 2015, the debt-to-equity ratio of the Group was 29.7% (as calculated from the net debt (being short-term and long-term borrowings plus obligations under finance leases minus cash and cash equivalents) divided by equity attributable to owners of the Company). Assuming 30 June 2015 is the date of the Completion, the pro forma net debt and equity attributable to owners of the Company would be approximately HK$31,507 million and HK$48,245 million respectively. Accordingly, the debt-to-equity ratio of the Enlarged Group would be increased to 65.3%.

We note that the debt-to-equity ratio of the Enlarged Group would increase significantly after the Transactions primary due to the assumption that the Consideration will be financed by the Company’s internal cash. Kunlun Gas itself was in net cash position as at 30 September 2015. As stated in the “Letter from the Board”, the Company plans to first consider funding this transaction through its internal funds and debt financing instruments. Whenever necessary and if market conditions allow, the Company will also consider other suitable external financing methods.

7. Continuing connected transactions

– 55 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Both CNPC and PetroChina are the controlling shareholders of the Company, thus both CNPC and PetroChina are connected persons of the Company under Chapter 14A of the Listing Rules. After the Completion, Kunlun Gas will become a wholly owned subsidiary of the Company, the continuing transactions between Kunlun Gas and CNPC or PetroChina and their respective associates will become continuing connected transactions of the Company under Chapter 14A of the Listing Rules.

(a) Provision of products and services by the CNPC Group to the Target Group

The CNPC Group has been providing, among others, the following products and services to Kunlun Gas and its subsidiaries:

(i) oil and gas products, including primarily natural gas and LPG;
(ii) general products and services, including primarily engineering services, production services and social and ancillary services; and
(iii) financial services, including primarily loans (which are provided by the CNPC Group to the Target Group on normal commercial terms and hence fully exempted from reporting, announcement and Independent Shareholders’ approval requirements under the Listing Rules) and deposit services and the associated interest incomes and expenses;

– 56 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(b) Provision of products and services by the CNPC Group to the Target Group

The Target Group has been providing oil and gas products to the CNPC Group.

After the completion of the Acquisition, Kunlun Gas will become a subsidiary of the Company, and the above transactions will be subject to the terms and conditions of the Master Agreement (as supplemented). Further, the annual revenue generated from the provision of products by Kunlun Gas to the CNPC Group will be aggregated with the Existing Caps for the relevant category under the Master Agreement (as supplemented). Thus, the annual revenue to be generated by Kunlun Gas for providing the products to the CNPC Group will increase the annual cap figures for existing continuing connected transactions regarding the provision of products by the Group to the CNPC Group under the Master Agreement (as supplemented) and should therefore be subject to reporting, announcement and Independent Shareholders’ approval requirements.

– 57 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(c) Proposed Revised Caps in Relation to the Continuing Connected Transactions

The table below sets out the annual caps for the continuing connected transactions in relation to the Master Agreement (as amended) not being exempt from Independent Shareholders’ approval requirements under the Listing Rules (the “ Revised Caps Subject to Approval ”):

Table 7: Continuing connected transactions subject to Independent Shareholders’ approval

	Category of
	Continuing
	Connected			Year Ending 31 December
	Transactions	2016				2017
		Existing Cap	Revised Cap	Additional				Additional
		(as defined	(as defined	CCT				CCT
		herein)	herein)	(Note 1)	Existing Cap		Revised Cap	(Note 1)
(a)	Provision of	HK$14,708	HK$17,252	HK$2,544	HK$10,424		HK$13,232	HK$2,808
	products and	million	million	million	million		million	million
	services by the	(Note 4)	(Note 4)		_(Note _	4)	(Note 4)
	CNPC Group
	to the Group
	under the
	Master
	Agreement, and
	for the
	avoidance of
	doubt including
	those under the
	Second
	Supplemental
	Agreement but
	excluding the
	Oil and Gas
	Products (Note
	2) (Note 3)
(b)	(Note 5)
(c)	(Note 5)
(d)	Purchase of Oil	HK$32,338	HK$72,498	HK$40,160	HK$37,424		HK$85,644	HK$48,220
	and Gas	million	million	million	million		million	million
	Products by the
	Group under
	the Second
	Supplemental
	Agreement
	(Note 6)
(e)	Provision of	HK$21,935	HK$25,369	HK$3,434	HK$22,080		HK$26,080	HK$4,000
	products and	million	million	million	million		million	million
	services by the
	Group to the
	CNPC Group
	under the Third
	Supplemental
	Agreement
	(Note 7)

– 58 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Notes:

Additional CCT for each category of the continuing connected transactions equals to the relevant Revised Cap less the corresponding Existing Cap
Oil and Gas Products means such crude oil, natural gas, refined oil products, chemical products and other ancillary or similar products to be provided by the CNPC Group to the Group from time to time under the new category of additional products and services set out in the Second Supplemental Agreement
Considering the nature of the products and services provided by the CNPC Group, the products and services provided by the CNPC Group referred to under subparagraph (a)(ii) and (iii) above are categorised under this category of continuing connected transactions.
These amounts includes the Exiting Caps and the Revised Caps for deposit services which are exempted from the Shareholders’ approval pursuant to Rule 14A.76 of the Listing Rules.

Excluding the deposit services, the Existing Caps for category (a) are HK$10,703 million and HK$4,984 million for the two years ending 31 December 2017. Excluding the deposit services, the Revised Caps for category (a) are HK$11,513 million and HK$6,058 million for the two years ending 31 December 2017. The additional CCT excluding the deposit services are HK$810 million and HK$1,074 million for the two years ending 31 December 2017.

Category (b) is intentionally left blank to maintain consistency with categorisation in the “Letter form the Board” in the Circular. Category (c) is intentionally left blank as the property lease and the proposed revised annual caps are by themselves exempted from Independent Shareholders’ approval requirement pursuant to Rule 14A.76 of the Listing Rules.
Considering the nature of the oil and gas products, the oil and gas products provided by the CNPC Group referred to under subparagraph (a)(i) above are categorised under this category of continuing connected transactions.
Considering the nature of the products and services, the products provided the Group referred to under subparagraph (b) above are categorised under this category of continuing connected transactions.

(d) Reasons for the Revised Caps subject to Approval

We note that the Directors estimated the Revised Caps Subject to Shareholders’ Approval for each of the two years ending 31 December 2017 according to the following basis:

(i) the continuing connected transactions will continue to be entered into in accordance with the provisions and conditions under the Master Agreement (as supplemented);
(ii) the continuing connected transactions will continue to be entered into during the daily and ordinary course of business of the Group according to normal commercial terms;
(iii) the existing annual caps for continuing connected transactions approved by the Independent Shareholders on 10 December 2014 (the “ Existing Caps ”);

– 59 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(iv) the transaction amounts of continuing connected transactions between Kunlun Gas and the CNPC Group and future growth potentials; and
(v) the anticipated future growth of the Group as a result of the reorganisation of the Group, the downstream distribution of natural gas and the diversification of application areas.

In determining whether the Revised Caps Subject to Approval proposed by the Company are fair and reasonable and are in the interests of the Company and its Shareholders as a whole, we have discussed with the Management the basis of determining the revised cap (the “ Revised Cap ”) of each relevant category of continuing connected transactions. We have also reviewed the assumptions or projections in deriving the Additional CCTs.

(i) Category (a) – Provision of products and services by the CNPC Group to the Group but excluding the Oil and Gas Products and deposit services

The Revised Cap for category (a) continuous connected transactions is the estimated annual caps for the provision of products and services by the CNPC Group to the Group aggregated with the estimated annual figures for the provision of products and service by the CNPC Group to the Target Group after the Acquisition.

The Additional CCT (excluding the deposit services) is HK$810 million (equivalent to approximately RMB 667 million[3] ) and HK$1,074 million (equivalent to approximately RMB 885 million[3] ) for 2016 and 2017, respectively. For the three years ended 31 December 2014 (the “ Historical Period ”), the costs incurred by the Kunlun Gas for procuring products and services under category (a) were RMB181 million, RMB650 million and RMB269 million. The Additional CCT (excluding the deposit services) for 2016 is therefore slightly higher than the actual amount in 2013 (the highest amount in the Historical Period), whilst the Additional CCT (excluding the deposit services) for 2017 is approximately 36.2% above the actual amount in 2013. We note that the increase of Additional CCT for 2017 is primarily due to the planned major projects of the Target Group as described below.

As stated in the “Letter from the Board”, in respect of the Revised Caps for the category (a) continuing connected transactions for the two years ending 31 December 2017, the Board has considered (among others) the additional capital expenditure that may be incurred due to certain planned major projects of the Target Group whose construction work is expected to commence in 2016 or 2017. If the CNPC Group, subject to fulfilment of the relevant public bidding requirements, provides design and construction services to the Target

The RMB amounts of the Additional CCT are translated at the exchange rate of HK$1 = RMB0.8238

– 60 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Group in relation to such projects, the connected transaction amount would increase significantly. It is anticipated that the provision of social and ancillary services by the CNPC Group should remain stable each year.

We are of the view that the Revised Caps for category (a) are fair and reasonable given that (i) the Additional CCT for 2016 is only slightly higher than the highest amount in the Historical Period; and (ii) the Additional CTT for 2017 has taken into account mainly the additional capital expenditure that may be incurred due to certain planned major projects of the Target Group as mentioned above.

(ii) Category (d) – Purchase of Oil and Gas Products by the Group

The Revised Cap is the estimated annual caps for the purchase of Oil and Gas Products by the Group under the Second Supplemental Agreement from the CNPC Group aggregated with the estimated annual figures for the purchase of Oil and Gas Products by the Target Group from the CNPC Group after the Acquisition.

The Additional CCT is HK$40,160 million (equivalent to approximately RMB 33,084 million[3] ) and HK$48,220 million (equivalent to approximately RMB 39,724 million[3] ) for 2016 and 2017, respectively. For the three years ended 31 December 2014, the costs incurred by the Kunlun Gas for procuring products and services under category (d) were RMB29,718 million, RMB34,070 million and RMB32,512 million. The Additional CCT for 2016 is therefore slightly lower than the actual amount in 2013 (the highest amount in the Historical Period), whilst the Additional CCT for 2017 is approximately 16.6% above the actual amount in 2013.

As stated in the “Letter from the Board”, in respect of the Revised Caps for the category (d) continuing connected transactions for the two years ending 31 December 2017, the Board has considered (among others) the planned purchase amount of natural gas and LPG of the Target Group, the percentage of natural gas and LPG that may be purchased from the CNPC Group based on prior experience, the historical and estimated natural gas and LPG prices.

We are of the view that the Revised Caps for category (d) are fair and reasonable given that (i) the Additional CCT for 2016 is below the highest amount in the Historical Period; and (ii) the Additional CCT for 2017, which is 16.6% above the highest amount in the Historical Period, takes into account the fluctuation of the natural gas and LPG prices in future.

(iii) Category (e) – Provision of products and services by the Group to the CNPC Group

The RMB amounts of the Additional CCT are translated at the exchange rate of HK$1 = RMB0.8238

– 61 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Revised Cap is the estimated annual caps for the provision of products and services by the Group to the CNPC Group aggregated with the estimated annual figures for the provision of products and service by the Target Group to the CNPC Group after the Acquisition.

The Additional CCT is HK$3,434 million (equivalent to approximately RMB 2,829 million[3] ) and HK$4,000 million (equivalent to approximately RMB 3,295 million[3] ) for 2016 and 2017, respectively. For the three years ended 31 December 2014, the revenue generated by Kunlun Gas for providing the oil and gas products to the CNPC Group under Category (e) were RMB1,394 million, RMB2,872 million and RMB3,230 million. This, however, decreased to RMB839 million for the nine months ended 30 September 2015. The Additional CCT for 2016 is therefore 12.4% lower than the actual amount in 2014 (the highest amount in the Historical Period), whilst the Additional CCT for 2017 is approximately 2.0% above the actual amount in 2014.

As stated in the “Letter from the Board”, in respect of the Revised Caps for the category (e) continuing connected transactions for the two years ending 31 December 2017, the Board has considered (among others) the historical amount of products and services provided by the Target Group and the Group to the CNPC Group, the price fluctuation of the relevant products and in particular, the completion of repair and maintenance of certain facilities of the CNPC Group which would restore its demand for the relevant services and products in 2016 and 2017.

We are of the view that the Revised Caps for category (e) are fair and reasonable given that (i) the Additional CCT for 2016 is below the highest amount in the Historical Period; and (ii) the Additional CCT for 2017 is only 2.0% above the highest amount in the Historical Period.

Pricing terms and internal control

The pricing determination of categories (a), (d) and (e) continuing connected transactions are set out in the “Letter from the Board”.

(i) Category (a)

We note that for category (a) continuing connected transactions, the price (the “ Relevant Market Price ”) should not exceed the best price among all the prices offered by all the independent third parties in similar conditions in the relevant market in the ordinary course of business. In the absence of the Relevant Market Price, the price should not exceed the best price among all the prices as offered by all the independent third parties in similar conditions in the nearby market in the ordinary course of business.

3 The RMB amounts of the Additional CCT are translated at the exchange rate of HK$1 = RMB0.8238

– 62 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

In respect of the services to be provided by the CNPC Group to the Group under the Second Supplemental Agreement, the price (the “ New Relevant Market Price (a) ”) should not exceed the best price among all the prices as offered by all the independent third parties in similar conditions in the relevant market or nearby market in the ordinary course of business (the “ Best Market Price (a) ”). If the CNPC Group provides the relevant services at a price lower than the Best Market Price (a) to independent third parties in such markets, such lower price shall be the New Relevant Market Price (a). In the absence of the New Relevant Market Price (a), the price shall be set at the agreed contractual price, being the aggregate value of the actual costs of all services to be provided under the Master Agreement which are required to be priced at agreed contractual prices during the relevant year plus an additional margin of not more than 3% (“ Pricing Margin (a) ”). We note, however, that the cost plus basis was seldom actually applied in the past and the Pricing Margin (a) was substantially lower than the margin of the core business of CNPC.

(ii) Category (d)

We note that the pricing principles for category (d) continuous connected transactions is essentially the same as that adopted for category (a) continuous connected transactions with the exception that cost plus basis is not applied.

(iii) Category (e)

We note that for category (e), the price (the “ New Relevant Market Price (e) ”) shall not exceed the best price among all the prices as offered by all the independent third parties in the relevant market or nearby market in the ordinary course of business (“ Best Market Price (e) ”). If the Group provides the relevant products or services at a price lower than the Best Market Price (e) to independent third parties in such markets, such lower price shall be the New Relevant Market Price (e). In the absence of the New Relevant Market Price (e), the price shall be set at the agreed contractual price, being the aggregate value of the actual costs of all products and services to be provided under the Master Agreement which are required to be priced at agreed contractual prices during the relevant year plus an additional margin of not more than 3% (“ Pricing Margin (e) ”). We note, however, that the cost plus basis was seldom actually applied in the past and the Pricing Margin (e) is to cover any administrative costs and handling charges incurred by the Group in providing the relevant products and services.

We note that internal control measures are adopted by the Group to review, from time to time, the terms offered by the independent third parties and compare with the terms of each of the continuing connected transactions to ensure that they are no less favourable than those offered by the independent third parties; (ii) review the prevailing market price of natural gas and LPG prescribed by the PRC government and based on the price list published by the CNPC Group; and (iii) review the relevant actual cost to apply the pricing margin. In addition, the independent non-executive Directors (the “ Independent Non-Executive Directors ”) and the auditor of the Company will conduct annual reviews, among others, on the continuing connected transactions in accordance with the Listing Rules, as set out further in the paragraph below.

– 63 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Given that (i) the categories (a), (d) and (e) continuing connected transactions will be subject to the terms and conditions of the Master Agreement (as supplemented); (ii) there will be no new supplemental agreement to be entered into by the Company. The terms of these continuing connected transactions, including the pricing terms, would therefore be the same under the existing arrangement; (iii) in December 2014, Independent Shareholders approved the continuing connected transactions as well as the Fifth Supplemental Agreement; and (iv) the incremental business as a result of the Additional CCTs does not change the nature of the continuous connected transactions, we are of the view that the price determination basis is fair and reasonable.

Annual review of continuing connected transactions

Under the Listing Rules, each year, the Independent Non-Executive Directors must review the transactions under the Master Agreement (as amended) and confirm in the Company’s annual report and accounts that the same have been entered into:

in the ordinary and usual course of business of the Group;
on normal commercial terms or better; and
according to the agreement governing them on terms that are fair and reasonable and in the interests of the Shareholders as a whole.

The Company will also be required to comply with all other continuing obligations under the Listing Rules, including confirmation from its auditor that the Revised Caps have not been exceeded. In addition, in respect of the written agreements to be entered into, to the extent that the terms are materially different from those of the existing written agreement, the Company will publish an announcement and will re-comply with the reporting and announcement and/or Independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules.

CONCLUSIONS AND RECOMMENDATION

Having considered and analysed the principal factors as set out in this letter, we would like to draw your attention to the following key factors, which should be read in conjunction with, and interpreted in, the full context of the Circular, in arriving at our conclusion:

the Group has started to develop the end-user sale and utilization of natural gas business since 2009 through equity acquisition, capital injection and the formation of new wholly-owned company or joint ventures. Natural gas distribution now accounts for 88.9% of the Group’s revenue. The Transactions would increase the geographic coverage, boosting the number of users and natural gas sales volume of the Company as well as expand the Company’s natural gas distribution and comprehensive utilisation business to areas like natural gas power generation business.

– 64 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

the Consideration is RMB14,827,093,900 payable in cash. The valuation multiples of the Target Group based on the Consideration of the Acquisition are generally lower than those of the Comparable Companies and Comparable Transactions;
the Enlarged Group would have higher revenue, EBITDA, net profit attributable to the Shareholders and earnings per share for the year ended 31 December 2014 than the Group, which is due to contribution of the Target Group. We further note that the gearing ratio of the Enlarged Group would, however, increase due to the payment of the Consideration;
the Revised Caps Subject to Shareholders’ Approval for the two years ending 31 December 2017 for categories (a), (d) and (e) are mainly determined with reference to Existing Caps which has been approved by Independent Shareholders and the Additional CCT as a result of the Transactions; and
the Company will also be required to comply with all other continuing obligations under the Listing Rules, including confirmation from its auditor that the Revised Caps have not been exceeded.

Based on the above, we are of the opinion that the although the Transactions are not in the ordinary and usual course of business of the Group, the Transactions are on normal commercial terms and the terms of the Transactions and the Revised Caps Subject to Shareholders’ Approval are fair and reasonable and in the interests of Kunlun Energy and the Shareholders as a whole so far as the Independent Shareholders are concerned. Therefore, we advise the Independent Shareholders and the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the SGM in relation to the Transactions and the Revised Caps Subject to Shareholders’ Approval.

Yours faithfully,

For and on behalf of

ING BANK N.V., Hong Kong Branch

David Wu Andrew Lau Managing Director Director

Note: Messrs David Wu and Andrew Lau are relevant individuals registered with the Hong Kong Monetary Authority to carry out Type 6 (advising on corporate finance) regulated activity under the SFO and have over 17 and 28 years, respectively, of experience in corporate finance industry.

– 65 –

INDUSTRY OVERVIEW

BUSINESS ENVIRONMENT AND GENERAL DEVELOPMENT

Natural gas is a clean, environmentally friendly and high-quality source of energy. With the continued economic development in the PRC and the increased awareness of environmental protection, many cities are increasingly turning to natural gas as a clean source of energy. According to the BP Statistical Review of World Energy[1] issued in June 2015, through the rapid growth in recent years, natural gas consumption in the PRC in 2014 reached 185.5 billion m[3] , representing a compound annual growth rate of 14.9% since 2009. The production volume of natural gas in the PRC for the same year amounted to 134.5 billion m[3] , representing a compound annual growth rate of 8.8% since 2009.

According to statistics in the BP Statistical Review of World Energy, in 2014, China’s natural gas consumption accounted for 5.6% of its primary energy consumption. In accordance with the Notice on Issuance of The Energy Development Strategy Action Plan (2014-2020) by the General Office of the State Council, the period between 2014 and 2020 will be a strategic window of opportunities for energy development and transformation: clean and low-carbon energy shall be taken as the development direction for energy structure adjustment, and by 2020, the percentage of natural gas consumption in China’s total energy consumption shall be no less than 10%.

LPG is mainly produced during the refining process by refineries and petrochemical enterprises or oil and gas fields exploration. It is mainly used for, amongst others, residential, industrial, transportation, commercial purposes. With the demand for control of atmospheric pollution (e.g. haze) becomes increasingly prominent, natural gas, LPG and other clean energy have become the prioritised solutions. Particularly, for countryside and rural areas that are not yet covered by natural gas pipeline networks, promotion of LPG has become the preferred solution. The LPG deep processing industry and propane dehydrogenation (PDH) facilities in China recorded rapid development in recent years. Alkylation and other LPG deep processing have shown its bright prospects. The mixed dehydrogenation and other deep processing technologies are showing great promises. All these factors have brought development opportunities for the LPG market.

COMPETITION LANDSCAPE

The market of fuel gas mainly represents the distribution and services of products such as natural gas, coal gas and LPG to end users through urban pipeline networks or in CNG, LNG, bottled gas or other forms.

1 Source: BP Statistical Review of World Energy was not commissioned by the Company. It was first published in 1951. Professionals in the media, academia, world governments and energy companies value the review as a comprehensive reference. The statistics in the review are compiled using a combination of primary official sources from government, published data and other sources which are considered to be reliable, including Organization of the Petroleum Exporting Countries (OPEC), Energy Information Administration (EIA), International Energy Agency (IEA), Organisation for Economic Co-operation and Development (OECD), Oil and Gas Journal, Energy Intelligence Group, World Energy Council etc., assuming the relevant data and other sources are accurate and up-to-date.

– 66 –

INDUSTRY OVERVIEW

Currently, the competitive landscape of the fuel gas market mainly includes four major types of companies, namely city gas players controlled by large state owned enterprises represented by Kunlun Gas and China Resources Gas Group Limited, local gas players represented by Beijing Enterprises Holdings Limited, private enterprises represented by ENN Energy Holdings Limited and China Gas Holdings Limited and Hong Kong gas players represented by Towngas China Company Limited. To develop its city gas business, PetroChina integrated and restructured 52 city gas projects and established Kunlun Gas in 2008. Since its inception, Kunlun Gas has grown rapidly and successfully established itself in more than 120 cities with business coverage across 29 provinces, municipalities and autonomous regions, including provincial capital cities such as Harbin, Lanzhou and Kunming; and overtaken the LPG sales business from 35 refinery and oilfield enterprises under CNPC. Compared to its competitors, Kunlun Gas enjoys many advantages in securing resources and product supply, market development, human resources and technology management, etc.

FUTURE OPPORTUNITIES AND CHALLENGES

“The Eighteenth National Congress” report clearly set up the goal that China’s GDP in 2020 would double that in 2010. The achievement of this goal will lead to continual growth of energy consumption. Substantial economic growth and national awareness of natural gas as a clean energy solution form favourable environmental for the industry. Moreover, the PRC government’s intensified efforts for reduction in emission, coupled with frequent haze outbreak, results in the pressure for environmental protection which will push natural gas consumption.

Potential competition to natural gas may come from potential substitution by other energy sources such as solar and wind power. However, comparing with natural gas, alternative energy sources such as solar power and wind power, are limited by technology and extensive research and development is needed before wide application. Currently, natural gas is the primary source of clean energy in China. According to BP Statistical Review of World Energy, natural gas accounted for 5.6% in the primary energy consumption of China in 2014, which is higher than 1.0%, 0.4% and 0.2% for nuclear energy, wind energy and solar energy, respectively.

The Target Group is also faced with challenges during its operation, mainly including timely planning to meet rapidly growing demand and to balance the fluctuation in seasonal demand for fuel gas.

– 67 –

INDUSTRY OVERVIEW

KEY NATIONAL POLICIES CONCERNING FUEL GAS OF RELEVANT SECTORS

Driven by factors such as intensified efforts in the PRC for environmental protection and increasing level of urbanisation, in recent years, many national policies have been released to encourage rapid development of the fuel gas sector. The following policies will forcefully bring about rapid development in fuel gas of relevant sectors, primarily including:

In November 2014, the General Office of State Council issued the Notice on Issuance of The Energy Development Strategy Action Plan (2014-2020) , which called to firmly stick to the simultaneous development of non-fossil energy and efficient and clean utilisation of fossil energy, to reduce the proportion of coal consumption step by step, and to increase the proportions of natural gas consumption, so that in 2020 the share of coal consumption across China could be reduced to less than 62% and that of natural gas consumption over 10%.
In November 2014, the NDRC released China’s National Plan on Climate Change (2014-2020) , which reiterated the objective by 2020 of reducing the rate of carbon dioxide emission to unit GDP by 40-45 percent from the amount recorded in 2005, thus fully accomplishing the target of controlling greenhouse gas emission. Accordingly, it is expected that the demand for gas will be further boosted.
On 4 November 2014, the NDRC, the Ministry of Housing and Urban-Rural Development, and the National Energy Administration jointly released the Detailed Rules for Pilot Projects of Natural Gas Distributed Energy Resources , aiming for improvement in management procedures and promotion of fast, sound and orderly development.
On 16 March 2014, the State Council officially announced the National Plan on New Urbanisation (2014-2020) , calling for sound and orderly development in urbanisation, targeting at approximately 60% urbanisation ratio by 2020 as measured by permanent urban resident population. With the accelerated pace in China’s urbanisation, the people’s living standards have witnessed continuous improvement, which leads to increasing demand for clean, efficient and convenient fuels with high quality. Governments of all levels are expected to increase their support on city gas development.
In September 2013, the State Council released the Air Pollution Prevention and Control Action Plan , to accelerate the switch to clean energy sources and accelerate the replacement for coal-fired facilities in Beijing-Tianjin-Hebei region, Yangtze River Delta and Pearl River Delta, with objective to generally complete the natural conversion for coal-fired boilers, industrial furnaces and coal-fired power plants in 2017. This policy will vigorously promote the rapid development of the fuel gas sector.

– 68 –

RISK FACTORS

The Board has considered the risk factors in relation to the business and operation of the Target Group as listed below and is of the view that such risks are relatively low and would not affect the Enlarged Group after the Acquisition. The Company will continue to adopt the current control measures as implemented by the Target Group before the Acquisition and will identify other effective measures to minimise such risks.

However, the risks listed do not purport to comprise all those risks associated with the Acquisition. Additional risks and uncertainties not currently known to the Board or that the Board currently deem to be immaterial may also have an adverse effect on the Target Group’s businesses and hence the Enlarged Group’s performance after the Completion.

RISKS RELATING TO SAFETY

Due to the flammable and explosive nature of fuel gas, the sales and transmission of fuel gas is a highly hazardous business. It cannot be guaranteed that accidents or incidents concerning public safety or any industry-related accidents will not occur during the operations of the Target Group in the future. The operation of the Target Group depends on its various assets, such as natural gas pipelines, CNG stations and substations, etc., and these assets are inevitably exposed to various risks and hazards, including equipment failure, natural disasters, environmental hazards and industrial accidents. These hazards may also cause personal injury or death, or severe damage to, and destruction of, property, factory plant and equipment, as well as contamination of, or damage to, the environment and the termination of the business operations of the Target Group. For example, an earthquake in any of the operating cities of the Target Group may cause destruction of, or damage to, the pipelines of the Target Group and leakage of natural gas. Significant operational hazards and natural disasters may cause interruptions in operations of the Target Group that could have a material adverse effect on business and financial conditions, as well as reputation of the Target Group.

In order to prevent, control and mitigate effectively the risks to the assets of the Target Group caused by safety accidents and natural disasters associated with fuel gas business, the Target Group has implemented stringent measures to lower the risk of safety accidents associated with fuel gas, including but not limited to implementation of standardised operation protocols, regular inspection and contingency plans. Furthermore, the Target Group has undertaken property insurance covering most of its assets (including properties and equipment) and third-party liability insurance as well as employer liability insurance and medical insurance for the employees to ensure an effective coverage to safeguard its assets and employees.

RISKS RELATING TO THE RELIANCE ON THE MAJOR SUPPLIERS

The Target Group has entered into fuel gas procurement arrangement with PetroChina. If the Target Group is unable to obtain timely supply of fuel gas from PetroChina, the Target Group may need to seek alternative suppliers for fuel gas. It cannot be guaranteed that the Target Group will be able to obtain the same amount of fuel gas supply from other suppliers on similar terms or without material interruption. The supply of fuel gas by the Target Group

– 69 –

RISK FACTORS

to the end users may be affected. Failures to secure supply from other fuel gas suppliers in time will adversely affect the Target Group’s operational results and financial conditions. The Target Group has in its past purchased natural gas and LNG from independent third party suppliers and may continue to do so in order to diversify its source of procurement.

RISKS RELATING TO PRICING

The sales price of fuel gas and transmission fees charged by the Target Group are subject to the relevant price control regulations of the PRC. The sales price of fuel gas and transmission fees are subject to the restrictions of the relevant pricing authorities. The business of Target Group includes up-stream fuel gas procurement and down-stream fuel gas distribution sales. If the relevant pricing authorities adjust the up-stream fuel gas procurement price or down-stream fuel gas sales price, and the Target Group cannot reflect such adjustment in time to the respective down-stream sales or up-stream procurement, or if the relevant pricing authorities substantially lower the transmission fees for fuel gas, the profitability of the Target Group will be adversely affected. The Target Group has put in place comprehensive internal policies and measures applicable across various departments and subsidiaries to ensure the adjustment of upstream procurement price be reflected in the downstream sale price, and vice versa, in a timely manner.

RISKS RELATING TO MARKET CONCENTRATION

The primary business of the Target Group is to sell and transmit fuel gas in 29 provinces and autonomous regions and over 100 cities. The Target Group derived most of its revenues from these cities. The Company expects that the Target Group will continue to rely on the same market after the Acquisition in the near future. In the event that there are any adverse changes in the economic or social conditions, taxation regime, or legal and regulatory requirements in these cities, the profitability of the Target Group would be adversely and materially affected. Given the cities in which the Target Group has set its footprint cover the major fuel gas consuming cities, the Target Group will closely monitor the changes in respect these cities and adjust its allocation of resources accordingly.

FINANCIAL RISKS

The activities of the Target Group are susceptible to various financial risks, including cash flow risks, credit risks and liquidity risks. The overall risk management scheme of the Target Group is focused on the unpredictability of the financial market, and seeks to minimise, to the highest extent, the potential adverse effect on the Target Group’s financial performance. The Target Group has not yet utilised derivative financial instruments to hedge specific exposures.

The management of the Target Group executes the risk management in accordance with the policies approved by the Board. The management manages and monitors those exposures, so as to ensure the timely and effective implementation of appropriate measures. The above-mentioned risks which the Target Group faces or its way of management and monitoring of those risks have remained unchanged.

– 70 –

RISK FACTORS

1. Cash flow risks

Currently, the Target Group is maintaining a relatively adequate level of cash flow. However, if the situation of the PRC’s economy and industry landscape change in the future, the Target Group may face cash flow risk.

2. Credit risks

Since most of the savings deposits of the Target Group are placed in state-owned banks and financial institutions, the corresponding credit risks are relatively low. The Target Group has adopted control measures to assess the clients’ credibility. The book value of cash and cash equivalents, accounts receivables and other accounts receivables included in the consolidated statement of financial position represent the significant credit risks exposures which the Target Group faces. Currently, the Target Group has no significant concentration of credit risk.

3. Liquidity risks

The Target Group at present maintains relatively sufficient cash and cash equivalent items, and can obtain capital support through sufficient general credit facilities. Therefore, the Target Group is not currently facing any significant liquidity risks. However, the Target Group may face liquidity risks arising from changes in the operation environment or the macro-economy.

THE TARGET GROUP IS YET TO OBTAIN CERTAIN TITLE CERTIFICATES OR PERMITS FOR SOME OF ITS LAND AND PROPERTIES, AND CERTAIN PIPELINE PROJECTS STILL NEED TO COMPLETE THE RELEVANT PROCEDURES

The obtaining of land use rights, building ownership certificates and permission to use the state allocated land involves obtaining government approvals at different levels. The Target Group is yet to obtain the relevant title certificates or permits for certain parcels of land, properties and building units where the Target Group operates.

If the relevant PRC government authorities were to take actions against the use of these properties, the Target Group may be subject to the imposition of fines, confiscation of land, payment of additional land costs and eviction from or demolition of building units, causing suspension or termination of the operations of the asset projects. In addition, prior to obtaining the relevant certificates or permits, the transfer, lease, mortgage or otherwise disposal of properties that Kunlun Gas may be affected. However, as the Target Group has already entered into the relevant preliminary procedures or contracts for some of the above-mentioned properties which is yet to obtain title certificate or permit whilst Kunlun Gas is also urging the relevant persons to proactively follow up with the relevant title certificate/permit applications; in light of the current conditions, this shall not cause any material adverse effect to the Acquisition or the ordinary operations of the Target Group.

The Target Group has not yet obtained all the engineering construction approvals and procedures for some of the pipeline projects it operates. This may subject such projects to imposition of fines due to incomplete procedures. However, this will not materially and

– 71 –

RISK FACTORS

adversely affect the actual construction and operation of these projects. The Target Group is urging the relevant persons to actively process the relevant procedures; therefore, the incomplete procedures will not have any material adverse effect to the Acquisition.

THE BUSINESS CARRIED OUT BY KUNLUN GAS MAY INVOLVE INCOMPLETE PROCEDURES OR INCOMPLETE PERMIT

The Target Group is required to apply for designated operation permits for the city gate stations (gas terminating stations) and fuel gas distribution business it operates, the requirements of which vary depending on the particular requirements of the location where the city gate stations (gas terminating stations) of the Target Group operate. In addition, such requirements are implemented by the local authority differently from location to location. Some of the subsidiaries of the Target Group are still in the process of applying for and completing the relevant procedures for the relevant operation permits during the construction period of the projects. The Target Group may face risks such as financial penalties by the relevant government authority due to the lack of such permits. However, this will not have material adverse effect on the actual operations of the Target Group. The Target Group has urged the relevant persons to apply for the relevant permits and licences; therefore in light of the current conditions, this will not have material adverse effect on the Acquisition.

RISKS ASSOCIATED WITH CHANGES IN PREFERENTIAL TAX TREATMENT

The Target Group are subject to various PRC taxes, including the current statutory PRC enterprise income tax rate of 25%, as determined in accordance with the relevant PRC tax laws and regulations. However, PRC tax laws and regulations provide certain preferential tax treatment applicable to different enterprises, industries and locations. For example, some of the enterprises set up in the western part of the PRC enjoy “China Western Development (西部大開發)” related preferential tax treatment. Any change or elimination of such preferential tax treatment may adversely affect the Target Group’s financial condition and operational results.

RISKS RELATING TO THE DEMAND FOR FUEL GAS AS AFFECTED BY CHANGES IN COMMODITY PRICES

There is a certain degree of competitive relationship between fuel gas and some other commodities, such as oil and coal. The fluctuations of international and domestic prices of these commodities may lead to changes in the demand for fuel gas. If the prices of commodities such as oil or coal drop significantly relative to that of fuel gas, this may lead to a decrease in demand for fuel gas. The decrease in fuel gas demand may have a material adverse effect on the Target Group’s business, financial condition, operational results and prospects.

DEVELOPMENT OF CERTAIN NEW TECHNOLOGIES COULD REDUCE MARKET DEMAND FOR FUEL GAS

The development and expansion of new technologies could further broaden the supply of alternative energy sources. For example, new technology development may increase safety level and reduce the relevant costs of nuclear energy, which could lead to an increase in demand for nuclear energy.

– 72 –

RISK FACTORS

New technologies may reduce the cost of alternative energy, improve its utilisation rate, operation efficiency and stability. This may also result in fuel gas projects and technologies becoming obsolete and lack of competitiveness, or result in a decrease in demand for fuel gas. The decline in fuel gas demand may have a material adverse effect on the Target Group’s business, financial condition, operational results and prospects.

OTHER RISKS

Upon the completion of the Acquisition, the Target Group will become a wholly foreign-owned enterprise (since the Company was incorporated outside China) from a PRC domestic company. This may result in changes of regulatory environment for the Target Group and the laws and policies (including, but not limited to, foreign exchange control and tax treatment, etc.) applicable to the Target Group will also become different from those before the Acquisition. The Enlarged Group will need time to familiarise itself with and adapt to the implications caused by these changes.

– 73 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

A. MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

The Group has been developing its natural gas business segment during the three years and six months ended 30 June 2015. The profit before income tax expense from the natural gas distribution business segment contributed around 75.39% (2012: 64.75%) of the Group’s profit before income tax expense for the year ended 31 December 2013; 83.88% (2013: 75.39%) for the year ended 31 December 2014; and 103.70% (same period of 2014: 83.05%) for the six months ended 30 June 2015.

Operating Results

The financial results of the Group for the year ended 31 December 2012 were benefited from the expansion of natural gas business. Profit before income tax expense of the Group for the year ended 31 December 2012 was approximately HK$13,306 million, representing an increase of 26.88% as compared with HK$10,487 million for the preceding year. Profit attributable to owners of the Company for the year ended 31 December 2012 was approximately HK$6,518 million representing an increase of 15.96% as compared with HK$5,621 million for the preceding year.

The financial results of the Group for the year ended 31 December 2013 were benefited from the expansion of natural gas business. Profit before income tax expense of the Group for the year ended 31 December 2013 was approximately HK$14,353 million, representing an increase of 7.87% as compared with amount of HK$13,306 million for the preceding year. Profit attributable to owners of the Company for the year ended 31 December 2013 was approximately HK$6,851 million, representing an increase of 5.11% as compared with amount of HK$6,518 million for the preceding year.

Profit before income tax expense of the Group for the year ended 31 December 2014 was approximately HK$11,956 million, representing a decrease of 16.70% as compared with HK$14,353 million for the preceding year. Profit attributable to owners of the Company for the year ended 31 December 2014 was approximately HK$5,610 million, representing a decrease of 18.11% as compared with HK$6,851 million for the preceding year.

Profit before income tax expense of the Group for the six months ended 30 June 2015 was approximately HK$4,705 million, representing a decrease of 25.62% as compared with HK$6,326 million for the same period of last year. Profit attributable to owners of the Company for the six months ended 30 June 2015 was approximately HK$1,921 million, representing a decrease of 39.42% as compared with HK$3,171 million for the same period of last year.

Revenue

Revenue for the year ended 31 December 2012 was approximately HK$32,953 million, representing an increase of 27.16% as compared with HK$25,915 million for the preceding year. The increase was mainly due to the expansion of natural gas business.

– I-1 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Revenue from the exploration and production segment accounted for 18.44% of the Group’s total revenue amounting to approximately HK$6,076 million while revenue from the natural gas distribution business segment accounted for 81.56% of the Group’s total revenue amounting to approximately HK$26,877 million.

Revenue for the year ended 31 December 2013 was approximately HK$43,430 million, representing an increase of 31.79% as compared with amount of HK$32,953 million for the preceding year. The increase was mainly due to the expansion of natural gas business.

Revenue from the exploration and production segment accounted for 13.03% (2012: 18.44%) of the Group’s total revenue amounting to approximately HK$5,660 million (2012: HK$6,076 million) while revenue from the natural gas distribution business segment accounted for 86.97% (2012: 81.56%) of the Group’s total revenue amounting to approximately HK$37,770 million (2012: HK$26,877 million).

Revenue for the year ended 31 December 2014 was approximately HK$48,044 million, representing an increase of 10.62% as compared with amount of HK$43,430 million for the preceding year. The increase was mainly due to the expansion of natural gas business.

Revenue from the exploration and production segment accounted for 11.11% (2013: 13.03%) of the Group’s total revenue amounting to approximately HK$5,336 million (2013: HK$5,660 million) while revenue from the natural gas distribution business segment accounted for 88.89% (2013: 86.97%) of the Group’s total revenue amounting to approximately HK$42,708 million (2013: HK$37,770 million).

Revenue for the six months ended 30 June 2015 was approximately HK$20,879 million, representing a decrease of 8.28% as compared with amount of HK$22,763 million for the same period of the preceding year. The decrease was mainly due to the decrease in realised crude oil selling price compared to the same period of the preceding year.

Revenue from the exploration and production segment accounted for 6.64% (same period of 2014: 12.49%) of the Group’s total revenue amounting to approximately HK$1,386 million (same period of 2014: HK$2,844 million) while revenue from the natural gas distribution business segment accounted for 93.36% (same period of 2014: 87.51%) of the Group’s total revenue amounting to approximately HK$19,493 million (same period of 2014: HK$19,919 million).

Other Gains, Net

Other gains, net for the year ended 31 December 2012 was approximately HK$361 million, representing an increase of 107.47% as compared with HK$174 million for last year. The increase was mainly due to the increase of the subsidy from the government.

– I-2 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Other gains, net for the year ended 31 December 2013 was approximately HK$768 million, representing an increase of 112.74% as compared with amount of HK$361 million for the preceding year. The increase mainly came from the compensation from government in the PRC for revenue reduction due to the implementation of Valued-added-Tax (“ VAT ”) Reform. The Group has received the VAT refunds under the transitional supportive financial policies, but no assurance that the Group will continue to receive such a grant in the future.

Other gains, net for the year ended 31 December 2014 was approximately HK$837 million, representing an increase of 8.98% as compared with amount of HK$768 million for the preceding year. The increase mainly came from the compensation from government in the PRC for revenue reduction due to the implementation of VAT Reform. PetroChina Beijing Gas Pipeline Co., Ltd has received the VAT refunds of HK$665 million (2013: HK$538 million) under the transitional supportive financial policies, but no assurance that the Group will continue to receive such a grant in the future.

Other gains, net for the six months ended 30 June 2015 was approximately HK$488 million, representing an increase of 40.23% as compared with amount of HK$348 million for the same period of the preceding year. The increase was mainly due to stable exchange rate during the six months ended 30 June 2015 compared with the same period of the preceding year which has exchange loss on the borrowing which was denominated in USD of HK$87 million.

Interest Income

Interest income for the year ended 31 December 2012 was approximately HK$172 million, representing a decrease of 3.37% as compared with HK$178 million for the preceding year. The decrease was mainly due to a decrease in bank deposit of some projects during the year ended 31 December 2012.

Interest income for the year ended 31 December 2013 was approximately HK$228 million, representing an increase of 32.56% as compared with amount of HK$172 million for the preceding year. The increase was mainly due to an increase in proportion of time deposits with higher interest rates held by the Group.

Interest income for the year ended 31 December 2014 was approximately HK$217 million, representing a decrease of 4.82% as compared with amount of HK$228 million for the preceding year. The decrease was mainly due to a decrease in the average balance of cash and cash equivalents.

Interest income for the six months ended 30 June 2015 was approximately HK$103 million, representing a decrease of 1.90% as compared with amount of HK$105 million for the same period of the preceding year.

Purchases, Services and Others

Purchases, services and others were approximately HK$12,912 million for the year ended 31 December 2012, representing an increase of 38.73% as compared with HK$9,307 million for the preceding year. This was mainly due to the increase in purchase volume of natural gas which is in line with the market condition.

– I-3 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Purchases, services and others were approximately HK$21,303 million for the year ended 31 December 2013, representing an increase of 64.99% as compared with amount of HK$12,912 million for the preceding year. This was mainly due to the increase in purchase volume of natural gas which is in line with the expansion of natural gas business.

Purchases, services and others were approximately HK$26,354 million for the year ended 31 December 2014, representing an increase of 23.71% as compared with amount of HK$21,303 million for the preceding year. This was mainly due to the increase in purchase volume of natural gas which is in line with the expansion of natural gas business.

Purchases, services and others were approximately HK$11,315 million for the six months ended 30 June 2015, representing a decrease of 3.83% as compared with amount of HK$11,766 million for the same period of the preceding year.

Employee Compensation Costs

Employee compensation costs of the Group was approximately HK$1,684 million for the year ended 31 December 2012, representing an increase of 11.89% as compared with amount of HK$1,505 million for the preceding year. This increase was mainly due to the expansion of the Group’s natural gas business.

Employee compensation costs of the Group was approximately HK$2,046 million for the year ended 31 December 2013, representing an increase of 21.50% as compared with amount of HK$1,684 million for the preceding year. This increase was mainly due to the expansion of the Group’s natural gas business.

Employee compensation costs of the Group was approximately HK$2,368 million for the year ended 31 December 2014, representing an increase of 15.74% as compared with amount of HK$2,046 million for the preceding year. This increase was mainly due to the expansion of the Group’s natural gas business and the increase in the average salary level.

Employee compensation costs of the Group was approximately HK$1,012 million for the six months ended 30 June 2015, representing a decrease of 1.56% as compared with amount of HK$1,028 million for the same period of the preceding year. This decrease was mainly due to the decrease in the number of staff of the Group.

Exploration Expenses

Exploration costs for the year ended 31 December 2012 was approximately HK$42 million, representing a decrease of 83.00% as compared with amount of HK$247 million for the preceding year. This was mainly due to the termination of the project Continental Geopetro (Bengara II) Ltd (the “ CGB2 ”).

Exploration expenses for the year ended 31 December 2013 was approximately HK$11 million, representing a decrease of 73.81% as compared with HK$42 million for the preceding year. This was mainly related to the decrease in exploration activities undertaken by the Group’s exploration and production projects.

– I-4 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

There were no exploration expenses charged to profit or loss during the year ended 31 December 2014 (2013: HK$11 million).

Exploration expenses for the six months ended 30 June 2015 was approximately HK$2 million, representing an increase of 100.00% as compared with the same period of the preceding year.

Depreciation, Depletion and Amortisation

Depreciation, depletion and amortisation for the year ended 31 December 2012 was approximately HK$4,434 million, representing an increase of 8.41% as compared with HK$4,090 million for last year. This was mainly due to the combined effect of addition of property, plant and equipment during the year ended 31 December 2012 following the business expansion and revision of the estimate useful lives of the Group’s certain pipelines with effect from 1 July 2012.

Depreciation, depletion and amortisation for the year ended 31 December 2013 was approximately HK$4,528 million, representing an increase of 2.12% as compared with amount of HK$4,434 million for the preceding year. This was mainly due to addition of property, plant and equipment during the year ended 31 December 2013 following the business expansion, offset by the revision of the estimate useful lives of the Group’s pipelines with effect from 1 July 2012.

Depreciation, depletion and amortisation for the year ended 31 December 2014 was approximately HK$5,392 million, representing an increase of 19.08% as compared with amount of HK$4,528 million for the preceding year. This was mainly due to addition of property, plant and equipment during the year ended 31 December 2014 following the business expansion.

Depreciation, depletion and amortisation for the six months ended 30 June 2015 was approximately HK$2,899 million, representing an increase of 6.86% as compared with amount of HK$2,713 million for the same period of the preceding year. This was mainly due to addition of property, plant and equipment during the six months ended 30 June 2015 and the second half of 2014.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended 31 December 2012 was approximately HK$2,165 million, representing an increase of 34.72% as compared with HK$1,607 million for the preceding year. This was mainly due to a robust expansion of the Group’s natural gas business.

Selling, general and administrative expenses for the year ended 31 December 2013 was approximately HK$2,878 million, representing an increase of 32.93% as compared with amount of HK$2,165 million for the preceding year. This was mainly due to the expansion of the Group’s natural gas business.

– I-5 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Selling, general and administrative expenses for the year ended 31 December 2014 was approximately HK$2,777 million, representing a decrease of 3.51% as compared with amount of HK$2,878 million for the preceding year. This was mainly due to the decrease in royalties in exploration and production business which is in line with the decrease in realised crude oil selling price.

Selling, general and administrative expenses for the six months ended 30 June 2015 were approximately HK$1,143 million, representing a decrease of 5.77% as compared with amount of HK$1,213 million for the same period of the preceding year. This was mainly due to the decrease in royalties in exploration and production business which is in line with the decrease in realised crude oil selling price.

Taxes other than Income Taxes

Taxes other than income taxes for the year ended 31 December 2012 was approximately HK$923 million, representing a decrease of 22.76% as compared with HK$1,195 million for the preceding year. It was mainly due to less payment of the special levy on the sales of domestic crude oil in China by the Group as the decrease both in sales volume and the average crude oil price throughout the year ended 31 December 2012.

Taxes other than income taxes for the year ended 31 December 2013 was approximately HK$746 million, representing a decrease of 19.18% as compared with amount of HK$923 million for the preceding year. It was mainly due to the implementation of VAT Reform that eliminated business tax and the decrease of levy on petroleum sales volume in the PRC.

Taxes other than income taxes for the year ended 31 December 2014 was approximately HK$737 million, representing a decrease of 1.21% as compared with amount of HK$746 million for the preceding year. This decrease was mainly due to the decrease in levy on petroleum in line with the decrease in realised crude oil selling price of the Group’s exploration and production business.

Taxes other than income taxes for the six months ended 30 June 2015 was approximately HK$195 million, representing a decrease of 48.68% as compared with amount of HK$380 million for the same period of the preceding year. This decrease was mainly due to the decrease in levy on petroleum which is in line with the decrease in realised crude oil selling price in the Group’s exploration and production business.

Interest Expenses

Interest expenses for the year ended 31 December 2012 was approximately HK$661 million, representing an increase of 63.21% as compared with HK$405 million for the preceding year. The increase was mainly due to the increase in borrowing during the year ended 31 December 2012.

– I-6 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Interest expenses for the year ended 31 December 2013 was approximately HK$622 million, representing a decrease of 5.90% as compared with amount of HK$661 million for the preceding year. Total interest expenses for the year ended 31 December 2013 was approximately HK$1,882 million of which HK$1,260 million had been capitalised under construction-in-progress.

Interest expenses for the year ended 31 December 2014 was approximately HK$486 million, representing a decrease of 21.86% as compared with amount of HK$622 million for the preceding year. Total interest expenses for the year ended 31 December 2014 was approximately HK$1,521 million of which HK$1,035 million had been capitalised under construction-in-progress.

Interest expenses for the six months ended 30 June 2015 was approximately HK$258 million, representing an increase of 16.22% as compared with amount of HK$222 million for the same period of the preceding year. Total interest expenses for the six months ended 30 June 2015 was approximately HK$657 million of which HK$399 million had been capitalised under construction-in-progress.

Share of Profits Less Losses of Associates

Share of profits less losses of associates for the year ended 31 December 2012 was approximately HK$2,334 million, representing an increase of 3.50% as compared with amount of HK$2,255 million for the preceding year, it was mainly attributable to CNPCAktobemunaigas Joint Stock Company.

Share of profits less losses of associates for the year ended 31 December 2013 decreased by 29.48% to approximately HK$1,646 million (2012: HK$2,334 million). It was mainly due to the decrease in sales volume and crude oil realised selling price and increase in exploration cost in CNPC-Aktobemunaigas Joint Stock Company.

The currency of Republic of Kazakhstan was devalued in February 2014. Please refer to the announcement of the Company on 14 February 2014.

Share of profits less losses of associates for the year ended 31 December 2014 decreased by 56.50% to approximately HK$716 million (2013: HK$1,646 million). This was mainly due to the combined effect of the decrease in sales volume and realised crude oil selling price in CNPC-Aktobemunaigas Joint Stock Company and exchange loss due to devaluation of the currency of Republic of Kazakhstan for the year ended 31 December 2014.

Share of profits less losses of associates for the six months ended 30 June 2015 decreased by 132.98% to loss of approximately HK$62 million (same period of 2014: profit of HK$188 million). This was mainly due to the decrease in realised crude oil selling price during the six months ended 30 June 2015 which led to the decrease in the shared operating results from CNPC-Aktobemunaigas Joint Stock Company.

– I-7 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Share of Profits Less Losses of Jointly Controlled Entities or Joint Ventures

Share of profits less losses of jointly controlled entities for the year ended 31 December 2012 was approximately HK$307 million representing a decrease of 4.66% as compared with amount of HK$322 million for the preceding year, it was mainly due to the decrease of crude oil sales price in Oman project.

Share of profits less losses of joint ventures for the year ended 31 December 2013 increased by 35.18% to approximately HK$415 million (2012: HK$307 million). It was mainly due to the increase of crude oil realised selling price and sales volume in Oman project.

Share of profits less losses of joint ventures for the year ended 31 December 2014 decreased by 38.31% to approximately HK$256 million (2013: HK$415 million). It was mainly due to provision for impairment loss amounting to HK$150 million (2013: HK$Nil) in relation to a joint venture.

Share of profits less losses of joint ventures for the six months ended 30 June 2015 decreased by 54.17% to approximately HK$121 million (same period of 2014: HK$264 million). This was mainly due to the decrease in realised crude oil selling price during the six months ended 30 June 2015 which led to the decrease in the shared operating results from Oman project.

Profit Before Income Tax Expense

Profit before income tax expense for the year ended 31 December 2012 was approximately HK$13,306 million, representing an increase of 26.88% as compared with HK$10,487 million for the preceding year.

Profit before income tax expense for the year ended 31 December 2013 was approximately HK$14,353 million, representing an increase of 7.87% as compared with amount of HK$13,306 million for the preceding year.

Profit before income tax expense for the year ended 31 December 2014 was approximately HK$11,956 million, representing a decrease of 16.70% as compared with amount of HK$14,353 million for the preceding year.

Profit before income tax expense for the six months ended 30 June 2015 was approximately HK$4,705 million, representing a decrease of 25.62% as compared with amount of HK$6,326 million for the same period of the preceding year.

Income Tax Expense

Income tax expense for the year ended 31 December 2012 was approximately HK$3,392 million, representing an increase of 48.06% as compared with HK$2,291 million for the preceding year.

– I-8 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Income tax expense for the year ended 31 December 2013 was approximately HK$3,845 million, representing an increase of 13.35% as compared with amount of HK$3,392 million for the preceding year. The effective tax rate (excluding joint ventures and associates) for the year was 31.28% (2012: 31.80%).

Income tax expense for the year ended 31 December 2014 was approximately HK$3,080 million, representing a decrease of 19.90% as compared with amount of HK$3,845 million for the preceding year. The effective tax rate (excluding joint ventures and associates) for the year ended 31 December 2014 decrease to 28.04% (2013: 31.28%).

Income tax expense for the six months ended 30 June 2015 was approximately HK$1,257 million, representing a decrease of 16.92% as compared with amount of HK$1,513 million for the same period of the preceding year. The effective tax rate (excluding joint ventures and associates) for the six months ended 30 June 2015 increased to 27.06% (same period of 2014: 25.76%).

Profit for the year/period and profit attributable to owners of the Company

The profit of the Group for the year ended 31 December 2012 was approximately HK$9,914 million, representing an increase of 20.96% as compared with HK$8,196 million for the preceding year. The profit attributable to owners of the Company for the year ended 31 December 2012 was approximately HK$6,518 million, representing an increase of 15.96% as compared with HK$5,621 million for the preceding year.

The profit for the year ended 31 December 2013 of the Group was approximately HK$10,508 million, representing an increase of 5.99% as compared with amount of HK$9,914 million for the preceding year. The profit attributable to owners of the Company for the year 2013 was approximately HK$6,851 million, representing an increase of 5.11% as compared with amount of HK$6,518 million for the preceding year.

The profit for the year ended 31 December 2014 of the Group was approximately HK$8,876 million, representing a decrease of 15.53% as compared with amount of HK$10,508 million for the preceding year. The profit attributable to owners of the Company for the year ended 31 December 2014 was approximately HK$5,610 million, representing a decrease of 18.11% as compared with amount of HK$6,851 million for the preceding year.

The profit for the six months ended 30 June 2015 of the Group was approximately HK$3,448 million, representing a decrease of 28.36% as compared with amount of HK$4,813 million for the same period of the preceding year. The profit attributable to owners of the Company for the six months ended 30 June 2015 was approximately HK$1,921 million, representing a decrease of 39.42% as compared with amount of HK$3,171 million for the same period of the preceding year.

– I-9 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Liquidity and Capital Resources

2012

As at 31 December 2012, the carrying value of total assets of the Group is approximately HK$108,542 million, representing an increase of HK$24,335 million or 28.90% as compared with HK$84,207 million as at 31 December 2011.

The gearing ratio of the Group was 33.75% as at 31 December 2012 compared with 37.65% as at 31 December 2011. It is computed by dividing the total borrowings of HK$31,673 million (2011: HK$27,575 million) by the total equity plus borrowings of HK$93,851 million (2011: HK$73,233 million).

Profit before income tax expense, excluding interest income and expense, depreciation, depletion and amortisation (“ EBITDA ”) for the year ended 31 December 2012 was approximately HK$18,229 million, representing an increase of 23.14% as compared with HK$14,804 million for the preceding year.

The Group paid interest of HK$1,418 million (2011: HK$1,463 million) during the year ended 31 December 2012.

The Group received dividends of HK$3,113 million (2011: HK$2,128 million) from associates during the year ended 31 December 2012.

During the year ended 31 December 2012, the Company issued 80 million new shares (2011: 23 million new shares) for exercise of share options and received subscription amount of HK$346 million (2011: HK$96 million). In April 2012, the Company issued 800 million shares at HK$13.10 per share to the public and received subscription amount of HK$10,259 million, net of direct transaction costs of HK$221 million.

2013

As at 31 December 2013, the carrying value of total assets of the Group is approximately HK$119,462 million, representing an increase of HK$10,920 million or 10.06% as compared with 31 December 2012 amount of HK$108,542 million.

The gearing ratio of the Group was 30.26% as at 31 December 2013 compared with 33.75% as at 31 December 2012, representing decrease of 3.49%. It is computed by dividing the total borrowings of HK$31,350 million (2012: HK$31,673 million) by the total equity plus borrowings of HK$103,618 million (2012: HK$93,851 million).

EBITDA for the year ended 31 December 2013 was approximately HK$19,275 million, representing an increase of 5.74% as compared with amount of HK$18,229 million for the preceding year.

– I-10 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

The Group received dividends of HK$814 million (2012: nil) from a joint venture in Middle East and HK$1,826 million from associates which is mainly from an associate in Central Asia during the year ended 31 December 2013 (2012: HK$3,113 million).

The Group raised new borrowings of HK$9,112 million and repaid HK$10,521 million to financial institutions and related parties resulting a net decrease in borrowings of HK$1,409 million during the year ended 31 December 2013.

During the year ended 31 December 2013, a few senior executives of the Company exercised their share options. As a result, the Company issued 15.6 million new shares (2012: 80.0 million new shares) and received subscription amount of HK$86 million (2012: HK$346 million).

During the year ended 31 December 2013, the Company repurchased a total of 4,518,000 shares of the Company (2012: nil) for HK$57 million (2012: nil) during the year ended 31 December 2013.

As at 31 December 2013, the Group had net current liabilities of HK$4,269 million. Notwithstanding the net current liabilities of the Group at 31 December 2013, the Group’s consolidated financial statements have been prepared on a going concern basis because the directors are of the opinion that the Group would have adequate funds to meet its obligation, as and when they fall due, having regard to the following:

(i) Subsequent to the end of the reporting period, China Petroleum Finance Company Limited (“ CP Finance ”) has confirmed to the Group that loans totalling US$550 million (equivalent to HK$4,263 million) that were due to be repaid in 2014 would be extended by three years upon maturities, subject to revision of borrowing interest rate. In addition, the Group has extended a loan of RMB1,700 million (equivalent to HK$2,191 million) that were due to be repaid in 2014 by one year upon maturities; and
(ii) the Group expects to generate positive operation cash flows for the year ending 31 December 2014. Consequently, the consolidated financial statements have been prepared on a going concern basis.

2014

As at 31 December 2014, the carrying value of total assets of the Group was approximately HK$117,710 million, representing a decrease of HK$1,752 million or 1.47% as compared with 31 December 2013 amount of HK$119,462 million.

The gearing ratio of the Group was 25.57% as at 31 December 2014 compared with 30.26% as at 31 December 2013, representing a decrease of 4.69%. It is computed by dividing the sum of interest-bearing borrowings and obligations under finance leases of HK$25,532 million (2013: HK$31,350 million) by the sum of total equity, interest-bearing borrowings and obligations under finance leases of HK$99,846 million (2013: HK$103,618 million).

– I-11 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

EBITDA for the year ended 31 December 2014 was approximately HK$17,617 million, representing a decrease of 8.60% as compared with amount of HK$19,275 million for the preceding year.

The Group received dividends of HK$401 million from a joint venture in Middle East (2013: HK$814 million) and HK$1,041 million mainly from an associate in Central Asia during the year ended 31 December 2014 (2013: HK$1,826 million).

The Group obtained new borrowings and finance leases of HK$10,054 million and repaid HK$15,442 million to financial institutions and related parties resulting a net decrease in the aggregate amount of borrowings and obligations under finance leases of HK$5,388 million during the year ended 31 December 2014.

During the year ended 31 December 2014, a few senior executives of the Company exercised share options. As a result, the Company issued 9.9 million new shares (2013: 15.6 million new shares) and received subscription amount of HK$32 million (2013: HK$86 million).

During the year ended 31 December 2014, the Company has not repurchased any of its shares. As at 31 December 2013, the Company repurchased a total of 4,518,000 shares of the Company with HK$57 million.

As at 31 December 2014, the Group had net current liabilities of HK$4,887 million. Notwithstanding the net current liabilities of the Group at 31 December 2014, the Group’s consolidated financial statements have been prepared on a going concern basis because the directors are of the opinion that the Group would have adequate funds to meet its obligation, as and when they fall due, having regard to the following:

(i) the Group has certain undrawn facilities which include an undrawn facility provided by the Company’s immediate holding company amounting to HK$2,300 million;
(ii) the Group expects to generate positive operating cash flows in the future; and
(iii) the directors consider that the Group could obtain financing from various sources of funding. Consequently, the consolidated financial statements have been prepared on a going concern basis.

2015 (Half Year)

As at 30 June 2015, the carrying value of total assets of the Group was approximately HK$122,476 million, representing an increase of HK$4,766 million or 4.05% as compared with 31 December 2014 amount of HK$117,710 million.

The gearing ratio of the Group was 29.55% as at 30 June 2015 compared with 25.57% as at 31 December 2014, representing an increase of 3.98%. It is computed by dividing the sum of interest bearing borrowings and obligations under finance leases of HK$31,498 million (31 December 2014: HK$25,532 million) by the total equity, interest bearing borrowings and obligations under finance leases of HK$106,601 million (31 December 2014: HK$99,846 million).

– I-12 –

APPENDIX I MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

EBITDA for the six months ended 30 June 2015 was approximately HK$7,759 million, representing a decrease of 15.26% as compared with the amount of HK$9,156 million for the last Period.

During the six months ended 30 June 2015, the Company has issued two senior notes to improve the debt financing structure:

		Nominal		Annualised
Items	Date of issue	Amount	Tenor year	Interest Rate
		US$ ‘million		%
Senior Notes due 2020	13 May 2015	500	5	2.875
(Stock code: 5510)
Senior Notes due 2025	13 May 2015	500	10	3.750
(Stock code: 5511)

Note: Please refer to the announcements on the issue of senior notes published by the Company on the website of the Stock Exchange and the website of the Company in April and May 2015.

The Group raised new borrowings of HK$17,374 million including the net amount of the senior notes of US$988 million (equivalent to HK$7,655 million) mentioned above and repaid HK$11,479 million resulting an net increase of HK$5,895 million during the six months ended 30 June 2015.

The Group received no dividends (same period of 2014: nil) from a joint venture in Middle East and no dividends (same period of 2014: HK$458 million) from an associate in Central Asia during the six months ended 30 June 2015.

During the six months ended 30 June 2015, no share option (31 December 2014: 9.9 million shares exercised and HK$32 million received) has been exercised by the senior executives of the Company as the exercise price of HK$10.32 was above the market price of HK$7.36 on the share option expiry date and the share options were lapsed.

The Group paid interest of HK$636 million (same period of 2014: HK$763 million) during the six months ended 30 June 2015 excluding the accrued interest of the Senior Notes which will be paid on 12 November 2015.

2014 final dividend of HK20 cents per share amounting to HK$1,614 million (2013: HK23 cents per share amounting to HK$1,857 million) was distributed to owners of the Company during the six months ended 30 June 2015.

Use of Proceeds

2011 final dividend of HK$0.22 per share amounting HK$1,766 million (2010: HK$0.138 per share amounting HK$684 million) was distributed to owners of the Company during the year ended 31 December 2012.

– I-13 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

During the year ended 31 December 2012, the Group raised new borrowings of HK$8,213 million (2011: HK$17,565 million) and repaid HK$4,512 million (2011: HK$7,918 million) to financial institutions and related parties resulting a net increase in borrowings of HK$3,701 million (2011: HK$9,670 million) as at 31 December 2012.

In April 2012, the Company issued 800 million shares at HK$13.10 per share to the public and received subscription amount of HK$10,259 million, net of direct transaction costs of HK$221 million. The net proceeds were mainly used for the construction of LNG processing plants and natural gas stations.

The Group paid interest of HK$1,856 million (2012: HK$1,418 million) during the year ended 31 December 2013.

2012 final dividend of HK23 cents per share amounting to HK$1,855 million (2011: HK22 cents per share amounting to HK$1,766 million) was distributed to owners of the Company during the year ended 31 December 2013.

The Group paid interest of HK$1,486 million (2013: HK$1,856 million) during the year ended 31 December 2014.

2013 final dividend of HK23 cents per share amounting to HK$1,857 million (2012: HK23 cents per share amounting to HK$1,855 million) was distributed to owners of the Company during the year ended 31 December 2014.

Pledge of Assets

As at 31 December 2012, 31 December 2013, 31 December 2014 and 30 June 2015, no short-term and long-term borrowings were secured by property, plant and equipment and advanced operating lease payment.

New Investment in Major Projects

During the year ended 31 December 2012, the capital increase in Binhai New Energy Co., Ltd. was completed in February 2012 and Binhai New Energy Co., Ltd. becomes the subsidiary of the Company. The Company also established Kunlun Energy (Gansu) Company Limited and Jilin Jigang Clean Energy Company Limited with Yumen Oilfield and Jinlin Oilfield respectively.

The Group had no major acquisition during the years ended 31 December 2013, 31 December 2014 and the six months ended 30 June 2015.

Termination of Project

The Company owns 70% issued share capital of CGB2 which owns an undivided 100% participating interest in the contract rights and interests in the Bengara-II Production Sharing Contract (“ Bengara-II PSC ”) which has a term of thirty years in Indonesia.

– I-14 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Under the Bengara-II PSC, the exploration phase expired on 30 November 2011. The Company and CGB2 had since April 2011 been actively negotiating with BPMIGAS (a state oil and gas regulatory body established under the Directorate General of Oil and Natural Gas of The Ministry of Mines and Energy of the Republic of Indonesia) for a further extension of the exploration phase for two years.

Despite the continuous efforts of the Company and CGB2 in negotiating with BPMIGAS for further extension, on 24 August 2012, BPMIGAS issued a letter to CGB2 stating that the Bengara-II PSC was expired as from 30 November 2011. No reason was specified in the said letter.

The Company has sought the opinion of its Indonesian counsel regarding the expiry of the Bengara-II PSC and was advised that under the applicable Indonesia laws and the Bengara-II PSC, BPMIGAS has no obligation to grant another extension other than the four-year extension period immediately after the initial six years of the exploration phase. In view of the opinion of the Indonesian counsel, the Company has decided not to pursue further application/request for extension of the term of the Bengara-II PSC.

A total expenses of HK$55 million for the year ended 31 December 2012 was absorbed for the project.

Employee

On 31 December 2012, the Group had approximately 17,475 staff globally (excluding the staff under entrustment contracts) (2011: 14,239 staff). Remuneration package and benefits were determined in accordance with market terms, industry practice as well as the duties, performance, qualifications and experience of the staff. In addition, the Group set up a share option scheme, pursuant to which the directors and employees of the Company were granted options to subscribe shares of the Company.

On 31 December 2013, the Group had approximately 21,589 staff globally (excluding the staff under entrustment contracts) (2012: 17,475 staff). Remuneration package and benefits were determined in accordance with market terms, industry practice as well as the duties, performance, qualifications and experience of the staff.

On 31 December 2014, the Group had approximately 21,751 staff globally (excluding the staff under entrustment contracts) (31 December 2013: 21,589 staff). Remuneration package and benefits were determined in accordance with market terms, industry practice as well as the duties, performance, qualifications and experience of the staff.

On 30 June 2015, the Group had approximately 20,507 staff globally (excluding the staff under entrustment contracts) (31 December 2014: 21,751 staff). Remuneration package and benefits were determined in accordance with market terms, industry practice as well as the duties, performance, qualifications and experience of the staff.

– I-15 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Final/Interim Dividend

The Board of Directors recommended the payment of a final dividend of HK23 cents (2011: HK22 cents) per share. The proposed dividend will be paid in June 2013 to the shareholders whose names appear on the Register on 28 May 2013 (Tuesday), subject to the approval at the Annual General Meeting.

The Board of Directors recommended the payment of a final dividend of HK23 cents (2012: HK23 cents) per share. The proposed dividend will be paid on or before 30 June 2014 to the shareholders whose names appear on the Register on 19 June 2014 (Thursday), subject to the approval at the Annual General Meeting.

The Board of Directors recommended the payment of a final dividend of HK20 cents (2013: HK23 cents) per share. The proposed dividend will be paid on or before 19 June 2015 to the shareholders whose names appear on the Register on 9 June 2015 (Tuesday), subject to the approval at the Annual General Meeting.

The Board has resolved not to declare an interim dividend for the six months ended 30 June 2015.

Purchase, Sale or Redemption of Shares

During the year ended 31 December 2012, the Company has not repurchased any of its shares.

Neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company’s shares during the year ended 31 December 2012.

During the year ended 31 December 2013, 4,518,000 shares of HK$0.01 each of the Company were repurchased by the Company through the Stock Exchange and cancelled on 22 July 2013, details of which are as follows:

	Number of			Aggregate
	shares	Highest	Lowest	amount
Month	repurchased	Price	Price	paid
				HK$
		HK$	HK$	‘million
June 2013	2,000,000	12.84	12.00	25
July 2013	2,518,000	12.84	12.40	32

Save for the foregoing, neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company’s shares during the year ended 31 December 2013.

Neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company’s shares during the year ended 31 December 2014.

Neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company’s shares during the six months ended 30 June 2015.

– I-16 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

B. MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

Selected consolidated financial information of the Target Group

The summary of the financial information of the Target Group represents the financial information for the three years ended 31 December 2012, 2013 and 2014 and the nine months ended 30 September 2015:

Selected items of consolidated statements of financial position

Total assets Total liabilities Equity	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 21,032,008 24,433,093 27,151,679 9,359,518 13,131,569 12,339,646 11,672,490 11,301,524 14,812,033	As at 30 September 2015 RMB’000 28,353,752 12,328,623
		16,025,129

Selected items of consolidated statements of comprehensive income

				Nine months ended	Nine months ended
	Year	ended 31 December		30 September
	2012	2013	2014	2014	2015
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Revenue	50,040,457	53,404,448	54,179,798	40,610,537	32,172,758
Profit before income tax
expense	937,857	1,411,418	1,534,791	1,337,115	1,655,467
Profit for the year/period	660,970	1,011,141	1,124,510	971,501	1,185,194

Selected items of consolidated statements of cash flows

Cash inflows from operating activities Cash outflows from investing activities Cash inflows/(outflows) from financing activities Increase/(decrease) in cash and cash equivalents	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 2,609,856 3,451,169 2,138,043 (2,672,991) (2,912,742) (4,117,886) 462,676 19,832 2,572,833 399,541 558,259 592,990	Nine months ended 30 September 2014 2015 RMB’000 RMB’000 2,223,222 1,903,031 (2,104,173) (2,076,805 168,530 (20,815 287,579 (194,589	Nine months ended 30 September 2014 2015 RMB’000 RMB’000 2,223,222 1,903,031 (2,104,173) (2,076,805 168,530 (20,815 287,579 (194,589
			(194,589

– I-17 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Profitability of the Target Group

Consolidated statement of comprehensive income summary

				For the nine months	For the nine months
	For the year ended 31		December	ended 30 September
	2012	2013	2014	2014	2015
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Revenue	50,040,457	53,404,448	54,179,798	40,610,537	32,172,758
Increase/(decrease)		3,363,991	775,350		(8,437,779)
Percentage change		6.7%	1.5%		(20.8%)
Other gains, net	113,393	127,092	177,509	76,713	126,934
Increase/(decrease)		13,699	50,417		50,221
Percentage change		12.1%	39.7%		65.5%
Interest income	113,915	113,675	142,103	104,031	111,054
Increase/(decrease)		(240)	28,428		7,023
Percentage change		(0.2%)	25.0%		6.8%
Purchases, services and others	45,468,671	48,043,479	48,358,465	36,157,432	27,511,974
Increase/(decrease)		2,574,808	314,986		(8,645,458)
Percentage change		5.7%	0.7%		(23.9%)
Employee compensation costs	1,621,985	1,949,346	2,297,073	1,647,417	1,608,261
Increase/(decrease)		327,361	347,727		(39,156)
Percentage change		20.2%	17.8%		(2.4%)
Depreciation and amortisation	817,485	903,699	1,100,087	736,787	887,844
Increase/(decrease)		86,214	196,388		151,057
Percentage change		10.5%	21.7%		20.5%
Selling, general and administrative
expenses	1,333,487	1,258,604	1,113,315	807,021	677,779
Increase/(decrease)		(74,883)	(145,289)		(129,242)
Percentage change		(5.6%)	(11.5%)		(16.0%)
Taxes other than income taxes	63,314	70,640	84,963	60,388	54,402
Increase/(decrease)		7,326	14,323		(5,986)
Percentage change		11.6%	20.3%		(9.9%)
Interest expenses	25,454	23,699	61,715	43,896	38,066
Increase/(decrease)		(1,755)	38,016		(5,830)
Percentage change		(6.9%)	160.4%		(13.3%)
Share of profits less losses of:
– Associates	488	13,827	47,985	(1,225)	22,435
Increase/(decrease)		13,339	34,158		23,660
Percentage change		2,733.4%	247.0%		1,931.4%
– A joint venture	–	1,843	3,014	–	612
Increase/(decrease)		1,843	1,171		612
Percentage change			63.5%
Profit before income tax expense	937,857	1,411,418	1,534,791	1,337,115	1,655,467
Increase/(decrease)		473,561	123,373		318,352
Percentage change		50.5%	8.7%		23.8%
Income tax expense	276,887	400,277	410,281	365,614	470,273
Increase/(decrease)		123,390	10,004		104,659
Percentage change		44.6%	2.5%		28.6%
Profit for the year/period	660,970	1,011,141	1,124,510	971,501	1,185,194
Increase/(decrease)		350,171	113,369		213,693
Percentage change		53.0%	11.2%		22.0%

– I-18 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Revenue

				Nine months ended	Nine months ended
	Year	ended 31 December		30 September
	2012	2013	2014	2014	2015
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Sales of LPG	35,545,749	33,853,288	29,802,374	23,456,628	15,462,668
Percentage of Revenue	71.03%	63.39%	55.01%	57.76%	48.06%
Increase/(decrease)		(4.76%)	(11.97%)		(34.08%)
Sales of Natural Gas	9,102,794	12,619,855	16,362,115	11,504,513	11,436,366
Percentage of Revenue	18.19%	23.63%	30.20%	28.33%	35.55%
Increase/(decrease)		38.64%	29.65%		(0.59%)
Sales of CNG	3,407,759	4,479,410	5,339,610	3,936,321	3,377,259
Percentage of Revenue	6.81%	8.39%	9.86%	9.69%	10.50%
Increase/(decrease)		31.45%	19.20%		(14.20%)
Revenue from Construction
contracts	1,553,299	1,931,872	2,055,807	1,271,130	1,483,056
Percentage of Revenue	3.10%	3.62%	3.79%	3.13%	4.61%
Increase/(decrease)		24.37%	6.42%		16.67%
Other revenue	430,856	520,023	619,892	441,945	413,409
Percentage of Revenue	0.87%	0.97%	1.14%	1.09%	1.28%
Increase/(decrease)		20.70%	19.20%		(6.46%)
Revenue	50,040,457	53,404,448	54,179,798	40,610,537	32,172,758

Revenue for 2012 was approximately RMB50,040 million. Sales of LPG, natural gas and CNG contributed 71.03%, 18.19% and 6.81% of revenue for 2012 respectively.

Revenue for 2013 was approximately RMB53,404 million, representing an increase of 6.7% as compared with amount of RMB50,040 million for the preceding year. The increase was mainly due to increase in sales volume and unit price of natural gas and CNG as a result of market expansion, business development and the effort to improve the unit price of the Target Group along with growing demand of clean energy in the PRC. Sales of natural gas and CNG increased by 38.64% and 31.45% respectively in 2013, while sales of LPG decreased slightly by 4.76%. Sales of LPG, natural gas and CNG contributed 63.39%, 23.63% and 8.39% of revenue for 2013 respectively.

Revenue for 2014 was approximately RMB54,180 million, representing an increase of 1.5% as compared with amount of RMB53,404 million for the preceding year. The increase was mainly due to increase in sales of natural gas by 29.65% as a result of higher unit price following the market expansion, business development and the effort to improve the unit price of the Target Group. Increase in sales of CNG by 19.20% also contributed to the increase of revenue for 2014. The increase in sales of natural gas and CNG was partly offset by the decrease in sales of LPG by 11.97%, which was mainly due to the decrease of LPG unit price. Sales of LPG, natural gas and CNG contributed 55.01%, 30.20% and 9.86% of revenue for 2014 respectively.

– I-19 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Revenue for the nine months ended 30 September 2015 was approximately RMB32,173 million, representing a decrease of 20.8% as compared with amount of RMB40,611 million for the same period in the preceding year. The decrease was mainly due to decrease in sales of LPG by 34.09%, which was due to the decrease in unit price of LPG caused by the decrease of world oil price. Meanwhile, sales of natural gas and CNG also decreased by 0.59% and 14.20%, respectively, due to the macroeconomic environment. Sales of LPG, natural gas and CNG contributed 48.06%, 35.55% and 10.50% of revenue for the nine months ended 30 September 2015 respectively.

Other gains, net

Other gains, net for 2012 was approximately RMB113 million.

Other gains, net for 2013 was approximately RMB127 million, representing an increase of 12.1% as compared with amount of RMB113 million for the preceding year. The increase was mainly due to increase in net exchange gains.

Other gains, net for 2014 was approximately RMB178 million, representing an increase of 39.7% as compared with amount of RMB127 million for the preceding year. The increase was mainly due to increase in government grants received from municipal governments in relation to residential natural gas business of certain subsidiaries of the Target Group.

Other gains, net for the nine months ended 30 September 2015 was approximately RMB127 million, representing an increase of 65.5% as compared with amount of RMB77 million for the same period in the preceding year. The increase was mainly due to the early payment of government grants from municipal governments in relation to residential natural gas business of certain subsidiaries of the Target Group.

Interest income

Interest income for 2012 was approximately RMB114 million.

Interest income for 2013 was approximately RMB114 million, representing a decrease of 0.2% as compared with amount of RMB114 million for the preceding year.

Interest income for 2014 was approximately RMB142 million, representing an increase of 25.0% as compared with amount of RMB114 million for the preceding year. The increase was mainly due to the increase in the average balance of cash and cash equivalent.

Interest income for the nine months ended 30 September 2015 was approximately RMB111 million, representing an increase of 6.8% as compared with amount of RMB104 million for the same period in the preceding year. The increase was mainly due to the increase in the average balance of cash and cash equivalent.

Purchases, services and others

The purchases, services and others mainly represent purchase costs for natural gas, LPG, LNG, power and fuel, repair and maintenance expenses, and other operating expenses.

Purchases, services and others for 2012 was approximately RMB45,469 million.

– I-20 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Purchases, services and others for 2013 was approximately RMB48,043 million, representing an increase of 5.7% as compared with amount of RMB45,469 million for the preceding year. The increase was mainly due to increase in purchase volume of natural gas and CNG, increase in processing costs and other operating expenses as a result of business expansion.

Purchases, services and others for 2014 was approximately RMB48,358 million, representing an increase of 0.7% as compared with amount of RMB48,043 million for the preceding year.

Purchases, services and others for the nine months ended 30 September 2015 was approximately RMB27,512 million, representing a decrease of 23.9% as compared with amount of RMB36,157 million for the same period in the preceding year. The decrease was mainly due to the decrease of average purchase price of LPG.

Employee compensation costs

Employee compensation costs for 2012 was approximately RMB1,622 million.

Employee compensation costs for 2013 was approximately RMB1,949 million, representing an increase of 20.2% as compared with amount of RMB1,622 million for the preceding year. The increase was mainly due to the increase in employee count with business expansion.

Employee compensation costs for 2014 was approximately RMB2,297 million, representing an increase of 17.8% as compared with amount of RMB1,949 million for the preceding year. The increase was mainly due to the increase in employee count with business expansion.

Employee compensation costs for the nine months ended 30 September 2015 was approximately RMB1,608 million, representing a decrease of 2.4% as compared with amount of RMB1,647 million for the same period in the preceding year.

Depreciation and amortisation

Depreciation and amortisation for 2012 was approximately RMB817 million.

Depreciation and amortisation for 2013 was approximately RMB904 million, representing an increase of 10.6% as compared with amount of RMB817 million for the preceding year. The increase was mainly due to addition of production facilities and factory stand during the year following the business expansion.

Depreciation and amortisation for 2014 was approximately RMB1,100 million, representing an increase of 21.7% as compared with amount of RMB904 million for the preceding year. The increase was mainly due to addition of production facilities and factory stand during the year following the business expansion.

Depreciation and amortisation for the nine months ended 30 September 2015 was approximately RMB888 million, representing an increase of 20.5% as compared with amount of RMB737 million for the same period in the preceding year. The increase was mainly due to (1) addition of production facilities and factory stand during the period following the business expansion; and (2) lump-sum supplementary depreciation of assets with original value of under RMB5,000.

– I-21 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Selling, general and administrative expenses

Selling, general and administrative expenses for 2012 were approximately RMB1,333 million.

Selling, general and administrative expenses for 2013 was approximately RMB1,259 million, representing a decrease of 5.6% as compared with amount of RMB1,333 million for the preceding year. The decrease was mainly due to fact that the Target Group proactively implemented measures for integrating the reorganisation and enhancing efficiency to strengthen control over costs and expenses.

Selling, general and administrative expenses for 2014 was approximately RMB1,113 million, representing a decrease of 11.5% as compared with amount of RMB1,259 million for the preceding year. The decrease was mainly due to fact that the Target Group proactively implemented measures for integrating the reorganisation and enhancing efficiency to strengthen control over costs and expenses.

Selling, general and administrative expenses for the nine months ended 30 September 2015 was approximately RMB678 million, representing a decrease of 16.0% as compared with amount of RMB807 million for the same period in the preceding year. The decrease was mainly due to fact that the Target Group proactively implemented measures for reducing expenditure, cutting costs and enhancing efficiency to strengthen control over costs and expenses by current domestic policy implications, which was partly offset by the increase in safety payments, such as safety production costs and property insurance premium.

Taxes other than income taxes

Taxes other than income taxes for 2012 were approximately RMB63 million.

Taxes other than income taxes for 2013 was approximately RMB71 million, representing an increase of 11.6% as compared with amount of RMB63 million for the preceding year. The increase was mainly due to increase of land use tax and property tax caused by newly projects.

Taxes other than income taxes for 2014 was approximately RMB85 million, representing an increase of 20.3% as compared with amount of RMB71 million for the preceding year. The increase was mainly due to land use tax and property tax caused by newly operated projects.

Taxes other than income taxes for the nine months ended 30 September 2015 was approximately RMB54 million, representing a decrease of 9.9% as compared with amount of RMB60 million for the same period in the preceding year.

Interest expenses

Interest expenses for 2012 were approximately RMB25 million.

– I-22 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Interest expenses for 2013 was approximately RMB24 million, representing a decrease of 6.9% as compared with amount of RMB25 million for the preceding year. The decrease was mainly due to the optimisation of debt scale of the Target Group.

Interest expenses for 2014 was approximately RMB62 million, representing an increase of 160.4% as compared with amount of RMB24 million for the preceding year. The increase was mainly due to increase in the average balance of short-term borrowings from commercial banks.

Interest expenses for the nine months ended 30 September 2015 was approximately RMB38 million, representing a decrease of 13.3% as compared with amount of RMB44 million for the same period in the preceding year. The decrease was mainly due to interest rate adjustments of banks.

Income tax expense

Income tax expense for 2012 was approximately RMB277 million.

Income tax expense for 2013 was approximately RMB400 million, representing an increase of 44.6% as compared with amount of RMB277 million for the preceding year. The increase was basically in line with that of profit before income tax expense.

Income tax expense for 2014 was approximately RMB410 million, representing an increase of 2.5% as compared with amount of RMB400 million for the preceding year. The increase was basically in line with that of profit before income tax expense.

Income tax expense for the nine months ended 30 September 2015 was approximately RMB470 million, representing an increase of 28.4% as compared with amount of RMB366 million for the same period in the preceding year. The increase was basically in line with that of profit before income tax expense.

Profit for the year/period

Profit for the year of 2012 was approximately RMB661 million.

Profit for the year of 2013 was approximately RMB1,011 million, representing an increase of 53.0% as compared with amount of RMB661 million for the preceding year. The increase was mainly due to profit increased in sales of natural gas and CNG.

Profit for the year of 2014 was approximately RMB1,125 million, representing an increase of 11.3% as compared with amount of RMB1,011 million for the preceding year. The increase was mainly due to profit increased in sales of natural gas and related business.

Profit for the nine months ended 30 September 2015 was approximately RMB1,185 million, representing an increase of 22.0% as compared with amount of RMB972 million for the same period in the preceding year. The increase was mainly due to profit increased in sales of LPG, natural gas and related business.

– I-23 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Capital Structure of the Target Group

Financing and financial policies

The capital management objective of the Target Group is to maintain the ability to continue as a going concern, so as to provide return to shareholders and reduce capital cost. To achieve the capital management objective, the Target Group may increase capital, adjust liabilities level or take up a combination of short-term borrowings and long-term borrowings.

Gearing Ratio

2012

The gearing ratio of the Target Group was 7.40% as at 31 December 2012. It is computed by dividing the total borrowings of RMB932.3 million by the total equity plus borrowings of RMB12,604.8 million.

2013

The gearing ratio of the Target Group was 7.73% as at 31 December 2013 compared with 7.40% as at 31 December 2012, representing an increase of 0.33%. It is computed by dividing the total borrowings of RMB947.1 million (2012: RMB932.3 million) by the total equity plus borrowings of RMB12,248.6 million (2012: RMB12,604.8 million).

2014

The gearing ratio of the Target Group was 7.17% as at 31 December 2014 compared with 7.73% as at 31 December 2013, representing a decrease of 0.56%. It is computed by dividing the total borrowings of RMB1,143.5 million (2013: RMB947.1 million) by the total equity plus borrowings of RMB15,955.5 million (2013: RMB12,248.6 million).

2015 (nine months ended 30 September)

The gearing ratio of the Target Group was 6.68% as at 30 September 2015 compared with 7.17% as at 31 December 2014, representing a decrease of 0.48%. It is computed by dividing the total borrowings of RMB1,147.9 million (2014: RMB1,143.5 million) by the total equity plus borrowings of RMB17,173.0 million (2014: RMB15,955.5 million).

– I-24 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Borrowings

The loans of the Target Group are denominated in RMB. Except a small portion of bank loans, the majority of loans were granted by CP Finance. As at 31 December 2012, 2013, 2014 and 30 September 2015, the total amount of bank loans and other loans of the Target Group were approximately RMB932.3 million, RMB947.1 million, RMB1,143.5 million and RMB1,147.9 million respectively. The breakdown of the loans is as follows:

				As at
	As	at 31 December		30 September
	2012	2013	2014	2015
	RMB ‘million	RMB ‘million	RMB ‘million	RMB ‘million
Short-term
borrowings	292.5	141.0	589.9	730.8
Long-term
borrowings	639.8	806.1	553.6	417.1
Total borrowings	932.3	947.1	1,143.5	1,147.9

Charges on the Assets of the Target Group

As at 31 December 2012, 2013, 2014 and 30 September 2015, the Target Group’s outstanding secured short-term borrowings were RMB111.0 million, RMB114.2 million, RMB54.7 million and RMB73.8 million, respectively. The Target Group’s outstanding secured long-term borrowings were RMB97.7 million, RMB140.9 million, RMB188.2 million and RMB126.0 million, respectively.

Contingent Liabilities

As at 31 December 2012, 2013, 2014 and 30 September 2015, the Target Group did not have any material contingent liabilities.

Investment of the Target Group

The Group will assess and determine its investment plan with the management of the Target Group for the Target Group in 2016 after the Group has completed the Aquisition.

Prospect

In accordance with the Notice on Issuance of The Energy Development Strategy Action Plan (2014-2020) by the General Office of the State Council in 2014, the percentage of natural gas consumption in China’s total energy consumption should reach 10% or above by 2020. According to statistics in the BP Statistical Review of World Energy, China’s natural gas consumption accounted for only 5.6% of its primary energy consumption in 2014, which

– I-25 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

represented relatively large room for growth as compared to such strategic objective. In addition, with the demand for control of atmospheric pollution (e.g. haze) becomes increasingly prominent, natural gas, LPG and other clean energy have become the prioritised solutions. Particularly, for countryside and rural areas that are not yet covered by natural gas pipeline networks, promotion of LPG has become the preferred solution. The LPG deep processing industry and propane dehydrogenation (PDH) facilities in China recorded rapid development in recent years. Alkylation and other LPG deep processing have shown its bright prospects. The mixed dehydrogenation and other deep processing technologies are showing great promises. All these factors have brought development opportunities for the LPG market.

By capitalizing on the aforesaid development opportunities in the fuel gas market, the Target Group will develop its natural gas and LPG business in a coordinated manner and continue to improve the quality efficiency of its gas business. The Target Group will strive to perfect its piped fuel gas business by following the principle of attaching equal importance to quality efficiency and scale as well as giving priority to the development of new high-end and highly efficient development projects; grow its branch network transmission business in scale and strength, and proactively promote direct fuel gas supply project to various major consumers including users of distributed power and power plants; accelerate the efficient development of distribution business for LNG transportation and effectively develop CNG distribution business on an orderly basis; and refine its LPG business by broadening resource channels, optimising resource allocation, expanding the distribution market and increasing the proportion of retail sales in the LPG sector. With the above-mentioned measures in position, it is expected that the Target Group will enhance market competitiveness and achieve rapid growth, thereby maximising returns for the Shareholders of the Company.

Liquidity and capital resources

Cash flows from operating activities

Cash inflows from operating activities for 2012 was approximately RMB2,610 million.

Cash inflows from operating activities for 2013 was approximately RMB3,451 million, representing an increase of 32.2% as compared with amount of RMB2,610 million for the preceding year. The increase was mainly due to the increase in profit for the year.

Cash inflows from operating activities for 2014 was approximately RMB2,138 million, representing a decrease of 38.0% as compared with amount of RMB3,451 million for the preceding year. The decrease was mainly due to the increase in account receivable.

Cash inflows from operating activities for the nine months ended 30 September 2015 was approximately RMB1,903 million, representing a decrease of 14.4% as compared with amount of RMB2,223 million for the same period in the preceding year. The decrease was mainly due to the increase in accounts receivable.

– I-26 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Cash flows from investing activities

Cash outflows from investing activities for 2012 was approximately RMB2,673 million.

Cash outflows from investing activities for 2013 was approximately RMB2,913 million, representing an increase of 9.0% as compared with amount of RMB2,673 million for the preceding year. The increase was mainly due to the decrease in amounts due from the immediate holding company.

Cash outflows from investing activities for 2014 was approximately RMB4,118 million, representing an increase of 41.4% as compared with amount of RMB2,913 million for the preceding year. The increase was mainly due to the payment on business combination under common control.

Cash outflows from investing activities for the nine months ended 30 September 2015 was approximately RMB2,077 million, representing a decrease of 1.3% as compared with amount of RMB2,104 million for the same period in the preceding year. The decrease was mainly due to the decrease in capital expenditure.

Cash flows from financing activities

Cash inflows from financing activities for 2012 was approximately RMB463 million.

Cash inflows from financing activities for 2013 was approximately RMB20 million, representing a decrease of 95.7% as compared with amount of RMB463 million for the preceding year. The decrease was mainly due to the decrease in capital contributions from the owners and non-controlling interests.

Cash inflows from financing activities for 2014 was approximately RMB2,573 million, representing an increase of 12,873.1% as compared with amount of RMB20 million for the preceding year. The increase was mainly due to the Target Group received capital contributions from the owner of RMB2,500 million.

Cash outflows for the nine months ended 30 September 2015 was approximately RMB21 million, while that for the same period in the preceding year was a net cash inflows with a difference of RMB190 million. The difference was mainly due to the repayments of borrowings.

Cash and cash equivalents

As at 31 December 2012, 2013, 2014 and 30 September 2015, the cash and cash equivalents of the Target Group were approximately RMB2,975 million, RMB3,533 million, RMB4,126 million and RMB3,932 million respectively. Cash and cash equivalents were mainly held in RMB. The sufficient cash and cash equivalents reflect the Target Group’s effective management of cash flow.

– I-27 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP AND THE TARGET GROUP

APPENDIX I

Working Capital

The breakdown of the working capital is as follows:

				As at
	As at 31 December			30 September
	2012	2013	2014	2015
	RMB’000	RMB’000	RMB’000	RMB’000
Current assets	7,371,053	7,711,502	9,504,585	10,917,135
Increase/(decrease)		340,449	1,793,083
Percentage change		5%	23%
Current liabilities	7,786,086	11,217,110	10,422,426	10,661,774
Increase/(decrease)		3,431,024	(794,684)
Percentage change		44%	(7%)
Working capital	(415,033)	(3,505,608)	(917,841)	255,361
Increase/(decrease)		(3,090,575)	2,587,767

Note: Working capital is calculated as current assets less current liabilities.

The working capital of the Target Group in 2013 represented a decrease by RMB3,091 million as compared with 2012. Such decrease was mainly due to the increase in advances from customers and amounts due to related parties resulting from the business combination under common control.

The working capital of the Target Group in 2014 represented an increase by RMB2,588 million as compared with 2013. Such increase was mainly attributable to the increase in amounts due from the immediate holding company and bank deposit.

Employee

As at 30 September 2015, the Target Group has employed approximately 20,000 contract staff. The Target Group has adopted a proactive and effective salary system for the adjustment of the salary of its employees. There is no share option scheme at present. The Target Group provides sufficient trainings for its employees, which include compulsory trainings, safety training, production technique training as well as management training under the law of the PRC.

The Target has provided its staff with pension, medical insurance, injury insurance, unemployment insurance, maternity insurance, housing fund and employer liability insurance, etc.

– I-28 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

The financial information of the Group:

(a) for the year ended 31 December 2012 (together with the comparative financial information for the year ended 31 December 2011, as restated) is disclosed on page 38 to 122 of the annual report of the company for the year ended 31 December 2012;
(b) for the year ended 31 December 2013 is disclosed on page 39 to 129 of the annual report of the company for the year ended 31 December 2013;
(c) for the year ended 31 December 2014 is disclosed on page 41 to 129 of the annual report of the company for the year ended 31 December 2014; and
(d) for the six months ended 30 June 2015 is disclosed on page 20 to 45 of the interim report of the company for the six months ended 30 June 2015.

All these reports have been published on the website of the Stock Exchange at www.hkexnews.hk.

– II-1 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

The following is the text of a report, prepared for the purpose of incorporation in this circular, received from the Company’s reporting accountants, KPMG, Certified Public Accountants, Hong Kong.

8th Floor Prince’s Building 10 Chater Road Central Hong Kong

23 January 2016

The Directors

Kunlun Energy Company Limited

Dear Sirs,

INTRODUCTION

We set out below our report on the consolidated financial information relating to PetroChina Kunlun Gas Company Limited (the “Target Company”) and its subsidiaries (together the “Target Group”) which comprise the consolidated statements of financial position of the Target Group as at 31 December 2012, 2013 and 2014 and 30 September 2015 and the consolidated statements of comprehensive income, the consolidated statements of changes in equity and the consolidated statements of cash flows, for each of the years ended 31 December 2012, 31 December 2013 and 31 December 2014 and the nine months ended 30 September 2015 (the “Relevant Periods”), and a summary of significant accounting policies and other explanatory information (the “Financial Information”), for inclusion in the circular of the Kunlun Energy Company Limited (the “Company”) dated 23 January 2016 (the “Circular”) in connection with the proposed acquisition of the Target Group by the Company.

The Target Company was incorporated in Beijing, the People’s Republic of China (the “PRC”), on 27 July 2001 as a limited liability company under the Companies Law of the PRC.

All companies comprising the Target Group have adopted 31 December as their financial year end date. Details of the companies comprising the Target Group that are subject to audit during the Relevant Periods and the names of the respective auditors are set out in note 35 of Section B. The statutory financial statements of these companies were prepared in accordance with the Accounting Standards for Business Enterprises issued by the Ministry of Finance of the PRC.

The directors of the Target Company have prepared the consolidated financial statements for the Relevant Periods (the “Underlying Financial Statements”) in accordance with HKFRSs issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”). The Underlying Financial Statements for each of the years ended 31 December 2012, 2013 and 2014 and the nine months ended 30 September 2015 were audited by KPMG Huazhen LLP in accordance with Hong Kong Standards on Auditing issued by the HKICPA.

– III-1 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

The Financial Information has been prepared by the directors of the Company for inclusion in the Circular based on the Underlying Financial Statements, with no adjustments made thereon, and in accordance with the applicable disclosure provisions of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Listing Rules”).

DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL INFORMATION

The directors of the Company are responsible for the preparation of the Financial Information that gives a true and fair view in accordance with HKFRSs issued by the HKICPA and the applicable disclosure provisions of the Listing Rules, and for such internal control as the directors of the Company determine is necessary to enable the preparation of the Financial Information that is free from material misstatement, whether due to fraud or error.

REPORTING ACCOUNTANTS’ RESPONSIBILITY

Our responsibility is to form an opinion on the Financial Information based on our procedures performed in accordance with Auditing Guideline “Prospectuses and the Reporting Accountant” (Statement 3.340) issued by the HKICPA. We have not audited any financial statements of the Target Company, its subsidiaries or the Target Group in respect of any period subsequent to 30 September 2015.

OPINION

In our opinion, the Financial Information gives, for the purpose of this report, a true and fair view of the financial position of the Target Group as at 31 December 2012, 2013 and 2014 and 30 September 2015 and of the Target Group’s financial performance and cash flows for the Relevant Periods then ended.

CORRESPONDING FINANCIAL INFORMATION

For the purpose of this report, we have also reviewed the unaudited corresponding interim financial information of the Target Group comprising the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the nine months ended 30 September 2014, together with the notes thereon (the “Corresponding Financial Information”), for which the directors are responsible, in accordance with Hong Kong Standard on Review Engagements 2410 “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” issued by the HKICPA.

The directors of the Company are responsible for the preparation of the Corresponding Financial Information in accordance with the same basis adopted in respect of the Financial Information. Our responsibility is to express a conclusion on the Corresponding Financial Information based on our review.

– III-2 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

A review consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Hong Kong Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion on the Corresponding Financial Information.

Based on our review, for the purpose of this report, nothing has come to our attention that causes us to believe that the Corresponding Financial Information is not prepared, in all material respects, in accordance with the same basis adopted in respect of the Financial Information.

– III-3 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

A FINANCIAL INFORMATION

Consolidated statement of comprehensive income

Section B
Note
Revenue
4
Other gains, net
5
Interest income
6
Purchases, services and others

Employee compensation costs
7
Depreciation and amortisation
Selling, general and
administrative expenses
Taxes other than income taxes
Interest expenses
8
Share of profits less
losses of:
– Associates
– A joint venture
Profit before income
tax expense
9
Income tax expense
10
Profit for the year/period
Other comprehensive
income, net of nil tax
Total comprehensive income
for the year/period
Total comprehensive income
for the year/period
attributable to:
– Owner of the Target
Company
– Non-controlling interests

For the year ended 31 December
For the nine months
ended 30 September
2012
2013
2014
2014
2015
RMB’000
RMB’000
RMB’000
RMB’000
RMB’000
(unaudited)
50,040,457
53,404,448
54,179,798
40,610,537
32,172,758
113,393
127,092
177,509
76,713
126,934
113,915
113,675
142,103
104,031
111,054
(45,468,671) (48,043,479) (48,358,465) (36,157,432) (27,511,974)
(1,621,985)
(1,949,346)
(2,297,073)
(1,647,417)
(1,608,261)
(817,485)
(903,699)
(1,100,087)
(736,787)
(887,844)
(1,333,487)
(1,258,604)
(1,113,315)
(807,021)
(677,779)
(63,314)
(70,640)
(84,963)
(60,388)
(54,402)
(25,454)
(23,699)
(61,715)
(43,896)
(38,066)
488
13,827
47,985
(1,225)
22,435
–
1,843
3,014
–
612
937,857
1,411,418
1,534,791
1,337,115
1,655,467
(276,887)
(400,277)
(410,281)
(365,614)
(470,273)
660,970
1,011,141
1,124,510
971,501
1,185,194
- - - - - - - -
- - - - - - - -
- - - - - - - -
- - - - - - - -
- - - - - - - -
–
–
–
–
–
- - - - - - - -
- - - - - - - -
- - - - - - - -
- - - - - - - -
- - - - - - - -
660,970
1,011,141
1,124,510
971,501
1,185,194
377,559
691,782
723,479
665,680
822,278
283,411
319,359
401,031
305,821
362,916
660,970
1,011,141
1,124,510
971,501
1,185,194

– III-4 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

Consolidated statement of financial position

Section B Note Assets Non-current assets Property, plant and equipment 13 Advanced operating lease payments 14 Investments in associates 15 Investments in a joint venture 16 Intangible and other non-current assets 18 Deferred tax assets 26 Current assets Inventories 19 Accounts receivable 20 Prepaid expenses and other receivable 21 Cash and cash equivalents 22 Total assets Equity Capital and reserves attributable to owner of the Target Company Share capital 23(b) Retained earnings Reserves 23(c) Non-controlling interests Total equity Liabilities Current liabilities Accounts payable and accrued liabilities 24 Income tax payable Other taxes payable Short-term borrowings 25 Non-current liabilities Long-term borrowings 25 Deferred tax liabilities 26 Other long-term obligations 27 Total liabilities Total equity and liabilities Net current (liabilities)/assets Total assets less current liabilities	As 2012 RMB’000 12,021,745 594,036 76,679 – 625,266 343,229 13,660,955 - - - - - - - - - - 597,445 682,337 3,116,350 2,974,921 7,371,053 - - - - - - - - - - 21,032,008 6,060,000 362,847 1,721,039 8,143,886 3,528,604 11,672,490 - - - - - - - - - - 7,285,972 126,092 81,506 292,516 7,786,086 - - - - - - - - - - 639,758 125,297 808,377 1,573,432 - - - - - - - - - - 9,359,518 - - - - - - - - - - 21,032,008 (415,033) 13,245,922	at 31 December 2013 2014 RMB’000 RMB’000 14,580,386 15,396,886 728,666 780,565 464,257 479,637 40,254 40,867 519,019 467,817 389,009 481,322 16,721,591 17,647,094 - - - - - - - - - - - - - - - - - - - - 560,373 390,215 792,340 941,860 2,825,609 4,046,340 3,533,180 4,126,170 7,711,502 9,504,585 - - - - - - - - - - - - - - - - - - - - 24,433,093 27,151,679 6,060,000 8,560,000 890,378 1,536,270 398,159 413,839 7,348,537 10,510,109 3,952,987 4,301,924 11,301,524 14,812,033 - - - - - - - - - - - - - - - - - - - - 10,807,968 9,563,659 191,841 184,005 76,288 84,838 141,013 589,924 11,217,110 10,422,426 - - - - - - - - - - - - - - - - - - - - 806,103 553,568 111,088 97,188 997,268 1,266,464 1,914,459 1,917,220 - - - - - - - - - - - - - - - - - - - - 13,131,569 12,339,646 - - - - - - - - - - - - - - - - - - - - 24,433,093 27,151,679 (3,505,608) (917,841) 13,215,983 16,729,253	As at 30 September 2015 RMB’000 15,166,290 786,931 500,947 38,056 492,903 451,490
			17,436,617 - - - - - - - - - - - 351,106 1,437,701 5,196,747 3,931,581
			10,917,135 - - - - - - - - - - -
			28,353,752

			8,560,000 2,312,284 460,103
			11,332,387 4,692,742
			16,025,129 - - - - - - - - - - - 9,749,811 109,618 71,565 730,780
			10,661,774 - - - - - - - - - - - 417,129 96,442 1,153,278
			1,666,849 - - - - - - - - - - -
			12,328,623 - - - - - - - - - - -
			28,353,752

			255,361

			17,691,978

– III-5 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

Consolidated statement of changes in equity

Section B Note Balances at 1 January 2012 Changes in equity: Total comprehensive income for the year Transfer between reserves Final dividend paid to former owner of the Target Company Dividend to non-controlling interests Capital contribution from the former owner of subsidiaries acquired under common control Capital contributions from non-controlling interests Disposal of subsidiaries Balances at 31 December 2012 Balances at 1 January 2013 Changes in equity: Total comprehensive income for the year Transfer between reserves Final dividend paid to former owner of the Target Company Dividend to non-controlling interests Capital contribution from the former owner of subsidiaries acquired under common control Capital contribution from non-controlling interests Disposal of subsidiaries Consideration for the acquisitions of subsidiaries/businesses under common control 30 Others Balances at 31 December 2013 Balances at 1 January 2014 Changes in equity: Total comprehensive income for the year Transfer between reserves Dividend to non-controlling interests Capital contribution from the owner of the Target Company 23(b) Capital contributions from non-controlling interests Disposal of subsidiaries Consideration for the acquisitions of subsidiaries/businesses under common control 30 Others Balances at 31 December 2014	Attributable to owner of the Target Share capital Retained earnings Reserves RMB‘000 RMB‘000 RMB‘000 (Note 23(b)) 6,060,000 109,231 1,102,825 – 377,559 – – (85,511) 85,511 – (38,432) – – – – – – 532,703 – – – – – – 6,060,000 362,847 1,721,039 6,060,000 362,847 1,721,039 – 691,782 – – (98,890) 98,890 – (65,361) – – – – – – 13,005 – – – – – – – – (1,440,285) – – 5,510 6,060,000 890,378 398,159 6,060,000 890,378 398,159 – 723,479 – – (77,587) 77,587 – – – 2,500,000 – – – – – – – – – – (61,907) – – – 8,560,000 1,536,270 413,839	Company Sub-total RMB‘000 7,272,056 377,559 – (38,432) – 532,703 – – 8,143,886 8,143,886 691,782 – (65,361) – 13,005 – – (1,440,285) 5,510 7,348,537 7,348,537 723,479 – – 2,500,000 – – (61,907) – 10,510,109	Non- controlling interests RMB‘000 2,757,443 283,411 – – (156,441) – 659,598 (15,407) 3,528,604 3,528,604 319,359 – – (246,825) – 348,169 (2,824) – 6,504 3,952,987 3,952,987 401,031 – (249,710) – 191,998 (12,372) – 17,990 4,301,924	Total equity RMB‘000 10,029,499 660,970 – (38,432) (156,441) 532,703 659,598 (15,407)
				11,672,490

				11,672,490 1,011,141 – (65,361) (246,825) 13,005 348,169 (2,824) (1,440,285) 12,014
				11,301,524

				11,301,524 1,124,510 – (249,710) 2,500,000 191,998 (12,372) (61,907) 17,990
				14,812,033

– III-6 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

Section B Note Balances at 1 January 2015 Changes in equity: Total comprehensive income for the period Transfer between reserves Dividend to non-controlling interests Capital contributions from non-controlling interests Balances at 30 September 2015 Balances at 1 January 2014 Changes in equity: Total comprehensive income for the period Transfer between reserves Dividend to non-controlling interests Capital contributions from non-controlling interests Disposal of subsidiaries Consideration for the acquisitions of subsidiaries/businesses under common control 30 Balances at 30 September 2014 (unaudited)	Attributable to owner of the Target Share capital Retained earnings Reserves RMB‘000 RMB‘000 RMB‘000 (Note 23(b)) 8,560,000 1,536,270 413,839 – 822,278 – – (46,264) 46,264 – – – – – – 8,560,000 2,312,284 460,103 6,060,000 890,378 398,159 – 665,680 – – (41,228) 41,228 – – – – – – – – – – – (61,907) 6,060,000 1,514,830 377,480	Company Sub-total RMB‘000 10,510,109 822,278 – – – 11,332,387 7,348,537 665,680 – – – – (61,907) 7,952,310	Non- controlling interests RMB‘000 4,301,924 362,916 – (203,738) 231,640 4,692,742 3,952,987 305,821 – (225,987) 51,786 (142) – 4,084,465	Total equity RMB‘000 14,812,033 1,185,194 – (203,738) 231,640
				16,025,129

				11,301,524 971,501 – (225,987) 51,786 (142) (61,907)
				12,036,775

– III-7 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

Consolidated statement of cash flows

Section B Note Cash flows from operating activities Profit for the year/period Adjustments for: Income tax expense 10 Taxes other than income taxes Depreciation and amortisation Share of profits less losses of associates Share of profits less losses of a joint venture (Gains)/losses on disposals of subsidiaries Impairment of property, plant and equipment and other non-current assets Impairment of inventories Impairment loss on accounts receivable and prepaid expenses and other current assets Losses/(gains) on disposals of property, plant and equipment 5 Net exchange (gains)/losses 5 Interest income 6 Interest expense 8 Changes in working capital: Accounts receivable and prepaid expenses and other current assets Inventories Accounts payable and accrued liabilities and other taxes payable Cash generated from operations Income tax paid Net cash generated from operating activities Cash flows from investing activities Dividends received from associates Payment for acquisitions of subsidiaries/businesses under common control Proceeds from disposal of subsidiaries Capital contributions to or acquisitions of associates Payment for acquisitions of a joint venture Proceeds from disposal of property, plant and equipment Capital expenditure Interest received Increase/(decrease) in amounts due from the immediate holding company, net Net cash used in investing activities	For the year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 660,970 1,011,141 1,124,510 276,887 400,277 410,281 63,314 70,640 84,963 817,485 903,699 1,100,087 (488) (13,827) (47,985) – (1,843) (3,014) (78) 1,727 (27,722) – 4,681 – 408 (471) 3,179 (650) 2,276 (410) 14,083 2,446 10,655 (3,093) (32,253) (30,143) (113,915) (113,675) (142,103) 25,454 23,699 61,715 (350,463) 116,451 (458,831) 337,679 37,543 166,979 1,287,774 1,406,882 439,986 3,015,367 3,819,393 2,692,147 (405,511) (368,224) (554,104) 2,609,856 3,451,169 2,138,043 - - - - - - - - - - - - - - - - - - - - - - - - – 580 9,001 – – (1,502,192) 19,742 2,774 41,216 (20,400) – (378,074) – – (38,411) 33,893 11,683 53,044 (3,416,586) (3,088,081) (1,545,420) 113,915 113,675 142,103 596,445 46,627 (899,153) (2,672,991) (2,912,742) (4,117,886) - - - - - - - - - - - - - - - - - - - - - - - -	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) 971,501 1,185,194 365,614 470,273 60,388 54,402 736,787 887,844 1,225 (22,435) – (612) 14 – – – (3,863) (7,042) (7) – 1,452 (88) (15,845) 1,791 (104,031) (111,054) 43,896 38,066 (639,396) (600,414) 151,286 46,151 1,116,984 490,605 2,686,005 2,432,681 (462,783) (529,650) 2,223,222 1,903,031 - - - - - - - - - - - - - - - - 9,001 19,548 – – 89 – (17,000) (15,000) – – 34,049 7,026 (1,212,681) (1,097,984) 104,031 111,054 (1,021,662) (1,101,449) (2,104,173) (2,076,805) - - - - - - - - - - - - - - - -	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) 971,501 1,185,194 365,614 470,273 60,388 54,402 736,787 887,844 1,225 (22,435) – (612) 14 – – – (3,863) (7,042) (7) – 1,452 (88) (15,845) 1,791 (104,031) (111,054) 43,896 38,066 (639,396) (600,414) 151,286 46,151 1,116,984 490,605 2,686,005 2,432,681 (462,783) (529,650) 2,223,222 1,903,031 - - - - - - - - - - - - - - - - 9,001 19,548 – – 89 – (17,000) (15,000) – – 34,049 7,026 (1,212,681) (1,097,984) 104,031 111,054 (1,021,662) (1,101,449) (2,104,173) (2,076,805) - - - - - - - - - - - - - - - -
			2,432,681 (529,650)
			1,903,031 - - - - - - - - 19,548 – – (15,000) – 7,026 (1,097,984) 111,054 (1,101,449)
			(2,076,805) - - - - - - - -

– III-8 –

APPENDIX III

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Section B Note Cash flows from financing activities Capital contributions from the owners Capital contributions from non- controlling interests Dividends paid to owner of the Target Company Dividends paid to non-controlling interests Increase in borrowings Repayments of borrowings Interest paid Net cash generated/(used) in financing activities Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December/30 September 22	For the year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 532,703 13,005 2,500,000 659,598 315,076 191,998 (38,432) (65,361) – (150,489) (222,023) (245,014) 486,586 521,036 572,504 (1,004,274) (473,940) (345,985) (23,016) (67,961) (100,670) 462,676 19,832 2,572,833 - - - - - - - - - - - - - - - - - - - - - - - - 399,541 558,259 592,990 2,575,380 2,974,921 3,533,180 2,974,921 3,533,180 4,126,170	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) – – 51,786 231,640 – – (177,079) (202,995) 509,153 94,248 (133,104) (91,622) (82,226) (52,086) 168,530 (20,815) - - - - - - - - - - - - - - - - 287,579 (194,589) 3,533,180 4,126,170 3,820,759 3,931,581	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) – – 51,786 231,640 – – (177,079) (202,995) 509,153 94,248 (133,104) (91,622) (82,226) (52,086) 168,530 (20,815) - - - - - - - - - - - - - - - - 287,579 (194,589) 3,533,180 4,126,170 3,820,759 3,931,581
			(20,815) - - - - - - - -
			(194,589) 4,126,170
			3,931,581

– III-9 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

B NOTES TO THE FINANCIAL INFORMATION

1 SIGNIFICANT ACCOUNTING POLICES

(a) Statement of compliance

The Financial Information set out in this report has been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual HKFRSs, Hong Kong Accounting Standards and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”). Further details of the significant accounting policies adopted are set out in the remainder of this Section B.

The HKICPA has issued a number of new and revised HKFRSs. For the purpose of preparing this Financial Information, the Target Group has adopted all applicable new and revised HKFRSs to the Relevant Periods, except for any new standards or interpretations that are not yet effective for the accounting period ended 30 September 2015. The revised and new accounting standards and interpretations issued but not yet effective for the accounting year beginning 1 January 2015 are set out in Note 34.

The Financial Information also complies with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).

The accounting policies set out below have been applied consistently to all periods presented in the Financial Information.

The Corresponding Financial Information for the nine months ended 30 September 2014 has been prepared in accordance with the same basis and accounting policies adopted in respect of the Financial Information.

(b) Basis of measurement

The Financial Information is presented in Renminbi (“RMB”), rounded to the nearest thousand. It is prepared on the historical cost basis.

(c) Use of estimates and judgments

The preparation of Financial Information in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgements made by management in the application of HKFRSs that have significant effect on the Financial Information and major sources of estimation uncertainty are discussed in Note 3.

(d) Subsidiaries and non-controlling interests

Subsidiaries are entities controlled by the Target Group. The Target Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. When assessing whether the Target Group has power, only substantive rights (held by the Target Group and other parties) are considered.

The investment in the subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases. Intra-group balances, transactions and cash flows and any unrealised profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.

– III-10 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

Non-controlling interests represent the equity in a subsidiary not attributable directly or indirectly to the Target Company, and in respect of which the Target Group has not agreed any additional terms with the holders of those interests which would result in the Target Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability.

Non-controlling interests are presented in the consolidated statement of financial position within equity, separately from equity attributable to the owner of the Target Company. Non-controlling interests in the results of the Target Group are presented on the face of the consolidated statement of other comprehensive income as an allocation of the total profit or loss and total comprehensive income for the period between non-controlling interests and the owner of the Target Company.

Changes in the Target Group’s interests in a subsidiary that do not result in a loss of control are accounted for as equity transactions, whereby adjustments are made to the amounts of controlling and non-controlling interests within consolidated equity to reflect the change in relative interests, but no adjustments are made to goodwill and no gain or loss is recognised.

When the Target Group loses control of a subsidiary, it is accounted for as a disposal of the entire interest in that subsidiary, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former subsidiary at the date when control is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture (see Note 1(e)).

A business combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. The assets and liabilities that the acquirer receives in the acquisition are accounted for at the acquiree’s carrying amount on the acquisition date. The difference between the carrying amount of the acquired net assets and the carrying amount of the consideration paid for the acquisition (or the total nominal value of shares issued) is recognised in reserve. Any costs directly attributable to the combination shall be recognised in profit or loss for the current period when incurred. The combination date is the date on which the acquirer effectively obtains control of the acquiree.

In the Target Company’s statement of financial position, an investment in subsidiary is stated at cost less impairment.

A list of the Target Group’s principal subsidiaries is set out in Note 31.

(e) Associates and joint ventures

An associate is an entity in which the Target Group or the Target Company has significant influence, but not control or joint control, over its management, including participation in the financial and operating policy decisions.

A joint venture is an arrangement whereby the Target Group or the Target Company and other parties contractually agree to share control of the arrangement, and have rights to the net assets of the arrangement.

An investment in an associate or a joint venture is accounted for in the consolidated financial statements under the equity method. Under the equity method, the investment is initially recorded at cost, adjusted for any excess of the Target Group’s share of the acquisition-date fair values of the investee’s identifiable net assets over the cost of the investment (if any). Thereafter, the investment is adjusted for the post acquisition change in the Target Group’s share of the investee’s net assets and any impairment loss relating to the investment. Any acquisition-date excess over cost, the Target Group’s share of the post-acquisition, post-tax results of the investees and any impairment losses for the year are recognised in the consolidated statement of comprehensive income, whereas the Target Group’s share of the post-acquisition post-tax items of the investees’ other comprehensive income is recognised in the consolidated statement of comprehensive income.

When the Target Group’s share of losses exceeds its interest in the associate or the joint venture, the Target Group’s interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Target Group has incurred legal or constructive obligations or made payments on behalf of the investee. For this purpose, the Target Group’s interest is the carrying amount of the investment under the equity method together with the Target Group’s long-term interests that in substance form part of the Target Group’s net investment in the associate or the joint venture.

Unrealised profits and losses resulting from transactions between the Target Group and its associates and joint venture are eliminated to the extent of the Target Group’s interest in the investee, except where unrealised losses provide evidence of an impairment of the asset transferred, in which case they are recognised immediately in profit or loss.

– III-11 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

If an investment in an associate becomes an investment in a joint venture or vice versa, retained interest is not re-measured. Instead, the investment continues to be accounted for under the equity method.

In all other cases, when the Target Group ceases to have significant influence over an associate or joint control over a joint venture, it is accounted for as a disposal of the entire interest in that investee, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former investee at the date when significant influence or joint control is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset.

In the Target Company’s statement of financial position, investments in associates and investments in joint ventures are stated at cost less impairment.

Lists of the Target Group’s principal associates and joint ventures are set out in Note 15 and Note 16, respectively.

(f) Foreign currencies

(i) Functional and presentation currency

Items included in the financial statements of each entity in the Target Group are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in RMB, which is the Target Company’s presentation currency. The Target Company’s functional currency is RMB.

(ii) Translation of foreign currencies

Foreign currency transactions during the year are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the end of the reporting period. Exchange gains and losses are recognised in profit or loss.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the foreign exchange rates ruling at the transaction dates. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated using the foreign exchange rates ruling at the dates the fair value was measured.

(g) Investment property and other property, plant and equipment

Investment properties are buildings which are owned to earn rental income. Other property, plant and equipment, including construction in progress, are initially recorded in the consolidated statement of financial position at cost where it is probable that they will generate future economic benefits. Cost represents the purchase price of the asset and other costs incurred to bring the asset into existing use. For construction in progress, cost comprises direct costs of construction as well as interest charges, and foreign exchange differences on related borrowed funds to the extent that they are regarded as an adjustment to interest charges, during the periods of construction. Construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use. Subsequent to their initial recognition, property, plant and equipment are carried at cost less accumulated depreciation and amortisation (including any impairment).

Depreciation to write off the cost of each asset to their residual values over their estimated useful lives is calculated using the straight-line method.

The Target Group uses the following useful lives for depreciation purposes:

Buildings	8 – 40 years
Equipment and machinery	4 – 30 years
Motor vehicles	7 – 14 years
Others	4 – 12 years

No depreciation is provided for construction in progress until the assets are completed and ready for use.

The residual values and useful lives of assets are reviewed, and adjusted if appropriate, at each statement of financial position date.

– III-12 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

Property, plant and equipment, including construction in progress, are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of a cash generating unit exceeds the higher of its fair value less costs to sell and its value in use, which is the estimated net present value of future cash flows to be derived from the cash generating unit.

Gains and losses on disposals of property, plant and equipment are determined by reference to their carrying amounts and are recorded in profit or loss.

Interest and other costs on borrowings to finance the construction of property, plant and equipment are capitalised during the period of time that is required to complete and prepare the asset for its intended use. Costs for repair and maintenance activities are expensed as incurred except for costs of components that result in improvements or betterments which are capitalised as part of property, plant and equipment and depreciated over their useful lives.

(h) Intangible assets

Expenditure on acquired patents, trademarks, technical know-how and licenses are capitalised at historical cost and amortised using straight line method over their estimated useful lives. Intangible assets are not subsequently re-valued. The carrying amount of each intangible asset is reviewed annually and adjusted for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount and is recognised in profit or loss. The recoverable amount is measured as the higher of fair value less costs to sell and value in use which is the estimated net present value of future cash flows to be derived from the assets.

(i) Leased assets

An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Target Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.

Where the Target Group has the use of assets held under operating leases, payments made under the leases are charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in profit or loss as an integral part of the aggregate net lease payments made. Contingent rentals are charged to profit or loss in the accounting period in which they are incurred.

(j) Impairment of assets

Internal and external sources of information are reviewed at the end of each reporting period to identify indications that the following assets may be impaired or an impairment loss previously recognised no longer exists or may have decreased:

property, plant and equipment;
intangible assets; and
investments in subsidiaries, associates and joint ventures in the Target Company’s statement of financial position.

If any such indication exists, the asset’s recoverable amount is estimated.

Calculation of recoverable amount

The recoverable amount is the greater of its fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the investment. Where an investment does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of investments that generates cash inflows independently (i.e. a cash-generating unit).

– III-13 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

Recognition of impairment losses

An impairment loss is recognised in profit or loss if the carrying amount of an investment, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs of disposal (if measurable) or value in use (if determinable).

Reversals of impairment losses

An impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognised.

(k) Inventories

Inventories include Natural Gas, Liquefied Petroleum Gas (“LPG”), Compressed Natural Gas (“CNG”) and materials for natural gas pipelines which are stated at the lower of cost and net realisable value. Cost of inventories is primarily determined by the weighted average cost method, comprises raw materials, direct labour, other direct costs and related production overheads, but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses.

(l) Construction contracts

Construction contracts are contracts specifically negotiated with a customer for the construction of an asset or a group of assets, where the customer is able to specify the major structural elements of the design. The accounting policy for contract revenue is set out in Note 1(r) (iii). When the outcome of a construction contract can be estimated reliably, contract costs are recognised as an expense by reference to the stage of completion of the contract at the end of the reporting period. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. When the outcome of a construction contract cannot be estimated reliably, contract costs are recognised as an expense in the period in which they are incurred.

Construction contracts in progress at the end of the reporting period are recorded at the net amount of costs incurred plus recognised profit less recognised losses and progress billings, and are presented in the statement of financial position as the “Gross amount due from customers for contract work” (as an asset) or the “Gross amount due to customers for contract work” (as a liability), as applicable. Progress billings not yet paid by the customer are included under “Accounts receivable”. Amounts received before the related work is performed are presented as “Advances from customers” under “Accounts payable and accrued liabilities”.

(m) Accounts receivable

Accounts receivable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision made for impairment of these receivables. Such provision for impairment is established if there is objective evidence that the Target Group will not be able to collect amounts due according to the original terms of the receivables. The factors the Target Group considers when assessing whether an account receivable is impaired include but not limited to significant financial difficulties of the customer, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.

(n) Cash and cash equivalents

Cash and cash equivalents comprise cash in hand, deposits held with banks and highly liquid investments with original maturities of three months or less from the time of purchase.

(o) Accounts payable

Accounts payable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

– III-14 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

(p) Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. In subsequent periods, borrowings are stated at amortised cost using the effective yield method. Any difference between proceeds (net of transaction costs) and the redemption value is recognised in profit or loss over the period of the borrowings.

General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

Borrowings are classified as current liabilities unless the Target Group has unconditional rights to defer settlements of the liabilities for at least 12 months after the reporting period.

(q) Taxation

Income tax expense for the year comprises current and deferred tax. Tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the statement of financial position date, and any adjustment to tax payable in respect of previous years.

Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from initial recognition of goodwill. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the statement of financial position date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures except where the timing of the reversal of the temporary difference is controlled by the Target Group and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

The Target Group also incurs various other taxes and levies that are not income taxes. “Taxes other than income taxes”, which form part of operating expenses, primarily comprise stamp duty, land use tax and property tax.

(r) Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable. Provided it is probable that the economic benefits will flow to the Target Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised in profit or loss as follows:

(i) Sales of goods

Sales are recognised upon delivery of products and customer acceptance, net of sales taxes and discounts. Revenue is recognised only when the Target Group has transferred to the buyers significant risks and rewards of ownership of the goods in the ordinary course of the Target Group’s activities, and when the amount of revenue and the costs incurred or to be incurred in respect of the transaction can be measured reliably and collectability of the related receivables is reasonably assured.

– III-15 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

(ii) Rendering of services

Revenue from the rendering of services is recognised in profit or loss upon performance of the services. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, the possible return of service being rendered, or when the amount of revenue and the costs incurred or to be incurred in respect of the transaction cannot be measured reliably.

(iii) Contract revenue

When the outcome of a construction contract can be estimated reliably, revenue is recognised using the percentage of completion method, measured by reference to the percentage of contract costs incurred to date to estimated total contract costs for the contract.

When the outcome of a construction contract cannot be estimated reliably, revenue is recognised only to the extent of contract costs incurred that it is probable will be recoverable.

(iv) Dividend

Dividend income is recognised when the shareholder’s right to receive payment is established.

(v) Interest income

Interest income is recognised on a time apportioned basis that takes into account the effective yield on the assets.

(s) Government grants

Government grants are the gratuitous monetary assets or non-monetary assets that the Target Group receives from the government, excluding capital injection by the government as an investor. Special funds such as investment grants allocated by the government, if clearly defined in official documents as part of “capital reserve” are dealt with as capital contributions, and not regarded as government grants.

Government grants are recognised when there is reasonable assurance that the grants will be received and the Target Group is able to comply with the conditions attaching to them. Government grants in the form of monetary assets are recorded based on the amount received or receivable, whereas non-monetary assets are measured at fair value.

Government grants received in relation to assets are recorded as deferred income (Note 27), and recognised evenly in profit or loss over the assets’ useful lives. Government grants received in relation to revenue are recorded as deferred income, and recognised as income in future periods as compensation when the associated future expenses or losses arise; or directly recognised as income in the current period as compensation for past expenses or losses.

(t) Provisions

Provisions for environmental restoration, restructuring costs and legal claims are recognised when: (i) the Target Group has a present legal or constructive obligation as a result of past events; (ii) it is probable that an outflow of resources will be required to settle the obligation; and (iii) reliable estimates of the amount can be made.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditure expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.

(u) Retirement benefit plans

The Target Group contributes to various employee retirement benefit plans organised by PRC municipal and provincial governments under which it is required to make monthly contributions to these plans at prescribed rates for its employees in the PRC. The relevant PRC municipal and provincial governments undertake to assume the retirement benefit obligations of existing and future retired employees of the Target Group in the PRC. Contributions

– III-16 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

to these PRC plans are charged to profit or loss as incurred. The Target Group currently has no additional material obligations outstanding for the payment of retirement and other material post retirement benefits of employees in the PRC other than the monthly contributions described above.

(v) Related parties

(a) A person, or a close member of that person’s family, is related to the Target Group if that person:
(i) has control or joint control over the Target Group;
(ii) has significant influence over the Target Group; or
(iii) is a member of the key management personnel of the Target Group or the Target Group’s parent.
(b) An entity is related to the Target Group if any of the following conditions applies:
(i) The entity and the Target Group are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
(v) The entity is a post-employment benefit plan for the benefit of employees of either the Target Group or an entity related to the Target Group.
(vi) The entity is controlled or jointly controlled by a person identified in (a).
(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).
(viii) Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.

(w) Segment reporting

Operating segments, and the amounts of each segment item reported in the financial statements, are identified from the financial information provided regularly to the Target Group’s most senior executive management for the purposes of allocating resources to, and assessing the performance of the Target Group’s various lines of business and geographical locations.

Individually material operating segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in respect of the nature of products and services, the nature of production processes, the type or class of customers, the methods used to distribute the products or provide the services, and the nature of the regulatory environment. Operating segments which are not individually material may be aggregated if they share a majority of these criteria.

Management of the Target Group assesses the performance and allocates the resources of the Group as a whole. The Target Group’s operations are sales of natural gas, LPG, CNG and the construction and installation of natural gas pipeline network and facilities. Therefore, management considers there to be only one operating segment under the requirements of HKFRS 8, Operating Segments. In this regard, no segment information is presented for the Relevant Periods.

No geographic information is shown as the turnover and profit from operations of the Target Group are derived from its activities in the PRC.

– III-17 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

2 FINANCIAL RISK MANAGEMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS

2.1 Financial risk factors

Exposure to foreign exchange rate risk, credit risk and liquidity risk arises in the normal course of the Target Group’s business. The Target Group’s exposure to these risks and the financial risk management policies and practices used by the Target Group to manage these risks are described below.

Risk management is carried out by management of the Target Company under policies approved by the Board of Directors. Management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

(a) Foreign exchange rate risk

The Target Group conducts its business primarily in RMB, but maintains a portion of its assets in other currencies to meet foreign currency financial liabilities. The Target Group is exposed to currency risks arising from fluctuations in foreign currency exchange rates against the RMB, but the risks are not significant to the Target Group.

(b) Credit risk

Credit risk arises primarily from cash and cash equivalents, accounts receivable, other receivables, and amounts due from related parties.

A substantial portion of the Target Group’s cash at bank and time deposits are placed with state-owned banks and financial institutions in the PRC and management believes that the credit risk is low.

The Target Group performs ongoing assessment of the credit quality of its customers and sets appropriate credit limits taking into account the financial position and past history of defaults of customers. The ageing analysis of accounts receivable is presented in Note 20. The Target Group’s accounts receivable balances that are neither past due nor impaired are with customers with no recent history of default.

The carrying amounts of cash and cash equivalents, accounts receivable, other receivables, and amounts due from related parties included in the consolidated statement of financial position represent the Target Group’s maximum exposure to credit risk. No other financial assets carry a significant exposure to credit risk.

The Target Group has no significant concentration of credit risk.

(c) Liquidity risk

Liquidity risk is the risk that the Target Group will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.

The Target Group’s liquidity risk management involves maintaining sufficient cash and cash equivalents and availability of funding through an adequate amount of committed credit facilities. Management prepares monthly cash flow budget to ensure that the Target Group will always have sufficient liquidity to meet its financial obligations as they fall due. The Target Group arranges and negotiates financing with financial institutions and maintains a certain level of standby credit facilities to reduce the Target Group’s liquidity risk.

Given the low level of gearing and continued access to funding, the Target Group believes that its liquidity risk is not material.

Analysis of the Target Group’s financial liabilities based on the remaining period at the date of the consolidated statement of financial position to the contractual maturity dates are presented in Notes 24 and 25.

– III-18 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

2.2 Capital risk management

The Target Group’s primary objectives when managing capital are to safeguard its ability to continue as a going concern, optimise returns for owner and to minimise its cost of capital. In meeting its objectives of managing capital, the Target Group may adjust its debt levels or the mix between short-term and long-term borrowings.

The Target Group monitors capital on the basis of gearing ratio which is calculated as interest-bearing borrowings divided by the sum of total equity and interest-bearing borrowings. The gearing ratios were 7.40%, 7.73%, 7.17% and 6.68% as at 31 December 2012, 2013 and 2014 and 30 September 2015, respectively.

Neither the Target Company nor any of its subsidiaries are subject to externally imposed capital requirements.

2.3 Fair value estimation

The carrying amounts of the Target Group’s financial instruments carried at cost as of 31 December 2012, 2013 and 2014 and 30 September 2015 are short-term in nature and are not materially different from their fair values.

The fair values are based on discounted cash flow using applicable discount rates based upon the prevailing market rates of interest available to the Target Group for financial instruments with substantially the same terms and characteristics at the statement of financial position date.

3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

Estimates and judgements are regularly evaluated by the Target Group, based on historical experience and other factors which include expectations of future events that are believed to be reasonable under the circumstances.

Key sources of estimation uncertainty and judgement are described as follows:

(a) Estimation of impairment of non-financial assets

Property, plant and equipment, are reviewed for possible impairments whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Determination as to whether and how much an asset is impaired involves management estimates and judgements such as future prices of natural gas. However, the impairment reviews and calculations are based on assumptions that are consistent with the Target Group’s business plans. Favourable changes to some assumptions may allow the Target Group to avoid the need to impair any assets in these years, whereas unfavourable changes may cause the assets to become impaired.

(b) Estimation of useful lives and residual values of property, plant and equipment

The Target Group’s management determines the estimated useful lives and residual values for the Target Group’s property, plant and equipment. This estimate is based on the historical experience of the actual useful lives and residual values of property, plant and equipment of similar nature and functions. It could change significantly as a result of technological advancement and innovations in the oil and gas industry. Management will adjust the depreciation charge where residual values vary with previously estimated, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold. Actual residual values may differ from estimated residual values. Periodic review could result in a change in residual values and therefore depreciation in the future periods.

– III-19 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

4 REVENUE

Sales of LPG Sales of Natural Gas Sales of CNG Revenue from Construction contracts Other revenue	For the year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 35,545,749 33,853,288 29,802,374 9,102,794 12,619,855 16,362,115 3,407,759 4,479,410 5,339,610 1,553,299 1,931,872 2,055,807 430,856 520,023 619,892 50,040,457 53,404,448 54,179,798	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) 23,456,628 15,462,668 11,504,513 11,436,366 3,936,321 3,377,259 1,271,130 1,483,056 441,945 413,409 40,610,537 32,172,758	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) 23,456,628 15,462,668 11,504,513 11,436,366 3,936,321 3,377,259 1,271,130 1,483,056 441,945 413,409 40,610,537 32,172,758
			32,172,758

There is no single customer contribute more than 10% of the total revenue of the Target Group during the Relevant Periods.

5 OTHER GAINS, NET

Net exchange gains/(losses) Net (losses)/gains on disposals of non-current assets Government grants Others	For the year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 3,093 32,253 30,143 (14,083) (2,446) (10,655) 115,503 91,275 110,664 8,880 6,010 47,357 113,393 127,092 177,509	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) 15,845 (1,791) (1,452) 88 58,372 110,031 3,948 18,606 76,713 126,934	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) 15,845 (1,791) (1,452) 88 58,372 110,031 3,948 18,606 76,713 126,934
			126,934

Government grants mainly represent subsidies received from municipal governments in relation to residential natural gas business of certain subsidiaries of the Target Group. There were no unfulfilled conditions and other contingencies attached to the receipts of these grants. There is no assurance that the Target Group will continue to receive such grants in the future.

6 INTEREST INCOME

Interest income on: – Amounts due from related parties – Bank deposits	For the year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 83,002 77,030 84,652 30,913 36,645 57,451 113,915 113,675 142,103	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) 60,909 63,663 43,122 47,391 104,031 111,054	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) 60,909 63,663 43,122 47,391 104,031 111,054
			111,054

– III-20 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

7 EMPLOYEE COMPENSATION COSTS

Salaries, wages and allowances Retirement benefits scheme contributions	For the year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 1,419,376 1,692,994 2,011,790 202,609 256,352 285,283 1,621,985 1,949,346 2,297,073	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) 1,436,124 1,376,791 211,293 231,470 1,647,417 1,608,261	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) 1,436,124 1,376,791 211,293 231,470 1,647,417 1,608,261
			1,608,261

As stipulated by the regulations of the PRC, the Target Group participates in various defined contribution retirement plans organised by municipal and provincial governments for its employees. The Target Group has no other material obligation for the payment of pension benefits associated with these plans beyond the annual contributions described above.

8 INTEREST EXPENSES

Interest expenses on: Bank loans Other loans, from related parties: – The immediate holding company – China Petroleum Finance Company Limited Less: Amounts capitalised	For the year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 19,485 8,691 17,654 4,690 5,767 34,978 16,640 40,836 40,230 (15,361) (31,595) (31,147) 25,454 23,699 61,715	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) 10,315 7,845 26,968 19,840 30,387 25,226 (23,774) (14,845) 43,896 38,066	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) 10,315 7,845 26,968 19,840 30,387 25,226 (23,774) (14,845) 43,896 38,066
			38,066

Amounts capitalised are borrowing costs that are attributable to the construction of qualifying assets. The average interest rate used to capitalise such borrowing costs was 3.39%, 3.60%, 3.63%, 3.63% (unaudited) and 3.63%, per annum for the year ended 31 December 2012, 2013 and 2014 and the nine months ended 30 September 2014 and 2015, respectively. China Petroleum Finance Company Limited is a financial institution controlled by China National Petroleum Corporation (“CNPC”).

– III-21 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

9 PROFIT BEFORE INCOME TAX EXPENSE

Items charged in arriving at the profit before income tax expense include:

				For the nine	months	ended
	For the	year ended 31	December	30 September
	2012	2013	2014	2014		2015
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(unaudited)
Amortisation of advanced
operating lease payments
and intangible assets	71,430	77,629	91,074	51,436		67,842
Auditors’ remuneration	7,148	8,904	8,468	5,140		5,562
Cost of inventories
recognised as expenses	45,215,397	47,850,296	48,209,911	36,029,017	27,429,502
Depreciation of property,
plant and equipment	746,055	826,070	1,009,013	685,351	820,002
Operating lease expenses	274,467	314,412	305,984	204,199	181,375
Impairment loss on
property, plant and
equipment	–	4,681	–	–		–

10 INCOME TAX EXPENSE

Current tax Under-provision in prior year Deferred tax (Note 26)	For the year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 347,055 454,228 496,077 22,621 6,038 20,417 (92,789) (59,989) (106,213) 276,887 400,277 410,281	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) 366,692 415,397 14,033 25,790 (15,111) 29,086 365,614 470,273	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) 366,692 415,397 14,033 25,790 (15,111) 29,086 365,614 470,273
			470,273

In accordance with the relevant PRC income tax rules and regulations, the PRC corporate income tax rate applicable to the Target Group’s subsidiaries in the PRC is principally 25%. The operations of the Target Group in certain regions in the PRC have qualified for a preferential income tax rates 15%.

Reconciliation between income tax expense and accounting profit at applicable tax rate:

Profit before income tax expense Tax calculated at a tax rate of 25% Effect of preferential tax rate Tax effect of income not subject to tax Tax effect of expenses not deductible for tax purposes Under-provision in prior year Tax effect of unused tax losses not recognised in prior years/period Income tax expense	For the year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 937,857 1,411,418 1,534,791 234,464 352,855 383,698 (34,489) (24,920) (36,719) (122) (3,918) (12,750) 27,840 30,183 10,028 22,621 6,038 20,417 26,573 40,039 45,607 276,887 400,277 410,281	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) 1,337,115 1,655,467 334,279 413,867 (26,462) (32,704) (306) (5,762) 8,552 20,295 14,033 25,790 35,518 48,787 365,614 470,273	For the nine months ended 30 September 2014 2015 RMB’000 RMB’000 (unaudited) 1,337,115 1,655,467 334,279 413,867 (26,462) (32,704) (306) (5,762) 8,552 20,295 14,033 25,790 35,518 48,787 365,614 470,273
			470,273

– III-22 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

11 DIRECTORS’ REMUNERATION

The directors believe the presentation of such information is not meaningful for the purpose of this report.

12 INDIVIDUALS WITH HIGHEST EMOLUMENTS

The directors believe the presentation of the five highest paid employees information is not meaningful for the purpose of this report.

13 PROPERTY, PLANT AND EQUIPMENT

Cost: Balances at 1 January 2012 Additions Disposals Transfers Reclassification Balances at 31 December 2012 Balances at 1 January 2013 Additions Disposals Transfers Reclassification Balances at 31 December 2013 Balances at 1 January 2014 Additions Disposals Transfers Reclassification Balances at 31 December 2014 Balances at 1 January 2015 Additions Disposals Transfers Reclassification Balances at 30 September 2015 Accumulated depreciation and impairment losses: Balances at 1 January 2012 Additions Disposals Transfers Impairment loss Balances at 31 December 2012 Balances at 1 January 2013 Additions Disposals Transfers Impairment loss Balances at 31 December 2013	Buildings RMB’000 915,621 82,765 (6,602) 92,721 1,812 1,086,317 - - - - - - 1,086,317 714 (2,102) 424,573 (38,418) 1,471,084 - - - - - - 1,471,084 17,903 (514) 61,356 7,460 1,557,289 - - - - - - 1,557,289 44,555 (17,627) 1,648 – 1,585,865 - - - - - - 131,011 32,389 (4,151) 267 – 159,516 - - - - - - 159,516 52,334 (736) (9,072) – 202,042 - - - - - -	Equipment and machinery RMB’000 8,159,688 179,700 (84,740) 1,652,418 (1,302) 9,905,764 - - - - - - 9,905,764 110,027 (18,938) 2,437,093 42,103 12,476,049 - - - - - - 12,476,049 125,036 (142,597) 1,944,873 (8,270) 14,395,091 - - - - - - 14,395,091 44,943 (23,504) 613,617 24 15,030,171 - - - - - - 1,804,096 589,639 (54,289) (198) 5,095 2,344,343 - - - - - - 2,344,343 639,884 (15,439) 8,713 2,589 2,980,090 - - - - - -	Motor Vehicles RMB’000 905,883 71,252 (31,184) 129,730 – 1,075,681 - - - - - - 1,075,681 50,721 (18,813) 49,563 8,186 1,165,338 - - - - - - 1,165,338 – (17,652) 26,760 (31) 1,174,415 - - - - - - 1,174,415 6,944 (871) 5,441 – 1,185,929 - - - - - - 357,206 113,211 (9,339) – – 461,078 - - - - - - 461,078 111,424 (16,201) 3,455 – 559,756 - - - - - -	Others RMB’000 167,360 20,799 (18,939) 26,707 (510) 195,417 - - - - - - 195,417 7,601 (1,160) 33,402 (11,871) 223,389 - - - - - - 223,389 4,592 (40,833) 32,568 841 220,557 - - - - - - 220,557 26 (393) 6,351 (24) 226,517 - - - - - - 38,982 20,827 (10,618) (69) – 49,122 - - - - - - 49,122 22,685 (1,043) (3,096) – 67,668 - - - - - -	Construction in progress RMB’000 1,806,376 2,872,155 – (1,901,576) – 2,776,955 - - - - - - - 2,776,955 3,228,320 – (2,944,631) – 3,060,644 - - - - - - - 3,060,644 1,718,422 – (2,065,557) – 2,713,509 - - - - - - - 2,713,509 499,769 – (628,230) – 2,585,048 - - - - - - - 7,440 – – – – 7,440 - - - - - - - 7,440 – – – 2,092 9,532 - - - - - - -	Sub-total RMB’000 11,954,928 3,226,671 (141,465) – – 15,040,134 - - - - - - 15,040,134 3,397,383 (41,013) – – 18,396,504 - - - - - - 18,396,504 1,865,953 (201,596) – – 20,060,861 - - - - - - 20,060,861 596,237 (42,395) (1,173) – 20,613,530 - - - - - - 2,338,735 756,066 (78,397) – 5,095 3,021,499 - - - - - - 3,021,499 826,327 (33,419) – 4,681 3,819,088 - - - - - -	Investment property RMB’000 9,345 286 (5,222) – – 4,409 - - - - - - 4,409 – – – – 4,409 - - - - - - 4,409 – – – – 4,409 - - - - - - 4,409 – – 1,173 – 5,582 - - - - - - 2,480 358 (1,539) – – 1,299 - - - - - - 1,299 140 – – – 1,439 - - - - - -	Total RMB’000 11,964,273 3,226,957 (146,687) – –
								15,044,543 - - - - - - 15,044,543 3,397,383 (41,013) – –
								18,400,913 - - - - - - 18,400,913 1,865,953 (201,596) – –
								20,065,270 - - - - - - 20,065,270 596,237 (42,395) – –
								20,619,112 - - - - - - 2,341,215 756,424 (79,936) – 5,095
								3,022,798 - - - - - -
								3,022,798 826,467 (33,419) – 4,681
								3,820,527 - - - - - -

– III-23 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

Balances at 1 January 2014 Additions Disposals Transfers Balances at 31 December 2014 Balances at 1 January 2015 Additions Disposals Transfers Balances at 30 September 2015 Net book value: Balances at 30 September 2015 Balances at 31 December 2014 Balances at 31 December 2013 Balances at 31 December 2012	Buildings RMB’000 202,042 51,035 (269) 1,135 253,943 - - - - - - 253,943 39,564 (16,564) (282) 276,661 - - - - - - 1,309,204 1,303,346 1,269,042 926,801	Equipment and machinery RMB’000 2,980,090 820,972 (112,310) (1,343) 3,687,409 - - - - - - 3,687,409 658,494 (17,799) 3 4,328,107 - - - - - - 10,702,064 10,707,682 9,495,959 7,561,421	Motor Vehicles RMB’000 559,756 118,250 (15,292) (6) 662,708 - - - - - - 662,708 87,979 (819) – 749,868 - - - - - - 436,061 511,707 605,582 614,603	Others RMB’000 67,668 24,795 (39,463) 214 53,214 - - - - - - 53,214 33,835 (382) (3) 86,664 - - - - - - 139,853 167,343 155,721 146,295	Construction in progress RMB’000 9,532 – – – 9,532 - - - - - - - 9,532 – – – 9,532 - - - - - - - 2,575,516 2,703,977 3,051,112 2,769,515	Sub-total RMB’000 3,819,088 1,015,052 (167,334) – 4,666,806 - - - - - - 4,666,806 819,872 (35,564) (282) 5,450,832 - - - - - - 15,162,698 15,394,055 14,577,416 12,018,635	Investment property RMB’000 1,439 139 – – 1,578 - - - - - - 1,578 130 – 282 1,990 - - - - - - 3,592 2,831 2,970 3,110	Total RMB’000 3,820,527 1,015,191 (167,334) – 4,668,384 - - - - - - 4,668,384 820,002 (35,564) – 5,452,822 - - - - - - 15,166,290 15,396,886 14,580,386 12,021,745

All the buildings of the Target Group are located in the PRC.

As of 31 December 2013, the short-term borrowings of RMB10,000 thousand (Note 25) were pledged by equipment and machinery with an aggregate carrying value of RMB8,485 thousand (31 December 2012, 2014 and 30 September 2015: Nil).

14 ADVANCED OPERATING LEASE PAYMENTS

The Target Group’s advanced operating lease payments mainly represent land use rights and comprise:

Leases of between 10 to 50 years Lease of over 50 years Leasehold interest in land in the PRC Balance as at 1 January Additions Disposals Amortisation for the year/period Balance as at 31 December/ 30 September	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 562,856 697,961 750,335 31,180 30,705 30,230 594,036 728,666 780,565 484,536 594,036 728,666 132,240 166,087 100,388 (4,636) – (23,312) (18,104) (31,457) (25,177) 594,036 728,666 780,565	As at 30 September 2015 RMB’000 757,058 29,873 786,931 780,565 25,283 – (18,917) 786,931

These advanced operating lease payments are amortised over the related lease terms using the straight-line method.

As of 31 December 2013, the short-term borrowings of RMB3,000 thousand (Note 25) were pledged by land use rights with an aggregate carrying value of RMB23,989 thousand (31 December 2012 and 2014 and 30 September 2015: Nil).

– III-24 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

15 INVESTMENTS IN ASSOCIATES

Target Group

Share of net assets Less: Impairment losses Target Company Unlisted shares, at cost	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 80,479 468,057 483,437 (3,800) (3,800) (3,800) 76,679 464,257 479,637 As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 61,648 435,980 405,818	As at 30 September 2015 RMB’000 504,747 (3,800)
		500,947

		As at 30 September 2015 RMB’000 420,714

During the Relevant Periods, the Target Group had interest in the following principal associates:

		Nominal value		Percentage of
		of issued and		equity interest
	Place of	fully paid		attributable to
	incorporation/	ordinary shares/	Type of legal	the Target
Name of associates	establishment	registered capital	entity	Group
		RMB’000
Jiangsu Huadian Yizheng	PRC	4,800	Limited liability	20.00%
Heating and Electricity			Company
Co., Ltd. (note (i))
江蘇華電儀征熱電有限公司
Suzhou Industrial Park North	PRC	3,250	Limited liability	27.00%
Gas Turbine Heating and			Company
Electricity Co., Ltd.
(note (i))
蘇州工業園區北部燃機熱電有
限公司
Jiangsu Huaneng Jinling Gas	PRC	3,750	Limited liability	21.00%
Turbine Heating and			Company
Electricity Co., Ltd.
(note (i))
江蘇華能金陵燃機熱電有限公
司

(i) The English translation of the name is for identification only. The official name of the entity is in Chinese.

In 2013, the Target Company acquired the above associates from PetroChina Kunlun Using Company Limited, a wholly owned subsidiary of PetroChina Company Limited (“PetroChina”).

– III-25 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

Summarised financial information of three material associates are adjusted for any differences in accounting policies, and reconciled to the carrying amounts in the consolidated financial statements, are disclosed below:

	Jiangsu Huadian Yizheng Heating and	Jiangsu Huadian Yizheng Heating and	Jiangsu Huadian Yizheng Heating and
		Electricity Co., Ltd.
			As at
	As at 31	December	30 September
	2013	2014	2015
	RMB’000	RMB’000	RMB’000
Gross amounts of the associate’s
Current assets	264,596	75,470	124,245
Non-current assets	1,932,076	1,740,902	1,688,210
Current liabilities	326,123	174,426	462,685
Non-current liabilities	1,330,039	972,635	705,595
Equity	540,510	669,311	644,175
Reconciled to the Target Group’s interests
in the associate
Gross amounts of net assets of the associate	540,510	669,311	644,175
Target Group’s interest	20%	20%	20%
Target Group’s share of net assets
of the associate	108,102	133,862	128,835
			For the
			period ended
	For the year ended 31 December		30 September
	2013	2014	2015
	RMB’000	RMB’000	RMB’000
Gross amounts of the associate’s
Revenue	1,444,166	1,586,510	1,471,579
Total comprehensive income	48,134	155,205	53,275
Dividend received from the associate	–	5,281	15,682
	Suzhou Industrial Park North Gas Turbine Heating
	and Electricity Co., Ltd.
			As at
	As at 31	December	30 September
	2013	2014	2015
	RMB’000	RMB’000	RMB’000
Gross amounts of the associate’s
Current assets	315,506	448,961	339,738
Non-current assets	946,319	922,072	946,339
Current liabilities	247,733	172,318	162,962
Non-current liabilities	713,933	890,000	783,221
Equity	300,159	308,715	339,894
Reconciled to the Target Group’s interests
in the associate
Gross amounts of net assets of the associate	300,159	308,715	339,894
Target Group’s interest	27%	27%	27%
Target Group’s share of net assets
of the associate	81,043	83,353	91,771

– III-26 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

						For the
						period ended
	For the year ended 31			December		30 September
		2013			2014	2015
		RMB’000		RMB’000		RMB’000
Gross amounts of the associate’s
Revenue		368,299		597,451		748,042
Total comprehensive income		2,169			8,556	31,179
	Jiangsu Huaneng Jinling Gas Turbine Heating and
			Electricity		Co., Ltd.
						As at
		As at 31	December			30 September
		2013			2014	2015
		RMB’000		RMB’000		RMB’000
Gross amounts of the associate’s
Current assets		219,795		215,385		203,919
Non-current assets		989,856		1,128,588		1,051,508
Current liabilities		170,451		379,821		342,035
Non-current liabilities		678,000		587,000		542,000
Equity		361,200		377,152		371,392
Reconciled to the Target Group’s interests
in the associate
Gross amounts of net assets of the associate		361,200		377,152		371,392
Target Group’s interest		21%			21%	21%
Target Group’s share of net assets
of the associate		75,852			79,202	77,992
						For the period
						ended
	For the year ended 31			December		30 September
		2013			2014	2015
		RMB’000		RMB’000		RMB’000
Gross amounts of the associate’s
Revenue		697,176		1,102,528		884,788
Total comprehensive income		(16,243)			15,952	(5,760)
Aggregate information of associates that are	not individually material:
						As at
		As at 31 December				30 September
	2012	2013			2014	2015
	RMB’000	RMB’000			RMB’000	RMB’000
Aggregate carrying amount of
individually immaterial associates
in the consolidated financial
statements	76,679	199,260			183,220	202,349
Aggregate amounts of the Target
Group’s share of those associates’
total comprehensive income	488	7,026			11,284	4,571

– III-27 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

16 INVESTMENTS IN A JOINT VENTURE

Target Group

Share of net assets Target Company Unlisted shares, at cost	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 – 40,254 40,867 As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 – 38,411 38,411	As at 30 September 2015 RMB’000 38,056

		As at 30 September 2015 RMB’000 38,411

In 2013, the Target Company acquired the above joint venture from PetroChina Kunlun Using Company Limited, a wholly owned subsidiary of PetroChina.

There is no individually material joint venture which significantly affects the results and/or net assets of the Target Group. Information of the sole joint venture that is not individually material:

					As at
			As at 31 December		30 September
		2012	2013	2014	2015
		RMB’000	RMB’000	RMB’000	RMB’000
	Carrying amount of the individually
	immaterial joint venture in the
	consolidated financial statements	–	40,254	40,867	38,056
	Amounts of the Target Group’s share
	of the joint venture’s total
	comprehensive income	–	1,843	3,014	612
17	INVESTMENTS IN SUBSIDIARIES

Target Company

									As at
					As	at	31 December		30 September
				2012			2013	2014	2015
				RMB’000			RMB’000	RMB’000	RMB’000
Unlisted	shares,	at	cost	3,922,490			5,715,515	5,946,421	6,225,648

Details of the principal subsidiaries are set out in Note 31.

– III-28 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

The following tables list out the information related to Yunan PetroChina Kunlun Gas Company Limited, Gansu PetroChina Kunlun Gas Company Limited and Harbin Zhongqing Gas Company Limited, the three subsidiaries of the Target Group which have material non-controlling interests (“NCI”). The summarised financial information presented below represents the amounts before any intercompany elimination.

Yunan PetroChina Kunlun Gas Company Limited

				As at
	As	at 31 December		30 September
	2012	2013	2014	2015
	RMB’000	RMB’000	RMB’000	RMB’000
NCI percentage	49%	49%	49%	49%
Current assets	349,253	398,480	546,302	551,433
Non-current assets	630,884	921,352	1,125,590	1,570,942
Current liabilities	454,458	718,736	876,204	844,165
Non-current liabilities	31,397	19,676	17,980	52,731
Net assets	494,282	581,420	777,708	1,225,479
Carrying amount of NCI	278,651	350,366	456,656	676,903
				For the
				period ended
	For the year ended 31 December			30 September
	2012	2013	2014	2015
	RMB’000	RMB’000	RMB’000	RMB’000
Revenue	632,875	898,705	1,152,060	750,452
Total comprehensive income
for the year/period	7,320	26,941	44,692	13,029
Total comprehensive income
allocated to NCI	1,663	9,762	19,655	1,725
Dividend paid to NCI	3,652	5,589	11,284	14,692
Cash flows from operating activities	139,733	162,869	115,175	10,976
Cash flows from investing activities	(181,681)	(214,056)	(223,122)	(197,801)
Cash flows from financing activities	58,834	52,987	209,201	111,261

Gansu PetroChina Kunlun Gas Company Limited

					As at
		As	at 31 December		30 September
	2012		2013	2014	2015
	RMB’000		RMB’000	RMB’000	RMB’000
NCI percentage	50%		50%	50%	50%
Current assets	697,714		873,829	1,034,268	1,037,113
Non-current assets	1,871,984		2,186,723	2,062,341	1,945,216
Current liabilities	1,134,409		1,585,811	1,643,036	1,518,922
Non-current liabilities	404,812		383,735	338,213	330,150
Net assets	1,030,477		1,091,006	1,115,360	1,133,257
Carrying amount of NCI	447,245		496,937	521,847	552,840

				For the
				period ended
	For the year ended 31 December			30 September
	2012	2013	2014	2015
	RMB’000	RMB’000	RMB’000	RMB’000
Revenue	1,715,389	2,532,084	3,192,582	2,259,304
Total comprehensive income
for the year/period	59,298	58,322	98,842	88,834
Total comprehensive income
allocated to NCI	29,444	29,305	48,925	66,462
Dividend paid to NCI	9,539	18,480	25,313	35,429
Cash flows from operating activities	348,713	741,393	478,452	163,435
Cash flows from investing activities	(204,330)	(336,249)	(214,177)	(60,336)
Cash flows from financing activities	(88,013)	(51,680)	(89,384)	(71,483)

– III-29 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

Harbin Zhongqing Gas Company Limited

				As at
	As	at 31 December		30 September
	2012	2013	2014	2015
	RMB’000	RMB’000	RMB’000	RMB’000
NCI percentage	49%	49%	49%	49%
Current assets	258,690	496,410	667,180	765,635
Non-current assets	1,288,019	1,211,770	1,277,711	1,221,861
Current liabilities	774,913	898,053	1,076,556	955,183
Non-current liabilities	169,369	107,487	82,064	68,546
Net assets	602,427	702,640	786,271	963,767
Carrying amount of NCI	295,209	344,285	385,252	472,209
				For the
				period ended
	For the year ended 31 December			30 September
	2012	2013	2014	2015
	RMB’000	RMB’000	RMB’000	RMB’000
Revenue	1,080,972	1,232,805	1,299,246	1,001,737
Total comprehensive income
for the year/period	63,405	136,263	163,982	177,496
Total comprehensive income
allocated to NCI	31,045	66,740	80,339	86,957
Dividend paid to NCI	–	17,665	39,372	–
Cash flows from operating activities	225,501	253,348	298,846	148,587
Cash flows from investing activities	(317,360)	36,462	(115,404)	637
Cash flows from financing activities	(67,855)	(76,271)	(20,395)	(56,887)

18 INTANGIBLE AND OTHER NON-CURRENT ASSETS

Intangible assets (note (i)) Prepaid construction costs Others	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 315,386 273,741 232,565 248,805 174,979 150,612 61,075 70,299 84,640 625,266 519,019 467,817	As at 30 September 2015 RMB’000 201,301 175,215 116,387
		492,903

(i) The intangible assets mainly comprise franchise rights and computer software costs.

The movements in intangible assets are as follows:

At 1 January Additions Amortisation for the year/period At 31 December/30 September	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 356,356 315,386 273,741 1,023 785 902 (41,993) (42,430) (42,078) 315,386 273,741 232,565	As at 30 September 2015 RMB’000 232,565 238 (31,502)
		201,301

– III-30 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

19 INVENTORIES

Inventories in the consolidated statement of financial position comprise:

Raw materials Finished goods Less: write down of inventories	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 149,543 170,149 167,321 453,938 395,783 231,631 603,481 565,932 398,952 (6,036) (5,559) (8,737) 597,445 560,373 390,215	As at 30 September 2015 RMB’000 192,271 160,475 352,746 (1,640) 351,106

20 ACCOUNTS RECEIVABLE

As of the end of each reporting period, the ageing analysis of accounts receivable, based on the invoice date (or date of revenue recognition, if earlier) is as follows:

Within 1 year Between 1 to 2 years Between 2 to 3 years Over 3 years Less: allowance for doubtful debts	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 633,862 686,889 777,669 39,133 79,454 86,987 3,723 20,872 56,718 8,467 9,899 23,464 685,185 797,114 944,838 (2,848) (4,774) (2,978) 682,337 792,340 941,860	As at 30 September 2015 RMB’000 1,224,704 102,855 57,057 56,063 1,440,679 (2,978) 1,437,701

Trade receivables due from customers of LPG, natural gas and pipeline services are generally collectable within a period ranging from 7 to 30 days upon the goods are delivered or services were rendered. While the Target Group generally requires customers of construction contracts to pay in advance or on a credit term no more than 30 days. Normally, the Target Group does not obtain collateral from customers.

As at 31 December 2012, 2013 and 2014 and 30 September 2015, accounts receivable of approximately RMB48,475 thousand, RMB105,451 thousand, RMB164,191 thousand and RMB212,997 thousand were past due over 1 year but for which the Target Group has not provided for impairment loss. These accounts receivable relate to a number of independent customers that have a good track record with the Target Group. Accordingly, the ageing analysis of the accounts receivable which were past due but not impaired is disclosed in the above ageing analysis. Further details on the Target Group’s credit policy are set out in Note 2.1(b).

– III-31 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

21 PREPAID EXPENSES AND OTHER RECEIVABLES

Advances to suppliers Amounts due from related parties – The immediate holding company – Others Other receivables Less: allowance for doubtful debts Value-added tax recoverable Prepaid expenses	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 312,014 158,556 385,951 2,007,287 1,960,660 2,859,813 122,106 134,561 194,096 313,688 189,902 159,007 2,755,095 2,443,679 3,598,867 (5,540) (5,890) (1,080) 2,749,555 2,437,789 3,597,787 227,700 265,600 267,303 139,095 122,220 181,250 3,116,350 2,825,609 4,046,340	As at 30 September 2015 RMB’000 360,970 3,961,262 206,930 179,318
		4,708,480 (1,080)
		4,707,400 232,775 256,572
		5,196,747

All of the amounts due from related parties are expected to be settled within one year. Except for the amounts due from the immediate holding company of RMB2,007,287 thousand, RMB1,960,660 thousand, RMB2,859,813 thousand and RMB3,961,262 thousand as at 31 December 2012, 2013 and 2014 and 30 September 2015, respectively, which are unsecured and interest bearing at 110% of one-year deposit rate determined by People’s Bank of China, the other amounts due from related parties are interest free and unsecured.

22 CASH AND CASH EQUIVALENTS

Cash on hand Cash at bank Cash and cash equivalents	For the year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 319 86 33 2,974,602 3,533,094 4,126,137 2,974,921 3,533,180 4,126,170	For the period ended 30 September 2015 RMB’000 81 3,931,500
		3,931,581

– III-32 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

23 SHARE CAPITAL AND RESERVES

(a) Movements in components of equity

The reconciliation between the opening and closing balances of each component of the Target Group’s consolidated equity is set out in the consolidated statement of changes in equity. Details of the changes in the Target Company’s individual components of equity between the beginning and the end of the year/period are set out below:

Notes Balances at 1 January 2012 Changes in equity: Total comprehensive income for the year Transfer between reserves Balances at 31 December 2012 Balances at 1 January 2013 Changes in equity: Total comprehensive income for the year Transfer between reserves Balances at 31 December 2013 Balances at 1 January 2014 Changes in equity: Total comprehensive income for the year Transfer between reserves Capital contribution from the owner of the Target Company 23(b) Balances at 31 December 2014 Balances at 1 January 2015 Changes in equity: Total comprehensive income for the period Transfer between reserves Balances at 30 September 2015 Balances at 1 January 2014 Changes in equity: Total comprehensive income for the period Transfer between reserves Balances at 30 September 2014	Share capital RMB’000 6,060,000 – – 6,060,000 6,060,000 – – 6,060,000 6,060,000 – – 2,500,000 8,560,000 8,560,000 – – 8,560,000 6,060,000 – – 6,060,000	Retained earnings RMB’000 (154,322) 310,714 (56,929) 99,463 99,463 413,020 (73,377) 439,106 439,106 249,659 (51,542) – 637,223 637,223 594,513 (23,432) 1,208,304 439,106 431,116 (18,758) 851,464	Reserves RMB’000 – – 56,929 56,929 56,929 – 73,377 130,306 130,306 – 51,542 – 181,848 181,848 – 23,432 205,280 130,306 – 18,758 149,064	Total RMB’000 5,905,678 310,714 –
				6,216,392

				6,216,392 413,020 –
				6,629,412

				6,629,412 249,659 – 2,500,000
				9,379,071

				9,379,071 594,513 –
				9,973,584

				6,629,412 431,116 –
				7,060,528

– III-33 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

(b) Share capital

							As at
			As	at	31 December		30 September
		2012			2013	2014	2015
		RMB’000			RMB’000	RMB’000	RMB’000
Share	capital	6,060,000			6,060,000	8,560,000	8,560,000

In December 2014, PetroChina made capital contribution of RMB2,500,000 thousand in cash to the Target Company.

(c) Reserves

Pursuant to the Company Law of the PRC, the Articles of Association and the resolution of Board of Directors of the Target Company’s and the Target Group’s subsidiaries established in the PRC, each of the target entities is required to transfer 10% of its net profit to statutory surplus reserves. Appropriation to the statutory surplus reserves may be ceased when the fund aggregates to 50% of the Target Company’s or those subsidiaries’ registered capital. The statutory surplus reserves may be used to make good previous years’ losses or to increase the capital of the Target Company and the subsidiaries upon approval.

(d) Dividends

In December 2015, the Target Company declared a dividend of RMB1 billion. The dividend declared after the balance sheet date has not been recognised as a liability as at 30 September 2015.

24 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable (note (i)) Advances from customers (note (ii)) Salaries and welfare payable Dividend payable to non-controlling interests Interest payable Construction fee and equipment cost payables Amounts due to related parties Other payables	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 1,137,185 1,361,956 1,316,885 3,182,399 4,156,337 4,707,276 39,093 51,496 226,931 44,495 61,007 65,703 24,546 11,879 4,071 2,205,758 2,598,351 2,754,740 8,485 2,117,111 7,664 644,011 449,831 480,389 7,285,972 10,807,968 9,563,659	As at 30 September 2015 RMB’000 1,185,622 5,200,152 402,987 66,446 4,896 2,218,063 6,996 664,649
		9,749,811

(i) As of the end of each reporting period, the ageing analysis of accounts payable, based on the invoice date, is as follows:

Within 3 months Between 3 to 6 months Over 6 months	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 977,087 1,045,466 1,042,421 21,869 144,595 69,522 138,229 171,895 204,942 1,137,185 1,361,956 1,316,885	As at 30 September 2015 RMB’000 809,335 135,569 240,718
		1,185,622

The Target Group has financial risk management policies in place to ensure that all payables fall within the credit time frame. The contractual maturity date of accounts payable and accrued liabilities are within one year.

– III-34 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

(ii) As at 31 December 2012, 2013 and 2014 and 30 September 2015, the balance includes gross amounts due to customers for contract work of RMB1,325,879 thousand, RMB1,691,407 thousand, RMB1,853,928 thousand and RMB2,533,299 thousand, respectively.

25 BORROWINGS

Short-term borrowings Secured Unsecured Current portion of long-term borrowings Secured Unsecured Long-term borrowings Secured Unsecured Less: Current portion of long-term borrowings Secured Unsecured Total	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 90,000 93,000 35,000 4,800 5,000 65,000 21,000 21,166 19,652 176,716 21,847 470,272 292,516 141,013 589,924 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 118,708 162,060 207,841 718,766 687,056 835,651 (21,000) (21,166) (19,652) (176,716) (21,847) (470,272) 639,758 806,103 553,568 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 932,274 947,116 1,143,492	As at 30 September 2015 RMB’000 – 87,000 73,798 569,982
		730,780 - - - - - - - - - - - 199,766 861,143 (73,798) (569,982)
		417,129 - - - - - - - - - - -
		1,147,909

As at 31 December 2012, 2013 and 2014 and 30 September 2015, the borrowings of the Target Group were repayable as follows:

Within one year Between one to two years Between two to five years After five years	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 292,516 141,013 589,924 89,586 367,226 254,035 498,589 393,397 288,662 51,583 45,480 10,871 932,274 947,116 1,143,492	As at 30 September 2015 RMB’000 730,780 234,103 135,479 47,547
		1,147,909

– III-35 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

26 DEFERRED TAX ASSETS AND LIABILITIES RECOGNISED

Deferred tax is calculated in full on temporary differences under the liability method using the applicable tax rates which is expected to apply at the time of reversal of the temporary difference.

The movements in net deferred tax assets/(liabilities) are as follows:

At 1 January Credit/(charged) to the consolidated profit or loss (Note 10) At 31 December/30 September Representing: Deferred tax assets Deferred tax liabilities	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 125,143 217,932 277,921 92,789 59,989 106,213 217,932 277,921 384,134 343,229 389,009 481,322 (125,297) (111,088) (97,188) 217,932 277,921 384,134	As at 30 September 2015 RMB’000 384,134 (29,086) 355,048 451,490 (96,442) 355,048

The movements in deferred tax assets/(liabilities) during the year/period without taking into consideration of the offsetting of balances within the same tax jurisdiction, are as follows:

At 1 January 2012 Credited/(charged) to the consolidated profit or loss At 31 December 2012 At 1 January 2013 Credited to the consolidated profit or loss At 31 December 2013 At 1 January 2014 Credited/(charged) to the consolidated profit or loss At 31 December 2014 At 1 January 2015 Credited/(charged) to the consolidated profit or loss At 30 September 2015	Revaluation of long- term assets RMB’000 (139,602) 14,305 (125,297) (125,297) 14,209 (111,088) (111,088) 13,900 (97,188) (97,188) 746 (96,442)	Tax effect of unused tax losses not recognised RMB’000 162,538 (49,353) 113,185 113,185 5,285 118,470 118,470 (1,113) 117,357 117,357 (1,454) 115,903	Deferred income RMB’000 86,307 24,720 111,027 111,027 37,945 148,972 148,972 51,738 200,710 200,710 (25,776) 174,934	Others RMB’000 15,900 103,117 119,017 119,017 2,550 121,567 121,567 41,688 163,255 163,255 (2,602) 160,653	Total RMB’000 125,143 92,789 217,932 217,932 59,989 277,921 277,921 106,213 384,134 384,134 (29,086) 355,048

In accordance with the accounting policy set out in Note 1(q), the Target Group has not recognised deferred tax assets in respect of accumulated tax losses of RMB213,750 thousand, RMB357,168 thousand, RMB528,012 thousand and RMB676,057 thousand as at 31 December 2012, 2013 and 2014 and 30 September 2015, respectively, as it is not probable that future taxable profits against which the losses can be utilised will be available.

– III-36 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

27 OTHER LONG-TERM OBLIGATIONS

Deferred income (note (i)) Other non-current liabilities	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 475,420 625,258 822,287 332,957 372,010 444,177 808,377 997,268 1,266,464	As at 30 September 2015 RMB’000 710,349 442,929
		1,153,278

(i) Some subsidiaries of the Target Group provide services to customers for the construction and connection of natural gas pipeline and received construction and connection service fees from customers. As required by relevant local government of certain provinces in the PRC, relevant subsidiaries of the Target Group have the obligation to provide customers with ongoing maintenance services and replacement of customers’ relevant gas pipeline equipment. The relevant subsidiaries of the Target Group defer the portion of service fees received over the relevant construction and connection costs and release it to profit or loss over the estimated useful lives of the relevant major gas pipeline equipment for which the relevant subsidiaries of the Target Group have maintenance and replacement obligation.

28 COMMITMENTS

(a) Operating lease commitments

Operating lease commitments of the Target Group are mainly for leasing of land and buildings and motor vehicles. Leases range from one to fifty years and usually do not contain renewal options. Future minimum lease payments as of 31 December 2012, 2013 and 2014 and 30 September 2015 under non-cancellable operating leases are as follows:

Not later than one year Later than one year and not later than five years More than five years	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 58,111 92,951 129,259 118,723 168,786 251,008 14,718 105,027 154,787 191,552 366,764 535,054	As at 30 September 2015 RMB’000 100,440 233,959 171,827
		506,226

(b) Capital commitments

							As at
			As	at	31 December		30 September
		2012			2013	2014	2015
		RMB’000			RMB’000	RMB’000	RMB’000
Contracted	for	1,135,103			1,439,112	1,500,658	1,202,400

29 RELATED PARTY TRANSACTIONS

CNPC, the ultimate shareholder of the Target Company, is a state-controlled enterprise directly controlled by the PRC government. Related parties include CPNC and its subsidiaries (together, the “CNPC Group”), other state-owned enterprises and their subsidiaries which the PRC government has control, joint control or significant influence over the enterprises which the Target Group is able to control, jointly control or exercise significant influence over, key management personnel of the Target Company and CNPC and their close family members.

– III-37 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

In addition to the related party information shown elsewhere in the consolidated financial statements, the following is a summary of significant related party transactions entered into in the ordinary course of business between the Target Group and its related parties during the Relevant Periods and balances arising from related party transactions at the end of each reporting period indicated below:

(a) Transactions with CNPC Group, associates and a joint venture

The Target Group has extensive transactions with other companies in the CNPC Group. Due to these relationships, it is possible that the terms of the transactions between the Target Group and other members of the CNPC Group are not the same as those that would result from transactions with other related parties or wholly unrelated parties.

During the Relevant Periods, apart from the transactions disclosed in Notes 15, 16 and 30, the principal related party transactions with the CNPC Group and associates and a joint venture of the Target Group, which were carried out in the ordinary course of business, are as follows:

				For the
				period ended
	For the year ended 31 December			30 September
	2012	2013	2014	2015
	RMB’000	RMB’000	RMB’000	RMB’000
Sales of goods	1,381,429	2,867,515	3,215,609	823,807
Purchase of goods	29,717,964	34,069,795	32,511,887	18,880,472
Services rendered	12,674	4,101	14,153	14,742
Services received	183,118	650,584	275,669	99,116
Interest income	83,002	77,030	84,652	63,663
Interest expense	21,330	46,603	75,208	45,066
(Decrease)/increase in amounts due
from the immediate holding
company, net	(62,116)	(46,627)	899,153	1,101,449
Increase in/(repayment of)
borrowings, net	192,545	116,335	176,380	(2,000)

As at 31 December 2012, 2013 and 2014 and 30 September 2015, balances with CNPC Group, associates and a joint venture of the Target Group are included in the following accounts:

					As at
		As	at 31 December		30 September
	2012		2013	2014	2015
	RMB’000		RMB’000	RMB’000	RMB’000
Accounts receivable	7,745		35,393	37,801	31,892
Prepaid expenses and other
current assets	2,343,947		2,206,857	3,342,193	4,431,554
Accounts payable and accrued
liabilities	983,791		3,162,293	1,112,515	984,471
Borrowings	585,975		702,310	878,690	876,690
Other long-term obligation	162,493		205,775	282,278	282,278

– III-38 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

(b) Key management compensation

Salaries and allowances Retirement benefits – defined contribution scheme	For the year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 3,111 4,059 4,949 214 254 307 3,325 4,313 5,256	For the period ended 30 September 2015 RMB’000 1,852 227
		2,079

(c) Transactions with other state-controlled entities in the PRC

Apart from transactions with CNPC Group, associates and a joint venture of the Target Group, the Target Group has transactions with other state-controlled entities, which included but not limited to (i) sales and purchases of goods and services; (ii) purchases of assets; (iii) lease of assets; and (iv) bank deposits and borrowings.

These transactions are conducted in the ordinary course of the Target Group’s business on terms comparable to those with other entities that are not state-controlled.

30 BUSINESS COMBINATION UNDER COMMON CONTROL

During the years ended 31 December 2013 and 2014, the Target Company acquired certain subsidiaries and businesses under the control of PetroChina. The net assets acquired as at the acquisition date and the corresponding consideration were RMB2,128 million and RMB1,440 million for 2013, and RMB112 million and RMB62 million for 2014, respectively.

These Acquisitions are business combination under common control since the Target Company and the acquired subsidiaries and businesses are under the common control of PetroChina. As a result, the Target Company has accounted for the Acquisitions in accordance with the accounting policy as disclosed in Note 1(d).

31 PRINCIPAL SUBSIDIARIES

Details of the Target Company’s principal subsidiaries, all of which are limited liability companies at 30 September 2015 are as follows:

		Nominal value		Percentage of
		of issued and		equity interest
	Place of	fully paid		attributable to
	incorporation/	ordinary shares/	Type of	the Target
Name of subsidiary	establishment	registered capital	legal entity	Group
		RMB’000
Daqing PetroChina Kunlun	Heilongjiang	1,000,000.00	Limited liability	100%
Gas Company Limited 大慶中石油昆侖燃氣有限公	Daqing		company
司
Yunan PetroChina Kunlun	Yunnan	1,000,000.00	Limited liability	51%
Gas Company Limited 雲南中石油昆侖燃氣有限公	Kunming		company
司_(note i)_
Gansu PetroChina Kunlun	Gansu	700,551.10	Limited liability	50%
Gas Company Limited 甘肅中石油昆侖燃氣有限公	Lanzhou		company
司_(note ii)_

– III-39 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

		Nominal value		Percentage of
		of issued and		equity interest
	Place of	fully paid		attributable to
	incorporation/	ordinary shares/	Type of	the Target
Name of subsidiary	establishment	registered capital	legal entity	Group
		RMB’000
Harbin Zhongqing Gas	Heilongjiang	561,790.00	Limited liability	51%
Company Limited 哈爾濱中慶燃氣有限責任公	Harbin		company
司
Hunan PetroChina Kunlun	Hunan	500,000.00	Limited liability	40%
Xiangloushao Gas	Changsha		company
Transmission and
Distribution Company
Limited
湖南中石油昆侖湘婁邵天然
氣輸配有限公司_(note iii)_
Hebei PetroChina Kunlun	Hebei	300,000.00	Limited liability	60%
Gas Company Limited 河北中石油昆侖天然氣有限	Shijiazhuang		company
公司
Linyi PetroChina Kunlun	Shandong	300,000.00	Limited liability	51%
Gas Transmission and	Linyi		company
Distribution Company
Limited
臨沂中石油昆侖天然氣輸配
有限公司
Hunan PetroChina Kunlun	Hunan	149,254.00	Limited liability	76.55%
Gas Transmission and	Changde		company
Distribution Company
Limited
湖南中石油昆侖天然氣輸配
有限公司
Dalian PetroChina Kunlun	Liaoning	120,000.00	Limited liability	51%
Tiancheng Gas Company	Dalian		company
Limited
大連中石油昆侖天誠燃氣有
限公司
Changde PetroChina	Hunan	119,760.00	Limited liability	99.33%
Kunlun Gas Company	Changde		company
Limited
常德中石油昆侖燃氣有限公
司
Guangdong PetroChina	Guangdong	91,080.00	Limited liability	51%
Kunlun LPG Company	Shantou		company
Limited
廣東中石油昆侖液化氣有限
公司
Fushun PetroChina Kunlun	Liaoning	60,000.00	Limited liability	51%
Gas Company Limited 撫順中石油昆侖燃氣有限公	Fushun		Company
司
Huangshi PetroChina	Hubei	50,000.00	Limited liability	80%
Kunlun Chengtou Gas	Huangshi		Company
Company Limited 黃石中石油昆侖城投燃氣有
限公司
Beijing Huayou United Gas	Beijing	10,000.00	Limited liability	51%
Development Company			Company
Limited
北京華油聯合燃氣開發有限
公司

– III-40 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

(i) On 1 April 2015, Yunnan PetroChina Kunlun Gas Company Limited’s share capital has increased from RMB400 million to RMB1 billion, that the Target Company has contributed RMB306 million all in cash, which has no change to the proportion of shareholding.
(ii) The Target Company has the power to control the operation of this company by appointing directors and senior management, approving annual investment budget, major financing and operation activities and determining the remuneration of employees, etc. and to affect the variable returns.
(iii) The Target Company is the biggest equity owner of this company and no other equity owners individually or in the aggregate had the power to control this company according to the articles of association. Historically, the Target Company controlled the operation of this company by appointing directors and senior management, approving annual investment budget and determining the remuneration of employees, etc. and to affect the variable returns.
(iv) The English translation of the name is for identification only. The official name of the entity is in Chinese.

32 COMPANY-LEVEL STATEMENT OF FINANCIAL POSITION

Section B Note Assets Non-current assets Property, plant and equipment Advanced operating lease payments Investments in associates 15 Investments in a joint venture 16 Investments in subsidiaries 17 Intangible and other non-current assets Deferred tax assets Current assets Inventories Accounts receivable Prepaid expenses and other current assets Cash and cash equivalents Total assets Equity Capital and reserves attributable to owner of the Target Company Share capital 23(b) Retained earnings Reserves 23(c) Total equity	As 2012 RMB’000 1,082,722 54,574 61,648 – 3,922,490 18,707 30,146 5,170,287 - - - - - - - - - 282,064 148,999 3,352,136 10,291 3,793,490 - - - - - - - - - 8,963,777 6,060,000 99,463 56,929 6,216,392 - - - - - - - - -	at 31 December As at 30 September 2013 2014 2015 RMB’000 RMB’000 RMB’000 1,665,296 1,801,148 1,715,509 80,029 124,482 122,784 435,980 405,818 420,714 38,411 38,411 38,411 5,715,515 5,946,421 6,225,648 13,984 8,784 9,301 36,131 83,271 79,808 7,985,346 8,408,335 8,612,175 - - - - - - - - - - - - - - - - - - - - - - - - - - - 271,724 67,007 74,686 187,262 457,510 666,190 3,685,173 4,656,836 5,549,540 14,037 18,252 44,235 4,158,196 5,199,605 6,334,651 - - - - - - - - - - - - - - - - - - - - - - - - - - - 12,143,542 13,607,940 14,946,826 6,060,000 8,560,000 8,560,000 439,106 637,223 1,208,304 130,306 181,848 205,280 6,629,412 9,379,071 9,973,584 - - - - - - - - - - - - - - - - - - - - - - - - - - -	at 31 December As at 30 September 2013 2014 2015 RMB’000 RMB’000 RMB’000 1,665,296 1,801,148 1,715,509 80,029 124,482 122,784 435,980 405,818 420,714 38,411 38,411 38,411 5,715,515 5,946,421 6,225,648 13,984 8,784 9,301 36,131 83,271 79,808 7,985,346 8,408,335 8,612,175 - - - - - - - - - - - - - - - - - - - - - - - - - - - 271,724 67,007 74,686 187,262 457,510 666,190 3,685,173 4,656,836 5,549,540 14,037 18,252 44,235 4,158,196 5,199,605 6,334,651 - - - - - - - - - - - - - - - - - - - - - - - - - - - 12,143,542 13,607,940 14,946,826 6,060,000 8,560,000 8,560,000 439,106 637,223 1,208,304 130,306 181,848 205,280 6,629,412 9,379,071 9,973,584 - - - - - - - - - - - - - - - - - - - - - - - - - - -
			8,612,175 - - - - - - - - - 74,686 666,190 5,549,540 44,235
			6,334,651 - - - - - - - - -
			14,946,826

			8,560,000 1,208,304 205,280
			9,973,584 - - - - - - - - -

– III-41 –

APPENDIX III

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Section B Note Liabilities Current liabilities Accounts payable and accrued liabilities Income tax payable Other tax payable Short-term borrowings Non-current liabilities Long-term borrowings Other long-term obligation Total liabilities Total equity and liabilities Net current assets/(liabilities) Total assets less current liabilities	As 2012 RMB’000 1,487,770 49 25,437 1,012,621 2,525,877 - - - - - - - - - 33,625 187,883 221,508 - - - - - - - - - 2,747,385 - - - - - - - - - 8,963,777 1,267,613 6,437,900	at 31 December As at 30 September 2013 2014 2015 RMB’000 RMB’000 RMB’000 4,046,316 2,053,681 2,207,803 49 49 49 26,666 26,535 27,102 1,191,117 1,813,461 2,407,383 5,264,148 3,893,726 4,642,337 - - - - - - - - - - - - - - - - - - - - - - - - - - - 15 – – 249,967 335,143 330,905 249,982 335,143 330,905 - - - - - - - - - - - - - - - - - - - - - - - - - - - 5,514,130 4,228,869 4,973,242 - - - - - - - - - - - - - - - - - - - - - - - - - - - 12,143,542 13,607,940 14,946,826 (1,105,952) 1,305,879 1,692,314 6,879,394 9,714,214 10,304,489	at 31 December As at 30 September 2013 2014 2015 RMB’000 RMB’000 RMB’000 4,046,316 2,053,681 2,207,803 49 49 49 26,666 26,535 27,102 1,191,117 1,813,461 2,407,383 5,264,148 3,893,726 4,642,337 - - - - - - - - - - - - - - - - - - - - - - - - - - - 15 – – 249,967 335,143 330,905 249,982 335,143 330,905 - - - - - - - - - - - - - - - - - - - - - - - - - - - 5,514,130 4,228,869 4,973,242 - - - - - - - - - - - - - - - - - - - - - - - - - - - 12,143,542 13,607,940 14,946,826 (1,105,952) 1,305,879 1,692,314 6,879,394 9,714,214 10,304,489
			4,642,337 - - - - - - - - - – 330,905
			330,905 - - - - - - - - -
			4,973,242 - - - - - - - - -
			14,946,826

			1,692,314

			10,304,489

33 IMMEDIATE AND ULTIMATE CONTROLLING PARTY

As at 30 September 2015, the directors consider the immediate parent and ultimate controlling party of the Target Group to be PetroChina and CNPC which are incorporated in the PRC respectively. PetroChina, an intermediate holding company, produces financial statements available for public use.

34 POSSIBLE IMPACT OF AMENDMENTS, NEW STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR THE RELEVANT PERIODS

Up to the date of issue of these financial statements, the HKICPA has issued a few amendments and a new standard which are not yet effective for the Relevant Periods and which have not been adopted in these financial statements. These include the following which may be relevant to the Target Group.

	Effective for
	accounting periods
	beginning on or after
Annual Improvements to HKFRSs 2012-2014 Cycle	1 January 2016
Amendments to HKFRS 10 and HKAS 28, Sale or contribution of assets between	1 January 2016
an investor and its associate or joint venture
Amendments to HKFRS 11, Accounting for acquisitions of interests in	1 January 2016
joint operations
Amendments to HKAS 1, Disclosure initiative	1 January 2016
Amendments to HKAS 16 and HKAS 38, Clarification of acceptable methods of	1 January 2016
depreciation and amortisation
HKFRS 15, Revenue from contracts with customers	1 January 2018
HKFRS 9, Financial instruments	1 January 2018

– III-42 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

The Target Group is in the process of making an assessment of what the impact of these amendments is expected to be in the period of initial application. So far it has concluded that the adoption of them is unlikely to have a significant impact on the consolidated financial statements.

35 STATUTORY AUDIT

The statutory financial statements of the Target Company’s principal subsidiaries during the Relevant Periods were audited by the following auditors:

Company name	Statutory financial year	Auditor
大慶中石油昆侖燃氣有限公司	The year ended 31 December 2012	普華永道中天會計師事務所有限
Daqing PetroChina Kunlun		公司
Gas Company Limited		PricewaterhouseCoopers
		Zhongtian CPAs Limited
		Company (i)
雲南中石油昆侖燃氣有限公司	The year ended 31 December 2012	普華永道中天會計師事務所有限
Yunan PetroChina Kunlun		公司
Gas Company Limited		PricewaterhouseCoopers
		Zhongtian CPAs Limited
		Company
	The year ended 31 December 2013	畢馬威華振會計師事務所(特殊
		普通合夥)
		KPMG Huazhen (Special
		General Partnership) (ii)
	The year ended 31 December 2014	天健會計師事務所
		Pan-China Certified Public
		Accountants LLP
甘肅中石油昆侖燃氣有限公司	The year ended 31 December 2012	普華永道中天會計師事務所有限
Gansu PetroChina Kunlun Gas		公司
Company Limited		PricewaterhouseCoopers
		Zhongtian CPAs Limited
		Company
哈爾濱中慶燃氣有限責任公司	The year ended 31 December 2012	普華永道中天會計師事務所有限
Haerbin Zhongqing Gas		公司
Company Limited		PricewaterhouseCoopers
		Zhongtian CPAs Limited
		Company
河北中石油昆侖天然氣有限公司	The year ended 31 December 2012	普華永道中天會計師事務所有限
Hebei PetroChina Kunlun Gas		公司
Company Limited		PricewaterhouseCoopers
		Zhongtian CPAs Limited
		Company
	The year ended 31 December 2013	普華永道中天會計師事務所(特殊
		普通合夥)
		PricewaterhouseCoopers Zhong
		Tian LLP
	The year ended 31 December 2014	普華永道中天會計師事務所(特殊
		普通合夥)
		PricewaterhouseCoopers Zhong
		Tian LLP

– III-43 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

Company name Statutory financial year Auditor 臨沂中石油昆侖天然氣輸配有限 The year ended 31 December 2012 普華永道中天會計師事務所有限公司公司 Linyi PetroChina Kunlun Gas PricewaterhouseCoopers Transmission and Distribution Zhongtian CPAs Limited Company Limited Company The year ended 31 December 2014 山東天元同泰會計師事務所 Shandong Tianyuantongtai CPAs Co., Ltd. 湖南中石油昆侖天然氣輸配有限 The year ended 31 December 2012 普華永道中天會計師事務所有限公司公司 Hunan PetroChina Kunlun Gas PricewaterhouseCoopers Transmission and Distribution Zhongtian CPAs Limited Company Limited Company The year ended 31 December 2013 畢馬威華振會計師事務所(特殊普通合夥) KPMG Huazhen (Special General Partnership) 大連中石油昆侖天誠燃氣有限 The year ended 31 December 2012 普華永道中天會計師事務所有限公司公司 Dalian PetroChina Kunlun PricewaterhouseCoopers Tiancheng Gas Company Zhongtian CPAs Limited Limited Company The year ended 31 December 2013 普華永道中天會計師事務所(特殊普通合夥) PricewaterhouseCoopers Zhong Tian LLP The year ended 31 December 2014 普華永道中天會計師事務所(特殊普通合夥) PricewaterhouseCoopers Zhong Tian LLP 常德中石油昆侖燃氣有限公司 The year ended 31 December 2012 湖南正陽會計師事務所 Changde PetroChina Kunlun Gas Hunan Zhengyang CPAs Company Limited 廣東中石油昆侖液化氣有限公司 The year ended 31 December 2012 普華永道中天會計師事務所有限 Guangdong PetroChina Kunlun 公司 LPG Company Limited PricewaterhouseCoopers Zhongtian CPAs Limited Company The year ended 31 December 2013 畢馬威華振會計師事務所(特殊普通合夥) KPMG Huazhen (Special General Partnership) 撫順中石油昆侖燃氣有限公司 The year ended 31 December 2012 普華永道中天會計師事務所有限 Fushun PetroChina Kunlun Gas 公司 Company Limited PricewaterhouseCoopers Zhongtian CPAs Limited Company

– III-44 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

Company name	Statutory financial year	Auditor
	The year ended 31 December 2013	普華永道中天會計師事務所(特殊
		普通合夥)
		PricewaterhouseCoopers Zhong
		Tian LLP
	The year ended 31 December 2014	普華永道中天會計師事務所(特殊
		普通合夥)
		PricewaterhouseCoopers Zhong
		Tian LLP
黃石中石油昆侖城投燃氣有限	The year ended 31 December 2012	普華永道中天會計師事務所有限
公司		公司
Huangshi PetroChina Kunlun		PricewaterhouseCoopers
Chengtou Gas Company		Zhongtian CPAs Limited
Limited		Company
	The year ended 31 December 2013	普華永道中天會計師事務所(特殊
		普通合夥)
		PricewaterhouseCoopers Zhong
		Tian LLP
	The year ended 31 December 2014	普華永道中天會計師事務所(特殊
		普通合夥)
		PricewaterhouseCoopers Zhong
		Tian LLP
北京華油聯合燃氣開發有限公司	The year ended 31 December 2012	普華永道中天會計師事務所有限
Beijing Huayou United Gas		公司
Development Company		PricewaterhouseCoopers
Limited		Zhongtian CPAs Limited
		Company
	The year ended 31 December 2013	畢馬威華振會計師事務所(特殊
		普通合夥)
		KPMG Huazhen (Special
		General Partnership)

(i) In June 2013, the name of PricewaterhouseCoopers Zhongtian CPAs Limited Company has been changed to PricewaterhouseCoopers Zhong Tian LLP.
(ii) In July 2015, the name of KPMG Huazhen (Special General Partnership) has been changed to KPMG Huazhen LLP.

36 SUBSEQUENT EVENTS

In December 2015, the Target Company declared a special dividend of RMB1 billion. The dividend declared after the end of Relevant Period has not been recognised as a liability as at 30 September 2015.

– III-45 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX III

C SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Target Company and its subsidiaries in respect of any period subsequent to 30 September 2015.

Yours faithfully,

KPMG

Certified Public Accountants Hong Kong

– III-46 –

APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

A. INDEPENDENT REPORTING ACCOUNTANTS’ ASSURANCE REPORT ON THE COMPILATION OF PRO FORMA FINANCIAL INFORMATION

The following is the text of a report received from the Company’s reporting accountants, KPMG, Certified Public Accountants, Hong Kong, in respect of the Group’s pro forma financial information for the purpose of incorporation in this circular.

8th Floor Prince’s Building 10 Chater Road Central Hong Kong

23 January 2016

TO THE DIRECTORS OF KUNLUN ENERGY COMPANY LIMITED

We have completed our assurance engagement to report on the compilation of pro forma financial information of Kunlun Energy Company Limited (the “Company”) and its subsidiaries (collectively the “Group”) by the directors of the Company (the “Directors”) for illustrative purposes only. The pro forma financial information consists of the unaudited pro forma consolidated statement of financial position as at 30 June 2015 and the unaudited pro forma consolidated statement of comprehensive income and unaudited pro forma consolidated statement of cash flows for the year ended 31 December 2014 and related notes as set out in Part B of Appendix IV to the circular dated 23 January 2016 (the “Circular”) issued by the Company. The applicable criteria on the basis of which the Directors have compiled the pro forma financial information are described in Part B of Appendix IV to the Circular.

The pro forma financial information has been compiled by the Directors to illustrate the impact of the proposed acquisition of PetroChina Kunlun Gas Co., Ltd. (the “Proposed Acquisition”) on the Group’s financial position as at 30 June 2015 and the Group’s financial performance and cash flows for the year ended 31 December 2014 as if the Proposed Acquisition had taken place at 30 June 2015 and 1 January 2014, respectively. As part of this process, information about the Group’s financial position as at 30 June 2015 has been extracted by the Directors from the interim report of the Group for the six months ended 30 June 2015, on which a review report has been published. Information about the Group’s financial performance and cash flows for the year ended 31 December 2014 has been extracted by the Directors from the consolidated financial statements of the Group for the year then ended, on which an audit report has been published.

DIRECTORS’ RESPONSIBILITIES FOR THE PRO FORMA FINANCIAL INFORMATION

The Directors are responsible for compiling the pro forma financial information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” (“AG 7”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).

– IV-1 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

OUR INDEPENDENCE AND QUALITY CONTROL

We have complied with the independence and other ethical requirements of the Code of Ethics for Professional Accountants issued by the HKICPA, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behavior.

The firm applies Hong Kong Standard on Quality Control 1 and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.

REPORTING ACCOUNTANTS’ RESPONSIBILITIES

Our responsibility is to express an opinion, as required by paragraph 4.29(7) of the Listing Rules, on the pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

We conducted our engagement in accordance with Hong Kong Standard on Assurance Engagements (“HKSAE”) 3420 “Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus” issued by the HKICPA. This standard requires that the reporting accountants plan and perform procedures to obtain reasonable assurance about whether the Directors have compiled the pro forma financial information in accordance with paragraph 4.29 of the Listing Rules, and with reference to AG 7 issued by the HKICPA.

For purpose of this engagement, we are not responsible for updating or reissuing any reports or opinions on any historical financial information used in compiling the pro forma financial information, nor have we, in the course of this engagement, performed an audit or review of the financial information used in compiling the pro forma financial information.

The purpose of pro forma financial information included in an investment circular is solely to illustrate the impact of a significant event or transaction on the unadjusted financial information of the Group as if the event had occurred or the transaction had been undertaken at an earlier date selected for purposes of the illustration. Accordingly, we do not provide any assurance that the actual outcome of the events or transactions at 30 June 2015 or 1 January 2014 would have been as presented.

– IV-2 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

A reasonable assurance engagement to report on whether the pro forma financial information has been properly compiled on the basis of the applicable criteria involves performing procedures to assess whether the applicable criteria used by the Directors in the compilation of the pro forma financial information provide a reasonable basis for presenting the significant effects directly attributable to the event or transaction, and to obtain sufficient appropriate evidence about whether:

the related pro forma adjustments give appropriate effect to those criteria; and
the pro forma financial information reflects the proper application of those adjustments to the unadjusted financial information.

The procedures selected depend on the reporting accountants’ judgement, having regard to the reporting accountants’ understanding of the nature of the Group, the event or transaction in respect of which the pro forma financial information has been compiled, and other relevant engagement circumstances.

The engagement also involves evaluating the overall presentation of the pro forma financial information.

We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

OPINION

In our opinion:

(a) the pro forma financial information has been properly compiled on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the pro forma financial information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

KPMG

Certified Public Accountants Hong Kong

– IV-3 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

B. UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Introduction

The following is the unaudited pro forma financial information of the Enlarged Group (“ Unaudited Pro Forma Financial Information ”), being the Group together with the Target Group, as if the Acquisition had been completed on 30 June 2015 for the unaudited pro forma consolidated statement of financial position or on 1 January 2014 for the unaudited pro forma consolidated statement of comprehensive income and the unaudited pro forma consolidated statement of cash flows.

The Unaudited Pro Forma Financial Information has been prepared by the directors of the Company in accordance with Paragraph 4.29 of the Listing Rules, for the purpose of illustrating the effect of the Acquisition pursuant to the terms of the Acquisition Agreement. Because of its hypothetical nature, the Unaudited Pro Forma Financial Information may not give a true picture of the financial position, financial performance or cash flows of the Enlarged Group had the Acquisition been completed as of the specified dates or any future date.

The Unaudited Pro Forma Financial Information is based upon the audited consolidated financial information of the Company for the year ended 31 December 2014, which has been extracted from the Company’s annual report for the year then ended as set out in Appendix II to this circular; the unaudited consolidated interim financial information of the Company as of 30 June 2015, which has been extracted from the Company’s interim report for the six months then ended as set out in Appendix II to this circular; the consolidated financial information of the Target Group for the year ended 31 December 2014 and as of 30 September 2015 as extracted from the accountants’ report thereon set out in Appendix III to this circular, and adjusted on a pro forma basis to reflect the effect of the Acquisition. These pro forma adjustments are (i) directly attributable to the Acquisition and not relating to other future events and decisions and (ii) factually supportable based on the terms of the Acquisition Agreement.

The Unaudited Pro Forma Financial Information should be read in conjunction with the consolidated financial information of the Company as set out in the published interim report of the Company for the six months ended 30 June 2015 and annual report of the Company for the year ended 31 December 2014, the accountants’ report of the Target Group as set out in Appendix III to this circular and other financial information included elsewhere in this circular.

– IV-4 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

Unaudited Pro Forma Consolidated Statement of Financial Position

The Group as at 30 June 2015 HK$ ‘million Note 1 86,551 3,348 – 4,671 1,569 85 1,451 793	The Target Group as at 30 September 2015 RMB ‘million Note 2 15,166 787 – 501 38 – 493 452	Pro forma adjustments The Target Group as at 30 September 2015 Other pro forma adjustments The Enlarged Group HK$ ‘million Note 3 Note 4 Note 5 Note 6 Note 9 19,154 105,705 994 4,342 – 17,998 (17,998) – 633 5,304 48 1,617 – 85 623 2,074 571 1,364 22,023 17,998 – (17,998) – 120,491 443 2,073 1,816 4,024 6,562 11,032 4,966 (17,998) (13) (1,214) 1,441 13,787 (17,998) (13) – (1,214) 18,570 35,810 (13) (17,998) (1,214) 139,061 10,811 (10,811) 81 2,920 (13) (1,214) 29,691 581 (7,187) 18,473 14,312 – (13) (17,998) (1,214) 48,245 5,927 27,872 20,239 – (13) (17,998) (1,214) 76,117 12,314 25,508 139 627 90 279 923 10,415 – 249 13,466 – – – – 37,078 527 21,618 122 1,519 – 666 1,456 2,063 2,105 – – – – 25,866 15,571 62,944 35,810 – (13) (17,998) (1,214) 139,061 321 (17,998) (13) – (1,214) (18,508) 22,344 – (13) (17,998) (1,214) 101,983	Pro forma adjustments The Target Group as at 30 September 2015 Other pro forma adjustments The Enlarged Group HK$ ‘million Note 3 Note 4 Note 5 Note 6 Note 9 19,154 105,705 994 4,342 – 17,998 (17,998) – 633 5,304 48 1,617 – 85 623 2,074 571 1,364 22,023 17,998 – (17,998) – 120,491 443 2,073 1,816 4,024 6,562 11,032 4,966 (17,998) (13) (1,214) 1,441 13,787 (17,998) (13) – (1,214) 18,570 35,810 (13) (17,998) (1,214) 139,061 10,811 (10,811) 81 2,920 (13) (1,214) 29,691 581 (7,187) 18,473 14,312 – (13) (17,998) (1,214) 48,245 5,927 27,872 20,239 – (13) (17,998) (1,214) 76,117 12,314 25,508 139 627 90 279 923 10,415 – 249 13,466 – – – – 37,078 527 21,618 122 1,519 – 666 1,456 2,063 2,105 – – – – 25,866 15,571 62,944 35,810 – (13) (17,998) (1,214) 139,061 321 (17,998) (13) – (1,214) (18,508) 22,344 – (13) (17,998) (1,214) 101,983	Pro forma adjustments The Target Group as at 30 September 2015 Other pro forma adjustments The Enlarged Group HK$ ‘million Note 3 Note 4 Note 5 Note 6 Note 9 19,154 105,705 994 4,342 – 17,998 (17,998) – 633 5,304 48 1,617 – 85 623 2,074 571 1,364 22,023 17,998 – (17,998) – 120,491 443 2,073 1,816 4,024 6,562 11,032 4,966 (17,998) (13) (1,214) 1,441 13,787 (17,998) (13) – (1,214) 18,570 35,810 (13) (17,998) (1,214) 139,061 10,811 (10,811) 81 2,920 (13) (1,214) 29,691 581 (7,187) 18,473 14,312 – (13) (17,998) (1,214) 48,245 5,927 27,872 20,239 – (13) (17,998) (1,214) 76,117 12,314 25,508 139 627 90 279 923 10,415 – 249 13,466 – – – – 37,078 527 21,618 122 1,519 – 666 1,456 2,063 2,105 – – – – 25,866 15,571 62,944 35,810 – (13) (17,998) (1,214) 139,061 321 (17,998) (13) – (1,214) (18,508) 22,344 – (13) (17,998) (1,214) 101,983	Pro forma adjustments The Target Group as at 30 September 2015 Other pro forma adjustments The Enlarged Group HK$ ‘million Note 3 Note 4 Note 5 Note 6 Note 9 19,154 105,705 994 4,342 – 17,998 (17,998) – 633 5,304 48 1,617 – 85 623 2,074 571 1,364 22,023 17,998 – (17,998) – 120,491 443 2,073 1,816 4,024 6,562 11,032 4,966 (17,998) (13) (1,214) 1,441 13,787 (17,998) (13) – (1,214) 18,570 35,810 (13) (17,998) (1,214) 139,061 10,811 (10,811) 81 2,920 (13) (1,214) 29,691 581 (7,187) 18,473 14,312 – (13) (17,998) (1,214) 48,245 5,927 27,872 20,239 – (13) (17,998) (1,214) 76,117 12,314 25,508 139 627 90 279 923 10,415 – 249 13,466 – – – – 37,078 527 21,618 122 1,519 – 666 1,456 2,063 2,105 – – – – 25,866 15,571 62,944 35,810 – (13) (17,998) (1,214) 139,061 321 (17,998) (13) – (1,214) (18,508) 22,344 – (13) (17,998) (1,214) 101,983	Pro forma adjustments The Target Group as at 30 September 2015 Other pro forma adjustments The Enlarged Group HK$ ‘million Note 3 Note 4 Note 5 Note 6 Note 9 19,154 105,705 994 4,342 – 17,998 (17,998) – 633 5,304 48 1,617 – 85 623 2,074 571 1,364 22,023 17,998 – (17,998) – 120,491 443 2,073 1,816 4,024 6,562 11,032 4,966 (17,998) (13) (1,214) 1,441 13,787 (17,998) (13) – (1,214) 18,570 35,810 (13) (17,998) (1,214) 139,061 10,811 (10,811) 81 2,920 (13) (1,214) 29,691 581 (7,187) 18,473 14,312 – (13) (17,998) (1,214) 48,245 5,927 27,872 20,239 – (13) (17,998) (1,214) 76,117 12,314 25,508 139 627 90 279 923 10,415 – 249 13,466 – – – – 37,078 527 21,618 122 1,519 – 666 1,456 2,063 2,105 – – – – 25,866 15,571 62,944 35,810 – (13) (17,998) (1,214) 139,061 321 (17,998) (13) – (1,214) (18,508) 22,344 – (13) (17,998) (1,214) 101,983	The Enlarged Group 105,705 4,342 – 5,304 1,617 85 2,074 1,364
98,468	17,437	22,023	17,998	–			120,491
1,630 2,208 4,470 15,700	351 1,438 5,196 3,932	443 1,816 6,562 4,966
24,008	10,917	13,787
122,476	28,354	35,810

81 27,998 25,079	8,560 2,312 460	10,811 2,920 581
53,158 21,945	11,332 4,693	14,312 5,927	–
75,103	16,025	20,239	–
13,194 488 189 9,492 249	9,750 110 71 731 –	12,314 139 90 923 –					25,508 627 279 10,415 249
23,612	10,662	13,466	–	–	–	–	37,078
21,091 1,397 666 607	417 97 – 1,153	527 122 – 1,456					21,618 1,519 666 2,063
23,761	1,667	2,105	–	–	–	–	25,866
47,373	12,329	15,571					62,944

122,476	28,354	35,810	–

396	255	321

98,864	17,692	22,344	–

– IV-5 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

Unaudited Pro Forma Consolidated Statement of Comprehensive Income

Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments The Enlarged Group HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 5 Note 7 48,044 54,180 69,120 (24) 117,140 837 177 226 1,063 217 142 181 398 (26,354) (48,358) (61,693) 24 (88,023) (2,368) (2,297) (2,930) (5,298) (5,392) (1,100) (1,403) (6,795) (2,777) (1,113) (1,420) (13) (4,210) (737) (85) (108) (845) (486) (62) (79) (565) 716 48 61 777 256 3 4 260 11,956 1,535 1,959 (13) – 13,902 (3,080) (410) (523) (3,603) 8,876 1,125 1,436 (13) – 10,299 (1,283) – – (1,283) (572) – – (572) (9) – – (9) (29) – – (29) (1,893) – – – – (1,893) 6,983 1,125 1,436 (13) – 8,406 5,610 724 924 (13) 6,521 3,266 401 512 3,778 8,876 1,125 1,436 (13) – 10,299 4,307 724 924 (13) 5,218 2,676 401 512 3,188 6,983 1,125 1,436 (13) – 8,406	Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments The Enlarged Group HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 5 Note 7 48,044 54,180 69,120 (24) 117,140 837 177 226 1,063 217 142 181 398 (26,354) (48,358) (61,693) 24 (88,023) (2,368) (2,297) (2,930) (5,298) (5,392) (1,100) (1,403) (6,795) (2,777) (1,113) (1,420) (13) (4,210) (737) (85) (108) (845) (486) (62) (79) (565) 716 48 61 777 256 3 4 260 11,956 1,535 1,959 (13) – 13,902 (3,080) (410) (523) (3,603) 8,876 1,125 1,436 (13) – 10,299 (1,283) – – (1,283) (572) – – (572) (9) – – (9) (29) – – (29) (1,893) – – – – (1,893) 6,983 1,125 1,436 (13) – 8,406 5,610 724 924 (13) 6,521 3,266 401 512 3,778 8,876 1,125 1,436 (13) – 10,299 4,307 724 924 (13) 5,218 2,676 401 512 3,188 6,983 1,125 1,436 (13) – 8,406	Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments The Enlarged Group HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 5 Note 7 48,044 54,180 69,120 (24) 117,140 837 177 226 1,063 217 142 181 398 (26,354) (48,358) (61,693) 24 (88,023) (2,368) (2,297) (2,930) (5,298) (5,392) (1,100) (1,403) (6,795) (2,777) (1,113) (1,420) (13) (4,210) (737) (85) (108) (845) (486) (62) (79) (565) 716 48 61 777 256 3 4 260 11,956 1,535 1,959 (13) – 13,902 (3,080) (410) (523) (3,603) 8,876 1,125 1,436 (13) – 10,299 (1,283) – – (1,283) (572) – – (572) (9) – – (9) (29) – – (29) (1,893) – – – – (1,893) 6,983 1,125 1,436 (13) – 8,406 5,610 724 924 (13) 6,521 3,266 401 512 3,778 8,876 1,125 1,436 (13) – 10,299 4,307 724 924 (13) 5,218 2,676 401 512 3,188 6,983 1,125 1,436 (13) – 8,406	Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments The Enlarged Group HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 5 Note 7 48,044 54,180 69,120 (24) 117,140 837 177 226 1,063 217 142 181 398 (26,354) (48,358) (61,693) 24 (88,023) (2,368) (2,297) (2,930) (5,298) (5,392) (1,100) (1,403) (6,795) (2,777) (1,113) (1,420) (13) (4,210) (737) (85) (108) (845) (486) (62) (79) (565) 716 48 61 777 256 3 4 260 11,956 1,535 1,959 (13) – 13,902 (3,080) (410) (523) (3,603) 8,876 1,125 1,436 (13) – 10,299 (1,283) – – (1,283) (572) – – (572) (9) – – (9) (29) – – (29) (1,893) – – – – (1,893) 6,983 1,125 1,436 (13) – 8,406 5,610 724 924 (13) 6,521 3,266 401 512 3,778 8,876 1,125 1,436 (13) – 10,299 4,307 724 924 (13) 5,218 2,676 401 512 3,188 6,983 1,125 1,436 (13) – 8,406	Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments The Enlarged Group HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 5 Note 7 48,044 54,180 69,120 (24) 117,140 837 177 226 1,063 217 142 181 398 (26,354) (48,358) (61,693) 24 (88,023) (2,368) (2,297) (2,930) (5,298) (5,392) (1,100) (1,403) (6,795) (2,777) (1,113) (1,420) (13) (4,210) (737) (85) (108) (845) (486) (62) (79) (565) 716 48 61 777 256 3 4 260 11,956 1,535 1,959 (13) – 13,902 (3,080) (410) (523) (3,603) 8,876 1,125 1,436 (13) – 10,299 (1,283) – – (1,283) (572) – – (572) (9) – – (9) (29) – – (29) (1,893) – – – – (1,893) 6,983 1,125 1,436 (13) – 8,406 5,610 724 924 (13) 6,521 3,266 401 512 3,778 8,876 1,125 1,436 (13) – 10,299 4,307 724 924 (13) 5,218 2,676 401 512 3,188 6,983 1,125 1,436 (13) – 8,406
8,876	1,125	1,436
		– – – –
		–	–	–
6,983	1,125	1,436

5,610 3,266	724 401	924 512
8,876	1,125	1,436

4,307 2,676	724 401	924 512
6,983	1,125	1,436

– IV-6 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

Unaudited Pro Forma Consolidated Statement of Cash Flows

Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 4 Note 5 Note 8 Note 9 8,876 1,125 1,436 (13) 3,080 410 523 737 85 108 5,392 1,100 1,403 (716) (48) (61) (256) (3) (4) – (28) (36) 2 – – – 3 4 6 – – 16 10 13 123 (30) (38) (217) (142) (181) 486 62 79 – – – 13 (818) (459) (586) (7) 167 213 174 440 561 16,878 2,692 3,434 – – – – (3,180) (554) (707) 13,698 2,138 2,727 – – – – 1,041 9 11 401 – – – (1,502) (1,916) (17,998) – 41 52 (84) (378) (482) – (38) (48) 158 53 68 (9,553) (1,546) (1,972) 210 142 181 13 – – (33) – – 246 – – – (899) (1,147) 1,147 – – – (1,147) – – – – (13) (7,601) (4,118) (5,253) (17,998) (13) – –	Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 4 Note 5 Note 8 Note 9 8,876 1,125 1,436 (13) 3,080 410 523 737 85 108 5,392 1,100 1,403 (716) (48) (61) (256) (3) (4) – (28) (36) 2 – – – 3 4 6 – – 16 10 13 123 (30) (38) (217) (142) (181) 486 62 79 – – – 13 (818) (459) (586) (7) 167 213 174 440 561 16,878 2,692 3,434 – – – – (3,180) (554) (707) 13,698 2,138 2,727 – – – – 1,041 9 11 401 – – – (1,502) (1,916) (17,998) – 41 52 (84) (378) (482) – (38) (48) 158 53 68 (9,553) (1,546) (1,972) 210 142 181 13 – – (33) – – 246 – – – (899) (1,147) 1,147 – – – (1,147) – – – – (13) (7,601) (4,118) (5,253) (17,998) (13) – –	Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 4 Note 5 Note 8 Note 9 8,876 1,125 1,436 (13) 3,080 410 523 737 85 108 5,392 1,100 1,403 (716) (48) (61) (256) (3) (4) – (28) (36) 2 – – – 3 4 6 – – 16 10 13 123 (30) (38) (217) (142) (181) 486 62 79 – – – 13 (818) (459) (586) (7) 167 213 174 440 561 16,878 2,692 3,434 – – – – (3,180) (554) (707) 13,698 2,138 2,727 – – – – 1,041 9 11 401 – – – (1,502) (1,916) (17,998) – 41 52 (84) (378) (482) – (38) (48) 158 53 68 (9,553) (1,546) (1,972) 210 142 181 13 – – (33) – – 246 – – – (899) (1,147) 1,147 – – – (1,147) – – – – (13) (7,601) (4,118) (5,253) (17,998) (13) – –	Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 4 Note 5 Note 8 Note 9 8,876 1,125 1,436 (13) 3,080 410 523 737 85 108 5,392 1,100 1,403 (716) (48) (61) (256) (3) (4) – (28) (36) 2 – – – 3 4 6 – – 16 10 13 123 (30) (38) (217) (142) (181) 486 62 79 – – – 13 (818) (459) (586) (7) 167 213 174 440 561 16,878 2,692 3,434 – – – – (3,180) (554) (707) 13,698 2,138 2,727 – – – – 1,041 9 11 401 – – – (1,502) (1,916) (17,998) – 41 52 (84) (378) (482) – (38) (48) 158 53 68 (9,553) (1,546) (1,972) 210 142 181 13 – – (33) – – 246 – – – (899) (1,147) 1,147 – – – (1,147) – – – – (13) (7,601) (4,118) (5,253) (17,998) (13) – –	Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 4 Note 5 Note 8 Note 9 8,876 1,125 1,436 (13) 3,080 410 523 737 85 108 5,392 1,100 1,403 (716) (48) (61) (256) (3) (4) – (28) (36) 2 – – – 3 4 6 – – 16 10 13 123 (30) (38) (217) (142) (181) 486 62 79 – – – 13 (818) (459) (586) (7) 167 213 174 440 561 16,878 2,692 3,434 – – – – (3,180) (554) (707) 13,698 2,138 2,727 – – – – 1,041 9 11 401 – – – (1,502) (1,916) (17,998) – 41 52 (84) (378) (482) – (38) (48) 158 53 68 (9,553) (1,546) (1,972) 210 142 181 13 – – (33) – – 246 – – – (899) (1,147) 1,147 – – – (1,147) – – – – (13) (7,601) (4,118) (5,253) (17,998) (13) – –	Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 4 Note 5 Note 8 Note 9 8,876 1,125 1,436 (13) 3,080 410 523 737 85 108 5,392 1,100 1,403 (716) (48) (61) (256) (3) (4) – (28) (36) 2 – – – 3 4 6 – – 16 10 13 123 (30) (38) (217) (142) (181) 486 62 79 – – – 13 (818) (459) (586) (7) 167 213 174 440 561 16,878 2,692 3,434 – – – – (3,180) (554) (707) 13,698 2,138 2,727 – – – – 1,041 9 11 401 – – – (1,502) (1,916) (17,998) – 41 52 (84) (378) (482) – (38) (48) 158 53 68 (9,553) (1,546) (1,972) 210 142 181 13 – – (33) – – 246 – – – (899) (1,147) 1,147 – – – (1,147) – – – – (13) (7,601) (4,118) (5,253) (17,998) (13) – –	Note 9	The Enlarged Group 10,299 3,603 845 6,795 (777) (260) (36) 2 4 6 29 85 (398) 565 13 (1,404) 206 735
				–	–	–	20,312 (3,887)
13,698	2,138	2,727	–	–	–	–	16,425
							1,052 401 (19,914) 52 (566) (48) 226 (11,525) 391 13 (33) 246 – (1,147) (13)
						–	(30,865)

– IV-7 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 4 Note 5 Note 8 – 2,500 3,189 789 192 245 (1,857) – – – – – (3,865) (245) (313) 32 – – 9,193 573 731 (15,402) (346) (441) (1,486) (101) (129) 861 – – (40) – – (1) – – (13) – – 631 – – 1,009 – – (10,149) 2,573 3,282 – – – (4,052) 593 756 (17,998) (13) – 14,897 3,533 4,507 – (116) – – – 10,729 4,126 5,263 (17,998) (13) –	Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 4 Note 5 Note 8 – 2,500 3,189 789 192 245 (1,857) – – – – – (3,865) (245) (313) 32 – – 9,193 573 731 (15,402) (346) (441) (1,486) (101) (129) 861 – – (40) – – (1) – – (13) – – 631 – – 1,009 – – (10,149) 2,573 3,282 – – – (4,052) 593 756 (17,998) (13) – 14,897 3,533 4,507 – (116) – – – 10,729 4,126 5,263 (17,998) (13) –	Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 4 Note 5 Note 8 – 2,500 3,189 789 192 245 (1,857) – – – – – (3,865) (245) (313) 32 – – 9,193 573 731 (15,402) (346) (441) (1,486) (101) (129) 861 – – (40) – – (1) – – (13) – – 631 – – 1,009 – – (10,149) 2,573 3,282 – – – (4,052) 593 756 (17,998) (13) – 14,897 3,533 4,507 – (116) – – – 10,729 4,126 5,263 (17,998) (13) –	Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 4 Note 5 Note 8 – 2,500 3,189 789 192 245 (1,857) – – – – – (3,865) (245) (313) 32 – – 9,193 573 731 (15,402) (346) (441) (1,486) (101) (129) 861 – – (40) – – (1) – – (13) – – 631 – – 1,009 – – (10,149) 2,573 3,282 – – – (4,052) 593 756 (17,998) (13) – 14,897 3,533 4,507 – (116) – – – 10,729 4,126 5,263 (17,998) (13) –	Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 4 Note 5 Note 8 – 2,500 3,189 789 192 245 (1,857) – – – – – (3,865) (245) (313) 32 – – 9,193 573 731 (15,402) (346) (441) (1,486) (101) (129) 861 – – (40) – – (1) – – (13) – – 631 – – 1,009 – – (10,149) 2,573 3,282 – – – (4,052) 593 756 (17,998) (13) – 14,897 3,533 4,507 – (116) – – – 10,729 4,126 5,263 (17,998) (13) –	Pro forma adjustments The Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 The Target Group for the year ended 31 December 2014 Other pro forma adjustments HK$’ million RMB’ million HK$’ million Note 1 Note 2 Note 3 Note 4 Note 5 Note 8 – 2,500 3,189 789 192 245 (1,857) – – – – – (3,865) (245) (313) 32 – – 9,193 573 731 (15,402) (346) (441) (1,486) (101) (129) 861 – – (40) – – (1) – – (13) – – 631 – – 1,009 – – (10,149) 2,573 3,282 – – – (4,052) 593 756 (17,998) (13) – 14,897 3,533 4,507 – (116) – – – 10,729 4,126 5,263 (17,998) (13) –
		3,282	–	–	–
		756 4,507 –
10,729	4,126	5,263

– IV-8 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

Notes to the Unaudited Pro Forma Financial Information of the Enlarged Group:

The unadjusted consolidated statement of financial position of the Group as at 30 June 2015, the unadjusted consolidated statement of comprehensive income and the unadjusted consolidated statement of cash flows of the Group for the year ended 31 December 2014 are extracted from published interim report and published annual report of the Group as set out in Appendix II to the circular respectively.
The unadjusted consolidated statement of financial position of the Target Group as at 30 September 2015, the unadjusted consolidated statement of comprehensive income and the unadjusted consolidated statement of cash flows of the Target Group for the year ended 31 December 2014 are extracted from the accountants’ report of the Target Group as set out in Appendix III to this circular.
For the purposes of this Unaudited Pro Forma Financial Information, the unadjusted consolidated statement of comprehensive income and the unadjusted consolidated statement of cash flows of the Target Group for the year ended 31 December 2014 are translated into Hong Kong dollars using an exchange rate of RMB1 to HK$1.2758, being the average exchange rate adopted by the Group for the year ended 31 December 2014, and the unadjusted consolidated statement of financial position of Kunlun Gas as at 30 September 2015 are translated into Hong Kong dollars using an exchange rate of RMB1 to HK$1.2629, being the exchange rate adopted by the Group as at 30 June 2015. No representation is made that RMB denominated amounts have been, could have been or could be converted to HK$, or vice versa, at the rates applied or at any other rates or at all.
The adjustment represents the consideration for the Acquisition of approximately HK$17,998 million (denominated in RMB14,827,093,900 and for the purposes of this Unaudited Pro Forma Financial Information, translated at the exchange rate of RMB1 to HK$1.2139) to be satisfied by cash as if the Acquisition had been completed on 30 June 2015 for the unaudited pro forma consolidated statement of financial position and on 1 January 2014 for the unaudited pro forma consolidated statement of cash flows. No representation is made that RMB denominated amounts have been, could have been or could be converted to HK$, or vice versa, at the rates applied or at any other rates or at all. The consideration amount in Hong Kong dollars is subject to change with the spot rate of the payment dates.

In accordance with the Acquisition Agreement, the Gain or Loss during the Transition Period will be, regardless of whether distributed or not, entitled to or borne by PetroChina. The Gain or Loss during the Transition Period will be determined and settled as follows:

(i) if the net book asset value of the Target Group in the Completion Date Financial Statements is less than the net book asset value of the Target Group in the Audited Financial Statements as at the Valuation Reference Date after deducting the Special Dividend, the Gain or Loss during the Transition Period will represent a loss in net assets, which will be borne by PetroChina and will be paid by PetroChina to the Company;
(ii) if the net book asset value of the Target Group in the Completion Date Financial Statements is more than the net book asset value of the Target Group in the Audited Financial Statements as at the Valuation Reference Date after deducting the Special Dividend, the Gain or Loss during the Transition Period will represent a gain in net assets, to which PetroChina will be entitled and shall be paid by the Company to PetroChina.

Besides, save for the Special Dividend, if there is any increase or reduction in share capital, dividend distribution or asset disposal in respect of Kunlun Gas between the date of the signing of the Acquisition agreement and the Completion Date, the consideration shall be adjusted accordingly.

For the purpose of this Unaudited Pro Forma Financial Information, no consideration has been taken on these above potential adjustments.

The Consideration above will be funded by the internal cash of the Company and the other available sources of funds, including but not limited to debt financing and equity financing.

The adjustments for the payment of the consideration are not expected to have a continuing effect.

– IV-9 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

The adjustment represents payment for estimated acquisition-related costs (including fees to legal advisers, financial adviser, reporting accountants, valuer, printer and other expenses) of approximately HK$13 million in cash. The adjustments for the estimated acquisition-related costs are not expected to have a continuing effect.
Prior to the Acquisition, Kunlun Gas and the Company were under common control of PetroChina. Upon the completion of the Acquisition, the assets and liabilities of the Target Group will be accounted for in the consolidated financial statements of the Enlarged Group using merger accounting in accordance with Accounting Guideline 5 “Merger Accounting for Common Control Combination” issued by the Hong Kong Institute of Certified Public Accountant. The adjustment represents the consideration for the Acquisition, elimination of the share capital/paid in capital of Kunlun Gas and recognition of merger reserve.
The adjustment represents the elimination of inter-company sales and purchases between the Group and the Target Group for the year ended 31 December 2014. This adjustment is expected to have continuing effect on the Enlarged Group’s consolidated statement of comprehensive income.
The adjustment represents the reclassification of deposits in PetroChina, being the former immediate holding company of Kunlun Gas. This adjustment is expected to have continuing effect on the Enlarged Group’s consolidated statement of cash flows.
The adjustment represents the declaration of Special Dividend on 27 December 2015 by Kunlun Gas to PetroChina, being the existing immediate holding company of Kunlun Gas, in the amount of HK$1,214 million (denominated in RMB1 billion and translated at the exchange rate of RMB1 to HK$1.2139). The consideration for the Acquisition of approximately HK$17,998 million (denominated in RMB14,827,093,900 and translated at the exchange rate of RMB1 to HK$1.2139) has taken into account the Special Dividend declared by the Kunlun Gas to PetroChina as set out in the Acquisition Agreement and disclosed in the section headed “Letter from the Board”. The adjustment is not expected to have a continuing effect.
No adjustments have been made to the unaudited pro forma consolidated statement of financial position to reflect any trading results or other transactions of the Group and the Target Group entered into subsequent to 30 June 2015 and 30 September 2015 respectively. No adjustments have been made to the unaudited pro forma consolidated statement of comprehensive income and unaudited pro forma consolidated statement of cash flows to reflect any trading results or other transactions of the Enlarged Group entered into subsequent to 31 December 2014 respectively.

– IV-10 –

VALUATION REPORT

APPENDIX V

VALUATION REPORT

ON THE ENTIRE EQUITY INTEREST IN PETROCHINA KUNLUN GAS CO., LTD. IN RELATION TO THE PROPOSED ACQUISITION OF EQUITY INTEREST IN PETROCHINA KUNLUN GAS CO., LTD. BY KUNLUN ENERGY COMPANY LIMITED

Zhong Qi Hua Ping Zhi Zi [2015] No. 1435 Volume I, Book 1

Beijing China Enterprise Appraisals Co., Ltd.

(北京中企華資產評估有限責任公司)

20 December 2015

– V-1 –

VALUATION REPORT

APPENDIX V

CERTIFIED PUBLIC VALUER’S STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . .	CERTIFIED PUBLIC VALUER’S STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . .	V-3
SUMMARY OF THE VALUATION REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . .		V-4
VALUATION REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		V-6
I.	The principal, the equity holder and other users of the valuation report as
	specified in the engagement letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	V-6
II.	Purpose of valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	V-11
III.	Subject and scope of valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	V-11
IV.	Type and definition of valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	V-12
V.	Valuation reference date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	V-12
VI.	Basis of valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	V-12
VII.	Valuation methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	V-15
VIII.	Implementation and procedures of valuation . . . . . . . . . . . . . . . . . . . . . . .	V-19
IX.	Valuation assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	V-22
X.	Valuation conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	V-23
XI.	Explanation of special issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	V-24
XII.	Explanation of the restrictions on the use of the valuation report . . . . . . .	V-25
XIII.	Date of the valuation report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	V-25

– V-2 –

VALUATION REPORT

APPENDIX V

Certified Public Valuer’ Statement

I. We have observed the relevant laws, regulations and asset valuation standards and adhered to the principles of independence, objectiveness and fairness in the implementation of this asset valuation. Based on the information collected in the valuation process, the information set out in this valuation report is objective and we assume the corresponding legal liabilities for the reasonableness of the valuation conclusion.
II. The lists of assets and liabilities in relation to the subject of valuation have been reported and endorsed by the principal and the equity holder. The principal and the related parties shall be responsible for the validity, legality, completeness of the information provided and the appropriate use of the valuation report.
III. We have no existing or prospective interests in the subject of valuation of this valuation report; and we have no existing or prospective interests with the related parties or any bias towards the related parties.
IV. We have conducted on-site investigation, given due considerations to the status of the legal title of the subject of valuation of this valuation report and the relevant assets and examined the relevant information regarding the legal title of the subject of valuation and the relevant assets. We have duly disclosed issues identified and have requested the principal and the related parties to perfect the titles for the purpose of issuing the valuation report.
V. The analysis, judgments and conclusions set out in our valuation report are subject to the assumptions and limitations set out in the valuation report. Users of the valuation report should give due considerations to the assumptions, limitations and special issues set out in the valuation report and their impacts on the valuation conclusion.

– V-3 –

VALUATION REPORT

APPENDIX V

Summary of the Valuation Report on the Entire Equity Interest in PetroChina Kunlun Gas Co., Ltd. in Relation to the Proposed Acquisition of Equity Interest in PetroChina Kunlun Gas Co., Ltd. by Kunlun Energy Company Limited

Important

This summary is extracted from the full text of the valuation report. Please read carefully the valuation report for details and for a reasonable understanding of the valuation conclusion.

We, Beijing China Enterprise Appraisals Co., Ltd., under the engagement by Kunlun Energy Company Limited, conducted the valuation on the market value of the entire equity interest in PetroChina Kunlun Gas Co., Ltd as of the valuation reference date in accordance with the relevant laws, regulations and asset valuation standards as well as the principles of independence, objectiveness and fairness and in compliance with all necessary valuation procedures by adopting a generally accepted valuation approach. The details of the valuation are set out below.

Economic activity: Kunlun Energy Company Limited proposed to acquire the equity interest in PetroChina Kunlun Gas Co., Ltd..

Purpose of valuation: As Kunlun Energy Company Limited needs to understand the market value of the entire equity interest in PetroChina Kunlun Gas Co., Ltd., Beijing China Enterprise Appraisals Co., Ltd. has accepted the engagement by Kunlun Energy Company Limited to assess the market value of the entire equity interest in PetroChina Kunlun Gas Co., Ltd., so as to provide valuation consultation service to the principal.

Subject of valuation: The value of the entire equity interest in PetroChina Kunlun Gas Co., Ltd.

Scope of valuation: The scope of valuation included all assets and liabilities of the subject of valuation, in particular, the current assets, non-current assets, current liabilities and non-current liabilities etc.

Valuation reference date: 30 September 2015

Type of value: market value

Valuation methodology: market approach

– V-4 –

VALUATION REPORT

APPENDIX V

Valuation conclusion: the valuation conclusion set out in the valuation report is based on the valuation results derived from the market approach. The conclusion of the valuation is as follows:

As at the valuation reference date, the carrying amounts of total assets, total liabilities (comprising current liabilities and non-current liabilities), owner’s equity and owner’s equity attributable to the parent company of PetroChina Kunlun Gas Co., Ltd. calculated on a consolidated basis in accordance with the “PRC GAAP” were RMB28,353,752,000, RMB12,328,623,000, RMB16,025,129,000 and RMB11,332,387,000, respectively. The carrying amounts of total assets, total liabilities and net assets calculated on the parent company basis in accordance with the “PRC GAAP” were RMB15,087,812,000, RMB4,973,242,000 and RMB10,114,570,000, respectively.

Based on the valuation using the market approach, the entire equity interest amounted to RMB15,827,093,900, representing an increase of RMB5,712,523,900 or 56.48% as compared with the net assets calculated on the parent company basis.

The valuation of the entire equity interest in PetroChina Kunlun Gas Co., Ltd. amounted to RMB15,827,093,900.

This valuation report is solely for the purpose of providing a basis of value reference for the economic activity specified herein, and is valid for one year from the valuation reference date, being 30 September 2015.

Users of this valuation report should give due considerations to the assumptions, limitations and explanations of special issues set out in this valuation report and their impacts on the valuation conclusion.

– V-5 –

VALUATION REPORT

APPENDIX V

Valuation Report on the Entire Equity Interest in PetroChina Kunlun Gas Co., Ltd. in Relation to the Proposed Acquisition of Equity Interest in PetroChina Kunlun Gas Co., Ltd. by Kunlun Energy Company Limited

To: Kunlun Energy Company Limited:

We, Beijing China Enterprise Appraisals Co., Ltd., under your engagement, has compiled the valuation on the market value of the entire equity interest in PetroChina Kunlun Gas Co., Ltd. in relation to the proposed acquisition of equity interest in PetroChina Kunlun Gas Co., Ltd. by Kunlun Energy Company Limited as of 30 September 2015 in accordance with relevant laws, regulations, asset valuation standards and principles of independence, objectiveness and fairness and in compliance with all necessary valuation procedures required by adopting the market approach. Details of the asset valuation are set out below.

I. THE PRINCIPAL, ASSETS OWNER, THE APPRAISED ENTITY AND OTHER USERS OF THE VALUATION REPORT AS AGREED UNDER THE ENGAGEMENT LETTER

For the purposes of this valuation, the principal, assets owner and the appraised entity are Kunlun Energy Company Limited, PetroChina Company Limited and PetroChina Kunlun Gas Co., Ltd. respectively, and other users of the valuation report as specified in the engagement letter include, among others, approving authorities and regulatory bodies of the valuation industry.

(I) The principal and assets owner:

1. The principal

Name: Kunlun Energy Company Limited (hereinafter referred to as “Kunlun Energy”)

Address: 39th Floor, 118 Connaught Road West, Hong Kong and Clarendon House, 2 Church Street, Hamilton HM11, Bermuda.

Type: Joint-stock company with limited liability

Legal representative: Wu Enlai

Stock code: 00135.HK

Share capital: 8,072,390,300 shares

– V-6 –

VALUATION REPORT

APPENDIX V

Scope of business:

Kunlun Energy is an investment holding company. The principal activities of its subsidiaries, associates and joint ventures are the exploration and production of crude oil and natural gas in the PRC, the Republic of Kazakhstan, the Sultanate of Oman, the Republic of Peru, the Kingdom of Thailand and the Azerbaijan Republic, the sales of natural gas, liquefied natural gas (“LNG”) processing, LNG terminal business and transmission of natural gas in the PRC.

2. The assets owner

Name: PetroChina Company Limited (hereinafter referred to as “PetroChina”)

Address: 9 Dongzhimen North Street, Dongcheng District, Beijing, the PRC

Type: Joint-stock company with limited liability

Legal representative: Wang Yilin

Stock code: 601857

Share capital: 183,021,000,000 shares

Scope of business: PetroChina and its subsidiaries mainly engage in petroleum and natural gas-related activities, including (i) the exploration, development, production and sale of crude oil and natural gas; (ii) the refining, transportation, storage and marketing of crude oil and petroleum products; (iii) the production and sale of basic petrochemical products, derivative chemical products and other petrochemical products; and (iv) the transmission of natural gas, crude oil and refined products, and the sale of natural gas.

– V-7 –

VALUATION REPORT

APPENDIX V

(II) The appraised entity

Name: PetroChina Kunlun Gas Co., Ltd. (hereinafter referred to as “Kunlun Gas”)
Company address: 68 Jundu Road, Renhe Area, 9 Datun Road, Shunyi District, Chaoyang, Beijing, the PRC
Legal representative: Zhao Yongqi
Registered capital: RMB8,560,000,000
Type: Joint-stock company with limited liability (sole proprietorship of legal person)
Scope of principal business: (i) sales and transportation, storage, CNG, LPG; (ii) wholesales of feed gas and sales of propylene, propane and butane; (iii) sales of chemical products and light industry materials; (iv) technical development, consultation and services for gas products; and (v) investments in city gas projects, transfer of technology, leasing of equipment etc.
History:

On 10th September 2008, the registered capital of Kunlun Gas was increased by RMB3,000.00 million, which was contributed in cash by PetroChina Company Limited, and ABS Certified Public Accountant (安必盛會計師事務所) has issued a capital verification report, namely An Bi Sheng Yan Zi (2008) No. 7 (安必盛驗字 (2008)第7號), in respect thereof. Upon such capital increase, the registered capital of Kunlun Gas was changed to RMB3,060.00 million.

– V-8 –

VALUATION REPORT

APPENDIX V

On 18th March 2010, the registered capital of Kunlun Gas was increased by RMB3,000.00 million, which was contributed in cash by PetroChina Company Limited, and Asia Pacific CPA (Group) Co., Ltd. has issued a capital verification report, namely Ya Hui Jing Yan Zi (2010) No. 5 (亞會(京)驗字(2010)第5號), in respect thereof. Upon such capital increase, the registered capital of Kunlun Gas was changed to RMB6,060.00 million.

On 15th November 2010, the registered capital of Kunlun Gas was further increased by RMB2,500.00 million, which was contributed in cash by PetroChina Company Limited. Upon such capital increase, the registered capital of Kunlun Gas was changed to RMB8,560.00 million.

As of the valuation reference date, the shareholding structure of Kunlun Gas was as follows:

		Amount of	Shareholding
Name	of shareholder	contribution	percentage
		(RMB’0,000)	(%)
Petro	China Company Limited	856,000	100

– V-9 –

VALUATION REPORT

APPENDIX V

Corporate management structure

Adopted a three-tier management system, Kunlun Gas has a total of 34 second-tier units under financial accounting, which are responsible for managing third-tier project companies. The second-tier units are listed as follows:

==> picture [182 x 454] intentionally omitted <==

----- Start of picture text -----

Headquarter of PetroChina Kunlun Gas Co., Ltd.
Daqing PetroChina Kunlun Gas Co., Ltd.
Harbin Zhongqing Gas Co., Ltd.
Harbin PetroChina Kunlun Vehicle Natural Gas Co., Ltd.
PetroChina Kunlun Gas (Heilongjiang) Co., Ltd.
PetroChina Kunlun Gas (Jilin) Co., Ltd.
PetroChina Kunlun Gas (Liaoning) Co., Ltd.
PetroChina Kunlun Gas (Northwestern China) Co., Ltd.
Gansu PetroChina Kunlun Gas Co., Ltd.
PetroChina Kunlun Gas (Xinjiang) Co., Ltd.
Beijing Huayou United Gas Development Co., Ltd.
PetroChina Kunlun Gas (Northern China) Co., Ltd.
Tianjin PetroChina Kunlun Gas Co., Ltd.
PetroChina Kunlun Gas (Hebei) Co., Ltd.
PetroChina Kunlun Gas (Shanxi) Co., Ltd.
PetroChina Kunlun Gas (Shandong) Co., Ltd.
Linyi PetroChina Kunlun Natural Gas Transportation Co., Ltd.
PetroChina Kunlun Gas (Henan) Co., Ltd.
PetroChina Kunlun Gas (Subei) Co., Ltd.
PetroChina Kunlun Gas (Eastern China) Co., Ltd.
PetroChina Kunlun Gas (Anhui) Co., Ltd.
PetroChina Kunlun Gas (Hubei) Co., Ltd.
PetroChina Kunlun Gas (Southwestern China) Co., Ltd.
PetroChina Kunlun Gas (Hunan) Co., Ltd.
Hunan PetroChina Kunlun Natural Gas Transportation Co., Ltd.
Changde PetroChina Kunlun Gas Co., Ltd.
Yunnan PetroChina Kunlun Gas Co., Ltd.
Guangdong PetroChina Kunlun Liquefied Natural Gas Co., Ltd.
PetroChina Kunlun Gas (Guangxi) Co., Ltd.
PetroChina Kunlun Gas (Southern China) Co., Ltd.
PetroChina Kunlun Gas (Guizhou) Co., Ltd.
Liupanshui PetroChina Kunlun Gas Co., Ltd.
Guiyang PetroChina Kunlun Gas Co., Ltd.
Gas Technology Research Institution of PetroChina Kunlun Gas Co., Ltd.
PetroChina Kunlun Gas Co., Ltd.
----- End of picture text -----

Financial and business conditions over recent years (prepared under the “PRC GAAP”)

– V-10 –

VALUATION REPORT

APPENDIX V

RMB16,025,129,000 and RMB11,332,387,000, respectively; and revenue and net profit attributable to the parent company calculated on a consolidated basis amounted to RMB54,329,937,000 and RMB672,848,000 respectively for the year of 2014.

The carrying amounts of total assets, total liabilities (comprising current liabilities and non-current liabilities) and net assets of Kunlun Gas calculated on the parent company basis were RMB15,087,812,000; RMB4,973,242,000 and RMB10,114,570,000, respectively; and revenue and net profit of Kunlun Gas calculated on the parent company basis amounted to RMB30,563,659,000 and RMB269,559,000 respectively for the year of 2014.

The aforesaid financial data were extracted from the Audited Financial Statements on which an unqualified audit opinion was issued.

(III) Relationship among the principal, the assets owner and the appraised entity

PetroChina Kunlun Gas Co., Ltd. is a wholly-owned subsidiary of PetroChina Company Limited, which holds 100% equity interest in PetroChina Kunlun Gas Co., Ltd.. Kunlun Energy Company Limited intends to acquire the entire equity interest in PetroChina Kunlun Gas Co., Ltd..

(IV) Other users of the valuation report as agreed under the engagement letter

Other users of the valuation report as agreed under the engagement letter include, among others, approving authorities and regulatory authorities of the valuation industry.

II. PURPOSE OF VALUATION

As Kunlun Energy Company Limited needs to understand the market value of the entire equity interest in PetroChina Kunlun Gas Co., Ltd., Beijing China Enterprise Appraisals Co., Ltd. has accepted the engagement by Kunlun Energy Company Limited to assess the market value of the entire equity interest in PetroChina Kunlun Gas Co., Ltd., so as to provide valuation consultation service to the principal.

III. SUBJECT AND SCOPE OF VALUATION

(I) Subject of valuation

Based on the valuation purpose, the subject of valuation is the 100% equity interest in PetroChina Kunlun Gas Co., Ltd.

(II) Scope of valuation

Scope of valuation: all assets and liabilities involved in the subject of valuation including, among others, current assets, non-current assets (long-term equity investments, fixed assets, construction in progress, intangible assets and other non-current assets), current liabilities, non-current liabilities.

– V-11 –

APPENDIX V

VALUATION REPORT

The subject and scope of valuation involved in this valuation were consistent with those involved in the economic activity. As at the valuation reference date, the carrying amounts of assets and liabilities within the scope of valuation were extracted from the Audited Financial Statements on which an unqualified audit opinion was issued.

IV. TYPE AND DEFINITION OF VALUATION

Based on the purpose of valuation, the type of the subject of valuation is determined as market value.

Market value refers to the estimated value of the subject of valuation under normal and fair transaction reasonably conducted on the valuation reference date between a willing buyer and a willing seller without compulsion.

V. VALUATION REFERENCE DATE

The valuation reference date is 30 September 2015.

The valuation reference date is determined by the principal.

VI. BASIS OF VALUATION

(I) Basis of economic activity

The Letter of Intent on Integration Between the Company and PetroChina (《有關本公司與中國石油之整合意向書》) and relevant announcements published by Kunlun Energy Company Limited (Stock Code: 00135.HK).

(II) Basis of laws and regulations

Company Law of the People’s Republic of China (adopted at the 6th meeting of the 12th session of Standing Committee of the National People’s Congress on 28 December 2013);
Securities Law of the People’s Republic of China (adopted at the 18th meeting of the 10th session of Standing Committee of the National People’s Congress on 27 October 2005);

– V-12 –

VALUATION REPORT

APPENDIX V

Urban Real Estate Administration Law of the People’s Republic of China (adopted at the 29th meeting of the 10th session of Standing Committee of the National People’s Congress on 30 August 2007);
Land Administration Law of the People’s Republic of China (adopted at the 11th meeting of the 10th session of Standing Committee of the National People’s Congress on 28 August 2004);
Enterprise Income Tax Law of the People’s Republic of China (adopted at the 5th meeting of the 10th session of Standing Committee of the National People’s Congress on 16 March 2007);
Law of the People’s Republic of China on the State-Owned Assets of Enterprises (adopted at the 5th meeting of the 11th session of Standing Committee of the National People’s Congress on 28 October 2008);
Accounting Standards for Business Enterprises – Basic Standards (Order No.33 of the Ministry of Finance);
Detailed Rules for the Implementation of the Interim Regulation of the People’s Republic of China on Value Added Tax (Order No. 50 of the Ministry of Finance and the State Administration of Taxation);
Other laws, regulations and rules related to the valuation.

(III) Basis of valuation standards

Asset Valuation Standards – Basic Standards (Cai Qi [2004] No. 20);
Code of Professional Ethics for Asset Valuation – Basic Standards (Cai Qi [2004] No. 20);
Guiding Opinions for Certified Public Valuer on Concerns Relating to the Legal Title of Subjects under Valuation (Hui Xie [2003] No.18);
Asset Valuation Standards – Valuation Procedures (Zhong Ping Xie [2007] No. 189);
Asset Valuation Standards – Working Papers (Zhong Ping Xie [2007] No. 189);
Guiding Opinions for Types of Value of Assets under Valuation (Zhong Ping Xie [2007] No. 189);
Guidelines on Quality Control of Business Operations of Valuation Institutions (Zhong Ping Xie [2010] No. 214);
Asset Valuation Standards – Enterprise Value (Zhong Ping Xie [2011] No. 227);

– V-13 –

VALUATION REPORT

APPENDIX V

Code of Professional Ethics for Asset Valuation – Independence (Zhong Ping Xie [2012] No. 248);
Asset Valuation Standards – Valuation Report (Zhong Ping Xie [2011] No. 230);
Asset Valuation Standards – Engagement Letter (Zhong Ping Xie [2011] No. 230).

(IV) Basis of ownership

State-owned asset ownership certificates;
State-owned land use rights certificates;
Building ownership certificates;
Vehicle licenses; and
Other relevant certificates of property rights.

(V) Basis of pricing

Deposit and lending benchmark rate and foreign exchange rate as of the valuation reference date;
Future operation forecasts of the appraised entity;
On-site investigation records and other relevant valuation information collected by the valuer; and
Other information related to this asset valuation.

(VI) Other basis of reference

Asset list and declaration form of asset valuation provided by the appraised entity;
Audited Financial Statements;
Wind financial terminal;
Data base of Beijing China Enterprise Appraisals Co., Ltd..

– V-14 –

VALUATION REPORT

APPENDIX V

VII. VALUATION METHODOLOGY

Basic methods for valuation of enterprise value mainly include income approach, market approach and asset-based approach.

The income approach in valuation of enterprise value refers to an approach to determine the value of the subject of valuation by capitalising or discounting projected income. Two common methods used in the income approach are the discounted dividend approach and discounted cash flow approach.

The market approach in valuation of enterprise value involves comparison between the subject of valuation and comparable listed companies or comparable transactions, so as to determine the approach to the value of the subject of valuation. Two common methods used in the market approach are the listed company comparison method and transaction case comparison method.

The asset-based approach in valuation of enterprise value seeks to determine the approach to appraise the value of the subject of valuation on the basis of a reasonable assessment of the assets and liabilities of the enterprise, as reflected in the on-and-off balance sheet, of the enterprise as of the valuation reference date.

As prescribed under the Asset Valuation Standards – Enterprise Value , the certified public valuers engaged in valuation of enterprise value shall select one or more basic asset valuation approaches by analysing the applicability of three basic approaches, namely, the income approach, the market approach and the asset-based approach, of asset valuation in light of the relevant conditions, such as valuation purpose, valuation subject, valuation type and information collection.

The appraised entity, PetroChina Kunlun Gas Company Limited, is currently under rapid development. Its investments, market share, sales revenue and net profit in the coming years are likely to change significantly. Therefore, its assets and liabilities on the valuation reference date cannot accurately reflect the market value of the company. The asset-based approach, which is based on the assets and liabilities as of the valuation reference date, is not applicable to the appraised entity given its current development. Meanwhile, the asset-based approach cannot reflect the distribution network, the large, diverse and full-of-potentials customer base, the continuously improving risk management and internal control, the experienced management team and other intrinsic value of the company.

In the PRC fuel gas operation sector, the upstream gas source is operated mainly by three operators, namely China National Petroleum Corporation, China Petrochemical Corporation and China National Offshore Oil Corporation, which are subject to strong resources control and stringent regulatory policy. The downstream sales business has certain public attributes, with its prices mainly set by the government. The National Development and Reform Commission recently published the “Guidance Opinion on the Establishment of a Tiered Natural Gas Price for Residential Gas Consumption” (《國家發展改革委關於建立健全居民生活用氣階梯價格制

– V-15 –

APPENDIX V

VALUATION REPORT

度的指導意見》) which plans to establish a tiered natural gas price for residential gas consumption. However, the details of rules and timing for the implementation remain unclear. Moreover, from the perspective of the upstream gas source, the price of natural gas in the international market has been continuously fluctuating and showed a decreasing trend in recent years. Impact of the above matters on the future revenue of Kunlun Gas cannot be reflected in the valuation using the income approach.

The market approach directly reflects the intrinsic value of the corporate equity interests from the level of investors’ recognition of the companies in the fuel gas industry. PetroChina Kunlun Gas Co., Ltd is highly comparable with Hong Kong-listed companies in the fuel gas industry as they are relatively similar in corporate positioning, business lines, product portfolios, associated risks and income margin. In addition, the information of the comparable companies is publicly available and complete which provides a solid base for selecting the market approach. Furthermore, the purpose of the valuation is to provide reference of value for the acquisition of the equity interests in PetroChina Kunlun Gas Co., Ltd. by Kunlun Energy, a company listed on the Hong Kong Stock Exchange, and the valuation result calculated by way of market approach which is based on comparable companies listed in Hong Kong is closer to the actual transaction prices.

Having considered the above as a whole, the results of the valuation using the market approach was selected as the valuation conclusion in this evaluation.

(I) Introduction of valuation approaches

Market approach is a valuation method whereby the value of the appraised subject is determined by comparing the appraised subject’s enterprise value, shareholder’s equity and security assets with those of reference enterprises, and market transaction cases. Listed company comparison method and transaction case comparison method are the two methods most commonly employed under market approach.

Listed company comparison method refers to the method whereby an appropriate value ratio or economic indicator calculated by analysing the operating and financial data of the companies listed in the capital market and operated in the same or similar industry as the appraised subject and compared with that of the appraised subject in a comparative analysis so as to determine the value of the appraised subject.

The transaction case comparison method refers to the method which analyses the purchases and sale, acquisition and merger cases of companies in the industry that is the same as or similar to that of the appraised entity and acquires and analyses the data of such transaction cases to calculate an appropriate value ratio or economic indicator so as to determine the value of appraised subject on the basis of comparison and analysis of the appraised entity.

In view of the limited M&A cases of companies in the fuel gas industry, coupled with the fact that certain conditions which are related to M&A cases and may impact the transaction price are not publicly available, thus making analysis on relevant discount or premium impossible, M&A case method is hardly applicable.

– V-16 –

VALUATION REPORT

APPENDIX V

Listed company comparison method is adopted in this valuation, for which enterprise value (EV) multiple is adopted as the value ratio:

EV/EBITDA = Enterprise Value/Earnings before Interest, Tax, Depreciation and Amortisation

The adoption of EV/EBITDA can eliminate the difference arising from different capital intensiveness and deprecation methods.

EV multiple (EV/EBITDA), though similar to PE ratio, is designated to measure enterprise value. EV/EBITDA multiple is driven by the following factors: price earnings growth (PEG), return on invested capital (ROIC), tax rate and weighted average cost of capital (WACC). In most circumstances, all companies in the industry are generally subject to the same tax policies and exposed to similar operational risk, with insignificant differences in tax rate and capital cost. Due to lack of such similarity, ROIC and PEG may have comparatively significant impact on EV/EBITDA.

(II) Implementation procedures for valuation through market approach

Identify the basic information on the appraised enterprise, including the appraised subject and equity interest particulars thereof, such as nature of enterprise, capital size, scope of business, business volume, market share, growth potential, etc.
Select reference enterprises to be used for analysis of comparison with the appraised enterprise.
Compared with the listed companies in Hong Kong which are engaged in the fuel gas industry, PetroChina Kunlun Gas Co., Ltd. is relatively similar in terms of institutional positioning, business scope, product mix, risk exposure and rate of return. Furthermore, the purpose of the valuation is to provide reference of value for the acquisition of the equity interests in PetroChina Kunlun Gas Co., Ltd. by Kunlun Energy, a company listed on the Hong Kong Stock Exchange, and the valuation result calculated by way of market approach which is based on comparable companies in Hong Kong is closer to the actual transaction prices. By comparing the companies in the fuel gas industry trading in the Hong Kong market with Kunlun Gas in respect of scope of business, product mix, length of industrial value chain, location, revenue and assets size, comparable listed companies with relatively similar business structure, revenue size and asset size were selected. Accordingly, the companies comparable to Kunlun Gas, which mainly include China Gas Holding Limited (China Gas), Towngas China Company Limited (Towngas China), ENN Energy Holdings Limited (ENN Energy) and China Resources Gas Group Limited (China Resources Gas), were selected as the comparable companies for this valuation.
Conduct analysis of business conditions and financial position of the selected reference enterprises or transaction cases, carry out comparison of the same with those of the appraised enterprise, and make necessary adjustment accordingly.

– V-17 –

VALUATION REPORT

APPENDIX V

Firstly, financial information on the reference enterprises, such as industry statistics data, annual reports of listed companies and research reports issued by relevant research institutes, is collected. And then, the aforesaid business and financial information obtained from public channels is analysed and adjusted where necessary, so that the financial information on reference enterprises is made as accurate and objective as practical, and thus comparable with those of appraised enterprise.

Select, calculate and adjust value ratios. Following analysis of and adjustments to the financial data of the reference enterprises, select EV multiple (EV/EBITDA) as the value ratio, and make necessary analysis of and adjustments to the value ratios based on the above work.

Enterprise value (EV) multiple is adopted as the value ratio:

EV/EBITDA = Enterprise Value/Earnings before Interest, Tax, Depreciation and Amortisation.

EV multiple (EV/EBITDA), though similar to PE ratio, is designated to measure enterprise value. The adoption of EV/EBITDA multiple is mainly due to the following reasons. Firstly, it will not be affected by the difference in income tax rates and thus making the listed companies in different countries and different markets more comparable. Secondly, it will not be affected by the difference in capital structures, such that any changes in the capital structures of the companies will have no effect on the valuation, thus facilitating the comparison of valuation of different companies. Lastly, the impact of non-cash costs such as depreciation and amortization were eliminated, the enterprise value can be reflected more accurately.

Based on the audited financial data of the comparable companies for 2014 and the market capitalisation of the capital market as at the valuation reference date, EV/EBITDAs of the comparable companies, after adjustments to non-operating assets and liabilities, were as follows:

					China
			Towngas	ENN	Resources
	China	Gas	China	Energy	Gas
EV/EBITDA		12.3	9.0	12.4	8.0

The main factors which affect EV/EBITDA include earnings growth, return on invested capital, tax rate and cost of capital of a company. By analyzing and adjusting the aforesaid factors of the comparable companies and Kunlun Gas, Kunlun Gas’s EV/EBITDA was calculated to be 8.51. The value of operating assets of Kunlun Gas was then derived through multiplying EV/EBITDA by the corresponding earnings before interest, depreciation and amortization (excluding non-recurring gains and losses) of Kunlun Gas.

– V-18 –

VALUATION REPORT

APPENDIX V

Draw valuation conclusion based on value ratios. After value ratios of the reference enterprises are calculated and adjusted, the needed equity value and enterprise value are calculated using such value ratios multiplied by the corresponding financial data or index of the appraised subject.

Following calculation of the value of its operating assets, the value of its non-operating assets and that of its unconsolidated subsidiaries were also calculated. EV was derived by summing up the value of operating assets, the value of non-operating assets and the value of unconsolidated subsidiaries of the appraised enterprise. Then, equity value was calculated as EV less interest-bearing debts, minority interests, etc.. Finally, entire equity value attributable to the owner of Kunlun Gas was arrived at after deducting market liquidity discount.

Entire equity value attributable to the owner = Value of operating assets + Value of surplus assets (Value of unconsolidated subsidiaries) + Value of non-opearting assets – Interest-bearing debts – Equity value attributable to minority interests – liquidity discount value

VIII. IMPLEMENTATION AND PROCEDURES OF VALUATION

During the period from 8th October 2015 to 10th December 2015, the valuer conducted a valuation on the involved assets and liabilities of the appraised subject. The main implementation process and procedures of this valuation are as follows:

(I) Acceptance of engagement

On 20 September 2015, an agreement was reached between us and the principal in relation to the basic matters of this valuation, including the purpose of valuation, the subject and scope of valuation and the valuation reference date, as well as the rights and obligations of each party. In addition, a corresponding valuation plan was devised through negotiation.

(II) Preparatory work

Formulation of the valuation plan
Establishment of the valuation team
Implementation of the project training
3.1 Training program for the personnel of the appraised entity

In order to facilitate the financial and assets management personnel of the appraised entity to understand and properly complete the declaration procedures of assets valuation-related materials so as to ensure the quality of declaration materials of this valuation, we prepared relevant training materials for the appraised entity, launched training program for relevant personnel of the appraised entity, and specially designated certain personnel to answer questions arising from completing and declaring assets valuation-related materials.

– V-19 –

VALUATION REPORT

APPENDIX V

3.2 Training program for the valuer

In order to ensure the quality of this valuation, improve the work efficiency and consistently implement the proposed operation plan for assets valuation, it is explained to the project team the background of economic activity of this valuation, the characteristics of the involved assets of the appraised subject, the technological approach of this valuation and the specific implementation requirements.

(III) On-site Investigation

During the period from 8 October 2015 to 30 November 2015, the valuer conducted a requisite inspection and verification for the involved assets and liabilities of the appraised subject, and performed a necessary due diligence on the operating conditions and management situation of the appraised entity.

Verification of assets
1.1 Instructed the appraised entity to complete relevant forms and collect information which should be provided to us.

The valuer instructed financial and asset management personnel of the appraised entity to register and report assets accurately and in detail on the “Declaration Form for Assets to Be Appraised (資產評估申報表)” provided by us based on their self-check on the involved assets and in accordance with their completion requirement and the information list. We also collected documents evidencing the title of the appraised assets and documents and information which reflect the performance, condition and economic and technical indicators.

1.2 Initially examined and improved the Declaration Form for Assets to Be Appraised (資產評估申報表) completed and declared by the appraised entity

The valuer understood the detailed status of the specific valuation objects included in the valuation scope by looking over the relevant materials, and carefully examined the various “Declaration Forms for Assets to Be Appraised (資產評估申報表)”, checked whether there is any blank filled incompletely or any contents filled incorrectly, or any asset items unclear. The valuer also checked whether there is any items missed in the “Declaration Form for Assets to Be Appraised (資產評估申報表)”, etc. based on their experience and the information available, and reported the same, if any, to the appraised entity for improvements.

1.3 On-site investigation

Based on the type, quantity and allocation status of the assets included in the scope of this valuation, the valuer conducted an on-site investigation on various assets with the assistance of relevant personnel of the appraised entity in accordance with the relevant requirements of the asset valuation standards. Different investigation methods were employed depending upon different nature and characteristics of the assets.

– V-20 –

VALUATION REPORT

APPENDIX V

1.4 Supplementation, revision and improvement of the Declaration Form for Assets to Be Appraised (資產評估申報表)

Based on the on-site inspection and proper communication with relevant personnel of the appraised entity, the valuer further improved the “Declaration Form for Assets to Be Appraised (資產評估申報表)” so as to match the accounts and the declared information with the actual assets.

1.5 Verification of title documents

The valuer examined title documents of various assets including buildings and land use rights included in the scope of this valuation, and requested the appraised entity to verify or provide relevant title documents where the title information was incomplete or the title was unclear.

Due diligence

The valuer carried out necessary due diligence work to develop full understanding of the operating conditions, management situation and risk exposures of the appraised entity. The main contents of due diligence work were as follows:

2.1 History, substantial shareholders and their shareholding percentages, necessary titles and management structure of the appraised entity;
2.2 Assets, financial position, operating conditions and management situation of the appraised entity;
2.3 Business plan and development blueprint of the appraised entity;
2.4 Past valuation and transactions of the appraised subject and appraised entity;
2.5 Macro and regional economical factors which may impact the operations of the appraised entity;
2.6 Development and prospects of the industry in which the appraised entity operates;
2.7 Other relevant information.

(IV) Collection of information

The valuer collected valuation information based on the specific conditions of the valuation projects, such as information obtained independently and directly from channels including the market, information obtained from the related parties including the principal, and information obtained from government departments, various professional institutions and other relevant authorities. The valuer also performed the necessary analysis, generalisation and re-organisation on the valuation information collected to form the basis of the evaluation and estimation.

– V-21 –

VALUATION REPORT

APPENDIX V

(V) Evaluation and estimation

Taking into account the specific conditions of different types of assets, the valuer selected the corresponding formula and parameters to perform analysis, calculation and judgment according to the valuation method chosen, and formed the preliminary valuation conclusion. The person-in-charge of the project summed up the preliminary valuation conclusion of different types of assets, and compiled and formed the draft of the valuation report.

(VI) Internal review

According to the requirement of our Administrative Measures for Valuation Procedure, upon the completion of the first review of the draft of the valuation report, the person-in-charge of the project formed and submitted the initial draft of the valuation report to the company for internal review. Upon the completion of the internal review, the person-in-charge of the project formed the draft for comments of the valuation report, which was submitted to the client for comments. After reasonable amendments based on the feedback, the official valuation report was formed and submitted to the principal.

IX. VALUATION ASSUMPTION

The assumptions adopted by the analysis and estimation of the valuation report are set out as follows:

It is assumed that after the valuation reference date, the appraised entity will continue to operate on an on-going basis;
It is assumed that after the valuation reference date, there will be no material changes to the political, economic and social landscapes of the countries and regions where the appraised entity is located;
It is assumed that after the valuation reference date, there will be no material changes to the macroeconomic policies, industrial policies and regional development policies of the countries and regions where the appraised entity is located except for what is publicly known;
It is assumed that after the valuation reference date, there will be no material changes to the tax bases, tax rates, and policy-driven charges related to the appraised entity except for what is publicly known;
It is assumed that after the valuation reference date, the management of the appraised entity will remain responsible, stable and capable of performing their duties;
It is assumed that the appraised entity will be in compliance with relevant laws and regulations, and there will be no material non-compliance issues which may affect the development of the company and realisation of its profit;

– V-22 –

VALUATION REPORT

APPENDIX V

It is assumed that after the valuation reference date, the accounting policies adopted by the appraised entity will remain consistent in material respects with the accounting policies adopted by the appraised entity when preparing the valuation report;
It is assumed that after the valuation reference date, there will be no material changes to the business scope and operating model of the appraised entity based on the existing management model and management standards except for that otherwise disclosed in the valuation report; and
It is assumed that after the valuation reference date, there will be no force majeure which will have a material adverse effect on the appraised entity.

Subject to the assumptions set out above, the valuation conclusion contained in this valuation report is tenable as at the valuation reference date. If there is any material change in such assumptions, the signing certified public valuer and this valuation institution will not assume any liability for any other different valuation conclusion deduced due to changes in assumptions.

X. VALUATION CONCLUSION

Based on the valuation under the market approach, the entire equity interest amounted to RMB15,827,093,900, representing an appreciation of RMB5,712,523,900 or 56.48% as compared with the net assets calculated on the parent company basis.

The valuation of the entire equity interest in PetroChina Kunlun Gas Co., Ltd. amounted to RMB15,827,093,900.

– V-23 –

VALUATION REPORT

APPENDIX V

XI. EXPLANATION OF SPECIAL ISSUES

Set out below are relevant issues identified during the process of valuation which may affect the valuation conclusion but could not be appraised or estimated by the valuer with its professional proficiency and capacity:

(I) This valuation conclusion just reflects the prevailing price determined under the open market principle for the valuation purpose, without considering the impact on the valuation due to any pledge and guarantee being undertaken and any additional price which a special counterparty may pay, nor taking into account the impact on asset price due to change of national macroeconomic policies, or the occurrence of a natural disaster and other force majeure causes. In case of change of foregoing conditions, the valuation conclusion generally becomes invalid.
(II) This report is prepared based on relevant economic activity documents, business licenses, property ownership certificates, financial statements, accounting evidences, asset particulars in relation to the valuation and other relevant information as provided by the management and relevant personnel of the principal and the equity holder. The principal and the equity holder should be responsible for the truthfulness, legitimacy and completeness of the information provided. In case there is any deficiency which may affect the asset valuation, not being mentioned by the entity and could not be known by the valuer based on their professional experience under normal circumstances, the valuation institution and the valuer should bear no responsibility.
(III) Upon inspection and verification, there is deficiency in the property and land use right certificates within the scope of valuation.

During the process of this valuation, the application for new property certificates, and name change and renewal of property certificates and land certificates are still in progress subsequent to the valuation reference date. When evaluating the property and land use rights, we have not taken account of the effect of relevant costs and expenses incurred when applying for such certificates on property valuation. In other words, in respect of such new certificate application, and renewal of property certificates and land use certificates, this valuation is made based on the condition on the valuation reference date when the ownership is clear.

(IV) Subsequent to the valuation reference date, PetroChina Kunlun Gas Co., Ltd. intends to distribute profits of RMB1,000 million to its shareholders. This above matter is not considered under this valuation.

– V-24 –

VALUATION REPORT

APPENDIX V

XII. EXPLANATION OF RESTRICTIONS ON THE USE OF THE VALUATION REPORT
(I) The use of this valuation report is limited to the purposes and uses specified in the valuation report;
(II) This valuation report is only used by the users specified in the valuation report;
(III) All or any part of contents of this valuation report to be extracted, cited, or disclosed at public media are subject to the review of the relevant contents by the valuation institution, except for those required by laws, regulations or otherwise agreed by the involved parties;
(IV) This valuation report is effective upon being signed by certified public valuers and sealed by the valuation institution;
(V) In case of any change in asset quantity and consideration standard subsequent to the valuation reference date which will affect the valuation conclusion, this valuation conclusion cannot be used directly and should be amended or conducted once again; and
(VI) The valuation conclusion disclosed in this valuation report is only valid for the economic activity illustrated in the valuation report. The valuation conclusion is valid for one year from the valuation reference date.

XIII. DATE OF THE VALUATION REPORT

This valuation report is issued on 20 December 2015.

Legal representative: Quan Zhongguang

Certified public valuer: Liu Haisheng

Certified public valuer: Zhang Ning Certified public valuer: Zhang Meijie

Beijing China Enterprise Appraisals Co., Ltd.

20 December 2015

– V-25 –

GENERAL INFORMATION

APPENDIX VI

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes the particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief, the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2. DIRECTORS’ INTERESTS

As at the Latest Practicable Date, the interests or short positions of the Directors and chief executive of the Company in the shares, underlying shares and debentures of the Company or any associated corporation (within the meaning of Part XV of the SFO) which (a) are required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which any such Director and chief executive of the Company is taken or deemed to have under such provisions of the SFO); or which (b) are required, pursuant to section 352 of the SFO, to be entered into the register maintained by the Company; or which (c) are required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers under the Listing Rules, to be notified to the Company and the Stock Exchange are set out below.

2.1 Ordinary Shares of HK$0.01 Each of the Company

	Number of	Capacity and	Percentage of
Name	Shares	Nature of Interests	Issued Shares
Zhang Bowen (note)	15,336,000	Beneficial owner	0.190%
Cheng Cheng (note)	7,772,000	Beneficial owner	0.096%
Li Kwok Sing Aubrey
(note)	1,000,000	Beneficial owner	0.012%

Note: The interests held by Mr Zhang Bowen, Mr Cheng Cheng and Mr Li Kwok Sing Aubrey represent long position in the Shares of the Company.

– VI-1 –

GENERAL INFORMATION

APPENDIX VI

2.2 Share Options

Shares options were granted to the Directors and chief executives of the Company under the share option scheme of 2002, details of which are set out below:

Outstanding at 1 January 2015 ’000 2,400 2,400 2,200 1,500 1,500 2,000 400 400 400	Number of Share Options Granted during the six months ended 30 June 2015 Exercised during the six months ended 30 June 2015 Lapsed during the six months ended 30 June 2015 ’000 ’000 ’000 – – (2,400) – – – – – – – – (1,500) – – – – – – – – (400) – – (400) – – (400) – – (5,100) – – (6,000) – – – – – – – – (6,000) – – (11,100)	Number of Share Options Granted during the six months ended 30 June 2015 Exercised during the six months ended 30 June 2015 Lapsed during the six months ended 30 June 2015 ’000 ’000 ’000 – – (2,400) – – – – – – – – (1,500) – – – – – – – – (400) – – (400) – – (400) – – (5,100) – – (6,000) – – – – – – – – (6,000) – – (11,100)	Number of Share Options Granted during the six months ended 30 June 2015 Exercised during the six months ended 30 June 2015 Lapsed during the six months ended 30 June 2015 ’000 ’000 ’000 – – (2,400) – – – – – – – – (1,500) – – – – – – – – (400) – – (400) – – (400) – – (5,100) – – (6,000) – – – – – – – – (6,000) – – (11,100)	Outstanding at 30 June 2015 ’000 – 2,400 2,200 – 1,500 2,000 – – –
13,200 6,000 6,000 11,500	– – – –	– – – –	(5,100) (6,000) – –	8,100 – 6,000 11,500
23,500	–	–	(6,000)	17,500
36,700	–	–	(11,100)	25,600

– VI-2 –

GENERAL INFORMATION

APPENDIX VI

Save as disclosed above, as at the Latest Practicable Date, none of the Directors, the chief executive of the Company nor their associates, had any other interests or short positions in the shares, underlying shares and debentures of the Company or any associated corporations (within the meaning of Part XV of the SFO) which (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which any such Director or the chief executive of the Company is taken or deemed to have under such provisions of the SFO); or which (b) were required, pursuant to section 352 of the SFO, to be entered in the register maintained by the Company; or which (c) were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules, to be notified to the Company or the Stock Exchange, and none of the Directors, nor their spouse or children under the age of 18, had any right to subscribe for securities of the Company, or had exercised any such right since 6 August 2015.

2.3 Competing Business

Save as disclosed below, as at the Latest Practicable Date, none of the Directors and their respective associates had any interest in a business which competes or may compete with the businesses of the Group (as would be required to be disclosed under Rule 8.10 of the Listing Rules if each of them were a controlling shareholder).

Name of	Name of	Nature of	Nature of
director	company	interest	competing business
Wu Enlai	PetroChina	Secretary to the	Exploration, development
		Board of	and product and
		directors	marketing of crude oil
			and natural gas

As the Board is independent of the board of the above entity, the Company has therefore been capable of carrying on its businesses independently of, and at arm’s length from, the above business.

2.4 Additional Disclosure of Interest

There was no contract or arrangement subsisting as at the Latest Practicable Date, in which any of the Directors was materially interested and which was significant in relation to the businesses of the Group.

Save as disclosed herein, none of the Directors, directly or indirectly, has had any interest in any assets which had since 6 August 2015 been acquired or disposed of by or leased to any member of the Group, or were proposed to be acquired or disposed of by or leased to any member of the Group.

– VI-3 –

GENERAL INFORMATION

APPENDIX VI

3. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, the register of substantial shareholders maintained under section 336 of the SFO, showed that the Company has been notified of the following interests, being 5% or more of the Company’s issued share capital. These interests are in addition to those disclosed above in respect of the Directors and the chief executive of the Company.

			Percentage of
			the total
	Number of Shares		number of
Name	Direct Interest	Indirect Interest	Shares in issue
Sun World Limited(1)	4,708,302,133 (L)	–	58.33%
PetroChina Hong Kong
(BVI) Ltd. (“PetroChina
(BVI)”)(1)	–	4,708,302,133 (L)	58.33%
PetroChina Hong Kong
Ltd. (“PetroChina
Hong Kong”)(1)	–	4,708,302,133 (L)	58.33%
PetroChina Company
Limited (“PetroChina”)(1)	–	4,708,302,133 (L)	58.33%
China National Oil and
Gas Exploration and
Development Corporation
(“CNODC”)(2)	–	277,432,000 (L)	3.43%
CNPC International Ltd.
(“CNPCI”)(2)	–	277,432,000 (L)	3.43%
Fairy King Investments Ltd	277,432,000 (L)	–	3.43%
CNPC(1)(2)	–	4,985,734,133 (L)	61.76%

Notes:

(1) Sun World is a wholly-owned subsidiary of PetroChina (BVI), which in turn is wholly-owned by PetroChina Hong Kong. PetroChina Hong Kong is wholly owned by PetroChina, which is in turn owned as to 86.47% by CNPC. Accordingly, CNPC is deemed to have interest in the 4,708,302,133 shares (L) held by Sun World. Mr. Wu Enlai, the Chairman of the Company and Mr. Zhang Bowen, the President of the Company are also directors of Sun World, which is a substantial shareholder of the Company (within the meaning of Part XV of the SFO).
(2) Fairy King Investments Ltd. is a wholly-owned subsidiary of CNPCI, which in turn is wholly owned by CNODC, which is in turn owned as to 100.00% by CNPC. Accordingly, CNPC is deemed to have interest in the 277,432,000 shares (L) held by Fairy King Investments Ltd.

Save as disclosed above, as at the Latest Practicable Date, the Directors and the chief executive of the Company were not aware of any person (other than a Director or chief executive of the Company) who had any interest or short position in the Shares or underlying Shares of the Company which would fall to be disclosed to the Company under Divisions 2 and 3 of Part XV of the SFO.

– VI-4 –

GENERAL INFORMATION

APPENDIX VI

As at the Latest Practicable Date, the Directors and the chief executive of the Company were not aware of any person (other than a Director or chief executive of the Company) who was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group, or any options in respect of such capital.

4. SERVICE CONTRACT

As at the Latest Practicable Date, none of the Directors, directors of any member of the Enlarged Group or proposed directors has any existing service contract or proposed service contract with the Company or any of its subsidiaries (excluding contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation)).

5. MATERIAL CONTRACTS

The following contracts (not being entered into the ordinary course of business) have been entered into by the members of the Enlarged Group within two years preceding the Latest Practicable Date and which are or may be material:

The Company has issued two senior notes to improve the debt financing structure:

		Nominal		Annualised
Items	Date of issue	Amount	Tenor year	Interest Rate
		US$ ‘million		%
Senior notes due 2020
(Stock code: 5510)	13 May 2015	500	5	2.875
Senior notes due 2025
(Stock code: 5511)	13 May 2015	500	10	3.750

Note: Please refer to the announcements on the issue of senior notes published by the Company on the website of the Stock Exchange and the website of the Company in April and May 2015.

The Company entered into a letter of intention with the Target Group and PetroChina on 25 November 2015 regarding the proposed transaction between the Company and PetroChina in relation to the integration with the Target Group. Please refer to the announcement of the Company dated 25 November 2015 for more details.

Save as disclosed above, no material contracts (not being a contract entered into the ordinary course of business carried on by the Enlarged Group) have been entered into by any member of the Enlarged Group within two years preceding the Latest Practicable Date which are or may be material.

– VI-5 –

GENERAL INFORMATION

APPENDIX VI

6. LITIGATION

So far as the Directors are aware, as at the Latest Practicable Date, neither the Company nor any of the members of the Enlarged Group was engaged in any litigation or arbitration of material importance and no litigation or claim of material importance was pending or threatened against the Company or any of the members of the Enlarged Group.

7. MATERIAL ADVERSE CHANGE

Save for the profit warning as disclosed in the announcement of the Company dated 20 January 2016, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 30 June 2015 (being the date to which the latest published reviewed financial statements of the Company have been made up) and up to the Latest Practicable Date.

8. QUALIFICATION AND CONSENT OF EXPERTS

The following are the qualifications of the experts who have given opinion or advice which is contained in this circular:

Name	Qualification
Beijing China Enterprise	a licensed valuer under the law of PRC to carry out
Appraisals Co. Ltd.	valuation and appraisal services in relation to assets,
	securities and futures contracts
ING Bank N.V.	a registered institution under the SFO registered to carry
	out Type 1 (dealing in securities), Type 4 (advising on
	securities) and Type 6 (advising on corporate finance)
	regulated activities under the SFO
KPMG	Certified Public Accountants

Each of the experts referred to above has given and has not withdrawn its written consent to the issue of this circular with the expert’s statement included in the form and context in which it is included.

As at the Latest Practicable Date, the experts referred to above did not have any shareholding in any member of the Group nor did they have any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

None of the experts referred to above, directly or indirectly, has had any interest in any assets which had since 31 December 2014 (being the date to which the latest published audited financial statements of the Company were made up) been acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.

– VI-6 –

GENERAL INFORMATION

APPENDIX VI

9. MISCELLANEOUS

(a) The company secretary of the Company is Lau Hak Woon. Lau Hak Woon is a member of Hong Kong Institute of Certified Public Accountants in Hong Kong; fellow member of The Chartered Association of Certified Accountants in UK and Certified Management Accountant of the Society of Management Accountants of Ontario in Canada.
(b) The registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM11, Bermuda.
(c) The share registrar of the Company is Tricor Secretaries Limited.
(d) All references to times in this circular refer to Hong Kong times.
(e) The English text of this circular shall prevail over the Chinese text, in case of any inconsistency.

10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during business hours at the registered office of the Company at 39th Floor, 118 Connaught Road West, Hong Kong from the date of this circular up to and including 5 February 2016:

(a) the memorandum and articles of the Company;
(b) the purchase agreement dated 6 May 2015, New York time, entered into among the Company, Citigroup Global Markets Inc. and Morgan Stanley & Co. International plc, as representatives of the initial purchasers (including Citigroup Global Markets Inc., Morgan Stanley & Co. International plc, Credit Suisse Securities (Europe) Limited, Goldman Sachs (Asia) L.L.C., the Hongkong and Shanghai Banking Corporation Limited and Standard Chartered Bank), in connection with the issuance of the US$500,000,000 aggregate principal amount of 2.875% senior notes due 2020 issued by the Company and the US$500,000,000 aggregate principal amount of 3.750% senior notes due 2025 issued by the Company (“ Senior Notes ”);
(c) the written agreements between the Company as issuer of the Senior Notes and The Bank of New York Mellon as trustee of the Senior Notes will be issued;
(d) the letter of intention with the Target Group and PetroChina on 25 November 2015 regarding the proposed transaction between the Company and PetroChina in relation to the integration with the Target Group;
(e) the Acquisition Agreement;
(f) the Master Agreement;

– VI-7 –

GENERAL INFORMATION

APPENDIX VI

(g) the First Supplemental Agreement;
(h) the Second Supplemental Agreement;
(i) the Third Supplemental Agreement;
(j) the Fourth Supplemental Agreement;
(k) the Fifth Supplemental Agreement;
(l) the annual report of the Company for the year ended 31 December 2012;
(m) the annual report of the Company for the year ended 31 December 2013;
(n) the annual report of the Company for the year ended 31 December 2014;
(o) the interim report of the Company for the six months ended 30 June 2015;
(p) the Audited Financial Statements;
(q) the announcement of the Company dated 7 November 2014;
(r) the circular of the Company dated 11 November 2014;
(s) the announcement of the Company dated 28 April 2015;
(t) the announcement of the Company dated 7 May 2015;
(u) the letter from the Independent Financial Adviser;
(v) the accountants’ report of the Target Group prepared by KPMG, the text of which is set out in Appendix III to this circular;
(w) the report on the unaudited pro forma financial information of the Enlarged Group issued by KPMG, the text of which is set out in Appendix IV to this circular; and
(x) this circular.

– VI-8 –

NOTICE OF SGM

==> picture [26 x 21] intentionally omitted <==

==> picture [246 x 39] intentionally omitted <==

==> picture [119 x 10] intentionally omitted <==

----- Start of picture text -----

(Stock Code: 00135.HK)
----- End of picture text -----

NOTICE OF SPECIAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that the Special General Meeting of Kunlun Energy Company Limited (the “ Company ”) will be convened at President’s Suite, 38th Floor, World Trade Centre, 280 Gloucester Road, Causeway Bay, Hong Kong on 18 February 2016 (Thursday) at 10:00 a.m. for the purpose of considering and, if thought fit, passing with or without modifications, the following resolutions as ordinary resolutions of the Company:–

Unless otherwise indicated, capitalised terms used in this notice and the following resolutions shall have the same meanings as those defined in the circular of the Company dated 23 January 2016 relating to, amongst other things, the Acquisition Agreement and the Revised Caps Subject to Approval (the “ Circular ”).

“ THAT :
(a) the entering into of the Acquisition Agreement and the transactions contemplated thereunder, details of which are more particularly described in the Circular, be and is hereby approved, ratified and confirmed; and
(b) the Board be and is hereby authorised to implement the transactions under the Acquisition Agreement.”
“ THAT :
(a) the continuing connected transactions under categories (a), (d) and (e) as set out in the “Letter from the Board” in the Circular be and are hereby approved;
(b) the Revised Caps Subject to Approval for the continuing connected transactions under categories (a), (d) and (e) for the for the two years ending 31 December 2017 as set out in section VII (3) of the “Letter from the Board” in the Circular be and are hereby approved; and
(c) any one director (if execution under the common seal of the Company is required, any two directors) of the Company be and is/are hereby authorised for and on behalf of the Company to sign, and where required, to affix the common seal of the Company to any documents, instruments or agreements, and to do any acts and things deemed by him to be necessary or expedient in order to give effect to and implement the continuing connected transactions under categories (a), (d) and (e) and the Revised Caps Subject to Approval for the continuing connected transactions under categories (a), (d) and (e) for the two years ending 31 December 2017.”

By Order of the Board Lau Hak Woon Company Secretary

Hong Kong, 23 January 2016

– SGM-1 –

NOTICE OF SGM

Notes:

The register of members of the Company will be closed for registration of transfer of shares from Tuesday, 16 February 2016 to Wednesday, 17 February 2016, both days inclusive. In order to qualify for attending and voting at the SGM, all transfer documents should be lodged for registration with Tricor Secretaries Limited, the Company’s branch share registrar and transfer office in Hong Kong, at Level 22 Hopewell Centre 183 Queen’s Road East Hong Kong before 4:00 p.m. on Monday, 15 February 2016.
A member entitled to attend and vote at the meeting is entitled to appoint one or more proxies to attend and vote in his/her stead. A proxy need not be a member of the Company. Completion and return of the form of proxy will not preclude a member from attending and voting in person at the meeting or any adjourned meeting should he so wish.
To be valid, the form of proxy, together with a power of attorney or other authority (if any) under which it is signed or a notarially certified copy of such power of attorney or authority, must be deposited at the Company’s principal office at 39th Floor, 118 Connaught Road West, Hong Kong not less than 48 hours before the time appointed for holding the meeting or adjourned meeting. The form of proxy must be completed strictly in accordance with the instructions set out therein.
CNPC, PetroChina and its associates and Mr. Zhang Bowen will abstain from voting in respect of Resolutions Nos. 1 and 2.
Unless otherwise defined, terms use in this notice shall have the same meanings as those defined in the Circular.

As at the date of this notice, the board of directors of the Company comprises Mr. Wu Enlai as Chairman and Executive Director, Mr. Zhao Yongqi as Chief Executive Officer and Executive Director, Mr. Zhang Bowen as President and Executive Director, Mr. Cheng Cheng as Senior Vice President and Executive Director and Dr. Lau Wah Sum, Mr. Li Kwok Sing Aubrey and Dr. Liu Xiao Feng as Independent Non-Executive Directors.

– SGM-2 –

AI assistant

Raymond Industrial Limited — Proxy Solicitation & Information Statement 2016

49052_rns_2016-01-22_ceaa435c-c991-4002-a244-6e62b107f9af.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

(1) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF PETROCHINA KUNLUN GAS CO., LTD. AND

Financial Advisers

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

(Stock Code: 00135.HK)

Independent Non-executive Directors

(1) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF PETROCHINA KUNLUN GAS CO., LTD. AND (2) PROPOSED CONTINUING CONNECTED TRANSACTIONS

I. INTRODUCTION

II. THE ACQUISITION AGREEMENT

2. Parties:

3. Assets to be acquired

4. Consideration

LETTER FROM THE BOARD

5. Basis of Consideration Determination

6. Conditions Precedent

7. Completion

III. SHAREHOLDING THE TARGET GROUP

COMPANY AND

IV. BUSINESS AND FINANCIAL INFORMATION OF KUNLUN GAS

1. Key Business Information of Kunlun Gas

2. Key Financial Information of Kunlun Gas

LETTER FROM THE BOARD

V. FINANCIAL EFFECT OF THE ACQUISITION ON THE GROUP

Assets and Liabilities

Profit

Working Capital

Indebtedness

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Gearing Ratio

VI. REASONS FOR AND BENEFITS OF THE ACQUISITION

The Acquisition will better define the Company’s business positioning and growth strategies.

LETTER FROM THE BOARD

The Acquisition will facilitate the Company’s establishment of an integrated investment, financing and operating entity for the natural gas distribution and comprehensive utilisation business and help avoid the horizontal competition between the Company and PetroChina.

The Acquisition will further improve our business structure and increase our business growth.

The Acquisition will generate synergies among the businesses, enhance operational efficiency and increase our market competitiveness.

VII. CONTINUING CONNECTED TRANSACTIONS ARISING FROM THE ACQUISITION

Master Agreement and the subsequent supplemental agreements in relation to the provision of general products and services by the CNPC Group to the Enlarged Group and vice versa

1. Provision of products and services by the CNPC Group to the Target Group

(iv) property leases.

LETTER FROM THE BOARD

2. Provision of products and services by the Target Group to the CNPC Group

LETTER FROM THE BOARD

3. Proposed Revised Caps in relation to the continuing connected transactions

4. Reasons for and benefits of the new continuing connected transactions

LETTER FROM THE BOARD

5. Basis of determining of the Revised Caps

(ii) Category (c) – Rental Payments

6. Pricing determination

(ii) Category (c) – Rental Payments

(iii) Category (d) – Oil and Gas Products

LETTER FROM THE BOARD

LETTER FROM THE BOARD

VIII. LISTING RULES IMPLICATIONS

LETTER FROM THE BOARD

IX. INFORMATION ON THE PARTIES

1. Information on the Group

2. Information on the Target Group

3. Information on PetroChina

X. SPECIAL GENERAL MEETING

XI. RECOMMENDATION

LETTER FROM THE BOARD

XII. ADDITIONAL INFORMATION

(1) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF PETROCHINA KUNLUN GAS CO., LTD. AND

(2) PROPOSED CONTINUING CONNECTED TRANSACTIONS AND REVISED CAPS SUBJECT TO APPROVAL

Yours faithfully,

Independent Board Committee

(1) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF PETROCHINA KUNLUN GAS CO., LTD AND (2) PROPOSED CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

TERMS OF REFERENCE

PRINCIPAL FACTORS AND REASONS CONSIDERED

Raymond Industrial Limited Proxy Solicitation & Information Statement 2016