**Exhibit 99.1**

** **

** **

** **

 
|   | **Mitteldeutsche Braun-  kohlengesellschaft mbH,  Theissen**                                                                                                                                                                                                 |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                         |
|   | Report on the audit of  the consolidated financial statements in accordance with German GAAP and of  the US GAAP reconciliations as of December 31, 2005 and 2004 and  for each of the years in the three year period ended December 31, 2005 |

 

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**Mitteldeutsche Braunkohlengesellschaft mbH**

 

**Index to Consolidated Financial Statements**

 
|                                                                                                       |   |   |
|------------------------------------------------------------------------------------------------------------|--------|--------|
| Report of  Independent Auditors                                                                            |   |   |
|                                                                                                       |   |   |
| Consolidated  Financial Statements                                                                         |   |   |
|                                                                                                       |   |   |
| Consolidated  Statements of Income for the years ended December 31, 2005, 2004 and 2003                    |   |   |
|                                                                                                       |   |   |
| Consolidated  Balance Sheets at December 31, 2005 and 2004                                                 |   |   |
|                                                                                                       |   |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003                |   |   |
|                                                                                                       |   |   |
| Consolidated Statements of  Shareholders’ Equity for the years ended December 31, 2005, 2004 and 2003 |   |   |
|                                                                                                       |   |   |
| Notes to the Consolidated Financial Statements                                                             |   |   |

 

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**REPORT OF INDEPENDENT AUDITORS**

 

 

Tothe Shareholders of

MIBRAG mbH

Theissen, Germany

 

 

                Wehave audited the accompanying consolidated balance sheets of MitteldeutscheBraunkohlengesellschaft mbH and its subsidiaries (MIBRAG or Group) as ofDecember 31, 2005 and 2004, and the related consolidated statements of income,shareholders’ equity and cash flows for each of the years in the three-yearperiod ended December 31, 2005. These consolidated financial statements are theresponsibility of the Group’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

 

                Weconducted our audits in accordance with auditing standards generally acceptedin Germany and the United States of America. Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

                Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of MIBRAGas of December 31, 2005 and 2004 and the consolidated results of its operationsand cash flows for each of the years in the three-year period ended December31, 2005, in conformity with accounting principles generally accepted inGermany.

 

1

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                Generallyaccepted accounting principles in Germany vary in certain significant respectsfrom generally accepted accounting principles in the United States of America.We have audited the effect of applying accounting principles generally acceptedin the United States of America on the results of operations for each of theyears in the three-year period ended December 31, 2005 and on shareholders’equity as of December 31, 2005 and 2004. In our opinion, the effect of applyingaccounting principles generally accepted in the United States of America on theresults of operations for each of the years in the three-year period endedDecember 31, 2005 and shareholders’ equity as of December 31, 2005 and 2004 isfairly presented in Note C to the consolidated financial statements.

 

 

 

 

**Deloitte & Touche**GmbH

Wirtschaftspruefungsgesellschaft

 

Leipzig,Germany

February 6, 2006

 

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**Mitteldeutsche Braunkohlengesellschaft mbH**

**Consolidated Statements of Income**

**in thousands of Euro (TEUR)**

 
| ** **                                                                          | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                          | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Sales revenue                                                                       |       | 291,108                     |       | 293,564 |   | 303,856 |   |
| Changes in inventories                                                              |       | 5,838                       |       | (1,133 | ) | 5,372 |   |
| Own costs capitalized                                                               |       | 11,668                      |       | 12,913 |   | 1,467 |   |
| Other operating income                                                              |       | 40,007                      |       | 38,402 |   | 42,719 |   |
| Total performance                                                                   |       | 348,621                     |       | 343,746 |   | 353,414 |   |
| ** **                                                                          | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of materials                                                                   |       | 82,729                      |       | 82,469 |   | 90,829 |   |
| Personnel expenses                                                                  |       | 101,573                     |       | 103,535 |   | 99,992 |   |
| Depreciation on intangible and tangible fixed assets                                |       | 69,747                      |       | 66,594 |   | 69,582 |   |
| Other operating expenses                                                            |       | 45,072                      |       | 44,859 |   | 50,158 |   |
| Total operating expenses                                                            |       | 299,121                     |       | 297,457 |   | 310,561 |   |
|                                                                                |       |                        |       |   |   |   |   |
| Operating result                                                                    |       | 49,500                      |       | 46,289 |   | 42,853 |   |
| ** **                                                                          | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income from associated company and from  companies in which participations are held | ** ** | 208                         | ** ** | 178 | ** ** | 920 | ** ** |
| Income from financial assets                                                        |       | 1,266                       |       | 1,565 |   | 1,848 |   |
| Depreciation on financial assets and short term  investments                        |       | 0                           |       | (1 | ) | (390 | ) |
| Interest income                                                                     |       | 1,726                       |       | 2,754 |   | 3,461 |   |
| Interest expense                                                                    |       | (10,510                     | )          | (9,324 | ) | (10,435 | ) |
| Net income from ordinary activities                                                 |       | 42,190                      |       | 41,461 |   | 38,257 |   |
|                                                                                |       |                        |       |   |   |   |   |
| Income taxes                                                                        |       | 2,705                       |       | 3,263 |   | 47 |   |
| Other taxes                                                                         |       | 5,724                       |       | 5,584 |   | 5,150 |   |
| Net  income                                                                         |       | 33,761                      |       | 32,614 |   | 33,060 |   |

 

See accompanying Notes to Consolidated FinancialStatements,

 

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**Mitteldeutsche Braunkohlengesellschaft mbH**

**Consolidated Balance Sheets**

**in thousands of Euro (TEUR)**

 
| ** **                                                                  | ** ** | **At December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                                  | ** ** | **2005**            | ** ** | **2004** | ** ** |
| **ASSETS**                                                                  |       |                |       |   |   |
| **Non-current  assets**                                                     |       |                |       |   |   |
| Intangible  assets                                                          |       |                |       |   |   |
| Concessions,  trade marks, patents and licenses                             |       | 248,460             |       | 256,148 |   |
|                                                                        |       |                |       |   |   |
| Property,  plant and equipment                                              |       |                |       |   |   |
| 1. Land  and mining property                                           |       | 150,485             |       | 158,377 |   |
| 2. Buildings                                                           |       | 45,148              |       | 46,180 |   |
| 3. Strip  mines                                                        |       | 55,694              |       | 47,210 |   |
| 4. Technical  equipment and machinery                                  |       | 195,345             |       | 187,609 |   |
| 5. Factory  and office equipment                                       |       | 24,894              |       | 23,853 |   |
| 6. Payments  on account and assets under construction                  |       | 19,658              |       | 20,672 |   |
|                                                                        |       | 491,224             |       | 483,901 |   |
| Financial  assets                                                           |       |                |       |   |   |
| 1. Participations  (including associated company)                      |       | 12,594              |       | 12,398 |   |
| 2. Loan  receivable from participation                                 |       | 4,549               |       | 4,924 |   |
| 3. Other  loan receivables                                             |       | 10,626              |       | 15,288 |   |
|                                                                        |       | 27,769              |       | 32,610 |   |
|                                                                        |       |                |       |   |   |
| **Total  non-current assets**                                               |       | 767,453             |       | 772,659 |   |
|                                                                        |       |                |       |   |   |
| Overburden                                                                  |       | 156,033             |       | 149,813 |   |
|                                                                        |       |                |       |   |   |
| **Current  assets**                                                         |       |                |       |   |   |
| Inventories                                                                 |       |                |       |   |   |
| 1. Raw  materials and supplies                                         |       | 5,303               |       | 5,956 |   |
| 2. Finished  goods                                                     |       | 1,095               |       | 1,477 |   |
|                                                                        |       | 6,398               |       | 7,433 |   |
| Receivables  and other assets                                               |       |                |       |   |   |
| 1. Trade  receivables                                                  |       | 34,780              |       | 31,151 |   |
| 2. Receivables  from enterprises in which participations are held |       | 577                 |       | 521 |   |
| 3. Other  assets                                                       |       | 13,502              |       | 13,372 |   |
|                                                                        |       | 48,859              |       | 45,044 |   |
| Investments                                                                 |       |                |       |   |   |
| Other  investments                                                          |       | 36,534              |       | 36,537 |   |
|                                                                        |       |                |       |   |   |
| Cash  and cash equivalents                                                  |       | 2,774               |       | 19,248 |   |
|                                                                        |       |                |       |   |   |
| **Total  current assets**                                                   |       | 94,565              |       | 108,262 |   |
|                                                                        |       |                |       |   |   |
| Prepaid  expenses                                                           |       | 7,792               |       | 7,511 |   |
| **TOTAL  ASSETS**                                                           |       | 1,025,843           |       | 1,038,245 |   |

* *

Seeaccompanying Notes to Consolidated Financial Statements

 

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**Mitteldeutsche Braunkohlengesellschaft mbH**

**Consolidated Balance Sheets**

**in thousands of Euro (TEUR)**

 
| ** **                                                                                                                                            | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                                                                                                            | ** ** | **2005**            | ** ** | **2004** | ** ** |
| **SHAREHOLDERS’  EQUITY AND LIABILITIES**                                                                                                        |       |                |       |   |   |
| **Shareholders’  Equity**                                                                                                                        |       |                |       |   |   |
| Subscribed  capital                                                                                                                                   |       | 30,700              |       | 30,700 |   |
|                                                                                                                                                  |       |                |       |   |   |
| Capital  reserve                                                                                                                                      |       | 293,191             |       | 293,191 |   |
|                                                                                                                                                  |       |                |       |   |   |
| Balance Sheet Profit:                 TEUR  43,544; 2004: TEUR 35,296 |       |                |       |   |   |
| Less: Interim dividend paid:    TEUR 22,000; 2004: TEUR 12,500                                                                         |       | 21,544              |       | 22,796 |   |
|                                                                                                                                                  |       |                |       |   |   |
| Minority  interest                                                                                                                                    |       | (35,002             | )          | (37,850 | ) |
| thereof  net income for the year:                                                                                                                     |       |                |       |   |   |
| TEUR  13,013 (2004: TEUR 11,500)                                                                                                                      |       |                |       |   |   |
| **Total  Shareholders’ Equity**                                                                                                                  |       | 310,433             |       | 308,837 |   |
|                                                                                                                                                  |       |                |       |   |   |
| Special  item for investment subsidies and incentives                                                                                                 |       | 308,430             |       | 330,158 |   |
|                                                                                                                                                  |       |                |       |   |   |
| Provisions                                                                                                                                            |       |                |       |   |   |
| 1. Accruals  for pensions and similar obligations                                                                                                |       | 10,601              |       | 11,391 |   |
| 2. Taxation  accruals                                                                                                                            |       | 1,259               |       | 3,531 |   |
| 3. Environmental  and mining provisions                                                                                                          |       | 197,441             |       | 192,500 |   |
| 4. Other  accruals                                                                                                                               |       | 20,128              |       | 22,606 |   |
|                                                                                                                                                  |       | 229,429             |       | 230,028 |   |
| Liabilities                                                                                                                                           |       |                |       |   |   |
| 1. Liabilities  to banks                                                                                                                         |       | 147,584             |       | 140,078 |   |
| 2. Payments  received                                                                                                                            |       | 59                  |       | 88 |   |
| 3. Trade  payables                                                                                                                               |       | 15,075              |       | 14,555 |   |
| 4. Payables  to participations                                                                                                                   |       | 2,613               |       | 2,253 |   |
| 5. Other  payables                                                                                                                               |       | 12,205              |       | 12,231 |   |
|                                                                                                                                                  |       | 177,536             |       | 169,205 |   |
|                                                                                                                                                  |       |                |       |   |   |
| Deferred  income                                                                                                                                      |       | 15                  |       | 17 |   |
| **TOTAL  SHAREHOLDERS’ EQUITY AND LIABILITIES**                                                                                                  |       | 1,025,843           |       | 1,038,245 |   |

* *

See accompanying Notes to Consolidated Financial Statements

 

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**MitteldeutscheBraunkohlengesellschaft mbH**

**Consolidated Statements of Cash Flows**

**in thousands ofEuro (TEUR)**

** **
| ** **                                                            | ** ** | **Year  ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                            | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income for the year                                               |       | 33,761                       |       | 32,614 |   | 33,060 |   |
| Depreciation on  tangible, intangible and financial assets       |       | 69,747                       |       | 66,594 |   | 69,582 |   |
| Write-up of tangible  assets                                          |       | 0                            |       | 0 |   | (3,976 | ) |
| Increase in medium- and  long-term accruals                           |       | 6,094                        |       | 7,949 |   | 5,803 |   |
| Other non-cash income  and expenses                                   |       | (21,923                      | )          | (21,663 | ) | (22,334 | ) |
| **Cash  earnings according to DVFA/SG**                               |       | 87,679                       |       | 85,494 |   | 82,135 |   |
|                                                                  |       |                         |       |   |   |   |   |
| Increase/decrease in  overburden                                      |       | (6,220                       | )          | 1,014 |   | (5,520 | ) |
| Gains/losses from disposal  of assets                                 |       | (268                         | )          | 198 |   | (571 | ) |
| Increase/decrease in  inventories, trade receivables and other assets |       | (3,058                       | )          | 11,827 |   | 57,988 |   |
| Increase in trade  payables and other liabilities                     |       | (6,147                       | )          | (16,955 | ) | (48,741 | ) |
| **Cash flow  from operating activities**                              |       | 71,986                       |       | 81,578 |   | 85,291 |   |
|                                                                  |       |                         |       |   |   |   |   |
| Capital expenditures on  fixed assets                                 |       | (69,845                      | )          | (47,603 | ) | (58,041 | ) |
| Proceeds from disposal  of fixed assets                               |       | 731                          |       | 367 |   | 471 |   |
| Acquisition of  securities                                            |       | (1                           | )          | (364 | ) | (2 | ) |
| Proceeds from disposals  of securities                                |       | 5,037                        |       | 5,120 |   | 3,954 |   |
| **Cash flow  used by investing activities**                           |       | (64,078                      | )          | (42,480 | ) | (53,618 | ) |
|                                                                  |       |                         |       |   |   |   |   |
| Disbursements to  minority shareholders                               |       | (10,165                      | )          | (9,623 | ) | (9,356 | ) |
| Disbursements to  shareholders (dividends and distributions)     |       | (22,000                      | )          | (12,500 | ) | (10,500 | ) |
| Cash inflow from  borrowing                                           |       | 71,000                       |       | 0 |   | 0 |   |
| Cash outflow from  repayment of bank loans                            |       | (63,217                      | )          | (21,956 | ) | (17,490 | ) |
| **Cash flow  used by financing activities**                           |       | (24,382                      | )          | (44,079 | ) | (37,346 | ) |
|                                                                  |       |                         |       |   |   |   |   |
| **Change in  cash and cash equivalents**                              |       | (16,474                      | )          | (4,981 | ) | (5,673 | ) |
| Opening balance of cash  and cash equivalents                         |       | 19,248                       |       | 24,229 |   | 29,902 |   |
| **Closing  balance of cash and cash equivalents**                     |       | 2,774                        |       | 19,248 |   | 24,229 |   |
|                                                                  |       |                         |       |   |   |   |   |
| **Supplemental  information:**                                        |       |                         |       |   |   |   |   |
| Income taxes paid                                                     |       | 4,931                        |       | 67 |   | 23 |   |
| Interest paid                                                         |       | 10,786                       |       | 9,109 |   | 9,730 |   |

** **

See accompanying Notesto Consolidated Financial Statements

 

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**Mitteldeutsche Braunkohlengesellschaft mbH**

**Consolidated Statements ofShareholders’ Equity**

**in thousands of Euro (TEUR)**

 
| ** **                             | ** ** | **Subscribed  capital** | ** ** | **Capital  increase** | ** ** | **Capital  reserve** | ** ** | **Balance  sheet  profit/  net profit** | ** ** | **Minority  Interest** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-------------------------|------------|-----------------------|------------|----------------------|------------|-----------------------------------------|------------|------------------------|------------|-----------|------------|
| **Balance as of January 1, 2003**      |       |                    |       |                  |       | 293,221              |       | 3,790                                   |       | (42,569                | )          | 285,142   |       |
|                                   |       |                    |       |                  |       |                 |       |                                    |       |                   |       |      |       |
| Net income 2003                        |       |                    |       |                  |       |                 |       | 20,862                                  |       | 12,198                 |       | 33,060    |       |
| Transfer to capital reserve            |       |                    |       |                  |       | (30                  | )          | 30                                      |       |                   |       |      |       |
| Distributions                          |       |                    |       |                  |       |                 |       | (10,500                                 | )          |                   |       | (10,500   | )          |
| Disbursements to minority shareholders |       |                    |       |                  |       |                 |       |                                    |       | (9,356                 | )          | (9,356    | )          |
| **Balance as of December 31, 2003**    |       | 30,700                  |       | 0                     |       | 293,191              |       | 14,182                                  |       | (39,727                | )          | 298,346   |       |
|                                   |       |                    |       |                  |       |                 |       |                                    |       |                   |       |      |       |
| Net income 2004                        |       |                    |       |                  |       |                 |       | 21,114                                  |       | 11,500                 |       | 32,614    |       |
| Transfer from capital reserve          |       |                    |       |                  |       |                 |       |                                    |       |                   |       |      |       |
| Distributions                          |       |                    |       |                  |       |                 |       | (12,500                                 | )          |                   |       | (12,500   | )          |
| Disbursements to minority shareholders |       |                    |       |                  |       |                 |       |                                    |       | (9,623                 | )          | (9,623    | )          |
| **Balance as of December 31, 2004**    |       | 30,700                  |       | 0                     |       | 293,191              |       | 22,796                                  |       | (37,850                | )          | 308,837   |       |
|                                   |       |                    |       |                  |       |                 |       |                                    |       |                   |       |      |       |
| Net income 2005                        |       |                    |       |                  |       |                 |       | 20,748                                  |       | 13,013                 |       | 33,761    |       |
| Transfer from capital reserve          |       |                    |       |                  |       |                 |       |                                    |       |                   |       |      |       |
| Distributions                          |       |                    |       |                  |       |                 |       | (22,000                                 | )          |                   |       | (22,000   | )          |
| Disbursements to minority shareholders |       |                    |       |                  |       |                 |       |                                    |       | (10,165                | )          | (10,165   | )          |
| **Balance as of December 31, 2005**    |       | 30,700                  |       | 0                     |       | 293,191              |       | 21,544                                  |       | (35,002                | )          | 310,433   |       |

 

See accompanying Notes to Consolidated FinancialStatements

 

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**NOTE A                 ORIGINATION AND NATURE OFBUSINESS**

 

ORIGINATION: For decades,raw brown coal is being mined in the Mid-German area by MitteldeutscheBraunkohlengesellschaft mbH (“MIBRAG” or “MIBRAG mbH” or “Company”) and itspredecessors. The current MIBRAG mbH was created from the split-up of MIBRAGAG, which had been previously owned by the Treuhandanstalt (the Germangovernment privatization agency), into three separate entities. EffectiveJanuary 1, 1994 a consortium comprising of NRG Energy, Inc. (“NRG”), WashingtonGroup International Inc. (formerly Morrison Knudsen Corporation) (“WashingtonGroup”) and PowerGen plc. (“PowerGen”) jointly acquired 99 % of the activemining, power generation and related assets and liabilities from theTreuhandanstalt through its Dutch holding company, MIBRAG B.V. The remaining 1% was transferred on December 18, 1996 from the German government privatizationagency to Lambique Beheer B.V., Amsterdam, a subsidiary of NRG, WGI NetherlandsB.V. (formerly Morrison Knudsen B.V.), Amsterdam, and PowerGen NetherlandsB.V., Amsterdam, in equal portions (1/3 %) for each partner. In April 2001Washington Group and NRG performed a share buyback of PowerGen’s 33,33 %interest in MIBRAG; thus, resulting in Washington Group and NRG each owning 50% of MIBRAG.

 

NATURE OF BUSINESS: Theoperations of MIBRAG mbH include two open-cast brown coal mines in Profen andSchleenhain and rights on future mining reserves. Operations also include over200 mega watts of power generation. A significant portion of the sales ofMIBRAG is made pursuant to long-term coal and energy supply contracts.

 

 

**NOTE B                 SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

BASIS OF PRESENTATION: The consolidatedfinancial statements of MIBRAG mbH and subsidiaries have been prepared in accordancewith the German Commercial Code, which represents accounting principlesgenerally accepted in Germany (“German GAAP”). German GAAP varies in certainsignificant respects from accounting principles generally accepted in theUnited States of America (“US GAAP”). Application of US GAAP would haveaffected the results of operations for each of the years in the three-yearperiod ended December 31, 2005 and shareholders’ equity as of December 31, 2005and 2004 to the extent summarized in note C to the consolidated financialstatements.

 

Thefigures shown in the following notes are stated in thousand of Euros (TEUR).

 

PRINCIPLES OF CONSOLIDATION: All materialcompanies in which MIBRAG has legal or effective control are fullyconsolidated. In 2005, MIBRAG consolidated 6 (2004: 6, 2003: 6) domesticsubsidiaries.

 

 

8

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One significant investment, theMitteldeutsche Umwelt- und Entsorgungs GmbH, Braunsbedra (“MUEG”), in whichMIBRAG has an ownership interest of 50 %, is accounted for in accordance withthe equity method. This investment is referred to as an associated company inthese financial statements.

 

All other investments are included at costand are referred to as participations in these financial statements.

 

Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.

 

USE OF ESTIMATES: The preparation offinancial statements in conformity with generally accepted accountingprinciples necessarily requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the balance sheet dates and the reportedamounts of revenues and expenses during the reported periods. Actual resultscould differ from those estimates.

 

TOTAL COST METHOD: The income statement hasbeen presented according to the total cost (or type of expenditure) format ascommonly used in Germany. According to this format, production and all otherexpenses incurred during the period are classified by type of expenses.

 

REVENUE RECOGNITION: The Company recognizesrevenues from sales of products at the time persuasive evidence of anarrangement exists, delivery has occurred, the price to the customer is fixed,and collection is reasonably assured. When these four conditions are met, theCompany recognizes revenues as it considers that revenues are realizable orrealized and earned. Service revenue consists primarily of training,maintenance, and installation services and is recognized as the services areprovided.

 

INTANGIBLE ASSETS: Intangible assets arevalued at acquisition cost and are amortized on a straight-line basis overtheir respective useful lives (3 to 20 years).

 

PROPERTY, PLANT AND EQUIPMENT: Property, plantand equipment acquired is recorded on the basis of acquisition or manufacturingcost, including capitalized mine development costs, and subsequently reduced byscheduled depreciation charges over the assets’ useful lives as follows:buildings 3 to 50 years, technical facilities and machinery 4 to 25 years andfacilities, factory and office equipment 5 to 10 years. The line item land andland rights refers to plots of land and buildings as well as mining properties.Land is principally accounted for at acquisition costs. If, after utilizationin mining, the value of a piece of land is expected to be permanently impaired,it is written down to the lower value.

 

9

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Maintenance and repair costs are expensed as incurred. Depreciation iscomputed principally by the straight-line method. The strip mines (explorationand mine development costs) are amortized using the unit-of-production costs(amortization period equals the life of the mines). Low value items are expensedin the year of acquisition. Opportunities for special tax deductible depreciationwere utilized for both book and tax purposes in 1998 and prior years. Thisresulted in lower depreciation charges for German GAAP purposes over theremaining useful life of the prospective assets.

 

Impairment tests of long-term assets are madewhen conditions indicate a possible loss. If an impairment is indicated, theasset is written down to its estimated fair value. If, at a later date, theconditions leading to impairment no longer exist, the impairment loss isreversed up to the value of such assets, if the asset had not been impaired.

 

INVESTMENTS:The long-term loans and investments are recorded at cost.

 

OVERBURDEN: Overburden represents the costsof removing the surface above a coal field subsequent to the initial opening ofthe field to the extent that the removal exceeds what is needed for the currentyear’s coal extraction. These are costs incurred in advance in respect offuture coal production. The overburden is valued on an average cost basis.

 

INVENTORIES: Inventories are carried at thelower of average or market cost. Obsolescence provisions are made to the extentthat inventory risks are determinable.

 

SECURITIES: Securities held asfixed assets as well as marketable securities are valued individually at costor at lower quoted or market values.

 

RECEIVABLES AND OTHER ASSETS: All receivablesare valued at cost, reduced for appropriate valuation allowances.

 

CASH AND CASH EQUIVALENTS: Cash and cashequivalents include short-term, highly-liquid investments with remaining maturitydates of three months or less at the time of purchase.

 

SPECIAL ITEM FOR INVESTMENT SUBSIDIES AND INCENTIVES: To support theacquisition of certain tangible assets, investment allowances and subsidieswere granted by the German federal government and the states of Saxony andSaxony-Anhalt. The application, conditions and payments of investment grantsare governed by German law and regulations. Investment allowances and subsidiesreceived and formally claimed are credited to the special item account. Thespecial item is amortized into income over the normal operating useful lives ofthe underlying assets to which the allowances and subsidies relate.

 

10

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As of January 1, 2002 MIBRAG acquired rightsto transportation services of a railway company (TEUR 251,710) by partially waivingrights for future payments from the privatization agreement against the formershareholder Treuhandanstalt and debt of TEUR 8,963. The waiver of claims ispresented on the balance sheet as deferred income in the line item special itemfor investment subsidies and incentives.

 

ACCRUALS FOR PENSION OBLIGATIONS: Thisaccrual refers to one-time payments to non-tariff employees to which MIBRAG iscommitted on one side and to the compensation for lost pension credits to whichMIBRAG is obliged if employees agree to take part in the Company’s earlyretirement program on the other side. The valuation is based on the net presentvalue of the liability, assuming an interest rate of 6 % per annum. Insurancepolicies were entered into to cover MIBRAG’s obligation in the case that MIBRAGwill not be solvent at the due dates of the payment.

 

ENVIRONMENTAL AND MINING PROVISIONS: Accrualsfor environmental and mining-related matters are recorded when it is probablethat a liability has been incurred and the amount of the liability can bereasonably estimated, based on current law and existing technologies. Theseaccruals are adjusted periodically as assessment and utilization progress or asadditional technical or legal information becomes available.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value ofcash, accounts payable and receivable as well as short-term borrowingsapproximates book value because of the short maturity period and interest ratesapproximating market rates. The Company has determined the estimated fair valueof long-term debt by using available market information and generally acceptedvaluation methodologies. The use of different market assumptions or estimationmethodologies could have a material effect on the estimated fair value amounts.

 

LIABILITIES:Liabilities are shown at their repayment amounts.

 

PER SHARE AMOUNTS: Per share amounts are notdisclosed in the financial statements. MIBRAG is a nonpublic enterprise.

 

 

**NOTE C                 SIGNIFICANTDIFFERENCES BETWEEN GERMAN AND UNITED**

**                                STATES GENERALLY ACCEPTEDACCOUNTING PRINCIPLES**

 

The MIBRAG consolidated financial statementscomply with German GAAP, which differs in certain respects from US GAAP. Thesignificant differences that affect consolidated net income and shareholders’equity of MIBRAG are set out below.

 

 

11

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**I.Application of the purchase method of accounting**

 

The German GAAP financial statements includethe historical cost book values of assets transferred from a predecessorcompany.

 

The acquisition of 99 % of the shares inMIBRAG mbH on January 1, 1994 by MIBRAG B.V. was accounted for using thepurchase method of accounting. The purchase price adjustments to the historicalcost basis have been pushed down to MIBRAG mbH for purposes of the reconciliationto US GAAP. The excess (TEUR 387,183) of the fair value of the net assetsacquired over the purchase price was proportionally allocated to reduce thevalue assigned to non-current assets, excluding long-term investments.

 

12

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**Reconciliationto US GAAP**

 

The following is a summary of the significantadjustments to net income for 2005, 2004 and 2003 and to shareholders’ equityat December 31, 2005 and December 31, 2004, which would be required if US GAAPhad been applied instead of German GAAP.

 
| ** **                                                       | ** ** | ** ** | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|
| ** **                                                       | ** ** | **Note**   | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | **TEUR**                    | ** ** | **TEUR** | ** ** | **TEUR** | ** ** |
| Net  income as reported in the consolidated                      |       |       |       |                        |       |   |   |   |   |
| income  statement under German GAAP                              |       |       |       | 33,761                      |       | 32,614 |   | 33,060 |   |
| ** **                                                       | ** ** | ** ** | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Adjustments  required to conform with                            |       |       |       |                        |       |   |   |   |   |
| US  GAAP:                                                        |       |       |       |                        |       |   |   |   |   |
| Fixed assets                                                     |       | (1         | )          | (5,967                      | )          | (6,332 | ) | (3,542 | ) |
| Relocation accruals                                              |       | (2         | )          | 1,413                       |       | (372 | ) | (669 | ) |
| Investment in power plants                                       |       | (3         | )          | (2,066                      | )          | (2,356 | ) | (2,635 | ) |
| Interest capitalization                                          |       | (4         | )          | (435                        | )          | (435 | ) | (435 | ) |
| Receivable/payables at                                           |       |       |       |                        |       |   |   |   |   |
| non-market interest rates                                        |       | (5         | )          | 0                           |       | 0 |   | 0 |   |
| Overburden                                                       |       | (6         | )          | 4,775                       |       | 7,884 |   | 11,702 |   |
| Environmental and mining provisions                              |       | (7         | )          | 4,103                       |       | (1,491 | ) | 18,869 |   |
| Pension obligations                                              |       | (8         | )          | (1,355                      | )          | 682 |   | (1,067 | ) |
| Other                                                            |       | (9         | )          | 1,511                       |       | 1,475 |   | 610 |   |
| Realized gains and losses on securities                          |       | (10        | )          | (596                        | )          | 84 |   | (389 | ) |
| **Net  income in accordance with US GAAP**                       | ** ** | ** ** | ** ** | **35,144**                  | ** ** | **31,753** | ** ** | **55,504** | ** ** |
| thereof:                                                         | ** ** | ** ** | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income  from continuing operations**                           | ** ** | ** ** | ** ** | **35,144**                  | ** ** | **31,753** | ** ** | **35,577** | ** ** |
| **Cumulative  effect of a change in accoun­ting principle** | ** ** | ** ** | ** ** | **0**                       | ** ** | **0** | ** ** | **19,927** | ** ** |

 

13

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| ** **                                   | ** ** | ** ** | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **Note**   | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | ** ** | ** ** | ** **                  | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | ** ** | ** ** | **TEUR**                    | ** ** | **TEUR** | ** ** |
| Shareholders’  equity as reported       |       |       |       |                        |       |   |   |
| in the consolidated balance                  |       |       |       |                        |       |   |   |
| sheet under German GAAP                      |       |       |       | 310,433                     |       | 308,837 |   |
|                                         |       |       |       |                        |       |   |   |
| Adjustments  required to conform with        |       |       |       |                        |       |   |   |
| US GAAP:                                     |       |       |       |                        |       |   |   |
| Fixed assets                                 |       | (1)        |       | 84,752                      |       | 90,719 |   |
| Relocation accruals                          |       | (2)        |       | 24,325                      |       | 22,912 |   |
| Investments in power plants                  |       | (3)        |       | (44,698                     | )          | (52,799 | ) |
| Interest capitalization                      |       | (4)        |       | 3,408                       |       | 3,844 |   |
| Overburden                                   |       | (6)        |       | (10,122                     | )          | (14,897 | ) |
| Environmental and mining provisions          |       | (7)        |       | 4,717                       |       | 614 |   |
| Pension obligations                          |       | (8)        |       | (1,120                      | )          | 235 |   |
| Other                                        |       | (9)        |       | (3,513                      | )          | (4,990 | ) |
| **Shareholders’  equity in accordance** |       |       |       |                        |       |   |   |
| **with US  GAAP**                            | ** ** | ** ** | ** ** | **368,182**                 | ** ** | **354,475** | ** ** |

 

14

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**Reporting of statement of shareholders’ equity**

 

Comprehensive income inaccordance with SFAS No. 130, “Reporting Comprehensive Income”, includes theimpact of other comprehensive income. These are revenues, gains, expenses andlosses that under US GAAP are not included in net income.

 
| ** **                                                                 | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                 | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                 | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                 | ** ** | **TEUR**                    | ** ** | **TEUR** | ** ** | **TEUR** | ** ** |
| Net  income in accordance with US GAAP                                     |       | 35,144                      |       | 31,753 |   | 55,504 |   |
| Other  comprehensive income/unrealized gains on marketable securities |       |                        |       |   |   |   |   |
| Reclassification adjustments for gains realized  in net income             |       | 596                         |       | (84 | ) | 0 |   |
| Unrealized holding gains/(losses) on securities                            |       | (33                         | )          | 165 |   | 389 |   |
| **Comprehensive  income**                                                  | ** ** | **35,707**                  | ** ** | **31,834** | ** ** | **55,893** | ** ** |

 

Statement ofshareholders’ equity:

 
| ** **                                           | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **TEUR**                    | ** ** | **TEUR** | ** ** | **TEUR** | ** ** |
| Stockholders’  equity according to US GAAP      |       |                        |       |   |   |   |   |
| before  accumulated other comprehensive income       |       | 367,149                     |       | 354,005 |   | 334,734 |   |
| Accumulated  other comprehensive income:             |       |                        |       |   |   |   |   |
| Unrealized holding gains/(losses) on securities      |       | 1,033                       |       | 470 |   | 389 |   |
| **Total  stockholders’ equity according to US** | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **GAAP  including comprehensive income**             | ** ** | **368,182**                 | ** ** | **354,475** | ** ** | **335,123** | ** ** |

 

 

15

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# **II. Notes to significantUS GAAP adjustments**

**1. Fixed assets**

 

The differences relate primarily to thefollowing:

 

•                  In the US GAAP balance sheetas of January 1, 1994, fixed asset balances, other than financial assets, were adjustedto their fair market values, then reduced by the allocation of the differencebetween the net acquisition costs for the MIBRAG shares and the fair marketvalue of MIBRAG’s net assets.

•                  The depreciation period oflong term assets are based upon periods acceptable for German tax purposes,which differ from the economic useful lives for US accounting purposes.

•                  Special accelerateddepreciation for tax purposes is recorded in the German financial statementsfor 1998 and prior years. This resulted in lower depreciation charges forGerman GAAP purposes over the remaining useful life of the prospective assets.

 

Upondisposal, the above differences also resulted in differing gains or losses ondisposition.

 

**Financialinvestment in MUEG**

 

For German GAAP purposes, MIBRAG accounted for theinvestment in MUEG as of January 1, 1994 using the cost method. Under USGAAP the book value was increased to account for the equity earnings that werenot distributed to MIBRAG as of that date.

 

 

**2. Relocation accruals**

 

As of January 1, 1994 for US GAAPpurposes, liabilities and deferred costs of TEUR 45,357 were recognized torelocate three villages. The deferred costs are amortized in accordance withquantities of coal extracted. In accordance with German accounting principles,accruals for the relocation of villages can not be accrued earlier than twoyears prior to the relocation, and certain relocation costs must be expensed asincurred.

 

 

16

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**3. Investment in power plants**

 

In 1995 and 1996, third party investorsloaned TEUR 110,624 to a MIBRAG subsidiary, MIBRAG Industriekraftwerke GmbH& Co. KG (“MI”), which operates three lignite-fired power plants. Theinvestment is structured such that the third party investors obtain acceleratedtax depreciation while retaining a put option to sell their investments back toMIBRAG at predetermined prices at approximately TEUR 15,600. The third partyinvestments were considered additions to equity as minority interests forGerman GAAP, while these arrangements are accounted for as a third-party loanin accordance with US GAAP.

 

 

**4. Interest capitalization**

 

Interest is expensed in the German financialstatements. Interest expense related to qualified assets, however, iscapitalized and depreciated for US GAAP purposes. The effect in 2005,   2004 and 2003 reflects the depreciation ofamounts previously capitalized.

 

 

**5. Receivables/payables atnon-market interest rates**

 

Certain accounts receivable or loans payableare recorded in the German GAAP financial statements at their nominal values.As they carry non-market interest rates, these receivables and payables wereadjusted to their market values for US GAAP purposes.

 

 

**6. Overburden**

 

Overburden in the German financial statementsincludes depreciation on fixed assets (equipment) which are used for the wasteremoval. Because of the purchase accounting adjustments, a different amount ofdepreciation is included in overburden in the US GAAP financial statements.Additionally, overburden as of January 1, 1994 was written down to fair value.

 

 

17

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**7. Environmental and miningprovisions**

 

Certain accrued mining reclamation provisionsare accrued ratably in the German financial statements. For US GAAP purposes,MIBRAG implemented SFAS 143 on January 1, 2003 and performed a complete newcalculation of the asset retirement obligation (ARO) in accordance with thispronouncement at that date. In the year of adopting this new standard, MIBRAGdisclosed the difference between the previous method of recognition of theendlake reserves as of December 31, 2002 (TEUR 168,532) and the new calculationof the ARO liability as of January 1, 2003 (TEUR 148,605) as a cumulativeeffect of initially applying SFAS 143 (cumulative effect of a change inaccounting principle) in the income statement (TEUR 19,927).

 

 

**8.Pension obligations**

 

Thecompany grants post-retirement benefits to a few employees. For US GAAPpurposes the valuation and carrying amounts of pension commitments and theexpenses required to cover these commitments are based on the projected unitcredit method according to SFAS 87, “Employers’ Accounting for Pensions”. Themethod used for the valuation of pension obligations under German GAAP differsin various respects from the projected unit credit method.

 

 

**9. Other**

 

Certain costs and income in the Germanfinancial statements are capitalized or deferred for US GAAP purposes,respectively.

 

 

**10. Realized/Unrealized holdinggains and losses**

 

For US GAAP purposes available-for-salesecurities are accounted for according to the cost adjusted for fair value(mark-to-market) method, under which the carrying amount is adjusted at financialstatement date for changes in fair value (i.e., they are carried at market value).Unrealized gains and losses for a period are excluded from earnings andreported as other comprehensive income. For German GAAP purposes thesesecurities are accounted for at cost. If the market value is below cost, a lossis recognized for German GAAP purposes.

 

 

18

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**11. Deferred taxes**

 

The differences noted above result intemporary differences which, when combined with tax loss carry-forwards, wouldresult in a net deferred tax asset of TEUR 87,150 and TEUR 90,313 at December31, 2005 and December 31, 2004, respectively. Because of available negative evidence,a 100 % valuation allowance would have been recorded at each year-end. Becauseno net deferred taxes were recorded for German or US GAAP purposes, noadjustment to net income or shareholders equity is listed in the precedingreconciliation.

 

 

**12. U.S. GAAP AccountingPronouncements**

 

***Adoption of accounting standards***

 

In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity”. SFAS amends the accounting and classification for certain financialinstruments, such as those used in most stock buy-back programs, thatpreviously were accounted for and classified as equity. SFAS No. 150 requiresthat certain types of freestanding financial instruments that havecharacteristics of both liabilities and equity be classified as liabilitieswith generally recognition of changes in fair value in the income statement.

 

This Statement is effective for financial instrumentsentered into or modified after May 31, 2003, and otherwise is effective at thebeginning of the first interim period beginning after June 15, 2003, except formandatory redeemable financial instruments of nonpublic entities. For nonpublicentities, mandatory redeemable financial instruments are subject to theprovisions of this Statement for the first fiscal period beginning afterDecember 15, 2003. The adoption of SFAS No. 150 did not have a material impacton the consolidated financial statements.

 

 

19

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***Recently issued accountingstandards***

 

In December 2004, the FASB issued SFAS No. 153, “*Exchanges of Non-monetary Assets — An Amendment of APB Opinion No. 29*.”APB Opinion No. 29 provided an exception to the basic measurement principle(fair value) for exchanges of similar productive assets. That exceptionrequired that some non-monetary exchanges, although commercially substantive,be recorded on a carryover basis. SFAS No. 153 eliminates the exception to fairvalue for exchanges of similar productive assets and replaces it with a generalexception for exchange transactions that do not have commercial substance —that is, transactions that are not expected to result in significant changes inthe cash flows of the reporting entity. SFAS No. 153 is effective for fiscalyears beginning after June 15, 2005. The Company does not expect that theadoption of SFAS No. 153 will have a significant impact on the result ofoperations or cash flows.

 

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections — a replacement of APB No. 20and FASB Statement No. 3.*This Statement changes the requirementsfor the accounting for and reporting of a change in accounting principle. Itapplies to all voluntary changes in accounting principle, error corrections andrequired changes due to new accounting pronouncements which do not specify acertain transition method. The Statement generally requires retrospectiveapplication to prior period’s financial statements for changes in accountingprinciple, unless it is impracticable to determine either the period-specificeffects or the cumulative effect of the change. In addition, this Statementrequires that retrospective application of a change in accounting principle belimited to the direct effects of the change. It also requires that a change indepreciation, amortization, or depletion method for long-lived, nonfinancialassets be accounted for on a prospective basis. SFAS No. 154 is effective forfiscal years beginning after December 15, 2005. MIBRAG plans to implement SFASNo. 154 on January 1, 2006. The Company expects that the adoption of SFAS No.154 will not have a material impact on the Company’s consolidated financial statements.

 

InMarch 2005, the FASB issued Interpretation No. 47,*Accounting for Conditional Asset RetirementObligations — an interpretation of FASB Statement No. 143* (“FINNo. 47”)*.* FIN No. 47clarifies the term conditional asset retirement obligation as used in SFASNo. 143,*Accounting for AssetRetirement Obligations,* and requires a liability to be recorded ifthe fair value of the obligation can be reasonably estimated. The types ofasset retirement obligations that are covered by FIN No. 47 are those forwhich an entity has a legal obligation to perform an asset retirement activity,even though the timing and method of settling the obligation are conditional ona future event that may or may not be within the control of the entity. FINNo. 47 also clarifies when an entity would have sufficient information toreasonably estimate the fair value of an asset retirement obligation. FINNo. 47 is effective for fiscal years beginning after December 15, 2005.The Company plans to implement FIN No. 47 on January 1, 2006 but does notexpected

 

 

20

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thatthe adoption of FIN No. 47 has a significant impact on the Company’sconsolidated financial statements.

 

Inthe mining industry, companies may be required to remove overburden and wastematerials to access mineral deposits. The costs of removing overburden andwaste materials are referred to as “stripping costs.” The Company incurssignificant stripping costs in its lignite coal mining operations. InMarch 2005, the Emerging Issues Task Force (“EITF”) reached a consensus onIssue No. 04-6,*Accounting forStripping Costs Incurred during Production in the Mining Industry.*The EITF concluded that stripping costs incurred during the production phase ofa mine are variable production costs that should be included in the cost ofinventory produced during the period the stripping costs are incurred. EITFNo. 04-6 is effective for fiscal years beginning after December 15, 2005.The Company plans to implement EITF No. 04-6 on January 1, 2006.

 

Basedupon MIBRAG’s deferred stripping costs recorded as of December 31, 2005, we estimatethe adoption of EITF No. 04-6 will result in a significant write-down ofcapitalized overburden costs and an equivalent reduction of total stockholders’equity. EITF No. 04-6 requires any adjustment from adoption to berecognized as a cumulative effect adjustment to beginning retained earnings inthe period of adoption or by retrospective adjustment of our financial statements.

 

TheCompany’s mines are open pit lignite coal mines, which cover several squaremiles and have an estimated remaining life of 40 or more years. Because of themining procedures used, the Company generally does not maintain any significantinventory of mined coal. Accordingly, under EITF No. 04-6, costs ofremoving overburden will be expensed in the period incurred. The execution ofthe mine plan may result in fiscal periods during which costs incurred for theremoval of overburden will not bear a direct relationship to the revenue derivedfrom the sale of coal. This may result in a degree of variability in the futurereported earnings of the Company.

 

In June 2005, the FASB ratified EITF Issue No. 05-5, *Accounting for Early Retirement or Postemployment Programs withSpecific Features (such as Terms Specified in Altersteilzeit Early RetirementArrangements).*Altersteilzeit (ATZ) in Germany is incentive andbenefit program towards early retirement. Companies are required to recognizethe salary ratably over the active service period. Accruals for Company-grantedbonuses shall be recorded ratably from the date the individual employee enrollsin the ATZ arrangements to the end of the active service period. EITF No. 05-5is effective for fiscal years beginning after December 15, 2005. MIBRAG plansto implement EITF No. 05-5 on January 1, 2006. The Company expects that theadoption of EITF No. 05-5 will lead to a decrease in the accruals and anincrease in the shareholders’ equity in the Company’s consolidated financialstatements.

 

21

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**NOTE D                 CONCENTRATION OF CREDIT RISK ANDLONG-TERM COAL**

**                                SALES AGREEMENT**

 

MIBRAG mbH markets its coal principally to electric utilities inGermany. As of December 31, 2005 and 2004 accounts receivable from electricutilities totaled TEUR 27,684 and TEUR 24,677, respectively. Credit is extendedbased on an evaluation of the customer’s financial condition. Credit losses areprovided for in the financial statements and consistently have been minimal.

 

MIBRAG mbH is committed under several long-term contracts to supply rawbrown coal and whirl fine coal to the Schkopau power station and the Lippendorfpower station. Under the terms of the Schkopau Agreement, MIBRAG mbH maydeliver annually up to 5.8 million tons of coal. The agreement is in effectuntil 2010, with an option for the purchaser to extend the agreement foranother 10 years. The price to be paid by the Schkopau power station is a fixedprice adjusted by an annual escalation rate.

 

The Lippendorf Agreements provide for deliveries of up to 10 million tonsof raw brown coal per year from 1999 through 2040 with an option for thecustomers to extend for an additional 3-year period. These Agreements wereclosed with Vereinigte Energiewerke AG (VEAG), Berlin, E.ON Kraftwerke GmbH,Hanover, and EnBW Lippendorf Beteiligungsgesellschaft mbH, Stuttgart. The priceto be paid by the Lippendorf power station is a base-price with escalation andadjustment based on quality of the coal delivered. The first bloc of the newLippendorf power station went into full operation in October 1999 and thesecond bloc went into effect in May 2000.

 

A substantial portion of the Company’s coal reserves is dedicated tothe production of coal for such agreements.

 

22

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**NOTE E                 BVS SETTLEMENT2002**

 

In the fourth quarterof 2002, MIBRAG mbH successfully negotiated with Bundesanstalt fuervereinigungsbedingte Sonderaufgaben (“BvS”) amendments to the originalagreement on transportation credit matters that had been entered into with theGerman government in 1993. The amendments were effective as of January 1, 2002.As a result of those negotiations, a settlement agreement was concludedreplacing annual payments to be received by MIBRAG mbH over 18.75 years fromthe German government with a one-time, up-front payment totaling TEUR 383,225,which was recorded as deferred income (special item for investment subsidiesand incentives). MIBRAG mbH also capitalized TEUR 251,710 for coaltransportation rights (intangible assets) and TEUR 140,478 for mining rights(land and mining property) acquired through the settlement agreement. Both thedeferred revenue and the rights will be amortized straight-line over the term of the contract of 18.75 years. Asof December 31, 2005, the book values for coal transportation rightsamounts to TEUR 198,012 (2004: TEUR 211,436) and for the miningrights TEUR 110,509 (2004: TEUR 118,002).

 

**NOTE F                 INTANGIBLEASSETS**

** **
| ** **                                           | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **TEUR**               | ** ** | **TEUR**               | ** ** |
| ** **                                           | ** ** | ** **             | ** ** | ** **             | ** ** |
| Concessions,  trade marks, patents and licenses cost |       | 312,614                |       | 304,448                |       |
| Less:  accumulated amortization                      |       | (64,154                | )          | (48,300                | )          |
| Net  book value                                      |       | 248,460                |       | 256,148                |       |

 

The aggregate amortization expense for amounted toTEUR 16,835 (2005), TEUR 14,096 (2004) and TEUR 14,099 (2003). For each of thefollowing years the aggregate amortization expense is estimated to be:

 
| **TEUR** |
|----------|
| 2006:    |   |   | 16,908  |
| 2007:    |   |   | 16,900  |
| 2008:    |   |   | 16,823  |
| 2009:    |   |   | 16,803  |
| 2010:    |   |   | 16,659  |

 

 

 

23

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**NOTE G                 PROPERTY, PLANT AND EQUIPMENT**

 

The major categories of fixed assets are the following:

 
| ** **                                          | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                          | ** ** | **TEUR**               | ** ** | **TEUR**               | ** ** |
| ** **                                          | ** ** | ** **             | ** ** | ** **             | ** ** |
| Property,  plant and equipment cost                 |       |                   |       |                   |       |
| - land and land rights                              |       | 189,238                |       | 187,36                 |       |
| - buildings                                         |       | 139,385                |       | 137,801                |       |
| - strip mines                                       |       | 66,943                 |       | 57,372                 |       |
| - technical equipment and machinery                 |       | 835,661                |       | 809,094                |       |
| - factory and office equipment                      |       | 115,168                |       | 111,388                |       |
| - payments on account and assets under construction |       | 19,658                 |       | 20,672                 |       |
| Total  cost                                         |       | 1,366,053              |       | 1,323,690              |       |
| Less:  accumulated depreciation                     |       | (874,829               | )          | (839,789               | )          |
| Net  book value                                     |       | 491,224                |       | 483,901                |       |

 

The line item strip mines includes the reconstruction cost incurred upto July 1, 1990 in respect of the mining pits of Profen and Schleenhain.Depreciation has been provided according to actual extraction of coal from themine in relation to the total coal volume in the mine. The construction cost ofstrip mines include the cost for the removal of ground cover up to the coalbanks as well as the removal of rock banks until the installation of productionequipment and the commencement of raw brown coal production is possible. In2004, a new mining field (Schwerzau) within the mine Profen was opened leadingto additions to the strip mines. In the fiscal year 2005 further additions tothe strip mines amounted to TEUR 9,571.

 

Total depreciation charges are as follows: TEUR 52,912 (2005), TEUR52,498 (2004), and TEUR 55,483 (2003), including normal depreciation andunplanned depreciation.

 

**NOTE H                 PARTICIPATIONS (INCLUDING ASSOCIATEDCOMPANY)**

** **

MIBRAG’s investment in MUEG is accounted for using the equity method.MUEG was founded in 1990 and coordinates the waste disposal activities in theCentral German brown coal area. The equity value is TEUR 6,952 and TEUR 6,757as of December 31, 2005 and 2004, respectively and the cost basis is TEUR 6,740and TEUR 6,740 at December 31, 2005 and 2004.

 

Investments in three other companies are accounted for at cost.

 

 

24

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**NOTE I                  LOANRECEIVABLE FROM PARTICIPATIONS**

 

In 1995, MIBRAG sold its district heating network assets to a companyin which it holds a participation. The sales price is being repaid in equalinstallments of TEUR 375 over a period of 25 years. The interest rate iscurrently 5.0 percent.

 

The fair market value of the loan approximates the book value, whichamounted to TEUR 4,549 and TEUR 4,924 at December 31, 2005 and 2004,respectively.

 

**NOTE J                 OTHERLOAN RECEIVABLES**

** **

The other loans were granted to the third party investors in asubsidiary of MIBRAG mbH. These loans were financed by a borrowing from KfW(Kreditanstalt fuer Wiederaufbau). KfW granted MIBRAG mbH a loan of TEUR 52,663due on December 30, 2005 at interest rates between 6.26% and 6.82%. The loanwas repaid by the Company at the end of 2005. The balance of the loan to theinvestors as of December 31, 2005 and 2004 amounted to TEUR 10,626 and TEUR15,288, which approximates the fair value as of these dates. The loans to thethird party investors of the subsidiary of MIBRAG mbH were granted at the sameconditions as those applicable to the loan between MIBRAG mbH and KfW.

 

**NOTE K                 OVERBURDEN**

** **

The reconciliation of the overburden costs is as follows: 

 
| ** **  | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------|------------|-----------------------|------------|-----------------------|------------|
| ** **  | ** ** | ** **            | ** ** | **Value**             | ** ** | ** ** | ** ** | **Value** | ** ** |
| ** **  | ** ** | **Million tons**      | ** ** | **TEUR**              | ** ** | **Million tons** | ** ** | **TEUR** | ** ** |
| Profen      |       | 21.3                  |       | 80,539                |       | 20.7 |   | 77,223 |   |
| Schleenhain |       | 24.1                  |       | 75,494                |       | 22.1 |   | 72,590 |   |
|        |       | 45.4                  |       | 156,033               |       | 42.8 |   | 149,813 |   |

 

The basis for the determination of the overburden isthe total quantity of partially exposed raw brown coal.

 

 

25

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**NOTE L                 TRADE RECEIVABLES**

** **

Trade receivables were disclosed in the balance sheet, net ofallowances, as follows:

 
| ** **        | ** ** | **December 31, 2005  TEUR** | ** ** | **December 31, 2004  TEUR** | ** ** |
|-------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Trade receivables |       | 35,056                      |       | 31,402                      |       |
| Less allowances   |       | (276                        | )          | (251                        | )          |
|              |       | 34,780                      |       | 31,151                      |       |

** **

**NOTE M                OTHERINVESTMENTS**

** **

Other investments totaled TEUR 36,534 and TEUR 36,537 at December 31,2005 and 2004, respectively. The balance consists of investment funds of MI(TEUR 35,938 and TEUR 35,938 at December 31, 2005 and 2004, respectively),which were specially set up to reinvest the additional liquidity resulting fromthe entry of new investors into a subsidiary of MIBRAG and to short-terminvestments (TEUR 0 and TEUR 539) at December 31, 2005 and 2004, respectively.

 

Interest on other investments of TEUR 1,279, TEUR 1,995, and TEUR 2,195were disclosed in interest income in 2005, 2004 and 2003, respectively.

 

**NOTE N                 ACCRUALSFOR PENSIONS AND SIMILAR OBLIGATIONS**

** **

The provision relates primarily to briquette benefit claims of activeand retired employees on the basis of the collective bargaining agreement ofNovember 9, 1993 in respect to briquette benefit claims. Individuals entitledmust be employees of the Company at the date of retirement. The right does notvest and lapses with early termination of the working relationship or uponreceipt of social plan benefits.

 

The calculation is based on an actuarial valuation, which takes intoaccount the right to the redemption value of EUR 95.00 per metric ton ofbriquettes as specified in the collective bargaining agreement, the employeesentitled to benefits as of December 31, 2005, and official mortality tables. In2005 there has been made an update of the mortality table of Germany accordingto a more realistic living expectation and changes in generations.

 

Due to an amendment to this collective bargaining agreement in 2004,these future payments to the employees were changed into a one-time payment tothe employees resulting in a reduction of the liability.

 

 

26

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In addition, pension obligations for early retirement benefits wereaccrued. These amounts have also been calculated on the basis of actuarialvaluations.

** **

**NOTE O                TAXATIONACCRUALS**

** **

MIBRAG accrued TEUR 289 (2004: TEUR 330) for property taxes.

 

In 2005, three subsidiaries of MIBRAG had to pay municipal trade taxes.As of December 31, 2005 accruals for municipal trade taxes had to be accruedfor this purpose in the subsidiaries MI KG (TEUR 931), MBEG (TEUR 6) and GALA(TEUR 20). These subsidiaries do not have any tax loss carry forwards formunicipal trade taxes anymore.

 

The income taxes paid in 2005 amounting to TEUR 144 (2004: TEUR 67;2003: TEUR 23). In the current year, the parent company (TEUR 102) and otherconsolidated companies (MBEG TEUR 8 and GALA TEUR 34) had to pay corporateincome taxes. The German income tax rate applicable to MIBRAG (corporate incometax, solidarity surcharge, municipal trade tax) is 36.26% in 2005 (2004: 35.98%,2003: 35.98%). For this purpose accruals for outstanding balances were postedin the following subsidiaries: MBEG (TEUR 4) and GALA (TEUR 9). In 2004 and2003, MIBRAG did not provide accruals for income taxes under German GAAPbecause of tax losses brought forward from prior years for all consolidatedcompanies.

 

Due to tax loss carry forwards the Company has an effective tax rate of8.01% (2004: 7.87%, 2003: 0%)

 

Deferred tax assets and liabilities have not been recorded becausethere are no significant differences between the German GAAP financialstatement and the tax bases of the assets and liabilities. The recording of adeferred tax benefit for net loss carry-forwards is prohibited under GermanGAAP.

 

At December 31, 2005 the Company had approximately TEUR 249.456 netoperating loss carry-forwards for corporate income tax purposes and TEUR326.704 for municipal trade tax purposes, which do not expire and may beapplied against future taxable income.

 

 

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** **

**NOTE P                 ENVIRONMENTAL AND MININGPROVISIONS**

** **

The following is a summary of environmental and mining provisions:

 
| ** **                                    | ** ** | **December 31, 2005  TEUR** | ** ** | **December 31, 2004  TEUR** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| 1) Mining reclamation provisions              |       | 165,926                     |       | 162,233                     |       |
| 2) Provision for environmental  measures      |       | 5,040                       |       | 5,040                       |       |
| 3) Landscaping                                |       | 4,341                       |       | 4,285                       |       |
| 4) Planting                                   |       | 1,884                       |       | 1,001                       |       |
| 5) Relocation of villages                     |       | 17,219                      |       | 19,941                      |       |
| 6) Other accruals for  mining and landscaping |       | 3,031                       |       | 0                           |       |
|                                          |       | 197,441                     |       | 192,500                     |       |

 

1) Mining reclamation provisions

 

MIBRAG is responsible for reclaiming the mines Profen and Schleenhain.The mining field reclaimation of the Profen and Schleenhain mines after theceasing of production is planned for 2029 to 2046 and 2041 to 2073,respectively. A legally binding closure plan laying down the principles foraction plans in accordance with the Federal Mining Law (Bundesberggesetz) isnormally approved by the relevant mining authorities two years in advance tothe commencement of production. The liability to reclaim the area exists from thestart of mining activities. In each year of coal extraction the reclaimationcosts are accrued ratably using the relation of the coal mined to the totalcoal mine volume.

 

The calculation of the total cost for reclaiming mining fields has beenmade on the basis of a third party opinion and estimations on the basis ofcurrent prices. These costs consist mainly of costs for reconstruction, bankreinforcement, dewatering and watering.

 

For the future reclamation of the Schleenhain mine, a new opinion wasmade in 2004 indicating that the estimated total redevelopment expenses wouldnot significantly change.

 

In 2002, a new opinion for the future reclamation of the Profen minewas made indicating increased total redevelopment expenses. Therefore anadditional amount of TEUR 2,733 was accrued as of January 1, 2002.

 

 

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2) Provision for environmental measures

 

The provision for the environmental measures is determined in respectto disposal sites and old locations of MIBRAG mbH in refinement and miningareas on which waste deposits can be found. The accrued amount is derived fromarticle 19.3 of the purchase and sales agreement. Qualifying costs that exceedthe provision are to be reimbursed by the Bundesanstalt fuer ver­einigungsbedingteSonderaufgaben (BvS).

 

3) Landscaping

 

This provision includes costs for reclaiming disposal areas andleveling the area outside the embankments. These costs relate solely tocontinuous landscaping, while costs for closing down landscaping are includedin certain mining provisions.

 

4) Planting

 

Provision is made for costs in connection with temporary planting as ofDecember 31, 2005 and December 31, 2004.

 

5) Relocation of villages

 

The provision for the relocation of villages is in respect to therelocation of municipalities, which is necessary for the expansion of theProfen and Schleenhain mines. The calculation of the provision is based on amethod that takes into account the cost for project planning, infrastructuraldevelopment, cemetery relocation, demolition and landmark preservation. Theprovision is accrued in equal annual amounts, commencing two years before therelocation starts and ending in the middle of the relocation year.

 

6) Other accruals for mining and landscaping

 

In 2005, a reclassification of accruals for coal-mining subsidencedamages (TEUR 2,531) was made from other accruals to environmental and miningprovisions. Additionally, accruals for landscaping and planting at the area ofthe former briquette factory were newly formed in 2005 amounting to TEUR 500.

 

 

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** **

**NOTE Q                OTHERACCRUALS**

** **

Accrued liabilities are as follows:

 
| ** **                                     | ** ** | **December 31, 2005****TEUR** | ** ** | **December 31, 2004****TEUR** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| 1)  Severance payments                         |       | 10,043                        |       | 11,211                        |       |
| 2) Personnel  expenses                         |       |                          |       |                          |       |
| — Employment anniversaries                |       | 1,162                         |       | 1,134                         |       |
| — Vacation and other compensated absences |       | 490                           |       | 434                           |       |
| — Other                                   |       | 1,372                         |       | 1,347                         |       |
|                                           |       | 3,024                         |       | 2,915                         |       |
| 3)  Remaining accruals                         |       | 7,061                         |       | 8,480                         |       |
|                                           |       | 20,128                        |       | 22,606                        |       |

 

1) Severance payments

 

Bases for the provisions are signed social plan framework agreements inwhich the measures for the personnel adjustments are defined. The employees areentitled to a one-time severance payment if the company initiates terminationor in case of retrenchments. The severance payments are limited to TEUR 26 perperson. Employees participating in early retirement programs are entitled toadditional compensation, mainly for the reduction in statutory pension paymentsdue to early retirement.

 

2) Personnel expenses

 

MIBRAG mbH grants awards in recognition of long service in the Company,based on the collective bargaining agreement dated January 1, 1992 and theCompany agreement dated October 1, 1995. The employees are entitled tofinancial awards, which increase in proportion to their employment periods. Thevaluations of the benefits were based on actuarial valuations.

 

The liability for vacation and other compensated absences arises fromthe days and shifts outstanding at balance sheet dates, which have been determinedfor each employee.

 

The accrual for profit sharing is calculated based on the actual netincome of the MIBRAG Group excluding extraordinary items and based on theachievement of goals in working safety.

 

 

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3) Remaining accruals

 

Composition:

 
| ** **                           | ** ** | **December 31, 2005  TEUR** | ** ** | **December 31, 2004  TEUR** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Outstanding invoices                 |       | 3,072                       |       | 3,125                       |       |
| Mine damages                         |       | 0                           |       | 2,240                       |       |
| Water usage fees                     |       | 194                         |       | 484                         |       |
| Professional service and  litigation |       | 1,688                       |       | 1,226                       |       |
| Others                               |       | 2,107                       |       | 1,405                       |       |
|                                 |       | 7,061                       |       | 8,480                       |       |

** **

**NOTE R                 LIABILITIES TO BANKS**

** **

Liabilities to banks consist of the following:

 
| ** **                                                           | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | **TEUR**              | ** ** | **TEUR**              | ** ** |
| a) Loan to finance the  power stations                               |       |                  |       |                  |       |
| — build up the power station of Waehlitz                        |       | 42,712                |       | 46,272                |       |
| — modernization of the power stations in Deuben and Mumsdorf    |       | 23,598                |       | 28,318                |       |
| — finance the additional paid-in capital by the investors of MI |       | 0                     |       | 15,288                |       |
| b) Loan to finance the  Schleenhain mine investments                 |       | 8,482                 |       | 47,894                |       |
| c) Loan for home  construction                                       |       | 1,630                 |       | 1,867                 |       |
| d) Commerzbank Refinancing  credit facility                          |       | 42,000                |       | 0                     |       |
| Commerzbank Revolver credit facility                                 |       | 29,000                |       | 0                     |       |
| e) Deferred interest                                                 |       | 162                   |       | 439                   |       |
|                                                                 |       | 147,584               |       | 140,078               |       |

** **

**Liabilities to banks** rose by TEUR 7,506 at December 31, 2005in comparison to December 31, 2004.

 

 

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a) Loan to finance the power stations

 

These liabilities refer to three loans from the Kreditanstalt fuerWiederaufbau, Frankfurt/Main.

 

The first loan was granted December 9, 1992 for the construction of araw brown coal powered industrial power station in Waehlitz of TEUR 71,187. Theinterest rate is currently at 5% per annum. The loan period is 25 years. Therepayments are due in 40 equal amounts commencing from June 30, 1998.

 

On April 3, 1995 two additional loan agreements were closed withKreditanstalt fuer Wiederaufbau (KfW). One of these contracts was closed forpartially financing the modernization and reshaping of both industrial powerplants in Deuben and Mumsdorf (TEUR 61,355). The redemption period is 13years starting on December 31, 1998. Interest has to be paid between 6.04% and6.80% for the respective tranches.

 

The other loan at the amount of TEUR 52,663 was granted to partiallyfinance the limited partner capital contribution of investors. The redemptionperiod is 13 years. In 1996, the loan proceeds were received by MIBRAG (TEUR52,663). In 2002, MIBRAG made principal payments of TEUR 4,602. The interestrates are between 6.26% and 6.82%. In the fiscal year MIBRAG paid back theremaining amount of the loan. In this connection MIBRAG has borrowed new loans.We would like to refer to point d).

 

b) Loan to finance the Schleenhain mine investments

 

In 1997 and 1998, loan contracts were entered into with four banks tofinance the capital expenditures at the Schleenhain mine, especially theconstruction of the blending yard and environmental measures for the conveyorbelts. In 1998 TEUR 61,355 and in 1999 TEUR 10,226 were borrowed at interestrates between 3.5% and 5.4% per annum, which are adjusted in the years after.In the fiscal year MIBRAG paid back a main part of the loans. In thisconnection MIBRAG has borrowed new loans. We would like to refer to point d).

 

Interest expense for the loans to point a) and b) amounted to TEUR7,773, TEUR 8,755 and TEUR 8,571 in 2005, 2004, and 2003, respectively.

 

c) Loan for home construction

 

The loans for home construction were granted by the Deutsche Bank AGand the Nord LB for relocation-related home construction purposes inHohenmoelsen.

 

 

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For the loan granted by Deutsche Bank AG amounting to TEUR 1,333, aninterest rate of 5.6% was set for a period ending 2007. For the two loansgranted by Nord LB at the amounts of TEUR 624 and TEUR 861 there are nointerest payments due until 2007 and 2010, respectively. Thereafter, the rateis fixed at 8% per annum.

 

d) Commerzbank Refinancing and Revolver credit facilities

 

In the fiscal year, MIBRAG signed a loan agreement for a total ofTEUR 105,000 with a consortium of banks led by the Commerzbank. UntilDecember 31, 2005 MIBRAG called TEUR 71,000 of that loan, thereofTEUR 42,000 are for refinancing (first tranche of TEUR 15,000 had afixed rate of interest of 4.191% p. a. and the second tranche ofTEUR 27,000 had a fixed rate of interest of 4.317% p. a.) andadditional TEUR 29,000 were used for a short-term financing at a variableinterest rate between 3.513 and 3.533% p. a.

 

**NOTE S                 OTHER PAYABLES**

** **

The other payables refer to:

 
| ** **                     | ** ** | **December 31, 2005  TEUR** | ** ** | **December 31, 2004  TEUR** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Tax authorities                |       | 4,001                       |       | 3,865                       |       |
| Wages and salaries             |       | 3,317                       |       | 3,302                       |       |
| Social security  contributions |       | 2,525                       |       | 2,479                       |       |
| Tax lease                      |       | 928                         |       | 1,237                       |       |
| Others                         |       | 1,434                       |       | 1,348                       |       |
|                           |       | 12,205                      |       | 12,231                      |       |

 

 

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** **

**NOTE T                 MATURITY PERIODS OF LIABILITIES**

** **

The maturity periods of liabilities (in TEUR) are as follows:

 
| ** **                           | ** **               | **Liabilities to banks *)** | ** ** | **Payments**** received** | ** ** | **Trade****payables** | ** ** | **Payables to****participations** | ** ** | **Other   payables** | ** ** | **Total** | ** ** |
|--------------------------------------|--------------------------|-----------------------------|------------|--------------------------------|------------|-----------------------|------------|-----------------------------------|------------|----------------------|------------|-----------|------------|
|                                 |                     |                        |       |                           |       |                  |       |                              |       |                 |       |      |       |
| Balance as of December 31, 2005 |                     | 147,584                     |       | 59                             |       | 15,075                |       | 2,613                             |       | 12,205               |       | 177,536   |       |
| thereof:                             | maturity period          |                        |       |                           |       |                  |       |                              |       |                 |       |      |       |   |
|                                 | — up to 1 year      |                        | 40,276     |                           | 59         |                  | 14,882     |                              | 2,613      |                 | 11,369     |      | 69,199     |   |
|                                 | — 1-5 years         |                        | 60,461     |                           | 0          |                  | 193        |                              | 0          |                 | 836        |      | 61,490     |   |
|                                 | — more than 5 years |                        | 46,847     |                           | 0          |                  | 0          |                              | 0          |                 | 0          |      | 46,847     |   |

----

**) Liabilities to banks are collateralized bymortgages at an amount of TEUR 67,940.*

* *

Annual maturities of liabilities to banks are as follows:

 

| **Year of maturity** | ** ** | **Amount in TEUR** | ** ** |
|----------------------|------------|--------------------|------------|
| 2006                 |       |               |       | 40,276 |   |
| 2007                 |       | 16,238             |       |   |   |
| 2008                 |       | 15,923             |       |   |   |
| 2009                 |       | 14,649             |       |   |   |
| 2010                 |       | 13,651             |       |   |   |
|                 |       |               |       | 60,461 |   |
| Thereafter           |       |               |       | 46,847 |   |
| Total                |       |               |       | 147,584 |   |

 

The estimated fair value of the Company’s liabilities to banksapproximates the carrying value.

 

 

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** **

**NOTE U                 COMMITMENTS AND CONTINGENCIES**

** **

From time to time, the Company may be subject to legal proceedings andclaims in the ordinary course of business. At December 31, 2005 the Company wasnot aware of any legal proceedings or claims that the Company believes willhave, individually or in the aggregate, a material adverse effect on theCompany’s business, financial condition, or results of operations.

 
| ** **                             | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                             | ** ** | **2005**         | ** ** | **2004**         | ** ** |
| ** **                             | ** ** | **TEUR**         | ** ** | **TEUR**         | ** ** |
| Guarantees for  indebtedness of others |       | 13,256           |       | 13,256           |       |
| Other contractual  obligations         |       | 87,700           |       | 80,400           |       |

 

The other contractual obligations refer to long-term investmentprojects in the mines Profen and Schleenhain.

 

MIBRAG leases office equipment, railway-carriages and vehicles as wellas vending machines, expiring at various dates. Rental and lease expensesamounted to TEUR 612, TEUR 684 and TEUR 819 in the years ended December 31,2005, 2004, and 2003 respectively.

 

With the operators of the Lippendorf power plant a long-term raw browncoal supply contract was concluded which obliges MIBRAG to guarantee the annualdelivery of 10 million tons of raw brown coal to the power plant over a periodof 40 years. This contract was closed assuming the relocation of the Heuersdorfvillage. Some of the inhabitants of that village try to remain the village inits current place resulting in legal disputes with the Company and legalproceedings. It is planned that the excavators will be mining through theHeuersdorf area in 2009. Management of MIBRAG believes that the plan will berealized. However, substantial delay or the mining around that village may havea material impact on the future earnings situation of the Company.

 

 

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** **

**NOTE V                 SEGMENT INFORMATION**

** **

MIBRAG operates as one segment. Sales were exclusively achieved inGermany, and all long-lived assets are located in Germany. Sales were almostcompletely limited to the new German Federal States, mainly to Saxony-Anhalt,Thuringia and Saxony.

 

Net sales by product and service:

 
| ** **                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                            | ** ** | **TEUR** | ** ** | **TEUR** | ** ** | **TEUR** | ** ** |
| Raw brown coal and coal  products                     |       | 236,890  |       | 239,232  |       | 249,229  |       |
| Electrical power, heating  and steam                  |       | 30,382   |       | 28,814   |       | 28,074   |       |
| Other products and  services                          |       | 1,818    |       | 2,414    |       | 3,853    |       |
| Further charging of  transport services, ash disposal |       |     |       |     |       |     |       |
| and others                                            |       | 22,018   |       | 23,104   |       | 22,700   |       |
|                                                  |       | 291,108  |       | 293,564  |       | 303,856  |       |

 

Several major customers account for 10% or more of MIBRAG’s revenues.As a percentage of total sales such customers accounted for 27%, 23%, 12% and10% in 2005; 24%, 24% and 12% in 2004 and 23%, 23% and 12% in 2003.

 

**NOTE W               RELATEDPARTY TRANSACTIONS**

** **

Agreements for consulting and management services were closed inrespect to the mining operations and the refinement facilities between MIBRAGand two subsidiaries of the common parent companies. These contracts determinecertain consulting services to be provided by the two subsidiaries WashingtonGroup Deutschland GmbH (WGD) (former: Morrison Knudsen Deutschland GmbH) andSaale Energie Services GmbH (SES) to MIBRAG or its subsidiaries. MIBRAG isobliged to determine and pay the cost-related remuneration for these services.Expenditures for MIBRAG amount to TEUR 8,755, 8,755, and TEUR 8,755 for 2005,2004, and 2003, respectively. As of December 31, 2005 and 2004, MIBRAG stillhad liabilities amounting to TEUR 84 and TEUR 84, respectively towards WGD andSES for the provision of these services.

 

 

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Part of the lignite deliveries from 2002 to 2005 to the Schkopau powerplant were sales to Saale Energie GmbH (SEG), which is a subsidiary of the 50%shareholder of MIBRAG - NRG Energy Inc. SEG is operating two blocs of theSchkopau power station with 400 mega watts. Sales to SEG amounted to TEUR33,174, TEUR 31,066, and TEUR 34,025 in 2005, 2004, and 2003, respectively. Theconditions of delivery are the same as to the other (third party) operator ofthe Schkopau power plant. As of December 31, 2005 and 2004, MIBRAG disclosedreceivables of TEUR 3,960 and TEUR 3,634 respectively from SEG.

 

 

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