**Exhibit 99.1**

 

**Mitteldeutsche Braun-**

**kohlengesellschaft mbH,**

**Theissen**

 

Report on the audit of the financial statementsfor the years ended December 31, 2004, 2003and 2002 in accordance with German GAAP andon the audit of the US GAAP reconciliations for the years ended December 31,2004, 2003 and 2002

 

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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, 2004, 2003 and 2002                    |   |
|                                                                                                             |   |
| Consolidated Balance Sheets  at December 31, 2004 and 2003                                                  |   |
|                                                                                                             |   |
| Consolidated  Statements of Cash Flows for the years ended  December 31, 2004, 2003 and 2002                |   |
|                                                                                                             |   |
| Consolidated  Statements of Shareholders’ Equity for the years  ended December 31, 2004, 2003 and 2002 |   |
|                                                                                                             |   |
| Notes to the Consolidated Financial Statements                                                                   |   |

 

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**REPORT OFINDEPENDENT AUDITORS**

 

Tothe Shareholders ofMIBRAG mbHTheissen, Germany

 

We have audited the accompanying consolidated balancesheets of Mitteldeutsche Braunkohlengesellschaft mbH and its subsidiaries(MIBRAG or Group) as of December 31, 2004 and 2003, and the related consolidatedstatements of income, shareholders’ equity and cash flows for each of the yearsin the three-year period ended December 31, 2004. These consolidatedfinancial statements are the responsibility of the Group’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with auditingstandards generally accepted in Germany and the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of MIBRAG as of December 31, 2004 and 2003 and theconsolidated results of its operations and cash flows for each of the years inthe three-year period ended December 31, 2004, in conformity withaccounting principles generally accepted in Germany.

 

1

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Generally accepted accountingprinciples in Germany vary in certain significant respects from generallyaccepted accounting principles in the United States of America. We have auditedthe effect of applying accounting principles generally accepted in the UnitedStates of America on the results of operations for each of the years in thethree-year period ended December 31, 2004 and on shareholders’ equity asof December 31, 2004 and 2003. 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 ended December 31,2004 and shareholders’ equity as of December 31, 2004 and 2003 are fairlypresented in Note C to the consolidated financial statements.

 

 

**Deloitte & Touche**GmbH

Wirtschaftspruefungsgesellschaft

 

Leipzig,Germany

January 31,2005

 

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**MitteldeutscheBraunkohlengesellschaft mbH**

**Consolidated Statements of Income**

**inthousands of Euro (TEUR)**

 
| ** **                                                                          | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Sales revenue                                                                       |       | 293,564                          |       | 303,856 |   | 298,056 |   |
| Changes  in inventories                                                             |       | (1,133                           | )          | 5,372 |   | (6,474 | ) |
| Own  costs capitalized                                                              |       | 12,913                           |       | 1,467 |   | 3,481 |   |
| Other  operating income                                                             |       | 38,402                           |       | 42,719 |   | 43,557 |   |
| Total  performance                                                                  |       | 343,746                          |       | 353,414 |   | 338,620 |   |
| ** **                                                                          | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost  of materials                                                                  |       | 82,469                           |       | 90,829 |   | 84,848 |   |
| Personnel  expenses                                                                 |       | 103,535                          |       | 99,992 |   | 91,904 |   |
| Depreciation  on intangible and tangible fixed assets                               |       | 66,594                           |       | 69,582 |   | 67,704 |   |
| Other  operating expenses                                                           |       | 44,859                           |       | 50,158 |   | 46,828 |   |
| Total  operating expenses                                                           |       | 297,457                          |       | 310,561 |   | 291,284 |   |
|                                                                                |       |                             |       |   |   |   |   |
| Operating  result                                                                   |       | 46,289                           |       | 42,853 |   | 47,336 |   |
| ** **                                                                          | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income  from associated company and from companies in which participations are held |       | 178                              |       | 920 |   | 927 |   |
| Income  from financial assets                                                       |       | 1,565                            |       | 1,848 |   | 2,175 |   |
| Depreciation  on financial assets and short term investments                        |       | (1                               | )          | (390 | ) | (1,379 | ) |
| Interest  income                                                                    |       | 2,754                            |       | 3,461 |   | 16,859 |   |
| Interest  expense                                                                   |       | (9,324                           | )          | (10,435 | ) | (24,360 | ) |
| Net  income from ordinary activities                                                |       | 41,461                           |       | 38,257 |   | 41,558 |   |
|                                                                                |       |                             |       |   |   |   |   |
| Income  taxes                                                                       |       | 3,263                            |       | 47 |   | 14 |   |
| Other  taxes                                                                        |       | 5,584                            |       | 5,150 |   | 1,802 |   |
| Net  income                                                                         |       | 32,614                           |       | 33,060 |   | 39,742 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements,*

 

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**MitteldeutscheBraunkohlengesellschaft mbH**

**ConsolidatedBalance Sheets**

**inthousands of Euro (TEUR)**

 
| ** **                                                        | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                        | ** ** | **2004**                 | ** ** | **2003** | ** ** |
| **ASSETS**                                                        |       |                     |       |   |   |
| **Non-current  assets**                                           |       |                     |       |   |   |
| Intangible  assets                                                |       |                     |       |   |   |
| Concessions,  trade marks, patents and licenses                   |       | 256,148                  |       | 256,359 |   |
|                                                              |       |                     |       |   |   |
| Property,  plant and equipment                                    |       |                     |       |   |   |
| 1.  Land and mining property                                      |       | 158,377                  |       | 166,635 |   |
| 2.  Buildings                                                     |       | 46,180                   |       | 48,849 |   |
| 3.  Strip mines                                                   |       | 47,210                   |       | 36,768 |   |
| 4.  Technical equipment and machinery                             |       | 187,609                  |       | 205,495 |   |
| 5.  Factory and office equipment                                  |       | 23,853                   |       | 25,168 |   |
| 6.  Payments on account and assets under construction             |       | 20,672                   |       | 6,715 |   |
|                                                              |       | 483,901                  |       | 489,630 |   |
| Financial  assets                                                 |       |                     |       |   |   |
| 1.  Participations (including associated company)                 |       | 12,398                   |       | 12,620 |   |
| 2.  Loan receivable from participation                            |       | 4,924                    |       | 5,999 |   |
| 3.  Other loan receivables                                        |       | 15,288                   |       | 18,969 |   |
|                                                              |       | 32,610                   |       | 37,588 |   |
|                                                              |       |                     |       |   |   |
| **Total  non-current assets**                                     |       | 772,659                  |       | 783,577 |   |
|                                                              |       |                     |       |   |   |
| Overburden                                                        |       | 149,813                  |       | 150,827 |   |
|                                                              |       |                     |       |   |   |
| **Current  assets**                                               |       |                     |       |   |   |
| Inventories                                                       |       |                     |       |   |   |
| 1. Raw  materials and supplies                                    |       | 5,956                    |       | 6,155 |   |
| 2.  Finished goods                                                |       | 1,477                    |       | 1,596 |   |
|                                                              |       | 7,433                    |       | 7,751 |   |
| Receivables  and other assets                                     |       |                     |       |   |   |
| 1.  Trade receivables                                             |       | 31,151                   |       | 30,355 |   |
| 2.  Receivables from enterprises in which participations are held |       | 521                      |       | 502 |   |
| 3.  Other assets                                                  |       | 13,372                   |       | 12,141 |   |
|                                                              |       | 45,044                   |       | 42,998 |   |
| Investments                                                       |       |                     |       |   |   |
| Other  investments                                                |       | 36,537                   |       | 52,158 |   |
|                                                              |       |                     |       |   |   |
| Cash  and cash equivalents                                        |       | 19,248                   |       | 24,229 |   |
|                                                              |       |                     |       |   |   |
| **Total  current assets**                                         |       | 108,262                  |       | 127,136 |   |
|                                                              |       |                     |       |   |   |
| Prepaid  expenses                                                 |       | 7,511                    |       | 5,444 |   |
| **TOTAL  ASSETS**                                                 |       | 1,038,245                |       | 1,066,984 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements*

 

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**MitteldeutscheBraunkohlengesellschaft mbH**

 

**ConsolidatedBalance Sheets**

**inthousands of Euro (TEUR)**

 
| ** **                                                                                                                    | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                    | ** ** | **2004**                 | ** ** | **2003** | ** ** |
| **SHAREHOLDERS’  EQUITY AND LIABILITIES**                                                                                |       |                     |       |   |   |
| **Shareholders’  Equity**                                                                                                |       |                     |       |   |   |
| Subscribed  capital                                                                                                           |       | 30,700                   |       | 30,700 |   |
|                                                                                                                          |       |                     |       |   |   |
| Capital  reserve                                                                                                              |       | 293,191                  |       | 293,191 |   |
|                                                                                                                          |       |                     |       |   |   |
| Balance  Sheet Profit         :   TEUR  35,296; 2003: TEUR 24,682 |       |                     |       |   |   |
| Less:  Interim dividend paid: TEUR 12,500; 2003: TEUR 10,500                                                                  |       | 22,796                   |       | 14,182 |   |
|                                                                                                                          |       |                     |       |   |   |
| Minority  interest                                                                                                            |       | (37,850                  | )          | (39,727 | ) |
| thereof  net income for the year:                                                                                             |       |                     |       |   |   |
| TEUR  11,500 (2003: TEUR 12,198)                                                                                              |       |                     |       |   |   |
| **Total  Shareholders’ Equity**                                                                                          |       | 308,837                  |       | 298,346 |   |
|                                                                                                                          |       |                     |       |   |   |
| Special  item for investment subsidies and incentives                                                                         |       | 330,158                  |       | 351,821 |   |
|                                                                                                                          |       |                     |       |   |   |
| Provisions                                                                                                                    |       |                     |       |   |   |
| 1.  Accruals for pensions and similar obligations                                                                             |       | 11,391                   |       | 13,052 |   |
| 2.  Taxation accruals                                                                                                         |       | 3,531                    |       | 428 |   |
| 3.  Environmental and mining provisions                                                                                       |       | 192,500                  |       | 188,602 |   |
| 4.  Other accruals                                                                                                            |       | 22,606                   |       | 19,997 |   |
|                                                                                                                          |       | 230,028                  |       | 222,079 |   |
| Liabilities                                                                                                                   |       |                     |       |   |   |
| 1.  Liabilities to banks                                                                                                      |       | 140,078                  |       | 162,101 |   |
| 2.  Payments received                                                                                                         |       | 88                       |       | 0 |   |
| 3.  Trade payables                                                                                                            |       | 14,555                   |       | 16,706 |   |
| 4.  Payables to participations                                                                                                |       | 2,253                    |       | 1,736 |   |
| 5.  Other payables                                                                                                            |       | 12,231                   |       | 14,181 |   |
|                                                                                                                          |       | 169,205                  |       | 194,724 |   |
|                                                                                                                          |       |                     |       |   |   |
| Deferred  income                                                                                                              |       | 17                       |       | 14 |   |
| **TOTAL  SHAREHOLDERS’ EQUITY AND LIABILITIES**                                                                          |       | 1,038,245                |       | 1,066,984 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements*

 

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**MitteldeutscheBraunkohlengesellschaft mbH**

**Consolidated Statements of Cash Flows**

**inthousands of Euro (TEUR)**

 
| ** **                                                            | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net  income for the year                                              |       | 32,614                           |       | 33,060 |   | 39,742 |   |
| Depreciation  on tangible, intangible and  financial assets      |       | 66,594                           |       | 69,582 |   | 67,704 |   |
| Write-up  of tangible assets                                          |       | 0                                |       | (3,976 | ) | 0 |   |
| Increase  in medium- and long-term accruals                           |       | 7,949                            |       | 5,803 |   | 8,103 |   |
| Other  non-cash income and expenses                                   |       | (21,663                          | )          | (22,334 | ) | (20,919 | ) |
| **Cash  earnings according to DVFA/SG**                               |       | 85,494                           |       | 82,135 |   | 94,630 |   |
|                                                                  |       |                             |       |   |   |   |   |
| Increase/decrease  in overburden                                      |       | 1,014                            |       | (5,520 | ) | 6,525 |   |
| Gains/losses  from disposal of assets                                 |       | 198                              |       | (571 | ) | 5 |   |
| Increase/decrease  in inventories, trade receivables and other assets |       | 11,827                           |       | 57,988 |   | (27,522 | ) |
| Increase  in trade payables and other liabilities                     |       | (16,955                          | )          | (48,741 | ) | 12,611 |   |
| **Cash flow  from operating activities**                              |       | 81,578                           |       | 85,291 |   | 86,249 |   |
|                                                                  |       |                             |       |   |   |   |   |
| Capital  expenditures on fixed assets                                 |       | (47,603                          | )          | (58,041 | ) | (41,294 | ) |
| Proceeds  from disposal of fixed assets                               |       | 367                              |       | 471 |   | 5,623 |   |
| Acquisition  of securities                                            |       | (364                             | )          | (2 | ) | (5,272 | ) |
| Proceeds  from disposals of securities                                |       | 5,120                            |       | 3,954 |   | 0 |   |
| **Cash flow  used by investing activities**                           |       | (42,480                          | )          | (53,618 | ) | (40,943 | ) |
|                                                                  |       |                             |       |   |   |   |   |
| Disbursements  to minority shareholders                               |       | (9,623                           | )          | (9,356 | ) | (8,814 | ) |
| Disbursements  to shareholders (dividends and distributions)          |       | (12,500                          | )          | (10,500 | ) | (24,118 | ) |
| Cash  outflow from repayment of bank loans                            |       | (21,956                          | )          | (17,490 | ) | (17,352 | ) |
| **Cash flow  used by financing activities**                           |       | (44,079                          | )          | (37,346 | ) | (50,284 | ) |
|                                                                  |       |                             |       |   |   |   |   |
| **Change in  cash and cash equivalents**                              |       | (4,981                           | )          | (5,673 | ) | (4,978 | ) |
| Opening  balance of cash and cash equivalents                         |       | 24,229                           |       | 29,902 |   | 34,880 |   |
| **Closing  balance of cash and cash equivalents**                     |       | 19,248                           |       | 24,229 |   | 29,902 |   |
|                                                                  |       |                             |       |   |   |   |   |
| **Supplemental  information:**                                        |       |                             |       |   |   |   |   |
| Income  taxes paid                                                    |       | 67                               |       | 23 |   | 13 |   |
| Interest  paid                                                        |       | 9,109                            |       | 9,730 |   | 12,251 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements*

 

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**MitteldeutscheBraunkohlengesellschaft mbH**

**Consolidated Statements of Shareholders’ Equity**

**inthousands of Euro (TEUR)**

 
| ** **                                | ** ** | ** **     | ** ** | ** **   | ** ** | ** **  | ** ** | **Balance**       | ** ** | ** **   | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|----------------|------------|--------------|------------|-------------|------------|-------------------|------------|--------------|------------|------------|------------|
| ** **                                | ** ** | **Subscribed** | ** ** | **Capital**  | ** ** | **Capital** | ** ** | **sheet profit/** | ** ** | **Minority** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **capital**    | ** ** | **increase** | ** ** | **reserve** | ** ** | **net profit**    | ** ** | **Interest** | ** ** | **Total**  | ** ** |
| **Balance  as of January 1, 2002**   |       | 30,678         |       | 22           |       | 292,043     |       | 118               |       | (44,529      | )          | 278,332    |       |
|                                      |       |           |       |         |       |        |       |              |       |         |       |       |       |
| Capital  increase                         |       | 22             |       | (22          | )          |        |       |              |       |         |       | 0          |       |
| Net  income 2002                          |       |           |       |         |       |        |       | 28,968            |       | 10,774       |       | 39,742     |       |
| Transfer  to capital reserve              |       |           |       |         |       | 1,178       |       | (1,178            | )          |         |       | 0          |       |
| Distributions                             |       |           |       |         |       |        |       | (24,118           | )          |         |       | (24,118    | )          |
| Disbursements  to minority shareholders   |       |           |       |         |       |        |       |              |       | (8,814       | )          | (8,814     | )          |
| **Balance  as of December 31, 2002** |       | 30,700         |       | 0            |       | 293,221     |       | 3,790             |       | (42,569      | )          | 285,142    |       |
|                                      |       |           |       |         |       |        |       |              |       |         |       |       |       |
| Net  income 2003                          |       |           |       |         |       |        |       | 20,862            |       | 12,198       |       | 33,060     |       |
| Transfer  from capital reserve            |       |           |       |         |       | (30         | )          | 30                |       | 0            |       | 0          |       |
| 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            |       |           |       |         |       |        |       |              |       | 0            |       |       |       |
| 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    |       |

 

*Seeaccompanying Notes to Consolidated Financial Statements*

 

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**NOTE A****          ****ORIGINATION AND NATURE OFBUSINESS**

 

ORIGINATION:For decades, raw brown coal is being mined in the Mid-German area byMitteldeutsche Braunkohlengesellschaft mbH (“MIBRAG” or “MIBRAG mbH” or “Company”)and its predecessors. The current MIBRAG mbH was created from the split-up ofMIBRAG AG, which had been previously owned by the Treuhandanstalt (the Germangovernment privatization agency), into three separate entities. Effective January 1,1994 a consortium comprising of NRG Energy, Inc. (“NRG”), Washington GroupInternational Inc. (formerly Morrison Knudsen Corporation) (“Washington Group”)and PowerGen plc. (“PowerGen”) jointly acquired 99 % of the active mining,power generation and related assets and liabilities from the Treuhandanstaltthrough its Dutch holding company, MIBRAG B.V. The remaining 1 % was transferredon December 18, 1996 from the German government privatization agency toLambique Beheer B.V., Amsterdam, a subsidiary of NRG, WGI Netherlands B.V.(formerly Morrison Knudsen B.V.), Amsterdam, and PowerGen Netherlands B.V.,Amsterdam, in equal portions (1/3 %) for each partner. In April 2001Washington Group and NRG performed a share buyback of PowerGen’s 33 % interestin MIBRAG; thus, resulting in Washington Group and NRG each owning 50 % ofMIBRAG.

 

NATUREOF BUSINESS: The operations of MIBRAG mbH include two open-cast brown coalmines in Profen and Schleenhain and rights on future mining reserves.Operations also include over 200 mega watts of power generation and one coalbriquette factoring plant. A significant portion of the sales of MIBRAG is madepursuant to long-term coal and energy supply contracts.

 

**NOTE B          SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

BASISOF PRESENTATION: The consolidated financial statements of MIBRAG mbH andsubsidiaries have been prepared in accordance with the German Commercial Code,which represents accounting principles generally accepted in Germany (“GermanGAAP”). German GAAP varies in certain significant respects from accountingprinciples generally accepted in the United States of America (“US GAAP”).Application of US GAAP would have affected the results of operations for eachof the years in the three-year period ended December 31, 2004 andshareholders’ equity as of December 31, 2004 and 2003 to the extentsummarized in note C to the consolidated financial statements.

 

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

 

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PRINCIPLESOF CONSOLIDATION: All material companies in which MIBRAG has legal or effectivecontrol are fully consolidated. In 2004, MIBRAG consolidated 6 (2003: 6, 2002:6) domestic subsidiaries.

 

Onesignificant investment, the Mitteldeutsche Umwelt- und Entsorgungs GmbH,Braunsbedra (“MUEG”), in which MIBRAG has an ownership interest of 50 %, isaccounted for in accordance with the equity method. This investment is referredto as an associated company in these financial statements.

 

Allother investments are included at cost and are referred to as participations inthese financial statements.

 

Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.

 

USEOF ESTIMATES: The preparation of financial statements in conformity withgenerally accepted accounting principles necessarily requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the balancesheet dates and the reported amounts of revenues and expenses during thereported periods. Actual results could differ from those estimates.

 

TOTALCOST METHOD: The income statement has been presented according to the totalcost (or type of expenditure) format as commonly used in Germany. According tothis format, production and all other expenses incurred during the period are classifiedby type of expenses.

 

REVENUERECOGNITION: The Company recognizes revenues from sales of products at the timepersuasive evidence of an arrangement exists, delivery has occurred, the priceto the customer is fixed, and collection is reasonably assured. When these fourconditions are met, the Company recognizes revenues as it considers thatrevenues are realizable or realized and earned. Service revenue consistsprimarily of training, maintenance, and installation services and is recognizedas the services are provided.

 

INTANGIBLEASSETS: Intangible assets are valued at acquisition cost and are amortized on astraight-line basis over their respective useful lives (3 to 25 years).

 

PROPERTY,PLANT AND EQUIPMENT: Property, plant and equipment acquired is recorded on thebasis of acquisition or manufacturing cost, including capitalized minedevelopment costs, and subsequently reduced by scheduled depreciation chargesover the assets’ useful lives as follows: buildings - 3 to 40 years, technicalfacilities and machinery - 4 to 25 years and facilities, factory and officeequipment - 5 to 10 years. The line item land and land rights refers to plotsof land and buildings as well as mining properties. Land is principallyaccounted for at acquisition

 

9

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costs.If, after utilization in mining, the value of a piece of land is expected to bepermanently impaired, it is written down to the lower value.

 

Maintenanceand repair costs are expensed as incurred. Depreciation is computed principallyby the straight-line method. The strip mines (exploration and mine developmentcosts) are amortized using the unit-of-production costs (amortization periodequals the life of the mines). Low value items are expensed in the year ofacquisition. Opportunities for special tax deductible depreciation wereutilized for both book and tax purposes in 1998 and prior years. This resultedin lower depreciation charges for German GAAP purposes over the remaininguseful life of the prospective assets.

 

Impairmenttests of long-term assets are made when conditions indicate a possible loss. Ifan impairment is indicated, the asset is written down to its estimated fairvalue. If, at a later date, the conditions leading to impairment no longer exist,the impairment loss is reversed up to the value of such assets, if the assethad not been impaired.

 

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

 

OVERBURDEN:Overburden represents the costs of removing the surface above a coal fieldsubsequent to the initial opening of the field to the extent that the removalexceeds what is needed for the current year’s coal extraction. These are costsincurred in advance in respect of future coal production. The overburden is valuedon an average cost basis.

 

INVENTORIES:Inventories are carried at the lower of average or market cost. Obsolescenceprovisions are made to the extent that 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.

 

RECEIVABLESAND OTHER ASSETS: All receivables are valued at cost, reduced for appropriatevaluation allowances.

 

CASHAND CASH EQUIVALENTS: Cash and cash equivalents include short-term,highly-liquid investments with remaining maturity dates of three months or lessat the time of purchase.

 

10

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SPECIALITEM FOR INVESTMENT SUBSIDIES AND INCENTIVES: To support the acquisition ofcertain tangible assets, investment allowances and subsidies were granted bythe German federal government and the states of Saxony and Saxony-Anhalt. Theapplication, conditions and payments of investment grants are governed byGerman law and regulations. Investment allowances and subsidies received andformally claimed are credited to the special item account. The special item isamortized into income over the normal operating useful lives of the underlyingassets to which the allowances and subsidies relate.

 

Asof January 1, 2002 MIBRAG acquired rights to transportation services of arailway company (TEUR 251,710) by partially waiving rights for future paymentsfrom the privatization agreement against the former shareholder Treuhandanstaltand debt of TEUR 8,963. The waiver of claims is presented on the balance sheetas deferred income in the line item special item for investment subsidies andincentives.

 

ACCRUALSFOR PENSION OBLIGATIONS: This accrual refers to one-time payments to non-tariffemployees to which MIBRAG is committed on one side and to the compensation forlost pension credits to which MIBRAG is obliged if employees agree to take partin the Company’s early retirement program on the other side. The valuation isbased on the net present value of the liability, assuming an interest rate of 6% per annum. Insurance policies were entered into to cover MIBRAG’s obligationin the case that MIBRAG will not be solvent at the due dates of the payment.

 

ENVIRONMENTALAND MINING PROVISIONS: Accruals for environmental and mining-related mattersare recorded when it is probable that a liability has been incurred and theamount of the liability can be reasonably estimated, based on current law andexisting technologies. These accruals are adjusted periodically as assessmentand utilization progress or as additional technical or legal informationbecomes 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.

 

PERSHARE AMOUNTS: Per share amounts are not disclosed in the financial statements.MIBRAG is a nonpublic enterprise.

 

11

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**NOTE C          ****SIGNIFICANT DIFFERENCES BETWEENGERMAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES**

 

TheMIBRAG consolidated financial statements comply with German GAAP, which differsin certain respects from US GAAP. The significant differences that affectconsolidated net income and shareholders’ equity of MIBRAG are set out below.

 

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

 

TheGerman GAAP financial statements include the historical cost book values ofassets transferred from a predecessor company.

 

Theacquisition of 99 % of the shares in MIBRAG mbH on January 1, 1994 byMIBRAG B.V. was accounted for using the purchase method of accounting. Thepurchase price adjustments to the historical cost basis have been pushed downto MIBRAG mbH for purposes of the reconciliation to US GAAP. The excess (TEUR387,183) of the fair value of the net assets acquired over the purchase pricewas proportionally allocated to reduce the value assigned to non-currentassets, excluding long-term investments.

 

12

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**Reconciliation to US GAAP**

 

Thefollowing is a summary of the significant adjustments to net income for 2004,2003 and 2002 and to shareholders’ equity at December 31, 2004 and December 31,2003, which would be required if US GAAP had been applied instead of GermanGAAP.

 
| ** **                                                                     | ** ** | ** ** | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **Note**   | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                     | ** ** | ** ** | ** ** | **TEUR**                         | ** ** | **TEUR** | ** ** | **TEUR** | ** ** |
| Net income  as reported in the consolidated income statement under German GAAP |       |       |       | 32,614                           |       | 33,060 |   | 39,742 |   |
| ** **                                                                     | ** ** | ** ** | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Adjustments  required to conform with                                          |       |       |       |                             |       |   |   |   |   |
| US  GAAP:                                                                      |       |       |       |                             |       |   |   |   |   |
| Fixed  assets                                                                  |       | (1)        |       | (6,332                           | )          | (3,542 | ) | 2,563 |   |
| Relocation  accruals                                                           |       | (2)        |       | (372                             | )          | (669 | ) | 84 |   |
| Investment  in power plants                                                    |       | (3)        |       | (2,356                           | )          | (2,635 | ) | (2,961 | ) |
| Interest  capitalization                                                       |       | (4)        |       | (435                             | )          | (435 | ) | (463 | ) |
| Receivable/payables  at non-market interest rates                              |       | (5)        |       | 0                                |       | 0 |   | (501 | ) |
| Overburden                                                                     |       | (6)        |       | 7,884                            |       | 11,702 |   | 14,984 |   |
| Environmental  and mining provisions                                           |       | (7)        |       | (1,491                           | )          | 18,869 |   | 458 |   |
| Pension  obligations                                                           |       | (8)        |       | 682                              |       | (1,067 | ) | 871 |   |
| Other                                                                          |       | (9)        |       | 1,475                            |       | 610 |   | 418 |   |
| Realized  gains and losses on securities                                       |       | (10)       |       | 84                               |       | (389 | ) | (261 | ) |
| **Net  income in accordance with US GAAP thereof:**                            | ** ** | ** ** | ** ** | **31,753**                       | ** ** | **55,504** | ** ** | **54,934** | ** ** |
| **Income  from continuing operations**                                         | ** ** | ** ** | ** ** | **31,753**                       | ** ** | **35,577** | ** ** | **54,934** | ** ** |
| **Cumulative  effect of a change in accounting principle**                     | ** ** | ** ** | ** ** | **0**                            | ** ** | **19,927** | ** ** | **0** | ** ** |

 

13

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| ** **                                                                                 | ** ** | ** ** | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|----------------------------------|------------|
| ** **                                                                                 | ** ** | **Note**   | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| ** **                                                                                 | ** ** | ** ** | ** ** | **TEUR**                         | ** ** | **TEUR** | ** ** |
| Shareholders’  equity as reported in the consolidated balance sheet under German GAAP |       |       |       | 308,837                          |       | 298,346 |   |
|                                                                                       |       |       |       |                             |       |   |   |
| Adjustments  required to conform with                                                      |       |       |       |                             |       |   |   |
| US  GAAP:                                                                                  |       |       |       |                             |       |   |   |
| Fixed  assets                                                                              |       | (1)        |       | 90,719                           |       | 97,051 |   |
| Relocation  accruals                                                                       |       | (2)        |       | 22,912                           |       | 23,284 |   |
| Investments  in power plants                                                               |       | (3)        |       | (52,799                          | )          | (60,084 | ) |
| Interest  capitalization                                                                   |       | (4)        |       | 3,844                            |       | 4,279 |   |
| Overburden                                                                                 |       | (6)        |       | (14,897                          | )          | (22,781 | ) |
| Environmental  and mining provisions                                                       |       | (7)        |       | 614                              |       | 2,105 |   |
| Pension  obligations                                                                       |       | (8)        |       | 235                              |       | (447 | ) |
| Other                                                                                      |       | (9)        |       | (4,990                           | )          | (6,630 | ) |
| **Shareholders’  equity in accordance with US GAAP**                                  | ** ** | ** ** | ** ** | **354,475**                      | ** ** | **335,123** | ** ** |

 

14

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**Reporting of statement ofshareholders’ 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,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                            | ** ** | **TEUR**                         | ** ** | **TEUR** | ** ** | **TEUR** | ** ** |
| Net  income in accordance with US GAAP                                |       | 31,753                           |       | 55,504 |   | 54,934 |   |
| Other  comprehensive income-unrealized gains on marketable securities |       |                             |       |   |   |   |   |
| Reclassification  adjustments for gains realized in net income        |       | (84                              | )          | 0 |   | 261 |   |
| Unrealized  holding gains/(losses) on securities                      |       | 165                              |       | 389 |   | 0 |   |
| **Comprehensive  income**                                             | ** ** | **31,834**                       | ** ** | **55,893** | ** ** | **55,195** | ** ** |

 

Statement of shareholders’ equity:

 
| ** **                                                                                    | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                    | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                    | ** ** | **TEUR**                         | ** ** | **TEUR** | ** ** | **TEUR** | ** ** |
| Stockholders’  equity according to US GAAP before accumulated other comprehensive Income |       | 354,005                          |       | 334,734 |   | 289,651 |   |
| Accumulated  other comprehensive income:                                                      |       |                             |       |   |   |   |   |
| Unrealized  holding gains/(losses) on securities                                              |       | 470                              |       | 389 |   | 0 |   |
| **Total  stockholders’ equity according to US GAAP including comprehensive income**      | ** ** | **354,475**                      | ** ** | **335,123** | ** ** | **289,651** | ** ** |

 

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# **II. Notes to significant US GAAP adjustments**

# ** **

**1. Fixed assets**

 

Thedifferences relate primarily to the following:

 

•                  In the US GAAP balance sheet as of January 1,1994, fixed asset balances, other than financial assets, were adjusted to theirfair market values, then reduced by the allocation of the difference betweenthe net acquisition costs for the MIBRAG shares and the fair market value ofMIBRAG’s net assets.

•                  The depreciation period of long term assets arebased upon periods acceptable for German tax purposes, which differ from theuseful lives for US accounting purposes.

•                  A write-up of previously impaired fixed assetsof the briquette plant Deuben (made in 1999 for German GAAP purposes) is notallowed under US GAAP.

•                  Special accelerated depreciation for taxpurposes is recorded in the German financial statements for 1998 and prioryears. This resulted in lower depreciation charges for German GAAP purposesover the remaining useful life of the prospective assets.

 

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

 

**Financial investment 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**

 

TheUS GAAP results recognized liabilities and deferred costs of TEUR 45,357 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.

 

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**3. Investment in power plants**

 

In1995 and 1996, third party investors loaned TEUR 110,624 to a MIBRAGsubsidiary, MIBRAG Industriekraftwerke GmbH & Co. KG (“MI”), which operatesthree lignite-fired power plants. The investment is structured such that thethird party investors obtain accelerated tax depreciation while retaining a putoption to sell their investments back to MIBRAG at predetermined prices atapproximately TEUR 15,600. The third party investments were consideredadditions to equity as minority interests for German GAAP, while thesearrangements are accounted for as a loan in accordance with US GAAP.

 

**4. Interest capitalization**

 

Interestis expensed in the German financial statements. Interest expense related toqualified assets, however, is capitalized and depreciated for US GAAP purposes.The effect in 2004, 2003 and 2002 reflects the depreciation of amountspreviously capitalized.

 

**5. Receivables/payables at non-market interest rates**

 

Certainaccounts receivable or loans payable are recorded in the German GAAP financialstatements at their nominal values. As they carry non-market interest rates,these receivables and payables were adjusted to their market values for US GAAPpurposes.

 

**6. Overburden**

 

Overburdenin the German financial statements includes depreciation on fixed assets(equipment) which are used for the waste removal. Because of the purchaseaccounting adjustments, a different amount of depreciation is included inoverburden in the US GAAP financial statements. Additionally, overburden as of January 1,1994 was written down to fair value.

 

**7. Environmental and mining provisions**

 

Certainaccrued mining reclamation provisions are accrued ratably in the Germanfinancial statements. For US GAAP purposes, MIBRAG implemented SFAS 143 on January 1,2003 and performed a complete new calculation of the asset retirement obligation(ARO) in accordance with this pronouncement at that date. In the year ofadopting this new standard, MIBRAG disclosed the difference between the oldrecognition of the endlake reserves as of December 31,

 

17

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2003(TEUR 168,532) and the new calculation of the ARO liability as of January 1,2003 (TEUR 148,605) as a cumulative effect of initially applying SFAS 143(cumulative effect of a change in accounting 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 unit creditmethod according to SFAS 87, “Employers’ Accounting for Pensions”. The methodused for the valuation of pension obligations under German GAAP differs invarious respects from the projected unit credit method.

 

**9. Other**

 

Certaincosts and income in the German financial statements are capitalized or deferredfor US GAAP purposes, respectively.

 

**10. Realized/Unrealized holding gains and losses**

 

ForUS GAAP purposes available-for-sale securities (primarily investments inspecial funds) are accounted for according to the cost adjusted for fair value(mark-to-market) method, under which the carrying amount is adjusted atfinancial statement date for changes in fair value (i.e., they are carried atmarket value). Unrealized gains and losses for a period are excluded fromearnings and reported as other comprehensive income. For German GAAP purposesthese securities are accounted for at cost. If the market value is below cost,a loss is recognized for German GAAP purposes.

 

**11. Deferred taxes**

 

Thedifferences noted above result in temporary differences which, when combinedwith tax loss carry-forwards, would result in a net deferred tax asset of TEUR90,313 and TEUR 80,369 at December 31, 2004 and December 31,2003, respectively. Because of available negative evidence, a 100 % valuationallowance would have been recorded at each year-end. Because no net deferredtaxes were recorded for German or US GAAP purposes, no adjustment to net incomeor shareholders equity is listed in the preceding reconciliation.

 

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**11. U.S. GAAP Accounting Pronouncements**

 

***Adoption of accounting standards***

 

In December 2003, theFASB issued a revision of Interpretation No. 46, “Consolidation of VariableInterest Entities” (“FIN 46R”). This interpretation clarifies the applicationof Accounting Research Bulletin No. 51 relating to consolidation of variableinterest entities (“VIE’s”). In general, a VIE is a corporation, partnership,trust, or any other legal structure used for business purposes which has one ormore of the following characteristics: (a) equity investors lack certaincharacteristics of a controlling financial interest, (b) invested equity thatis not sufficient for the entity to support its activities, or (c) equityinvestors have voting rights not proportionate to their economic interests andthe entity’s activities involved or conducted on behalf of an investor withdisproportionately few voting rights.

 

FIN 46R requires the primary beneficiary of VIE’s toconsolidate such VIE. FIN 46R also sets forth certain disclosures regardinginterests in VIE’s.

 

A nonpublic entity is required to apply the provisionsof FIN 46R immediately to VIE’s created after December 31, 2003. Theadoption of those provisions was not material. For a nonpublic entity’sinterest in other VIE’s, FIN 46R applies for the first fiscal year beginningafter December 31, 2004. The application of FIN 46R would require theCompany to consolidate the special investment funds rather than to account forthe investment in such funds as available-for-sale securities. This wouldresult in certain unrealized gains and losses currently accounted for in othercomprehensive income to be accounted for in the Company’s income statement.

 

In May 2003, the FASB issued SFAS 150, “Accounting forCertain 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 150 requires thatcertain types of freestanding financial instruments that have characteristicsof both liabilities and equity be classified as liabilities with generallyrecognition 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 for mandatory redeemable financial instruments of nonpublic entities.For nonpublic entities, mandatory redeemable financial instruments are subjectto the provisions of this Statement for the first fiscal period beginning afterDecember 15, 2003. The adoption of SFAS 150 did not have a material impacton the financial statements.

 

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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*.”ABP Opinion 29 provided an exception to the basic measurement principle (fairvalue) for exchanges of similar productive assets. That exception required thatsome non-monetary exchanges, although commercially substantive, be recorded ona carryover basis. SFAS No. 153 eliminates the exception to fair value forexchanges of similar productive assets and replaces it with a general exceptionfor exchange transactions that do not have commercial substance – that is,transactions that are not expected to result in significant changes in the cashflows of the reporting entity. SFAS No. 153 is effective for us in the thirdquarter of 2005 but is not expected to have a significant impact on our resultof operations or cash flows.

 

20

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

 

MIBRAGmbH markets its coal principally to electric utilities in Germany. As of December 31,2004 and 2003 accounts receivable from electric utilities totaled TEUR 24,677and TEUR 23,251, respectively. Credit is extended based on an evaluation of thecustomer’s financial condition. Credit losses are provided for in the financialstatements and consistently have been minimal.

 

MIBRAGmbH is committed under several long-term contracts to supply raw brown coal andwhirl fine coal to the Schkopau power station and the Lippendorf power station.Under the terms of the Schkopau Agreement, MIBRAG mbH may deliver annually upto 5.8 million tons of coal. The agreement is in effect until 2010, with anoption for the purchaser to extend the agreement for another 10 years. Theprice to be paid by the Schkopau power station is a fixed price adjusted by anannual escalation rate.

 

TheLippendorf Agreements provide for deliveries of up to 10 million tons of rawbrown coal per year from 1999 through 2040 with an option for the customers toextend for an additional 3-year period. These Agreements were closed withVereinigte Energiewerke AG (VEAG), Berlin, E.ON Kraftwerke GmbH, Hanover, andEnBW Lippendorf Beteiligungsgesellschaft mbH, Stuttgart. The price to be paidby the Lippendorf power station is a base-price with escalation and adjustmentbased on quality of the coal delivered. The first bloc of the new Lippendorfpower station went into full operation in October 1999 and the second blocwent into effect in May 2000.

 

Asubstantial portion of the Company’s coal reserves is dedicated to theproduction of coal for such agreements.

 

**NOTE E          ****BVS SETTLEMENT 2002**

 

Inthe fourth quarter of 2002, MIBRAG mbH successfully negotiated withBundesanstalt fuer vereinigungsbedingte Sonderaufgaben (“BvS”) amendments tothe original agreement on transportation credit matters that had been enteredinto with the German 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

 

21

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through the settlement agreement. Both the deferredrevenue and the rights will be amortized straight-line over the term of thecontract of 18.75 years.

 

**NOTEF          INTANGIBLE ASSETS**

 
| ** **                                           | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **TEUR**                    | ** ** | **TEUR**                    | ** ** |
| Concessions,  trade marks, patents and licenses cost |       | 304,448                     |       | 290,661                     |       |
| Less:  accumulated amortization                      |       | (48,300                     | )          | (34,302                     | )          |
| Net  book value                                      |       | 256,148                     |       | 256,359                     |       |

 

The aggregate amortization expense for amounted toTEUR 14,098 (2004), TEUR 14,097 (2003) and TEUR 14,342 (2002). For each of thefollowing years the aggregate amortization expense is estimated to be:

 
| ** ** | ** ** | **TEUR** | ** ** |
|------------|------------|----------|------------|
| 2005:      |       | 16,060   |       |
| 2006:      |       | 17,020   |       |
| 2007:      |       | 16,955   |       |
| 2008:      |       | 16,885   |       |
| 2009:      |       | 16,885   |       |

 

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**NOTE G          ****PROPERTY, PLANT AND EQUIPMENT**

 

Themajor categories of fixed assets are the following:

 
| ** **                      | ** **                                           | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------|------------------------------------------------------|-----------------------------|------------|-----------------------------|------------|
| ** **                      | ** **                                           | **TEUR**                    | ** ** | **TEUR**                    | ** ** |
| Property,  plant and equipment  |                                                 |                        |       |                        |       |
| cost                            | - land  and land rights                              |                        | 187,363    |                        | 185,961    |   |
|                            | -  buildings                                         |                        | 137,801    |                        | 139,156    |   |
|                            | -  strip mines                                       |                        | 57,372     |                        | 45,772     |   |
|                            | -  technical equipment and machinery                 |                        | 809,094    |                        | 805,217    |   |
|                            | -  factory and office equipment                      |                        | 111,388    |                        | 109,831    |   |
|                            | - payments  on account and assets under Construction |                        | 20,672     |                        | 6,715      |   |
| Total  cost                     |                                                 | 1,323,690                   |       | 1,292,652                   |       |
| Less:  accumulated depreciation |                                                 | (839,789                    | )          | (803,022                    | )          |
| Net  book value                 |                                                 | 483,901                     |       | 489,630                     |       |

 

Theline item strip mines includes the reconstruction cost incurred up to July 1,1990 in respect of the mining pits of Profen and Schleenhain. Depreciation hasbeen provided according to actual extraction of coal from the mine in relationto the total coal volume in the mine. The construction cost of strip mines includethe cost for the removal of ground cover up to the coal banks as well as theremoval of rock banks until the installation of production equipment and thecommencement of raw brown coal production is possible. In 2004, a new miningfield (Schwerzau) within the mine Profen was opened leading to additions to thestrip mines.

 

Totaldepreciation charges are as follows: TEUR 52,498 (2004), TEUR 55,483 (2003),and TEUR 53,362 (2002), including normal depreciation and unplanneddepreciation.

 

**NOTE H          PARTICIPATIONS(INCLUDING ASSOCIATED COMPANY)**

 

MIBRAG’sinvestment in MUEG is accounted for using the equity method. MUEG was foundedin 1990 and coordinates the waste disposal activities in the Central Germanbrown coal area. The equity value is TEUR 6,757 and TEUR 6,615 as of December 31,2004 and 2003, respectively and the cost basis is TEUR 6,740 and TEUR 6,376 at December 31,2004 and 2003.

 

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One investmentwas sold in 2004 at the book value. Investments in four other companies areaccounted for at cost.

 

**NOTE I          LOANRECEIVABLE FROM PARTICIPATIONS**

 

In 1995, MIBRAGsold its district heating network assets to a company in which it holds aparticipation. The sales price is being repaid in equal installments of TEUR375 over a period of 25 years. The interest rate is fixed at 5.4 percentbeginning in 2000.

 

The fair marketvalue of the loan approximates the book value, which amounted to TEUR 4,924 andTEUR 5,999 at December 31, 2004 and 2003, respectively.

 

**NOTE J          ****OTHER LOAN RECEIVABLES**

 

Theother loans were granted to the third party investors in a subsidiary of MIBRAGmbH. These loans were financed by a borrowing from KfW (Kreditanstalt fuerWiederaufbau). KfW granted MIBRAG mbH a loan of TEUR 52,663 due on December 30,2005 at interest rates between 6.26 % and 6.82 %. The balance of the loan as ofDecember 31, 2004 and 2003 amounted to TEUR 15,288 and TEUR 18,969 whichapproximates the fair value as of this date. The loans to the third partyinvestors of the subsidiary of MIBRAG mbH were granted at the same conditionsas those applicable to the loan between MIBRAG mbH and KfW.

 

**NOTE K          ****OVERBURDEN**

 

Thereconciliation of the overburden costs is as follows:

 
| ** **  | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|-------------|------------|----------------------------|------------|----------------------------|------------|
| ** **  | ** ** | **Metric tons**            | ** ** | **Value**                  | ** ** | **Metric tons** | ** ** | **Value** | ** ** |
| ** **  | ** ** | ** **                 | ** ** | **TEUR**                   | ** ** | ** ** | ** ** | **TEUR** | ** ** |
| Profen      |       | 20.7                       |       | 77,223                     |       | 20.8 |   | 77,330 |   |
| Schleenhain |       | 22.1                       |       | 72,590                     |       | 21.9 |   | 73,497 |   |
|        |       | 42.8                       |       | 149,813                    |       | 42.7 |   | 150,827 |   |

 

The basis for the determination of the overburden is thetotal quantity of partially exposed raw brown coal.

 

24

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**NOTE L          ****TRADE RECEIVABLES**

 

Tradereceivables were disclosed in the balance sheet, net of allowances, as follows:

 
| ** **        | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **        | ** ** | **TEUR**                    | ** ** | **TEUR**                    | ** ** |
| Trade receivables |       | 31,402                      |       | 31,205                      |       |
| Less allowances   |       | (251                        | )          | (850                        | )          |
|              |       | 31,151                      |       | 30,355                      |       |

 

**NOTE M          ****OTHER INVESTMENTS**

 

Other investments totaled TEUR 36,537and TEUR 52,158 at December 31, 2004 and 2003,respectively. The balance consists of investment funds of MI (TEUR 35,938 andTEUR 45,879 at December 31, 2004 and 2003, respectively), which werespecially set up to reinvest the additional liquidity resulting from the entryof new investors into a subsidiary of MIBRAG and to short-term investments(TEUR 539 and TEUR 6,279) at December 31, 2004 and 2003, respectively.

 

Interest on otherinvestments of TEUR 1,995, TEUR 2,195, and TEUR 2,386 were disclosed ininterest income in 2004, 2003 and 2002, respectively.

 

**NOTE N          ACCRUALSFOR PENSIONS AND SIMILAR OBLIGATIONS**

 

Theprovision relates primarily to briquette benefit claims of active and retiredemployees on the basis of the collective bargaining agreement of November 9,1993 in respect to briquette benefit claims. Individuals entitled must beemployees of the Company at the date of retirement. The right does not vest andlapses with early termination of the working relationship or upon receipt of socialplan benefits.

 

Thecalculation is based on an actuarial valuation, which takes into account theright to the redemption value of DM 185.00 (EUR 94.60) per metric ton ofbriquettes as specified in the collective bargaining agreement, the employeesentitled to benefits as of December 31, 2004, and official demographictables. 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.

 

Inaddition, pension obligations for early retirement benefits were accrued. Theseamounts have

 

25

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alsobeen calculated on the basis of actuarial valuations.

 

**NOTE O          ****TAXATION ACCRUALS**

 

MIBRAGaccrued TEUR 330 (2003: TEUR 428) for property taxes.

 

In2004,**one subsidiary of MIBRAG had to pay municipal trade taxes the first timein many years, TEUR 3,154 were accrued for this purpose. The tax loss carryforwards for municipal trade taxes of that subsidiary were fully used in 2003.The parent company and all other consolidated companies did not pay incometaxes in 2004. In 2003 and 2002, MIBRAG did not provide for income taxes underGerman GAAP because of tax losses brought forward from prior years for allconsolidated companies.

 

Deferredtax assets and liabilities have not been recorded because there are nosignificant differences between the German GAAP financial statement and the taxbases of the assets and liabilities. The recording of a deferred tax benefitfor net loss carry-forwards is prohibited under German GAAP.

 

TheGerman income tax rate applicable to MIBRAG (corporate income tax, solidaritysurcharge, trade tax) is 35.98 % in 2004 (2003: 35.98 %, 2002: 37.22 %) onundistributed income. The Company has an effective tax rate of 7.87 (2003: 0 %,2002: 0 %), because the Company has no taxable income for corporate incomepurposes and, for one subsidiary only, taxable income for trade tax purposesonly.

 

Theincome taxes paid in 2004 amounting to TEUR 67 (2003: TEUR 23; 2002: TEUR 13) relateto that subsidiary of MIBRAG.

 

At December 31, 2004 the Company hadapproximately TEUR 249.685 net operating loss carry-forwards for corporateincome tax purposes and TEUR 328.453 for municipal trade tax purposes, which donot expire and may be applied against future taxable income.

 

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**NOTE P          ****ENVIRONMENTAL AND MININGPROVISIONS**

 

Thefollowing is a summary of environmental and mining provisions:

 
| ** **                                          | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **TEUR**                    | ** ** | **TEUR**                    | ** ** |
| 1)  Mining  reclamation provisions        |       | 162,233                     |       | 157,383                     |       |
| 2)  Provision for  environmental measures |       | 5,040                       |       | 5,040                       |       |
| 3)  Landscaping                           |       | 4,285                       |       | 4,987                       |       |
| 4)  Planting                              |       | 1,001                       |       | 998                         |       |
| 5)  Relocation of  villages               |       | 19,941                      |       | 20,194                      |       |
|                                                |       | 192,500                     |       | 188,602                     |       |

 

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1) Mining reclamation provisions

 

MIBRAG is responsible for reclaiming the mines Profenand Schleenhain. The mining field reclaimation of the Profen and Schleenhainmines after the ceasing of production is planned for 2029 to 2046 and 2041 to2073, respectively. A legally binding closure plan laying down the principlesfor action plans in accordance with the Federal Mining Law (Bundesberggesetz)is normally approved by the relevant mining authorities two years in advance tothe commencement of production. The liability to reclaim the area exists fromthe start of mining activities. In each year of coal extraction thereclaimation costs are accrued ratably using the relation of the coal mined tothe total coal mine volume.

 

The calculation of the total cost for reclaimingmining fields has been made on the basis of a third party opinion andestimations on the basis of current prices. These costs consist mainly of costsfor reconstruction, bank reinforcement, dewatering and watering.

 

For the future reclamation of the Schleenhain mine, anew opinion was made in 2004 indicating that the estimated total redevelopmentexpenses would not significantly change.

 

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

 

2)Provision for environmental measures

 

Theprovision for the environmental measures is determined in respect to disposalsites and old locations of MIBRAG mbH in refinement and mining areas on whichwaste deposits can be

 

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found.The accrued amount is derived from article 19.3 of the purchase and salesagreement. Qualifying costs that exceed the provision are to be reimbursed bythe Bundesanstalt fuer vereinigungsbedingte Sonderaufgaben (BvS).

 

3) Landscaping

 

This provision includes costs for reclaiming disposalareas and leveling the area outside the embankments. These costs relate solelyto continuous landscaping, while costs for closing down landscaping areincluded in certain mining provisions.

 

4) Planting

 

Provision is made for costs in connection withtemporary planting as of December 31, 2004 and December 31,2003.

 

5) Relocation of villages

 

The provision for the relocation of villages is inrespect to the relocation of municipalities, which is necessary for theexpansion of the Profen and Schleenhain mines. The calculation of the provisionis based on a method that takes into account the cost for project planning,infrastructural development, cemetery relocation, demolition and landmarkpreservation. The provision is accrued in equal annual amounts, commencing twoyears before the relocation starts and ending in the middle of the relocationyear.

 

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**NOTEQ          OTHER ACCRUALS**

 

Accruedliabilities are as follows:

 
| ** **                                 | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | **TEUR**                   | ** ** | **TEUR**                   | ** ** |
| 1)  Severance payments                     |       | 11,211                     |       | 9,395                      |       |
| 2)  Personnel expenses                     |       |                       |       |                       |       |
| - Employment  anniversaries                |       | 1,134                      |       | 1,236                      |       |
| -  Vacation and other compensated absences |       | 434                        |       | 697                        |       |
| -  Other                                   |       | 1,347                      |       | 832                        |       |
|                                       |       | 2,915                      |       | 2,765                      |       |
| 3)  Remaining accruals                     |       | 8,480                      |       | 7,837                      |       |
|                                       |       | 22,606                     |       | 19,997                     |       |

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1) Severancepayments

 

Bases for theprovisions are signed social plan framework agreements in which the measuresfor the personnel adjustments are defined. The employees are entitled to aone-time severance payment if the company initiates termination or in case ofretrenchments. The severance payments are limited to TEUR 26 per person.Employees participating in early retirement programs are entitled to additionalcompensation, mainly for the reduction in statutory pension payments due toearly retirement.

 

2) Personnelexpenses

 

MIBRAG mbH grantsawards in recognition of long service in the Company, based on the collectivebargaining agreement dated January 1, 1992 and the Company agreement datedOctober 1, 1995. The employees are entitled to financial awards, whichincrease in proportion to their employment periods. The valuations of thebenefits were based on actuarial valuations.

 

The liability forvacation and other compensated absences arises from the days and shiftsoutstanding at balance sheet dates, which have been determined for eachemployee.

 

The accrual forprofit sharing is calculated based on the actual net income of the MIBRAG Groupexcluding extraordinary items and based on the achievement of goals in workingsafety.

 

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3) Remainingaccruals

 

Composition:

 
| ** **                           | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **TEUR**                    | ** ** | **TEUR**                    | ** ** |
| Outstanding invoices                 |       | 3,125                       |       | 4,188                       |       |
| Mine damages                         |       | 2,240                       |       | 1,790                       |       |
| Water usage fees                     |       | 484                         |       | 447                         |       |
| Professional service and  litigation |       | 1,226                       |       | 1,067                       |       |
| Others                               |       | 1,405                       |       | 345                         |       |
|                                 |       | 8,480                       |       | 7,837                       |       |

 

**NOTE R          ****LIABILITIESTO BANKS**

 

Liabilitiesto banks consist of the following:

 
| ** **                                                       | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                       | ** ** | **TEUR**                    | ** ** | **TEUR**                    | ** ** |
| a) Loan to finance the power  stations                           |       |                        |       |                        |       |
| - build up the power station  of Waehlitz                        |       | 46,272                      |       | 49,831                      |       |
| - modernization of the power  stations in Deuben and Mumsdorf    |       | 28,318                      |       | 33,037                      |       |
| - finance the additional  paid-in capital by the investors of MI |       | 15,288                      |       | 18,969                      |       |
| b) Loan to finance the  Schleenhain mine investments             |       | 47,894                      |       | 57,653                      |       |
| c) Loan for home  construction                                   |       | 1,867                       |       | 2,105                       |       |
| d) Deferred interest                                             |       | 439                         |       | 506                         |       |
|                                                             |       | 140,078                     |       | 162,101                     |       |

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a) Loan to finance the power stations

 

Theseliabilities refer to three loans from the Kreditanstalt fuer Wiederaufbau,Frankfurt/Main.

 

Thefirst loan was granted December 9, 1992 for the construction of a rawbrown 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.The repayments are due in 40 equal amounts commencing from June 30, 1998.

 

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On April 3, 1995 two additional loan agreementswere closed with Kreditanstalt fuer Wiederaufbau (KfW). One of these contractswas closed for partially financing the modernization and reshaping of bothindustrial power plants in Deuben and Mumsdorf (TEUR 61,355). The redemptionperiod is 13 years starting on December 31, 1998. Interest has to be paidbetween 6.04 % and 6.80 % for the respective tranches.

 

The other loan at the amount of TEUR 52,663 wasgranted to partially finance the limited partner capital contribution ofinvestors. The redemption period is 13 years. In 1996, the loan proceeds werereceived by MIBRAG (TEUR 52,663). In 2002, MIBRAG made principal paymentsof TEUR 4,602. The interest rates are between 6.26 % and 6.82 %.

 

Interestexpense for the three loans amounted to TEUR 8,755, TEUR 8,571 andTEUR 8,449 in 2004, 2003, and 2002, respectively.

 

b)Loan to finance the Schleenhain mine investments

 

In1997 and 1998, loan contracts were entered into with four banks to finance thecapital expenditures at the Schleenhain mine, especially the construction ofthe blending yard and environmental measures for the conveyor belts. In 1998TEUR 61,355 and in 1999 TEUR 10,226 were borrowed at interest ratesbetween 3.5 % and 5.4 % per annum, which are adjusted in the years after.

 

c) Loan for home construction

 

Theloans for home construction were granted by the Deutsche Bank AG and the NordLB for relocation-related home construction purposes in Hohenmoelsen.

 

Forthe loan granted by Deutsche Bank AG amounting to TEUR 1,333, an interest rateof 5.6 % was set for a period ending 2007. For the two loans granted by Nord LBat the amounts of TEUR 624 and TEUR 861 there are no interest payments dueuntil 2007 and 2010, respectively. Thereafter, the rate is fixed at 8 % perannum.

 

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**NOTE S          OTHERPAYABLES**

 

Theother liabilities refer to:

 
| ** **                                 | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **TEUR**                    | ** ** | **TEUR**                    | ** ** |
| Tax authorities                            |       | 3,865                       |       | 4,140                       |       |
| Wages and salaries                         |       | 3,302                       |       | 3,315                       |       |
| Social security  contributions             |       | 2,479                       |       | 2,463                       |       |
| Tax lease                                  |       | 1,237                       |       | 1,872                       |       |
| Usage reimbursement for the  mining rights |       | 0                           |       | 686                         |       |
| Others                                     |       | 1,348                       |       | 1,705                       |       |
|                                       |       | 12,231                      |       | 14,181                      |       |

 

**NOTET          MATURITY PERIODSOF LIABILITIES**

 

The maturityperiods of liabilities (in TEUR) are as follows:

 
| ** **                            | ** ** | **Liabilities to  banks *)** | ** ** | **Payments  received** | ** ** | **Trade  payables** | ** ** | **Payables to  participations** | ** ** | **Other liabilities** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|------------------------------|------------|------------------------|------------|---------------------|------------|---------------------------------|------------|-----------------------|------------|-----------|------------|
|                                  |       |                         |       |                   |       |                |       |                            |       |                  |       |      |       |
| Balance  as of December 31, 2004 |       | 140,078                      |       | 88                     |       | 14,555              |       | 2,253                           |       | 12,231                |       | 169,205   |       |
| thereof:  maturity period             |       |                         |       |                   |       |                |       |                            |       |                  |       |      |       |
| - up  to 1 year                       |       | 22,290                       |       | 88                     |       | 14,428              |       | 2,253                           |       | 11,106                |       | 50,165    |       |
| - 1-5  years                          |       | 83,253                       |       | 0                      |       | 127                 |       | 0                               |       | 1,125                 |       | 84,505    |       |
| - more  than 5 years                  |       | 34,535                       |       | 0                      |       | 0                   |       | 0                               |       | 0                     |       | 34,535    |       |

 

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**) Liabilities to banks are collateralized by mortgages at an amount ofTEUR 91,744.*

 

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Annualmaturities of liabilities to banks are as follows:

 
| **Year of maturity** | ** ** | **Amount  in TEUR** | ** ** |
|----------------------|------------|---------------------|------------|
| 2005                 |       |                |       | 22,290 |   |
| 2006                 |       | 22,109              |       |   |   |
| 2007                 |       | 21,887              |       |   |   |
| 2008                 |       | 22,285              |       |   |   |
| 2009                 |       | 16,972              |       |   |   |
|                 |       |                |       | 83,253 |   |
| Thereafter           |       |                |       | 34,535 |   |
| Total                |       |                |       | 140,078 |   |

 

The estimated fair value of the Company’s liabilitiesto banks approximates the carrying value.

 

**NOTE U          COMMITMENTSAND CONTINGENCIES**

 

From time totime, the Company may be subject to legal proceedings and claims in theordinary course of business. At December 31, 2004, the Company was notaware of any legal proceedings or claims that the Company believes will have,individually or in the aggregate, a material adverse effect on the Company’sbusiness, financial condition, or results of operations.

 
| ** **                             | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **TEUR**                    | ** ** | **TEUR**                    | ** ** |
| Guarantees for indebtedness  of others |       | 13,256                      |       | 16,416                      |       |
| Other contractual  obligations         |       | 80,400                      |       | 60,800                      |       |

 

Theother contractual obligations refer to long-term investment projects in themines Profen and Schleenhain.

 

MIBRAGleases office equipment, railway-carriages and vehicles as well as vendingmachines, expiring at various dates. Rental and lease expenses amounted to TEUR684, TEUR 819 and TEUR 1,200 in the years ended December 31, 2004, 2003and 2002, respectively.

 

Withthe operators of the Lippendorf power plant a long-term raw brown coal supplycontract was concluded which obliges MIBRAG to guarantee the annual delivery of10 million tons of raw brown coal to the power plant over a period of 40 years.This contract was closed assuming the relocation of the Heuersdorf village.Some of the inhabitants of that village try to remain the village

 

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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.

 

# **NOTE V**          SEGMENT INFORMATION

 

MIBRAG operates as one segment. Sales were exclusivelyachieved in Germany, and all long-lived assets are located in Germany. Saleswere almost completely limited to the new German Federal States, mainly toSaxony-Anhalt, Thuringia and Saxony.

 

Net sales by product and service:

 
| ** **                                                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                       | ** ** | **TEUR** | ** ** | **TEUR** | ** ** | **TEUR** | ** ** |
| Raw brown coal and coal  products                                |       | 239,232  |       | 249,229  |       | 222,423  |       |
| Electrical power, heating  and steam                             |       | 28,814   |       | 28,074   |       | 33,167   |       |
| Other products and services                                      |       | 2,414    |       | 3,853    |       | 5,163    |       |
| Further charging of  transport services, ash disposal and others |       | 23,104   |       | 22,700   |       | 37,303   |       |
|                                                             |       | 293,564  |       | 303,856  |       | 298,056  |       |

 

Several major customers account for 10 % or more ofMIBRAG’s revenues. As a percentage of total sales such customers accounted for24 %, 24 % and 12 % in 2004; 23 %, 23 % and 12 % in 2003 and 33 %, 28 % and 15% in 2002.

 

**NOTEW          RELATED PARTYTRANSACTIONS**

 

Agreements forconsulting and management services were closed in respect to the miningoperations and the refinement facilities between MIBRAG and two subsidiaries ofthe common parent companies. These contracts determine certain consultingservices to be provided by the two subsidiaries Morrison Knudsen DeutschlandGmbH (MKD) and Saale Energie Services GmbH (SES) to MIBRAG or its subsidiaries.MIBRAG is obliged to determine and pay the cost-related remuneration for theseservices. Expenditures for MIBRAG amount to TEUR 8,755, 8,755, and TEUR 8,755for 2004, 2003 and 2002, respectively. As of December 31, 2004 and 2003,MIBRAG still had liabilities amounting to TEUR 84 and TEUR 85, respectivelytowards

 

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MKDand SES for the provision of these services.

 

Partof the lignite deliveries from 2002 to 2004 to the Schkopau power plant weresales 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 amount to TEUR 31,066,and TEUR 34,025, and TEUR 30,223 in 2004, 2003 and 2002, respectively. Theconditions of delivery are the same as to the other (third party) operator ofthe Schkopau power plant. As of December 31, 2004 and 2003, MIBRAGdisclosed receivables of TEUR 3,634 and TEUR 2,944 respectively from SEG.

 

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