**Exhibit 99.1**

 

 
|   | **Mitteldeutsche Braun-  kohlengesellschaft mbH,  Theissen**                                                                                                                                                                                    |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                            |
|   | Report on the audit of the  financial statements for the years ended December 31, 2003, 2002 and  2001 in accordance with German GAAP and on the audit of the US GAAP  reconciliations for the years ended December 31, 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 endedDecember 31,  2003, 2002 and 2001                    |   |
|                                                                                                            |   |
| Consolidated Balance Sheets  at December 31, 2003 and 2002                                                 |   |
|                                                                                                            |   |
| Consolidated  Statements of Cash Flows for the years endedDecember 31,  2003, 2002 and 2001                |   |
|                                                                                                            |   |
| Consolidated  Statements of Shareholders’ Equity for the yearsended  December 31, 2003, 2002 and 2001 |   |
|                                                                                                            |   |
| Notes to the  Consolidated Financial Statements                                                                 |   |

 

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**REPORT OF INDEPENDENT AUDITORS**

 

 

To the Shareholders ofMIBRAG mbHTheissen, Germany

 

 

Wehave audited the accompanying consolidated balance sheets of MitteldeutscheBraunkohlengesellschaft mbH and its subsidiaries (MIBRAG or Group) as ofDecember 31, 2003 and 2002, and the related consolidated statements ofincome, shareholders’ equity and cash flows for each of the years in thethree-year period ended December 31, 2003. These consolidated financialstatements are the responsibility of the Group’s management. Our responsibilityis to express an opinion on these financial statements based on our audits.

 

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

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of MIBRAGas of December 31, 2003 and 2002 and the consolidated results of itsoperations and cash flows for each of the years in the three-year period endedDecember 31, 2003, in conformity with accounting principles generallyaccepted in Germany.

 

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Generallyaccepted accounting principles in Germany vary in certain significant respectsfrom generally accepted accounting principles in the United States of America.We have audited the effect of applying accounting principles generally acceptedin the United States of America on the results of operations for the yearsended December 31, 2003 and 2002 and on shareholders’ equity as ofDecember 31, 2003 and 2002. We have not audited these effects on theresults of operations for the year ended December 31, 2001. In ouropinion, the effect of applying accounting principles generally accepted in theUnited States of America on the results of operations for the years endedDecember 31, 2003 and 2002 and shareholders’ equity as of December 31,2003 and 2002 are fairly presented in Note C to the consolidated financialstatements.

 

 

**Deloitte & Touche**GmbH

Wirtschaftspruefungsgesellschaft

 

Halle, Germany

January 30, 2004

 

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**Mitteldeutsche Braunkohlengesellschaft mbHConsolidated Statements of Incomein thousands of Euro (TEUR)**

 
|                                                                                |   | **Year  ended December 31,** |       |
|-------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                |   | **2003**                          |       | **2002** |   | **2001** |   |
| Sales revenue                                                                       |   | 303,856                           |       | 298,056 |   | 306,392 |   |
| Changes in inventories                                                              |   | 5,372                             |       | (6,474 | ) | (13,014 | ) |
| Own costs capitalized                                                               |   | 1,467                             |       | 3,481 |   | 1,605 |   |
| Other operating income                                                              |   | 42,719                            |       | 43,557 |   | 16,396 |   |
| Total performance                                                                   |   | 353,414                           |       | 338,620 |   | 311,379 |   |
|                                                                                |   |                              | ** ** |   | ** ** |   | ** ** |
| Cost of materials                                                                   |   | 90,829                            |       | 84,848 |   | 73,048 |   |
| Personnel expenses                                                                  |   | 99,992                            |       | 91,904 |   | 84,628 |   |
| Depreciation on intangible and  tangible fixed assets                               |   | 69,582                            |       | 67,704 |   | 45,820 |   |
| Other operating expenses                                                            |   | 50,158                            |       | 46,828 |   | 70,032 |   |
| Total operating expenses                                                            |   | 310,561                           |       | 291,284 |   | 273,528 |   |
|                                                                                |   |                              |       |   |   |   |   |
| Operating result                                                                    |   | 42,853                            |       | 47,336 |   | 37,851 |   |
|                                                                                |   |                              | ** ** |   | ** ** |   | ** ** |
| Income from associated company  and from companies in which participations are held |   | 920                               |       | 927 |   | 202 |   |
| Income from financial assets                                                        |   | 1,848                             |       | 2,175 |   | 2,495 |   |
| Depreciation on financial assets  and short term investments                        |   | (390                              | )          | (1,379 | ) | (1,296 | ) |
| Interest income                                                                     |   | 3,461                             |       | 16,859 |   | 5,763 |   |
| Interest expense                                                                    |   | (10,435                           | )          | (24,360 | ) | (13,526 | ) |
| Net income from ordinary activities                                                 |   | 38,257                            |       | 41,558 |   | 31,489 |   |
|                                                                                |   |                              |       |   |   |   |   |
| Income taxes                                                                        |   | 47                                |       | 14 |   | 6 |   |
| Other taxes                                                                         |   | 5,150                             |       | 1,802 |   | 1,458 |   |
| Net income                                                                          |   | 33,060                            |       | 39,742 |   | 30,025 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements,*

 

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**Mitteldeutsche Braunkohlengesellschaft mbHConsolidated Balance Sheetsin thousands of Euro (TEUR)**

 
|                                                                    |   | **At  December 31,** |   |
|-------------------------------------------------------------------------|--------|---------------------------|--------|
|                                                                    |   | **2003**                  |   | **2002** |   |
| **ASSETS**                                                              |   |                      |   |   |   |
| **Non-current assets**                                                  |   |                      |   |   |   |
| Intangible assets                                                       |   |                      |   |   |   |
| Concessions, trade marks,  patents and licenses                         |   | 256,359                   |   | 247,709 |   |
|                                                                    |   |                      |   |   |   |
| Property, plant and equipment                                           |   |                      |   |   |   |
| 1. Land and mining property                                             |   | 166,635                   |   | 176,160 |   |
| 2. Buildings                                                            |   | 48,849                    |   | 51,304 |   |
| 3. Strip mines                                                          |   | 36,768                    |   | 38,023 |   |
| 4. Technical equipment and  machinery                                   |   | 205,495                   |   | 204,959 |   |
| 5. Factory and office  equipment                                        |   | 25,168                    |   | 23,810 |   |
| 6. Payments on account and  assets under construction                   |   | 6,715                     |   | 6,056 |   |
|                                                                    |   | 489,630                   |   | 500,312 |   |
| Financial assets                                                        |   |                      |   |   |   |
| 1. Participations (including  associated company)                       |   | 12,620                    |   | 12,223 |   |
| 2. Loan receivable from  participation                                  |   | 5,999                     |   | 6,374 |   |
| 3. Other loan receivables                                               |   | 18,969                    |   | 22,548 |   |
|                                                                    |   | 37,588                    |   | 41,145 |   |
|                                                                    |   |                      |   |   |   |
| **Total non-current assets**                                            |   | 783,577                   |   | 789,166 |   |
|                                                                    |   |                      |   |   |   |
| Overburden                                                              |   | 150,827                   |   | 145,307 |   |
|                                                                    |   |                      |   |   |   |
| **Current assets**                                                      |   |                      |   |   |   |
| Inventories                                                             |   |                      |   |   |   |
| 1. Raw materials and supplies                                           |   | 6,155                     |   | 6,069 |   |
| 2. Finished goods                                                       |   | 1,596                     |   | 1,744 |   |
|                                                                    |   | 7,751                     |   | 7,813 |   |
| Receivables and other assets                                            |   |                      |   |   |   |
| 1. Trade receivables                                                    |   | 30,355                    |   | 31,160 |   |
| 2. Receivables from  enterprises in which participations  are held |   | 502                       |   | 460 |   |
| 3. Other assets                                                         |   | 12,141                    |   | 48,565 |   |
|                                                                    |   | 42,998                    |   | 80,185 |   |
| Investments                                                             |   |                      |   |   |   |
| Other investments                                                       |   | 52,158                    |   | 72,286 |   |
|                                                                    |   |                      |   |   |   |
| Cash and cash equivalents                                               |   | 24,229                    |   | 29,902 |   |
|                                                                    |   |                      |   |   |   |
| **Total current assets**                                                |   | 127,136                   |   | 190,186 |   |
|                                                                    |   |                      |   |   |   |
| Prepaid expenses                                                        |   | 5,444                     |   | 6,042 |   |
| **TOTAL ASSETS**                                                        |   | 1,066,984                 |   | 1,130,701 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements*

 

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**MitteldeutscheBraunkohlengesellschaft mbHConsolidated Balance Sheetsin thousands of Euro (TEUR)**

 
|                                                                                                                                                                                  |   | **At  December 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|--------|
|                                                                                                                                                                                  |   | **2003**                  |   | **2002** |   |
| **SHAREHOLDERS’ EQUITY AND LIABILITIES**                                                                                                                                         |   |                      |   |   |   |
| **Shareholders’ Equity**                                                                                                                                                         |   |                      |   |   |   |
| Subscribed capital                                                                                                                                                                    |   | 30,700                    |   | 30,700 |   |
|                                                                                                                                                                                  |   |                      |   |   |   |
| Capital reserve                                                                                                                                                                       |   | 293,191                   |   | 293,221 |   |
|                                                                                                                                                                                  |   |                      |   |   |   |
| Balance  Sheet Profit           :  TEUR 24,682; 2002: TEUR 27,790  Less: Interim dividend paid: TEUR 10,500; 2002: TEUR 24,000 |   | 14,182                    |   | 3,790 |   |
|                                                                                                                                                                                  |   |                      |   |   |   |
| Minority interest                                                                                                                                                                     |   | (39,727                   | )      | (42,569 | ) |
| thereof net income for the  year:                                                                                                                                                     |   |                      |   |   |   |
| TEUR 12,198 (2002: TEUR  10,774)                                                                                                                                                      |   |                      |   |   |   |
| **Total Shareholders’ Equity**                                                                                                                                                   |   | 298,346                   |   | 285,142 |   |
|                                                                                                                                                                                  |   |                      |   |   |   |
| Special item for investment  subsidies and incentives                                                                                                                                 |   | 351,821                   |   | 374,145 |   |
|                                                                                                                                                                                  |   |                      |   |   |   |
| Provisions                                                                                                                                                                            |   |                      |   |   |   |
| 1. Accruals for pensions and  similar obligations                                                                                                                                     |   | 13,052                    |   | 13,651 |   |
| 2. Taxation accruals                                                                                                                                                                  |   | 428                       |   | 491 |   |
| 3. Environmental and mining  provisions                                                                                                                                               |   | 188,602                   |   | 183,669 |   |
| 4. Other accruals                                                                                                                                                                     |   | 19,997                    |   | 18,465 |   |
|                                                                                                                                                                                  |   | 222,079                   |   | 216,276 |   |
| Liabilities                                                                                                                                                                           |   |                      |   |   |   |
| 1. Liabilities to banks                                                                                                                                                               |   | 162,101                   |   | 179,624 |   |
| 2. Trade payables                                                                                                                                                                     |   | 16,706                    |   | 63,094 |   |
| 3. Payables to participations                                                                                                                                                         |   | 1,736                     |   | 2,268 |   |
| 4. Other payables                                                                                                                                                                     |   | 14,181                    |   | 10,145 |   |
|                                                                                                                                                                                  |   | 194,724                   |   | 255,131 |   |
|                                                                                                                                                                                  |   |                      |   |   |   |
| Deferred income                                                                                                                                                                       |   | 14                        |   | 7 |   |
| **TOTAL SHAREHOLDERS’ EQUITY AND  LIABILITIES**                                                                                                                                  |   | 1,066,984                 |   | 1,130,701 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements*

 

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**Mitteldeutsche Braunkohlengesellschaft mbHConsolidated Statements of Cash Flowsin thousands of Euro (TEUR)**

 
|                                                                  |   | **Year  ended December 31,** |   |
|-----------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                  |   | **2003**                          |   | **2002** |   | **2001** |   |
| Net income for the year                                               |   | 33,060                            |   | 39,742 |   | 30,025 |   |
| Depreciation on tangible,  intangible and  financial assets      |   | 69,582                            |   | 67,704 |   | 46,807 |   |
| Write-up of tangible assets                                           |   | (3,976                            | )      | 0 |   | (659 | ) |
| Increase in medium- and  long-term accruals                           |   | 5,803                             |   | 8,103 |   | 5,085 |   |
| Other non-cash income and  expenses                                   |   | (22,334                           | )      | (20,919 | ) | (1,379 | ) |
| **Cash earnings according to DVFA/SG**                                |   | 82,135                            |   | 94,630 |   | 79,879 |   |
|                                                                  |   |                              |   |   |   |   |   |
| Increase/decrease in  overburden                                      |   | (5,520                            | )      | 6,525 |   | 12,592 |   |
| Gains/losses from disposal of  assets                                 |   | (571                              | )      | 5 |   | (608 | ) |
| Increase/decrease in  inventories, trade receivables and other assets |   | 57,988                            |   | (27,522 | ) | 14,401 |   |
| Increase in trade payables and  other liabilities                     |   | (48,741                           | )      | 12,611 |   | 4,557 |   |
| **Cash flow from operating activities**                               |   | 85,291                            |   | 86,249 |   | 110,821 |   |
|                                                                  |   |                              |   |   |   |   |   |
| Capital expenditures on fixed  assets                                 |   | (58,041                           | )      | (41,294 | ) | (21,308 | ) |
| Proceeds from disposal of  fixed assets                               |   | 471                               |   | 5,623 |   | 5,673 |   |
| Acquisition of securities                                             |   | (2                                | )      | (5,272 | ) | (12,575 | ) |
| Proceeds from disposals of  securities                                |   | 3,954                             |   | 0 |   | 0 |   |
| **Cash flow used by investing activities**                            |   | (53,618                           | )      | (40,943 | ) | (28,210 | ) |
|                                                                  |   |                              |   |   |   |   |   |
| Withdrawals by investors                                              |   | 0                                 |   | 0 |   | 22 |   |
| Disbursements to minority  shareholders                               |   | (9,356                            | )      | (8,814 | ) | (8,546 | ) |
| Disbursements to shareholders  (dividends and  distributions)    |   | (10,500                           | )      | (24,118 | ) | (43,305 | ) |
| Cash outflow from repayment of  bank loans                            |   | (17,490                           | )      | (17,352 | ) | (15,805 | ) |
| **Cash flow used by financing activities**                            |   | (37,346                           | )      | (50,284 | ) | (67,634 | ) |
|                                                                  |   |                              |   |   |   |   |   |
| **Change in cash and cash equivalents**                               |   | (5,673                            | )      | (4,978 | ) | 14,977 |   |
| Opening balance of cash and  cash equivalents                         |   | 29,902                            |   | 34,880 |   | 19,903 |   |
| **Closing balance of cash and cash  equivalents**                     |   | 24,229                            |   | 29,902 |   | 34,880 |   |
|                                                                  |   |                              |   |   |   |   |   |
| **Supplemental information:**                                         |   |                              |   |   |   |   |   |
| Income taxes paid                                                     |   | 23                                |   | 13 |   | 6 |   |
| Interest paid                                                         |   | 9,730                             |   | 12,251 |   | 13,318 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements*

 

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**Mitteldeutsche Braunkohlengesellschaft mbHConsolidated Statements ofShareholders’ Equityin thousands of Euro (TEUR)**

 
|                                     |   | **Subscribed  capital** |   | **Capital  increase** |   | **Capital  reserve** |   | **Balance  sheet profit/net profit** |   | **Minority  Interest** |   | **Total** |   |
|------------------------------------------|--------|-------------------------|--------|-----------------------|--------|----------------------|--------|--------------------------------------|--------|------------------------|--------|-----------|--------|
| **Balance as of January 1, 2001**   |   | 30,678                  |   |                  |   | 310,421              |   | 5,074                                |   | (46,037                | )      | 300,136   |   |
|                                     |   |                    |   |                  |   |                 |   |                                 |   |                   |   |      |   |
| Net income 2001                          |   |                    |   |                  |   |                 |   | 19,971                               |   | 10,054                 |   | 30,025    |   |
| Transfer from capital reserve            |   |                    |   |                  |   | (18,378              | )      | 18,378                               |   |                   |   | 0         |   |
| Distributions                            |   |                    |   |                  |   |                 |   | (43,305                              | )      |                   |   | (43,305   | )      |
| Disbursements to minority shareholders   |   |                    |   |                  |   |                 |   |                                 |   | (8,546                 | )      | (8,546    | )      |
| Capital increase not yet  effective      |   |                    |   | 22                    |   |                 |   |                                 |   |                   |   | 22        |   |
| **Balance as of December 31, 2001** |   | 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   |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements*

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE A****                                                 ****ORIGINATION AND NATURE OF BUSINESS**

 

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

 

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

 

**NOTE B****                                                 ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

BASIS OF PRESENTATION: Theconsolidated financial statements of MIBRAG mbH and subsidiaries have beenprepared in accordance with the German Commercial Code, which representsaccounting principles generally accepted in Germany (“German GAAP”). GermanGAAP varies in certain significant respects from accounting principlesgenerally accepted in the United States of America (“US GAAP”). Application ofUS GAAP would have affected the results of operations for each of the years inthe three-year period ended December 31, 2003 and shareholders’ equity asof December 31, 2003 and 2002 to the extent summarized in note C to theconsolidated financial statements.

 

The figures shown in thefollowing notes are stated in thousand of Euros (TEUR).

 

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PRINCIPLES OF CONSOLIDATION:All material companies in which MIBRAG has legal or effective control are fullyconsolidated. In 2003, MIBRAG consolidated 6 (2002: 6, 2001: 6) domesticsubsidiaries.

 

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

 

All other investments areincluded at cost and are referred to as participations in these financialstatements.

 

All significant intercompanyaccounts and transactions have been eliminated in consolidation.

 

USE OF ESTIMATES: Thepreparation of financial statements in conformity with generally acceptedaccounting principles necessarily requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the balance sheet dates andthe reported amounts of revenues and expenses during the reported periods.Actual results could differ from those estimates.

 

TOTAL COST METHOD: The incomestatement has been presented according to the total cost (or type ofexpenditure) format as commonly used in Germany. According to this format,production and all other expenses incurred during the period are classified bytype of expenses.

 

REVENUE RECOGNITION: TheCompany recognizes revenues from sales of products at the time persuasiveevidence of an arrangement exists, delivery has occurred, the price to thecustomer is fixed, and collection is reasonably assured. When these four conditionsare met, the Company recognizes revenues as it considers that revenues arerealizable or realized and earned. Service revenue consists primarily oftraining, maintenance, and installation services and is recognized as theservices are provided.

 

INTANGIBLE ASSETS: Intangibleassets are valued at acquisition cost and are amortized on a straight-linebasis over their respective useful lives (3 to 25 years).

 

PROPERTY, PLANT AND EQUIPMENT:Property, plant and equipment acquired is recorded on the basis of acquisitionor manufacturing cost, including capitalized mine development costs, andsubsequently reduced by scheduled depreciation charges over the assets’ usefullives as follows: buildings - 3 to 40 years, technical facilities and machinery- 4 to 25 years and facilities, factory and office equipment - 5 to 10 years.The line item land and land rights refers to plots of land and buildings aswell as mining properties. Land is principally accounted for at acquisition

 

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costs. If, after utilizationin mining, the value of a piece of land is expected to be permanently impaired,it is written down to the lower value.

 

Maintenance and repair costsare expensed as incurred. Depreciation is computed principally by thestraight-line method. The strip mines (exploration and mine development costs)are amortized using the unit-of-production costs (amortization period equalsthe 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.

 

Impairment tests of long-termassets are made when conditions indicate a possible loss. If an impairment isindicated, the asset is written down to its estimated fair value. If, at alater date, the conditions leading to impairment no longer exist, theimpairment loss is reversed up to the value of such assets, if the asset hadnot been impaired.

 

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

 

OVERBURDEN: Overburdenrepresents the costs of removing the surface above a coal field subsequent tothe initial opening of the field to the extent that the removal exceeds what isneeded for the current year’s coal extraction. These are costs incurred inadvance in respect of future coal production. The overburden is valued on anaverage cost basis.

 

INVENTORIES: Inventories arecarried at the lower of average or market cost. Obsolescence provisions aremade to the extent that inventory risks are determinable.

 

SECURITIES:Securities held as fixed assets as well as marketable securities are valuedindividually at cost or at lower quoted or market values.

 

RECEIVABLES AND OTHER ASSETS:All receivables are valued at cost, reduced for appropriate valuationallowances.

 

CASH AND CASH EQUIVALENTS:Cash and cash equivalents include short-term, highly-liquid investments withremaining maturity dates of three months or less at the time of purchase.

 

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SPECIAL ITEM FOR INVESTMENTSUBSIDIES AND INCENTIVES: To support the acquisition of certain tangibleassets, investment allowances and subsidies were granted by the German federalgovernment and the states of Saxony and Saxony-Anhalt. The application,conditions and payments of investment grants are governed by German law andregulations. Investment allowances and subsidies received and formally claimedare credited to the special item account. The special item is amortized intoincome over the normal operating useful lives of the underlying assets to whichthe allowances and subsidies relate.

 

As of January 1, 2002MIBRAG acquired rights to transportation services of a railway company (TEUR251,710) by partially waiving rights for future payments from the privatizationagreement against the former shareholder Treuhandanstalt and debt of TEUR8,963. The waiver of claims is presented on the balance sheet as deferredincome in the line item special item for investment subsidies and incentives.

 

ACCRUALS FOR PENSIONOBLIGATIONS: This accrual refers to one-time payments to non-tariff employeesto which MIBRAG is committed on one side and to the compensation for lostpension credits to which MIBRAG is obliged if employees agree to take part inthe 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.

 

ENVIRONMENTAL AND MININGPROVISIONS: Accruals for environmental and mining-related matters are recordedwhen it is probable that a liability has been incurred and the amount of theliability can be reasonably estimated, based on current law and existingtechnologies. These accruals are adjusted periodically as assessment andutilization progress or as additional technical or legal information becomesavailable.

 

FAIR VALUE OF FINANCIALINSTRUMENTS: The fair value of cash, accounts payable and receivable as well asshort-term borrowings approximates book value because of the short maturityperiod and interest rates approximating market rates. The Company hasdetermined the estimated fair value of long-term debt by using available marketinformation and generally accepted valuation methodologies. The use ofdifferent market assumptions or estimation methodologies could have a materialeffect on the estimated fair value amounts.

 

LIABILITIES: Liabilities areshown at their repayment amounts.

 

PER SHARE AMOUNTS: Per shareamounts are not disclosed in the financial statements. MIBRAG is a nonpublicenterprise.

 

11

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| **NOTE C** | **SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED  STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES** |
|------------|--------------------------------------------------------------------------------------------------------|

 

The MIBRAG consolidatedfinancial statements comply with German GAAP, which differs in certain respectsfrom US GAAP. The significant differences that affect consolidated net incomeand shareholders’ equity of MIBRAG are set out below.

 

 

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

 

The German GAAP financialstatements include the historical cost book values of assets transferred from apredecessor company.

 

The acquisition of 99 % of theshares in MIBRAG mbH on January 1, 1994 by MIBRAG B.V. was accounted forusing the purchase method of accounting. The purchase price adjustments to thehistorical cost basis have been pushed down to MIBRAG mbH for purposes of thereconciliation to US GAAP. The excess (TEUR 387,183) of the fair value of thenet assets acquired over the purchase price was proportionally allocated toreduce the value assigned to non-current assets, excluding long-terminvestments.

 

12

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**Reconciliation to US GAAP**

 

The following is a summary ofthe significant adjustments to net income for 2003, 2002 and 2001 and to shareholders’equity at December 31, 2003 and December 31, 2002, which would be requiredif US GAAP had been applied instead of German GAAP.

 
|                                                                                     |   |     |       | **Year  ended December 31,** |       |
|------------------------------------------------------------------------------------------|--------|----------|------------|-----------------------------------|------------|
|                                                                                     |   | **Note** |       | **2003**                          |       | **2002** |   | **2001** |   |
|                                                                                     |   |     |       |                              |       |   |   | **(unaudited)** |   |
|                                                                                     |   |     |       | **TEUR**                          |       | **TEUR** |   | **TEUR** |   |
| Net income as reported in the  consolidated income statement under German GAAP           |   |     |       | 33,060                            |       | 39,742 |   | 30,025 |   |
|                                                                                     |   |     | ** ** |                              | ** ** |   | ** ** |   | ** ** |
| Adjustments required to  conform with US GAAP:                                           |   |     |       |                              |       |   |   |   |   |
| Fixed assets                                                                             |   | (1)      |       | (3,542                            | )          | 2,563 |   | 2,988 |   |
| Relocation accruals                                                                      |   | (2)      |       | (669                              | )          | 84 |   | 1,845 |   |
| Investment in power plants                                                               |   | (3)      |       | (2,635                            | )          | (2,961 | ) | (3,299 | ) |
| Interest capitalization                                                                  |   | (4)      |       | (435                              | )          | (463 | ) | (1,064 | ) |
| Receivable/payables at  non-market interest rates                                        |   | (5)      |       | 0                                 |       | (501 | ) | (523 | ) |
| Overburden                                                                               |   | (6)      |       | 11,702                            |       | 14,984 |   | 17,813 |   |
| Environmental and mining  provisions                                                     |   | (7)      |       | 18,869                            |       | 458 |   | 473 |   |
| Pension obligations                                                                      |   | (8)      |       | (1,067                            | )          | 871 |   | (251 | ) |
| Other                                                                                    |   | (9)      |       | 610                               |       | 418 |   | 426 |   |
| Unrealized holding gains and  losses                                                     |   | (10)     |       | (389                              | )          | (261 | ) | 261 |   |
| **Net income in accordance with US GAAP**                                                |   |     |       | **55,504**                        | ** ** | **54,934** | ** ** | **48,694** | ** ** |
| thereof:                                                                                 |   |     |       |                              | ** ** |   | ** ** |   | ** ** |
| **Income from continuing operations**                                                    |   |     |       | **35,577**                        | ** ** | **54,934** | ** ** | **48,694** | ** ** |
| **Cumulative effect of a change in  accounting principle - asset retirement obligation** |   | (7)      |       | **19,927**                        | ** ** | **0** | ** ** | **0** | ** ** |

 

13

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|                                                                                       |   |     |       | **Year  ended December 31,** |       |
|--------------------------------------------------------------------------------------------|--------|----------|------------|-----------------------------------|------------|
|                                                                                       |   | **Note** |       | **2003**                          |       | **2002** |   |
|                                                                                       |   |     |       | **TEUR**                          |       | **TEUR** |   |
| Shareholders’ equity as  reported in the consolidated balance sheet under German GAAP |   |     |       | 298,346                           |       | 285,142 |   |
|                                                                                       |   |     |       |                              |       |   |   |
| Adjustments required to  conform with                                                      |   |     |       |                              |       |   |   |
| US GAAP:                                                                                   |   |     |       |                              |       |   |   |
| Fixed assets                                                                               |   | (1)      |       | 97,051                            |       | 115,157 |   |
| Relocation accruals                                                                        |   | (2)      |       | 23,284                            |       | 19,615 |   |
| Investments in power plants                                                                |   | (3)      |       | (60,084                           | )          | (66,808 | ) |
| Interest capitalization                                                                    |   | (4)      |       | 4,279                             |       | 4,714 |   |
| Overburden                                                                                 |   | (6)      |       | (22,781                           | )          | (34,483 | ) |
| Environmental and mining  provisions                                                       |   | (7)      |       | 2,105                             |       | (16,764 | ) |
| Accrued liabilities                                                                        |   | (8)      |       | 0                                 |       | (10,226 | ) |
| Pension obligations                                                                        |   | (8)      |       | (447                              | )          | 620 |   |
| Other                                                                                      |   | (9)      |       | (6,630                            | )          | (7,316 | ) |
| **Shareholders’ equity in accordance  with US GAAP**                                  |   |     | ** ** | **335,123**                       | ** ** | **289,651** | ** ** |

 

14

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**Reporting of statement ofshareholders’ equity**

 

Comprehensiveincome in accordance with SFAS No. 130, “Reporting Comprehensive Income”,includes the impact of other comprehensive income. These are revenues, gains,expenses and losses that under US GAAP are not included in net income.

 
|                                                                        |   | **Year  ended December 31,** |       |
|-----------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                        |   | **2003**                          |       | **2002** |   | **2001** |   |
|                                                                        |   |                              |       |   |   | **(unaudited)** |   |
|                                                                        |   | **TEUR**                          |       | **TEUR** |   | **TEUR** |   |
| Net income in accordance with  US GAAP                                      |   | 55,504                            |       | 54,934 |   | 48,694 |   |
| Other comprehensive income  Unrealized holding gains/(losses) on securities |   | 389                               |       | 261 |   | (711 | ) |
| **Comprehensive income**                                                    |   | **55,893**                        | ** ** | **55,195** | ** ** | **47,983** | ** ** |

 

Statementof shareholders’ equity:

 
|                                                                                          |   | **Year  ended December 31,** |       |
|-----------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                          |   | **2003**                          |       | **2002** |   | **2001** |   |
|                                                                                          |   |                              |       |   |   | **(unaudited)** |   |
|                                                                                          |   | **TEUR**                          |       | **TEUR** |   | **TEUR** |   |
| Stockholders’ equity according  to US GAAP before accumulated other comprehensive income |   | 334,734                           |       | 289,651 |   | 258,835 |   |
| Accumulated other  comprehensive income:                                                      |   |                              |       |   |   |   |   |
| Unrealized holding  gains/(losses) on securities                                              |   | 389                               |       | 0 |   | (261 | ) |
| **Total stockholders’ equity according  to US GAAP including comprehensive income**      |   | **335,123**                       | ** ** | **289,651** | ** ** | **258,574** | ** ** |

 

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

 

**1. Fixed assets**

 

The differences relateprimarily 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.

•                  Capitalization of costs under German GAAP whichwere charged against an accrual for US GAAP

 

Upon disposal, the abovedifferences also resulted in differing gains or losses on disposition.

 

**Financial investment in MUEG**

 

For German GAAP purposes,MIBRAG accounted for the investment in MUEG as of January 1, 1994 usingthe cost method. Under US GAAP the book value was increased to account for theequity earnings that were not distributed to MIBRAG as of that date.

 

**2. Relocation accruals**

 

The US GAAP results recognizedliabilities and deferred costs of TEUR 45,357 to relocate three villages. Thedeferred costs are amortized in accordance with quantities of coal extracted.In accordance with German accounting principles, accruals for the relocation ofvillages can not be accrued earlier than 2 years prior to the relocation, andcertain relocation costs must be expensed as incurred.

 

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**3. Investment in power plants**

 

In 1995 and 1996, third partyinvestors loaned TEUR 110,624 to a MIBRAG subsidiary, MIBRAGIndustriekraftwerke GmbH & Co. KG (“MI”), which operates threelignite-fired power plants. The investment is structured such that the thirdparty 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 considered additionsto equity as minority interests for German GAAP, while these arrangements areaccounted for as a loan in accordance with US GAAP.

 

**4. Interest capitalization**

 

Interest is expensed in theGerman financial statements. Interest expense related to qualified assets,however, is capitalized and depreciated for US GAAP purposes. The effect in2003, 2002 and 2001 reflects the depreciation of amounts previouslycapitalized.

 

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

 

Certain accounts receivable orloans payable are recorded in the German GAAP financial statements at theirnominal values. As they carry non-market interest rates, these receivables andpayables were adjusted to their market values for US GAAP purposes.

 

**6. Overburden**

 

Overburden in the Germanfinancial statements includes depreciation on fixed assets (equipment) whichare used for the waste removal. Because of the purchase accounting adjustments,a different amount of depreciation is included in overburden in the US GAAPfinancial statements. Additionally, overburden as of January 1, 1994 waswritten down to fair value.

 

**7. Environmental and mining provisions**

 

Certain accrued miningreclamation provisions were reduced in 1998 based upon a new estimate of totalcosts to be incurred. For US GAAP purposes, this adjustment would be accountedfor prospectively.

 

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MIBRAG implemented SFAS 143 onJanuary 1, 2003 and performed a complete new calculation of the assetretirement obligation (ARO) in accordance with this pronouncement at that date.The difference between the old recognition of the endlake reserves as ofDecember 31, 2003 (TEUR 168,532) and the new calculation of the AROliability as of January 1, 2003 (TEUR 148,605) is disclosed as acumulative effect of initially applying SFAS 143 (cumulative effect of a changein accounting principle) in the income statement (TEUR 19,927).

 

**8. Accrued liabilities and pension obligations**

 

Certain mining and otheraccruals, which were provided for at January 1, 1994 in accordance with USGAAP purchase accounting, were not recorded in the German financial statements.Amounts charged against this accrual in 2003 were capitalized under GermanGAAP.

 

The company grantspost-retirement benefits to a few employees. For US GAAP purposes the valuationand carrying amounts of pension commitments and the expenses required to coverthese commitments are based on the projected unit credit method according toSFAS 87, “Employers’ Accounting for Pensions”. The method used for thevaluation of pension obligations under German GAAP differs in various respectsfrom the projected unit credit method.

 

**9. Other**

 

Certain costs and income inthe German financial statements are capitalized or deferred for US GAAPpurposes, respectively.

 

**10. Unrealized holding gains and losses**

 

For US GAAP purposesavailable-for-sale securities (primarily investments in special funds) areaccounted for according to the cost adjusted for fair value (mark-to-market)method, under which the carrying amount is adjusted at financial statement datefor changes in fair value (i.e., they are carried at market value). Unrealizedgains and losses for a period are excluded from earnings and reported as othercomprehensive income. For German GAAP purposes these securities are accountedfor at cost. If the market value is below cost a loss is recognized for GermanGAAP purposes.

 

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**11. Deferred taxes**

 

The differences noted aboveresult in temporary differences which, when combined with tax loss carry-forwards,would result in a net deferred tax asset of TEUR 80,369 and TEUR 98,655 atDecember 31, 2003 and December 31, 2002, respectively. Because ofavailable negative evidence, a 100 % valuation allowance would have beenrecorded at each year-end. Because no net deferred taxes were recorded forGerman or US GAAP purposes, no adjustment to net income or shareholders equityis listed in the preceding reconciliation.

 

**12. New Accounting Pronouncements**

 

InJune 2001, FASB issued SFAS No. 143, “Accounting for Asset RetirementObligations”, which was adopted by the Company effective January 1, 2003.The Company calculated its obligations that fall within the scope of SFAS No.143, and included the effects in the reconcilation to United States generallyaccepted accounting principles.  Thecumulative effect on shareholders’ equity as of January 1, 2003 was toincrease shareholders’ equity by TEUR 19,927.

 

In July 2002, FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities”, areplacement of Emerging Issue Task Force (“EITF”) Issue No. 94-3. SFAS No. 146requires costs associated with exit or disposal activities to be recognizedwhen the costs are incurred, rather than at a date of commitment to an exit ordisposal plan. The provisions of SFAS No. 146 are effective for disposalactivities initiated after December 31, 2002, with early adoptionencouraged. As of December 31, 2003, the Company had not initiated anyexit or disposal activities, which would have a material impact on theconsolidated financial statements. There can be no assurance that future exitor disposal activities will not result in a material charge to earnings.

 

In November 2002, FASB issued Interpretation No.45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others”, an interpretation ofFASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No.34. FASB Interpretation No. 45 elaborates on the disclosures to be made by aguarantor in its interim and annual financial statements about its obligationunder certain guarantees that it has issued. It also clarifies that a guarantoris required to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing the guarantee. Thedisclosure requirements in this interpretation are effective for financialstatements of interim or annual periods ending after December 15, 2002. Asof December 31, 2003 the Company has not issued any guarantees requiringthe recognition of a liability. There can be no assurance that in the futureguarantees issued will not result in a liability to be recognized. Applicabledisclosures required under FASB Interpretation No. 45 were made in note U.

 

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In December 2003, the FASB issued a revision ofInterpretation No. 46, “Consolidation of Variable Interest Entities”. Thisinterpretation clarifies the application of Accounting Research Bulletin No. 51relating to consolidation of variable interest entities (“VIE’s”). In general,a VIE is a corporation, partnership, trust, or any other legal structure usedfor business purposes which has one or more of the following characteristics:(a) equity investors lack certain characteristics of a controlling financialinterest, (b) invested equity that is not sufficient for the entity to supportits activities, or (c) equity investors have voting rights not proportionate totheir economic interests and the entity’s activities involved or conducted onbehalf of an investor with disproportionately few voting rights.  FIN 46 requires the primary beneficiary ofVIE’s to consolidate such VIE. FIN 46 also sets forth certain disclosuresregarding interests in VIE’s.

 

A nonpublic entity is requiredto apply the provisions of FIN 46 immediately to VIE’s created afterDecember 31, 2003, For a nonpublic entity’s interest in other VIE’s , FIN46 applies for the first fiscal year beginning after December 31, 2004.The application of FIN 46 would require the Company to consolidate the specialinvestment funds rather than to account for the investment in such funds asavailable-for-sale securities. This would result in certain unrealized gainsand losses currently accounted for in other comprehensive income to beaccounted for in the Company’s income statement.

 

In April 2003, the FASBissued SFAS 149, “Amendment of Statement 133 on Derivative Instruments andHedging Activities”. This statement clarifies the circumstances, under which aninitial net investment meets the characteristics of a derivative, and underwhich a derivative contains a financing component, and amends certain otherdefinitions and existing pronouncements.   SFAS 149 is effective for contracts entered into or modified afterJune 30, 2003, and for hedging relationships designated afterJune 30, 2003. The adoption of SFAS 149 did not have a material impact onthe financial statements.

 

In May 2003, the FASBissued SFAS 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity”. SFAS amends the accounting andclassification for certain financial instruments, such as those used in moststock buy-back programs, that previously were accounted for and classified asequity. SFAS 150 requires that certain types of freestanding financialinstruments that have characteristics of both liabilities and equity beclassified as liabilities with generally recognition of changes in fair valuein the income statement.

 

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This Statement is effectivefor financial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003, except for mandatory redeemable financial instrumentsof nonpublic entities. For nonpublic entities, mandatory redeemable financialinstruments are subject to the provisions of this Statement for the firstfiscal period beginning after December 15, 2003. The Company believes thatthe adoption of SFAS 150 will not have a material impacts on the financialstatements.

 

**NOTE D****                                                 ****CONCENTRATION OF CREDIT RISK AND LONG-TERM COAL SALESAGREEMENT**

 

MIBRAG mbH markets its coalprincipally to electric utilities in Germany. As of December 31, 2003 and2002 accounts receivable from electric utilities totaled TEUR 23,251 andTEUR 22,745, respectively. Credit is extended based on an evaluation ofthe customer’s financial condition. Credit losses are provided for in thefinancial statements and consistently have been minimal.

 

MIBRAG mbH is committed underseveral long-term contracts to supply raw brown coal and whirl fine coal to theSchkopau power station and the Lippendorf power station. Under the terms of theSchkopau Agreement, MIBRAG mbH may deliver annually up to 5.8 million tons ofcoal. The agreement is in effect until 2010, with an option for the purchaserto extend the agreement for another 10 years. The price to be paid by theSchkopau power station is a fixed price adjusted by an annual escalation rate.

 

The Lippendorf Agreementsprovide for deliveries of up to 10 million tons of raw brown coal per year from1999 through 2040 with an option for the customers to extend for an additional3-year period. These Agreements were closed with Vereinigte Energiewerke AG(VEAG), Berlin, E.ON Kraftwerke GmbH, Hanover and EnBW LippendorfBeteiligungsgesellschaft mbH, Stuttgart. The price to be paid by the Lippendorfpower station is a base-price with escalation and adjustment based on qualityof the coal delivered. The first bloc of the new Lippendorf power station wentinto full operation in October 1999 and the second bloc went into effectin May 2000.

 

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

 

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

 

In thefourth quarter of 2002, MIBRAG mbH successfully negotiated with Bundesanstaltfuer vereinigungsbedingte Sonderaufgaben (“BvS”) amendments to the originalagreement on transportation

 

21

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creditmatters that had been entered into with the German government in 1993. Theamendments were effective as of January 1, 2002. As a result of thosenegotiations, a settlement agreement was concluded replacing annual payments tobe received by MIBRAG mbH over 18.75 years from the German government with aone-time, up-front payment totaling TEUR 383,225, which was recorded asdeferred income (special item for investment subsidies and incentives). MIBRAGmbH also capitalized TEUR 251,710 for coal transportation rights (intangibleassets) and TEUR 140,478 for mining rights (land and mining property) acquiredthrough the settlement agreement. Both the deferred revenue and the rights willbe amortized straight-line over the term of the contract of 18.75 years.

 

**NOTE F****                                                   ****INTANGIBLE ASSETS**

 
|                                                 |   | **December 31,  2003** |   | **December 31,  2002** |   |
|------------------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                                                 |   | **TEUR**                    |   | **TEUR**                    |   |
| Concessions, trade marks,  patents and licenses cost |   | 290,661                     |   | 268,161                     |   |
| Less: accumulated amortization                       |   | (34,302                     | )      | (20,452                     | )      |
| Net book value                                       |   | 256,359                     |   | 247,709                     |   |

 

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

 

The major categories of fixedassets are the following:

 
|                           |                                                 | **December 31,  2003** |    | **December 31,  2002** |    |
|--------------------------------|------------------------------------------------------|-----------------------------|---------|-----------------------------|---------|
|                           |                                                 | **TEUR**                    |    | **TEUR**                    |    |
| Property, plant and equipment  |                                                 |                        |    |                        |    |
| cost                           | - land and land rights                               |                        | 185,961 |                        | 184,392 |   |
|                           | - buildings                                          |                        | 139,156 |                        | 137,142 |   |
|                           | - strip mines                                        |                        | 45,772  |                        | 45,772  |   |
|                           | - technical equipment and  machinery                 |                        | 805,217 |                        | 779,799 |   |
|                           | - factory and office equipment                       |                        | 109,831 |                        | 107,707 |   |
|                           | - payments on account and  assets under construction |                        | 6,715   |                        | 6,056   |   |
| Total cost                     |                                                 | 1,292,652                   |    | 1,260,868                   |    |
| Less: accumulated depreciation |                                                 | (803,022                    | )       | (760,556                    | )       |
| Net book value                 |                                                 | 489,630                     |    | 500,312                     |    |

 

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The line item strip minesincludes the reconstruction cost incurred up to July 1, 1990 in respect ofthe mining pits of Profen and Schleenhain. Depreciation has been providedaccording to actual extraction of coal from the mine in relation to the totalcoal volume in the mine. The construction cost of strip mines include the costfor the removal of ground cover up to the coal banks as well as the removal ofrock banks until the installation of production equipment and the commencementof raw brown coal production is possible.

 

Total depreciation charges areas follows: TEUR 69,582 (2003), TEUR 67,704 (2002) and TEUR 45,820 (2001),including normal depreciation and unplanned depreciation.

 

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

 

MIBRAG’s investment in MUEG isaccounted for using the equity method. MUEG was founded in 1990 and coordinatesthe waste disposal activities in the Central German brown coal area. The equityvalue is TEUR 6,615 and TEUR 5,834 as of December 31, 2003 and 2002,respectively and the cost basis is TEUR 6,376 at December 31, 2003 and2002.

 

Investments in five othercompanies are accounted for at cost.

 

**NOTE I****                                                      ****LOAN RECEIVABLE FROM PARTICIPATIONS**

 

In 1995, MIBRAG sold itsdistrict heating network assets to a company in which it holds a participation.The sales price is being repaid in equal installments of TEUR 375 over a periodof 25 years. The interest rate is fixed at 5.4 percent beginning in 2000.

 

The fair market value of theloan approximates the book value, which amounted to TEUR 5,999 and TEUR6,374 at December 31, 2003 and 2002, respectively. 

 

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

 

The other loans were grantedto the third party investors in a subsidiary of MIBRAG mbH. These loans werefinanced by a borrowing from KfW (Kreditanstalt fuer Wiederaufbau). KfW grantedMIBRAG mbH a loan of TEUR 52,663 due on December 30, 2005 at fixedinterest rates between 6.26 % and 6.82 %. The balance of the loan as ofDecember 31, 2003 and 2002 amounted to TEUR 18,969 and TEUR 22,548 whichapproximates the fair value as of this date.

 

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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**

 

The reconciliation of theoverburden costs is as follows: 

 
|        |   | **December 31,  2003** |   | **December 31,  2002** |   |
|-------------|--------|-----------------------------|--------|-----------------------------|--------|
|        |   | **Metric  tons**            |   | **Value  TEUR**             |   | **Metric  tons** |   | **Value  TEUR** |   |
| Profen      |   | 20.8                        |   | 77,330                      |   | 17.6 |   | 69,076 |   |
| Schleenhain |   | 21.9                        |   | 73,497                      |   | 22.9 |   | 76,231 |   |
|        |   | 42.7                        |   | 150,827                     |   | 40.5 |   | 145,307 |   |

 

The basis for the determinationof the overburden is the total quantity of partially exposed raw brown coal.

 

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

 

Trade receivables weredisclosed in the balance sheet, net of allowances, as follows:

 
|              |   | **December 31, 2003** |   | **December 31, 2002** |   |
|-------------------|--------|----------------------------|--------|----------------------------|--------|
|              |   | **TEUR**                   |   | **TEUR**                   |   |
| Trade receivables |   | 31,205                     |   | 32,312                     |   |
| Less allowances   |   | (850                       | )      | (1,152                     | )      |
|              |   | 30,355                     |   | 31,160                     |   |

 

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

 

Other investments totaled TEUR52,158 and TEUR72,286 at December 31, 2003 and 2002, respectively. The balance consistsof investment funds of MI (TEUR 45,879 and TEUR 45,490 at December 31,2003 and 2002, respectively), which were specially set up to reinvest theadditional liquidity resulting from the entry of new investors into asubsidiary of MIBRAG and to short-term investments (TEUR 6,279 and TEUR 26,796)at December 31, 2003 and 2002, respectively.

 

Interest on other investmentsof TEUR 2,195, TEUR 2,386 and TEUR 2,828 were disclosed in interest incomein 2003, 2002 and 2001, respectively.

 

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**NOTE N****                                                 ****ACCRUALS FOR PENSIONS AND SIMILAR OBLIGATIONS**

 

The provision relatesprimarily to briquette benefit claims of active and retired employees on thebasis of the collective bargaining agreement of November 9, 1993 inrespect to briquette benefit claims. Individuals entitled must be employees ofthe Company at the date of retirement. The right does not vest and lapses withearly termination of the working relationship or upon receipt of social planbenefits.

 

The calculation is based on anactuarial valuation, which takes into account the right to the redemption valueof DM 185.00 (EUR 94.60) per metric ton of briquettes as specified in the collectivebargaining agreement, the employees entitled to benefits as ofDecember 31, 2003, and official demographic tables.

 

In addition, pensionobligations for early retirement benefits were accrued. These amounts have alsobeen calculated on the basis of actuarial valuations.

 

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

 

MIBRAG accrued TEUR 428 (2002:TEUR 491) for property taxes.

 

MIBRAG did not provide forincome taxes under German GAAP in spite of a positive result for the year 2003because of tax losses brought forward from prior years. Deferred tax assets andliabilities have not been recorded because there are no significant differencesbetween the German GAAP financial statement and the tax bases of the assets andliabilities.

 

The German income tax rateapplicable to MIBRAG (corporate income tax, solidarity surcharge, trade tax) is35.98 % in 2003 (2002: 37.22 %, 2001: 37.22 %) on undistributed income. TheCompany has an effective tax rate of 0 % because the Company has notaxable income and the recording of a deferred tax benefit for net losscarry-forwards is prohibited under German GAAP.

The income taxes paid in 2003amounting to TEUR  23 (2002: TEUR  13; 2001: TEUR 6) relate to a subsidiary ofMIBRAG.

 

At December 31, 2003 theCompany had approximately TEUR 276,738 net operating loss carry-forwards forcorporate income tax purposes and TEUR 344,842 for municipal trade taxpurposes, which do not expire and may be applied against future taxable income.The tax audit is currently taking place for the fiscal years 1994 through 1997and was not completed yet.

 

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**NOTE P****                                                  ****ENVIRONMENTAL AND MINING PROVISIONS**

 

The following is a summary ofenvironmental and mining provisions:

 
|                                    |   | **December 31, 2003** |   | **December 31, 2002** |   |
|-----------------------------------------|--------|----------------------------|--------|----------------------------|--------|
|                                    |   | **TEUR**                   |   | **TEUR**                   |   |
| 1) Mining reclamation provisions        |   | 157,383                    |   | 151,767                    |   |
| 2) Provision for environmental measures |   | 5,040                      |   | 5,100                      |   |
| 3) Landscaping                          |   | 4,987                      |   | 5,131                      |   |
| 4) Planting                             |   | 998                        |   | 1,193                      |   |
| 5) Relocation of villages               |   | 20,194                     |   | 20,478                     |   |
|                                    |   | 188,602                    |   | 183,669                    |   |

 

1) Mining reclamationprovisions

 

MIBRAG is responsible forreclaiming the mines Profen and Schleenhain. The mining field reclaimation ofthe Profen and Schleenhain mines after the ceasing of production is planned for2029 to 2046 and 2041 to 2073, respectively. A legally binding closure planlaying down the principles for action plans in accordance with the Federal MiningLaw (Bundesberggesetz) is normally approved by the relevant mining authoritiestwo years in advance to the commencement of production. The liability toreclaim the area exists from the start of mining activities. In each year ofcoal extraction the reclaimation costs are accrued ratably using the relationof the coal mined to the total coal mine volume.

 

The calculation of the totalcost for reclaiming mining fields has been made on the basis of a third partyopinion and estimations on the basis of current prices. These costs consistmainly of costs for reconstruction, bank reinforcement, dewatering andwatering.

 

In 2002, a new opinion waspublished indicating increased total redevelopment expenses. Therefore anadditional amount of TEUR 2,733 was accrued as of January 1, 2002.

 

2) Provision for EnvironmentalMeasures

 

The provision for theenvironmental measures is determined in respect to disposal sites and oldlocations of MIBRAG mbH in refinement and mining areas on which waste depositscan be found. The accrued amount is derived from article 19.3 of thepurchase and sales agreement. Qualifying costs that exceed the provision are tobe reimbursed by the Bundesanstalt fuer vereinigungsbedingte Sonderaufgaben(BvS).

 

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3) Landscaping

 

This provision includes costsfor reclaiming disposal areas and leveling the area outside the embankments.These costs relate solely to continuous landscaping, while costs for closingdown landscaping are included in certain mining provisions.

 

4) Planting

 

Provision is made for costs inconnection with temporary planting as of December 31, 2003 andDecember 31, 2002. In 2002 a new calculation model was introduced,restating the costs of the separate activities at a lower level.

 

5) Relocation of villages

 

The provision for therelocation of villages is in respect to the relocation of municipalities, whichis necessary for the expansion of the Profen and Schleenhain mines. Thecalculation of the provision is based on a method that takes into account thecost for project planning, infrastructural development, cemetery relocation,demolition and landmark preservation. The provision is accrued in equal annualamounts, commencing two years before the relocation starts and ending in themiddle of the relocation year.

 

**NOTE Q****                                              ****OTHER ACCRUALS**

 

Accrued liabilities are asfollows:

 
|   |                                       | **December 31,  2003** |   | **December 31,  2002** |   |
|--------|--------------------------------------------|-----------------------------|--------|-----------------------------|--------|
|   |                                       | **TEUR**                    |   | **TEUR**                    |   |
| 1)     | Severance payments                         |                        | 9,395  |                        | 8,706  |   |
| 2)     | Personnel expenses                         |                        |   |                        |   |   |
|   | - Employment anniversaries                 |                        | 1,236  |                        | 1,363  |   |
|   | - Vacation and other  compensated Absences |                        | 697    |                        | 570    |   |
|   | - Other                                    |                        | 832    |                        | 691    |   |
|   |                                       | 2,765                       |   | 2,624                       |   |
| 3)     | Remaining accruals                         |                        | 7,837  |                        | 7,135  |   |
|   |                                       | 19,997                      |   | 18,465                      |   |

 

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1) Severance payments

 

Bases for the provisions aresigned social plan framework agreements in which the measures for the personneladjustments are defined. The employees are entitled to a one-time severancepayment if the company initiates termination or in case of retrenchments. The severancepayments are limited to TEUR 26 per person. Employees participating in earlyretirement programs are entitled to additional compensation, mainly for thereduction in statutory pension payments due to early retirement.

 

2) Personnel expenses

 

MIBRAG mbH grants awards inrecognition of long service in the Company, based on the collective bargainingagreement 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 for vacation andother compensated absences arises from the days and shifts outstanding atbalance sheet dates, which have been determined for each employee.

 

The accrual for profit sharingis calculated based on the actual net income of the MIBRAG Group excludingextraordinary items and based on the achievement of goals in working safety.

 

3) Remaining accruals

 

Composition:

 
|                                |   | **December 31, 2003** |   | **December 31, 2002** |   |
|-------------------------------------|--------|----------------------------|--------|----------------------------|--------|
|                                |   | **TEUR**                   |   | **TEUR**                   |   |
| Outstanding invoices                |   | 4,188                      |   | 3,192                      |   |
| Mine damages                        |   | 1,790                      |   | 1,790                      |   |
| Water usage fees                    |   | 447                        |   | 543                        |   |
| Professional service and litigation |   | 1,067                      |   | 870                        |   |
| Others                              |   | 345                        |   | 740                        |   |
|                                |   | 7,837                      |   | 7,135                      |   |

 

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**NOTE R****                                                 ****LIABILITIES TO BANKS**

 

Liabilities to banks consist of the following:

 
|   |                                                           | **December 31, 2003** |   | **December 31, 2002** |   |
|--------|----------------------------------------------------------------|----------------------------|--------|----------------------------|--------|
|   |                                                           | **TEUR**                   |   | **TEUR**                   |   |
| a)     | Loan to finance the power stations                             |                       |   |                       |   |   |
|   | - build up the power station of Waehlitz                       |                       | 49,831 |                       | 53,390 |   |
|   | - modernization of the power stations inDeuben and Mumsdorf    |                       | 33,037 |                       | 37,757 |   |
|   | - finance the additional paid-in capital bythe investors of MI |                       | 18,969 |                       | 22,548 |   |
| b)     | Loan to finance the Schleenhain mineinvestments                |                       | 57,653 |                       | 63,048 |   |
| c)     | Loan for home construction                                     |                       | 2,105  |                       | 2,342  |   |
| d)     | Deferred interest                                              |                       | 506    |                       | 539    |   |
|   |                                                           | 162,101                    |   | 179,624                    |   |

 

a) Loan to finance the powerstations

 

These liabilities refer tothree loans from the Kreditanstalt fuer Wiederaufbau, Frankfurt/Main.

 

The first loan was granted December 9,1992 for the construction of a raw brown coal powered industrial power stationin Waehlitz of TEUR 71,187. The interest rate has been fixed at 7 % perannum until December 9, 2002. Until December 9, 2012 the interestrate is fixed at 5 % per annum. The loan period is 25 years. The repayments aredue in 40 equal amounts commencing from June 30, 1998.

 

On April 3, 1995 twoadditional loan agreements were closed with Kreditanstalt fuer Wiederaufbau(KfW). One of these contracts was closed for partially financing themodernization and reshaping of both industrial power plants in Deuben andMumsdorf (TEUR 61,355). The redemption period is 13 years starting onDecember 31, 1998. Interest has to be paid between 6.04 % and 6.80 % forthe respective tranches. These rates are fixed until January 2006 forloans of TEUR 22,025, and 2007 for the remaining portion of the loans.

 

The other loan at the amountof TEUR 52,663 was granted to partially finance the limited partner capitalcontribution of investors. The redemption period is 13 years. In 1996, the loanproceeds were received by MIBRAG (TEUR 52,663). In 2002, MIBRAG madeprincipal payments of TEUR 4,602. The interest rates are fixed at between 6.26% and 6.82 % until 2005 at which time the rates will be adjusted to marketrates.

 

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Interest expense for the threeloans amounted to TEUR 8,571, TEUR 8,449 and TEUR 9,798 in 2003, 2002, and2001, respectively.

 

b) Loan to finance theSchleenhain mine investments

 

In 1997 and 1998, loancontracts were entered into with four banks to finance the capital expendituresat the Schleenhain mine, especially the construction of the blending yard andenvironmental measures for the conveyor belts. In 1998 TEUR 61,355 and in 1999TEUR 10,226 were borrowed at interest rates between 3.5 % and 5.4 %per annum, which are fixed until 2008 and 2009, respectively.

 

c) Loan for home construction

 

The loans for homeconstruction were granted by the Deutsche Bank AG and the Nord LB forrelocation-related home construction purposes in Hohenmoelsen.

 

For the loan granted byDeutsche Bank AG amounting to TEUR 1,333, an interest rate of 5.6 % was set fora period ending 2007. For the two loans granted by Nord LB at the amounts ofTEUR 624 and TEUR 861 there are no interest payments due until 2007 and 2010,respectively. Thereafter, the rate is fixed at 8 % per annum.

 

**NOTE S****                                                  ****OTHER PAYABLES**

 

The other liabilities referto:

 
|                                      |   | **December 31, 2003** |   | **December 31, 2002** |   |
|-------------------------------------------|--------|----------------------------|--------|----------------------------|--------|
|                                      |   | **TEUR**                   |   | **TEUR**                   |   |
| Tax authorities                           |   | 4,140                      |   | 1,461                      |   |
| Wages and salaries                        |   | 3,315                      |   | 3,055                      |   |
| Social security contributions             |   | 2,463                      |   | 2,203                      |   |
| Tax lease                                 |   | 1,872                      |   | 1,856                      |   |
| Usage reimbursement for the mining rights |   | 686                        |   | 576                        |   |
| Others                                    |   | 1,705                      |   | 994                        |   |
|                                      |   | 14,181                     |   | 10,145                     |   |

 

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**NOTE T****                                                  ****MATURITY PERIODS OF LIABILITIES**

 

The maturity periods ofliabilities (in TEUR) are as follows:

 
|                                 |                | **Liabilities  to  banks *)** |   | **Trade  payables** |   | **Payables  to par-  ticipations** |   | **Other  liabilities** |   | **Total** |   |
|--------------------------------------|---------------------|-------------------------------|--------|---------------------|--------|------------------------------------|--------|------------------------|--------|-----------|--------|
|                                 |                |                          |   |                |   |                               |   |                   |   |      |   |
| Balance as of  December 31,2002 |                | 179,624                       |   | 63,094              |   | 2,268                              |   | 10,145                 |   | 255,131   |   |
| thereof:  maturity period       |                |                          |   |                |   |                               |   |                   |   |      |   |
|                                 | - up to 1 year      |                          | 18,029 |                | 62,481 |                               | 2,268  |                   | 8,480  |      | 91,258 |   |
|                                 | - 1-5 years         |                          | 87,804 |                | 613    |                               | 0      |                   | 1,559  |      | 89,976 |   |
|                                 | - more than 5 years |                          | 73,791 |                | 0      |                               | 0      |                   | 106    |      | 73,897 |   |
|                                 |                |                          |   |                |   |                               |   |                   |   |      |   |
| Balance as of  December 31,2003 |                | 162,101                       |   | 16,706              |   | 1,736                              |   | 14,181                 |   | 194,724   |   |
| thereof:  maturity period       |                |                          |   |                |   |                               |   |                   |   |      |   |
|                                 | - up to 1 year      |                          | 22,460 |                | 16,257 |                               | 1,736  |                   | 12,945 |      | 53,398 |   |
|                                 | - 1-5 years         |                          | 88,134 |                | 449    |                               | 0      |                   | 1,236  |      | 89,819 |   |
|                                 | - more than 5 years |                          | 51,507 |                | 0      |                               | 0      |                   | 0      |      | 51,507 |   |

 

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**) Liabilities to banks are fully collateralizedby mortgages*

* *

Annual maturities ofliabilities to banks are as follows:

 
| **Year of maturity** |   | **Amount in TEUR** |   |
|----------------------|--------|--------------------|--------|
| 2004                 |   |               |   | 22,460 |   |
| 2005                 |   | 21,853             |   |   |   |
| 2006                 |   | 22,109             |   |   |   |
| 2007                 |   | 21,887             |   |   |   |
| 2008                 |   | 22,285             |   |   |   |
|                 |   |               |   | 88,134 |   |
| Thereafter           |   |               |   | 51,507 |   |
| Total                |   |               |   | 162,101 |   |

 

The estimated fair value ofthe Company’s liabilities to banks approximates the carrying value.

 

**NOTE U****                                                  ****COMMITMENTS AND CONTINGENCIES**

 

From time to time, the Companymay be subject to legal proceedings and claims in the ordinary course ofbusiness. At December 31, 2003, the Company was not aware of any legalproceedings

 

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or claims that the Companybelieves will have, individually or in the aggregate, a material adverse effecton the Company’s business, financial condition, or results of operations.

 
|                                  |   | **December 31,  2003** |   | **December 31,  2002** |   |
|---------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                                  |   | **TEUR**                    |   | **TEUR**                    |   |
| Guarantees for indebtedness of others |   | 16,416                      |   | 16,931                      |   |
| Other contractual obligations         |   | 60,800                      |   | 39,900                      |   |

 

The other contractualobligations refer to long-term investment projects in the mines Profen andSchleenhain.

 

MIBRAG leases officeequipment, railway-carriages and vehicles as well as vending machines, expiringat various dates. Rental and lease expenses amounted to TEUR 819, TEUR1,200 and TEUR 999 in the years ended December 31, 2003, 2002 and 2001,respectively.

 

With the operators of theLippendorf power plant a long-term raw brown coal supply contract was concludedwhich obliges MIBRAG to guarantee the annual delivery of 10 million tons of rawbrown coal to the power plant over a period of 40 years. This contract wasclosed assuming the relocation of the Heuersdorf village. Some of theinhabitants of that village try to remain the village in its current placeresulting in legal disputes with the Company and legal proceedings. It isplanned that the excavators will be mining through the Heuersdorf area in 2009.Management of MIBRAG believes that the plan will be realized. However,substantial delay or the mining around that village may have a material impacton the future earnings situation of the Company.

 

**NOTE V****                                                 ****SEGMENT INFORMATION**

 

MIBRAG operates as onesegment. Sales were exclusively achieved in Germany, and all long-lived assetsare located in Germany. Sales were almost completely limited to the new GermanFederal States, mainly to Saxony-Anhalt, Thuringia and Saxony.

 

Net sales by product andservice:

 
|                                                             |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                             |   | **TEUR** |   | **TEUR** |   | **TEUR** |   |
| Raw brown coal and coal products                                 |   | 249,229  |   | 222,423  |   | 224,180  |   |
| Electrical power, heating and steam                              |   | 28,074   |   | 33,167   |   | 32,141   |   |
| Other products and services                                      |   | 3,853    |   | 5,163    |   | 3,473    |   |
| Further charging of transport services, ash disposal  and others |   | 22,700   |   | 37,303   |   | 46,598   |   |
|                                                             |   | 303,856  |   | 298,056  |   | 306,392  |   |

 

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Several major customersaccount for 10 % or more of MIBRAG’s revenues. As a percentage of total salessuch customers accounted for 23 %, 23 % and 12 % in 2003; 33 %, 28 % and 15 %in 2002; 34 %, 27 % and  16 % in 2001.

 

**NOTE W****                                             ****RELATED PARTY TRANSACTIONS**

 

Agreements for consulting andmanagement services were closed in respect to the mining operations and therefinement facilities between MIBRAG and two subsidiaries of the common parentcompanies. These contracts determine certain consulting services to be providedby the two subsidiaries Morrison Knudsen Deutschland GmbH (MKD) and SaaleEnergie Services GmbH (SES) to MIBRAG or its subsidiaries. MIBRAG is obliged todetermine and pay the cost-related remuneration for these services.Expenditures for MIBRAG amount to TEUR 8,755, TEUR 8,755, and TEUR 8,303 for2003, 2002 and 2001, respectively. As of December 31, 2003 and 2002,MIBRAG still had liabilities amounting to TEUR 85 and TEUR 846, respectivelytowards MKD and SES for the provision of these services.

 

Part of the lignite deliveriesfrom 1998 to 2000 to the Schkopau power plant were sales to Saale Energie GmbH(SEG), which is a subsidiary of the 50 % shareholder of MIBRAG - NRGEnergy Inc. SEG is operating two blocs of the Schkopau power station with 400mega watts. Sales to SEG amount to TEUR 34,025, TEUR 30,223, and TEUR 24,792 in2003, 2002 and 2001, respectively. The conditions of delivery are the same asto the other (third party) operator of the Schkopau power plant. As ofDecember 31, 2003 and 2002, MIBRAG disclosed receivables of TEUR 2,944 andTEUR 3,213 respectively from SEG.

 

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