**Mitteldeutsche
                Braun-**
              **kohlengesellschaft
                mbH,**
              **Theissen**Report
                on the audit of the consolidated financial statements in accordance
                with
                German GAAP and of the US GAAP reconciliations as of
                December 31, 2006 and 2005 and for each of the years in the three
                year period ended December 31, 2006





**Mitteldeutsche
      Braunkohlengesellschaft mbH**


**Index
      to Consolidated Financial Statements**





PageReport
                  of Independent Registered Public Accounting FirmConsolidated
                  Financial Statements
              1Consolidated
                  Statements of Income for the years ended
                December
                  31, 2006, 2005 and 2004
              3Consolidated
                  Balance Sheets at December 31, 2006 and 2005
              4Consolidated
                  Statements of Cash Flows for the years ended
                December
                  31, 2006, 2005 and 2004
              6Consolidated
                  Statements of Shareholders’ Equity for the years
                ended
                  December 31, 2006, 2005 and 2004
              7Notes
                  to the Consolidated Financial Statements
              8








**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To
      the
      Shareholders of


MIBRAG
      mbH


Theissen,
      Germany








We
      have
      audited the accompanying consolidated balance sheets of Mitteldeutsche
      Braunkohlengesellschaft mbH and its subsidiaries (MIBRAG or Group) as of
      December 31, 2006 and 2005, and the related consolidated statements of income,
      shareholders’ equity and cash flows for each of the years in the three-year
      period ended December 31, 2006. These consolidated financial statements are
      the
      responsibility of the Group's management. Our responsibility is to express
      an
      opinion on these consolidated financial statements based on our
      audits.





We
      conducted our audit in accordance with auditing standards generally accepted
      in
      Germany and with the standards of the Public Company Accounting Oversight Board
      (United States of America). Those standards require that we plan and perform
      the
      audit to obtain reasonable assurance about whether the financial statements
      are
      free of material misstatement. An audit includes examining, on a test basis,
      evidence supporting the amounts and disclosures in the financial statements.
      An
      audit also includes assessing the accounting principles used and significant
      estimates made by management, as well as evaluating the overall financial
      statement presentation. We believe that our audits provide a reasonable basis
      for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of MIBRAG as
      of
      December 31, 2006 and 2005 and the consolidated results of its operations and
      cash flows for each of the years in the three-year period ended December 31,
      2006, in conformity with accounting principles generally accepted in
      Germany.





1


Generally
      accepted accounting principles in Germany vary in certain significant respects
      from generally accepted accounting principles in the United States of America.
      We have audited the effect of applying accounting principles generally accepted
      in the United States of America on the results of operations for each of the
      years in the three-year period ended December 31, 2006 and on shareholders’
equity as of December 31, 2006 and 2005. In our opinion, the effect of applying
      accounting principles generally accepted in the United States of America on
      the
      results of operations for each of the years in the three-year period ended
      December 31, 2006 and shareholders‘ equity as of December 31, 2006 and 2005 is
      fairly presented in Note C to the consolidated financial
      statements.














**Deloitte
      & Touche** GmbH


Wirtschaftspruefungsgesellschaft





Leipzig,
      Germany


February
      7, 2007











2





**Mitteldeutsche
                Braunkohlengesellschaft mbH****Consolidated
                Statements of Income****in
                thousands of Euro (TEUR)****Year
                ended December 31,****2006**
            
            **2005**
            
            **2004**Sales
                revenue
            
            
            320,992
            
            
            291,108
            
            
            293,564Changes
                in inventories
            
            
            2,809
            
            
            5,838
            
            
            (1,133
            )Own
                costs capitalized
            
            
            7,456
            
            
            11,668
            
            
            12,913Other
                operating income
            
            
            40,302
            
            
            40,007
            
            
            38,402Total
                performance
            
            
            371,559
            
            
            348,621
            
            
            343,746Cost
                of materials
            
            
            91,043
            
            
            82,729
            
            
            82,469Personnel
                expenses
            
            
            108,567
            
            
            101,573
            
            
            103,535Depreciation
                on intangibleand
                tangible fixed assets
            
            
            73,040
            
            
            69,747
            
            
            66,594Other
                operating expenses
            
            
            47,987
            
            
            45,072
            
            
            44,859Total
                operating expenses
            
            
            320,637
            
            
            299,121
            
            
            297,457Operating
                result
            
            
            50,922
            
            
            49,500
            
            
            46,289Income
                from associated companyand
                from companies in whichparticipations
                are held
            
            
            1,071
            
            
            208
            
            
            178Income
                from financial assets
            
            
            677
            
            
            1,266
            
            
            1,565Depreciation
                on financial assetsand
                short term investments
            
            
            0
            
            
            0
            
            
            (1
            )Interest
                income
            
            
            478
            
            
            1,726
            
            
            2,754Interest
                expense
            
            
            (7,766
            )
            
            (10,510
            )
            
            (9,324
            )Net
                income from ordinary activities
            
            
            45,382
            
            
            42,190
            
            
            41,461Income
                taxes
            
            
            2,028
            
            
            2,705
            
            
            3,263Other
                taxes
            
            
            6,574
            
            
            5,724
            
            
            5,584Net
                income
            
            
            36,780
            
            
            33,761
            
            
            32,614*See
                accompanying Notes to Consolidated Financial
                Statements*


3





**Mitteldeutsche
                Braunkohlengesellschaft mbH****Consolidated
                Balance Sheets****in
                thousands of Euro (TEUR)****At
                December 31,****2006**
            
            **2005****ASSETS****Non-current
              assets**Intangible
              assetsConcessions,
                trade marks, patents and licenses
            
            
            
            
            
            232,178
            
            
            248,460Property,
                plant and equipment1.
                Land and mining property
            
            
            
            
            
            142,838
            
            
            150,4852.
                Buildings
            
            
            
            
            
            45,155
            
            
            45,1483.
                Strip mines
            
            
            
            
            
            61,232
            
            
            55,6944.
                Technical equipment and machinery
            
            
            
            
            
            214,080
            
            
            195,3455.
                Factory and office equipment
            
            
            
            
            
            23,316
            
            
            24,8946.
                Payments on account and assets under construction
            
            
            
            
            
            9,480
            
            
            19,658496,101
            
            
            491,224Financial
                assets1.
                Participations (including associated company)
            
            
            
            
            
            12,925
            
            
            12,5942.
                Loan receivable from participation
            
            
            
            
            
            4,174
            
            
            4,5493.
                Other loan receivables
            
            
            
            
            
            7,146
            
            
            10,62624,245
            
            
            27,769**Total
                non-current assets**
            
            
            
            
            
            752,524
            
            
            767,453Overburden
            
            
            
            
            
            158,470
            
            
            156,033**Current
                assets**Inventories1.
                Raw materials and supplies
            
            
            
            
            
            4,937
            
            
            5,3032.
                Finished goods
            
            
            
            
            
            1,467
            
            
            1,0956,404
            
            
            6,398Receivables
                and other assets1.
                Trade receivables
            
            
            
            
            
            33,189
            
            
            34,7802.
                Receivables from enterprises in which participations
              are
                held
            
            
            
            
            
            359
            
            
            5773.
                Other assets
            
            
            
            
            
            14,049
            
            
            13,50247,597
            
            
            48,859InvestmentsOther
                investments
            
            
            
            
            
            0
            
            
            36,534Cash
                and cash equivalents
            
            
            
            
            
            7,931
            
            
            2,774**Total
                current assets**
            
            
            
            
            
            61,932
            
            
            94,565Prepaid
                expenses
            
            
            
            
            
            6,176
            
            
            7,792**TOTAL
                ASSETS**
            
            
            
            
            
            979,102
            
            
            1,025,843*See
                accompanying Notes to Consolidated Financial
                Statements*





4





**Mitteldeutsche
                Braunkohlengesellschaft mbH****Consolidated
                Balance Sheets****in
                thousands of Euro (TEUR)****At
                December 31,****2006**
            
            **2005****SHAREHOLDERS'
              EQUITY AND LIABILITIES****Shareholders'
                Equity**Subscribed
                capital
            
            
            
            
            
            30,700
            
            
            30,700Capital
                reserve
            
            
            
            
            
            293,191
            
            
            293,191Balance
                Sheet Profit :TEUR 44,456; 2005: TEUR 43,544Less:
                Interim dividend paid: TEUR 26,100; 2005: TEUR 22,000
            
            
            
            
            
            18,356
            
            
            21,544Minority
                interest
            
            
            
            
            
            (31,007
            )
            
            (35,002
            )thereof
                net income for the year:TEUR
                13,868 (2005: TEUR 13,013)**Total
                Shareholders' Equity**
            
            
            
            
            
            311,240
            
            
            310,433Special
                item for investment subsidies and incentives
            
            
            
            
            
            286,792
            
            
            308,430Provisions1.
                Accruals for pensions and similar obligations
            
            
            
            
            
            10,031
            
            
            10,6012.
                Taxation accruals
            
            
            
            
            
            714
            
            
            1,2593.
                Environmental and mining provisions
            
            
            
            
            
            201,840
            
            
            197,4414.
                Other accruals
            
            
            
            
            
            22,188
            
            
            20,128234,773
            
            
            229,429Liabilities1.
                Liabilities to banks
            
            
            
            
            
            118,293
            
            
            147,5842.
                Payments received
            
            
            
            
            
            109
            
            
            593.
                Trade payables
            
            
            
            
            
            16,489
            
            
            15,0754.
                Payables to participations
            
            
            
            
            
            2,444
            
            
            2,6135.
                Other payables
            
            
            
            
            
            8,945
            
            
            12,205146,280
            
            
            177,536Deferred
                income
            
            
            
            
            
            17
            
            
            15**TOTAL
                SHAREHOLDERS' EQUITY AND LIABILITIES**
            
            
            
            
            
            979,102
            
            
            1,025,843*See
                accompanying Notes to Consolidated Financial
                Statements*


5





**Mitteldeutsche
                Braunkohlengesellschaft mbH****Consolidated
                Statements of Cash Flows****in
                thousands of Euro (TEUR)****Year
                ended December 31,****2006**
            
            **2005**
            
            **2004**Net
                income for the year
            
            
            36,780
            
            
            33,761
            
            
            32,614Depreciation
                on fixed assets
            
            
            73,040
            
            
            69,747
            
            
            66,594Increase/
                decrease (-) in accruals
            
            
            5,464
            
            
            -599
            
            
            7,949Release
                (-) and adjustments of the special item for investment incentives
            
            
            -21,638
            
            
            -21,728
            
            
            -21,663Gains
                (-)/losses from disposal of fixed assets
            
            
            -588
            
            
            -268
            
            
            198Increase
                (-)/decrease in inventories, trade receivables and other assets,
                which are
                not related to investing or financing activities
            
            
            435
            
            
            -9,281
            
            
            -2,781Increase/
                decrease (-) in trade payables and other liabities, which are not
                related
                to investing or financing activities
            
            
            -2,125
            
            
            546
            
            
            -4,041Other
                non-cash income (-)/ expenses
            
            
            -334
            
            
            -791
            
            
            1**Cash
                flow from operating activities**
            
            
            91,034
            
            
            71,387
            
            
            78,871Cash
                inflow from disposals of fixed assets
            
            
            867
            
            
            731
            
            
            367Cash
                outflow for capital expenditures (-) in tangible assets
            
            
            -61,489
            
            
            -60,698
            
            
            -45,673Cash
                inflow from disposals of intangible assets
            
            
            1
            
            
            0
            
            
            0Cash
                outflow for capital expenditures (-) in intangible assets
            
            
            -543
            
            
            -9,147
            
            
            -14,843Cash
                inflow from redemption of loans
            
            
            3,855
            
            
            5,037
            
            
            5,120Cash
                outflow for capital expenditures (-) in financial assets
            
            
            0
            
            
            -1
            
            
            -364**Cash
                flow used by investing activities**
            
            
            -57,309
            
            
            -64,078
            
            
            -55,393Disbursements
                to shareholders and minority shareholders
            
            
            -35,973
            
            
            -32,165
            
            
            -22,123Cash
                inflow from raising of loans
            
            
            13,000
            
            
            71,000
            
            
            0Cash
                outflow for redemption of loans
            
            
            -42,129
            
            
            -63,217
            
            
            -21,956**Cash
                flow used by financing activities**
            
            
            -65,102
            
            
            -24,382
            
            
            -44,079**Change
                in cash and cash equivalents**
            
            
            -31,377
            
            
            -17,073
            
            
            -20,601**Change
                in cash and cash equivalents due to valuation
                differences**
            
            
            0
            
            
            596
            
            
            -1Opening
                balance of cash and cash equivalents
            
            
            39,308
            
            
            55,785
            
            
            76,387**Closing
                balance of cash and cash equivalents**
            
            
            7,931
            
            
            39,308
            
            
            55,785**Components
                of cash and cash equivalents:**Cash
            
            
            7,931
            
            
            2,774
            
            
            19,248Other
                investments
            
            
            0
            
            
            36,534
            
            
            36,537**Supplemental
                information:**Income
                taxes paid
            
            
            2,488
            
            
            4,931
            
            
            67Interest
                paid
            
            
            7,923
            
            
            10,786
            
            
            9,109See
                accompanying Notes to Consolidated Financial
                Statements





6


**Mitteldeutsche
                Braunkohlengesellschaft mbH****Consolidated
                Statements of Shareholders' Equity****in
                thousands of Euro (TEUR)**Subscribed
            
            Capital
            
            Balance
            
            Minoritycapital
            
            reserve
            
            sheet
                profit/
            
            interest
            
            Totalnet
                profit**Balance
                as of January 1, 2004**
            
            
            30,700
            
            
            293,191
            
            
            14,182
            
            
            (39,727
            )
            
            298,346Net
                income 2004
            
            
            
            
            
            
            
            
            21,114
            
            
            11,500
            
            
            32,614Transfer
                to capital reserveDistributions
            
            
            
            
            
            
            
            
            (12,500
            )
            
            
            
            
            (12,500
            )Disbursements
                to minority shareholders
            
            
            
            
            
            
            
            
            
            
            
            (9,623
            )
            
            (9,623
            )**Balance
                as of December 31, 2004**
            
            
            30,700
            
            
            293,191
            
            
            22,796
            
            
            (37,850
            )
            
            308,837Net
                income 2005
            
            
            
            
            
            
            
            
            20,748
            
            
            13,013
            
            
            33,761Transfer
                from capital reserveDistributions
            
            
            
            
            
            
            
            
            (22,000
            )
            
            
            
            
            (22,000
            )Disbursements
                to minority shareholders
            
            
            
            
            
            
            
            
            
            
            
            (10,165
            )
            
            (10,165
            )**Balance
                as of December 31, 2005**
            
            
            30,700
            
            
            293,191
            
            
            21,544
            
            
            (35,002
            )
            
            310,433Net
                income 2006
            
            
            
            
            
            
            
            
            22,912
            
            
            13,868
            
            
            36,780Transfer
                from capital reserveDistributions
            
            
            
            
            
            
            
            
            (26,100
            )
            
            
            
            
            (26,100
            )Disbursements
                to minority shareholders
            
            
            
            
            
            
            
            
            
            
            
            (9,873
            )
            
            (9,873
            )**Balance
                as of December 31, 2006**
            
            
            30,700
            
            
            293,191
            
            
            18,356
            
            
            (31,007
            )
            
            311,240*See
                accompanying Notes to Consolidated Financial
                Statements*








7


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





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





NATURE
      OF
      BUSINESS: The operations of MIBRAG mbH include two open-cast brown coal mines
      in
      Profen and Schleenhain and rights on future mining reserves. Operations also
      include over 200 mega watts of power generation. A significant portion of the
      sales of MIBRAG is made pursuant to long-term coal and energy supply
      contracts.








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





BASIS
      OF
      PRESENTATION: The consolidated financial statements of MIBRAG mbH and
      subsidiaries have been prepared in accordance with the German Commercial Code,
      which represents accounting principles generally accepted in Germany (“German
      GAAP“). German GAAP varies in certain significant respects from accounting
      principles generally accepted in the United States of America (“US GAAP“).
      Application of US GAAP would have affected the results of operations for each
      of
      the years in the three-year period ended December 31, 2006 and shareholders’
equity as of December 31, 2006 and 2005 to the extent summarized in note C
      to
      the consolidated financial statements.





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





PRINCIPLES
      OF CONSOLIDATION: All material companies in which MIBRAG has legal or effective
      control are fully consolidated. In 2006, MIBRAG consolidated 6 (2005: 6, 2004:
      6) domestic subsidiaries.


8


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





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





All
      significant intercompany accounts and transactions have been eliminated in
      consolidation.





USE
      OF
      ESTIMATES: The preparation of financial statements in conformity with generally
      accepted accounting principles necessarily requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the balance sheet dates
      and
      the reported amounts of revenues and expenses during the reported periods.
      Actual results could differ from those estimates.





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





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





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





PROPERTY,
      PLANT AND EQUIPMENT: Property, plant and equipment acquired is recorded on the basis of acquisition
      or manufacturing cost, including capitalized mine development costs, and
      subsequently reduced by scheduled depreciation charges over the assets’ useful
      lives as follows: buildings 3 to 50 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 as well as
      mining properties. Land is principally accounted for at acquisition costs.
      If,
      after utilization in mining, the value of a piece of land is expected to be
      permanently impaired, it is written down to the lower value.


9


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





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





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





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





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





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





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





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





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


10


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





ACCRUALS
      FOR PENSION OBLIGATIONS: This accrual refers to one-time payments to non-tariff
      employees to which MIBRAG is committed on one side and to the compensation
      for
      lost pension credits to which MIBRAG is obliged if employees agree to take
      part
      in the Company’s early retirement program on the other side. The valuation is
      based 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 obligation
      in the case that MIBRAG will not be solvent at the due dates of the
      payment.





ENVIRONMENTAL
      AND MINING PROVISIONS: Accruals for environmental and mining-related matters
      are
      recorded when it is probable that a liability has been incurred and the amount
      of the liability can be reasonably estimated, based on current law and existing
      technologies. These accruals are adjusted periodically as assessment and
      utilization progress or as additional technical or legal information becomes
      available.





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





LIABILITIES:
      Liabilities are shown at their repayment amounts.





PER
      SHARE
      AMOUNTS: P er
      share
      amounts are not disclosed in the financial statements. MIBRAG is a nonpublic
      enterprise.








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





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


11


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





The
      German GAAP financial statements include the historical cost book values of
      assets transferred from a predecessor company.





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











12


**Reconciliation
      to US GAAP**





The
      following is a summary of the significant adjustments to net income for 2006,
      2005 and 2004 and to shareholders' equity at December 31, 2006 and December
      31,
      2005, which would be required if US GAAP had been applied instead of German
      GAAP.





**Year
                ended December 31,****Note**
            
            **2006**
            
            **2005**
            
            **2004****TEUR**
            
            **TEUR**
            
            **TEUR**Net
                income as reported in the consolidatedincome
                statement under German GAAP
            
            
            
            36,780
            
            33,761
            
            32,614Adjustments
                required to conform withUS
                GAAP:Fixed
                assets
            
            
            (1
            )
            (3,997)
            
            (5,967
            )
            (6,332)Relocation
                accruals
            
            
            (2
            )
            485
            
            1,413
            
            (372)Investment
                in power plants
            
            
            (3
            )
            (204)
            
            (2,066
            )
            (2,356)Interest
                capitalization
            
            
            (4
            )
            (435)
            
            (435
            )
            (435)Overburden
            
            
            (5
            )
            (2,437)
            
            4,775
            
            7,884Environmental
                and mining provisions
            
            
            (6
            )
            1,640
            
            4,103
            
            (1,491)Pension
                and similar obligations
            
            
            (7
            )
            113
            
            (1,355
            )
            682Early
                retirement obligations
            
            
            (8
            )
            6,687
            
            0
            
            0Realized
                gains and losses on securities
            
            
            (9
            )
            901
            
            (596
            )
            84Other
            
            
            (10
            )
            486
            
            1,511
            
            1,475**Net
                income in accordance with US GAAP**
            
            
            
            
            **40,019**
            
            **35,144**
            
            **31,753**





13





**Year
                ended December 31,****Note**
            
            **2006**
            
            **2005****TEUR**
            
            **TEUR**Shareholders'
                equity as reportedin
              the consolidated balancesheet
                under German GAAP
            
            
            
            
            
            
            
            
            311,240
            
            
            310,433Adjustments
                required to conform withUS
                GAAP:Adjustment
                to opening balance of retained earnings due to the change in accounting
                principle
            
            
            
            
            
            (5
            )
            
            (145,911
            )
            
            0Fixed
                assets
            
            
            
            
            
            (1
            )
            
            80,754
            
            
            84,751Relocation
                accruals
            
            
            
            
            
            (2
            )
            
            24,810
            
            
            24,325Investments
                in power plants
            
            
            
            
            
            (3
            )
            
            (35,020
            )
            
            (44,698
            )Interest
                capitalization
            
            
            
            
            
            (4
            )
            
            2,974
            
            
            3,409Overburden
            
            
            
            
            
            (5
            )
            
            (12,559
            )
            
            (10,122
            )Environmental
                and mining provisions
            
            
            
            
            
            (6
            )
            
            6,357
            
            
            4,717Pension
                and similar obligations
            
            
            
            
            
            (7
            )
            
            (1,007
            )
            
            (1,120
            )Early
                retirement obligations
            
            
            
            
            
            (8
            )
            
            6,687
            
            
            0Other
            
            
            
            
            
            (9+10
            )
            
            (3,157
            )
            
            (3,513
            )**Shareholders'
                equity in accordance****with
                US GAAP**
            
            
            
            
            **235,166**
            
            
            **368,182**





14


**Reporting
      of statement of shareholders' equity**





Comprehensive
      income 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 31,2006
                
                2005
                
                2004TEUR
                
                TEUR
                
                TEURNet
                    income in accordance with US GAAP
                
                
                40,019
                
                
                35,144
                
                
                31,753Other
                    comprehensive income/unrealized gains on
                  marketable
                    securitiesReclassification
                    adjustments for gains realized in
                  net
                    income
                
                
                (901
                )
                
                596
                
                
                (84
                )Unrealized
                    holding gains/(losses) on securities
                
                
                (132
                )
                
                (33
                )
                
                165**Comprehensive
                    income**
                
                
                **38,986**
                
                
                **35,707**
                
                
                **31,834**
 
 Statement
          of shareholders‘ equity:
 
 Year
                    ended December 31,2006
                
                2005
                
                2004TEUR
                
                TEUR
                
                TEURStockholders'
                    equity according to US GAAPbefore
                    accumulated other comprehensiveincome
                
                
                235,166
                
                
                367,149
                
                
                354,005Accumulated
                    other comprehensive income:Unrealized
                    holding gains/(losses) on securities
                
                
                0
                
                
                1,033
                
                
                470**Total
                    stockholders' equity according to US****GAAP
                    including comprehensive income**
                
                
                **235,166**
                
                
                **368,182**
                
                
                **354,475**





15


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


**1.
      Fixed assets**





The
      differences relate primarily to the following:





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


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


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





Upon
      disposal, the above differences 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 using the cost method. Under US GAAP the book value was
      increased to account for the equity earnings that were not distributed to MIBRAG
      as of that date.








**2.
      Relocation accruals**





As
      of
      January 1, 1994 for US GAAP purposes, liabilities and deferred costs
      of TEUR 45,357 were recognized to relocate three villages. The deferred costs
      are amortized in accordance with quantities of coal extracted. In accordance
      with German accounting principles, accruals for the relocation of villages
      can
      not be accrued earlier than two years prior to the relocation, and certain
      relocation costs must be expensed as incurred.








16


**3.
      Investment in power plants**





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








**4.
      Interest capitalization**





Interest
      is expensed in the German financial statements. Interest expense related to
      qualified assets, however, is capitalized and depreciated for US GAAP purposes.
      The effect in 2006, 2005 and 2004 reflects the depreciation of amounts
      previously capitalized.








**5.
      Overburden**





MIBRAG
      is
      required to remove overburden and waste materials to access mineral deposits.
      The costs of removing overburden and waste materials are referred to as
“stripping costs” or “overburden”. MIBRAG incurs significant stripping costs in
      its coal mining operations. MIBRAG's mines are open pit mines, which cover
      several square miles and have an estimated remaining life of 40 or more years.
      Because of the mining procedures used, MIBRAG generally does not maintain any
      significant inventory of mined coal.





In
      March
      2005, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No.
      04-6, Accounting for Stripping Costs Incurred during Production in the Mining
      Industry. The EITF concluded that stripping costs incurred during the production
      phase of a mine are variable production costs that should be included in the
      cost of inventory produced during the period that stripping costs are incurred.





MIBRAG
      was required to adopt EITF No. 04-6 in the first quarter of 2006.





When
      MIBRAG adopted EITF No. 04-6 it charged EUR 145,911 million of deferred
      stripping costs which were classified as “overburden” on the balance sheet as of
      December 31, 2005 to the opening balance of retained earnings as required by
      EITF 04-6 in 2006. Although this results in a temporary difference for deferred
      tax purposes MIBRAG did not recognize a deferred tax benefit, because it is
      considered more likely than not that MIBRAG will be able to generate sufficient
      future taxable income to utilize that benefit.


17


Under
      EITF No. 04-6, costs of removing overburden are now expensed in the period
      incurred. For US GAAP purposes MIBRAG is reversing the inventory change in
      the
      German GAAP statutory overburden balance.








**6.
      Environmental and mining provisions**





Certain
      accrued mining reclamation provisions are accrued ratably in the German
      financial statements. The German Federal Mining Law and similar state statutes
      require, among other things, the restoration of mined property in accordance
      with specified standards and an approved reclamation plan. The Company’s total
      reclamation and demolition liabilities are based upon permit requirements and
      its engineering estimates related to these requirements. For US GAAP purposes
      the Company adopted SFAS 143 effective January 1, 2003. SFAS 143 requires that
      asset retirement obligations be recorded as a liability based on fair value,
      which is calculated as the present value of the estimated future cash flows.
      The
      estimate of ultimate reclamation liability and the expected period in which
      reclamation work will be performed is reviewed periodically by the Company’s
      management and engineers. In estimating future cash flows, the Company
      considered the estimated current cost of reclamation. The estimated liability
      can change significantly if actual costs vary from assumptions or if
      governmental regulations change significantly.








**7.
      Pension and similar obligations**





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








18


**8.
      Early retirement obligations**





On
      January 1, 2006, MIBRAG adopted EITF Issue No. 05-5, Accounting for
      Early Retirement or Post-employment Programs with Specific Features (such as
      terms specified in Altersteilzeit/ Early Retirement Arrangements), or “EITF
      05-5”. EITF 05-5 provides guidance on the accounting for early retirement or
      post-employment programs with specific features, and specifically the terms
      of
      Altersteilzeit early retirement arrangements. The Altersteilzeit, or “ATZ”,
      arrangement is a voluntary early retirement program in Germany designed to
      create an incentive for employees, within a certain age group, to transition
      from employment into retirement before their legal retirement age. If certain
      criteria are met by the employer, the German government provides to the employer
      a subsidy for bonuses paid to the employee and the additional contributions
      paid
      by the employer into the German government pension scheme under an ATZ
      arrangement for a maximum of six years. The employer (MIBRAG) should recognize
      the government subsidy when it meets the necessary criteria and is entitled
      to
      the subsidy. Payments made by the employer relative to the bonus feature and
      the
      additional contributions into the German government pension scheme, or the
      additional compensation, should be accounted for as a post-employment benefit
      under SFAS No. 112, Employers’ Accounting for Post-employment Benefits,
      which prescribes that an entity should recognize the additional compensation
      over the period from the point at which the employee signs the ATZ contract
      until the end of the active service period. The opening adjustment (first-time
      adoption) of TEUR 3,371 is treated as a change in accounting estimates effected
      by a change in accounting principle in 2006. The provision for US GAAP purposes
      is lower than for German GAAP purposes at the time the contacts are closed
      (because in accordance with German GAAP the whole compensation is accrued for
      immediately). An additional TEUR 3,316 relates to ATZ arrangements concluded
      in
      2006.





19


**9.
      Realized/Unrealized gains and losses on securities**





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








**10.
      Other**





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








**11.
      Deferred taxes**





The
      differences noted above result in temporary differences which, when combined
      with tax loss carry-forwards, would result in a net deferred tax asset of TEUR
      173,034 and TEUR 87,150 at December 31, 2006 and December 31, 2005,
      respectively. Because of available negative evidence, an 100 % valuation
      allowance would have been recorded at each year-end. Because no net deferred
      taxes were recorded for German or US GAAP purposes, no adjustment to net income
      or shareholders equity is listed in the preceding reconciliation.





20


**12.
      U.S. GAAP Accounting Pronouncements**





***Recently
      issued accounting standards***





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No.157 ,*Fair
      Value Measurements.*SFAS
      No. 157 clarifies the principle that fair value should be based on the
      assumptions market participants would use when pricing an asset or liability
      and
      establishes a fair value hierarchy that prioritizes the information used to
      develop those assumptions. Under the standard, fair value measurements would
      be
      separately disclosed by level within the fair value hierarchy. SFAS No. 157
      is effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years, with
      early adoption permitted. The Company is currently evaluating the impact, if
      any, that SFAS No. 157 will have on its consolidated financial
      statements.




In
      July
      2006, the FASB issued FASB Interpretation ("FIN") No. 48, *Accounting for Uncertainty in Income Taxes,* with
      respect to FASB Statement No. 109, *Accounting for Income Taxes,* regarding accounting for and disclosure of uncertain tax positions. FIN No.
      48
      is intended to reduce the diversity in practice associated with the recognition
      and measurement related to accounting for uncertainty in income taxes. This
      interpretation is effective for fiscal years beginning after December 15, 2006,
      and interim periods within those fiscal years. The Company is currently
      evaluating the impact, if any, that FIN No. 48 will have on its consolidated
      financial statements.








***Adoption
      of accounting standards***





In
      the
      mining industry, companies may be required to remove overburden and waste
      materials to access mineral deposits. The costs of removing overburden and
      waste
      materials are referred to as “stripping costs.” MIBRAG incurs significant
      stripping costs in its lignite coal mining operations. MIBRAG's mines are open
      pit mines, which cover several square miles and have an estimated remaining
      life
      of 40 or more years. Because of the mining procedures used, MIBRAG generally
      does not maintain any significant inventory of mined coal. In March 2005, the
      Emerging Issues Task Force (“EITF”) reached a consensus on Issue No.
      04-6, *Accounting for Stripping Costs Incurred during Production in the Mining
      Industry* .
      The
      EITF concluded that stripping costs incurred during the production phase of
      a
      mine are variable production costs that should be included in the cost of
      inventory produced during the period that stripping costs are incurred. The
      Company was required to adopt EITF No. 04-6 in the first quarter of 2006. In
      accordance with EITF No. 04-6 the adjustment of TEUR 145,911 from adoption
      was
      recognized as a cumulative effect adjustment to beginning retained earnings
      for
      the period 2006.


21





Under
      EITF No. 04-6, costs of removing overburden are now expensed in the period
      incurred. The execution of MIBRAG's mine plans may result in fiscal periods
      during which costs incurred for the removal of overburden will not bear a direct
      relationship to the revenue derived from the sale of coal. This may result
      in a
      degree of variability in the future reported earnings of MIBRAG.


In
      June
      2005, the FASB ratified the consensus reached in EITF Issue No.
      05-5, *Accounting for Early Retirement or Post-employment Programs with Specific
      Features (Such as Terms Specified in Altersteilzeit Early Retirement
      Arrangements).* EITF No.
      05-5 addresses the timing of recognition of salaries, bonuses and additional
      pension contributions associated with certain early retirement arrangements
      typical in Germany (as well as similar programs). The EITF also specified the
      accounting for government subsidies related to these arrangements. The effect
      of
      applying EITF No. 05-5 was to be recognized prospectively as a change in
      accounting estimate effected by a change in accounting principle under SFAS
      No.
      154, *Accounting Changes and Error Corrections - a Replacement of APB Opinion No.
      20
      and FASB Statement No. 3.* MIBRAG
      provides early retirement arrangements to its employees pursuant to a program
      designed by the German government. Prior to EITF No. 05-5, the additional
      compensation related to the early retirement program had been accrued and
      expensed at the time an employee elected to participate. However, EITF No.
      05-5
      requires that the additional compensation be recognized ratably over the
      employee's remaining service period. Accordingly, the adoption of EITF No.
      05-5
      in the first quarter of 2006 increased MIBRAG's earnings as the prior accruals
      were reversed by TEUR 3,671.





In
      December 2004, the FASB issued SFAS No. 123 (Revised), *Share-Based Payment* (“SFAS
      No. 123(R)”). SFAS No. 123(R) replaces SFAS No. 123 and supersedes Accounting
      Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees.* The
      Company’s employees did not receive any share-based payments in terms of SFAS
      No. 123 (R).





22


In
      May
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections - a replacement of APB No. 20 and FASB Statement
      No. 3.* This
      Statement changes the requirements for the accounting for and reporting of
      a
      change in accounting principle. It applies to all voluntary changes in
      accounting principle, error corrections and required changes due to new
      accounting pronouncements which do not specify a certain transition method.
      The
      Statement generally requires retrospective application to prior period’s
      financial statements for changes in accounting principle, unless it is
      impracticable to determine either the period-specific effects or the cumulative
      effect of the change. In addition, this Statement requires that retrospective
      application of a change in accounting principle be limited to the direct effects
      of the change. It also requires that a change in depreciation, amortization,
      or
      depletion method for long-lived, nonfinancial assets be accounted for on a
      prospective basis. SFAS No. 154 is effective for fiscal years beginning after
      December 15, 2005. MIBRAG implemented SFAS No. 154 on January 1, 2006. SFAS
      No.
      154 did not have any material impact on the Company’s consolidated financial
      statements.





In
      September 2006, the FASB issued SFAS No. 158, *Employers' Accounting for Defined Benefit Pension and Other Postretirement
      Plans* . SFAS
      No. 158 requires employers to recognize the overfunded or underfunded status
      of
      a defined benefit postretirement plan as an asset or liability in its statement
      of financial position, recognize changes in that funded status in the year
      in
      which the changes occur through comprehensive income and measure a plan's assets
      and its obligations that determine its funded status as of the end of the
      employer's fiscal year. The provisions of SFAS No. 158 are effective for fiscal
      years ending after December 15, 2006. The Company implemented SFAS No. 158
      in
      2006. SFAS No. 158 did not have any material impact on the Company’s
      consolidated financial statements.





In
      March 2005, the FASB issued Interpretation No. 47, *Accounting for Conditional Asset Retirement Obligations - an interpretation
      of
      FASB Statement No. 143* (“FIN
      No. 47”) *.* FIN
      No. 47 clarifies the term conditional asset retirement obligation as used
      in SFAS No. 143, *Accounting for Asset Retirement Obligations,* and
      requires a liability to be recorded if the fair value of the obligation can
      be
      reasonably estimated. The types of asset retirement obligations that are covered
      by FIN No. 47 are those for which an entity has a legal obligation to
      perform an asset retirement activity, even though the timing and method of
      settling the obligation are conditional on a future event that may or may not
      be
      within the control of the entity. FIN No. 47 also clarifies when an entity
      would have sufficient information to reasonably estimate the fair value of
      an
      asset retirement obligation. FIN No. 47 is effective for fiscal years
      beginning after December 15, 2005. The Company implemented FIN No. 47 on January
      1, 2006 but the adoption of FIN No. 47 did not have a significant impact on
      the
      Company’s consolidated financial statements.


23


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


**SALES
      AGREEMENT**


MIBRAG
      mbH markets its coal principally to electric utilities in Germany. As of
      December 31, 2006 and 2005 accounts receivable from electric utilities totaled
      TEUR 25,209 and TEUR 27,684, respectively. Credit is extended based on an
      evaluation of the customer’s financial condition. Credit losses are provided for
      in the financial statements and consistently have been minimal.MIBRAG mbH is
      committed under several long-term contracts to supply raw brown coal and whirl
      fine coal to the Schkopau power station and the Lippendorf power station. Under
      the terms of the Schkopau Agreement, MIBRAG mbH may deliver annually up to
      5.8
      million tons of coal. The agreement is in effect until 2010, with an option
      for
      the purchaser to extend the agreement for another 10 years. The price to be
      paid
      by the Schkopau power station is a fixed price adjusted by an annual escalation
      rate.





The
      Lippendorf Agreements provide for deliveries of up to 10 million tons of raw
      brown coal per year from 1999 through 2040 with an option for the customers
      to
      extend for an additional 3-year period. These Agreements were closed with
      Vereinigte Energiewerke AG (VEAG), Berlin, E.ON Kraftwerke GmbH, Hanover, and
      EnBW Lippendorf Beteiligungsgesellschaft mbH, Stuttgart. The price to be paid
      by
      the Lippendorf power station is a base-price with escalation and adjustment
      based on quality of the coal delivered.


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


24


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





In
      the
      fourth quarter of 2002, MIBRAG mbH successfully negotiated with Bundesanstalt
      fuer vereinigungsbedingte Sonderaufgaben (“BvS”) amendments to the original
      agreement on transportation credit matters that had been entered into with
      the
      German government in 1993. The amendments were effective as of January 1, 2002.
      As a result of those negotiations, a settlement agreement was concluded
      replacing annual payments to be received by MIBRAG mbH over 18.75 years from
      the
      German government with a one-time, up-front payment totaling TEUR 383,225,
      which
      was recorded as deferred income (special item for investment subsidies and
      incentives). MIBRAG mbH also capitalized TEUR 251,710 for coal transportation
      rights (intangible assets) and TEUR 140,478 for mining rights (land and mining
      property) acquired through the settlement agreement. Both the deferred revenue
      and the rights will be amortized straight-line over the term of the contract
      of
      18.75 years. As of December 31, 2006, the book values for coal
      transportation rights amounts to TEUR 184,587 (2005: TEUR 198,012) and
      for the mining rights TEUR 103,017 (2005: TEUR 110,509).








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





December
                31, 2006
            
            December
                31, 2005TEUR
            
            TEURConcessions,
                trade marks, patents and licenses cost
            
            
            313,822
            
            
            312,614Less:
                accumulated amortization
            
            
            (81,644
            )
            
            (64,154
            )Net
                book value
            
            
            232,178
            
            
            248,460





The
      aggregate amortization expense for intangible assets amounted to TEUR 16,824
      (2006), TEUR 16,835 (2005) and TEUR 14,096 (2004). For each of the following
      years the aggregate amortization expense is estimated to be:





TEUR


2007:
      17,027


2008:
      17,004


2009:
      16,983


2010:
      16,894


2011:
      16,665.





25


**NOTE
      G**  **PROPERTY,
      PLANT AND EQUIPMENT** The
      major
      categories of fixed assets are the following:





December
                31, 2006
            
            December
                31, 2005TEUR
            
            TEURProperty,
                plant and equipmentcost
                -
                  land and land
                  rights
            
            
            
            
            
            190,841
            
            
            189,238-
                buildings
            
            
            
            
            
            140,678
            
            
            139,385-
                strip mines
            
            
            
            
            
            73,964
            
            
            66,943-
                technical equipment and machinery
            
            
            
            
            
            886,872
            
            
            835,661-
                factory and office equipment
            
            
            
            
            
            116,227
            
            
            115,168-
                payments on account and assets underconstruction
            
            
            
            
            
            9,480
            
            
            19,658Total
                cost
            
            1,418,062
            
            
            1,366,053Less:
                accumulated depreciation
              (including
                depreciation for disposals)
            
            (921,961
            )
            
            (874,829
            )Net
                book value
            
            496,101
            
            
            491,224





Depreciation
      has been provided according to actual extraction of coal from the mine in
      relation to the total coal volume in the mine. The construction cost of strip
      mines include the cost for the removal of ground cover up to the coal banks
      as
      well as the removal of rock banks until the installation of production equipment
      and the commencement of raw brown coal production is possible. In 2004, a new
      mining field (Schwerzau) within the mine Profen was opened leading to additions
      to the strip mines. In the fiscal year 2006 further additions to the strip
      mines
      amounted to TEUR 7,022.





Total
      depreciation charges are as follows: TEUR 56,216 (2006), TEUR 52,912 (2005)
      and
      TEUR 52,498 (2004), including normal depreciation and unplanned depreciation.








**NOTE
      H**  **PARTICIPATIONS
      (INCLUDING ASSOCIATED COMPANY)** MIBRAG’s
      investment in MUEG is accounted for using the equity method. MUEG was founded
      in
      1990 and coordinates the waste disposal activities in the Central German brown
      coal area. The equity value is TEUR 7,283 and TEUR 6,952 as of December 31,
      2006
      and 2005, respectively and the cost basis is TEUR 6,740 and TEUR 6,740 at
      December 31, 2006 and 2005.


Investments
      in three other companies are accounted for at cost.


26


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





In
      1995,
      MIBRAG sold its district 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 period of 25 years. The interest rate is currently 5.0
      percent.





The
      fair
      market value of the loan approximates the book value, which amounted to TEUR
      4,174 and TEUR 4,549 at December 31, 2006 and 2005, respectively.





**NOTE
      J**  **OTHER
      LOAN RECEIVABLES** The
      balance of the loan to the investors as of December 31, 2006 and 2005 amounted
      to TEUR 7,146 and TEUR 10,626, which approximates the fair value as of
      these dates.








**NOTE
      K**  **OVERBURDEN** The
      reconciliation of the overburden costs is as follows:


December
                  31, 2006
              
              December
                  31, 2005Value
              
              
              
              ValueMillion
                  tons
              
              TEUR
              
              Million
                  tons
              
              TEURProfen
              
              
              24.1
              
              
              83,683
              
              
              21.3
              
              
              80,539Schleenhain
              
              
              24.6
              
              
              74,787
              
              
              24.1
              
              
              75,49448.7
              
              
              158,470
              
              
              45.4
              
              
              156,033





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








**NOTE
      L**  **TRADE
      RECEIVABLES** Trade
      receivables were disclosed in the balance sheet, net of allowances, as
      follows:


December
                31, 2006
              TEUR
            
            December
                31, 2005
              TEURTrade
                receivables
            
            
            33,675
            
            
            35,056Less
                allowances
            
            
            (486
            )
            
            (276
            )33,189
            
            
            34,780





27


**OTE
      M**  **OTHER
      INVESTMENTS** Other
      investments totaled TEUR 0 and TEUR
      36,534 at December 31, 2006 and 2005, respectively. The balance consists of
      investment funds of MI (TEUR 0 and TEUR 35,938 at December 31, 2006 and 2005,
      respectively), which were specially set up to reinvest the additional liquidity
      resulting from the entry of new investors into a subsidiary of MIBRAG. The
      Company sold all securities in 2006 with a gain on sale of TEUR
      596.





Interest
      on other investments of TEUR 0, TEUR 1,279 and TEUR 1,995 were disclosed in
      interest income in 2006, 2005 and 2004, respectively.








**NOTE
      N**  **ACCRUALS
      FOR PENSIONS AND SIMILAR OBLIGATIONS** The
      provision relates primarily to briquette benefit claims of active and retired
      employees on the basis of the collective bargaining agreement of November 9,
      1993 in respect to briquette benefit claims. Individuals entitled must be
      employees of the Company at the date of retirement. The right does not vest
      and
      lapses with early termination of the working relationship or upon receipt of
      social plan benefits.The calculation is based on an actuarial valuation, which
      takes into account the right to the redemption value of EUR 95.00 per metric
      ton
      of briquettes as specified in the collective bargaining agreement, the employees
      entitled to benefits as of December 31, 2006, and official mortality tables.








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


MIBRAG
      accrued TEUR 269 (2005: TEUR 289) for property taxes.


In
      2006,
      four subsidiaries of MIBRAG had to pay municipal trade taxes. As of December
      31,
      2006 accruals for municipal trade taxes had to be accrued for this purpose
      in
      the following entities: the parent company (TEUR 300), MI KG (TEUR 59), MBEG
      (TEUR 11) and GALA (TEUR 40). The subsidiaries do not have any tax loss carry
      forwards for municipal trade taxes anymore.





28


In
      the
      current year the other receivables from income taxes in 2006 amount to TEUR
      20
      (2005: TEUR -144). Thereof the books of the parent company (TEUR 72) show an
      amount of TEUR 72 for receivables from income taxes and on the other hand
      consolidated companies (MBEG TEUR -8 and GALA TEUR -44) have to pay corporate
      income taxes, for this purpose accruals for outstanding balances were posted
      in
      the following subsidiaries: MBEG (TEUR 4) and GALA (TEUR 31). In 2006 and 2005,
      the parent company did not provide accruals for income taxes under German GAAP
      because of tax losses brought forward from prior years.





The
      German income tax rate applicable to MIBRAG (corporate income tax, solidarity
      surcharge, municipal trade tax) is 36.67 % in 2006 (2005: 36.26 %, 2004:
      35.98 %).





Due
      to
      tax loss carry forwards the Company has an effective tax rate of 5.51 % (2005:
      8.01 %, 2004: 7.87 %)





Deferred
      tax assets and liabilities have not been recorded because there are no
      significant differences between the German GAAP financial statement and the
      tax
      bases of the assets and liabilities. The recording of a deferred tax benefit
      for
      net loss carry-forwards is prohibited under German GAAP.


At
      December 31, 2006 the Company had approximately TEUR 251,069 net operating
      loss
      carry-forwards for corporate income tax purposes and TEUR 328,454 for municipal
      trade tax purposes, which do not expire and may be applied against future
      taxable income.


29


**NOTE
      P**  **ENVIRONMENTAL
      AND MINING PROVISIONS** The
      following is a summary of environmental and mining provisions:


December
                31, 2006
              TEUR
            
            December
                31, 2005
              TEUR1)Mining
                reclamation provisions
            
            
            171,074
            
            
            165,9262)Provision
                for environmental measures
            
            
            5,040
            
            
            5,0403)Landscaping
            
            
            4,355
            
            
            4,3414)Planting
            
            
            2,035
            
            
            1,8845)Relocation
                of villages
            
            
            16,365
            
            
            17,2196)
                Other accruals for mining and landscaping
            
            
            2,971
            
            
            3,031201,840
            
            
            197,441





1)
      Mining
      reclamation provisionsMIBRAG is responsible for reclaiming the mines Profen
      and
      Schleenhain. The mining field reclaimation of the Profen and Schleenhain mines
      after the ceasing of production is planned for 2029 to 2046 and 2041 to 2073,
      respectively. A legally binding closure plan laying down the principles for
      action plans in accordance with the Federal Mining Law (Bundesberggesetz) is
      normally approved by the relevant mining authorities two years in advance to
      the
      commencement of production. The liability to reclaim the area exists from the
      start of mining activities. In each year of coal extraction the reclaimation
      costs are accrued ratably using the relation of the coal mined to the total
      coal
      mine volume.





The
      calculation of the total cost for reclaiming mining fields has been made on
      the
      basis of a third party study and estimations on the basis of current prices.
      These costs consist mainly of costs for reconstruction, bank reinforcement,
      dewatering and watering.





For
      the
      future reclamation of the Schleenhain mine, a new study was made in 2004
      indicating that the estimated total redevelopment expenses would not
      significantly change.








30


2)
      Provision for environmental measuresThe provision for the environmental measures
      is determined in respect to disposal sites and old locations of MIBRAG mbH
      in
      refinement and mining areas on which waste deposits can be found. The accrued
      amount is derived from article 19.3 of the purchase and sales agreement.
      Qualifying costs that exceed the provision are to be reimbursed by the
      Bundesanstalt fuer ver-einigungsbedingte Sonderaufgaben (BvS).


3)
      LandscapingThis provision includes costs for reclaiming disposal areas and
      leveling the area outside the embankments. These costs relate solely to
      continuous landscaping, while costs for closing down landscaping are included
      in
      certain mining provisions.4) PlantingProvision is made for costs in connection
      with temporary planting as of December 31, 2006 and December 31, 2005.


5)
      Relocation of villages The provision for the relocation of villages is in
      respect to the relocation of municipalities, which is necessary for the
      expansion of the Profen and Schleenhain mines. The calculation of the provision
      is based on a method that takes into account the cost for project planning,
      infrastructural development, cemetery relocation, demolition and landmark
      preservation. The provision is accrued in equal annual amounts, commencing
      two
      years before the relocation starts and ending in the middle of the relocation
      year.


6)
      Other
      accruals for mining and landscaping





In
      2005,
      a reclassification of accruals for coal-mining damages (TEUR 2,531) was made
      from other accruals to environmental and mining provisions. In the current
      year
      there are no changes to this accrual. Additionally, accruals for landscaping
      and
      planting at the area of the former briquette factory were recorded in 2005
      amounting to TEUR 500.




31


**NOTE
      Q**  **OTHER
      ACCRUALS** Accrued
      liabilities are as follows:


December
                31, 2006
              TEUR
            
            December
                31, 2005
              TEUR1)
                Severance and early retirement payments
            
            
            12,566
            
            
            10,0432)
                Personnel expenses-
                Employment anniversaries
            
            
            1,133
            
            
            1,162-
                Vacation and other compensatedabsences
            
            
            503
            
            
            490-
                Other
            
            
            1,434
            
            
            1,3723,070
            
            
            3,0243)
                Remaining accruals
            
            
            6,552
            
            
            7,06122,188
            
            
            20,128





1)
      Severance and early retirement paymentsBases for the provisions are signed
      social plan framework agreements in which the measures for the personnel
      adjustments are defined. The employees are entitled to a one-time severance
      payment if the company initiates termination or in case of retrenchments. The
      severance payments are limited to TEUR 26 per person.





Employees
      participating in early retirement programs are entitled to additional
      compensation, mainly for the reduction in statutory pension payments due to
      early retirement. These amounts have also been calculated on the basis of
      actuarial valuations. The first time MIBRAG entered into a contracts concerning
      the early retirement program was in the fiscal year 2001. Annually, the
      management of the parent company decides on the number of contracts to be signed
      considering the structure of personnel. From the employees that fulfill the
      requirements of early retirement part-time and that have applied for it,
      management and works council choose the persons to be considered. In the current
      year the company entered into 107 new contracts.





2)
      Personnel expensesMIBRAG mbH grants awards in recognition of long service in
      the
      Company, based on the collective bargaining agreement dated January 1, 1992
      and
      the Company agreement dated October 1, 1995. The employees are entitled to
      financial awards, which increase in proportion to their employment periods.
      The
      valuations of the benefits were based on actuarial valuations.


32


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


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





3)
      Remaining accrualsComposition:


December
                31, 2006
              TEUR
            
            December
                31, 2005
              TEUROutstanding
                invoices
            
            
            2,341
            
            
            3,072Water
                usage fees
            
            
            164
            
            
            194Professional
                service and litigation
            
            
            2,324
            
            
            1,688Others
            
            
            1,723
            
            
            2,1076,552
            
            
            7,061








**NOTE
      R**  **LIABILITIES
      TO BANKS** Liabilities to banks consist of the following:


December
                31, 2006
              TEUR
            
            December
                31, 2005
              TEURa)
                Loan to finance the power stations
              -
                build up the power station of Waehlitz
              -
                modernization of the power stations in
              Deuben
                and Mumsdorf
              b)
                Loan to finance the Schleenhain mine
              investments
              c)
                Loan for home construction
              d)
                Commerzbank Refinancing credit facility
              Commerzbank
                Revolver credit facility
              e)
                Deferred interest
            
            
            39,153
              
              7,865
              
              5,883
              1,392
              55,000
              9,000
              0
            
            
            42,712
              
              23,598
              
              8,482
              1,630
              42,000
              29,000
              162118,293
            
            
            147,584





**Liabilities
      to banks** decreased by TEUR 29,291 at December 31, 2006 in comparison to December 31,
      2005.


33


a)
      Loan
      to finance the power stations





These
      liabilities refer to three 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 station in Waehlitz of TEUR 71,187. The interest rate
      is currently at 5 % per annum. The loan period is 25 years. The repayments
      are
      due in 40 equal amounts commencing from June 30, 1998.





On
      April
      3, 1995, a loan agreement was closed with Kreditanstalt fuer Wiederaufbau (KfW)
      to partially finance the modernization and reshaping of both industrial power
      plants in Deuben and Mumsdorf (TEUR 61,355). The redemption period is 13
      years starting on December 31, 1998. Interest has to be paid between 6.04 %
      and
      6.80 % for the respective tranches.





In
      the
      current year, the first tranche of the loan was repaid after the end of the
      fixed interest period.





b)
      Loan
      to finance the Schleenhain mine investments





In
      1997
      and 1998, loan contracts were entered into with four banks to finance the
      capital expenditures at the Schleenhain mine, especially the construction of
      the
      blending yard and environmental measures for the conveyor belts. In 1998 TEUR
      61,355 and in 1999 TEUR 10,226 were borrowed at interest rates between 3.5
      % and 5.4 % per annum, which are adjusted in the years after.





Interest
      expense for the loans to point a) and b) amounted to TEUR 3,078, TEUR 7,773
      and
      TEUR 8,755 in 2006, 2005, and 2004, respectively.





c)
      Loan
      for home construction





The
      loans
      for home construction were granted by the Deutsche Bank AG and the Nord LB
      for
      relocation-related home construction purposes in Hohenmoelsen. The loan granted
      by the Deutsche Bank AG was repaid by December 31, 2006.





For
      the
      two loans granted by Nord LB at the amounts of TEUR 586 and TEUR 806 there
      are
      no interest payments due until 2007 and 2010, respectively. Thereafter, the
      rate
      is fixed at 8 % per annum.








34





d)
      Commerzbank Refinancing and Revolver credit facilities





In
      the
      prior year, MIBRAG signed a loan agreement for a total of TEUR 105,000 with
      a consortium of banks led by the Commerzbank. Through December 31, 2006 MIBRAG
      called TEUR 64,000 of that loan, of which TEUR 55,000 was for
      refinancing (first tranche of TEUR 15,000 with a fixed rate of interest of
      4.191 % p.a., the second tranche of TEUR 27,000 with a fixed rate of
      interest of 4.317 % p.a. and the third tranche of TEUR 13,000 with a fixed
      rate of interest of 4.510 % p.a.) and additional TEUR 9,000 was used for a
      short-term financing at a variable interest rate between 3.513 and 4,778 %
      p.a.








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





The
      other
      payables refer to:





December
                31, 2006
              TEUR
            
            December
                31, 2005
              TEURTax
                authorities
            
            
            2,847
            
            
            4,001Wages
                and salaries
            
            
            3,393
            
            
            3,317Social
                security contributions
            
            
            95
            
            
            2,525Tax
                lease
            
            
            754
            
            
            928Others
            
            
            1,856
            
            
            1,4348,945
            
            
            12,205








35


**NOTE
      T**  **MATURITY
      PERIODS OF LIABILITIES** The
      maturity periods of liabilities (in TEUR) are as follows:


Liabilities
                  to banks *)
              
              Payments
                received
              
              Trade
                payables
              
              Payables
                  to
                participations
              
              Other
                payables
              
              TotalBalance
                  as of December 31,
                2006
              
              
              118,293
              
              
              109
              
              
              16,489
              
              
              2,444
              
              
              8,945
              
              
              146,280thereof:
                  maturity period-
                  up to 1 year
              
              
              24,141
              
              
              3
              
              
              16,232
              
              
              2,444
              
              
              8,433
              
              
              51,253-
                  1-5 years
              
              
              51,513
              
              
              106
              
              
              257
              
              
              0
              
              
              512
              
              
              52,388-
                  more than 5 years
              
              
              42,639
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              42,639


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


Annual
      maturities of liabilities to banks are as follows:





Year
                of maturity
            
            Amount
                in TEUR2007
            
            
            
            24,1412008
            
            
            14,8222009
            
            
            13,5502010
            
            
            12,5532011
            
            
            10,58851,513Thereafter
            
            
            
            
            
            42,639Total
            
            
            
            
            
            118,293





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


36


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


From
      time
      to time, the Company may be subject to legal proceedings and claims in the
      ordinary course of business. At December 31, 2006 the Company was not aware
      of
      any legal proceedings or claims that the Company believes will have,
      individually or in the aggregate, a material adverse effect on the Company’s
      business, financial condition, or results of operations.





December
                31,
            
            December
                31,2006
            
            2005TEUR
            
            TEURGuarantees
                for indebtedness of others
            
            
            7,749
            
            
            13,256Other
                contractual obligations
            
            
            61,100
            
            
            87,700





The
      other
      contractual obligations refer to long-term investment projects in the mines
      Profen and Schleenhain.MIBRAG leases office equipment, railway-carriages and
      vehicles as well as vending machines, expiring at various dates. Rental and
      lease expenses amounted to TEUR 555, TEUR 612 and TEUR 684 in the years ended
      December 31, 2006, 2005, and 2004 respectively.





A
      long-term raw brown coal supply contract was concluded with the operators of
      the
      Lippendorf power plant which obliges MIBRAG to guarantee the annual delivery
      of
      10 million tons of raw brown coal to the power plant over a period of 40 years.
      This contract was closed assuming the relocation of the Heuersdorf village.
      Some
      of the inhabitants of that village are contesting. The relocation of the village
      resulting in legal disputes with the Company and legal proceedings. It is
      planned that the excavators will be mining through the Heuersdorf area in 2009.
      Management of MIBRAG believes that the plan will be realized.





37


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


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





Net
      sales
      by product and service:





2006
            
            2005
            
            2004TEUR
            
            TEUR
            
            TEURRaw
                brown coal and coal products
            
            
            261,016
            
            
            236,890
            
            
            239,232Electrical
                power, heating and steam
            
            
            35,317
            
            
            30,382
            
            
            28,814Other
                products and services
            
            
            1,874
            
            
            1,818
            
            
            2,414Further
                charging of transport services, ash disposaland
                others
            
            
            22,785
            
            
            22,018
            
            
            23,104320,992
            
            
            291,108
            
            
            293,564





Several
      major customers account for 10 % or more of MIBRAG’s revenues. As a percentage
      of total sales such customers accounted for 26 %, 23 % and 12 %
      in 2006, 27 %, 23 %, 12 % and 10 % in 2005 as well as 24 %, 24 % and 12 % in
      2004.








**NOTE
      W**  **RELATED
      PARTY TRANSACTIONS** Agreements
      for consulting and management services were closed in respect to the mining
      operations and the refinement facilities between MIBRAG and two subsidiaries
      of
      the common parent companies. These contracts determine certain consulting
      services to be provided by the two subsidiaries Washington Group Deutschland
      GmbH (WGD) (former: Morrison Knudsen Deutschland GmbH) and Saale Energie
      Services GmbH (SES) to MIBRAG or its subsidiaries. MIBRAG is obliged to
      determine and pay the cost-related remuneration for these services. Expenditures
      for MIBRAG amount to TEUR 8,755, TEUR 8,755, and TEUR 8,755 for 2006, 2005,
      and 2004, respectively. As of December 31, 2006 and 2005, MIBRAG still had
      liabilities amounting to TEUR 84 and TEUR 84, respectively towards WGD and
      SES
      for the provision of these services.


Part
      of
      the lignite deliveries from 2002 to 2006 to the Schkopau power plant were sales
      to Saale Energie GmbH (SEG), which is a subsidiary of the 50 % shareholder
      of MIBRAG - NRG Energy Inc. SEG is operating two blocs of the Schkopau power
      station with 400 mega watts. Sales to SEG amounted to TEUR 34,535, TEUR
      33,174 and TEUR 31,066, in 2006, 2005, and 2004, respectively. The conditions
      of
      delivery are the same as to the other (third party) operator of the Schkopau
      power plant. As of December 31, 2006 and 2005, MIBRAG disclosed receivables
      of
      TEUR 3,115 and TEUR 3,960 respectively from SEG.