**Exhibit 99.2**

 

 

 

|   |                        |
|--------|-----------------------------|
|   | **Mitteldeutsche Braun-**   |
|   | **kohlengesellschaft mbH,** |
|   | **Theissen**                |

 

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Report on the audit of the financial statementsfor the years ended December 31, 2002, 2001 and 2000 in accordance with GermanGAAP and on the audit of the US GAAP reconciliations for the year endedDecember 31, 2002

 

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**MitteldeutscheBraunkohlengesellschaft mbH**

 

**Index to Consolidated FinancialStatements**

 
| Report of Independent  Auditors                |
|------------------------------------------------|
|                                           |
| Consolidated Financial  Statements             |
|                                           |
|                                           | Consolidated  Statements of Income for the years ended December 31, 2002, 2001 and 2000 |
|                                           |   |
|                                           | Consolidated Balance Sheets  at December 31, 2002 and 2001 |
|                                           |   |
|                                           | Consolidated  Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 |
|                                           |   |
|                                           | Consolidated  Statements of Shareholders’ Equity for the years ended December 31, 2002,  2001 and 2000 |
|                                           |   |
| Notes to the Consolidated Financial Statements |

 

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**REPORT OF INDEPENDENT AUDITORS**

 

To the Shareholders ofMIBRAG mbHTheissen, Germany

 

We have audited theaccompanying consolidated balance sheets of Mitteldeutsche BraunkohlengesellschaftmbH and its subsidiaries (MIBRAG or Group) as of December 31, 2002 and 2001,and the related consolidated statements of income, shareholders’ equity, andcash flows for each of the years in the three-year period ended December 31,2002. These consolidated financial statements are the responsibility of theGroup’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in Germany and the UnitedStates of America. Those standards require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of MIBRAG as of December31, 2002 and 2001 and the consolidated results of its operations and cash flowsfor each of the years in the three-year period ended December 31, 2002, inconformity with accounting principles generally accepted in Germany.

 

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Generally accepted accountingprinciples in Germany vary in certain significant respects from generallyaccepted accounting principles in the United States of America. We have auditedthe effect of applying accounting principles generally accepted in the UnitedStates of America on the results of operations for the year ended December 31,2002 and on shareholders’ equity as of December 31, 2002. We have not auditedthese effects on the results of operations for the years ended December 31,2001 and 2000 and on the shareholders’ equity as of December 31, 2001. In ouropinion, the effect of applying accounting principles generally accepted in theUnited States of America on the results of operations for the year endedDecember 31, 2002 and shareholders’ equity as of December 31, 2002 are fairlypresented in Note C to the consolidated financial statements.

 
| /s/                        | DELOITTE & TOUCHE GmbH |   |
|----------------------------|----------------------------|--------|
| DELOITTE & TOUCHE GmbH |
|                       |
|                       |
| Halle, Germany             |
| June 6, 2003               |

 

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**Mitteldeutsche BraunkohlengesellschaftmbH**

**Consolidated Statements of Income****in thousands of Euro (TEUR)**

 
|                                                                                |   | **Year ended December 31,** |       |
|-------------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                                |   | **2002**                    |       | **2001** |   | **2000** |   |
| Sales revenue                                                                       |   | 298,056                     |       | 306,392 |   | 272,221 |   |
| Changes in inventories                                                              |   | (6,474                      | )          | (13,014 | ) | 1,675 |   |
| Own costs capitalized                                                               |   | 3,481                       |       | 1,605 |   | 502 |   |
| Other operating income                                                              |   | 43,557                      |       | 16,396 |   | 14,371 |   |
| Total performance                                                                   |   | 338,620                     |       | 311,379 |   | 288,769 |   |
|                                                                                |   |                        | ** ** |   | ** ** |   | ** ** |
| Cost of materials                                                                   |   | 84,848                      |       | 73,048 |   | 65,032 |   |
| Personnel expenses                                                                  |   | 91,904                      |       | 84,628 |   | 93,352 |   |
| Depreciation on intangible and tangible fixed  assets                               |   | 67,704                      |       | 45,820 |   | 49,059 |   |
| Other operating expenses                                                            |   | 46,828                      |       | 70,032 |   | 62,880 |   |
| Total operating expenses                                                            |   | 291,284                     |       | 273,528 |   | 270,323 |   |
|                                                                                |   |                        |       |   |   |   |   |
| Operating result                                                                    |   | 47,336                      |       | 37,851 |   | 18,446 |   |
|                                                                                |   |                        | ** ** |   | ** ** |   | ** ** |
| Income from associated company and from  companies in which participations are held |   | 927                         |       | 202 |   | 2,310 | ** ** |
| Income from financial assets                                                        |   | 2,175                       |       | 2,495 |   | 2,771 |   |
| Depreciation on financial assets and short term  investments                        |   | (1,379                      | )          | (1,296 | ) | 0 |   |
| Interest income                                                                     |   | 16,859                      |       | 5,763 |   | 6,943 |   |
| Interest expense                                                                    |   | (24,360                     | )          | (13,526 | ) | (14,563 | ) |
| Net income from ordinary activities                                                 |   | 41,558                      |       | 31,489 |   | 15,907 |   |
|                                                                                |   |                        |       |   |   |   |   |
| Income taxes                                                                        |   | 14                          |       | 6 |   | 42 |   |
| Other taxes                                                                         |   | 1,802                       |       | 1,458 |   | 1,287 |   |
| Net income                                                                          |   | 39,742                      |       | 30,025 |   | 14,578 |   |

 

*Seeaccompanying Notes to Consolidated Financial Statements,*

 

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**Mitteldeutsche BraunkohlengesellschaftmbH**

**Consolidated Balance Sheets****in thousands of Euro (TEUR)**

 
|                                                             |   | **At December 31,** |       |
|------------------------------------------------------------------|--------|---------------------|------------|
|                                                             |   | **Note**            |       | **2002** |   | **2001** |   |
| **ASSETS**                                                       |   |                | ** ** |   | ** ** |   | ** ** |
| **Non-current assets**                                           |   |                | ** ** |   | ** ** |   | ** ** |
| Intangible assets                                                |   |                |       |   |   |   |   |
| Concessions, trade marks, patents and licenses                   |   | B, E,  F            |       | 247,709 |   | 8,029 |   |
|                                                             |   |                |       |   |   |   |   |
| Property, plant and equipment                                    |   |                |       |   |   |   |   |
| 1. Land and mining property                                      |   | B, E,  G            |       | 176,160 |   | 41,948 |   |
| 2. Buildings                                                     |   | B, G                |       | 51,304 |   | 51,851 |   |
| 3. Strip mines                                                   |   | B, G                |       | 38,023 |   | 39,160 |   |
| 4. Technical equipment and machinery                             |   | B, G                |       | 204,959 |   | 206,672 |   |
| 5. Factory and office equipment                                  |   | B, G                |       | 23,810 |   | 24,273 |   |
| 6. Payments on account and assets under  construction            |   |                |       | 6,056 |   | 9,422 |   |
|                                                             |   |                |       | 500,312 |   | 373,326 |   |
| Financial assets                                                 |   |                |       |   |   |   |   |
| 1. Participations (including associated company)                 |   | B, H                |       | 12,223 |   | 12,088 |   |
| 2. Loan receivable from participation                            |   | B, I                |       | 6,374 |   | 6,749 |   |
| 3. Other loan receivables                                        |   | B, J                |       | 22,548 |   | 27,149 |   |
|                                                             |   |                |       | 41,145 |   | 45,986 |   |
|                                                             |   |                |       |   |   |   |   |
| **Total non-current assets**                                     |   |                |       | 789,166 |   | 427,341 |   |
|                                                             |   |                |       |   |   |   |   |
| Overburden                                                       |   | B, K                |       | 145,307 |   | 151,832 |   |
|                                                             |   |                |       |   |   |   |   |
| **Current assets**                                               |   |                | ** ** |   | ** ** |   | ** ** |
| Inventories                                                      |   |                |       |   |   |   |   |
| 1. Raw materials and supplies                                    |   | B                   |       | 6,069 |   | 5,941 |   |
| 2. Finished goods                                                |   | B                   |       | 1,744 |   | 1,693 |   |
|                                                             |   |                |       | 7,813 |   | 7,634 |   |
| Receivables and other assets                                     |   |                |       |   |   |   |   |
| 1. Trade receivables                                             |   | B, L                |       | 31,160 |   | 43,191 |   |
| 2. Receivables from enterprises in which  participationsare held |   | B                   |       | 460 |   | 596 |   |
| 3. Other assets                                                  |   | B                   |       | 48,565 |   | 12,115 |   |
|                                                             |   |                |       | 80,185 |   | 55,902 |   |
| Investments                                                      |   |                |       |   |   |   |   |
| Other investments                                                |   | B, M                |       | 72,286 |   | 68,390 |   |
|                                                             |   |                |       |   |   |   |   |
| Cash and cash equivalents                                        |   | B                   |       | 29,902 |   | 34,880 |   |
|                                                             |   |                |       |   |   |   |   |
| **Total current assets**                                         |   |                |       | 190,186 |   | 166,806 |   |
|                                                             |   |                |       |   |   |   |   |
| Prepaid expenses                                                 |   |                |       | 6,042 |   | 2,982 |   |
| **TOTAL ASSETS**                                                 |   |                |       | 1,130,701 |   | 748,961 |   |

 

*See accompanying Notes to Consolidated Financial Statements*

 

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**Mitteldeutsche BraunkohlengesellschaftmbH**

**ConsolidatedBalance Sheetsin thousands of Euro (TEUR)**

 
|                                                         |   |     |   | **At December 31,** |   |
|--------------------------------------------------------------|--------|----------|--------|---------------------|--------|
|                                                         |   | **Note** |   | **2002**            |   | **2001** | ** ** |
| **SHAREHOLDERS’ EQUITY AND LIABILITIES**                |   |     |   |                |   |   |   |
| **Shareholders’ Equity**                                |   |     |   |                |   |   |   |
| Subscribed capital                                           |   |     |   | 30,700              |   | 30,678 |   |
|                                                         |   |     |   |                |   |   |   |
| Capital increase not yet effective                           |   |     |   | 0                   |   | 22 |   |
|                                                         |   |     |   |                |   |   |   |
| Capital reserve                                              |   |     |   | 293,221             |   | 292,043 |   |
|                                                         |   |     |   |                |   |   |   |
| Balance Sheet Profit: TEUR 27,790; 2001:  TEUR 38,500        |   |     |   |                |   |   |   |
| Less: Interim dividend paid: TEUR 24,000; 2001:  TEUR 38,382 |   |     |   | 3,790               |   | 118 |   |
|                                                         |   |     |   |                |   |   |   |
| Minority interest                                            |   |     |   | (42,569             | )      | (44,529 | ) |
| thereof net income for the year:                             |   |     |   |                |   |   |   |
| TEUR 10,774 (2001: TEUR 10,054)                              |   |     |   |                |   |   |   |
| **Total Shareholders’ Equity**                          |   |     |   | 285,142             |   | 278,332 |   |   |
|                                                         |   |     |   |                |   |   |   |   |
| Special item for investment subsidies and incentives         |   | B, E     |   | 374,145             |   | 13,216 |   |
|                                                         |   |     |   |                |   |   |   |
| Provisions                                                   |   |     |   |                |   |   |   |
| 1. Accruals for pensions and similar obligations             |   | B, N     |   | 13,651              |   | 12,665 |   |
| 2. Taxation accruals                                         |   | O        |   | 491                 |   | 749 |   |
| 3. Environmental and mining provisions                       |   | B, P     |   | 183,669             |   | 179,069 |   |
| 4. Other accruals                                            |   | Q        |   | 18,465              |   | 15,541 |   |
|                                                         |   |     |   | 216,276             |   | 208,024 |   |
| Liabilities                                                  |   |     |   |                |   |   |   |
| 1. Liabilities to banks                                      |   | B, R,  T |   | 179,624             |   | 197,060 |   |
| 2. Trade payables                                            |   | B, T     |   | 63,094              |   | 20,864 |   |
| 3. Payables to participations                                |   | B, T     |   | 2,268               |   | 2,695 |   |
| 4. Other payables                                            |   | B, S,  T |   | 10,145              |   | 28,766 |   |
|                                                         |   |     |   | 255,131             |   | 249,385 |   |
| Deferred income                                              |   |     |   |                |   |   |   |
|                                                         |   |     |   | 7                   |   | 4 |   |
| **TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES**          |   |     |   | 1,130,701           |   | 748,961 |   |

 

*See accompanying Notes to Consolidated Financial Statements*

 

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**Mitteldeutsche Braunkohlengesellschaft mbH**

**Consolidated Statements of CashFlows****in thousands of Euro (TEUR)**

 
|                                                                  |   | **Year ended December 31,** |   |
|-----------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                  |   | **2002**                    |   | **2001** |   | **2000** |   |
| Net income for the year                                               |   | 39,742                      |   | 30,025 |   | 14,578 |   |
| Depreciation on tangible, intangible andfinancial assets              |   | 67,704                      |   | 46,807 |   | 49,059 |   |
| Write-up of tangible assets                                           |   | 0                           |   | (659 | ) | 0 |   |
| Increase in medium-and long-term accruals                             |   | 8,103                       |   | 5,085 |   | 4,464 |   |
| Other non-cash income and expenses                                    |   | (20,919                     | )      | (1,379 | ) | (1,714 | ) |
| **Cash earnings according to DVFA/SG**                                |   | 94,630                      |   | 79,879 |   | 66,387 |   |
|                                                                  |   |                        |   |   |   |   |   |
| Increase/decrease in overburden                                       |   | 6,525                       |   | 12,592 |   | (2,876 | ) |
| Gains/losses from disposal of assets                                  |   | 5                           |   | (608 | ) | (2,466 | ) |
| Increase/decrease in inventories, trade  receivables and other assets |   | (27,522                     | )      | 14,401 |   | (7,626 | ) |
| Increase in trade payables and other liabilities                      |   | 12,611                      |   | 4,557 |   | 5,587 |   |
| **Cash flow from operating activities**                               |   | 86,249                      |   | 110,821 |   | 59,006 |   |
|                                                                  |   |                        |   |   |   |   |   |
| Capital expenditures on fixed assets                                  |   | (41,294                     | )      | (21,308 | ) | (35,169 | ) |
| Proceeds from disposal of fixed assets                                |   | 5,623                       |   | 5,673 |   | 4,686 |   |
| Acquisition of securities                                             |   | (5,272                      | )      | (12,575 | ) | (7,968 | ) |
| Proceeds from disposals of securities                                 |   |                        |   |   |   | 21,672 |   |
| **Cash flow used by investing activities**                            |   | (40,943                     | )      | (28,210 | ) | (16,779 | ) |
|                                                                  |   |                        |   |   |   |   |   |
| Withdrawals by investors                                              |   | 0                           |   | 22 |   | 0 |   |
| Disbursements to minority shareholders                                |   | (8,814                      | )      | (8,546 | ) | (8,020 | ) |
| Disbursements to shareholders (dividends anddistributions)            |   | (24,118                     | )      | (43,305 | ) | (13,452 | ) |
| Cash outflow from repayment of bank loans                             |   | (17,352                     | )      | (15,805 | ) | (13,862 | ) |
| **Cash flow used by financing activities**                            |   | (50,284                     | )      | (67,634 | ) | (35,334 | ) |
|                                                                  |   |                        |   |   |   |   |   |
| **Change in cash and cash equivalents**                               |   | (4,978                      | )      | 14,977 |   | 6,893 |   |
| Opening balance of cash and cash equivalents                          |   | 34,880                      |   | 19,903 |   | 13,010 |   |
| **Closing balance of cash and cash equivalents**                      |   | 29,902                      |   | 34,880 |   | 19,903 |   |
|                                                                  |   |                        |   |   |   |   |   |
| **Supplemental information:**                                         |   |                        |   |   |   |   |   |
| Income taxes paid                                                     |   | 13                          |   | 6 |   | 42 |   |
| Interest paid                                                         |   | 12,251                      |   | 13,318 |   | 14,423 |   |

 

*See accompanying Notes to Consolidated Financial Statements*

 

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**Mitteldeutsche Braunkohlengesellschaft mbH**

**Consolidated Statements of Shareholders’Equity****in thousands of Euro (TEUR)**

 
|                                   |   | **Subscribed  capital** |       | **Capital  increase** |       | **Capital  reserve** |       | **Balance  sheet profit/  net profit** |       | **Minority  interest** |       | **Total** |       |
|----------------------------------------|--------|-------------------------|------------|-----------------------|------------|----------------------|------------|----------------------------------------|------------|------------------------|------------|-----------|------------|
|                                   |   |                    | ** ** |                  | ** ** |                 | ** ** |                                   | ** ** |                   | ** ** |      | ** ** |
| **Balance as of January 1, 2000**      |   | 30,678                  |       |                  |       | 317,007              |       | 3,988                                  |       | (44,643                | )          | 307,030   |       |
|                                   |   |                    |       |                  |       |                 |       |                                   |       |                   |       |      |       |
| Net income 2000                        |   |                    |       |                  |       |                 |       | 7,952                                  |       | 6,626                  |       | 14,578    |       |
| Transfer from capital reserve          |   |                    |       |                  |       | (6,586               | )          | 6,586                                  |       |                   |       | 0         |       |
| Distributions                          |   |                    |       |                  |       |                 |       | (13,452                                | )          |                   |       | (13,452   | )          |
| Disbursements to minority shareholders |   |                    |       |                  |       |                 |       |                                   |       | (8,020                 | )          | (8,020    | )          |
| **Balance as of December 31, 2000**    |   | 30,678                  |       |                  |       | 310,421              |       | 5,074                                  |       | (46,037                | )          | 300,136   |       |
|                                   |   |                    |       |                  |       |                 |       |                                   |       |                   |       |      |       |
| Net income 2001                        |   |                    |       |                  |       |                 |       | 19,971                                 |       | 10,054                 |       | 30,025    |       |
| Transfer from capital reserve          |   |                    |       |                  |       | (18,378              | )          | 18,378                                 |       |                   |       | 0         |       |
| Distributions                          |   |                    |       |                  |       |                 |       | (43,305                                | )          |                   |       | (43,305   | )          |
| Disbursements to minority shareholders |   |                    |       |                  |       |                 |       |                                   |       | (8,546                 | )          | (8,546    | )          |
| Capital increase not yet effective     |   |                    |       | 22                    |       |                 |       |                                   |       |                   |       | 22        |       |
| **Balance as of December 31, 2001**    |   | 30,678                  |       | 22                    |       | 292,043              |       | 118                                    |       | (44,529                | )          | 278,332   |       |
|                                   |   |                    |       |                  |       |                 |       |                                   |       |                   |       |      |       |
| Capital increase                       |   | 22                      |       | (22                   | )          |                 |       |                                   |       |                   |       | 0         |       |
| Net income 2002                        |   |                    |       |                  |       |                 |       | 28,968                                 |       | 10,774                 |       | 39,742    |       |
| Transfer to capital reserve            |   |                    |       |                  |       | 1,178                |       | (1,178                                 | )          |                   |       | 0         |       |
| Distributions                          |   |                    |       |                  |       |                 |       | (24,118                                | )          |                   |       | (24,118   | )          |
| Disbursements to minority shareholders |   |                    |       |                  |       |                 |       |                                   |       | (8,814                 | )          | (8,814    | )          |
| **Balance as of December 31, 2002**    |   | 30,700                  |       | 0                     |       | 293,221              |       | 3,790                                  |       | (42,569                | )          | 285,142   |       |

 

*See accompanying Notes to Consolidated Financial Statements*

 

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

 

ORIGINATION: For decades, rawbrown coal is being mined in the Mid-German area by MitteldeutscheBraunkohlengesellschaft mbH (“MIBRAG” or “MIBRAG mbH”) and its predecessors.The current MIBRAG mbH was created from the split-up of MIBRAG AG, which hadbeen previously owned by the Treuhandanstalt (the German governmentprivatization agency), into three separate entities. Effective January 1, 1994a consortium comprising of NRG Energy, Inc. (“NRG”), Washington Group InternationalInc. (formerly Morrison Knudsen Corporation) (“Washington Group”) and PowerGenplc. (“PowerGen”) jointly acquired 99 % of the active mining, power generationand related assets and liabilities from the Treuhandanstalt through its Dutchholding 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 KnudsenB.V.), Amsterdam, and PowerGen Netherlands B.V., Amsterdam in equal portions(1/3 %) for each partner. In April 2001 Washington Group and NRG performed ashare buyback of PowerGen’s 33 % interest in MIBRAG; thus, resulting inWashington Group and NRG each owning 50 % of MIBRAG.

 

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

 

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

 

BASIS OF PRESENTATION: The consolidatedfinancial statements of MIBRAG mbH and subsidiaries have been prepared in accordancewith the German Commercial Code, which represents accounting principlesgenerally accepted in Germany (“German GAAP”). German GAAP varies in certainsignificant respects from accounting principles generally accepted in theUnited States of America (“US GAAP”). Application of US GAAP would haveaffected the results of operations for each of the years in the three-yearperiod ended December 31, 2002 and shareholders’ equity as of December 31, 2002and 2001 to the extent summarized in note C to the consolidated financialstatements.

 

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

 

PRINCIPLES OF CONSOLIDATION: All materialcompanies in which MIBRAG has legal or effective control are fully consolidated.In 2002, MIBRAG consolidated 6 (2001: 6, 2000: 6) domestic subsidiaries.

 

One significant investment, the MitteldeutscheUmwelt- und Entsorgungs GmbH, Braunsbedra (“MUEG”), in which MIBRAG has anownership interest of 50 %, is accounted for in accordance with the equitymethod. This investment is referred to as an associated company in thesefinancial statements.

 

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

 

All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

USE OF ESTIMATES: The preparation of financialstatements in conformity with generally accepted accounting principles necessarilyrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the balance sheet dates and the reported amounts of revenues andexpenses during the reported periods. Actual results could differ from thoseestimates.

 

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

 

REVENUE RECOGNITION: The Company recognizesrevenues from sales of products at the time persuasive evidence of an arrangementexists, delivery has occurred (either upon shipment or at time of finalacceptance by the end customer), the price to the customer is fixed, andcollection is reasonably assured. When these four conditions are met, theCompany recognizes revenues as it considers that revenues are realizable orrealized and earned. Service revenue consists primarily of training,maintenance, and installation services and is recognized as the services areprovided.

 

INTANGIBLE ASSETS: Intangible assets are valuedat acquisition cost and are amortized on a

 

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straight-line basis over their respectiveuseful lives (3 to 25 years).

 

Property, Plant And Equipment: Property, plantand equipment acquired is recorded on the basis of acquisition or manufacturingcost, including capitalized mine development costs, and subsequently reduced byscheduled depreciation charges over the assets’ useful lives as follows:buildings - 3 to 40 years, technical facilities and machinery - 4 to 25 yearsand facilities, factory and office equipment - 5 to 10 years. Maintenance andrepair costs are expensed as incurred. Depreciation is computed principally bythe straight-line method. Low value items are expensed in the year ofacquisition. Opportunities for special tax deductible depreciation wereutilized for both book and tax purposes in 1998 and prior years. This resultedin lower depreciation charges for German GAAP purposes over the remaininguseful life of the prospective assets.

 

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

 

Investments: The long-term loans andinvestments are recorded at cost.

 

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

 

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

 

SECURITIES: Securitiesheld as fixed assets as well as marketable securities are valued individuallyat cost or at lower quoted or market values.

 

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

 

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

 

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INVESTMENT GRANTS: To support the acquisitionof certain tangible assets, investment allowances and subsidies were granted bythe German federal government and the states of Saxony and Saxony-Anhalt. Theapplication, conditions and payments of investment grants are ruled by Germanlaw and regulations. Investment allowances and subsidies received and formallyclaimed are credited to the special item account. The special item is amortizedinto income over the normal operating useful lives of the underlying assets towhich the allowances and subsidies relate.

 

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

 

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

 

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

 

LIABILITIES: Liabilities are shown at theirrepayment amounts.

 

RESEARCH AND DEVELOPMENT: Research anddevelopment (“R&D”) costs are expensed as incurred.

 

As of January 1, 2002 MIBRAG acquired rights totransportation services of a railway company

 

14

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(TEUR 251,710) by partially waiving rights forfuture payments from the privatization agreement against the former shareholderTreuhandanstalt and debt of TEUR 8,963. The waiver of claims is presented onthe balance sheet as deferred income in the line item special item forinvestment subsidies and incentives.

 

Per Share Amounts: Per share amounts are notdisclosed in the financial statements. MIBRAG is a nonpublic enterprise.

 

15

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

 

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

 

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

 

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

 

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

 

 

16

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**Reconciliation to US GAAP**

 

Thefollowing is a summary of the significant adjustments to net income for 2002,2001 and 2000 and to shareholders’ equity at December 31, 2002 and December 31,2001, which would be required if US GAAP had been applied instead of GermanGAAP.

 
|                                                                           |   |     |       | **Year ended December 31,** |       |
|--------------------------------------------------------------------------------|--------|----------|------------|-----------------------------|------------|
|                                                                           |   |     |       | **2002**                    |       | **2001** |   | **2000** |   |
|                                                                           |   | **Note** |       | **TEUR**                    |       | **(unaudited)  TEUR** |   | **(unaudited)  TEUR** | ** ** |
| Net income as reported in the  consolidated income statement under German GAAP |   |     |       | 39,742                      |       | 30,025 |   | 14,578 |   |
|                                                                           |   |     | ** ** |                        | ** ** |   | ** ** |   | ** ** |
| Adjustments required to  conform with US GAAP:                                 |   |     |       |                        |       |   |   |   |   |
| Fixed assets                                                                   |   | (1)      |       | 2,563                       |       | 2,988 |   | 4,598 |   |
| Relocation accruals                                                            |   | (2)      |       | 84                          |       | 1,845 |   | 802 |   |
| Investment in power plants                                                     |   | (3)      |       | (2,961                      | )          | (3,299 | ) | (3,546 | ) |
| Interest capitalization                                                        |   | (4)      |       | (463                        | )          | (1,064 | ) | (221 | ) |
| Receivable/payables at  non-market interest rates                              |   | (5)      |       | (501                        | )          | (523 | ) | (516 | ) |
| Overburden                                                                     |   | (6)      |       | 14,984                      |       | 17,813 |   | 7,813 |   |
| Environmental and mining  provisions                                           |   | (7)      |       | 458                         |       | 473 |   | 5,569 |   |
| Pension obligations                                                            |   | (8)      |       | 871                         |       | (251 | ) | 0 |   |
| Other                                                                          |   | (9)      |       | 418                         |       | 426 |   | 404 |   |
| Unrealized holding gains and  losses                                           |   | (10)     |       | (261                        | )          | 261 |   | 0 |   |
| **Net income in accordance with US GAAP**                                      |   |     | ** ** | **54,934**                  | ** ** | **48,694** | ** ** | **29,481** | ** ** |

 

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|                                                                                       |   |     |       | **Year ended December 31,** |       |
|--------------------------------------------------------------------------------------------|--------|----------|------------|-----------------------------|------------|
|                                                                                       |   |     |       | **2002**                    |       | **2001** |   |
|                                                                                       |   | **Note** |       | **TEUR**                    |       | **(unaudited)  TEUR** | ** ** |
| Shareholders’ equity as  reported in the consolidated balance sheet under German GAAP |   |     |       | 285,142                     |       | 278,332 |   |
|                                                                                       |   |     |       |                        |       |   |   |
| Adjustments required to  conform with US GAAP:                                             |   |     |       |                        |       |   |   |
| Fixed assets                                                                               |   | (1)      |       | 115,157                     |       | 112,962 |   |
| Relocation accruals                                                                        |   | (2)      |       | 19,615                      |       | 19,424 |   |
| Investments in power plants                                                                |   | (3)      |       | (66,808                     | )          | (72,685 | ) |
| Interest capitalization                                                                    |   | (4)      |       | 4,714                       |       | 5,177 |   |
| Receivables/payables at  non-market interest rates                                         |   | (5)      |       | 0                           |       | 501 |   |
| Overburden                                                                                 |   | (6)      |       | (34,483                     | )          | (49,467 | ) |
| Environmental and mining  provisions                                                       |   | (7)      |       | (16,764                     | )          | (17,222 | ) |
| Accrued liabilities                                                                        |   | (8)      |       | (10,226                     | )          | (10,226 | ) |
| Pension obligations                                                                        |   | (8)      |       | 620                         |       | (251 | ) |
| Other                                                                                      |   | (9)      |       | (7,316                      | )          | (7,710 | ) |
| Unrealized holding gains and  losses                                                       |   | (10)     |       | 0                           |       | (261 | ) |
| **Shareholders’ equity in accordance  with US GAAP**                                  |   |     | ** ** | **289,651**                 | ** ** | **258,574** | ** ** |

 

18

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**Reporting of statement of shareholders’equity**

 

Comprehensive income in accordance with SFAS No. 130,“Reporting Comprehensive Income”, includes the impact of other comprehensiveincome. These are revenues, gains, expenses and losses that under US GAAP arenot included in net income.

 
|                                             |   | **Year ended December 31,** |       |
|--------------------------------------------------|--------|-----------------------------|------------|
|                                             |   | **2002**                    |       | **2001** |   | **2000** |   |
|                                             |   | **TEUR**                    |       | **(unaudited)  TEUR** |   | **(unaudited)  TEUR** |   |
| Net income in accordance with  US GAAP           |   | 54,934                      |       | 48,694 |   | 29,481 |   |
| Other comprehensive income                       |   |                        |       |   |   |   |   |
| Unrealized holding gains/(losses)  on securities |   | 261                         |       | (711 | ) | (1,531 | ) |
| **Comprehensive income**                         |   | **55,195**                  | ** ** | **47,983** | ** ** | **27,950** | ** ** |

 

Statement of shareholders’ equity:

 
|                                                                                          |   | **Year ended December 31,** |       |
|-----------------------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                                          |   | **2002**                    |       | **2001** |   | **2000** |   |
|                                                                                          |   | **TEUR**                    |       | **(unaudited)  TEUR** |   | **(unaudited)  TEUR** |   |
| Stockholders’ equity according  to US GAAP before accumulated other comprehensive income |   | 289,651                     |       | 258,835 |   | 253,446 |   |
| Accumulated other  comprehensive income:                                                      |   |                        |       |   |   |   |   |
| Unrealized holding  gains/(losses) on securities                                              |   | 0                           |       | (261 | ) | 450 |   |
| **Total stockholders’ equity according  to US GAAP including comprehensive income**      |   | **289,651**                 | ** ** | **258,574** | ** ** | **253,896** | ** ** |

 

19

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**II. Notes tosignificant US GAAP adjustments**

 

**1. Fixed assets**

 

Thedifferences relate primarily to the following:

 

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

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

•                  In 1999, an impairment loss was recognized forUS GAAP purposes to reduce the assets of the briquette plant Mumsdorf to theirfair values as of December 31, 1999. For German GAAP purposes the impairmentloss was recognized in 2000.

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

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

 

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

 

**Financial investment in MUEG**

 

ForGerman GAAP purposes, MIBRAG accounted for the investment in MUEG as ofJanuary 1, 1994 using the cost method. Under US GAAP the book value wasincreased to account for the equity earnings that were not distributed toMIBRAG as of that date.

 

**2. Relocation accruals**

 

TheUS GAAP results recognized liabilities and deferred costs of TEUR 45,357 torelocate three villages. The deferred costs are amortized in accordance withquantities of coal extracted. In accordance with German accounting principles,accruals for the relocation of villages can not be accrued earlier than 2 yearsprior to the relocation, and certain relocation costs must be expensed asincurred.

 

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**3. Investment in power plants**

 

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

 

**4. Interest capitalization**

 

Interestis expensed in the German financial statements. Interest expense related toqualified assets, however, is capitalized and depreciated for US GAAP purposes.The effect in 2002, 2001 and 2000 reflects the depreciation of amountspreviously capitalized.

 

**5. Receivables/payables at non-marketinterest rates**

 

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

 

**6. Overburden**

 

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

 

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**7. Environmental and miningprovisions**

 

Certainaccrued mining reclamation provisions were reduced in 1998 based upon a new estimateof total costs to be incurred. For US GAAP purposes, this adjustment would beaccounted for prospectively.

 

**8. Accrued liabilities and pensionobligations**

 

Certainmining and other accruals, which were provided for at January 1, 1994 inaccordance with US GAAP purchase accounting, were not recorded in the Germanfinancial statements.

 

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

 

**9. Other**

 

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

 

**10. Unrealized holding gains andlosses**

 

ForUS GAAP purposes available-for-sale securities are accounted for according tothe cost adjusted for fair value (mark-to-market) method, under which thecarrying amount is adjusted at financial statement date for subsequent changesin fair value (i.e., they are carried at market value). Unrealized gains andlosses for a period are excluded from earnings and reported as othercomprehensive income. For German GAAP purposes these securities are accountedfor at cost. If the market value is below cost an unrealized loss is recognizedfor German GAAP purposes.

 

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**11. Deferred taxes**

 

Thedifferences noted above result in temporary differences which, when combinedwith net operating loss carry-forwards, would result in a net deferred taxasset of TEUR 98,655 and TEUR 106,457 at December 31, 2002 and December31, 2001, respectively. Because of available negative evidence, a 100 %valuation allowance would have been recorded at each year-end. Because no net deferredtaxes were recorded for German or US GAAP purposes, no adjustment to net incomeor shareholders equity is listed in the following reconciliation.

 

**12. New Accounting Pronouncements**

 

SFASNo. 133, “Accounting for Derivative Instruments and Hedging activities” issuedby the Financial Accounting Standards Board, (the “FASB”) as amended by SFASNo. 137, “Accounting for Derivative Instruments and Hedging Activities—Deferralof the Effective Date of FASB Statement No. 133” and SFAS 138, “Accounting forCertain Derivative Instruments and Certain Hedging Activities” was effectivefor the Company as of January 1, 2001. This statement provides for that allderivative financial instruments to be reflected on the balance sheet at fairvalue. Changes in fair value must be recognized periodically in earnings or asa component of other comprehensive income, depending on the nature of theunderlying item. Changes in the fair value of the derivative will be recognizedcurrently in the statements of operations. As MIBRAG has not engaged in anytransactions that would be considered derivative instruments or hedgingactivities, the adoption of this standard did not have an effect on MIBRAG’snet income and equity reconciled from German to US GAAP.

 

InSeptember 2000, the FASB issued SFAS No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities – areplacement of FASB Statement No. 125.” This statement revises the standards foraccounting for securitizations and other transfers of financial assets andcollaterals and requires certain financial statement disclosures. SFAS No. 140is effective for transactions occurring after March 31, 2001. The newdisclosure requirements are effective for business years ending after December15, 2000. Adoption of this standard did not have a material effect on MIBRAG’snet income and equity reconciled from German to US GAAP.

 

In June 2001,FASB issued SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwilland Other Intangible Assets”, which were required to be adopted by the Companyeffective January 1, 2002. SFAS No. 141 and No. 142 change the accounting forbusiness

 

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combinations andgoodwill in two significant ways:

 

SFAS No. 141requires the use of the purchase method of accounting for all business combinationsinitiated after June 30, 2001. Use of the pooling-of-interest method isprohibited.

 

SFAS No. 142requires an impairment-only approach to accounting for goodwill. Theamortization of goodwill, including goodwill recorded in past businesscombinations, will cease upon adoption of this statement. The adoption of SFASNo. 141 and 142 did not have a material effect on the reconciliation to US GAAPin 2002.

 

In June 2001,FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”, whichis required to be adopted by the Company effective January 1, 2003. The Companyhas obligations that would fall within the scope of SFAS No. 143, and expectsthe adoption of SFAS No. 143 to have a material impact on the consolidatedfinancial statements or future results of operations. Based on the preliminarycalculation performed by the Company, the obligation as of January 1, 2003 isestimated to be approximately EUR 6 million higher than the current liabilitydisclosed in the balance sheet as of December 31, 2002.

 

In August 2001,FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets” - a replacement of Accounting Principles Board (“ABP”)Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occuring Events and Transactions”, and SFAS No. 121, “Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed of”. Because SFAS No. 121 did not address the accounting for a segmentof a business accounted for as a discontinued operation, two accounting modelsexisted for long-lived assets to be disposed of. SFAS No. 144 establishes asingle accounting model. SFAS No. 144 was required to be adopted for financialstatements issued for fiscal years beginning after December 15, 2001. TheCompany determined that its current accounting policy for the impairment oflong-lived assets is consistent with SFAS No. 144.

 

In July 2002,FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities”, a replacement of Emerging Issue Task Force (“EITF”) IssueNo. 94-3. SFAS No. 146 requires costs associated with exit or disposalactivities to be recognized when the costs are incurred, rather than at a dateof commitment to an exit or disposal plan. The provisions of SFAS No. 146 areeffective for disposal activities initiated after December 31, 2002, with earlyadoption encouraged. As of December 31, 2002, the Company had not

 

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initiated anyexit or disposal activities, which would have a material impact on theconsolidated financial statements. There can be no assurance that future exitor disposal activities will not result in a material charge to earnings.

 

In November 2002,FASB issued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers”, an interpretation of FASB Statements No. 5, 57, and 107 and rescissionof FASB Interpretation No. 34. FASB Interpretation No. 45 elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligation under certain guarantees that it has issued. Italso clarifies that a guarantor is required to recognize, at the inception of aguarantee, a liability for the fair value of the obligation undertaken inissuing the guarantee. The disclosure requirements in this interpretation areeffective for financial statements of interim or annual periods ending afterDecember 15, 2002. As of December 31, 2002 the Company has not issued anyguarantees requiring the recognition of a liability. There can be no assurancethat in the future guarantees issued will not result in a liability to berecognized. Applicable disclosures required under FASB Interpretation No. 45were made in note U.

 

In January 2003, FASB issuedInterpretation No. 46, “Consolidation of Variable Interest Entities”, publishedto improve financial reporting by companies involved with variable interest entitites.In general, a variable interest entity is a corporation, partnership, trust, orany other legal structure used for business purposes that either (a) does nothave equity investors with voting rights or (b) has equity investors that donot provide sufficient financial resources for the entity to support itsactivities. A variable interest entity often holds financial assets, includingloans or receivables, real estate or other property. A variable interest entitymay be essentially passive or it may engage in research and  development or other activities on behalf ofanother company. The interpretation applies to variable interest entitiescreated after January 31, 2003 and to variable interest entities in which anenterprise obtains an interest after that date. It applies in the fiscal yearor interim period beginning after June 15, 2003 to variable interest entitiesin which an enterprise holds a variable interest that was acquired beforeFebruary 1, 2003. We have determined that it is not reasonably possible that wewill be required to consolidate or disclose information about a variableinterest entity upon the effective date of this interpretation.

 

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**NOTE D****                                                 ****CONCENTRATION OF CREDIT RISKAND LONG-TERM COAL SALES AGREEMENT**

 

MIBRAG mbH markets its coal principally toelectric utilities in Germany. As of December 31, 2002 and 2001 accountsreceivable from electric utilities totaled TEUR 22,745 and TEUR 13,582,respectively. Credit is extended based on an evaluation of the customer’sfinancial condition. Credit losses are provided for in the financial statementsand consistently have been minimal.

 

MIBRAG mbH is committed under several long-termcontracts to supply raw brown coal and whirl fine coal to the Schkopau powerstation and the Lippendorf power station. Under the terms of the SchkopauAgreement, MIBRAG mbH may deliver annually up to 5.8 million tons of coal. Theagreement is in effect until 2010, with an option for the purchaser to extendthe agreement for another 10 years. The price to be paid by the Schkopau powerstation is a fixed price adjusted by an annual escalation rate.

 

The Lippendorf Agreements provide fordeliveries of up to 10 million tons of raw brown coal per year from 1999through 2040 with an option for the customers to extend for an additional3-year period. These Agreements were closed with Vereinigte Energiewerke AG(VEAG), Berlin, E.ON Kraftwerke GmbH, Hanover and EnBW LippendorfBeteiligungsgesellschaft mbH, Stuttgart. The price to be paid by the Lippendorfpower station is a base-price with escalation and adjustment based on qualityof the coal delivered. The first bloc of the new Lippendorf power station wentinto full operation in October 1999 and the second bloc went into effect in May2000.

 

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

 

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

 

In the fourth quarter of 2002, MIBRAG mbH successfully negotiatedamendments to the original agreement on transportation credit matters that hadbeen entered into with the German government in 1993. The amendments will beeffective as of January 1, 2002. As a result of those negotiations, asettlement agreement was concluded replacing annual payments to be received byMIBRAG 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 alsocapitalized TEUR 251,710 for coal

 

26

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transportation rights (intangible assets) and TEUR 140,478 for miningrights (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.

 

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

** **
|                                                 |   | **December 31,  2002** |   | **December 31,  2001** |   |
|------------------------------------------------------|--------|------------------------|--------|------------------------|--------|
|                                                 |   | **TEUR**               |   | **TEUR**               |   |
| Concessions, trade marks, patents and licenses  cost |   | 268,161                |   | 14,175                 |   |
| Less: accumulated amortization                       |   | (20,452                | )      | (6,146                 | )      |
| Net book value                                       |   | 247,709                |   | 8,029                  |   |

 

Themajor increase in intangible assets in 2002 results from the BvS settlementdescribed in detail in Note E.

 

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

** **

The major categories of fixed assets are thefollowing:

 
|                                                 |   | **December 31,  2002** |   | **December 31,  2001** |   |
|------------------------------------------------------|--------|------------------------|--------|------------------------|--------|
|                                                 |   | **TEUR**               |   | **TEUR**               |   |
| Property, plant and equipment                        |   |                   |   |                   |   |
| cost - land and land rights                          |   | 184,392                |   | 41,948                 |   |
| - buildings                                          |   | 137,142                |   | 139,937                |   |
| - strip mines                                        |   | 45,772                 |   | 45,772                 |   |
| - technical equipment and  machinery                 |   | 779,799                |   | 754,922                |   |
| - factory and office equipment                       |   | 107,707                |   | 106,507                |   |
| - payments on account and  assets under construction |   | 6,056                  |   | 9,422                  |   |
| Total cost                                           |   | 1,260,68               |   | 1,098,508              |   |
| Less: accumulated depreciation                       |   | (760,556               | )      | (725,182               | )      |
| Net book value                                       |   | 500,312                |   | 373,326                |   |

 

Theline item land and land rights refers to plots of land and buildings as well asmining properties. Land is principally accounted for at acquisition costs. If,after utilization in mining, the value of a piece of land is expected to bepermanently impaired, it is written down to the lower value. The increase in2002 results from the acquisition of mining property further described in NoteE.

 

Theline item strip mines includes the reconstruction cost incurred up to July 1,1990 in respect of the mining pits of Profen and Schleenhain. Depreciation hasbeen provided according to actual extraction of coal from the mine in relationto the total coal volume in the mine. The construction cost of strip minesinclude the cost for the removal of ground cover up to the coal banks as wellas the removal of rock banks until the installation of production equipment andthe commencement of raw brown coal production is possible.

 

Totaldepreciation charges are as follows: TEUR 67,704 (2002), TEUR 45,820 (2001) andTEUR 49,059 (2000), including normal depreciation and unplanneddepreciation.

 

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From1994 to 1998 the Company recorded significant special depreciations (about EUR243 million) in accordance with an investment program (Foerdergebietsgesetz).

 

In2000 MIBRAG reopened the briquette plant in Deuben and closed the briquetteplant in Mumsdorf. The fixed assets of the briquette plant in Deuben werewritten up at December 31, 1999 for German GAAP purposes to their continuedcarrying values as if the assets had not been impaired in 1996. The fixedassets of the briquette plant in Mumsdorf were fully written down for Germanand US GAAP purposes in 2000.

 

**NOTE H****                                                  PARTICIPATIONS (INCLUDING ASSOCIATEDCOMPANY)**

 

MIBRAG’s investment in MUEG is accounted forusing the equity method. MUEG was founded in 1990 and coordinates the wastedisposal activities in the Central German brown coal area. The equity value asof December 31, 2002 is TEUR 5,834, and the cost basis is TEUR 6,376.

 

Investments in five other companies areaccounted for at cost.

 

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

 

In1995, MIBRAG sold its district heating network assets to a company in which itholds a participation. The sales price is being repaid in equal installments ofTEUR 375 over a period of 25 years. The interest rate is fixed at 5.4 percentbeginning in 2000.

 

Thefair market value of the loan approximates the book value, which amounted toTEUR 6,374 and TEUR 6,749 at December 31, 2002 and 2001, respectively. 

 

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

 

Theother loans were granted to the third party investors in a subsidiary of MIBRAGmbH. These loans were financed by a borrowing from KfW (Kreditanstalt fuerWiederaufbau). KfW granted MIBRAG mbH a loan of TEUR 52,663 due on December 30,2005 at fixed interest rates between 6.26 % and 6.82 %. The balance of the loanas of December 31, 2002 amounted to TEUR 22,548 which approximates the fairvalue as of this date. The loans to the third party

 

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investorsof the subsidiary of MIBRAG mbH were granted at the same conditions as thoseapplicable to the loan between MIBRAG mbH and KfW.

30

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**NOTE K****                                                 ****OVERBURDEN**

 

Thereconciliation of the overburden costs is as follows: 

 
|        |   | **December 31, 2002**    |   | **December 31, 2001** |   |
|-------------|--------|--------------------------|--------|-----------------------|--------|
|        |   | **Tonnage  metric tons** |   | **Value  TEUR**       |   | **Tonnage  metric tons** |   | **Value  TEUR** |   |
| Profen      |   | 17.6                     |   | 69,076                |   | 18.5 |   | 73,788 |   |
| Schleenhain |   | 22.9                     |   | 76.231                |   | 22.7 |   | 78,044 |   |
|        |   | 40.5                     |   | 145,307               |   | 41.2 |   | 151,832 |   |

 

Thebasis for the determination of the overburden is the total quantity ofpartially exposed raw brown coal.

 

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

** **

Tradereceivables were disclosed in the balance sheet, net of allowances, as follows:
|              |   | **December 31, 2002  TEUR** |   | **December 31, 2001  TEUR** |   |
|-------------------|--------|-----------------------------|--------|-----------------------------|--------|
| Trade receivables |   | 32,312                      |   | 43,969                      |   |
| Less allowances   |   | (1,152                      | )      | (778                        | )      |
|              |   | 31,160                      |   | 43,191                      |   |

 

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

** **

AtDecember 31, 2002 other investments totaled TEUR 72,286. The balance consistsof investment funds of MI (TEUR 45,490), which were specially set up toreinvest the additional liquidity resulting from the entry of new investorsinto a subsidiary of MIBRAG and to short-term investments (TEUR 26,796).

 

Intereston other investments of TEUR 2,386, TEUR 2,828 and TEUR 3,367 weredisclosed in interest income in 2002, 2001 and 2000, respectively.

 

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

** **

The provision relates primarily to briquettebenefit claims of active and retired employees on the basis of the collectivebargaining agreement of November 9, 1993 in respect to briquette benefitclaims. Individuals entitled must be employees of the Company at the date ofretirement. The right does not vest and lapses with early termination of theworking relationship or upon receipt of social plan benefits.

 

The calculation is based on an actuarialvaluation, which takes into account the right to the redemption value of DM185.00 (EUR 94.60) per metric ton of briquettes as specified in the collectivebargaining agreement, the employees entitled to benefits as of December 31,2002, and official demographic tables.

 

In addition, pension obligations for earlyretirement benefits were accrued. These amounts have also been calculated onthe basis of actuarial valuations.

 

**NOTE O                Taxation Accruals**

 

MIBRAGaccrued TEUR 491 (2001: TEUR 749) for property taxes.

* *

MIBRAGdid not provide for income taxes under German GAAP in spite of a positiveresult for the year 2002 because of tax losses brought forward from prioryears. Deferred tax assets and liabilities have not been recorded because thereare no significant differences between the German GAAP financial statement andthe tax bases of the assets and liabilities.

 

TheGerman income tax rate applicable to MIBRAG (corporate income tax, solidaritysurcharge, trade tax) is 37.22 % in 2002 (2001: 37.22 %, 2000: 50.17 %) onundistributed income. The Company has an effective tax rate of 0 % because theCompany has no taxable income and the recording of a deferred tax benefit fornet loss carry-forwards is prohibited under German GAAP.

 

Theincome taxes paid in 2002 amounting to TEUR 14 (2001: TEUR 6, 2000: TEUR 42)relate to a subsidiary of MIBRAG.

 

AtDecember 31, 2002 the Company had approximately TEUR 276,738 net operating loss

 

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carry-forwards,which do not expire and may be applied against future taxable income. The tax auditis currently taking place for the fiscal years 1994 through 1997. 

 

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

** **

Thefollowing is a summary of environmental and mining provisions:

 
|                                    |   | **December 31, 2002  TEUR** |   | **December 31, 2001  TEUR** |   |
|-----------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
| 1) Mining reclamation provisions        |   | 151,767                     |   | 143,950                     |   |
| 2) Provision for environmental measures |   | 5,100                       |   | 5,100                       |   |
| 3) Landscaping                          |   | 5,131                       |   | 6,248                       |   |
| 4) Planting                             |   | 1,193                       |   | 3,476                       |   |
| 5) Relocation of villages               |   | 20,478                      |   | 20,295                      |   |
|                                    |   | 183,669                     |   | 179,069                     |   |

 

1)Mining reclamation provisions

 

MIBRAGis responsible for reclaiming the mines Profen and Schleenhain. The miningfield reclaimation of the Profen and Schleenhain mines after the ceasing ofproduction is planned for 2029 to 2046 and 2041 to 2073, respectively. Alegally binding closure plan laying down the principles for action plans inaccordance with the Federal Mining Law (Bundesberggesetz) is normally approvedby the relevant mining authorities two years in advance to the commencement ofproduction. The liability to reclaim the area exists from the start of miningactivities. In each year of coal extraction the reclaimation costs are accruedratably using the relation of the coal mined to the total coal mine volume.

 

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

 

In2002, a new opinion was published indicating increased total redevelopmentexpenses. Therefore an additional amount of TEUR 2,733 was accrued as ofJanuary 1, 2002.

 

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2) Provision for Environmental Measures

 

The provision for the environmental measures isdetermined in respect to disposal sites and old locations of MIBRAG mbH inrefinement and mining areas on which waste deposits can be found. The accruedamount is derived from article 19.3 of the purchase and sales agreement.Qualifying costs that exceed the provision are to be reimbursed by theBundesanstalt fuer vereinigungsbedingte Sonderaufgaben (BvS).

 

3) Landscaping

 

This provision includes costs for reclaimingdisposal areas and leveling the area outside the embankments. These costsrelate solely to continuous landscaping, while costs for closing downlandscaping are included in certain mining provisions.

 

4) Planting

 

Provision is made for costs in connection withtemporary planting as of December 31, 2002 and December 31, 2001. In 2002 a newcalculation model was introduced, restating the costs of the separateactivities at a lower level.

 

5) Relocation of villages 

 

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

 

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

 

Accruedliabilities are as follows:

 
|                                       |   | **December 31, 2002  TEUR** |   | **December 31, 2001  TEUR** |   |
|--------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
| 1) Severance payments                      |   | 8,706                       |   | 7,280                       |   |
| 2) Personnel expenses                      |   |                        |   |                        |   |
| - Employment anniversaries                 |   | 1,363                       |   | 1,187                       |   |
| - Vacation and other  compensated absences |   | 570                         |   | 488                         |   |
| - Other                                    |   | 691                         |   | 515                         |   |
|                                       |   | 2,624                       |   | 2,190                       |   |
| 3) Remaining accruals                      |   | 7,135                       |   | 6,071                       |   |
|                                       |   | 18,465                      |   | 15,541                      |   |

 

1)Severance payments

 

Basesfor the provisions are signed social plan framework agreements in which themeasures for the personnel adjustments are defined. The employees are entitledto a one-time severance payment if the company initiates termination or in caseof retrenchments. The severance payments are limited to TEUR 26 per person.Employees participating in early retirement programs are entitled to additionalcompensation, mainly for the reduction in statutory pension payments due toearly retirement.

 

2)Personnel expenses

 

MIBRAGmbH grants awards in recognition of long service in the Company, based on thecollective bargaining agreement dated January 1, 1992 and the Company agreementdated October 1, 1995. The employees are entitled to financial awards, whichincrease in proportion to their employment periods. The valuations of thebenefits were based on actuarial valuations.

* *

The liability for vacation and other compensatedabsences 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 basedon the actual net income of the MIBRAG

 

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Groupexcluding extraordinary items and based on the achievement of goals in workingsafety.

 

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3) Remaining provisions

 

Composition:

 
|                                |   | **December 31, 2002** |   | **December 31, 2001** |   |
|-------------------------------------|--------|-----------------------|--------|-----------------------|--------|
|                                |   | **TEUR**              |   | **TEUR**              |   |
| Outstanding invoices                |   | 3,192                 |   | 2,552                 |   |
| Mine damages                        |   | 1,790                 |   | 1,790                 |   |
| Water usage fees                    |   | 543                   |   | 680                   |   |
| Professional service and litigation |   | 870                   |   | 719                   |   |
| Others                              |   | 740                   |   | 330                   |   |
|                                |   | 7,135                 |   | 6,071                 |   |

 

**NOTE R****                                                 ****LONG-TERM DEBTS**

** **

Long-termdebt consists of the following:

 
|                                                           |   | **December 31, 2002** |   | **December 31, 2001** |   |
|----------------------------------------------------------------|--------|-----------------------|--------|-----------------------|--------|
|                                                           |   | **TEUR**              |   | **TEUR**              |   |
| a) Loan to finance the power stations                          |   |                  |   |                  |   |
| - build up the  power station of Waehlitz                      |   | 53,390                |   | 56,950                |   |
| - modernization  of the power stations in Deuben  and Mumsdorf |   | 37,757                |   | 42,476           |   |
| - finance the additional paid-in capital bythe investors of MI |   | 22,548                |   | 27,149                |   |
| b) Loan to finance the Schleenhain mineinvestments             |   | 63,048                |   | 67,281                |   |
| c) Loan for home construction                                  |   | 2,342                 |   | 2,580                 |   |
| d) Deferred interest                                           |   | 539                   |   | 624                   |   |
|                                                           |   | 179,624               |   | 197,060               |   |

 

a)Loan to finance the power stations

 

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

 

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Thefirst loan was granted December 9, 1992 for the construction of a raw browncoal powered industrial power station in Waehlitz of TEUR 71,187. The interestrate has been fixed at 7 % per annum until December 9, 2002. UntilDecember 9, 2012 the interest rate is fixed at 5 % per annum. The loan periodis 25 years. The repayments are due in 40 equal amounts commencing fromJune 30, 1998.

 

OnApril 3, 1995 two additional loan agreements were closed with Kreditanstaltfuer Wiederaufbau (KfW). One of these contracts was closed for partiallyfinancing the modernization and reshaping of both industrial power plants inDeuben and Mumsdorf (TEUR 61,355). The redemption period is 13 yearsstarting on December 31, 1998. Interest has to be paid between 6.04 % and 6.80% for the respective tranches. These rates are fixed until January 2006 forloans of TEUR 22,025, and 2007 for the remaining portion of the loans.

 

Theother loan at the amount of TEUR 52,663 was granted to partially finance thelimited partner capital contribution of investors. The redemption period is 13years. In 1996, the loan proceeds were received by MIBRAG (TEUR 52,663).In 2002, MIBRAG made principal payments of TEUR 4,602. The interest rates arefixed at between 6.26 % and 6.82 % until 2005 at which time the rates will beadjusted to market rates.

 

Interestexpense for the three loans amounted to TEUR 8,449, TEUR 9,798 andTEUR 10,627 in 2002, 2001, and 2000, respectively.

 

b)Loan to finance the Schleenhain mine investments

 

In1997 and 1998, loan contracts were entered into with four banks to finance thecapital expenditures at the Schleenhain mine, especially the construction ofthe blending yard and environmental measures for the conveyor belts. In 1998TEUR 61,355 and in 1999 TEUR 10,226 were borrowed at interest ratesbetween 3.5 % and 5.4 % per annum, which are fixed until 2008 and 2009,respectively.

 

c)Loan for home construction

 

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

 

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

 

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**NOTE S****                                                  ****OTHER LIABILITIES**

 

Theother liabilities refer to:

 
|                                      |   | **December 31, 2002** |   | **December 31, 2001** |   |
|-------------------------------------------|--------|-----------------------|--------|-----------------------|--------|
|                                      |   | **TEUR**              |   | **TEUR**              |   |
| Wages and salaries                        |   | 3,055                 |   | 2,890                 |   |
| Social security contributions             |   | 2,203                 |   | 2,124                 |   |
| Tax lease                                 |   | 1,856                 |   | 2,165                 |   |
| Tax authorities                           |   | 1,461                 |   | 2,432                 |   |
| Usage reimbursement for the mining rights |   | 576                   |   | 17,807                |   |
| Others                                    |   | 994                   |   | 1,348                 |   |
|                                      |   | 10,145                |   | 28,766                |   |

 

Asmentioned under Note E the usage reimbursement for the mining rights wassignificantly reduced in the settlement agreement with BvS dated January 1,2002.

 

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

 

The maturity periodsof liabilities (in TEUR) are as follows:

 
|                           |   | **Liabilities to  banks *)** |   | **Trade payables** |   | **Payables to  participations** |   | **Other liabilities** |   | **Total** |   |
|--------------------------------|--------|------------------------------|--------|--------------------|--------|---------------------------------|--------|-----------------------|--------|-----------|--------|
|                           |   |                         |   |               |   |                            |   |                  |   |      |   |
| Balance as of December 31,2001 |   | 197,060                      |   | 20,864             |   | 2,695                           |   | 28,766                |   | 249,385   |   |
| thereof:  maturity period |   |                         |   |               |   |                            |   |                  |   |      |   |
| - up to 1 year                 |   | 17,976                       |   | 20,496             |   | 2,695                           |   | 26,790                |   | 67,957    |   |
| - 1-5 years                    |   | 83,406                       |   | 368                |   | 0                               |   | 1,559                 |   | 85,333    |   |
| - more than 5 years            |   | 95,678                       |   | 0                  |   | 0                               |   | 417                   |   | 96,095    |   |
|                           |   |                         |   |               |   |                            |   |                  |   |      |   |
| Balance as of December 31,2002 |   | 179,624                      |   | 63,094             |   | 2,268                           |   | 10,145                |   | 255,131   |   |
| thereof:  maturity period |   |                         |   |               |   |                            |   |                  |   |      |   |
| - up to 1 year                 |   | 18,029                       |   | 62,481             |   | 2,268                           |   | 8,480                 |   | 91,258    |   |
| - 1-5 years                    |   | 87,804                       |   | 613                |   | 0                               |   | 1,559                 |   | 89,976    |   |
| - more than 5 years            |   | 73,791                       |   | 0                  |   | 0                               |   | 106                   |   | 73,897    |   |

 

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**) Liabilities to banks are fully collateralized bymortgages*

 

Annualmaturities of liabilities to banks are as follows:

 
| **Year of maturity** |   | **Amount in TEUR** |    |
|----------------------|--------|--------------------|---------|
| 2003                 |   |               | 18,029  |   |
| 2004                 |   | 21,955             |    |   |
| 2005                 |   | 21,853             |    |   |
| 2006                 |   | 22,110             |    |   |
| 2007                 |   | 21,886             |    |   |
|                 |   |               | 87,804  |   |
| Thereafter           |   |               | 73,791  |   |
| Total                |   |               | 179,624 |   |

 

Theestimated fair value of the Company’s liabilities to banks approximates thecarrying value.

 

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

 

Fromtime to time, the Company may be subject to legal proceedings and claims in theordinary course of business. At December 31, 2002, the Company was not aware ofany legal proceedings or claims that the Company believes will have,individually or in the aggregate, a material adverse effect on the Company’sbusiness, financial condition, or results of operations.

 
|                                  |   | **December 31,  2002  TEUR** |   | **December 31,  2001  TEUR** |   |
|---------------------------------------|--------|------------------------------|--------|------------------------------|--------|
| Guarantees for indebtedness of others |   | 16,931                       |   | 16,931                       |   |
| Other contractual obligations         |   | 39,900                       |   | 22,600                       |   |

 

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

 

MIBRAGleases office equipment, railway-carriages and vehicles as well as vendingmachines, expiring at various dates. Rental and lease expenses amounted to TEUR1,200, TEUR 999 and TEUR 780 in the years ended December 31, 2002, 2001 and 2000,respectively.

 

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

 

MIBRAGoperates as one segment. Sales were exclusively achieved in Germany, and alllong-lived assets are located in Germany. Sales were almost completely limitedto the new German Federal States, mainly to Saxony-Anhalt, Thuringia, andSaxony.

 

Netsales by product and service:

 
|                                                             |   | **2002  TEUR** |   | **2001  TEUR** |   | **2000  TEUR** |   |
|------------------------------------------------------------------|--------|----------------|--------|----------------|--------|----------------|--------|
| Raw brown coal and coal products                                 |   | 222,423        |   | 224,180        |   | 192,296        |   |
| Electrical power, heating and steam                              |   | 33,167         |   | 32,141         |   | 33,140         |   |
| Other products and services                                      |   | 5,163          |   | 3,473          |   | 2,678          |   |
| Further charging of transport services, ash disposal  and others |   | 37,303         |   | 46,598         |   | 44,107         |   |
|                                                             |   | 298,056        |   | 306,392        |   | 272,221        |   |

 

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Severalmajor customers account for 10 % or more of MIBRAG’s revenues. As a percentageof total sales such customers accounted for 33 %, 28 % and 15 % in2002, 34 %, 27 % and  16 % in 2001, and 22 %, 26 % and 14 % in 2000.

 

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

 

Agreementsfor consulting and management services were closed in respect to the miningoperations and the refinement facilities between MIBRAG and two subsidiaries ofthe common parent companies NRG, Washington Group and PowerGen. These contractsdetermine certain consulting services to be provided by the two subsidiariesMorrison Knudsen Deutschland GmbH (MKD) and Saale Energie Service GmbH (SES) toMIBRAG or its subsidiaries. MIBRAG is obliged to determine and pay thecost-related remuneration for these services. Expenditures for MIBRAG amount toTEUR 8,755, TEUR 8,303 and TEUR 7,669 for 2002, 2001 and 2000, respectively. Asof December 31, 2002 and 2001, MIBRAG still had liabilities amounting to TEUR846 and TEUR 1,477, respectively towards MKD and SES for the provision oftheses services.

 

Partof the lignite deliveries from 1998 to 2000 to the Schkopau power plant weresales to Saale Energie GmbH (SEG), which is a subsidiary of the common parentcompanies of MIBRAG - NRG Energy Inc. SEG is operating two blocs of theSchkopau power station with 400 mega watts. Sales to SEG amount to TEUR 30,223,TEUR 24,792, and TEUR 17,291 in 2002, 2001 and 2000, respectively. Theconditions of delivery are the same as to the other (third party) operator ofthe Schkopau power plant. As of December 31, 2002 and 2001, MIBRAG disclosedreceivables of TEUR 3,213 and TEUR 2,729, respectively from SEG.

 

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