<PAGE>


                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 20-F
                                   [MARK ONE]
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES
    EXCHANGE ACT OF 1934
                                       OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                  FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2002
                                       OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

            FOR THE TRANSITION PERIOD FROM __________ TO ___________

                     COMMISSION FILE NUMBER: NOT APPLICABLE

                                LUSCAR COAL LTD.
                            LUSCAR ENERGY PARTNERSHIP
--------------------------------------------------------------------------------
             (Exact name of Registrant as Specified in Its Charter)

                                 NOT APPLICABLE
--------------------------------------------------------------------------------
                 (Translation of Registrant's Name into English)

                                 ALBERTA, CANADA
--------------------------------------------------------------------------------
                 (Jurisdiction of Incorporation or Organization)



          LUSCAR COAL LTD.                         LUSCAR ENERGY PARTNERSHIP
          1600 OXFORD TOWER                            1133 YONGE STREET
         10235 - 101 STREET                            TORONTO, ONTARIO
          EDMONTON, ALBERTA                             CANADA M4T 2Y7
           CANADA T5J 3G1

                    (Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
                               Title of each class
                    Name of each exchange on which registered
                                      NONE
Securities registered or to be registered pursuant to Section 12(g) of the Act.

                                      NONE
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.

                     9.75% SENIOR NOTES DUE OCTOBER 15, 2011
              GUARANTEES OF 9.75% SENIOR NOTES DUE OCTOBER 15, 2011
              -----------------------------------------------------
                                (TITLE OF CLASS)

Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.

                   1,000,000 COMMON SHARES, WITHOUT PAR VALUE
                   7,600,000 SPECIAL SHARES, WITHOUT PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                 Yes X   No
                                    ---    ---

     Indicate by check mark which financial statement item the registrant has
elected to follow.

                            Item 17     Item 18 X
                                   ---         ---



<PAGE>


                                TABLE OF CONTENTS


<TABLE>
<S>           <C>                                                                                 <C>
              Introduction............................................................................ 1
              Glossary of Industry Terms and Conversion Factors....................................... 2
Part 1        Item 1     Identity of Directors, Senior Management and Advisors........................ 6
              Item 2     Offer Statistics and Expected Timetable...................................... 6
              Item 3     Key Information.............................................................. 6
              Item 4     Information on the Company...................................................20
              Item 5     Operating and Financial Review and Prospects.................................55
              Item 6     Directors, Senior Management and Employees...................................65
              Item 7     Major Shareholders and Related Party Transactions............................69
              Item 8     Financial Information........................................................71
              Item 9     The Offer and Listing........................................................71
              Item 10    Additional Information.......................................................71
              Item 11    Quantitative and Qualitative Disclosures about Market Risk...................80
              Item 12    Description of Securities Other Than Equity Securities.......................81
Part II       Item 13    Defaults, Dividend Arrearages and Delinquencies..............................81
              Item 14    Material Modifications to the Rights of Security Holders and Use
                         of Proceeds..................................................................81
              Item 15    Controls and Procedures......................................................81
              Item 16    Reserved.....................................................................81
Part III      Item 17    Financial Statements.........................................................82
              Item 18    Financial Statements.........................................................82
              Item 19    Exhibits.....................................................................83

</TABLE>


                                        i


<PAGE>

                                  INTRODUCTION

         References to "Luscar," "our company," "we," "us" and "our" in this
annual report refer to Luscar Coal Ltd. and its consolidated subsidiaries unless
the context otherwise requires. References to "LCIF" in this annual report are
references to Luscar Coal Income Fund and its consolidated subsidiaries unless
the context otherwise requires. References to "LEP" in this annual report are
references to Luscar Energy Partnership and its consolidated subsidiaries. LEP
acquired LCIF and us effective May 11, 2001 and, as a result of the acquisition,
we became a wholly owned subsidiary of LCIF whose sole purpose is to invest in
our company. LEP and LCIF have no independent operations or assets and Luscar
Ltd., our direct subsidiary, is the only entity in our corporate structure that
has operations. LEP, LCIF and Luscar Ltd. are guarantors of our Senior Notes due
October 15, 2011, which we refer to as our "Senior Notes" or our "notes." We
sometimes refer to LEP, LCIF and Luscar Ltd. as our "guarantors." Generally
accepted accounting principles do not permit us to consolidate our financial
statements with the financial statements of LCIF and LEP prior to May 11, 2001.
We are including in this annual report financial statements of LEP and LCIF.
LEP's SEC reporting for future periods will include our financial statements
until LEP's consolidated statements include three years of results of our
operations. We prepare audited financial statements for LEP, which contain
condensed consolidating information for LCIF, our subsidiaries and us from May
11, 2001 forward. See "Part 1 - Item 4 - Our Business" in this annual report for
a discussion of our corporate structure.

         Pursuant to the Combination Agreement, we transferred our metallurgical
coal assets to Fording on February 28, 2003. Concurrently, Fording sold the
Prairie Assets to our affiliate, SCAI. During 2003, we announced that we intend
to acquire SCAI from SCP II, subject to certain consents from SCAI's customers.
We intend to combine the Prairie Assets with our existing thermal coal
operations.

         This annual report discloses information regarding our former
metallurgical coal assets to the extent necessary to describe us as of December
31, 2002 when we still owned these assets. We also include information with
respect to the Prairie Assets, even though we did not manage or operate these
assets as of December 31, 2002, to better describe our operations assuming that
we acquire the Prairie Assets from SCP II during 2003. On May 8, 2003, we
announced our intention to acquire the Prairie Assets from our owners during
2003, subject to obtaining certain consents from customers, at a fair value to
be determined by an independent valuator. We have obtained most of the
information regarding the Prairie Assets, including coal reserve information,
from public information prepared and released by Fording, from whom SCP II
acquired the Prairie Assets on February 28, 2003. Although we have no knowledge
that any of Fording's public information is untrue or incomplete, we have not
independently verified this information. Actual information, including reserve
information, may differ from Fording's public information.

         All references to "tonnes" are references to metric tonnes. All dollar
references in this annual report are in Canadian dollars unless otherwise
specifically indicated. References to "$" or "Cdn$" are to Canadian dollars and
references to "US$" are to United States dollars. Unless otherwise specified,
references to "pro forma" give effect to LEP's acquisition of LCIF.







                                       1
<PAGE>


                GLOSSARY OF INDUSTRY TERMS AND CONVERSION FACTORS

                                  MINING TERMS

"ANTHRACITE COAL" means a class of coal of the highest rank and having a heat
value, calculated on an ash-free basis, as high as 34,900 KJ/Kg (15,000 BTU/lb)
and primarily used for industrial and home heating purposes.

"BCM" means a bank cubic meter, which represents one cubic meter of material
measured prior to disturbance.

"BITUMINOUS COAL" means a class of coal having heat values, calculated on an
ash-free basis, typically ranging from 24,400 to 32,600 KJ/Kg (10,000 to 14,000
BTU/lb), commonly used for utility and industrial steam purposes and, in the
steel-making industry, for making coke for pulverized coal injection into the
blast furnace.

"BTU" means a British thermal unit; the amount of heat needed to raise the
temperature of one pound of water by one degree Fahrenheit.

"COAL PROCESSING PLANT" means a facility for crushing, sizing, or washing coal
to prepare it for sale.

"COAL RANK" means the qualitative classification of coal from lignite to
anthracite based on calorific content and other qualitative and quantitative
characteristics.

"CHAR" means the product derived from lignite coal, which is used to produce
barbecue briquettes.

"CMT" means a clean metric tonne, which represents one metric tonne of coal that
has been prepared for sale in a coal processing plant.

"COKE" means a hard, dry carbon substance produced by heating coal to a very
high temperature in the absence of air, used primarily in the manufacture of
iron and steel.

"COKING COAL" is metallurgical coal that exhibits the physical and chemical
properties that are necessary to form coke.

"COMBINATION AGREEMENT" refers to an agreement among Sherritt, Teachers',
Fording, Teck Cominco Limited and Westshore Terminals Income Fund, made
effective February 28, 2003.

"CONSOL" refers to CONSOL Energy Inc., as well as to its affiliates and
subsidiaries.

"DRAGLINE" means a large, electrically powered, mobile machine with a large
bucket suspended from the end of a long boom used to remove overburden and coal
materials a short distance in the surface mining process.

"FORDING" refers collectively to Fording Inc., Fording Canadian Coal Trust and
Fording Coal Partnership, as well as to their affiliates and subsidiaries.

"FORDING UNITS" refers to trust units issued by Fording Canadian Coal Trust, a
mutual fund trust constituted under the laws of Alberta.




                                       2
<PAGE>

"GW" means gigawatt, equivalent to one million kilowatts.

"HAUL TRUCK" means a large, off-road truck used to haul overburden or coal on a
mine site.

"KG" means a kilogram or 1,000 grams.

"KJ" means a kilojoule or 1,000 joules equivalent to one kilowatt of power
radiated or dissipated for one second.

"KM" means a kilometer or 1,000 meters.

"KW" means a kilowatt, equivalent to 1,000 watts of electric power.

"KWH" means kilowatt hour, equivalent to the supply of one kilowatt of power for
a continuous one-hour period.

"LCL" refers to Luscar Coal Ltd. as well as to its affiliates and subsidiaries.

"LCIF" refers to Luscar Coal Income Fund, an open ended trust formed under the
laws of Alberta, with investments in the securities of Luscar Coal Ltd. and
Luscar Ltd.,

"LEP" refers to Luscar Energy Partnership (formerly Sherritt Coal Partnership),
a general partnership formed in February 2001 under the laws of Ontario between
Sherritt and Teachers', who each hold an indirect 50% partnership interest.

"LIBOR" refers to the London Inter-Bank Offered Rate.

"LIGNITE COAL" means a class of coal of the lowest rank and having a heat value,
calculated on an ash-free basis, ranging from 14,700 to 19,300 KJ/Kg (6,300 to
8,300 BTU/lb) and used primarily for power generation and the making of char.

"LOADER" means a large machine used to load coal or overburden.

"LUSCAR DEBENTURES" refers to convertible debentures issued by LCIF.

"LUSCAR UNITS" refers to trust units issued by LCIF.

"MANALTA" refers collectively to Manalta Coal Income Trust and Manalta Coal Ltd.
as well as to its affiliates and subsidiaries.

"METALLURGICAL COAL" means the various grades of coal used in the integrated
steel making process, which are suitable for carbonization to make coke or for
pulverized coal injection into the blast furnace.

"MINE-MOUTH POWER PLANT" means a coal-fired electrical generating plant located
in close proximity to a coal mining operation that is its sole fuel supply
source.

"MW" means a megawatt, equivalent to one thousand kilowatts.

"MWH" means a megawatt hour, equivalent to one thousand kilowatt hours.




                                       3
<PAGE>

"NEPTUNE" refers to Neptune Bulk Terminals (Canada) Ltd.

"NON-RESERVE COAL" means coal quantities that have not been economically
evaluated or if, based on such an evaluation, it has been concluded that those
coal quantities cannot be economically mined based on current technology and
market conditions.

"OVERBURDEN" means materials that overlie a mineral deposit.

"PRAIRIE ASSETS" refers to certain of the assets and operations acquired by SCAI
from Fording under the Combination Agreement, including a 50% joint venture
interest in Genesee mine, the Highvale-Whitewood mining contract, certain coal
and potash royalty agreements, and substantial non-producing coal and mineral
properties.

"PULVERIZED COAL INJECTION" refers to the injection of pulverized coal into a
blast furnace as part of the integrated steel mill process.

"RECLAMATION" means the restoration of land and the surrounding environment of a
mining site after the coal is extracted.

"RESERVE" means coal quantities that are anticipated to be mineable based upon
the completion of feasibility studies, utilizing existing technology, under
prevailing economic conditions and which have no legal impediment to mining.

"SCAI" refers to Sherritt Coal Acquisition Inc., a wholly owned subsidiary of
SCP II, which we intend to acquire from SCP II during 2003.

"SCP II" refers to Sherritt Coal Partnership II, a general partnership formed in
October 2002 under the laws of Ontario between Sherritt and Teachers', who each
hold an indirect 50% partnership interest.

"SEAM" means a three-dimensional zone consisting of one or more layers of coal,
which may be separated, by one or more thin layers of rock.

"SENIOR CREDIT FACILITY" refers to LCL's $100 million senior credit facility
with three Canadian chartered banks.

"SENIOR NOTES" refers to US$275 million of unsecured Senior Notes issued by LCL
on October 10, 2001, bearing interest at 9.75% per annum, repayable on October
15, 2011.

"SHERRITT" refers collectively to Sherritt International Corporation as well as
to its affiliates and subsidiaries.

"SHOVEL" means a large electric or diesel powered machine used in the surface
mining process to remove and load overburden or coal.

"STEAM COAL" has the same meaning as thermal coal.

"STRIP RATIO" means the ratio of overburden materials to underlying coal,
generally measured in BCM of overburden in place to CMT of coal.



                                       4
<PAGE>


"SUBBITUMINOUS COAL" means a class of coal intermediate in rank between lignite
and bituminous coal and possessing a heat value, calculated on an ash-free
basis, generally ranging from approximately 19,300 to 26,700 KJ/kg (8,300 to
11,500 BTU/lb), used to generate electricity or to process heat.

"SURFACE MINE" means a mine in which the coal deposit lies sufficiently near the
surface to be extracted by removing the overburden.

"SYNCLINE" means a series of flat lying rock strata that, has been folded into a
trough-like geological structure within which coal deposits may lie.

"TEACHERS'" refers to Ontario Teachers' Pension Plan, a corporation without
share capital, established by the Teachers' Pension Act of Ontario, which
administers the pension plan for approximately 154,000 current teachers and
89,000 retired teachers and their families. The plan is the second largest
pension fund in Canada, with total assets at December 31, 2002 exceeding $66
billion.

"THERMAL COAL" means coal used for its heating value by power plant and
industrial steam boilers to produce electricity or process heat.

"TONNE" refers to a metric tonne equal to approximately 2,204.6 pounds.

"TPD" means tonnes per day.

"VOLATILES" or "VOLATILE MATTER" means that portion of coal that is driven off
in gaseous and vapor form when coal is subjected to a standard heating test.


                               CONVERSION FACTORS

         Measurements in this document are generally given in metric units. The
following table sets forth standard conversions between metric units of measure
and imperial units of measure.

<TABLE>
<CAPTION>
     TO CONVERT FROM                TO                        MULTIPLY BY
     --------------------------------------------------------------------
     <S>                            <C>                      <C>
     Cubic meters                   cubic yards                   1.308
     Meters                         Feet                          3.281
     Kilometers                     Miles                         0.621
     Hectares                       Acres                         2.471
     Kilograms                      Pounds                        2.205
     Tonnes                         long tons                     0.984
     KJ/kg                          Btu/lb                        0.430
</TABLE>







                                       5
<PAGE>


                                     PART I

ITEM 1     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

           Not applicable.

ITEM 2     OFFER STATISTICS AND EXPECTED TIMETABLE

           Not applicable.

ITEM 3     KEY INFORMATION

                             SELECTED FINANCIAL DATA

                                LUSCAR COAL LTD.
                HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

         The following table sets forth a summary of certain of our historical
consolidated financial and other data for the dates and periods indicated and
should be read in conjunction with our audited consolidated financial statements
and the related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this annual report.
We prepare our consolidated financial statements in accordance with Canadian
GAAP, which differs in certain respects from U.S. GAAP. For a discussion of the
principal differences between Canadian GAAP and U.S. GAAP as they pertain to us,
see note 18 to our consolidated financial statements included elsewhere in this
annual report.


<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                            -------------------------------------------------------------------
                                              1998 (a)        1999         2000          2001          2002
                                            ------------  ------------ ------------  ------------  ------------
                                                                      (in thousands)
<S>                                        <C>            <C>          <C>           <C>           <C>
CONSOLIDATED STATEMENTS OF EARNINGS DATA
Canadian GAAP
Revenue...................................  $    443,860    $  716,435   $  657,052    $  635,534    $  595,633
Cost of sales.............................       319,886       561,554      534,286       484,843       469,016

Selling, general and administrative
expenses..................................        14,185        16,465       14,733        24,413        13,619
Other (income) expenses...................         3,530        (1,663)      (1,953)       (1,660)       (4,070)
Depreciation and amortization.............        66,389       118,161      105,941       100,023        93,774
Write-down and loss on disposal of
  capital assets..........................            --       172,824       45,808            --        42,791
Interest on subordinated notes............        54,336        59,593       11,200        42,375        31,769
Foreign currency translation loss (gain)..            --            --           --         8,415        (4,021)
Other interest............................         4,471        41,784       52,442        46,773        54,259
                                            ------------    ----------   ----------    ----------    ----------
Loss before income taxes..................       (18,937)     (252,283)    (105,405)      (69,648)     (101,504)
Income tax expense (recovery).............       (11,948)     (108,675)     (45,472)      (58,776)      (47,594)
                                            ------------    ----------   ----------    ----------    ----------

Loss before non-controlling interest......        (6,989)     (143,608)     (59,933)      (10,872)      (53,910)
Non-controlling interest (b)..............         4,910        86,166       32,813            --            --
                                            ------------    ----------   ----------    ----------    ----------
Net loss for the year.....................  $     (2,079)   $  (57,442)  $  (27,120)   $  (10,872)   $  (53,910)
                                            ============    ==========   ==========    ==========    ==========
US GAAP
Net loss for the year.....................                  $  (62,819)  $  (27,397)   $   (5,305)   $  (27,460)
                                                            ==========   ==========    ==========    ==========
</TABLE>






                                       6
<PAGE>

SELECTED FINANCIAL DATA
LUSCAR COAL LTD. (CONTINUED)

<TABLE>
<CAPTION>

                                                                       YEAR ENDED DECEMBER 31,
                                                -------------------------------------------------------------------
                                                  1998 (a)         1999          2000          2001          2002
                                                ------------   ------------  ------------  ------------  ------------
                                                                (in thousands, except per unit amounts)
<S>                                             <C>            <C>           <C>           <C>           <C>
OTHER FINANCIAL AND OPERATING DATA
Canadian GAAP
Cash flows from:
Operating activities......................               471           124       18,553        38,023        36,795
Financing activities......................            86,687        47,569      (60,151)      (14,248)       22,469
Investing activities......................           (87,159)      (47,691)      41,081       (25,828)      (50,237)
Capital expenditures......................            77,503        47,447       17,822        27,938        51,035
Ratio of earnings to fixed charges (c)....              0.67            --           --          0.29            --

CONSOLIDATED BALANCE SHEET DATA
(AT YEAR END)
Canadian GAAP
Cash and short term deposits..............        $      524    $      526   $        9    $       10    $    6,894
Total assets..............................         2,146,143     1,887,077    1,681,494     1,667,263     1,540,231
Operating line of credit..................            37,719        44,190       45,434         1,911            --
Long-term debt (including current portion,
  excluding promissory and subordinated notes)       376,057       419,547      355,534       445,684       440,246
Promissory notes (d)......................            92,085        86,439       81,283        74,928        69,371
Subordinated notes (e)....................           642,969       642,969      642,969       642,969       642,969
Shareholders' equity (deficit)............             4,519       (52,924)     (80,044)      (90,916)     (144,826)
US GAAP
Shareholders' equity (deficit)............                      $  (59,844)  $  (87,052)   $ (144,973)   $ (161,321)

</TABLE>


(a) Includes the results of the Manalta acquisition, which was effective
    October 1, 1998.
(b) Non controlling interest in Luscar held by LCIF.
(c) For the purpose of determining the ratio of earnings to fixed charges,
    earnings represent earnings before income taxes and non controlling
    interest, fixed charges and amortization of capitalized interest. Fixed
    charges consist of interest expense, capitalized interest, amortization of
    deferred financing costs and interest within rental expense. For the years
    ended December 31, 1998, 1999, 2000, 2001 and 2002 our earnings were
    insufficient to cover fixed charges by $21,119, $257,514, $105,038, $69,281
    and $101,137.
(d) The promissory notes were issued to finance certain mine assets acquired
    from one of our customers. Under the terms of the related coal supply
    contracts for these mines, the customer reimburses us for substantially all
    of the interest and sinking fund payments due under these notes. At
    maturity, we are obligated to repay these notes, net of sinking fund
    balances, at which time under the related coal supply contracts, the
    customer will reimburse us for the net repayment. See "Item 10 - Additional
    Information -- Material Contracts."
(e) The subordinated notes are obligations of Luscar Ltd. that are held by LCIF.
    These notes are eliminated in the consolidated financial statements of LEP.




                                       7
<PAGE>


                             SELECTED FINANCIAL DATA

                             LUSCAR COAL INCOME FUND
                       HISTORICAL FINANCIAL AND OTHER DATA

         The following table sets forth a summary of certain of LCIF's
historical financial and other data for the dates and periods indicated and
should be read in conjunction with LCIF's audited financial statements and the
related notes, LCIF's unaudited interim financial statements and the related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--LCIF" included elsewhere in this annual report. The
summary historical financial data for the six months ended June 30, 2000 and for
the period January 1, 2001 to May 11, 2001 are derived from LCIF's unaudited
interim financial statements and, in the opinion of LCIF's management, fairly
present LCIF's results for such periods. The interim financial statements
contain all normal recurring entries necessary for a fair presentation. The
results of LCIF's operations for any interim period are not necessarily
indicative of the results of operations for the entire year. LCIF prepares its
financial statements in accordance with Canadian GAAP, which differs in certain
respects from U.S. GAAP. For a discussion of the principal differences between
Canadian GAAP and U.S. GAAP as they pertain to LCIF, see note 9 to LCIF's
financial statements included elsewhere in this annual report.

         Until May 11, 2001, LCIF accounted for its investment in us using the
equity method. As a result of the takeover by LEP, LCIF became our controlling
shareholder and is entirely owned by LEP. Financial information for LCIF after
May 11, 2001 is included in the consolidated financial statements of LEP.


<TABLE>
<CAPTION>

                                                                     YEAR ENDED DECEMBER 31,                JANUARY 1 TO
                                                          ---------------------------------------------        MAY 11
                                                              1998            1999             2000             2001
                                                          ------------    ------------     ------------     ------------
                                                                      (in thousands, except per unit amounts)
<S>                                                       <C>             <C>              <C>              <C>
STATEMENTS OF EARNINGS DATA
Canadian GAAP
Interest and other income...............................  $     55,801    $     59,660     $     11,284     $      8,694
Net earnings (loss) for the period......................  $     40,695    $    (90,022)    $    (53,906)    $      9,089
US GAAP
Net earnings (loss) for the period......................                  $   (109,247)    $    (52,373)    $    (11,555)
OTHER FINANCIAL AND OPERATING DATA
Canadian GAAP
Total assets............................................  $    774,242    $    629,915     $    569,457     $    591,261
Long term debt..........................................  $     46,968    $     41,532     $     35,539     $     33,206
Unit holders' equity....................................  $    726,975    $    587,856     $    533,568     $    542,507
Distributions/unit......................................  $      1.02     $       0.54     $         --     $       0.10
Basic earnings (loss)/unit..............................  $      0.63     $      (0.99)    $      (0.59)    $       0.08
Fully diluted earnings (loss)/unit......................  $      0.60     $      (0.99)    $      (0.59)    $       0.08
US GAAP
Convertible debentures..................................                  $    100,000     $    100,000     $    100,000
Trust units.............................................                  $    735,728     $    735,728     $    735,728
Unit holders' deficit...................................                  $   (220,754)    $   (273,197)    $   (284,752)

</TABLE>





                                       8
<PAGE>


                             SELECTED FINANCIAL DATA

                            LUSCAR ENERGY PARTNERSHIP
                HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

         The following table sets forth a summary of certain of LEP's historical
consolidated financial and other data for the dates and periods indicated and
should be read in conjunction with LEP's audited consolidated financial
statements and the related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--LEP" included elsewhere in this
annual report. LEP prepares its consolidated financial statements in accordance
with Canadian GAAP, which differs in certain respects from U.S. GAAP. For a
discussion of the principal differences between Canadian GAAP and U.S. GAAP as
they pertain to LEP, see note 19 to LEP's consolidated financial statements
included elsewhere in this annual report.

<TABLE>
<CAPTION>

                                     MAY 11 TO   YEAR ENDED
                                    DECEMBER 31  DECEMBER 31
                                        2001        2002
                                    -----------  -----------
                                         (in thousands)
<S>                                 <C>          <C>
STATEMENT OF EARNINGS DATA
Canadian GAAP
Revenue ..........................   $  408,899   $  597,114
Net earnings for the period ......   $   22,250   $   32,200
US GAAP
Net earnings for the period ......   $   36,356   $   32,162
BALANCE SHEET DATA (AT PERIOD END)
Canadian GAAP
Total assets .....................   $1,612,531   $1,565,904
Long-term debt ...................   $  520,612   $  509,617
Partners' equity .................   $  496,963   $  529,163
US GAAP
Total assets .....................   $1,699,854   $1,655,960
</TABLE>


                               EXCHANGE RATE DATA

         Luscar Energy Partnership, Luscar Coal Income Fund and Luscar Coal Ltd.
present their financial statements in Canadian dollars. Unless otherwise
specified or the context otherwise requires, all dollar amounts in this annual
report are expressed in Canadian dollars.

         The following table sets forth certain exchange rates based upon the
noon buying rate in New York City for cable transfers in foreign currencies for
customs purposes by the Federal Reserve Bank of New York. Such rates are set
forth as United States dollars per Cdn$1.00 and are the inverse of the rate
quoted by the Federal Reserve Bank of New York for Canadian dollars per US$1.00.



<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                            -------------------------------------------------------------------
                                                1998          1999         2000          2001          2002
                                            ------------  ------------  -----------  ------------  ------------
<S>                                         <C>           <C>           <C>          <C>           <C>
Low.......................................        0.6341        0.6535       0.6413        0.6241        0.6200
High......................................        0.7105        0.6925       0.6969        0.6697        0.6619
End of Year...............................        0.6522        0.6925       0.6669        0.6279        0.6330
Average...................................        0.6714        0.6744       0.6732        0.6446        0.6370


<CAPTION>

                                                              LAST SIX MONTHS
                                   ----------------------------------------------------------------------------
                                   DECEMBER      JANUARY       FEBRUARY      MARCH         APRIL          MAY
                                   --------      -------       --------      -----         -----          ---
<S>                                <C>          <C>           <C>           <C>           <C>           <C>
Low.........................        0.6330        0.6349        0.6530       0.6709        0.6737        0.7032
High........................        0.6461        0.6570        0.6720       0.6823        0.6975        0.7437
End of Month................        0.6330        0.6542        0.6720       0.6805        0.6975        0.7293
</TABLE>


On June 27, 2003, the inverse of the noon buying rate for Canadian dollars was
$1.00 per US$0.7411.


                                       9
<PAGE>

               PRESENTATION OF OUR FINANCIAL AND OTHER INFORMATION

         Unless we indicate otherwise, financial information in this annual
report has been prepared in accordance with generally accepted accounting
principles in Canada, or Canadian GAAP. Canadian GAAP differs in some respects
from generally accepted accounting principles in the United States, or U.S.
GAAP, and thus our financial statements may not be comparable to the financial
statements of United States companies. The principal differences between
Canadian GAAP and U.S. GAAP are summarized in note 19 to the audited
consolidated financial statements of Luscar Energy Partnership, in note 9 to the
audited and unaudited financial statements of Luscar Coal Income Fund and in
note 20 to the audited consolidated financial statements of Luscar Coal Ltd.

                                  RISK FACTORS

         You should carefully consider the risk factors set forth below as well
as the other information contained in this annual report. The risks described
below are not the only risks facing us. Additional risks and uncertainties not
currently known to us or those we currently deem to be immaterial may also
materially and adversely affect our business operations. Any of the following
risks could materially adversely affect our business, financial condition or
results of operations.

WE RELY ON A SMALL NUMBER OF KEY CUSTOMERS TO WHOM WE SELL A LARGE AMOUNT OF
COAL.

         Five of the mines that we owned during 2002 derived substantially all
of their revenue from a single customer or a group of affiliated customers.
These customers were TransAlta, Ontario Power Generation, ATCO Electric, and
SaskPower. Our coal shipments to these customers accounted for 56% of our
revenues during 2002 and are expected to continue to provide a significant
percentage of our revenues in the future. The loss of one or more of these
customers could result in the closure of the relevant mine or mines or, in some
cases, the sale of the relevant mine to the customer. During 2003, we
transferred our metallurgical coal assets to Fording and suspended production at
Obed Mountain mine. We have managed the Prairie Assets on behalf of SCAI since
February 28, 2003 and intend to acquire SCAI from SCP II during 2003. After
giving effect to our expected acquisition of SCAI from our owners, our pro forma
revenue for 2002, including royalties, from TransAlta, Ontario Power Generation,
ATCO Electric, SaskPower and EPCOR accounted for 77% of our total pro forma
revenue, after giving effect to the foregoing transactions.

         Our coal supply contracts with our key customers allow them to
terminate the contracts under a number of circumstances including our failure to
perform our obligations under the contract or if our operating subsidiary,
Luscar Ltd., becomes bankrupt. In particular, a customer may terminate the
contract if we fail to deliver a minimum amount of coal or if our customer or we
are unable to obtain necessary permits or government approvals. In addition, the
contracts with these customers allow them to temporarily suspend or terminate
the contract as a result of specified events beyond the control of the affected
party, including work stoppages, rail disruptions, natural disasters, excessive
damage or required modifications to the power station being served, and
equipment break-downs. Some of the contracts with key customers also provide for
termination if available coal reserves are exhausted or if licenses, permits or
approvals required to mine the coal are not available. One coal supply contract,
which represented approximately 10% of our 2002 revenue, may be terminated by
either party to the agreement upon written notice given to the other party
during the month of July of 2006 or 2011. If notice is given, the contract will
terminate on July 1 of the following year. If any of these customers suspend or
terminate all of their contracts with us, it would materially adversely impact
our financial position. However, no individual contract is material to our
financial condition or ability to pay interest or principal on the Senior Notes.
In addition, these customers may choose not to extend their existing contracts
or not to enter into new contracts. If that happens, we would be affected
adversely to the extent that we are unable to find other customers to purchase
coal at the same level of profitability.




                                       10
<PAGE>

OUR DOMESTIC THERMAL COAL SALES ARE DEPENDENT ON THE ELECTRICITY GENERATION
INDUSTRY IN ALBERTA, SASKATCHEWAN AND NORTHWESTERN ONTARIO.

         Demand for our domestic thermal coal depends primarily on coal
consumption by the electric utility industry in Alberta, Saskatchewan and
northwestern Ontario. This demand is affected by a variety of factors, including
fluctuations in the demand for electricity, environmental and other governmental
regulations and orders, technological developments and the availability and
price of alternative electricity generation sources such as natural gas or oil
generation, nuclear energy or hydroelectric energy. Our business plan is
predicated on the sustained demand for electricity from the power plants we
supply. Any significant reduction of electricity demand from these power plants
will have a material adverse effect on our results of operations. In addition,
any increased coal sales in these markets are dependent upon increases in
electricity demand that we cannot be certain will occur.

WE EXPERIENCED SUBSTANTIAL CYCLICALITY IN OUR EXPORT COAL BUSINESS IN THE PAST
AND WE EXPECT THAT CYCLICALITY TO CONTINUE.

         We have experienced substantial price fluctuations in our export coal
business in the past and we expect that such fluctuations will continue. Our
export markets include customers in Japan, Korea, other Pacific Rim countries
and South American countries, which are all countries that have experienced
economic slowdowns within the past five years. Export coal markets are cyclical
and characterized by: (1) periods of excess supply resulting from expansions of
production capacities, more efficient mining techniques or other factors; and
(2) periods of insufficient demand resulting from weak general economic
conditions, reduced production by our customers or other factors. These
circumstances could result in downward pressure on export coal prices or demand,
which would reduce our revenues and profitability. Export coal prices may not
remain at current levels. A slowdown in economic growth may significantly reduce
the price and the demand for export coal. Any prolonged or severe weakness in
export coal prices or demand by foreign electricity generation industries would
reduce our revenues and profitability and could cause us to reduce our output
or, possibly, close one or more of our mines, all of which would reduce our cash
flow from operations. For example, we have recently reduced production at our
Coal Valley mine and indefinitely suspended production at our Obed Mountain mine
in response to low export thermal coal selling prices resulting from excess
production capacity in the seaborne thermal coal markets to which these mines
ship a significant portion of their sales.

         Since December 31, 2002, we have transferred our metallurgical coal
operations to Fording and reduced our export thermal coal production. We intend
to acquire Fording's Prairie Assets from SCP II during 2003, from which we
expect to derive revenues from the ownership and operation of mine mouth thermal
coal operations in Alberta. As a result, we expect that our ongoing exposure to
the cyclicality of the export coal business will be significantly less than in
prior years.

THE GUARANTORS AND WE ARE HIGHLY LEVERAGED AND HAVE SIGNIFICANT DEBT SERVICE
REQUIREMENTS.

         The guarantors and we have substantial indebtedness and significant
debt service obligations. As at December 31, 2002, the guarantors and we had
total indebtedness of $509.6 million and a debt to equity ratio of 1.0 to 1
including the current portion of the indebtedness but excluding intercompany
debt and future income taxes. The indenture governing the Senior Notes and our
credit facility permit our subsidiaries and us to incur additional indebtedness,
including secured indebtedness, subject to limitations. See "Item 10 -
Additional Information -- Material Contracts" on page 71.

         Our high degree of leverage could have important consequences to you.
For example, it could:

         -        make it more difficult for us to satisfy our obligations with
                  respect to the Senior Notes and our other indebtedness;



                                       11
<PAGE>

         -        require us to dedicate a substantial portion of our cash from
                  operations to the payment of debt service, thereby reducing
                  the availability of our cash flow to fund working capital,
                  capital expenditures and general corporate purposes;

         -        limit our ability to obtain additional financing in the future
                  for working capital, capital expenditures, general corporate
                  purposes or acquisitions;

         -        increase our vulnerability to general adverse economic and
                  industry conditions;

         -        place us at a disadvantage compared to our competitors that
                  have less debt; and

         -        limit our flexibility in planning for, or reacting to, changes
                  in our business and industry.

         Under our bank credit facility, the lenders have the option to convert
the bank credit facility from a 364-day term credit facility to a demand credit
facility if our fixed charge coverage ratio is less than 2.5 to 1. As at
December 31, 2002, our fixed charge coverage ratio was 2.4 to 1, however, our
lenders waived their option to convert at that time. As at March 31, 2003 our
fixed charge coverage ratio was 2.5 to 1.

YOUR RIGHT TO RECEIVE PAYMENT ON THE SENIOR NOTES AND THE GUARANTEES RANKS
BEHIND OUR SECURED INDEBTEDNESS, WHICH MAY REDUCE THE LIKELIHOOD THAT YOU WILL
BE REPAID IN THE EVENT OF BANKRUPTCY, LIQUIDATION OR OTHER ADMINISTRATIVE
PROCEEDINGS THAT REQUIRE ALLOCATION OR DISTRIBUTION OF OUR ASSETS.

         The Senior Notes and the guarantees are subordinate in right of payment
to the guarantors' and our secured indebtedness to the extent of the assets
securing such indebtedness. The Senior Notes are our senior unsecured
obligations, and the guarantees are senior unsecured obligations of the
guarantors. The Senior Notes and the guarantees rank equally with all of the
guarantors' and our senior unsecured indebtedness. As at December 31, 2002, (1)
we, together with the guarantors, had $75.2 million of outstanding secured debt
and (2) we had nothing drawn and had outstanding letters of credit of $62.5
million against our bank credit facility. Our bank credit facility allows total
secured borrowings of up to $100.0 million. In addition, the indenture governing
the Senior Notes permits us to incur additional secured indebtedness.
Accordingly, in the event of bankruptcy, liquidation, receivership or a
reorganization or similar proceeding relating to any of the guarantors or us,
you will participate with all other holders of our indebtedness and the
indebtedness of our guarantors in the assets remaining after the guarantors and
we have paid all of the obligations under any secured indebtedness. In any of
these cases, these assets may be insufficient to pay all of the guarantors' and
our creditors and you are likely to receive less, ratably, if any, than our
secured creditors.

WE MAY NOT BE ABLE TO ACQUIRE, RETAIN AND DEVELOP COAL RESERVES.

         Our ability to supply coal to our customers depends on our ability to
retain and exploit our coal reserves in an economic fashion. Any defect in our
rights to mine any of our coal reserves could adversely affect our ability to
mine these reserves and to supply our customers. In addition, our utility
customers or we often need to obtain land access rights from third parties to
mine our coal reserves. The acquisition of these rights could increase our
costs. The failure to acquire these rights could prevent us from mining the
particular coal reserves. If we are not successful in obtaining coal rights and
sustaining our coal reserves, our future revenues will be adversely affected. A
component of our business strategy is to acquire and develop new coal reserves.
If we are unsuccessful in this area, our future growth may be affected. We
intend to acquire SCAI during 2003 and thereby acquire the additional coal and
mineral reserves included in the Prairie Assets that SCAI acquired from Fording
earlier this year.

         Many of our properties, including those we expect to acquire from SCP
II as part of the Prairie Assets, contain non-reserve coal. We refer to
properties as having non-reserve coal, as opposed to coal reserves, when we have
not economically evaluated the feasibility of mining the coal on that property
or if, based on such an evaluation, we have concluded that the coal cannot be
economically mined based on




                                       12
<PAGE>

current technology and market conditions. If any or all of our non-reserve coal
cannot be economically mined now or in the future, we may need to seek new
non-reserve coal or reserves for development or other alternatives to support
our growth strategy.

         In addition, our capital resources may limit us from further developing
our existing coal reserves and non-reserve coal, finding and developing new
non-reserve coal that can be economically mined or acquiring new coal mines,
reserves and non-reserve coal.

WE CANNOT BE CERTAIN OF THE TRUE EXTENT OF OUR COAL RESERVES BECAUSE THEY ARE
BASED ON ESTIMATES OF ECONOMICALLY RECOVERABLE COAL.

         Our stated coal reserves, including the coal reserves recently acquired
by SCAI from Fording, are based on estimates. Estimates of coal reserves and
future net cash flows derivable from them may differ from actual results,
depending on a number of variables and assumptions, which include:

         -        historical coal recovery from an area compared with coal
                  recovery from other areas;

         -        coal seam thickness and the amount of rock and soil overlying
                  the coal deposit;

         -        availability of labor, equipment, and services required to
                  mine and deliver coal to our customers;

         -        effects of legislation and regulations; and

         -        future coal prices, operating costs, development and
                  reclamation costs.

         For these reasons, (1) estimates of economically recoverable quantities
of coal, (2) classifications of reserves based on probability of recovery and
(3) estimates of future net cash flows expected from reserves prepared by
different engineers or by the same engineers at different times may vary
substantially. Actual coal tonnage recovered from identified reserves and the
revenues, the mining costs and capital expenditures related to such tonnage may
be materially different from estimates, which may adversely affect our operating
results. Information regarding the coal reserves recently acquired by SCAI from
Fording has been derived from public information prepared by and released by
Fording, as at December 31, 2002. We have not yet evaluated the coal reserves
acquired by SCAI from Fording or the accuracy of Fording's public information
and, in the future, our estimates of coal reserves and future net cash flows
derivable from them may differ from the public information.

GOVERNMENT REGULATIONS COULD INCREASE OUR COSTS OF DOING BUSINESS.

         We are subject to extensive mining, environmental and health and safety
laws and regulations, including those relating to:

         -        conflicts with other land users such as recreational,
                  agricultural, forestry, and oil and gas users;

         -        employee health and safety;

         -        mining and other permit and license requirements;

         -        the protection of the environment, including air quality,
                  water pollution and other discharges of materials into the
                  environment, groundwater quality and availability, plant and
                  wildlife protection, and reclamation and restoration of mining
                  properties; and

         -        land use fees and royalties.





                                       13
<PAGE>

         Numerous government permits, licenses and other approvals are required
for mining. We may be required to prepare and present to government authorities
data pertaining to the impact that any proposed exploration or production of
coal may have on the environment, as well as efficient resource utilization,
multiple land use issues and other factors our operations may influence. The
process for obtaining environmental approvals, including the completion of any
necessary environmental impact assessments, can be lengthy, subject to public
input, controversial and expensive. Furthermore, changes in legislation,
regulations or their enforcement may materially adversely affect our mining
operations or our costs. We could experience difficulty and significantly
increased costs to meet new or amended environmental legislation, to obtain
approvals or to comply with the conditions imposed in new or revised approvals.

         Our failure to comply with legislation and regulations could subject us
to significant liabilities, including fines, other penalties and clean-up orders
or require us to reduce production.

GLOBAL WARMING CONCERNS AND THE KYOTO PROTOCOL MAY DISCOURAGE OR RESTRICT OUR
CUSTOMERS' USE OF COAL.

           Public and government concern over the addition of greenhouse gases
to the atmosphere may restrict the burning of coal or may cause coal consumers
to control the emission of greenhouse gases through investments in control
technologies. Canada, as a party to the United Nations Framework Convention on
Climate Change (the "Convention") and the subsequent implementation protocol
that was adopted in 1997 (known as the Kyoto Protocol), has stated its intention
to reduce overall greenhouse gas emissions to 94% of 1990 levels by no later
than 2012. One of the greenhouse gases of concern is carbon dioxide that is
produced from the burning of fossil fuels including coal. Many other countries
are also a party to the Convention and the Kyoto Protocol and have similar
intentions to limit greenhouse gas emissions. In July 2001, an agreement was
reached in Bonn, Germany among approximately 180 countries, which potentially
will lead to ratification of the Kyoto Protocol by several countries. In
December 2002, the Government of Canada ratified the Kyoto Protocol. The
Government of Canada has not yet released regulations relating to the Kyoto
Protocol.

           The Province of Alberta has recently proposed the Climate Change and
Emissions Management Act ("Bill 37"). If passed, Bill 37 would establish a
framework for management of greenhouse gases in the Province of Alberta. Bill 37
contemplates regulations regarding emissions offsets and targets for emissions
reductions of specified gases, for different sectors of the Alberta economy.
Bill 37 proposes sectoral agreements with industry, which may include minimum
energy efficiency levels and maximum levels of emissions of specified gases per
unit of energy input or output.

           If the power plants that we supply are subjected to any potential
requirement to reduce carbon dioxide emissions, then our customers may seek to
reduce the amount of coal consumed, introduce new technology that would allow
for reduction of carbon dioxide emissions, engage in programs that would permit
continued use of coal by paying for the right to do so or reduce carbon dioxide
emissions in other areas of their businesses. Any reduction of our customers'
use of coal, and any restrictions on the burning of coal, will negatively impact
our revenues and net earnings as well as our ability to extend existing
contracts or to grow through new coal sales.

COAL MINING IS SUBJECT TO INHERENT RISKS AND IS DEPENDENT UPON MANY FACTORS AND
CONDITIONS BEYOND OUR CONTROL, WHICH MAY ADVERSELY AFFECT OUR PRODUCTIVITY AND
OUR FINANCIAL POSITION.

         Coal mining is subject to inherent risks and is dependent upon a number
of conditions beyond our control, which can affect our costs at particular
mines, including for the delivery of coal. These risks and conditions include:

         -        inclement weather conditions;

         -        unexpected equipment or maintenance problems;



                                       14
<PAGE>

         -        variations in geological conditions;

         -        natural disasters;

         -        environmental hazards;

         -        industrial accidents;

         -        explosions caused by the ignition of coal dust or other
                  explosive materials at our mine sites; and

         -        fires caused by the spontaneous combustion of coal.

         These risks and conditions could result in damage to or the destruction
of mineral properties or production facilities, personal injury or death,
environmental damage, delays in mining, monetary losses and legal liability.
Insurance coverage may not be available or sufficient to fully cover claims that
may arise from the above conditions. We currently have insurance coverage that
includes $1 billion of property loss insurance, subject to a deductible level of
$5 million per incident (except where lower deductible levels are required
pursuant to our contracts), and $100 million of general liability insurance.
These policies contain customary exclusions and deductibles and may not provide
coverage in every particular case. We cannot be sure that such insurance
coverage will be available to us throughout the term of the Senior Notes. We
have investigated the availability of insurance to cover environmental spills or
accidents and have found the cost of such policies and restrictions contained in
such policies inappropriate given the nature of the risks we face. Over the past
five years, we have been adversely affected by some of these conditions, which
were not covered by insurance. For example, we expended extra cash resources on
our Line Creek mine conveyor system due to the failure of the equipment to meet
original specifications. Any of these risks or conditions could have a negative
impact on the cash available from our operations and our financial position.

WORK STOPPAGES OR OTHER LABOR DISRUPTIONS AT OUR OPERATIONS OR THOSE OF OUR KEY
CUSTOMERS OR SERVICE PROVIDERS COULD HAVE AN ADVERSE EFFECT ON OUR PROFITABILITY
AND FINANCIAL CONDITION.

         Most of our mining operations are unionized, and we have a risk of work
stoppages as the result of a strike or lockout. Any work stoppage could have a
material adverse effect on our financial condition and results of operations. In
addition, any work stoppage or labor disruption at our key customers or service
providers could impede our ability to supply coal, to receive critical equipment
and supplies for our mining operations or to collect payment from customers
encountering labor disruptions. This may increase our costs or impede our
ability to operate one or more of our mining operations.

COMPETITION COULD PUT DOWNWARD PRESSURE ON EXPORT COAL PRICES, REDUCING OUR
PROFITABILITY, OR COULD CAUSE US TO LOSE CUSTOMERS.

         The export coal industry is highly competitive, typically with numerous
producers competing in each coal consuming region or the international export
market. Historically, we have competed with large and small producers within a
region. Because of significant consolidation in the coal industry over the past
few years, some of our competitors have significantly increased their scale and
have a greater ability to influence pricing and be long-term suppliers of
competitively priced coals. In addition, many of our competitors can compete
more effectively than we do because they have significantly greater financial
resources than we do. Competitive factors could put downward pressure on export
coal prices or result in the loss of customers. We have recently reduced our
exposure to competition in export coal markets by transferring our metallurgical
coal operations to Fording and reducing or indefinitely suspending production at
our export thermal coal operations.




                                       15
<PAGE>

CURRENCY EXCHANGE RATE FLUCTUATIONS COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION.

         We incur costs and expenses primarily in Canadian dollars; however,
substantially all of our revenue from export coal sales, which amounted to $238
million during 2002, is denominated in United States dollars. If the Canadian
dollar gains value against the United States dollar while other factors remain
constant, we will see a relative decrease in revenue and our cash flow will be
diminished. Adverse changes in the United States dollar/Canadian dollar exchange
rate could make some of our mines uneconomic to operate and could make it
necessary for us to close them. Any such mine closures and the resulting closure
costs would reduce our cash flow from operations. Because we have recently
transferred our metallurgical coal operations to Fording and reduced or
indefinitely suspended production at our export thermal coal operations, our
revenues denominated in United States dollars will be significantly lower in the
future.

         If our competitors' currencies decline against the Canadian and United
States dollars, their competitive position in the marketplace may allow them to
offer lower prices to our customers. Furthermore, if the currencies of our
overseas customers were to significantly decline in value in comparison to the
United States dollar, those customers may seek decreased prices for the coal we
sell to them. Both of these factors could reduce our profitability or result in
a loss of coal sales. Because we have recently transferred our metallurgical
coal operations to Fording and reduced or indefinitely suspended production at
our export thermal coal operations, most of our competitors and customers will
be domestic and our risks related to the currencies used by export customers and
competitors will be significantly reduced.

         Our US$275 million of Senior Notes are denominated in United States
currency and we are obligated to make semi-annual interest payments in United
States currency. Upon maturity on October 15, 2011, we will be required to repay
the Senior Notes, in full, in United States currency. Because we have
significantly reduced our sources of United States currency, through the
transfer of our metallurgical coal operations to Fording and through the
reduction or indefinite suspension of production at our export thermal coal
operations, our exposure to fluctuations in the relative value of the United
States currency and the Canadian currency will be significantly greater in the
future. Any future decreases in the value of the Canadian currency relative to
United States currency will reduce our net earnings. For further information on
recent fluctuations between these currencies, please refer to page 9.

OUR ABILITY TO SELL COAL DEPENDS ON TRANSPORTATION BEING AVAILABLE AND
AFFORDABLE.

         We depend on rail and ship transportation to deliver coal to our export
customers, Ontario Power Generation, and other distant customers. For our export
sales, we pay for rail haulage of coal to the west coast of Canada and the port
cost of loading coal onto ships. These transportation costs are a significant
component of the total cost of supplying coal to these customers. Any increase
in the costs of transporting our coal, whether borne by our customers or us
could adversely affect our competitive position in specific market regions and
our profitability from sales in that region. Disruption of rail and port
services could impair our ability to supply coal to our customers thereby
resulting in lost sales and reduced profitability. The Line Creek, Luscar, Coal
Valley, Obed Mountain and Bienfait mines are dependent upon third party rail
carriers for delivery of coal and only the Bienfait mine is served by more than
one carrier. Since December 31, 2002 we have transferred the Line Creek and
Luscar mines to Fording, reduced production at our Coal Valley mine, and
indefinitely suspended operations at our Obed Mountain mine. We also intend to
acquire the Prairie Assets from SCP II, which include operations that are not
dependent upon transportation to distant customers.

ADVERSE ENVIRONMENTAL IMPACT FROM COAL MINING AND COAL USE MAY LEAD TO INCREASED
COSTS TO OUR CUSTOMERS AND US.

         Coal contains elements including sulfur, mercury, arsenic, nitrogen,
cadmium, uranium and selenium. Depending on the concentration of these elements,
their release into the environment through the mining process or through the
consumption of coal may have an adverse impact on the environment. The
unauthorized release of regulated materials on or from properties owned, leased,
occupied or used



                                       16
<PAGE>

by us could result in penalties, including potentially significant fines, and
governmental orders requiring the investigation, control and remediation of
these releases. The release of these materials could have a material adverse
effect on our ability to continue mine operations or to sell our interest in our
property or could lead to claims by third parties. Our customers are subject to
similar regulations. In addition, environmental regulations may restrict our
customers' ability to burn coal. As a result, such customers may reduce their
use of coal or need to invest in costly emission control technologies. For
example, the governments of Canada and the provinces have indicated that they
are considering regulatory and legislative changes to require coal-fired power
plants to reduce mercury emissions by as much as 90% in the future.

         Coal mines may harm the environment by contaminating waterways,
polluting ground water and creating unwanted dust or noise. Significant
sanctions could result from any of these events. Insurance against environmental
liability is generally not available within our industry. The cost to control or
remediate emissions and disturbances or the sanctions imposed as a result of
them may reduce our profitability or require us to reduce our coal production.

RECLAMATION AND MINE CLOSURE COSTS COULD ADVERSELY AFFECT OUR CASH FLOW FROM
OPERATIONS.

         We have accrued for the estimated costs of reclamation and mine
closing. The accrual for these costs is based upon government regulations in
effect at the time, our estimates of these costs, the timing of reclamation and
mine closure procedures. Changes in government regulations, cash costs or timing
of reclamation or mine closure procedures could result in adjustments to our
estimates. As a result, the accruals may need to be increased, reducing our
earnings. Actual cash costs may be greater than the estimated costs to complete
reclamation and mine closing procedures, which would negatively impact our
results of operations. During 2003, we intend to adopt CICA Handbook section
3110, which is similar to SFAS 143. As a result of adopting CICA Handbook
section 3110, we will significantly increase our accruals for reclamation and
mine closing costs to reflect the net present value of projected future cash
flows related to the reclamation and restoration of lands that we have disturbed
during mining. The adoption of CICA Handbook section 3110 will have an impact
upon our net earnings, both at the time of adoption and in future periods, but
will not have an impact upon our cash flows.

         In addition, we are required to provide financial security to
provincial authorities covering future reclamation costs. These financial
security requirements arise out of our obligation under provincial mining and
environmental legislation to reclaim lands that we disturb during mining. The
form of the security must be acceptable to the provincial governments.
Currently, we provide reclamation security by way of irrevocable letters of
credit issued under our new credit facility. For amounts outstanding under these
letters of credit, see "Item 10 - Additional Information - Material Contracts -
Bank Credit Facility". We may be unable to obtain adequate financial security in
the future or we may be required to replace our existing security with more
expensive forms of security, which might include cash deposits, which would
reduce our cash available for operations. If governmental regulations change in
a manner that significantly increases the costs associated with reclamation and
mine closure, it could materially reduce our results of operations and make
further development of existing and new mines less economically viable. For
example, the Saskatchewan government has legislated and is in the process of
implementing a system requiring security to be posted for mine reclamation
obligations based upon forecasted costs to reclaim disturbed lands. This
implementation will require us to provide additional reclamation security and
will reduce the capital available for other purposes. Our obligations to provide
reclamation security to the Alberta government may also increase in the future
if the government is successful in its initiative to require coal and other
industries to calculate reclamation security requirements based on contractor
rates rather than based upon our internal costs.

DEREGULATION IN THE ELECTRICITY INDUSTRY MAY ADVERSELY IMPACT OUR BUSINESS.

         A growing trend in many regions of North America is the deregulation of
the electricity industry, which may subject electricity generators, including
our customers, to increased competition and volatility in the revenues they
receive from sales of electricity. Affected utilities may seek to increase their
competitiveness by reducing the amounts they are willing to pay for coal
deliveries, being more



                                       17
<PAGE>

aggressive in negotiating new contracts with coal suppliers or attempting to
renegotiate coal prices and other terms in existing contracts. Additionally,
deregulation may make it more difficult for us to enter into new long-term
contracts with our electric utility customers, as these customers may become
more sensitive to long-term price or quantity commitments in a more competitive
environment.

         The Alberta electricity industry was deregulated as of January 1, 2001.
Electricity generation in the Province of Ontario was recently deregulated,
however, the government has introduced new regulations during November 2002 that
limit the price of electricity sold to residential users and certain commercial
users in that province. Electricity generation in the Province of Saskatchewan
is fully regulated. Any increased volatility of electricity prices and
uncertainty over electricity supplies brought on by deregulation may represent a
significant financial risk for our key customers which could adversely impact
our coal sales to affected customers.

WE REQUIRE HIGHLY SKILLED WORKERS TO OPERATE OUR MINES, AND WE COMPETE WITH
OTHER INDUSTRIES FOR THESE WORKERS.

         Our mining operations require employees with a high degree of technical
or professional skills, such as engineers, trades people and equipment
operators. We compete with other local industries, such as oil and gas or forest
products businesses, for these skilled workers. In the future, if we are unable
to find an adequate supply of skilled workers, a decrease in productivity or an
increase in costs will result which would have an adverse effect on our results
of operations and our financial condition.

OUR OPERATING EXPENSES COULD INCREASE SIGNIFICANTLY IF THE PRICE OF ELECTRICITY,
FUELS OR OTHER INPUTS INCREASES.

         We are a significant consumer of electricity, fuels and other inputs.
For example, a substantial portion of our major mining equipment and processing
plants is powered by electricity that we have to purchase from outside sources
at the Coal Valley, Obed Mountain and Bienfait mines. The electric utility
industry in Alberta was deregulated in January 2001 resulting in a significant
increase in our cost of electricity for 2001. Similarly, recent fluctuations in
crude oil and natural gas prices have affected our costs of diesel fuel and
natural gas. Although our mine-mouth contracts and contract mining agreements
have price escalation clauses that protect us from most cost increases, we are
not able to pass on cost increases to our export and other customers, which
could negatively impact our operating profits. Our exposure to increases in the
prices of electricity, fuels or other inputs will be significantly reduced as a
result of the recent transfer of our metallurgical coal operations to Fording
and our intention to acquire the Prairie Assets, where electricity, diesel fuel
and natural gas costs are recovered from the customer.

WE ARE CONTROLLED BY THE PARTNERS OF LUSCAR ENERGY PARTNERSHIP, WHOSE INTERESTS
MAY NOT BE ALIGNED WITH THE INTERESTS OF A HOLDER OF OUR SENIOR NOTES.

         LCIF owns all of our outstanding common stock and LCIF is 100% owned by
LEP. Sherritt and Teachers', in turn, control LEP. Accordingly, Sherritt and
Teachers' are able to elect the management committee of LEP, determine our
corporate and management policies and make decisions related to fundamental
corporate actions. LEP's interests, or the interests of Sherritt or Teachers',
may not be aligned with the interests of a holder of Senior Notes.

THE ABILITY TO ENFORCE CIVIL LIABILITIES IN CANADA MAY BE LIMITED.

         The guarantors and we are incorporated or established under the laws of
Canada or its provinces, and the laws of Canada or its provinces govern our
charters and material contracts. Substantially all of our assets are located in
Canada. All of the members of LEP's management committee, our directors,
officers, significant employees and the independent auditors named in this
annual report reside outside of the United States.




                                       18
<PAGE>

         It may not be possible, therefore, for investors to effect service of
process within the United States upon us, the guarantors or these individuals or
companies including with respect to matters arising under the United States
federal securities laws or to enforce judgments against them in United States
courts whether or not predicated upon the civil liability provisions under the
United States federal securities laws. Our Canadian counsel, Torys LLP, has
advised us that there is uncertainty as to the enforceability (1) in an original
action in Canadian courts of liabilities predicated solely upon United States
federal securities laws and (2) of judgments of United States courts obtained in
actions predicated upon the civil liability provisions of United States federal
securities laws in Canadian courts.

THE ASSERTION OF ABORIGINAL RIGHTS CLAIMS MAY IMPAIR OUR ABILITY TO FURTHER
DEVELOP EXISTING PROPERTIES OR TO ACQUIRE NEW PROPERTIES.

         Canadian courts have recognized that aboriginal peoples may continue to
have unenforced rights at law in respect of land used or occupied by their
ancestors where treaties have not been concluded to deal with those rights.
These rights may vary from limited rights of use for traditional purposes to a
right of aboriginal title and will depend upon, among other things, the nature
and extent of prior aboriginal use and occupation. The courts have encouraged
the federal and provincial governments and aboriginal peoples to resolve rights
claims through negotiation of treaties.

                 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

         This annual report contains forward-looking statements made pursuant to
the safe harbor provision of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are not based on historical facts, but
rather on our current expectations and our projections about future events,
including our current expectations regarding:

         -        the future demand for coal, coal prices and increases or
                  decreases of coal prices;

         -        the remaining life of coal reserves;

         -        our expectations of contract completions and renewals and the
                  results of contract terminations;

         -        our future profitability and capital needs, including capital
                  expenditures;

         -        the effect on us of new accounting releases;

         -        our expectations with respect to our intent to acquire SCAI
                  from SCP II during 2003 and the efficiencies and increased
                  profitability we expect will result from that acquisition;

         -        the benefits to be derived from the execution of our strategy;
                  and

         -        other future developments in our affairs or in our industry.

         These forward-looking statements generally can be identified by the use
of statements that include phrases such as "believe", "expect", "anticipate",
"intend", "plan", "likely", "will" or other similar words or phrases.

         Similarly, statements that describe our objectives, plans or goals are
or may be forward-looking statements. These forward-looking statements are
subject to risks, uncertainties and other factors that could cause our actual
results to differ materially from the future results expressed or implied by the
forward-looking statements. Any written and oral forward-looking statements made
by us or on our behalf are subject to such risks, uncertainties and other
factors, including the risk factors described in this annual report. In light of
these risks, uncertainties and assumptions, the forward-looking events




                                       19
<PAGE>

discussed in this annual report may not occur. The forward-looking statements
included in this annual report are made only as of the date of this annual
report.

ITEM 4     INFORMATION ON THE COMPANY


                                  OUR BUSINESS

                                    OVERVIEW

          We are the largest thermal coal producer in Canada, operating mines
that produce most of Canada's domestic thermal coal production. After giving
effect to the disposition of our metallurgical coal operations and the expected
acquisition of the Prairie Assets from SCP II during 2003, we will own and
operate eight surface mines, including one mine in which we have a 50% ownership
interest, and we will operate two surface mines under a mining contract with an
electric utility. Together, these mines produced almost 40 million tonnes of
coal during 2002, making us one of the largest coal producers in North America.
All of our coal production and coal reserves at our existing mines are less than
one percent sulfur by weight on average, which is considered to be low-sulfur
coal. Many utilities use low-sulfur coal to comply with environmental
regulations for sulfur-dioxide emissions. We generate a substantial portion of
our revenue from long-term contracts with ATCO Electric, EPCOR, SaskPower and
TransAlta, the major electricity generators in Alberta and Saskatchewan. We
supply these contracts from our mine-mouth operations, which are located in
close proximity to the coal-fired power plants operated by these customers.

         We have proven and probable coal reserves in western Canada that we
believe will last for many years based on 2002 production from our owned mines.
During 2003, we intend to acquire the Prairie Assets from SCP II, which include
additional proven and probable coal reserves in Alberta. We expect that the
acquisition of the Prairie Assets will enhance our position as a key supplier of
energy in domestic markets. We believe that there will be an increase in demand
for coal as a result of various factors, including a continued increase in the
demand for electricity. We believe that utilities will build new coal-fired
power plants and expand existing plants, and that industrial users will switch
from natural gas to coal in response to the greater price stability and
abundance of coal.

                                   OUR HISTORY

         We began operations in 1911 as Mountain Park Coal Company Limited,
which initially supplied coal to the domestic railway, industrial and home
markets. We began supplying power plants in Alberta in 1949 and in Saskatchewan
in 1971. We entered the export metallurgical coal market in 1970 and the export
thermal coal market in 1978. We began supplying coal to electric utilities in
southern Ontario in 1978 and in northwestern Ontario in 1981. Since then, we
have expanded coal sales to our diverse markets through new mine developments
and acquisitions. Prior to 1996, we were a private company. In 1996, we were
acquired by LCIF in connection with an initial public offering of the units of
LCIF that were traded publicly on the Toronto Stock Exchange.

         To continue our growth and to increase our coal assets, LCIF, our
parent, acquired Manalta Coal Income Trust ("MCIT") in September 1998 for
aggregate consideration of $562.6 million. MCIT's wholly owned subsidiary,
Manalta Coal Ltd., ("MCL") was our primary competitor in our Canadian markets
and also participated in export markets. LCL was incorporated at that time to
hold the common shares of the entity resulting from the amalgamation of LL and
MCL. The Manalta acquisition substantially increased our scale, market share and
low-sulfur coal reserves. Primarily as a result of the Manalta acquisition, from
1997 to 1999 our annual coal sales increased by approximately 25.0 million
tonnes, our reserve base increased by approximately 468.0 million tonnes and we
became the largest coal producer in Canada. Several of Manalta's mining
operations were adjacent to our existing operations, and by combining them we
were able to effect significant operating cost synergy as well as to reduce
corporate overhead costs.




                                       20
<PAGE>

         During 2001, pursuant to a take-over bid and a secondary-stage
compulsory acquisition, LEP acquired all the outstanding securities of Luscar
for total consideration of approximately $900 million, comprised of
approximately $472 million of equity contributed by LEP's partners and the
assumption of $428 million of long-term debt. LEP acquired control of LCIF and
LCL on May 11, 2001 and now holds all the issued capital of LCIF, which in turn
holds all the issued capital of LCL and Luscar Ltd. In October 2001, as part of
a refinancing, LCL issued U.S.$275 million of 9.75% Senior Notes due October 15,
2011, which are guaranteed as to principal and interest by LEP. We used the
proceeds from the Senior Notes to repay existing bank indebtedness and to
increase our cash position to fund operations and future growth. At the same
time, we negotiated the $100 million Senior Credit Facility.

         On February 28, 2003, under the terms of the Combination Agreement, we
transferred substantially all of our metallurgical coal assets to Fording. These
metallurgical coal assets included our 50% interest in each of the Line Creek
mine, the Luscar mine and the undeveloped Cheviot deposit, as well as our 23.2%
interest in Neptune and certain non-producing metallurgical coal properties. We
exchanged our 50% interest in Line Creek mine for 2,979,000 Fording Units and
distributed the remaining metallurgical coal assets to our partners, who
subsequently received 221,000 Fording Units in exchange for these metallurgical
coal assets. We retained certain land reclamation and severance obligations
related to the closure of the Luscar mine, as well as an obligation to fund,
over a five year period, certain defined benefit pension plan deficits assumed
by Fording. We also received cash payments from Fording in respect of accounts
receivable and inventories, net of accounts payable and accrued charges.

         Also under the Combination Agreement, our affiliate, SCAI, acquired
Fording's Prairie Assets, which include a 50% joint venture interest in the
Genesee mine, the Highvale-Whitewood mining contract, certain coal and potash
royalty agreements, and substantial non-producing coal and mineral properties.
Since February 28, 2003, we have managed and operated the Prairie Assets on
behalf of SCAI under a management agreement. On May 8, 2003 we announced our
intention to acquire the Prairie Assets from our owners, subject to obtaining
certain consents from customers, at a fair value to be determined by an
independent valuator.

         This annual report discloses information regarding our former
metallurgical coal assets, to the extent necessary to describe us as of December
31, 2002 when we still owned these assets. We also include information with
respect to the Prairie Assets, even though we did not manage or operate these
assets as of December 31, 2002, to better describe our operations after we
acquire the Prairie Assets from SCP II during 2003. We have obtained most of the
information regarding the Prairie Assets, including coal reserve information,
from public information prepared and released by Fording, from whom our owners
acquired the Prairie Assets on February 28, 2003. Although we have no knowledge
that any of Fording's public information is untrue or incomplete, we have not
independently verified this information. Actual information, including reserve
information, may differ from Fording's public information.

                              CORPORATE INFORMATION

         The following diagram illustrates our current corporate structure
excluding SCAI, which is indirectly held by our owners through SCP II, pending
completion of our announced intention to acquire SCAI from SCP II.







                                       21
<PAGE>
      Luscar Energy
       Partnership-------------------------------------
            |                                         |
            |                                         |
            |                                         |
            |                                         |
            |                                         |
            |                                         |
 Luscar Coal Income Fund                          Guarantees
            |                                         |
            |                                         |
            |                                         |
            |                                         |
            |                                         |
            |                                        \|/
     Luscar Coal Ltd.                            Senior Notes
            |                                Bank Credit Facility
            |                                        /|\
            |                                         |
            |                                         |
            |                                         |
            |                                         |
            |                                         |
       Luscar Ltd.----------------------------->  Guarantees
            |                                        /|\
            |                                         |
            |                                         |
   3718492 Canada Inc.---------------------------------


         LEP is a general partnership that was formed by wholly-owned
subsidiaries of each of Ontario Teachers' Pension Plan Board and Sherritt
International Corporation for the purpose of acquiring LCIF. Teachers' is a
corporation established by legislation of the Province of Ontario and is charged
with administering the second largest pension fund in Canada, with total assets
as at December 31, 2002 exceeding $66 billion. Sherritt is a diversified
resource company, with assets of over $2 billion related to its operations in
Canada, Cuba and internationally. Sherritt's main business segments include
coal, metals, oil and gas and power generation. Sherritt also has a number of
smaller investments including cellular telecommunications, soybean-based food
processing, tourism and agriculture. Sherritt is a public company listed on the
Toronto Stock Exchange under the symbol "S" and is incorporated under the laws
of New Brunswick, Canada.

         Under the terms of the partnership agreement, Sherritt appoints three
members to LEP's management committee and Teachers' appoints one member. LEP's
management committee makes its decisions by majority action that must include,
in every case, the approval of the Teachers' appointee.

          LEP and LCIF, which are guarantors of the Senior Notes, are holding
companies with no independent assets or operations other than investing cash on
hand and their investments in our subsidiaries and us. We are a holding company
that owns all of the common shares of Luscar Ltd. Our operations are conducted
by Luscar Ltd., which guarantees the Senior Notes on a senior basis. SCP II owns
all of the share capital of SCAI, which holds the coal and mineral properties
previously owned by Fording, which are now operated by Luscar Ltd. on SCAI's
behalf. 3718492 Canada Inc. is a non-operating, wholly owned subsidiary of
Luscar Ltd. that holds a $61 million, non-interest bearing demand note issued by
Luscar Ltd.

         Our registered and principal offices are located at 1600 Oxford Tower,
10235--101 Street, Edmonton, Alberta, Canada, T5J 3G1. Our telephone number is
(780) 420-5810. The registered and principal offices of Luscar Coal Income Fund
are located at 1510 Oxford Tower, 10235--101 Street,





                                       22

<PAGE>



Edmonton, Alberta, Canada T5J 3G1. The registered and principal offices of
Luscar Energy Partnership are located at 1133 Yonge Street, Toronto, Ontario,
Canada, M4T 2Y7.

         Prior to the transfer of our metallurgical coal assets to Fording, we
sold both thermal and metallurgical coal in domestic and international markets.
Thermal coal accounted for approximately 93% of our 2002 sales tonnage, while
metallurgical coal accounted for 7%. We sell thermal coal primarily to Canadian
and foreign utilities for the generation of electricity. Thermal coal sales to
our Canadian utility customers, ATCO Electric, EPCOR, Ontario Power, SaskPower
and TransAlta, account for the majority of our domestic sales. Metallurgical
coal is primarily used to produce coke for the steel making process. Prior to
transferring our metallurgical coal assets to Fording, we sold metallurgical
coal to a diversified customer base in the Pacific Rim, South America, the
United States, Europe and Canada.

         Including the Genesee mine, which we intend to acquire from SCP II
during 2003, we generate a substantial portion of our revenue from long-term
contracts with ATCO Electric, EPCOR, SaskPower and TransAlta, the major
electricity generators in Alberta and Saskatchewan. The remaining terms of these
contracts range from 8 to more than 25 years. We service these contracts from
five of our mines, which are located in close proximity to the coal-fired power
plants operated by these customers. These mines, which we refer to as our
mine-mouth operations, are the sole coal suppliers to these power plants, and we
believe them to be the most economic source of coal for these plants given the
considerable distance from other producing coal mines. The mines that we operate
on a contract basis supply three power plants owned by TransAlta and are also
mine-mouth operations. Taken together, the power plants served by our mine-mouth
operations generated most of the electricity generated in Alberta and
Saskatchewan in 2002. We expect that these power plants will continue to operate
close to capacity, given the high demand for electricity and the low cost of
coal-fired electricity generation in these provinces.

                               BUSINESS STRENGTHS

         We believe that the following business strengths will allow us to
increase our production and profitability.

         LONG-TERM COAL SUPPLY CONTRACTS

         The mine-mouth operations at the Boundary Dam, Paintearth, Genesee,
Poplar River and Sheerness mines sell coal under long-term coal supply
contracts. These contracts have remaining terms ranging from 2009 until 2026,
except for at Genesee where the contract will continue until the entire coal
field is depleted. We generate a substantial portion of our operating profits
from these contracts and we believe these contracts will continue to provide us
with stable operating profits. Pricing in these contracts is adjusted annually
based on cost indices that relate to our mine-site costs, including labor, fuel,
maintenance and other factors. Pricing in these contracts is not subject to
fluctuations based on the prices of other coals, competing fuels or electricity.
These contracts specify minimum tonnage amounts that the utilities are required
to pay for or purchase, as well as, in some cases, fixed monthly revenues that
are unrelated to tonnage delivered. These factors result in stable domestic
revenues despite any delivery variations that might occur. These contracts also
enable us to pass through specified costs, such as municipal taxes, government
royalties and costs relating to legislative changes. Electricity to power our
major mining equipment at these mines is provided without charge by the utility
serviced. These mines are the sole suppliers to the adjacent power plants, which
are operated on a consistent, on-going basis. We expect that we will remain the
principal supplier to these power plants given our contracts, the proximity of
the mines to the power plants and the relatively high cost to transport coal.

         MARKET LEADER

         We are currently the largest thermal coal producer in Canada, producing
most of Canada's domestic thermal coal production, and one of the largest coal
producers in North America. We are the dominant coal supplier to electric
utilities in Alberta and Saskatchewan, and the coal we produced accounted for
most of the electricity generated in these provinces in 2002. We intend to
acquire the





                                       23

<PAGE>




Prairie Assets from SCP II, during 2003, which will solidify our position in
these markets. In addition, we are currently the sole coal supplier to the only
two coal-fired power plants in northwestern Ontario.

         ABUNDANT, STRATEGICALLY LOCATED COAL RESERVES

         We estimate that our proven and probable reserves will last for many
years based on 2002 production from the reserves we own. All of our coal
reserves and production consist of low-sulfur coal, the majority of which is
located in close proximity to major coal-fired power plants. The locations of
our operations and our undeveloped reserves and non-reserve coal are a key
strength in serving our existing customers and potential new customers. We
intend to acquire the Prairie Assets from SCP II, during 2003, which include
large quantities of reserve coal and non-reserve coal that we believe will
enhance our position as a key supplier of energy in our domestic markets. We
believe that the demand for coal will increase because of the announced
intention of some parties, including TransAlta Utilities and EPCOR, to construct
new coal-fired power plants and the expansion of existing plants to meet the
continued increase in the demand for electricity. EPCOR is currently
constructing a third generating unit at Genesee, which will be supplied from the
Genesee mine. We also believe industrial users will switch from natural gas to
coal in response to coal's greater price stability and abundance. For example,
we have reserves and non-reserve coal located near major oil producing
facilities which use large quantities of natural gas, which can be replaced by
coal, to produce heavy oil and oil from tar-sands. We are currently in
discussions with several potential customers seeking to switch from natural gas
to coal.

         LONG-TERM CUSTOMERS

         We supply coal to mine-mouth power plants under long-term coal supply
contracts and a contract mining agreement. We also sell lesser quantities of
thermal coal to other domestic markets. We have recently reduced our sales to
international markets, as a result of the transfer of our metallurgical coal
assets to Fording and by reducing production at our export thermal coal
operations. We believe that our long-term customer relationships are a
competitive advantage. We supply most of our sales volumes to customers that we
have served for more than 10 years. We have a consistent track record of
maintaining these relationships, including ATCO Electric (46 years), Ontario
Power Generation (28 years), SaskPower (33 years), and TransAlta (32 years).
Through our intended acquisition of a 50% interest in the Genesee mine from SCP
II during 2003, we expect to have a long-term relationship with EPCOR, our
customer and joint venture partner. Prior to exiting the metallurgical coal
business, we enjoyed long-term relationships with several of our major
customers, including Japanese steel mills (32 years), Pohang Iron and Steel (26
years) and U.S. steel mills (11 years).

         COST-EFFICIENT OPERATIONS

         We have been able to achieve operating efficiencies and cost reductions
by effective engineering, relying on the extensive mining experience and skills
of our employees, investing in mining equipment and achieving economies of
scale. At the mines we currently operate, we utilize draglines, which are the
lowest cost surface mining method for moving large quantities of soil, rock and
other material for short distances. We achieved significant synergy from the
acquisition in September 1998 of our then largest competitor in Canada, Manalta,
by combining adjacent mine operations and reducing overhead costs. To reduce our
costs, we coordinate the purchase of supplies and equipment across the company.
We are currently implementing an intensive cost-reduction and efficiency program
at all of our operations.

         Prior to transferring our metallurgical coal assets to Fording, we also
achieved operating efficiencies and cost reductions in our metallurgical coal
business. At our Line Creek mine, we installed an 11-kilometer coal conveyor
system, which significantly reduces transportation costs from the mine to the
processing plant by eliminating truck haulage. In addition, our 23.2% ownership
interest in Neptune Terminals (Canada) Ltd. at the Port of Vancouver, British
Columbia, provided us with low-cost port loading facilities for a portion of our
west coast export shipments.




                                       24


<PAGE>




         BENEFICIAL CANADIAN OPERATING ENVIRONMENT

         We are not subject to a number of significant liabilities that U.S.
coal producers face because all of our mines are located in Canada and are
surface mines. For example, we do not have the significant post-retirement
health and insurance obligations that our U.S. peers have. We make fixed
payments for workers' compensation to a government entity and do not have
variable liabilities in this area, unlike U.S. coal producers. We are not
required to make on-going payments to trusts or funds related to environmental,
health or retiree benefits. Because our labor unions are organized on a local
basis, we typically have a different union local at each mine. Consequently, we
do not face the risks of national labor actions or disruptions that many of our
U.S. peers have experienced. All of our mines are surface mines, which do not
have the safety and health issues that underground mines have, such as
black-lung, catastrophic collapse, underground explosions and fires.

         EXPERIENCED MANAGEMENT

         Our senior executives and operations managers have many years of
experience in the coal industry. They have been involved in establishing our
strong customer relationships, maintaining a record of safety and environmental
responsibility, developing several new mine operations and successfully
acquiring and integrating several mines into our operations.

         STRONG EQUITY OWNERS

         We expect to benefit from the experience of our equity owners,
Teachers' and Sherritt. Teachers' administers the second largest pension fund in
Canada, with more than $66 billion of total assets as at December 31, 2002.
Sherritt, with assets of over $2 billion, is a diversified Canadian resource
company that operates in Canada and internationally. Sherritt, directly and
through its subsidiaries, in addition to its ownership interest in us, owns (1)
50% of a vertically-integrated nickel/cobalt metals business, (2) an oil and gas
exploration, development and production business with reserves in Cuba and
elsewhere, (3) a power generation business, which finances, constructs and
operates gas-fired electricity generation plants in Cuba, and (4) interests in
cellular telecommunications, soybean-based food processing, agriculture and
tourism in Cuba.

         INNOVATIVE AND SUCCESSFUL RECLAMATION MANAGEMENT

         We are a leader in reclamation management and we restore mined lands to
a condition equal to or better than their condition prior to mining. We were the
first company to have fully reclaimed and certified coal mines in both
Saskatchewan and Alberta. We received the first certificate issued in Alberta
for the return of mined lands to commercial forest end use. Our success in the
area of reclamation has been recognized through several awards by government and
industry organizations. Before we transferred our metallurgical coal assets to
Fording, the Line Creek mine had received ten awards for outstanding achievement
for reclamation from the Government of British Columbia. Other awards include
Ammonite awards for reclamation achievement from the Alberta Chamber of
Resources for the Paintearth and Luscar mines, and the Order of the Bighorn
issued by the Government of Alberta for the conservation of bighorn sheep
habitat through reclamation. We believe that our success in this area will
assist us in obtaining the necessary public support and regulatory permits to
develop new operations in the future.

                                BUSINESS STRATEGY

         The key components of our strategy include:

         FOCUS ON THERMAL COAL PRODUCTION

         Because we recently transferred all of our metallurgical coal assets to
Fording and intend to acquire the Prairie Assets from SCP II during 2003,
substantially all of our future operations will be related to the production of
thermal coal. Our equipment and customer base at most of these operations are
very



                                       25



<PAGE>


similar. At these operations, we remove most of the overburden using efficient,
low-cost dragline equipment and deliver thermal coal to nearby power plants
operated by domestic electric utility customers. We expect that the similarity
between these operations will enable us to streamline our operations and share
best practices among our operations. We intend to implement efficiencies at all
of our operations, which we expect will improve the profitability of our
business.

         MAINTAIN AND EXPAND OUR CUSTOMER RELATIONSHIPS

         We intend to maintain our strong relationships with existing customers
and to establish strong relationships with new customers. With increased coal
production, a shift in export tonnage to domestic markets and the potential for
coal as an alternative fuel for industries that consume large quantities of
natural gas, the opportunity to establish long-term contractual relationships
with new customers has become a focus of our business development group. We plan
to continue to sell the majority of our production under long-term contracts or
to customers with whom we have developed, strong relationships in order to
reduce market risk and exposure to coal price fluctuations. We also seek to
market our coal in regions where we can effectively compete and provide value to
our customers.

         FURTHER INCREASE PROFITABILITY

         We intend to continue reducing operating costs and increasing
productivity by optimizing process flows and prudently investing in more
efficient production equipment. We work cooperatively with our employees to
effect productivity improvements by implementing innovative work practice and
cost-reduction programs. We are in the process of a mine-by-mine operational
review in order to maximize production efficiency and are implementing
contemporary integrated business systems that we expect will provide us with
better information to optimize our operations and maintenance costs. We are also
investing in equipment and technology to improve the productivity of our
equipment. For example, at some of our mines, we have installed a global
positioning system on our reclamation dozers, which has increased equipment
utilization and productivity. During 2002, we replaced most of the reclamation
equipment fleet at Boundary Dam mine to improve productivity and are currently
considering the replacement of the coal haulers at that mine.

         INCREASE COAL PRODUCTION

         We intend to increase our production by expanding our existing mines
and developing our additional coal reserves and non-reserve coal to take
advantage of the growing demand for coal that we expect to occur. We have
successfully developed new mines from our coal reserves and non-reserve coal,
and we have undeveloped coal reserves and non-reserve coal in western Canada. We
believe we will be able to develop new mines or extend existing operations by
utilizing these reserves and non-reserve coal. We believe that our holdings of
coal reserves and non-reserve coal are extensive and located strategically,
which we expect will give us a competitive advantage over competitors with
inferior holdings of undeveloped coal properties, particularly in our primary
markets in Alberta and Saskatchewan. We will prudently develop new mines only
after establishing customer commitments, securing appropriate financing and
obtaining regulatory approvals.

         REDIRECT EXPORT TONNAGE TO DOMESTIC MARKETS

         We believe that, over the long term, domestic coal prices will be less
volatile than those in the export coal market. We have recently reduced
production at our Coal Valley mine and indefinitely suspended operations at our
Obed Mountain mine. We intend to seek opportunities to market coal from these
mines to domestic markets and we expect that any such domestic sales will
generate higher margins on average over the long term than our export sales.




                                       26


<PAGE>


         PURSUE STRATEGIC ACQUISITIONS

         We intend to seek strategic coal investments to increase our existing
production. We will focus on acquiring low-cost, low-sulfur coal reserves. We
have experience at successfully integrating acquired coal mine operations and
realizing synergy. The 1998 acquisition of Manalta increased our annual coal
sales by approximately 25 million tonnes; resulted in significant cost
efficiencies; and diversified our customer base. We acquired two undeveloped
coal properties, the Camrose-Ryley property in late 2000, and in early 2001, the
Judy Creek property, both in north-central Alberta. During 2003, we intend to
acquire the Prairie Assets from SCP II, including a 50% interest in the Genesee
mine, a contract mining agreement for the Highvale and Whitewood mines, and an
extensive portfolio of coal properties with large quantities of reserves and
non-reserve coal. We believe that these properties could be developed to supply
coal to potential new mine-mouth power plants or existing nearby industrial
operations seeking a long-term, low-cost fuel source.



                               COAL CLASSIFICATION

         The important characteristics of coal include heat content, sulfur
content and suitability for use in the making of steel. Heat content, or the
amount of energy in coal, is commonly measured in Btu per pound or KJ/kg. Coal
is generally classified according to its heat content as either lignite,
bituminous, subbituminous or anthracite. Lignite has the lowest heat content and
anthracite the highest. Most thermal coals are used primarily for their heating
characteristics in the production of electricity, steam and process heat.

         Lignite coal is a brownish-black coal with a heat value that generally
ranges from 6,300 to 8,300 Btu per pound. In Canada, lignite coal is mined
mainly in Saskatchewan and is primarily used by power plants located near the
mine. Our Boundary Dam, Poplar River and Bienfait mines produce lignite coal.

         Subbituminous coal is a dull black coal with a heat value that ranges
from approximately 8,300 to 11,500 Btu per pound. In Canada, this coal is mined
principally in Alberta. Electric utilities and some industrial consumers use
subbituminous coal almost exclusively. The Paintearth, Sheerness, Genesee,
Whitewood and Highvale mines produce subbituminous coal.

         Bituminous coal is a soft black coal with a heat value that ranges from
10,500 to 14,000 Btu per pound. Canadian bituminous coal is primarily mined in
the Rocky Mountains and adjacent foothills in Alberta and British Columbia.
Electric utilities and industrial plants use bituminous thermal coal, while
steel producers use bituminous metallurgical coal. The heat values of bituminous
coal are high enough to make it economic to transport it to distant markets. The
Coal Valley, Line Creek, and Obed Mountain mines produce bituminous thermal
coal, and the Line Creek and Luscar mines, which we have recently transferred to
Fording, produce bituminous metallurgical coal.

         Anthracite coal is a hard coal with a heat value that can be as high as
15,000 Btu per pound. Anthracite deposits are found in British Columbia, but are
not currently being mined. Anthracite is used primarily for industrial and home
heating purposes. We do not have any anthracite coal reserves.

         Certain types of bituminous coals are also classified as metallurgical
coals. Metallurgical coal that is used primarily for its chemical, physical and
heating characteristics is an important ingredient in the steel manufacturing
process and is typically sold at higher prices than thermal coal due to its
special characteristics. Metallurgical coal is less abundant than thermal coal
and is produced for export primarily in Australia, Canada, the United States and
China. Metallurgical coal is generally higher in carbon content and calorific
value and lower in moisture content than thermal coal.

         Sulfur content is another important characteristic of coal. Coal
combustion produces sulfur dioxide, the amount of which varies depending on the
concentration of sulfur in the coal and the manner




                                       27


<PAGE>



in which coal is burned. Due to restrictive environmental regulations regarding
sulfur dioxide emissions, coal is commonly described with reference to its
sulfur content. We refer to coal that is less than 1% sulfur by weight as
low-sulfur coal, and all of our coal meets this criteria. Utilities are often
confronted with the decision as to how to control sulfur emissions. They can
burn low-sulfur coal or use scrubbing technology, which removes a substantial
portion of the sulfur from coal during the burning process. Scrubbing technology
requires substantial capital costs, particularly for existing power plants. We
expect increasing demand for low-sulfur coal in many regions, as utilities are
increasingly required to operate within environmental guidelines for sulfur
dioxide emissions.

                                 MINING METHODS

         Coal is mined using either surface or underground methods. The method
used depends upon several factors, including the proximity of the coal seam to
the earth's surface and the geology of the surrounding area. In general, surface
techniques are employed when a coal seam is within 200 feet of the earth's
surface, and underground techniques are used for deeper seams. All coal mining
techniques are capital intensive. However, technological improvements, such as
larger capacity draglines, electric shovels and haul trucks, have resulted in
increased productivity.

         Substantially all coal production in Canada is derived from surface
mines. All of our mines are surface mines. It is generally safer, easier and
often more cost efficient to mine coal seams that are located close to the
surface than underground seams. Also, surface mining generally has a higher coal
recovery percentage (85 to 95%) than underground mining (50 to 60%).

         Surface mining primarily consists of moving the material on top of the
coal, called overburden, with large, mobile earth-moving equipment. The primary
surface mining methods are dragline and truck/shovel mining, with the optimal
method chosen based on the geological conditions, amount of overburden to be
removed, local topography and the configuration of the coal seam. Dragline
mining is typically better for the flat-lying, shallow coal seams found on the
prairies or in gentle topography, while truck/shovel mining is typically better
for shallow coal seams in hilly or mountainous terrain. Once uncovered, the coal
is loaded into haul trucks or onto overland conveyors for transportation
directly to customers or to processing and/or loading facilities. The site is
then backfilled with the overburden, contoured and otherwise restored to its
approximate original condition, a process known as reclamation. In Canada,
mining and reclamation are regulated by provincial law, which requires that the
land be reclaimed to a condition as good as or better than its undisturbed
condition.

         We use dragline mining at all of our mines. This method uses large
capacity electric-powered draglines to remove the overburden in long, narrow
pits. First, mobile equipment removes the topsoil and subsoil, before the
dragline removes the remaining overburden. Electric shovels or other earth
moving equipment then load the exposed coal into haul trucks. As the dragline
moves along the pit, the overburden is deposited in a previously mined portion
of the pit to begin the reclamation process. Earthmoving equipment is then used
to flatten and contour the land and to replace the subsoil and topsoil that was
previously moved. Ultimately, the land is seeded with crops or planted with
trees.

         Truck/shovel mining is used at the Line Creek and Luscar mines. The
Coal Valley and Obed Mountain mines have also used truck/shovel mining in the
past, however this equipment has been idled and these mines currently use only
dragline mining. This method uses large electric- or diesel-powered shovels to
remove the overburden and, often along with other equipment, to load the coal
into haul trucks. First, topsoil, subsoil and any timber are removed. The
overburden is then drilled and fractured with explosives. The shovels or other
earthmoving equipment load the overburden into haul trucks for transportation to
a previously mined pit or a dump area. The equipment then loads the exposed coal
into haul trucks. The mining continues downward until all the economically
recoverable coal is mined. We reclaim the pit by filling it with waste materials
from a nearby pit, contouring the land, and replacing subsoil and topsoil.
Ultimately, the land is planted with grasses or trees. Alternatively, the pit
may be allowed to fill with water and reclaimed as a lake to provide a
recreational area or new fish habitat.



                                       28


<PAGE>


                          COAL PREPARATION AND BLENDING

         Depending on coal quality and customer requirements, raw coal may be
shipped directly from the mine to the customer or to a processing plant. Coal
that is destined for a distant market is generally sent to a processing plant to
increase its heat value and consistency by removing impurities and to more
exactly match customer specifications. Coal processing entails an additional
expense but results in a higher-value product. The Line Creek, Luscar, Coal
Valley and Obed Mountain mines operate processing plants. At the Bienfait mine,
we operate a processing plant that crushes and sizes the coal to customer
specifications.

                               COAL TRANSPORTATION

         At Paintearth, Boundary Dam, Sheerness, Genesee, Highvale and Whitewood
mines, trucks transport coal directly from the mine to the adjacent power
plants. A short haul railroad that we own transports coal from our Poplar River
mine to the near-by power plant. Other than at these mine-mouth operations, we
generally sell coal to domestic customers free on board rail at the mine, and
the customer typically bears the transportation costs.

         Until recently, we sold metallurgical coal from our Line Creek and
Luscar mines to U.S. or eastern Canadian steelmakers either at the customer's
plant site or, in some cases, free on board at Thunder Bay Terminals. We
continue to sell lesser quantities of thermal coal by rail to both domestic and
international customers. We do not incur transportation costs for most of the
domestic thermal coal we ship by rail, as our customers arrange for their own
transportation. For the lesser quantities of thermal coal that we ship for
export, we bear the freight costs to the port and the customer bears any
additional freight costs to move the coal to its facility. We usually sell
export coal free on board vessel at the loading port. We are responsible for
rail shipping and loading charges and the customer pays the ocean freight. The
majority of our third-party rail transportation is provided under contract.
Following the disposition of our metallurgical coal assets and the indefinite
suspension of operations at Obed Mountain mine, we now have only two major rail
transportation contracts, which will expire on March 31, 2004. Our rail
transportation contracts for our former metallurgical coal operations were
assumed by Fording.

         The coal we transport by ship is loaded by bulk-products terminals on
the west coast of Canada and on Lake Superior, primarily pursuant to long-term
contracts. Until February 28, 2003, we owned a 23.2% interest in Neptune Bulk
Terminals (Canada) Ltd., Port of Vancouver, British Columbia, with which we had
a long-term renewable coal handling agreement that permitted us to process coal
through the terminal at cost. This ownership interest provided us with a
competitive advantage for a portion of our west coast export coal shipments. For
eastbound metallurgical shipments, we had a contract with Thunder Bay Terminals
Ltd., which was renewed annually. For westbound metallurgical shipments, we had
contracts with Westshore to handle our terminal requirements at commercial rates
to the extent we were unable to use Neptune for these purposes.

         Going forward, we will continue to have access to Neptune under a
subcontract with Fording, which will enable us to ship thermal coal through
Neptune, at cost, to the extent permitted by our contract with Westshore, which
expires on March 31, 2017. Our contract with Westshore limits our ability to
ship coal through other facilities until annual shipments through Westshore
exceed 1.4 million tonnes.



                                MINING OPERATIONS


COAL INDUSTRY AND OVERVIEW

         Coal is the world's most abundant fossil fuel and is more evenly
distributed throughout the world than other fossil fuels. The World Coal
institute estimates that world production of coal in 2001 was




                                       29


<PAGE>



approximately 4.7 billion tonnes. Although 87% of world coal production is
consumed in the country in which it is produced, the remaining 13% represents
one of the largest volumes of world trade for a single commodity. Coal that is
sold in the export markets is typically of higher value than coal sold in
regional markets due to the fact that the cost of transporting coal from mine to
customer can be large relative to the value of the coal itself. We supply
several regional markets in Canada with limited competition from other coal
producers, and we supply export markets in competition with other international
producers. Other energy sources including, natural gas, oil, nuclear, wind and
water are also used to generate electricity and compete indirectly with coal.

         Many countries in the world do not have sufficient domestic coal
supplies for power generation or for steel production and consequently import
coal by means of ocean-going vessels. Among the largest importers of coal are
Japan, Korea, other Pacific Rim countries, South America and Europe. Major
coal-supplying countries to this seaborne trade are Australia, South Africa,
China, Indonesia and the United States. Competition is on the basis of price,
quality and long-term deliverability to these markets. Large international
mining companies that can supply multiple types of coal from several countries
are increasingly dominating markets. Major international coal producers include
BHP Billiton/Mitsubishi, China National Coal, Anglo American, Rio Tinto,
Glencore International AG and MIM Holdings. We exported metallurgical coal from
1970 until February 28, 2003 and have exported thermal coal since 1978. Although
we are a relatively small player in the international markets, we provide
diversity of supply and reliable coal quality to these markets.

         During 2002, we supplied metallurgical coal to steel makers in the
Great Lakes area of the United States and Canada, which have been traditionally
supplied by United States coal producers. Despite the long distance, we offered
competitively priced coal, in part due to specific metallurgical characteristics
of our coal that are required by steel makers, the low foreign exchange value of
the Canadian currency and the depletion of comparable United States coal
supplies.

         SEABORNE COAL MARKETS

         The worldwide use of coal has grown in response to general economic
growth and the needs of developing countries for readily accessible fuels. The
following table sets forth the world seaborne trade of coal for the five years,
1998 through 2002:
<TABLE>
<CAPTION>
                                                                  WORLD SEABORNE TRADE(1)
                                            -------------------------------------------------------------------
                                                1998          1999         2000          2001          2002
                                            ------------  ------------ ------------  ------------  ------------
                                                                   (millions of tonnes)
<S>                                        <C>           <C>          <C>           <C>           <C>
Metallurgical (2).........................           177           173          179           190           177
Thermal...................................           295           308          340           383           403
                                            ------------  ------------ ------------  ------------  ------------
Total.....................................           472           481          519           573           580
                                            ============  ============ ============  ============  ============
</TABLE>

(1) SSY Consultancy Research Ltd. (1998-2000), Barlow Jonker Pty, Ltd.
    (2001-2002).
(2) Includes coking and pulverized coal injection coals.

         Internationally, seaborne and other export markets accounted for
approximately 625 million tonnes of coal in 2001, according to the Energy
Information Administration, or approximately 10% of world production. The bulk
of export coal is delivered to customers by ship (573 million tonnes in 2001 and
580 million tonnes in 2002). The seaborne coal export market represents one of
the largest volumes of world trade for a single commodity. The largest coal
importers are western Europe, Japan, South Korea, other Pacific Rim countries
and South America.

         Prices for export coal vary according to coal quality, regional supply
and demand and transportation costs. Japanese electric utilities and steel
makers, which are large importers of coal, traditionally establish benchmark or
reference prices. However, actual pricing varies and is dependent on the origin
of the coal, quality and the specific logistics and commercial considerations of
the particular buyer and seller.




                                       30


<PAGE>


         From 1993 to 2002, the prices for export coal delivered to Japan were
as follows:
<TABLE>
<CAPTION>
                                                          JAPANESE COAL PRICING
                         --------------------------------------------------------------------------------------
                           1993    1994     1995     1996     1997    1998     1999     2000     2001     2002
                         -------  -------  ------- -------  -------  -------  -------  ------- -------  -------
                                          (U.S.$ per tonne for fiscal years beginning April 1)
<S>                     <C>      <C>      <C>     <C>      <C>      <C>      <C>      <C>      <C>       <C>
  Metallurgical (1)....    49.30    45.45    51.10   53.30    52.80    50.15    41.10    39.00   42.15   NA(3)
  Thermal (2)..........    36.35    34.35    40.30   40.30    37.65    34.50    29.95    28.75   34.50   31.85
  Total................
</TABLE>
(1) Benchmark price for hard coking metallurgical coal sold to Japanese steel
    mills, free on board vessel. Prices are from publications of The Tex Report
    Ltd.
(2) Reference price for 28,050 KJ/Kg air-dried basis Canadian bituminous thermal
    coal sold to Japanese power utilities free on board. Prices are from
    publications of The Tex Report Ltd. and Barlow Jonker Pty., Ltd.
(3) The Japanese benchmark price for metallurgical coal ceased to exist in 2002.
    Pricing is currently based on confidential contracts between Japanese buyers
    and suppliers.

         CANADIAN COAL MARKETS
         Canadian coal production was 70.5 million tonnes in 2001, according to
Statistics Canada, with substantially all coal production based in western
Canada. Statistics Canada reports that Canadian coal consumption was 60.5
million tonnes in 2001, of which 93% was thermal coal with the remainder being
metallurgical coal. Canadian coal producers supply the majority of domestic coal
consumption. Coal imports totaled 23.6 million tonnes in 2000 according to
Statistics Canada, most of which was imported from the United States to supply
coal to power plants in the southern Ontario market. In 2001, Canadian coal
exports were 30.1 million tonnes, according to Statistics Canada.

         Our core domestic markets are in Alberta and Saskatchewan. The bulk of
all coal used in these provinces is consumed by power plants located adjacent to
coal mines. Competition in these two provinces is limited due to the proximity
of coal mines to power plants. Coal is important to Alberta and Saskatchewan's
electricity generation and accounted for approximately 80% of Alberta's
electricity generation, according to the Alberta Energy Utilities Board, and 72%
of Saskatchewan's electricity generation in 2001, according to SaskPower. The
mines we operate supplied most of the coal consumed by the power plants in these
two provinces during 2002.

         Pricing and terms for these mine-mouth operations are specified under
contracts, generally after extensive negotiation. As such, pricing does not
fluctuate based on the prices of other costs, competing fuels or electricity and
tends to be very stable. Pricing is typically based on, among other things, the
anticipated mining and capital costs, the proximity of the customer to the mine
and economic conditions at the time. Due to the long-term nature of most of
these contracts, base pricing is usually adjusted annually for inflation or
deflation. Prices are generally subject to adjustment should the quality of the
coal fall below certain specifications.

         Ontario is the most populated province in Canada, does not have any
producing coal mines and has significant coal-fired power generation capacity.
In Ontario, coal generates a significant but smaller percentage of electricity
(30% in 2000, according to Ontario Power Generation Inc.). Due to Ontario's
large population and industrial base, it is Canada's second largest
coal-consuming province. Using our own data and data published by Natural
Resources Canada, we believe that almost all of the coal consumed by Ontario is
currently supplied by us or imported from the United States. Contracts in
Ontario, including our own, typically have one to five year terms. Pricing is
principally based on coal quality, mining and transportation costs, and the
costs of competing coal supplies. The Ontario market remains a potential growth
market for western Canadian coal producers, given the low sulfur content of the
coal, the increasing demand for electricity, the recent changes in oil and
natural gas prices and the favorable Canadian dollar/U.S. dollar exchange rate.



                                       31



<PAGE>


         The following  table sets forth Canadian  domestic  consumption  of
coal for the five years,  1997 through 2001:
<TABLE>
<CAPTION>
                                                          CANADIAN DOMESTIC COAL CONSUMPTION (1)
                                            -------------------------------------------------------------------
                                                1997          1998         1999          2000          2001
                                            ------------  ------------ ------------  ------------  ------------
                                                                   (thousands of tonnes)

<S>                                         <C>           <C>          <C>           <C>           <C>
Thermal...................................        51,244        54,728       53,733        56,623        56,222
Metallurgical.............................         4,490         4,119        4,360         4,265         4,255
                                            ------------  ------------ ------------  ------------  ------------
Total.....................................        55,734        58,847       58,093        60,888        60,477
                                            ============  ============ ============  ============  ============
</TABLE>

(1) Statistics Canada.

METALLURGICAL COAL INDUSTRY

         Pursuant to the Combination Agreement, we transferred substantially all
of our metallurgical coal assets to Fording effective February 28, 2003. Through
our portfolio investment in Fording Units, we maintain an indirect interest in
the production and sale of metallurgical coal.

Steel Industry

         The primary production processes for steel include integrated steel
mills, electric arc scrap recovery mills and some newer technologies, which
directly reduce iron to steel. Integrated steel mills, which account for
approximately 70% of global steel production, are the primary users of
metallurgical coal.

         Integrated steel mills use coal in blast furnaces in the form of coke
or as a direct input known as pulverized coal injection. Coke, made from
metallurgical coal, provides heat and carbon to convert iron ore to liquid pig
iron. Due to its porous nature and strength at elevated temperatures, coke
provides critical support for the blast furnace charge throughout the blast
furnace process. It is important for the performance of the blast furnace and
the quality of the final steel product that the coke have low levels of
impurities such as ash, sulfur and phosphorus, and that it retain its hardness
and strength inside the blast furnace. Metallurgical coals that retain their
hardness through the coking process are also referred to as hard coking coals.
The volume of metallurgical coal used in coke ovens is relatively stable from
year to year because coke oven batteries are operated continuously from the time
they are put into operation until they are decommissioned several decades later.
Coal utilized for pulverized coal injection is generally derived from less
expensive coals, which tend to be priced relative to thermal coals. These coals
provide a source of heat and carbon for the steel-making process but cannot be
used to make coke.

         Coke quality is driven by the technical requirements of blast furnaces,
which have increasingly focused on coke strength. Because of their individual
operating circumstances, each integrated steel mill requires a unique blend of
metallurgical coal. The blending of coals used by individual integrated steel
mills is a complex task focused on achieving the required coke quality,
including impurities such as sulfur and phosphorus, at the lowest cost.

         Coal blends for coke making are generally a combination of low, mid and
high volatile coking coals. All three of these types of coal are also hard
coking coals as coke made from them retains its hardness and strength inside
blast furnaces. Low volatile coking coals generally attract the highest price
and are exported primarily from Australia and the United States. Most Canadian
hard coking coals are mid volatile and compete primarily with Australian coals
for inclusion in the coke blend. Australia and the United States are the primary
exporters of high volatile coking coal. Weak coking coals, which generally
attract the lowest price, are often included in coking coal blends to reduce the
cost of producing coke. Australia and China are the dominant suppliers of weak
coking coal.

         Metallurgical Coal Market

         The metallurgical coal market is influenced by crude steel production,
which is largely dependent on the overall state of the global economy. Crude
steel production from integrated steel mills has



                                       32


<PAGE>



experienced slow, steady growth of approximately 1.8% per annum over the last
decade. From 1997 to 2000, worldwide steel consumption grew at an average rate
of 2.3% per annum according to Barlow Jonker Pty. Limited. The corresponding
growth in crude steel production has been 1.4% per annum, and in pig iron
production 1.3% per annum. Although there are fluctuations in the total amount
of steel produced worldwide, the amount of steel produced by the integrated
steel mill process has been relatively stable. In turn, the volume of
metallurgical coal used in this process has not generally experienced the same
variability as total steel production.

         Our main markets for metallurgical coals in 2002 were steel-producing
countries that import coal by seaborne vessels, primarily Japan, Korea and other
Pacific Rim countries, and South America and western European countries. The
major countries that export metallurgical coal to this seaborne metallurgical
coal market are Australia, Canada, the eastern United States and China. Seaborne
trade of metallurgical coals, including hard coking coal is estimated by Barlow
Jonker Pty. Ltd. to have been 177.0 million tonnes during 2002.

         In addition to the seaborne metallurgical coal market, we supplied
metallurgical coals to steel mills in the Great Lakes area of the United States
and Canada in competition with United States coal producers.

         Australia is the dominant exporter of metallurgical coal, supplying
106.0 million tonnes or 55% of the total seaborne market in 2001. Australian
mines produce competitive, high quality metallurgical coals, including a
dominant share of low volatile coking coals that are in favor with many coal
buyers. Australia also supplies significant quantities of mid volatile coking
coals and semi-soft coking coals. Australian metallurgical coal producers have
benefited from the significant decline in the value of the Australian dollar
relative to the Canadian dollar and from their relative short overland
transportation distance to port facilities. Canada is the second largest
exporter of metallurgical coal with a 14% share of the seaborne market in 2001.
Most of Canada's exports are mid volatile coking coals produced by mines
situated in mountainous regions more than 1,000 kilometers from port facilities.

         Metallurgical coal exports from the United States decreased from 44.0
million tonnes in 1998 to 23.0 million tonnes in 2001. These exports are
predominantly low volatile and high volatile coking coals and are generally very
expensive. Metallurgical coals produced in the United States are no longer
widely sold in Asia. During 2001, China supplied 6% of worldwide metallurgical
coal exports, almost double its 2000 exports. These exports were primarily
semi-soft coking coals and pulverized coal injection coals for which Chinese
producers have a competitive cost structure. According to a recent study from
Barlow Jonker Pty. Limited, it is estimated that there will be an 11 million
tonne net increase in hard coking coal export capacity over the next five years,
principally from Australia, China and the former Soviet Union countries.

         Large international mining companies, which can supply multiple types
of coal from several mines, are increasingly dominating the seaborne market.
These include BHP Billiton Limited and BHP Billiton plc, Mitsubishi, China
National Coal Industry Import & Export (Group) Corporation, Anglo American plc,
Rio Tinto Limited, Xstrata plc and M.I.M. Holdings Limited. These companies
compete on the basis of price, quality and long-term deliverability.



                                       33



<PAGE>



         Metallurgical Coal Pricing

         Demand for metallurgical coal is driven by steel production, which is
closely related to general economic conditions. In addition, new technologies
have moderated growth in metallurgical coal use in steel making. Demand for
Canadian export metallurgical coal is driven by steel production in Asia, Europe
and South America. The 1997-1999 economic crisis in Asia resulted in steel
demand significantly weakening which, when combined with an oversupply of coal
in world markets, led to a decline in export coal prices. Benchmark Japanese
export metallurgical coal prices declined by approximately 27% from 1996 to
2000. During 2001, prices in Pacific Rim markets increased by approximately 8%,
while European and South American metallurgical coal prices increased by up to
30%, but from lower prior levels than the Pacific Rim market.

         The sale of seaborne coking coal is typically governed under contracts
that fix the coal price for one year and require annual price negotiations.
Metallurgical coal prices have been cyclical for many years. Up until the year
2000, benchmark prices for Australian and Canadian hard coking coals were
negotiated with Japanese steel mills and there was little variation in pricing
amongst the coals that fell into the hard coking coal category. Pricing in most
other markets was negotiated annually between individual buyers and sellers
after Japanese price negotiations were finished. Since 2001, Japanese hard
coking coal buyers have been negotiating prices individually and the influence
on overall pricing by the Japanese steel industry has diminished. It is believed
that 2002 pricing for Canadian coking coals has been settled with Japanese
customers at lower prices than for high quality Australian mid volatile coking
coals with the same customers. It is also believed that the widening price
difference between hard coking coals and weak coking coals is encouraging steel
producers to increase the use of weak coking coal at the expense of hard coking
coal. For the first time in 20 years the pricing of hard coking coal and weak
coking coal moved in different directions in 2002.

THERMAL COAL INDUSTRY

         Pursuant to the Combination Agreement, SCAI acquired the Prairie Assets
from Fording effective February 28, 2003. We intend to acquire SCAI from SCP II
during 2003. The Prairie Assets include a 50% ownership interest in the Genesee
mine, the Highvale-Whitewood mining contract, certain coal and potash royalty
agreements, and non-producing coal and mineral reserves and non-reserve coal and
minerals in western Canada. We previously held the Highvale mining contract from
1970 until December 2002.

         Thermal Coal Markets

         We supply most of the thermal coal we produce to major electric
utilities in Alberta and Saskatchewan. Plant capacity and the availability of
electricity generated by other fuel types, primarily natural gas, can impact the
amount of electricity generated by each of these power plants. Following the
expected acquisition of the Prairie Assets from SCP II during 2003, we will
supply substantially all of the coal consumed by most of the ten coal-fired
power plants operating in Alberta and all of the coal-fired power plants
operating in Saskatchewan. Six of these power plants hold long-term contracts
that, in most cases, will continue for most of the remaining useful lives of the
adjacent power plants. The Highvale and Whitewood mines, supply three of these
power plants under a five-year contract with TransAlta, which expires in
December 2007. We also supply coal on a spot basis to the smallest of these ten
power plants, H.R. Milner.

         Ontario Power has two coal-fired power plants in northwestern Ontario,
to which we supply coal by rail from the Bienfait mine in southern Saskatchewan.
We have supplied most of the coal consumed by these power plants since the early
1980s and recently received a new one-year contract, with an option to renew for
a second year. These power plants also have access to coal from the Powder River
Basin in the United States, and we have retained that business through
competitive pricing. Ontario also has access to hydroelectric power that, at
times, limits the demand for coal-fired electricity generation from these power
plants.



                                       34


<PAGE>



         Our Coal Valley mine in Alberta ships thermal coal to coal-fired power
plants in the southern Ontario market, which purchase most of their coal from
United States coal producers on the basis of competitive pricing. To supply the
southern Ontario market, Ontario Power also generates substantial amounts of
electricity by hydro, nuclear, natural gas and other means. We shipped coal to
this market from 1978 until 2000, when we were unable to compete due to low
prices and high transportation costs. We resumed deliveries to this market in
2001, due to price increases from our competitors in the United States, the
low-sulfur content of our Coal Valley coal, and favorable exchange rates.

         Historically, many industrial customers in Alberta and Saskatchewan
have used natural gas. In many instances coal can supply the same energy input
in an economical and reliable manner. With the recent volatility in natural gas
prices, some industrial consumers of natural gas in these provinces have turned
to coal as an alternate energy source. Other major industrial consumers of
natural gas may consider coal as an alternate source of energy in the future.

         THERMAL COAL DEMAND

         Consumption of coal in the domestic Canadian market is primarily
through long-term arrangements with utilities. Pricing tends to be influenced
by, amongst other things, the geology of the coal field, the quality of the
coal, the anticipated mining cost, capital investment and the proximity of the
generating facility to the coal resource. Pricing arrangements are the result of
extensive negotiation and tend to be more stable than those prevailing in the
export market.

         Demand for Canadian export thermal coal is driven by coal fired
electricity generation in the Pacific Rim. Demand for thermal coal has risen
significantly due to growth in coal-fired generating capacity in this region.
During 2002, Asian demand was 217 million tonnes, compared with 205 million
tonnes in 2001 according to Barlow Jonker. During 2003, Asian demand is
projected to increase to 228 million tonnes according to Macquarie Research.
During 2001 and 2002, new supply from Chinese and Australian producers caused
intense competition among suppliers and oversupply in the market. Spot prices
for export thermal coals decreased significantly as a result and although these
spot prices have increased since October 2002, they remain significantly lower
than during 2001. Historically, prices for export thermal coal markets have been
cyclical and Canadian suppliers have little influence on pricing due to the
limited volumes shipped. The Japanese reference price for export thermal coal
declined by approximately 8% during 2002 due to oversupply in the market caused
by significant increases in exports from Australia and China and we expect
further decreases in the Japanese reference price for 2003. Spot prices for
seaborne thermal coals were significantly lower than the Japanese reference
price during the second half of 2002. In light of these market conditions, we
reduced production from the Coal Valley and Obed Mountain mines near the end of
2002. In March 2003, we announced the indefinite suspension of production at the
Obed Mountain mine.

         LONG-TERM MINE-MOUTH COAL SUPPLY CONTRACTS

         In general, the provisions of coal supply contracts are based on
extensive negotiations with customers. Consequently, the provisions of these
contracts vary significantly, including their price and price adjustment
features, coal quality requirements, volumes, options to extend and force
majeure, termination and assignment provisions.

         Our long-term mine-mouth contracts as of December 31, 2002 are outlined
below, including the long-term mine-mouth contract for the Genesee mine, which
we intend to acquire as part of our acquisition of SCAI in the near future.
Because of our acquisition of Manalta, we service some of our customers and
their power plants under two contracts.




                                       35


<PAGE>

<TABLE>
<CAPTION>
                                                                                           ANNUAL TONNAGE
                                                     CUSTOMER          REMAINING           (IN THOUSANDS)
           MINE                 CUSTOMER           RELATIONSHIP         TERM OF      --------------------------
                                                      SINCE            CONTRACT         MINIMUM       MAXIMUM
---------------------------  -----------------  -----------------  ----------------  ------------  ------------
<S>                         <C>                <C>                <C>               <C>           <C>
                                                                       until 2006           1,450         1,812
                                                                        2007-2012             698           863
                                                                   --------------------------------------------
         Paintearth          ATCO Electric             1956            until 2007           1,104         1,400
                                                                        2008-2009           1,104         1,300
                                                                        2010-2012           1,104         1,250
---------------------------------------------------------------------------------------------------------------

          Sheerness          ATCO Electric             1956            until 2026             900         2,000
                                                                   --------------------------------------------
                             and TransAlta             1970            until 2026         50% (1)         1,850
---------------------------------------------------------------------------------------------------------------

                                                                       until 2012           2,100         4,200
        Boundary Dam         SaskPower                 1969             2013-2024           1,900         3,800
                                                                   --------------------------------------------
                                                                       until 2009           1,700         2,000
---------------------------------------------------------------------------------------------------------------

        Poplar River         SaskPower                 1969            until 2015           2,000         4,000
---------------------------------------------------------------------------------------------------------------

           Genesee           EPCOR                     2003      life of reserves        100% (1)      100% (1)
---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) percentage of total coal burned by power generating station.

         The base pricing in each of these contracts was negotiated between the
parties at the time the contract was made and is adjusted annually based on cost
indices, which related to our mine-mouth costs, including fuel, labor,
maintenance and other factors. Pricing in these contracts is not subject to
fluctuations based on prices of other coals, competing fuels, or electricity.
These contracts specify minimum tonnage amounts that the utilities are required
to pay for or purchase, as well as, in some cases, fixed monthly payments that
are unrelated to tonnage delivered. These contracts also provide for
pass-throughs of specified costs, such as municipal taxes, government royalties
and costs relating to legislative changes. Electricity to power our major mining
equipment at these mines is provided without charge by the utility served.

         Six of eight of our long-term coal supply contracts will not be subject
to price review provisions during their current terms. The two contracts that
will be subject to price review provisions will permit either party to
periodically request a price review. The next possible price review period will
occur in 2014 for one of the Boundary Dam contracts and in 2005 for the Poplar
River contract.

COAL MINING OPERATIONS

         During 2002, we had interests in ten mining operations and three
development projects in British Columbia, Alberta and Saskatchewan. On December
31, 2002, TransAlta awarded the Highvale mining contract to Fording. On February
28, 2003, as part of the Combination Agreement, we transferred our interests in
the Luscar and Line Creek mines to Fording, along with our interest in the
undeveloped Cheviot deposit. At the same time, SCAI acquired the Prairie Assets
from Fording, including the mining contract for the Highvale and Whitewood
mines, as well as a 50% joint venture interest in the Genesee mine. During 2003,
we intend to acquire the Prairie Assets from SCP II. The following is a summary
of the coal mines we operated during 2002 as well as the coal mines we expect to
acquire as part of the Prairie Assets:




                                       36

<PAGE>



<TABLE>
<CAPTION>
                                   MINE        ANNUAL
            MINE                COMMENCED      SURFACE      2002     PRODUCTION               MAJOR
                                OPERATION       AREA        SALES     CAPACITY              CUSTOMER
---------------------------  -------------- -----------  ----------  ----------- ------------------------------
                                             (hectares)    (millions of tonnes)
<S>                         <C>             <C>         <C>         <C>          <C>
THERMAL COAL
Boundary Dam                      1973            8,706         6.1          6.5 Adjacent power plants
Sheerness                         1985            7,000         3.6          4.0 Adjacent power plant
Poplar River                      1978           11,885         3.3          4.0 Adjacent power plant
Paintearth                        1981            5,120         3.0          3.5 Adjacent power plant
Bienfait                          1905           10,045         1.7          2.8 Domestic utilities and industrial
                                                                                 customers
Coal Valley                       1978           19,699         1.8          1.6 International and domestic utilities
Obed Mountain (6)                 1984            7,460         1.1          1.5 International and domestic utilities and
                                                                                 industrial customers
Line Creek (2)(4)                 1981            8,124         0.2          0.3 International utilities and domestic
                                                                                 industrial customers
Genesee (1)(5)                    1988           20,304         3.5          3.5 Adjacent power plant
Highvale (3)                      1970               --        12.7         13.0 Contract mining for adjacent power
                                                                                 plants
Whitewood (3)                     1956               --         2.8          2.8 Adjacent power plant

METALLURGICAL COAL
Line Creek (2)(4)                 1981            8,124         1.2          1.6 International and domestic steel
                                                                                 producers
Luscar (2)(4)                     1970            4,998         1.1          1.4 International steel producers
</TABLE>
(1) We are the sole operator of this mine, which we expect to acquire from SCP
    II during 2003.
(2) We and CONSOL were the joint operators of this mine until we transferred
    this mine to Fording on February 28, 2003.
(3) We operate this mine under a contract mining agreement with TransAlta, which
    we expect to acquire as part of the Prairie Assets during 2003.
(4) Transferred to Fording pursuant to the Combination Agreement.
(5) During 2003, we expect to acquire a 50% joint venture interest in this mine
    from SCP II.
(6) Production suspended in 2003.

         In domestic thermal coal markets, these operations primarily supply
thermal coal to major Canadian electric utilities under contract. The Boundary
Dam, Paintearth, Poplar River, Genesee and Sheerness mines are mine-mouth
operations, as each is located in close proximity to coal-fired power plants
that are the respective mine's customers. These operations provide a substantial
portion of our revenues on a stable on-going basis. The Highvale and Whitewood
mines, operated on a contract basis for TransAlta, are also considered
mine-mouth operations, however, margins from operating these mines are
substantially lower than margins from mines we own. We also sell lesser
quantities of coal to domestic industrial and to overseas electric utilities.

         Since February 28, 2003, we are no longer involved in the production
and sale of metallurgical coal. Prior to that date, most of our metallurgical
coal sales were exported to overseas and North American steel producers. On
March 25, 2003, we announced the indefinite suspension of production at the Obed
Mountain mine.








                                       37

<PAGE>


Since 1998, coal sales including from the former Manalta and Fording operations
were as follows:
<TABLE>
<CAPTION>
                                              1998 (1)        1999         2000          2001          2002
                                            ------------  ------------ ------------  ------------  ------------
                                                                   (thousands of tonnes)
<S>                                        <C>           <C>           <C>           <C>           <C>
DOMESTIC
Mine mouth................................        16,100        15,733       15,476        16,198        16,083
Contract mining...........................        12,672        12,382       12,491        12,175        12,704
Other thermal.............................         2,691         2,390        2,022         3,139         2,605
Metallurgical.............................           358           185          207           108           181
                                            ------------  ------------ ------------  ------------  ------------
Total domestic sales......................        31,821        30,690       30,196        31,620        31,573
                                            ------------  ------------ ------------  ------------  ------------

EXPORT
Thermal...................................         3,948         3,319        2,990         2,459         2,162
Metallurgical.............................         4,384         4,968        4,197         2,582         2,229
                                            ------------  ------------ ------------  ------------  ------------
Total export sales........................         8,332         8,287        7,187         5,041         4,391
                                            ------------  ------------ ------------  ------------  ------------

Total Luscar coal sales...................        40,153        38,977       37,383        36,661        35,964

Less metallurgical operations: (4)
  Line Creek mine.........................        (2,968)       (2,452)      (2,630)       (1,647)       (1,350)
  Luscar mine.............................        (1,267)       (1,325)      (1,280)       (1,461)       (1,060)
  Gregg River mine........................        (1,672)       (1,601)      (1,023)           --            --

Add Prairie Assets:.......................
  Genesee mine (2)........................         3,600         3,600        3,500         3,300         3,500
  Whitewood mine (2)......................         2,600         2,300        2,000         2,300         2,800
                                            ------------  ------------ ------------  ------------  ------------

Pro forma coal sales (3)..................        40,446        39,499       37,950        39,353        39,854
                                            ============  ============ ============  ============  ============
</TABLE>

(1) 1998 sales include Manalta operations acquired September 1998.
(2) Includes sales from Genesee and Whitewood mines, operated by Fording prior
    to February 28, 2003.
(3) Pro forma coal sales represents total coal sales from mines that constitute
    the coal business following the completion of the transactions with Fording
    on February 28, 2003, giving effect to the transfer of metallurgical coal
    operations to Fording and the expected acquisition of the Prairie Assets
    from SCP II during 2003.
(4) Including thermal coal produced at Line Creek mine.

         We operate mines situated in three geographic areas. The Boundary Dam,
Poplar River, Sheerness, Paintearth, Bienfait, Genesee, Whitewood and Highvale
mines are located in agricultural regions on the prairies of Alberta and
Saskatchewan. The Line Creek and Luscar mines, which were transferred to Fording
on February 28, 2003, are situated in mountainous terrain in the Canadian
Rockies. Our Coal Valley and Obed Mountain mines are situated in the foothills
of the Canadian Rockies west of Edmonton, Alberta. The mountain and foothill
mines are in alpine to sub-alpine forest areas. In all cases, elevation and
climate are such that each mine operates on a year-round basis. Surface rights
to lands are owned, leased from the provincial governments or private owners or
provided by utility customers as and when required for mining. All surface
rights for current mining are in place.

         Each mining operation is served by road access and employees live in
nearby communities, traveling to work on a daily basis. All of the metallurgical
coal mines (including the Line Creek and Luscar mines transferred to Fording)
have operational rail infrastructure in place, as well as several of our thermal
coal operations (Obed Mountain, Coal Valley, Bienfait and Poplar River mines).
Services such as electricity, natural gas, sewage, process water and potable
water are available, where required, on each site. We believe that each of our
mine's facilities and equipment are in good physical condition.

         Development projects, including Cheviot (transferred to Fording),
Brooks, Telkwa and Beaverhill are all within a short distance of established
communities and are accessible by road. Except for the Brooks mine project, we
anticipate that rail access may be required and each property is sufficiently
close to an existing active rail line to consider construction of a spur line to
the property. Cheviot is accessed by an existing but inactive rail right-of-way.
The development properties lack most required services. We anticipate providing
these services during mine construction.

         Cheviot is in mountainous terrain and had been an active mine site from
1911 to 1950. Telkwa is located in rolling hills covered with forest and pasture
land. The Beaverhill project is in the east-central




                                       38


<PAGE>



Alberta prairie agricultural region. The Brooks project is located in an
agricultural region in southern Alberta and consists of coal reserves, which are
included in the Prairie Assets, and a power project, the rights to which are
currently held by SCAI. Topographic and climatic features of each site are such
that surface mining operations can be developed on a year-round basis. We also
have other significant coal and mineral properties in Alberta, Saskatchewan and
Manitoba that may be developed in the future. Most of these non-reserve coal and
mineral holdings are situated in agricultural regions similar to those for the
Brooks and Beaverhill projects. Depending on coal quality and customer
requirements, raw coal may be shipped directly from the mine to the customer or
to a processing plant. Coal that is destined for a distant market is generally
sent to a processing plant to increase its heating value and consistency by
removing impurities and to more exactly match customer specifications. Coal
processing entails an additional expense but results in a higher-value product.
The Line Creek, Luscar, Coal Valley and Obed Mountain mines, all operate coal
processing plants. At the Bienfait mine, we operate a coal processing plant that
crushes and sizes the coal to customer specifications.

         All of the producing mines are equipped with shop office complexes and
substantially all maintenance activity is conducted by employees, although
rebuilds or repairs of a significant nature are occasionally contracted out to
third parties.

         PRODUCTION

         Coal production (including production from the former Manalta and
Fording operations) over the period from 1998 to 2002 was as follows:
<TABLE>
<CAPTION>
                                              1998 (1)        1999         2000          2001          2002
                                            ------------  ------------ ------------  ------------  ------------
                                                                   (thousands of tonnes)
<S>                                         <C>           <C>          <C>          <C>           <C>
BITUMINOUS
Metallurgical
  Line Creek mine (1)(2)..................         2,323         1,991        2,032         1,122         1,231
  Gregg River mine........................         1,672         1,601        1,023            --            --
  Luscar mine (1).........................         1,409         1,196        1,325         1,481         1,030

Thermal
  Line Creek mine (2).....................           606           579          526           260           266
  Coal Valley mine........................         1,876         1,606        1,088         1,514         1,789
  Obed Mountain mine......................         1,672         1,716        1,485         1,410         1,351

SUBBITUMINOUS
  Paintearth mine.........................         3,011         2,680        2,754         3,215         3,021
  Sheerness mine..........................         3,368         3,268        3,577         3,643         3,589
  Highvale mine (3)(4)....................        12,672        12,382       12,491        11,690        12,698
  Genesee (3).............................         3,530         3,597        3,542         3,497         3,553
  Whitewood (3)...........................         2,627         2,309        1,974         2,094         2,812

LIGNITE
  Poplar River mine.......................         3,599         3,744        3,489         3,382         3,427
  Boundary Dam mine.......................         5,722         6,243        5,915         6,354         6,193
  Bienfait mine...........................         2,195         2,095        1,778         2,008         1,834
</TABLE>
(1) Reflects our portion of production only. Transferred to Fording on February
    28, 2003.
(2) On December 31, 2000, we sold 50% of the Line Creek mine to CONSOL. On
    February 28, 2003, we transferred our remaining 50% interest to Fording.
(3) Part of the Prairie Assets which we intend to acquire from SCP II during
    2003.
(4) Operated by Manalta and us from 1970 to 2002.

         SAMPLING AND ANALYSIS

         The quality of coal is based upon a large number of parameters related
to a particular coal's usage and its handling characteristics. Determination of
the various parameters of quality is done according to widely accepted industry
standards and often to meet specific customer needs.





                                       39


<PAGE>


         Testing is done in mine site laboratories to ensure process efficiency
and product quality and is supplemented by analysis at independent test
facilities to provide a broader range of analysis for production design and
planning and to meet specific customer needs.

         OPERATING MINES

         The following is a map indicating the location of each mine, followed
by a description of each mine.


[MAP OF CANADA (TOGETHER WITH INSET SHOWING CANADA IN RELATIONSHIP TO THE UNITED
STATES) DEPICTING MINE AND UNDEVELOPED COAL PROJECT AND NON-RESERVE COAL
LOCATIONS, RAILROAD LINES, BULK-PRODUCTS SHIPPING TERMINALS AND MAJOR COAL
SEAMS]


(1)      Acquired by SCAI from Fording on February 28, 2003.
(2)      Transferred to Fording on February 28, 2003.


















                                     40

<PAGE>



         COAL VALLEY MINE

         The Coal Valley mine is located approximately 100 kilometers south of
Edson, Alberta, in the foothills of the Rocky Mountains. This mine supplies
bituminous thermal coal to a variety of international and domestic utilities. We
commenced operations at this mine in 1978. Currently, this mine's annual
production capacity is 1.6 million tonnes and 2002 sales were 1.8 million
tonnes. This mine had 5.8 million tonnes of proven reserves and 10.3 million
tonnes of probable reserves at December 31, 2002. We currently operate a
dragline to remove the overburden and front-end loaders to load the coal onto a
fleet of coal haulers. Raw coal is hauled to our adjacent processing plant,
where it is crushed, cleaned, and dried. From the processing plant, the coal is
transported by rail directly to customers or to port facilities for further
transportation by ship. We own all the equipment and facilities at this mine.

         The bituminous thermal coal at Coal Valley is mined from three distinct
coal seams, which are found within a 270-meter stratigraphic interval. One of
the seams is characterized by fine clay and sandstone partings within the seam,
and varies in thickness from 7.9 to 10.7 meters. The other seams range in
thickness from 2.4 to 6.7 meters.

         In November 1999, we discontinued truck shovel operations at the mine
in response to weak market conditions. Given the strong recovery in coal prices
during 2001, we purchased additional trucks and reactivated an electric shovel
to increase this mine's production capacity from 1.1 million tonnes per year to
1.6 million tonnes per year. Late in 2002, we idled the truck shovel equipment
at this mine again, reducing production levels back to 1.0 million tonnes due to
a significant decline in export thermal coal prices in the second half of 2002.

         OBED MOUNTAIN MINE

         The Obed Mountain mine is located approximately 30 kilometers east of
Hinton, Alberta in the foothills of the Rocky Mountains. This mine supplies
bituminous thermal coal to a variety of international and domestic utilities and
industrial customers. The mine commenced operations in 1984 and we acquired it
in 1989. This mine's annual production capacity is 1.5 million tonnes and 2002
sales were 1.2 million tonnes. During 2002, we reduced production to one million
tonnes per year. Subsequently, on March 25, 2003, in response to low export
selling prices and demand, we suspended production indefinitely at the mine. The
Obed Mountain mine had 5.1 million tonnes of proven reserves at December 31,
2002. When operating, this mine utilizes a dragline to remove the overburden and
also has three electric shovels available to remove overburden and to load the
coal onto a fleet of coal haulers. Raw coal is hauled to our adjacent processing
plant, where it is crushed, cleaned and dried. From the processing plant, we
transport the coal to a storage and rail load-out facility by an 11-kilometer
long overland conveyor for further transportation by rail directly to customers
or to port facilities. We own all the equipment and facilities at this mine.

         The bituminous thermal coal at Obed Mountain is a glacial hilltop
remnant of what was at one time an extensive, flat-lying multi-seam coal field.
There are six recognizable seams in this formation, two of which we mine. The
seams range in thickness from 1.6 to 2.8 meters.

         PAINTEARTH MINE

         The Paintearth mine is located approximately 200 kilometers southeast
of Edmonton, Alberta and is a prairie mine-mouth operation. This mine supplies
subbituminous thermal coal to ATCO Electric's Battle River power plant under
long-term contracts, which expire in 2012. We commenced operations at the mine
in 1981 and, in 1998, as part of the Manalta acquisition, acquired and combined
with our existing mine an adjacent mine, which had been operating since 1956.
This mine's annual production capacity is 3.5 million tonnes and 2002 sales were
3.0 million tonnes. The mine had 61.2 million tonnes of proven reserves at
December 31, 2002.

         This mine uses two draglines to remove the overburden, after which the
coal is loaded onto a fleet of coal haulers with a front-end loader or an
electric shovel for delivery directly to the adjacent power




                                       41



<PAGE>


plant. We own all the equipment and facilities at this mine, except for the two
draglines that are owned by our customer. We are responsible for dragline
operation and maintenance. ATCO Electric pays us a specified royalty based on
tonnage mined from some of our coal lease areas within the coal permit area. As
part of our intended acquisition of the Prairie Assets, we expect to acquire
certain royalty interests on coal produced from the Paintearth mine, in respect
of which ATCO Electric pays royalties.

         The Paintearth mine has two major coal zones throughout most of the
mining area. The zones vary in thickness from 2.0 to 4.0 meters and are commonly
split into four major beds or seams.

         SHEERNESS MINE

         The Sheerness mine is located approximately 200 kilometers northeast of
Calgary, Alberta and is a prairie mine-mouth operation. This mine supplies
subbituminous thermal coal to the Sheerness power plant under two long-term
contracts, both of which expire in 2026. ATCO Electric and TransAlta jointly own
the power plant. We commenced operations in 1995 and in 1998, as part of the
Manalta acquisition, acquired and combined with our existing mine an adjacent
mine which had been operating since 1985. The mine's annual production capacity
is 4.0 million tonnes and 2002 sales were 3.6 million tonnes. This mine had 60.5
million tonnes of proven reserves and 7.3 million tonnes of probable reserves at
December 31, 2002. This mine uses two draglines to remove the overburden, after
which the coal is loaded onto a fleet of coal haulers with a front-end loader or
an electric shovel for delivery directly to the adjacent power plant. We own all
the equipment and facilities at this mine, except for the two draglines, which
are owned by our customers. We are responsible for dragline operation and
maintenance. As part of our intended acquisition of the Prairie Assets, we
expect to acquire certain royalty interests on coal produced from the Sheerness
mine, in respect of which ATCO Electric and TransAlta pay royalties.

         The subbituminous coal at the Sheerness mine is in two seams having a
thickness varying between 0.5 and 1.9 meters.

         POPLAR RIVER MINE

         The Poplar River mine is located approximately 200 kilometers southwest
of Regina, Saskatchewan and is a prairie mine-mouth operation. This mine
supplies lignite thermal coal to SaskPower's Poplar River power plant under a
long-term contract that expires in 2015. Operations at this mine commenced in
1978 and we acquired the operations in 1998 as part of the Manalta acquisition.
This mine's annual production capacity is 4.0 million tonnes and 2002 sales were
3.3 million tonnes. This mine had 178.9 million tonnes of proven reserves and
5.3 million tonnes of probable reserves at December 31, 2002. The lignite coal
at the Poplar River mine is in a seam having an average thickness of 4.0 meters.
This mine uses two draglines to remove the overburden, after which the coal is
loaded onto a fleet of coal haulers with a front-end loader or two electric
shovels. Coal is initially transported to an adjacent crushing station before
being transported by rail approximately 20 kilometers to the power plant. We own
all the equipment and facilities at this mine, including the rail line and
related locomotives and railcars but excluding one of the draglines, which is
leased by SaskPower and operated by us under license.

         BOUNDARY DAM MINE

         The Boundary Dam mine is located approximately five kilometers south of
Estevan, Saskatchewan and is a prairie mine-mouth operation. This mine supplies
lignite thermal coal to SaskPower's Boundary Dam and Shand power plants under
long-term contracts that expire in 2009 and 2024 respectively. We commenced
mining operations in 1973. This mine's annual production capacity is 6.5 million
tonnes and 2002 sales were 6.1 million tonnes. The Boundary Dam mine had 102.9
million tonnes of proven reserves at December 31, 2002. The mine uses five
draglines to remove the overburden. The coal is then loaded onto a fleet of coal
haulers with a front-end loader or an electric shovel for delivery directly to
the adjacent power plants. We own all of the equipment and facilities at this
mine with the exception of two haul trucks that are subject to an operating
lease and one dragline, which will be transferred to the customer in May 2003
pursuant to the terms of the coal supply agreement. We will continue to operate
this dragline under license until the coal supply agreement terminates in 2009.





                                       42



<PAGE>



         The current Boundary Dam mine is the combination of four adjacent
mines, two of which we acquired as part of the Manalta acquisition and which had
been operating since 1957 and 1960. The lignite coal at the Boundary Dam mine is
in four recognizable coal zones having a cumulative mineable coal thickness of
up to approximately 5.2 meters. The mineable coal zones are not contiguous over
the entire mine area.

         BIENFAIT MINE

         The Bienfait mine is located approximately 15 kilometers east of
Estevan, Saskatchewan and is a prairie operation. This mine supplies lignite
thermal coal to Ontario Power Generation's Atikokan and Thunder Bay power plants
under a contract that expires at the end of 2003, with a one-year option to
renew. The mine also sells coal to several smaller domestic customers.
Operations commenced in 1905 and we acquired the mine in 1966 through our
acquisition of Manitoba & Saskatchewan Coal Company (Limited). The mine's annual
production capacity is 2.8 million tonnes and 2002 sales were 1.7 million
tonnes. This mine had 78.6 million tonnes of proven reserves as at December 31,
2002. The majority of the lignite coal at the Bienfait mine is part of a zone
that averages 4.0 meters in thickness. This mine uses a dragline to remove the
overburden, after which the coal is loaded onto a fleet of coal haulers with a
front-end loader. Coal is initially transported to our adjacent processing
plant, which crushes and sizes the coal before it is transported to customers by
rail. We own all the equipment and facilities at this mine.

         We also own a char plant at the Bienfait mine. Char is a product that
is used in the manufacture of charcoal briquettes. Our char plant uses a
carbonization process that nearly doubles the heat content of the original
lignite coal and lowers its moisture and volatile matter content. We supply char
under two long-term contracts with an aggregate annual tonnage of 82,000 tonnes,
which expire in 2003 and 2010. The char plant's capacity is 102,000 tonnes and
2002 sales were 113,000 tonnes.

         METALLURGICAL ASSETS

         LINE CREEK MINE

         The Line Creek mine is located approximately 25 kilometers north of
Sparwood, British Columbia and is a mountain mine. This mine commenced
operations in 1981 and we acquired this mine in 1998 as part of the Manalta
acquisition. On December 31, 2000, we sold a 50% interest in this mine to CONSOL
for $56.7 million and a retained royalty on coal mined in the future in excess
of 46.0 million tonnes. This mine was operated as a 50-50 joint venture with
CONSOL until February 28, 2003 when CONSOL and we transferred ownership of this
mine to Fording. Line Creek supplies bituminous metallurgical and thermal coal
to a variety of international and domestic steel producers and Pacific Rim
electric utilities. Our share of this mine's annual production capacity was 1.6
million tonnes of metallurgical coal and 0.3 million tonnes of thermal coal. Our
share of 2002 sales was 1.2 million tonnes of metallurgical coal and 0.2 million
tonnes of thermal coal. Our share of this mine's proven reserves was 19.9
million tonnes as at December 31, 2002. This mine uses six electric shovels to
remove the overburden and to load it onto waste haul trucks following which
front-end loaders load the coal onto coal haulers. Raw coal is transferred to an
11-kilometer coal conveyor for transportation to the nearby processing plant,
where it is crushed, cleaned, and dried. From the processing plant, the coal is
loaded onto trains for transport directly to customers or to port facilities for
further transportation by ship. Until February 28, 2003, we owned a 50% interest
in all the equipment and facilities at this mine. We remain obligated for
funding our share of a defined benefit pension plan deficit at this mine.

         The bituminous metallurgical and thermal coal at Line Creek is mined
from nine seams lying in a syncline. The seams average two to thirteen meters in
thickness, with the thickest seam reaching 15 meters in several places.





                                       43

<PAGE>



         LUSCAR MINE

         The Luscar mine is located approximately 42 kilometers south of Hinton,
Alberta and is a mountain operation. The mine was operated as a 50-50 joint
venture with CONSOL since operations commenced in 1970. On February 28, 2003
CONSOL and we transferred ownership of this mine to Fording. Our share of 2002
sales was 1.1 million tonnes, which was supplied to a variety of international
steel producers. Our share of proven and probable reserves was 0.7 million
tonnes at December 31, 2002 and the mine is scheduled to close near the end of
2003, when these reserves will be depleted. This mine uses six electric shovels
to remove the overburden and to load it onto waste haul trucks, following which
front-end loaders load the coal onto coal haulers. Raw coal is hauled to the
adjacent processing plant, where it is crushed, cleaned, and dried. From the
processing plant, the coal is transported by rail directly to customers or to
port facilities for further transportation by ship. We held a 50% interest in
all the equipment and facilities at this mine until February 28, 2003. We remain
obligated for our share of certain reclamation and mine closure costs.

         The bituminous metallurgical coal at this mine is mined from a seam
which has an average thickness of ten to twelve meters, although in some areas
folding and faulting has produced sections of coal up to 40 meters thick.

         CHEVIOT MINE PROJECT

         The Cheviot mine project is located approximately 20 kilometers
southeast of the Luscar mine at the former site of the inactive Mountain Park
mine. Until February 28, 2003 this project was a 50-50 joint venture with
CONSOL. On February 28, 2003 this project was transferred to Fording. We
operated the Mountain Park mine from 1911 to 1950. Our 50% share of this project
includes 18.2 million tonnes of proven bituminous metallurgical coal reserves
and 12.8 million tonnes of probable bituminous metallurgical coal reserves. In
December 2000, the Government of Alberta approved and issued the mine permit for
the Cheviot project at a design capacity of 3.2 million tonnes per year of which
50% would have been our share. In April 2001, the Government of Canada announced
its acceptance of the recommendation by the environmental review panel in favor
of the development of Cheviot, which allows the federal government to release
the regulatory authorizations required for the project to proceed. During 2002,
CONSOL and we applied for an amendment to its existing permits to allow for
construction of a haul road from the Cheviot property to the existing coal
processing plant at Luscar mine. If this permit is approved, approximately 2.2
million CMT of coal could be produced from the Cheviot reserves using the
existing infrastructure at Luscar mine.

         GREGG RIVER MINE

         The Gregg River mine, located 40 kilometers south of Hinton, Alberta,
was developed in 1983 and had a production capacity of 2.1 million tonnes of
coal per year until coal production ceased in October 2000. We are currently
completing the reclamation and closure of the mine. On February 28, 2003 we
transferred the coal leases at Gregg River mine to Fording pursuant to the
Combination Agreement. We retain all of the other assets associated with the
Gregg River mine as well as all of the existing reclamation obligations.


         PRAIRIE ASSETS

         HIGHVALE MINE

         The Highvale mine is located approximately 80 kilometers west of
Edmonton, Alberta. Highvale is a prairie mine-mouth operation owned by
TransAlta. This mine supplies subbituminous thermal coal to TransAlta's Sundance
and Keephills power plants. The mine's annual production capacity is 13.0
million tonnes and 2002 sales were 12.7 million tonnes. The mine uses four
draglines to remove the overburden, after which the coal is loaded onto a fleet
of coal haulers with electric shovels or front-end loaders for





                                       44
<PAGE>

delivery directly to the adjacent power plants. TransAlta owns this mine and
substantially all of the related equipment and facilities.

         Our predecessor, Manalta, and we operated the Highvale mine under
contract with TransAlta from 1970 until 2002. Fording took over the Highvale
contract effective January 1, 2003 and subsequently transferred the contract to
SCAI on February 28, 2003. During 2003, we expect to acquire the mining contract
as part of our intended acquisition of the Prairie Assets from SCP II. The
current five-year mining contract expires December 31, 2007, or earlier with a
90-day termination notice provision. If TransAlta does not renew or terminates
the contract, the operator would not expect to incur any material costs because
TransAlta is contractually required to reimburse the operator for costs
associated with terminating the mining contract. Also as part of our intended
acquisition of the Prairie Assets, we expect to acquire certain royalty
interests on coal produced from the Highvale mine, in respect of which TransAlta
pays royalties.

         GENESEE

         The Genesee mine is located approximately 70 kilometers southwest of
Edmonton, Alberta and is a prairie mine-mouth operation. This mine supplies
subbituminous thermal coal to EPCOR's 820 MW Genesee power plant under a
long-term contract that continues as long as there is economic coal within the
mining area. The Genesee mine commenced operations in 1988. The mine's annual
production capacity is 3.5 million tonnes and 2002 sales were 3.5 million
tonnes. Fording's share of proven and probable reserves at Genesee mine was 134
million tonnes as at December 31, 2002. The mine uses two draglines to remove
the overburden. Coal is then loaded onto a fleet of coal haulers with a
front-end loader or an electric shovel for delivery directly to the adjacent
power plant. SCAI owns a 50% joint venture interest in the equipment and
facilities at this mine and EPCOR owns the remaining joint venture interest. We
expect to acquire SCAI's interest in the equipment and facilities at this mine
during 2003. Also, as part of our intended acquisition of the Prairie Assets, we
expect to acquire certain royalty interests on coal produced from the Genesee
mine, in respect of which EPCOR pays royalties.

         The subbituminous coal at the Genesee mine is located in four
recognizable coal zones, which vary in thickness from 0.5 to 3.0 meters. All but
one of the coal zones is contiguous over the entire mine area.

         WHITEWOOD MINE

         The Whitewood mine is located 65 kilometers west of Edmonton, Alberta
and is a prairie mine-mouth operation. This mine supplies subbituminous thermal
coal to TransAlta's 588 MW Wabamun power plant. The mine's annual production
capacity is 2.8 million tonnes and 2002 sales were 2.8 million tonnes. The mine
uses one dragline to remove the overburden. Coal is then loaded onto a fleet of
coal haulers with a front-end loader or an electric shovel for delivery directly
to the adjacent power plant. TransAlta owns the mine and substantially all of
the related equipment and facilities.

         Fording operated the Whitewood mine under contract with TransAlta from
1986 until February 28, 2003. The current five-year mining contract expires
December 31, 2007 or earlier with a 90-day termination notice provision. We
expect to acquire the mining contract as part of our intended acquisition of the
Prairie Assets from SCP II during 2003. If TransAlta does not renew or
terminates the contract, we would not expect to incur any material costs because
TransAlta is contractually required to reimburse us for costs associated with
terminating the mining contract. Also as part of our intended acquisition of the
Prairie Assets, we expect to acquire certain royalty interests on coal produced
from the Whitewood mine, in respect of which TransAlta pays royalties.

         THIRD PARTY ROYALTY ARRANGEMENTS

         The Prairie Assets, which we intend to acquire from SCP II during 2003,
include extensive coal and mineral holdings in Alberta and Saskatchewan. Other
third parties and we are mining some of these coal and mineral holdings under
royalty agreements that have been assigned to SCAI. Royalty rates are




                                       45

<PAGE>


negotiated on a property-by-property basis and are based on mineral volumes
mined. In some cases, mining plans and production volumes are controlled by
third parties and are beyond our control. Agreements with third parties and us
provide that all reclamation and environmental liabilities with respect to these
properties are the responsibility of the party undertaking the mining activity.

MINE PROJECTS

         We hold several coal properties that could be brought into production
in the near term if a suitable market can be developed for the coal and subject
to obtaining necessary permits. The following is a brief description of each of
these projects.

         TELKWA MINE PROJECT

         The Telkwa mine project is located in west central British Columbia.
This project has 30.6 million tonnes of proven and 3.1 million tonnes of
probable bituminous thermal coal reserves. Coal has been mined in this area
intermittently since 1906. This project is located eight kilometers from the
main Canadian National Railway line, which could be utilized to transport coal
to the Ridley Island Terminals at Prince Rupert. Licenses and environmental
approvals will be sought when market conditions are conducive to development.

         BEAVERHILL MINE PROJECT

         The Beaverhill mine project, which is located approximately 62
kilometers southeast of Edmonton, Alberta, received a mine permit in 1987. This
project has 8.1 million tonnes of proven subbituminous thermal coal reserves.
Licenses and environmental approvals will be sought when market conditions are
conducive to development.

         BROOKS MINE PROJECT

         The Brooks mine project is located 145 kilometers southeast of Calgary,
Alberta. SCAI acquired the project from Fording on February 28, 2003. Fording
has reported that this project has 92 million tonnes of proven and 74 million
tonnes of probable subbituminous thermal coal reserves as at December 31, 2002.
Prior to February 28, 2003, Fording had applied for a permit to develop the
Brooks mine project. We are currently evaluating the merits of this project.
SCAI currently holds the rights to a power project, which if developed, would
use the coal reserves included in the Brooks mine project, which we intend to
acquire from SCP II as part of the Prairie Assets during 2003.

         UNDEVELOPED COAL PROPERTIES

         We have significant non-reserve coal properties that we hope to develop
into reserves in the future. We acquired non-reserve coal properties in the Judy
Creek South and Camrose-Ryley coal fields in 2001 and 2000 respectively. The
Camrose-Ryley property is located adjacent to the Beaverhill mine project and is
situated just south of the main Canadian National railway line. The Judy Creek
South property is situated adjacent to an existing transmission line that serves
the oil sands projects near Fort McMurray, Alberta. As part of our intended
acquisition of the Prairie Assets, we expect to acquire significant thermal coal
reserves and non-reserve coal properties in Canada, most of which are owned in
fee simple. Certain of these properties also include rights to other minerals.
We are currently evaluating the reserve and non-reserve coal properties, which
were owned by Fording until February 28, 2003. These reserves and non-reserve
coal properties include significant holdings in the Camrose-Ryley, Heatburg
(which is located approximately 35 kilometers east of Red Deer, Alberta) and
other coal fields.

COAL RESERVES

         Our coal reserves are classified based upon the Geologic Survey of
Canada publication Paper 88-21, "A Standardized Coal Resource/Reserve Reporting
System For Canada", J.D. Hughes, L. Klatzel-Mudry and D.J. Nikol, 1989.



                                       46

<PAGE>


         Coal reserves are broadly defined as coal that can be economically
mined using current technology and are further classified as proven or probable
according to the degree of certainty of existence. Reserve estimates as set
forth above were prepared internally by our professional engineers and
geologists under the supervision of our Vice President Operations, Howard Ratti,
P.Eng., and our Chief Geologist, Gary Johnston, P.Geol. Estimates are based on
geological data derived from ongoing mining operations, drilling program and
other geological examination. This information is combined with knowledge of
mining variables such as the maximum digging depth of equipment, the maximum
amount of overburden that can be moved to permit economic recovery of coal, the
percentage of in-place coal that can be recovered in mining, the percentage of
coal that can be economically recovered through processing plants and equipment
and labor productivity. Also considered are legal impediments to mining,
government regulations requiring efficient extraction of coal, coal prices and
economic conditions. These estimates are reviewed annually to reflect actual
coal production, new data or developments and changes in other assumptions and
parameters. Accordingly, reserve estimates will change from time to time
reflecting mining activities, analysis of new engineering and geological data,
changes in reserve holdings, modification of mining plans or methods, changes in
coal prices or production costs and other factors.

         The classification and presentation of proven (measured) and probable
(indicated) reserves conform to the requirements of the Canadian securities
regulations as set out in National Instrument 43-101 (the "National Instrument")
and prescribed by the United States Securities and Exchange Commission ("SEC")
as set out in Guide 7 -- Description of Property by Issuers Engaged or to be
Engaged in Significant Mining Operations of the Securities Act of 1933 as
amended ("SEC Guide 7").

         The following table summarizes our coal reserves within operating mine
permit areas and on development properties as of December 31, 2002:


<TABLE>
<CAPTION>
                                                                                            SULFUR        CALORIFIC
                                                               PROVEN (1)   PROBABLE (2)   CONTENT (3)     VALUE (4)
                                                              ------------ ------------   ------------   ------------
                                                                (millions of tonnes)         (%)           (KJ/Kg)
<S>                                                             <C>           <C>          <C>              <C>
BITUMINOUS METALLURGICAL
  Line Creek mine (5)(6)..................                        18.4          --           0.42           35,700
  Luscar Mine (5)(6)......................                         0.7          --         0.22-0.26        35,800
  Cheviot mine project (5)(6).............                        18.2          12.8       0.33-0.49        36,100
BITUMINOUS THERMAL
  Line Creek mine (5)(6)..................                         1.5          --           0.42           32,100
  Coal Valley mine........................                         5.8          10.3         0.27           30,500
  Obed Mountain mine......................                         5.1          --           0.46           30,000
  Telkwa mine project.....................                        30.6           3.1         0.93           33,000
SUBBITUMINOUS
  Paintearth mine.........................                        61.2          --           0.40           20,700
  Sheerness mine..........................                        60.5           7.3         0.55           20,000
  Beaverhill mine project.................                         8.1          --           0.38           21,000
LIGNITE
  Poplar River mine.......................                       178.9           5.3         0.62           14,300
  Boundary Dam mine.......................                       102.9          --           0.55           16,600
  Bienfait mine...........................                        78.6          --           0.42           17,900
                                                          ------------ -------------
Total reserves............................                       570.5          38.8
                                                          ============ =============
</TABLE>


(1) Proven (Measured) means reserves for which (a) quantity is computed from
    dimensions revealed in outcrops, trenches, workings or drill holes; grade or
    quality are computed from the results of detailed sampling and (b) the sites
    for inspection, sampling and measurement are spaced so closely and the
    geologic character is so well defined that the size, shape, depth and
    mineral content of the reserves are well-established.
(2) Probable (Indicated) means reserves for which quantity and grade and/or
    quality are computed from information similar to that used for proven
    (measured) reserves, but the sites available for inspection, sampling and
    measurement are farther apart or are otherwise less adequately spaced. The
    degree of assurance, although lower than for proven (measured) reserves, is
    high enough to assume continuity between points of observation.
(3) Estimated sulfur by weight, contract specification for bituminous coals,
    field average estimates for other coals.
(4) Approximate average calorific value, moist, ash free basis, air-dried
    bituminous coals, as received for other coals.
(5) Our 50% share of reserves only.
(6) Transferred to Fording effective February 28, 2003.




                                       47

<PAGE>


         RECONCILIATION OF RESERVES

         Our proven and probable coal reserves decreased from 704.6 million
tonnes as at December 31, 2001 to 609.3 million tonnes as at December 31, 2002,
primarily due to 2002 production volumes, reclassification of reserves to
non-reserve coal and reductions in reserves as a result of further exploration
and pit redesign.

         The following table provides a reconciliation and explanation of the
significant reserve changes:


<TABLE>
<CAPTION>
                                                               RESERVES AT                              RESERVES AT
                                                                DECEMBER 31  PRODUCTION                  DECEMBER 31
                                                                 2001(6)      IN 2002     ADJUSTMENTS     2002(6)
                                                               -----------  -----------   -----------   -----------
                                                                          (millions of tonnes)
<S>                                                             <C>           <C>         <C>            <C>
PROVEN
  Line Creek mine (1)(2)..................                        28.5           1.5         (7.1)         19.9
  Luscar Mine (1).........................                         1.0           0.8          0.5           0.7
  Cheviot mine project (1)................                        18.2          --           --            18.2
  Coal Valley mine (3)....................                        11.9           1.8         (4.3)          5.8
  Obed Mountain mine (4)..................                        39.3           1.4        (32.8)          5.1
  Telkwa mine project.....................                        30.6          --           --            30.6
  Paintearth mine.........................                        64.1           3.0          0.1          61.2
  Sheerness mine..........................                        63.6           3.6          0.5          60.5
  Beaverhill mine project.................                         8.1          --           --             8.1
  Poplar River mine (5)...................                       219.9           3.4        (37.6)        178.9
  Boundary Dam mine.......................                       109.7           6.2         (0.6)        102.9
  Bienfait mine...........................                        80.1           1.8          0.3          78.6
PROBABLE
  Luscar mine (1).........................                         0.7           0.2         (0.5)         --
  Line Creek mine (1).....................                        --            --           --            --
  Cheviot mine project (1)................                        12.8          --           --            12.8
  Coal Valley (3).........................                        --            --           10.3          10.3
  Telkwa mine project.....................                         3.1          --           --             3.1
  Sheerness mine..........................                         7.7          --           (0.4)          7.3
  Poplar River mine (5)...................                         5.3          --           --             5.3
                                                          ------------ ------------  ------------  ------------

Total.....................................                       704.6          23.7        (71.6)        609.3
                                                          ============ ============= ============  ============
</TABLE>


(1) Our 50% share only. Transferred to Fording on February 28, 2003.
(2) Additional exploration and pit redesign reclassified "reserve" to
    "non-reserve coal".
(3) Redesigning of pits, additional exploration and discontinued truck shovel
    operations reclassified "reserves" and "non-reserve coal".
(4) Revised economics reclassified "reserves" as "non-reserve coal".
(5) Environmental and logistical impediments to mining removed some "reserves"
    and transferred others to "non-reserve coal".
(6) Excludes reserves and production from the Highvale mine that is mined under
    contract. TransAlta owns the mine.



                               LAW AND REGULATION

         Coal reserves and leases in Canada are generally under the jurisdiction
of provincial governments. We gain access to our coal reserves through: (1) coal
leases from provincial governments, referred to as Crown coal leases; (2) our
freehold ownership of coal; (3) subleases from third parties who hold Crown coal
leases or freehold rights; and (4) our mine-mouth contracts with customers who
hold the rights. Royalty payments may be paid on Crown coal leases, freehold
rights and/or subleases. In general, coal reserves at any particular mine are
accessed through a variety of the above-mentioned methods.

         ALBERTA

         Alberta Crown coal leases are granted, under the Mines & Minerals Act,
for a term of 15 years and are renewable, subject to, the regulations in force
at the time of renewal, terms and conditions prescribed by order of the Minister
of Energy and consideration of remaining coal reserves. Annual lease rental
rates are $3.50 per hectare and there are no other expenditures required to
maintain the leases. New Crown coal leases on lands in Category 4 of "A Coal
Development Policy for Alberta, 1976" are




                                       48


<PAGE>



made available to the public through a competitive bidding process. The bulk of
our Alberta coal leases were acquired prior to the initiation of the bidding
process.

         Subbituminous coal under Crown coal lease that is used in power
generation in Alberta is subject to a flat royalty rate that is currently $0.55
per tonne. For bituminous coal, royalties are levied based on the mine-mouth
value of marketable coal produced and revenue generated by the sale of the coal
resource. Royalties are based on a two-tiered system with an initial rate of 1%
of the mine-mouth value of marketable coal produced from the Crown coal leases
per month. After the cumulative mine-mouth revenue of the coal mine equals or
exceeds the aggregate of the allowed cumulative project costs and the cumulative
return allowance of the project, an additional royalty on bituminous coal is
payable to the Crown, the value of which is equivalent to 13% of the net revenue
earned from Crown leases for a calendar year. Coal sold from leased, third party
freehold lands may also be subject to private royalties pursuant to agreements
under which the rights have been acquired. No provincial royalties are payable
on freehold coal.

         SASKATCHEWAN

         Saskatchewan Crown coal leases are granted under the Crown Minerals
Act, and Coal Mining Disposition Regulations, 1988, for a term of 15 years and
are renewable under effectively the same terms as Alberta Crown leases. Annual
lease rental rates are $5.50 per hectare and there are no other expenditures
required to maintain the leases. Prior to obtaining a Crown coal lease in
Saskatchewan, the applicant must first obtain a coal prospecting permit for coal
exploration. The costs associated with a coal prospecting permit are a $100.00
application fee and $1.00 per hectare for the first year and $1.00 per hectare
for each of two, six-month extensions allowed under the regulations. Upon expiry
of the coal prospecting permit, the permittee must either apply for a Crown coal
lease or cancel the permit. There is no competitive bidding process for
Saskatchewan Crown coal rights.

         In Saskatchewan, the sale of coal from Crown leases is subject to
payment of a Crown royalty in the amount of 15% of the average value of coal
related to the lease, payable quarterly. In addition, there are two taxes levied
against freehold coal rights. One is a freehold mineral tax of $3.71 per
hectare, payable yearly. The other is the freehold royalty that amounts to
approximately one-half of the Crown royalty rate. At the Bienfait mine, a rebate
of up to 87.5% of Crown and freehold royalties is available when selling prices
fall below a specified level. In 2002, the Bienfait mine was eligible for the
maximum rebate.

         BRITISH COLUMBIA

         British Columbia Crown coal licenses and Crown coal leases are granted
under the Coal Act. Crown coal licenses are granted for an indefinite term and
the rental rates start at $7.00 per hectare, escalating to $10.00 per hectare
after the first five years and continue to escalate by $5.00 per hectare every
five years. There is presently no cap on the rental rates. Prior to obtaining a
Crown coal lease, the licensee must first obtain a project approval certificate
issued under the Environmental Assessment Act. Once a project approval
certificate has been obtained, an application may be made for a coal lease.
Crown coal leases have a term of 30 years but may be renewed for a subsequent
period of 15 years. The annual rental rate is currently $10.00 per hectare.
There is no competitive bidding process for British Columbia Crown coal rights.

         In British Columbia, both Crown and freehold coal sales are subject to
the payment of a two level mineral tax. The first level is 2% on revenue less
operating costs (not including interest) with the next level being 13% on
cumulative revenue minus operating costs, capital costs and the amount payable
under the first level. Under the Mineral Land Tax Act, every owner of mineral
land must pay to the Crown a yearly tax based on the number of hectares owned.
This mineral land tax escalates on a graduated scale from $1.25 per hectare
(20,235 hectares or less) to $4.94 per hectare (more than 404,686 hectares). The
$1.25 per hectare charge applies to our freehold mineral interests held in
British Columbia.



                                       49

<PAGE>


         MINE PERMITTING

         In order to develop or extend an existing coal property, it is
necessary to obtain a mine permit from the applicable provincial government. In
certain instances, such as when mine operations cross navigable waters or
interfere with a fishery, it may be necessary to obtain permits from the federal
government. The process to obtain these permits involves disclosure of the
project to the applicable authorities. Proposed components of an Environmental
Impact Assessment ("EIA") are then published for public input and, with such
input the procedures and studies to be included in the EIA are finalized. We
must then complete the EIA and document full details of the mine development and
operational plans to complete the application. The authorities review the
application again with public input and, following required amendments or
additions, the application is deemed complete. Dependent upon the magnitude of
the project, the level of public interest and the location of the project, the
regulators may then require a public hearing process. When this process is
complete the regulator will either approve the project, request modifications to
the project and approve it as modified or reject the project. Once approved the
required permits are issued.

         If both the federal and provincial governments are involved the
application is subject to joint review. For a greenfields project the permitting
process can take three to five years whereas for a mine extension two years is
usually required as the EIA is not as detailed.

         We have the permits necessary to develop the Beaverhill mine project,
included in our proven and probable reserves. We had also acquired the permits
necessary to develop the Cheviot mine project, which we have subsequently
transferred to Fording. We have not completed the permitting of the Telkwa mine
project, which is also included in our proven and probable reserves. We have
completed the environmental impact assessment for the Telkwa mine project but
have decided not to submit the detailed application until we have identified a
niche market for the coal. We are not aware of any matters that would hinder our
ability to secure the permits for the Telkwa mine project. We intend to acquire,
from SCP II, the Brooks Mine project for which Fording had commenced permitting
activities. We have not fully evaluated the status of permitting activities for
the Brooks mine project but are not aware of any matters that would hinder our
ability to secure the permits for the Brooks mine project.

                                   ENVIRONMENT

         GENERAL

         Our management committee has a mandate to review environmental, health
and safety policies and programs, oversee our related performance and monitor
current and future regulatory issues. We believe that we are in material
compliance with all applicable environmental legislation.

         We have estimated our future liability for abandonment and site
restoration and have been accruing for this liability in accordance with
generally accepted accounting principles. The provisions for site restoration
and abandonment for the year ended December 31, 2002 are set out in note 7 to
the consolidated financial statements, which information is incorporated herein
by reference.

COAL

         The coal mining industry is subject to extensive regulation by federal,
provincial and local authorities as to matters including:

         -        employee health and safety;

         -        air quality;

         -        water quality and availability;



                                       50

<PAGE>

         -        the protection and enhancement of the environment (including
                  the protection of plants and wildlife);

         -        land-use zoning;

         -        development approvals;

         -        the generation, handling, use, storage, transportation,
                  release, disposal and clean-up of regulated materials,
                  including wastes; and

         -        the reclamation and restoration of mining properties after
                  mining is completed.

         Mining operations are regulated primarily by provincial legislation,
although we must also comply with applicable federal legislation and local
by-laws. A breach of environmental legislation may result in the imposition of
fines, other penalties and clean-up orders, which could potentially have a
material adverse effect on operations.

         Each of the provinces in which we operate has stringent environmental
legislation and requirements. These laws require approval of many aspects of
coal mining operations. The construction, development and operation of a mine
entails compliance with applicable environmental legislation and obtaining land
use and other permits, licenses and similar approvals from various governmental
authorities, which may involve costly and time consuming environmental impact
assessments. In addition, legislation requires that mined out sites be abandoned
and reclaimed to the satisfaction of provincial authorities. We do not
anticipate significant approval, issuance or renewal problems for its required
licenses and permits, but cannot give any assurance that its licenses and
permits will be renewed or granted in the future or that delays in obtaining or
failure to obtain approvals will not adversely affect operations.

         PROVINCIAL ENVIRONMENTAL LEGISLATION

         Mining operations span three provinces: British Columbia, Alberta and
Saskatchewan. In general, all three provinces have similar environmental
legislation. All three provinces have requirements for environmental impact
assessments of new projects or major expansions. These assessments typically
involve extensive stakeholder consultation, including public advertising and
input. Provincial jurisdiction extends from the opening of a mine to its
operations and closure. Each province also has its own legislation with respect
to heritage and cultural resources, the handling and transportation of dangerous
goods and site remediation and reclamation.

         In Alberta, the Environmental Protection and Enhancement Act ("EPEA")
establishes stringent environmental requirements relating to emissions,
clean-up, reclamation, conservation and disclosure. Alberta's EPEA also governs
the conduct of environmental impact assessments of new projects, existing
operations and mine closures. Operating licenses for up to ten years are issued
under the EPEA for virtually all aspects of mining operations. The Coal
Conservation Act, which is administered by the Energy Resources Conservation
Board, is the regulatory instrument that governs coal mining operations. The use
and protection of water are governed by the Water Act.

         The Province of Alberta has recently proposed the Climate Change and
Emissions Management Act ("Bill 37"). If enacted, Bill 37 would establish a
framework for management of greenhouse gases in the Province of Alberta. Bill 37
contemplates regulations regarding emissions offsets and targets for emissions
reductions of specified gases, for different sectors of the Alberta economy.
Bill 37 proposes sectoral agreements with industry, which may include minimum
energy efficiency levels and maximum levels of emissions of specified gases per
unit of energy input or output. With respect to the coal business, existing
customers produce a significant amount of electricity for regions they serve,
and it is expected they will continue to operate due to the ongoing and
increasing demand for electricity. If the power plants that we supply are
required to reduce carbon dioxide emissions, our customers may reduce coal
consumption, introduce new technology to reduce carbon dioxide emissions, engage
in programs



                                       51

<PAGE>


that would permit continued use of coal by paying for the right to do so, or
reduce carbon dioxide emissions in other areas of their businesses. Any
reduction of our customers' use of coal will reduce our coal sales, and any
restrictions on the burning of coal will negatively impact our revenue and net
earnings as well as our ability to extend existing contracts or to grow through
new coal sales.

         The Alberta government requires security bonding to be posted for mine
reclamation obligations based upon estimated costs to reclaim disturbed lands.
This obligation for security is satisfied by way of letters of credit provided
by Canadian banks.

         In Saskatchewan, environmental matters relating to mining operations
are governed primarily by the Environmental Management and Protection Act (the
"EMPA") and the Mineral Industry Environmental Protection Regulation made there
under. Under the EMPA and its regulations, permits and approvals are required
for any facility or operation that discharges a pollutant into the environment.
Approvals, typically issued for a one-year term, are routinely renewed each year
although there is no guarantee that this will not change. A development in
Saskatchewan may be subject to review under Saskatchewan's Environmental
Assessment Act. The Clean Air Act regulates air quality, including emissions
into the atmosphere, while the Water Corporation Act regulates the use of water.
The EMPA also regulates the decommissioning, abandonment and reclamation of a
mine or operation. The Saskatchewan government has recently enacted a
reclamation bonding system similar to the system in Alberta that it is in the
process of implementing and with which we will be required to comply.

         In British Columbia the primary legislation for the protection of the
environment is the Waste Management Act, including regulations made there under.
A project may be subject to review under British Columbia's Environmental
Assessment Act. Operating approvals are issued under a number of Acts, including
the Mines Act, the Waste Management Act, the Water Act, the Coal Act, the Land
Act and the Forest Act. Approvals are typically issued for the life of a
specific mine, pit or mining block, and include requirements to submit updated
reclamation information. The British Columbia government has a reclamation
bonding system similar to that of Alberta and with which we comply through
posting letters of credit provided by Canadian banks.

         FEDERAL ENVIRONMENTAL LEGISLATION

         Coal mining frequently involves crossing, impounding, diverting and
using surface waters. Such activities can require approval under federal
legislation, such as the federal Fisheries Act for the construction of a project
that may result in the harmful alteration of fish habitat or the Navigable
Waters Protection Act if the water course is navigable by watercraft.

         Other federal legislation that we must comply with includes the federal
Environmental Protection Act 1999, which generally regulates the use, importing,
storage and interprovincial or international transport of certain restricted and
prohibited substances. The federal Fisheries Act prohibits the alteration or
destruction of fish habitat, and prohibits the deposit of any substance that may
be harmful into water that may be inhabited by fish.

         The federal Environmental Assessment Act ("CEAA") requires that an
environmental impact assessment be conducted with respect to certain proposed
projects. Projects that are subject to CEAA include federally financed projects,
projects requiring the disposition of federal lands and projects requiring
prescribed federal regulatory actions, such as federal approvals. The CEAA may
apply to some of our proposed projects, which, for example, may impact fish
habitat or navigable waters.

         Although approvals under the federal Migratory Birds Convention Act are
not required, penalties under this statute can be imposed if activities result
in harm to migratory birds. New federal legislation relating to the protection
of endangered species is pending which could impact on our ability to develop
new mines, to mine in certain areas or could require added expenses to preserve
or enhance habitat for endangered species.



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         MUNICIPAL BY-LAWS

         We are also subject to local laws, including by-laws passed by local
municipalities relating to local land use, rural road closures, storm run-off
and nuisance situations, such as dust and weed controls.

         AIR QUALITY AND CLIMATE CHANGE

         The burning of coal results in the production of various combustion
products including sulfur, nitrogen and carbon compounds. Public and government
concern over the addition of these materials to the atmosphere may restrict the
burning of coal or may cause coal consumers to control the emission of these
compounds through investments in control technologies. Canada, as a party to the
United Nations Framework Convention on Climate Change (the "Convention") and the
subsequent implementation protocol that was adopted in 1997 (known as the Kyoto
Protocol), has stated its intention to reduce overall greenhouse gas emissions
to 94% of 1990 levels by no later than 2012. One of the greenhouse gases of
concern is carbon dioxide, which is produced from the burning of fossil fuels
including coal. Many other countries are also a party to the Convention and the
Kyoto Protocol and have similar intentions to limit greenhouse gas emissions. In
July 2001, an agreement was reached in Bonn, Germany among approximately 180
countries, which potentially will lead to ratification of the Kyoto Protocol by
several countries. In December 2002, the Government of Canada ratified the Kyoto
Protocol.

         With respect to the coal business, existing customers produce a
significant amount of electricity for regions they serve, and it is expected
they will continue to operate due to the ongoing and increasing demand for
electricity. If the power plants that we supply are required to reduce carbon
dioxide emissions, our customers may reduce coal consumption, introduce new
technology to reduce carbon dioxide emissions, engage in programs that would
permit continued use of coal by paying for the right to do so, or reduce carbon
dioxide emissions in other areas of their businesses. Any reduction of our
customers' use of coal will reduce our coal sales, and any restrictions on the
burning of coal will negatively impact our revenues and net earnings as well as
our ability to extend existing contracts or to grow through new coal sales.

         Luscar has been a member of the Voluntary Challenge Registry ("VCR")
since its inception. VCR is a voluntary program to report accomplishments in
greenhouse gas reductions. Since 1999, Luscar has attained gold level reporting
status and has received awards from VCR for leadership in the mining sector.

         ENVIRONMENTAL MANAGEMENT AND COMPLIANCE

         We are committed to meeting its responsibilities to protect the
environment wherever we operate and we anticipate making increased capital and
other expenditures as a result of the increasingly stringent environmental
protection legislation.

         We have established a comprehensive environmental management program
directed at environmental protection. The program consists of an environmental
policy, codes of practice, regular audits, the integration of environmental
procedures with operating procedures, employee training and emergency prevention
and response procedures. We intend to apply the same environmental management
program to the Genesee, Highvale and Whitewood operations.

         We believe that we are in material compliance with all applicable
environmental legislation. We endeavor to conduct mining operations in
compliance with all applicable federal, provincial and local laws, including
approvals obtained under those laws. Given the nature of the extensive and
comprehensive regulatory requirements, violations during mining operations
inevitably occur from time to time. We have been cited for few environmental
violations, and we have not incurred any violations that have had a material
adverse effect on the environment, our ability to continue any operation or on
our financial condition.



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         We believe that all approvals currently required to conduct our current
mining operations have been obtained. We may be required to prepare and present
to federal, provincial or local authorities data relating to the impact that a
proposed development or existing coal mine may have on the environment. Such
requirements could prove costly and time-consuming and could delay commencing
and continuing exploration or production operations.

         Future legislation and administrative regulations may further emphasize
the protection and enhancement of the environment and as a consequence, our
activities may be even more closely regulated. Such legislation and changes to
legislation, as well as future interpretations of laws and increased
enforcement, may require substantial increases in our equipment and operating
costs and delays, interruptions or a termination of operations, the extent of
which cannot be predicted.

         HEALTH AND SAFETY

         Like environmental matters, the provinces have primary jurisdiction
over health and safety matters at coal mines. The provinces either enforce
federal standards, or they have established their own equivalent legislation
governing safe work practices, both generally and specifically with respect to
mines. We carry out extensive health and safety training programs in an attempt
to provide a safe work place for its employees. In addition, all mines have
emergency response crews that are trained in advanced first aid and in
responding to emergency rescue situations.

         ABORIGINAL RIGHTS

         Canadian courts have recognized that aboriginal peoples may continue to
have unenforced rights at law in respect of land used or occupied by their
ancestors where treaties have not been concluded to deal with those rights.
These rights may vary from limited rights of use for traditional purposes to a
right of aboriginal title and will depend upon, among other things, the nature
and extent of prior aboriginal use and occupation. The courts have encouraged
the federal and provincial governments and aboriginal peoples to resolve rights
claims through negotiation of treaties.

         In British Columbia, few treaties exist with aboriginal peoples. Nearly
all of the land in British Columbia has been identified as being part of a
traditional territory for at least one aboriginal people. Under the British
Columbia Treaty Commission, each aboriginal people files a statement of intent
to negotiate, identifying the territory in which they historically lived and
carried out traditional activities.

         It is not possible to predict with certainty the impact which
aboriginal rights claims or future treaties that deal with these rights may have
on resource development or our ability to develop new or further develop
existing properties in British Columbia.

         In Alberta and Saskatchewan there are many treaties in place, and
aboriginal rights and claims therefore have less impact on resource development
since such claims are subject to the terms of those treaties.

         ELECTRIC UTILITY INDUSTRY

         The electric utility industry is subject to extensive regulation
regarding the environmental impact of electricity generation activities. New
legislation or regulations could be adopted that may have a significant impact
on coal mining operations or the ability of coal customers to use coal. Future
legislation and regulations could cause additional expense, capital
expenditures, reclamation obligations, restrictions and delays in the
development of new coal mines or the operation of existing coal mines, the
extent of which cannot be predicted. In the context of environmental permitting,
including the approval of reclamation plans, we must comply with legislated or
regulated standards and existing laws and regulations which may entail greater
or lesser costs and delays depending on the nature of the activity to be
permitted and how stringently the regulations are implemented by the permitting
authority.



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         TAX REGULATION

         For the purpose of income tax treatment at the federal and provincial
levels, our income is largely treated as resource income, and as such has
benefited from effective tax rates, which are lower than statutory tax rates. In
the 2003 federal budget, the Minister of Finance announced changes in taxation
for Canada's resource sector, including lower corporate tax rates, elimination
of the resource allowance, and changes to the deductibility of provincial
royalties. The changes contemplated by the federal budget will be phased in over
several years. The federal government has not yet released draft legislation and
regulations necessary to implement the proposed changes in resource taxation.

         The corporate structure of our owners and our subsidiaries is such that
our main operating subsidiary is tax efficient with respect to income taxes. We
have based our income tax provisions upon current income tax legislation. At
this time it is not possible to predict if, or when, changes may be made, but
there is potential for effective income tax rates to vary from those presently
recorded in our accounts.

                                LEGAL PROCEEDINGS

         From time to time, we are involved in legal proceedings arising in the
ordinary course of our business. Currently, there are no legal proceedings in
which we are involved that are outside the ordinary course of business or that
we would anticipate would result in a material adverse impact to us, our
financial condition or our results of operations.

ITEM 5     OPERATING AND FINANCIAL REVIEW AND PROSPECTS

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         Management's discussion and analysis should be read in conjunction with
the section entitled "Risk Factors" and the audited financial statements and
related notes that are included elsewhere in this annual report. References in
this annual report to "LCL", "we", "our" and "us" refer to Luscar Coal Ltd.
References to "LEP" refer to Luscar Energy Partnership, to "LCIF" refer to
Luscar Coal Income Fund, and to "LL" refer to Luscar Ltd.

                                    OVERVIEW

         We are the largest thermal coal producer in Canada, operating mines
that produce most of Canada's domestic thermal coal production. After giving
effect to the disposition of our metallurgical coal operations and the intended
acquisition of the Prairie Assets from SCP II during 2003, we own and operate
eight surface mines, including one mine in which we have a 50% ownership
interest, and we operate two surface mines under a mining contract with an
electric utility. Together, the mines that we operate produced almost 40 million
tonnes of coal during 2002, making us one of the largest coal producers in North
America.

         As a result of the transactions with Fording and after our expected
acquisition of the Prairie Assets from SCP II during 2003, substantially all of
our continuing operations will consist of thermal coal sales to domestic
customers, principally under long-term contracts to mine-mouth power generators
in western Canada. Other revenue from thermal coal operations is also expected
to included sales of thermal coal to industrial customers, contract mining at
the Highvale and Whitewood mines and royalty income derived from coal and potash
mining operations in Alberta and Saskatchewan. This is different than in prior
years when we served both thermal and metallurgical markets. Coal sales to
mine-mouth power generators are made on a free on board mine basis, and as a
result, selling prices do not include the recovery of substantial transportation
costs, as was the case with our metallurgical coal sales, which were
predominantly exported.



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         We refer to our Boundary Dam, Paintearth, Poplar River and Sheerness
mines together with the Genesee mine, which we intend to acquire from SCP II
during 2003, as mine-mouth operations because each is situated close to the
coal-fired power plant that it supplies. The mine-mouth operations deliver coal
pursuant to long-term coal supply contracts that expire from 2009 to 2026 and
beyond. Pricing under mine-mouth contracts is adjusted annually based on cost
indices that relate to our mine-site costs including labor, fuel, maintenance
and other factors. These contracts provide for the pass through to the customer
of royalties on coal production and property taxes. At four out of the five
mine-mouth operations, the customer is responsible for providing us with the
electricity to run the draglines and operate the mines. At the remaining
operation, we are responsible for the cost of electricity that is reflected in
our costs and our contract contains a price component related thereto, which is
included in our revenue. Where the customer provides the electricity, this cost
is borne directly by the customer and is not accounted for in our financial
statements. We cannot reasonably estimate the cost of electricity incurred
directly by our customers in these situations. Pricing in these contracts is not
subject to fluctuations based on the prices of other coals, competing fuels or
electricity. These contracts specify minimum tonnage amounts which the utilities
are required to purchase as well as, in some cases, fixed monthly revenues that
are unrelated to tonnes delivered and are to cover costs that we would incur
whether or not we made coal deliveries. The power plants supplied by these mines
provide a significant portion of electricity in Alberta and Saskatchewan. These
factors result in stable domestic revenue despite any delivery variations that
might occur.

         Our contract to mine coal at the Highvale mine expired at the end of
2002. TransAlta, the owner of the mine, awarded a new 5-year contract to Fording
effective January 1, 2003. We did not incur any material costs in terminating
our operations at Highvale since TransAlta reimbursed these costs in accordance
with the mining contract. As a result of the transactions with Fording and the
intended acquisition of the Prairie Assets from SCP II, we expect to reacquire
this contract and also expect to acquire the mining contract at the Whitewood
mine.

         Prior to the Fording transaction, our export revenue was derived from
metallurgical and thermal coal sold to customers outside of Canada. During 2002,
33% of our export sales were made to Japan, 16% to Korea, 23% to the United
States and Mexico, 12% to South America, and 10% to Europe and 6% to other
regions. We have long-term relationships with most of our export customers and
our export sales are under contracts of one to five years in duration, with
prices being negotiated annually. World steel production is the principal factor
influencing demand for metallurgical coal exports. Coal-fired electricity
generation, primarily in the Pacific Rim, is the principal factor influencing
demand for our thermal coal exports. Both steel production and coal-fired
electricity generation depend on global economic conditions. Resurgence of the
Asian economies in 2000, combined with rising energy prices and steel
production, led to an increase in demand and higher prices for export coals in
2001. In 2002, demand for metallurgical coal remained strong. However, in 2002
there was oversupply in the export thermal coal market, which resulted in
intense competition amongst world suppliers and significant price decline.

         Cost of sales includes the costs related to mining and processing the
coal, transportation, royalties and production taxes as well as land
reclamation. The costs of mining vary from mine to mine based on the method of
mining, which in turn is based on the mine's geology and topography. Our mining
costs are lower at our prairie mines where geologic and topographic conditions
are more favorable than at our mountain mines. As our mining operations progress
further into our reserves, the ratio of overburden to coal tends to increase and
our extraction costs increase. Although we believe our reserves are economically
recoverable with our existing equipment, it is possible to offset the impact of
higher mining ratios through investment in larger equipment, improvements in pit
designs and other productivity improvements.

         We incur processing costs at our mountain mines, namely Coal Valley and
Obed mines and at the metallurgical mines we operated prior to the Fording
transaction. Processing removes impurities from the coal prior to shipment to
increase the coal's heat content or improve its coking characteristics, to meet
customer specifications and to reduce shipping costs. This processing step is
not needed at our mine-mouth operations. We also incur higher costs at our
mountain operations to reclaim the lands we mine due to the contour of the land
and the nature of the overburden material. Following the transaction



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with Fording, we no longer operate any metallurgical mines, but are responsible
for the reclamation of the Gregg River mine and portions of the Luscar mine.

         We incur significant rail transportation and wharfage costs to deliver
coal to our export customers. Three of our four rail transportation agreements
for the westbound movement of coal contain provisions that increase or decrease
the price of transporting our coal based on the export prices we receive for our
coal sales. These costs will be significantly lower going forward now that we
have disposed of our metallurgical assets. In addition, most of the coal we
produce is subject to royalties and production taxes that are payable to
provincial governments and other mineral rights holders. At all of our
mine-mouth and contract mining operations, the customers pay these royalties and
production taxes directly or reimburse us.

         Generally, we depreciate long-term capital assets, including mining
properties, facilities and major mining equipment, using the straight-line
method over the remaining lives of our mines. Our ongoing replacement capital is
depreciated over its useful life, which generally ranges between five to ten
years. We regularly review our capital assets for any permanent value impairment
by comparing our future cash flows with our asset carrying values and, as a
result of such reviews, we reduced the carrying value of certain mines in 2000
and 2002.

         LEP acquired LCIF and us effective May 11, 2001 and, as a result of the
acquisition, we became a wholly owned subsidiary of LCIF whose sole purpose is
to invest in our company. LEP and LCIF have no independent operations or assets
and Luscar Ltd., our direct subsidiary, is the only entity in our corporate
structure that has operations. Generally accepted accounting principles do not
permit us to consolidate our financial statements with the financial statements
of LCIF and LEP prior to May 11, 2001. We are including in this annual report
financial statements of LEP and LCIF. LEP's SEC reporting for future periods
will include our financial statements until LEP's consolidated statements
include three years of results of our operations. We prepare audited financial
statements for LEP, which contain condensed consolidating information for LCIF,
our subsidiaries and us from May 11, 2001 forward.

         The principal differences between the earnings of LEP and us relate to
$643 million of subordinated notes issued by Luscar Ltd. and held by LCIF and
the non-controlling interest that LCIF owns in Luscar Ltd. through its holding
of special shares. Subsequent to the acquisition these subordinated notes and
special shares represent intercompany indebtedness and holdings; therefore, the
related interest payments and non-controlling interest have been eliminated in
the consolidated financial statements of LEP. There are also differences that
arise because push down accounting is not required under Canadian GAAP.
Particularly, the carrying value of capital assets and the related depreciation
are lower in LEP than in our financial statements because the fair value
allocated by LEP was less than our net book value. There are smaller differences
related to financial instruments and accruals for integration costs that will
have less impact in future years.

         Certain major events and transactions have affected the comparability
of our financial statements. In 2002, LCL wrote down its mine assets at Coal
Valley and Obed Mountain mines by $42.8 million since sales were affected by
oversupply in export thermal coal markets and lower demand from domestic
customers supplied from these mines. LEP's earnings do not reflect this
write-down because push down accounting is not required under Canadian GAAP and
LEP assigned lower values to these mines in allocating the purchase price when
it acquired LCL in May 2001. In 2000, when we closed the Gregg River mine
because the economic reserves were exhausted, we recorded closure costs of $15.1
million and a $25.3 million charge to write down the mine assets to their
realizable value. Also in 2000, we decided not to proceed with the Cheviot
project until there was less uncertainty in the export markets. As a result, it
was necessary to increase the provision for closure costs at the Luscar mine to
provide for the termination of the workforce which otherwise would have been
transferred to the Cheviot site. At the end of 2000, we sold a 50.0% interest in
the Line Creek mine to Consol Energy of Canada Ltd.

         As a result of the transfer of our metallurgical coal assets to Fording
and the intended acquisition of the Prairie Assets from SCP II during 2003,
substantially all of our continuing operations will consist of thermal coal
sales to domestic customers, principally to mine-mouth power generators in
western

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Canada. Accordingly, we have not provided separate information on our domestic
and export operations. Instead, we are providing separate information for our
metallurgical coal operations, which we have now disposed of, and for our
continuing thermal coal operations. This information will provide a better
understanding of our on-going business. Prior period information has been
restated to conform to this basis of presentation.

                            OUR RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

         Revenue. Our revenue in 2002 decreased to $595.6 million from $635.5
million in 2001, or by 6%. Our revenue from thermal operations in 2002 decreased
marginally to $441.6 million from $455.0 million in 2001, or by 3%. This
decrease was due to lower sales from our Coal Valley and Obed Mountain mines,
which were affected by oversupply in export thermal coal markets and lower
demand from domestic customers supplied from these mines. In January 2002 we
signed a new long-term coal supply agreement with SaskPower that had been agreed
to in 2001. As a result, 2001 revenue includes non-recurring revenue of $1.7
million from the Boundary Dam mine because the new prices were retroactive to an
interim agreement that was in effect from July 2000. Conditions in the export
thermal coal market were largely responsible for lowering our average thermal
coal price, which averaged $13.16 per tonne in 2002 compared to $13.51 per tonne
in 2001.

         Our revenue from metallurgical operations decreased to $154.0 million
in 2002 from $180.5 million in 2001, or 15%. This decrease was due to a 17%
reduction in shipments, which declined during 2002 as we reduced production at
the Luscar mine where coal reserves are almost depleted. The impact of lower
shipments was offset by higher average prices, which increased from $60.78 per
tonne in 2001 to $63.92 per tonne in 2002.

         Cost of sales. Our cost of sales decreased during 2002 to $469.0
million from $484.8 million in 2001, or 3%. Our net production during 2002 was
36.4 million tonnes compared with 36.1 million tonnes in 2001. Cost of sales
related to our thermal coal operations were $327.6 million in 2002 compared to
$327.0 million in 2001. On a per tonne basis, cost of sales increased from $9.67
per tonne in 2001 to $9.80 per tonne in 2002. In 2002, cost of sales was
affected by severance costs incurred at Coal Valley and Obed Mountain. We
reduced production by idling our higher cost truck and shovel mining equipment
in response to the weak export thermal coal market. Cost of sales at our mine
mouth operations was comparable to prior periods.

         Cost of sales related to our metallurgical operations were $141.4
million in 2002 compared to $157.8 million in 2001. On a per tonne basis, cost
of sales increased from $53.56 per tonne in 2001 to $58.22 per tonne in 2002. We
experienced higher production costs at the Luscar mine where we are now
producing from higher cost pits added to extend the life of the mine to the end
of 2003. We also incurred higher transportation costs as rail freight rates are
affected by the average selling prices we realize. Production costs were also
higher at Line Creek where there was an increase in the level of overburden
removal relative to coal production.

         Selling, general and administrative expenses. Our selling, general and
administrative expenses in 2002 decreased to $13.6 million from $14.5 million in
2001, or 6%.

         Take-over response costs. These costs are non-recurring and were the
costs of responding to LEP's public acquisition proposal and of implementing
management changes subsequent to the acquisition in 2001.

         Depreciation and amortization. Our depreciation and amortization
expense in 2002 decreased to $93.8 million from $100.0 million in 2001, or 6%.
Depreciation expense was higher in 2001 because of the amortization of
arrangement fees associated with bank credit facilities, which were replaced in
2001 with the senior credit facility.



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         Write-down and loss on disposal of capital assets. During 2002, we
recorded write-downs of $42.8 million related to our Coal Valley and Obed
Mountain mines, where sales were affected by oversupply in the export thermal
market and lower demand from domestic customers supplied by these mines. There
were no write-downs during 2001.

         Interest. Interest expense comprises interest on the subordinated notes
held by LCIF and other interest paid to our Senior Noteholders and other third
parties. During 2002, interest expense was $86.0 million compared with $89.1
million in 2001, of which $54.3 million was paid to third parties compared with
$46.8 million in 2001. Other interest increased in 2002 as LCL's floating rate
bank debt was replaced with fixed rate Senior Notes in October 2001. During
2002, we paid interest of $31.8 million on the subordinated notes held by LCIF,
compared with $42.4 million during 2001. The interest we pay to LCIF is based on
floating interest rates that are determined by reference to anticipated cash
flow and is eliminated on consolidation with LEP. The decrease in interest
payments reflects lower net earnings and higher capital spending in 2002.

         Foreign currency translation (gain) loss. Foreign currency translation
gains and losses reflect fluctuations in the Canadian dollar against the US
dollar and primarily relate to our US$275 million Senior Notes, but also to US
dollar cash balances and US dollar denominated working capital. The foreign
currency translation gain of $4.0 million in 2002 compared to a $8.4 million
loss in 2001 is largely due to the impact on the Senior Notes of a stronger
Canadian dollar.

         Income taxes. Our provision for income tax includes current taxes and
future income taxes. The current taxes include capital taxes on our net capital,
which are relatively stable and amounted to $2.5 million in 2002, compared to
$2.8 million in 2001. Our future income taxes relate to the difference between
our book income and our taxable income. Our income tax recovery in 2002
decreased to $47.6 million from $58.8 million in 2001, or 19%. Our future income
tax recoveries represent reductions in the previously recorded future income tax
liabilities. In 2002, these recoveries relate to decreases in statutory income
tax rates, provisions for actual and contingent income tax reassessments and
recoveries related to the current losses incurred. The reduced recovery
primarily relates to decreases in statutory income tax rates, which were
significantly lower this year than last.

         Net loss. The net loss was $53.9 million in 2002 compared with a net
loss of $10.9 million in 2001. The net loss increased due to the factors
discussed earlier including the $42.8 million write-down of assets at Coal
Valley and Obed Mountain mines, $11.2 million in reduced tax recoveries, offset
by the fact that there were no take-over defense costs in 2002, which amounted
to $9.9 million in 2001.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

         Revenue. Our revenue in 2001 decreased to $635.5 million from $657.1
million in 2000, or 3%. Our revenue from thermal operations in 2001 increased to
$455.0 million from $391.5 million in 2000, or 16%. The increase was due to a 4%
increase in sales volume and higher prices from our mine-mouth and contract
operations. Coal prices from our thermal coal operations averaged $13.51 per
tonne in 2001 compared to $12.08 per tonne in 2000. In particular, the Boundary
Dam mine received higher revenues from sales to SaskPower under a new long-term
coal supply agreement that was agreed to in 2001 and signed on January 30, 2002.
Our 2001 revenue included non-recurring revenue of $1.7 million from the
Boundary Dam mine because the new prices were retroactive to an interim
agreement that was in effect from July 2000. To a lesser extent, revenue from
our Paintearth and Sheerness mines increased in 2001 due to higher demand for
electricity generated by the power stations served by these two mines. Also, our
mountain and foothills mines, which produce higher value coals than our prairie
operations, shipped more sales to domestic customers in 2001 than in 2000.

         Our revenue from metallurgical operations decreased to $180.5 million
from $265.6 million in 2000, or 32%. This reduction was primarily due to the
closure of the Gregg River mine, which generated revenue of $50.0 million in
2000 compared with $3.2 million in 2001. Our share of revenue from the Line
Creek mine was $88.2 million in 2001, from our 50% ownership in the mine,
compared with $140.7 million in 2000 when we owned 100% of the mine. Rising
export coal prices offset the impact of reduced



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shipments from Line Creek and Gregg River. Coal prices from our metallurgical
operations averaged $60.78 per tonne in 2001 compared to $53.22 per tonne in
2000. Since most price increases became effective April 1, 2001, the full year
impact was not realized in 2001.

         Cost of sales. Our cost of sales decreased during 2001 to $484.8
million from $534.3 million in 2000, or 9%. Our net production during 2001 was
36.1 million tonnes compared with 37.5 million tonnes in 2000. Cost of sales
related to our thermal coal operations amounted to $327.0 million in 2001
compared to $269.2 in 2000. On a per tonne basis, cost of sales was $9.67 per
tonne in 2001 compared with $8.31 per tonne in 2000. The increased proportion of
sales from our foothills mines, which have a higher cost structure than our
mine-mouth operations, increased the average cost. Also, production costs for
export sales from our Alberta mines rose because electricity costs more than
doubled upon deregulation of the electricity markets and supply shortages.
Electricity costs moderated in the latter half of 2001 but remained higher than
in 2000. Our mine-mouth operations were not affected by rising electricity costs
because our contracts require the customer to supply the electricity or to
reimburse our electricity costs.

         Cost of sales from our metallurgical operations was $157.8 million in
2001 compared to $265.1 million in 2000. This decrease in cost of sales
primarily related to our Gregg River mine and the 50% interest in the Line Creek
mine. This decrease was partially offset by $19.7 million of additional closure
cost provisions at the Gregg River and Luscar mines and higher transportation
and energy costs. On a per tonne basis, cost of sales was $53.56 per tonne in
2001 compared with $53.12 per tonne in 2000. The increase in average
metallurgical coal selling prices led to higher transportation costs as rail
freight rates are affected by the average selling prices we realize. During
2001, our production costs per tonne increased at the Line Creek mine as
productivity fell short of targets while we expanded the mine's capacity by 36%.
Difficult labor negotiations during the third quarter, which resulted in a new
four-year collective bargaining agreement, also had an impact on productivity at
the Line Creek mine. Production costs at the Luscar mine also rose because
electricity costs more than doubled upon deregulation of the electricity markets
and supply shortages. Electricity costs moderated in the latter half of 2001 but
remained higher than in 2000.

         Selling, general and administrative expenses. Our selling, general and
administrative expenses in 2001 decreased to $14.5 million from $14.7 million in
2000, or 1%.

         Take-over response costs. These costs are non-recurring and were the
costs of responding to LEP's public acquisition proposal and of implementing
management changes subsequent to the acquisition in 2001.

         Depreciation and amortization. Our depreciation and amortization
expense in 2001 decreased to $100.0 million from $105.9 million in 2000, or 6%,
because depreciation on asset additions was offset by the reduction in our
depreciable asset base which occurred when we closed the Gregg River mine and
sold 50% of the Line Creek mine.

         Write-down and loss on disposal of capital assets. During 2000, we
recorded write-downs of $25.3 million because we closed the Gregg River mine and
we recorded a loss of $20.5 million on a sale of a 50% interest in the Line
Creek mine. There were no write-downs during 2001.

         Interest on subordinated notes. During 2001, we paid interest of $42.4
million on the subordinated notes held by LCIF, compared with $11.2 million
during 2000. The interest we pay to LCIF is based on floating interest rates
that are determined by reference to anticipated cash flow.

         Other interest. Our other net interest expense in 2001 decreased to
$46.8 million from $52.4 million in 2000, or 11%. Prior to our refinancing in
October 2001, our other net interest expense decreased because of the reductions
we made in our long-term bank debt during 2000, lower prime lending rates under
our former bank credit facility, and interest we received on income tax refunds.
Since the refinancing, our net interest expense has increased because of the
additional long-term debt and higher fixed interest rates under the US$275
million 9.75% Senior Notes due October 15, 2011.


                                       60


<PAGE>


         Foreign currency translation (gain) loss. Foreign currency translation
gains and losses reflect fluctuations in the Canadian dollar against the US
dollar and primarily relate to our US$275 million Senior Notes. The foreign
currency translation loss of $8.4 million in 2001 is due to the impact on the
Senior Notes of a weaker Canadian dollar.

         Income taxes. Our provision for income tax includes current taxes and
future income taxes. The current taxes include capital taxes on our net capital,
which are relatively stable and amounted to $2.8 million in 2001, compared to
$3.0 million in 2000. Our future income taxes relate to the difference between
our book income and our taxable income. Our income taxes recovered in 2001
increased to $58.8 million from $45.6 million in 2000, or 29%. Our future income
tax recoveries represent reductions in the previously recorded future income tax
liabilities. In 2001, these recoveries reflect decreases in statutory income tax
rates, the reversal of provisions made in prior years for actual and contingent
income tax reassessments and recoveries related to the current losses incurred.

         Net earnings. Net earnings reflected in our financial statements are
after deducting the non-controlling interest held by LCIF in our direct
subsidiary, Luscar Ltd. Before the acquisition of LCIF by LEP, LCIF held a
non-controlling interest in Luscar Ltd. However, subsequent to the acquisition,
both Luscar Ltd. and we became wholly owned subsidiaries of LCIF and LEP, which
makes it more meaningful to compare our earnings before deducting the
non-controlling interest. During 2001, such earnings amounted to a loss of $10.9
million compared to a loss of $59.9 million during 2000. The reported earnings
during 2001 included non-recurring expenses related to the acquisition. During
2000, the reported earnings included charges of $43.6 million (net of the income
tax impact) related to the closure of the Gregg River mine, the sale of 50% of
the Line Creek mine and the planned closure of Luscar mine.



                         LIQUIDITY AND CAPITAL RESOURCES

         Net cash provided from operating activities was $36.8 million compared
to $38.0 million in 2001 and $18.6 million in 2000. During 2002, the impact of
lower margins in 2002 was offset by the reduction in non-cash working capital
requirements and lower interest paid to LCIF on our subordinated notes. The
increase from 2000 to 2001 was due to improved net earnings and reductions in
non-cash working capital requirements, which were offset by a $31.2 million
increase in interest paid to LCIF on our subordinated notes. Our working capital
requirements increased in 2000 as we increased coal inventories at our export
operations.

         Our cash invested in working capital can fluctuate from period to
period. Because we have relatively few customers to whom we ship large
quantities of coal, our accounts receivable and coal inventories often vary
significantly from one period to the next, depending on the timing of shipments.
Following the divestiture of our metallurgical coal assets, which occurred on
February 28, 2003, fluctuations in accounts receivable and inventory levels are
expected to be smaller as our business will be predominantly mine-mouth
operations. We also expect our accounts payable balances to fluctuate depending
on the timing of payrolls and of equipment purchases.

         We incur capital expenditures to replace existing equipment that has
served its useful life, to develop new mining areas at existing mines, to expand
production capacity and to effect productivity improvements. Our capital
expenditures were $51.0 million in 2002. In addition to normal replacement of
equipment, we invested $12.0 million to replace a dragline tub at Poplar River
mine, $10.0 million to upgrade the reclamation fleet at Boundary Dam mine and
$7.0 million towards the replacement of our information systems, which will be
completed in 2003. Our capital expenditures amounted to $27.9 million in 2001
and consisted mainly of replacement capital expenditures. Capital expenditures
in 2001 and 2000 were $27.9 million and $17.8 million, respectively. As a result
of the closure of the Gregg River mine, we had surplus equipment that we
transferred to other mines, which helped reduce our capital requirements in
2000. Assuming we acquire SCAI from SCP II, we expect that, for the foreseeable
future, our annual replacement capital requirement will be between approximately
$25 million to $40 million. We fund our capital requirements from cash provided
by operating activities and expect that cash generation in the



                                       61

<PAGE>


future will be sufficient to meet these needs. As of December 31, 2002, our
outstanding capital commitments were not significant and were incurred in the
ordinary course of business.

         Our investing activities required cash of $50.2 in 2002 compared with
$25.8 million in 2001, primarily for capital expenditures. During 2000, we
generated $56.7 million of cash by selling 50.0% of the Line Creek mine,
resulting in net cash generated by investing activities of $41.1 million after
deducting our capital expenditures.

         During 2002, our financing activities generated cash of $22.5 million,
primarily in the form of advances from LEP. During 2001, our financing
activities required cash of $14.2 million. The proceeds from the issue of US$275
million 9.75% Senior Notes due October 15, 2011 were used to repay existing bank
credit facilities and to provide cash for future operating requirements. During
2000, our financing activities used net cash of $60.2 million to reduce our
operating line of credit and long-term debt, primarily with the Line Creek
proceeds. During 2001, a portion of the interest paid to LEP on intercompany
debt were returned to fund non-recurring capital expenditures.

         In addition to the Senior Notes, which were issued in 2001, we arranged
a new bank credit facility, which allows aggregate borrowings of up to $100
million, of which up to $75 million can be used for letters of credit. Although
we have not borrowed under this bank credit facility, we have used this bank
credit facility to issue approximately $62.5 million of letters of credit. Most
of these letters of credit are provided to provincial governments as security
for our reclamation obligations. Please see "Item 10 - Additional Information-
Material Contracts" for more detail about the terms of our indebtedness. In
October 2002, the Senior Credit Agreement was renewed until October 4, 2003
under the same terms and conditions.

         We have two promissory notes outstanding, a 12.75% note maturing in May
2003 and a 9.625% note maturing in December 2004. The 12.75% note has a
principal amount of $45.0 million less a related sinking fund that reduces the
amount payable to $22.1 million. The 9.625% note has a principal amount of $89.3
million less a related sinking fund that reduces the amount payable to $47.3
million. These amounts are disclosed in Note 6 to the Luscar Coal Ltd. financial
statements. Both of these notes relate to asset acquisitions at mine-mouth
operations. The related long-term coal supply agreements provide that the
customer reimburses us, as part of the coal price, for substantially all of the
interest and sinking fund payments related to the promissory notes. At maturity,
we are obligated to repay the promissory notes, net of sinking fund balances, at
which time the customer will reimburse us for the net payment pursuant to the
related coal supply contracts. Please see "Item 10 - Material Contracts". On May
18, 2003 when the promissory note for $45 million at 12.75% becomes due and
payable, the difference between the principal amount and the sinking fund
payment will be recorded as other income. After this promissory note has been
repaid, revenues under the Boundary Dam coal supply agreement will decrease by
approximately $5.7 million per annum, offsetting the elimination of interest
costs under the promissory note.

         At December 31, 2002, our long-term debt of $ 484.8 million included
$5.9 million related to capital lease obligations, which will be serviced from
operating cash flows, and $69.4 million related to the promissory notes, the
servicing and repayment of which is provided for as discussed above. The
carrying value of the Senior Notes fluctuates with the exchange rates and the
$434.4 million related to the Senior Notes reflects current foreign exchange
rates as at December 31, 2002. The Senior Notes are not due until October 15,
2011 and the annual servicing costs will be funded from operating cash flows. We
believe that our current operations will support the retirement or refinancing
of the Senior Notes at maturity.

         To optimize our tax structure, our operating subsidiary, Luscar Ltd.,
has two intercompany subordinated notes outstanding which are held by LCIF, a
$350 million aggregate principal amount of 12.5% subordinated notes due 2026 and
a $293 million aggregate principal amount of 7.5% subordinated notes due 2027.
Luscar Ltd. and LCIF each guarantee our obligations under the Senior Notes,
therefore the Luscar Ltd. subordinated notes are subordinated to the guarantees
of the Senior Notes. Going


                                       62


<PAGE>


forward, the Luscar Ltd. subordinated notes will remain outstanding and the
interest payments received by LCIF will be reinvested in our operations or
retained by LEP and would be available to us.

         We believe that our cash flow from operations, together with available
borrowings under the new credit facility, will be sufficient to fund our
operations and commitments for the foreseeable future. However, we cannot assure
you that our business will generate cash flow from operations in an amount
sufficient to enable us to service our indebtedness, including the Senior Notes,
or to fund our other liquidity needs.

                 DIFFERENCES BETWEEN CANADIAN GAAP AND U.S. GAAP

         The discussion and analysis has been based upon financial statements
prepared in accordance with Canadian GAAP, which differs in certain respects
from U.S. GAAP. For a further discussion on the differences between Canadian
GAAP and U.S. GAAP, see our, LEP's and LCIF's audited financial statements and
the notes thereto included elsewhere in this annual report.

                          CRITICAL ACCOUNTING POLICIES

         In preparing our financial statements, we are required to make
estimates and assumptions that affect the reported amount of assets and
liabilities, the disclosure of contingent liabilities at the date of the
financial statements, and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from our estimates.

         In particular, the amounts that we record for depreciation and
amortization of mining properties and for reclamation, site restoration and mine
closure are based on estimates of coal reserves and future costs. We regularly
update our estimates to reflect new data on coal reserves and new information
regarding future costs for reclamation, site restoration and mine closure, which
we base on our engineering plans. These estimates generally do not vary
materially from actual results; however, as was the case when new drilling
information led to our decision in 2000 to close the Gregg River mine,
unanticipated material differences may occur.

         We also regularly assess whether or not there has been any permanent
impairment of our mining properties, using projections of future cash flows
based on our engineering plans. Write-downs of mining properties can result from
changing market conditions, as in the case of our write-downs of export thermal
mines when export thermal coal prices declined significantly this year, or from
changes in estimates of coal reserves, as in the case of the closure of Gregg
River mine in 2000. Such write-downs may be material in amount.

                      RECENTLY ISSUED ACCOUNTING STANDARDS

         There have been recent releases related to accounting standards and
those that we believe may be relevant to our business are disclosed in Note 20
to the consolidated financial statements. The releases include pronouncements on
accounting for asset retirement obligations, which we intend to adopt in 2003.
We are in the process of assessing the impact of these releases on us. Although
the assessment is not complete, we do not believe that these releases will have
a significant impact on our results from operations.

                                       LEP

         LEP financial statements are provided in this annual report because it
is a guarantor of the Senior Notes. LEP is a general partnership formed on
February 20, 2001 under the laws of Ontario, Canada. On that date LEP announced
an offer to acquire all of the outstanding units and convertible debentures of
LCIF. As a result of that offer, LEP acquired control of LCIF on May 11, 2001
and by June 30, 2001 had become the owner of 100% of the equity interests of
LCIF, Luscar Ltd. and us. Effective on May 11, 2001, LEP began accounting for
LCIF and us as wholly owned subsidiaries.



                                       63

<PAGE>


         LEP receives all of LCIF's distributable cash as well as all interest
LCIF pays on its convertible debentures. Any taxable income generated by LEP is
taxed in the hands of its partners.

         The consolidated financial statements of LEP reflect the acquisition of
LCIF by LEP and the impact that the new ownership structure had on LEP's results
of operations for the periods ended December 31, 2001 and 2002.

         Prior to May 11, 2001, LEP did not have any operations. Thereafter, LEP
presents its financial statements on a consolidated basis including our results
of operations, as well as those of LCIF.

         LEP's consolidated financial statements differ from ours for several
reasons. The $643 million of subordinated notes are held by LCIF, which is
wholly owned by LEP, therefore the related debt and interest expense is
eliminated upon consolidation. Under Canadian GAAP, LEP did not apply push down
accounting to the acquisition of LCIF and us. As a result, LEP's consolidated
carrying values of financial instruments and capital assets differ from those
reflected in our accounts. In 2002, LEP's earnings were not impacted when we
wrote down our Coal Valley and Obed mines by $42.8 million ($27.6 million after
income taxes). Our revenues are less because LEP recorded foreign currency
forward contracts at their fair values at acquisition, to be amortized when the
contracts are settled. Also, because LEP valued our interest rate swap at fair
value, our interest expense is higher than reported by LEP. Our depreciation
expense is higher than reported by LEP and reflects the difference between the
underlying purchase price paid by LEP and our net book value. Finally, LEP's
selling, general and administrative costs were less than our costs, primarily
because LEP's purchase accounting included accruals for anticipated costs
related to the acquisition, which were reduced when these costs were determined.

                                      LCIF

         LCIF financial statements are provided in this annual report because it
is a guarantor of the Senior Notes. LCIF is an income trust formed under the
laws of Alberta, Canada whose purpose is to invest in securities related to the
operations of Luscar Ltd. All of its earnings are derived from its investment in
us and Luscar Ltd. LCIF's net income after May 11, 2001 will be consolidated
with LEP.

         On May 11, 2001, LEP acquired effective control of LCIF and was in a
position to complete the acquisition of all the remaining equity interests of
LCIF. As a result of the change in control of LCIF, our common shares were
transferred from Luscar Management Corporation to LCIF and we became wholly
owned by LCIF.

         Because LCIF did not control Luscar Ltd. or us prior to May 11, 2001,
LCIF accounted for its investments using the equity method. From May 11, 2001
forward, LEP is providing you with information on LCIF through the condensed
consolidating information note included in its financial statements.

         A detailed review of LCIF financial statements is not meaningful and
the discussion would not provide any significant additional information as
compared to our financial statements and the related discussion contained in
"Our Results of Operations" above. LCIF has distributed cash to its unit holders
as follows:

<TABLE>
<CAPTION>
                                                                ($000'S)
                                                                --------
<S>                                                             <C>
1998.........................................................    $64,549
1999.........................................................     48,751
2000.........................................................         --
2001 (to May 11, 2001).......................................         --
</TABLE>


         These distributions were based on interest and dividend income received
by LCIF from us less interest expenses on its convertible debentures and its
administrative costs. LCIF incurred administrative expenses related to running
the fund, primarily for providing unit holder information including annual




                                       64

<PAGE>

reports and annual meetings. These expenses amounted to $0.9 million in 1998,
$1.2 million in 1999, $1.0 million in 2000 and $0.1 million from January 1, 2001
to May 11, 2001. In 2001, LCIF incurred $12.3 million in expenses to respond to
LEP's offer to acquire all of the units and convertible debentures. Interest
costs on the convertible debentures amounted to $10.0 million per year of which
$4.0 million in 2000 and $4.6 million in 1999 was charged to earnings. The
remaining portion was charged against unit holders' equity.

ITEM 6     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

                     EXECUTIVE OFFICERS AND DIRECTORS OF LCL

         The following table sets forth information concerning the executive
officers and directors of LCL. The board of directors consists of five members.
Each director is elected by written resolution to hold office until his or her
respective successor is elected and qualified. Directors receive no fees for
their service as directors. Officers serve at the discretion of the board of
directors.

<TABLE>
<CAPTION>
                NAME                     AGE                               POSITION
-------------------------------------   ----- -----------------------------------------------------------
<S>                                     <C>    <C>
Dennis G. Maschmeyer................      64   Director, Chairman, President and Chief Executive Officer
Jowdat Waheed.......................      40   Director
Samuel W. Ingram, Q.C...............      58   Director
Patrice Merrin Best.................      54   Director
Joseph W. Bronneberg................      48   Director, Vice President, Finance and Chief Financial Officer
N. Allen Maydonik, Q.C..............      58   Vice President, General Counsel and Corporate Secretary
Howard Ratti........................      48   Vice President, Operations
Robert W. Bell......................      45   Vice President, Marketing and Development
Brian McClelland....................      61   Vice President, Human Resources
Robert Danelesko....................      44   Vice President, Transition
Ernest F. Lalonde...................      53   Vice President, Investor Relations
</TABLE>


         Mr. Maschmeyer has served as president and chief executive officer of
Sherritt since December 2001, prior to which he served as senior vice president,
metals operations of Sherritt from 1995 to 2001. In May 2002, Mr. Maschmeyer was
appointed president, chief executive officer and management committee member of
LEP, chairman, president, chief executive officer and trustee of LCIF, and
chairman and director of LCL. In April 2003, Mr. Maschmeyer also assumed the
duties of president and chief executive officer of LCL.

         Mr. Waheed received his Bachelor of Science degree in Economics at the
Wharton School, University of Pennsylvania in 1985 and a Bachelor of Science
degree in Systems Science and Engineering, School of Engineering and Applied
Science, University of Pennsylvania in 1986. Mr. Waheed is a Chartered Financial
Analyst. Mr. Waheed became senior vice president and chief financial officer of
Sherritt in May 2000 and has served as president and chief executive officer of
Sherritt Power Corporation from 1998 until 2003, when it was acquired by
Sherritt. From 1995 to May 2000, he served in the office of the chairman of
Sherritt. In 2001 Mr. Waheed became a director of LCL, a trustee of LCIF and a
member of the management committee, senior vice president and chief financial
officer of LEP.

          Mr. Ingram has served as senior vice president, general counsel and
corporate secretary of Sherritt since November 1995. Prior to November 1995, he
served as vice president, general counsel and corporate secretary of Viridian
Inc. (formerly Sherritt Inc.), a fertilizer company. In 2001 Mr. Ingram became a
director of LCL, a trustee and secretary of LCIF, and senior vice president,
general counsel and corporate secretary of LEP.

         Ms. Merrin Best was appointed executive vice president and chief
operating officer of Sherritt in November of 1999. Between December 1996 and
November 1999, Ms. Merrin Best served as senior vice president, corporate office
of Sherritt. From November 1995 through 1996 she served as Sherritt's vice
president, corporate affairs. In 2001 Ms. Merrin Best was elected a director of
LCL.



                                       65

<PAGE>


         Mr. Bronneberg received his chartered accountant designation in 1978
and his Bachelor of Commerce degree from the University of Alberta in 1976. He
began his business career in 1976 with Peat Marwick & Mitchell & Co. In 1979, he
joined A. E. Lepage Real Estate as a regional controller. In 1981 he joined the
Bowlen Group of Companies as controller and held various senior financial
positions related to the Bowlen Group's U.S. and Canadian holdings. He became
controller of Luscar in 1990 and was appointed vice president, finance and chief
financial officer of LCL in 2001. Mr. Bronneberg was appointed as a director of
LCL in April 2003. Mr. Bronneberg will become chief financial officer of
Sherritt International Corporation's oil and gas division in June 2003 and will
remain a director of LCL.

         Mr. Maydonik received his Bachelor of Arts degree in 1966 and his
Bachelor of Laws in 1969, both from the University of Alberta. In 1991 he was
appointed Queen's Counsel and in 1992 received his Masters in Business
Administration from Syracuse University. He began his law career in private
practice and then with the Department of the Alberta Attorney General. He joined
Luscar Coal Ltd. in 1980 as corporate counsel and was made general counsel and
corporate secretary in 1983. During 2002, Mr. Maydonik was appointed as vice
president, general counsel and corporate secretary of LCL.

         Mr. Ratti received his Bachelor of Science degree in Civil Engineering
in 1978 from Loughborough University of Technology. He began his career as a
site engineer with Murphy Mining and joined Luscar in 1981 as a mining engineer.
In 1989, Mr. Ratti became a general manager of the Coal Valley mine and in
September 1992 was made vice president and general manager of our Saskatchewan
operations. From June 1995 to March 1998 he served as vice president of eastern
operations of Andalex Resources, a coal company owned by the former owners of
Luscar. From 1998 to 2001, Mr. Ratti served as vice president and general
manager, engineering and operations of Luscar Ltd. During 2001, Mr. Ratti was
appointed as vice president, mountain mines and engineering. In April 2003, Mr.
Ratti was appointed as vice president, operations of LCL.

         Mr. Bell received his Bachelor of Engineering degree in mining from
McGill University in 1980 and his Masters of Business Administration from
Queen's University in 1988. He began his career in 1980 with Syncrude Canada
Ltd. and joined Luscar in 1988 as a financial analyst. He moved to the marketing
department in 1990 and progressed to vice president and general manager,
international coking coal by 1998. He was appointed vice president, marketing in
2001 and vice president, marketing and development of LCL in April 2003.

         Mr. McClelland has served as vice president, human resources of
Sherritt since September 2000, prior to which he served as Sherritt's general
manager, human resources. Mr. McClelland was appointed vice president, human
resources of LCL in April 2003.

         Mr. Danelesko has served as vice president, business development of
Sherritt since February 1997, and prior to that he was general manager,
procurement and logistics since November 1995. In 2001 he became a trustee of
LCIF. Mr. Danelesko was appointed vice president, transition of LCL in April
2003.

         Mr. Lalonde holds a Bachelor of Applied Science degree and a Masters of
Business Administration degree, both from Queen's University. From 1979 to 2001,
Mr. Lalonde held various senior positions with Luscar, most recently as
Treasurer and Director of Investor Relations. In January 2002, Mr. Lalonde was
appointed Vice President, Investor Relations and corporate affairs of Sherritt
as well as Vice President, Investor Relations of LCL.

               EXECUTIVE OFFICERS AND MANAGEMENT COMMITTEE OF LEP

         The following table sets forth information concerning the executive
officers and management committee of our ultimate parent, LEP. The management
committee consists of four members. Under the terms of the partnership
agreement, three of the members (Messrs. Delaney, Waheed and Maschmeyer) are
appointed by Sherritt and one member (Mr. Apperley) is appointed by Teachers'.
Additionally, decisions of the management committee are made by majority action
that must include, in every case, the



                                       66


<PAGE>


approval of the Teachers' appointee. Members of the management committee do not
receive fees for their service as members. Officers serve at the discretion of
the management committee.

<TABLE>
<CAPTION>
               NAME                      AGE                            POSITION
--------------------------------------  -----  ------------------------------------------------------------------------------
<S>                                     <C>    <C>
Ian W. Delaney......................      59   Chairman and Management Committee Member
Trevor M. Apperley..................      53   Management Committee Member
Dennis G. Maschmeyer................      64   President, Chief Executive Officer and Management Committee Member
Jowdat Waheed.......................      40   Senior Vice President, Chief Financial Officer and Management Committee
                                               Member
Samuel W. Ingram, Q.C...............      58   Senior Vice President, General Counsel and Corporate Secretary
Ernest F. Lalonde...................      53   Vice President, Investor Relations
</TABLE>


         Mr. Delaney has served as a director and chairman of the board of
directors of Sherritt since 1995. Until October 1996, he served as chairman of
the board, chief executive officer and a director of Viridian Inc. (formerly
Sherritt Inc.), a fertilizer company. Mr. Delaney also serves as a director and
chairman of the boards of Sherritt Power Corporation, Dynatec Corporation, The
Westaim Corporation, and as a director of Encana and Co-Steel Inc. Mr. Delaney
served as president and chief executive officer of The Horsham Corporation, an
investment company, from 1987 to 1990, and president and chief operating officer
of Merrill Lynch Canada Inc., from 1984 to 1987. In 2001, Mr. Delaney was
appointed as a member of the management committee and chairman of LEP.

         Mr. Apperley has served as Director, Relationship Investments of
Teachers' since 2002. Prior to that, Mr. Apperley was president and chief
executive officer of zed.i solutions inc., a publicly traded remote access
wireless communications company. Prior to that, Mr. Apperley served as vice
president corporate development for CanWest Global Communications Corp. and vice
president business development with Telus Corporation, both of which are
publicly traded companies.

         Please see "--Executive Officers and Directors of LCL" above for
information regarding Messrs. Maschmeyer, Waheed, Ingram, and Lalonde. Messrs.
Waheed and Ingram were appointed in 2001 and Messrs. Maschmeyer and Lalonde were
appointed in 2002. Mr. Apperley was appointed to LEP's management committee
during 2003.

                     EXECUTIVE OFFICERS AND TRUSTEES OF LCIF

         The following table sets forth information concerning the executive
officers and trustees of our parent, LCIF. The board of trustees consists of six
members, all of whom were appointed as trustees during 2001 except for Mr.
Maschmeyer who was appointed during 2002. Each trustee is appointed to hold
office until his or her respective successor is appointed and qualified.
Trustees do not receive fees for their service as trustees. Officers serve at
the discretion of the board of trustees.




<TABLE>
<CAPTION>
                NAME                     AGE                               POSITION
--------------------------------------- -----  ------------------------------------------------------------
<S>                                      <C>   <C>
Dennis G. Maschmeyer................      64   Trustee, Chairman, President and Chief Executive Officer
Susan Earle.........................      48   Trustee
Robert T. Danelesko.................      44   Trustee
Guy Bentinck........................      36   Trustee
Jowdat Waheed.......................      40   Trustee
Samuel W. Ingram, Q.C...............      58   Trustee, Secretary
</TABLE>


         During 2003, Ms. Earle was appointed as vice president administration
and controller of Sherritt. From 1998 until 2003, Ms. Earle served as vice
president, finance and chief financial officer of Sherritt Power Corporation.
Prior to that she held the position of taxation manager for Sherritt and
Viridian Inc. (formerly Sherritt Inc.)



                                       67
<PAGE>
         In 2003, Mr. Bentinck was appointed as vice president, finance of
Sherritt. Mr. Bentinck served as controller of Sherritt from 1997 until 2003.
Prior to that he served as senior manager, audit and business advisory services
group with PricewaterhouseCoopers.

         Please see "--Executive Officers and Directors of LCL" above for
information regarding Messrs. Maschmeyer, Waheed, Ingram and Danelesko.

         CASH COMPENSATION OF EXECUTIVE OFFICERS, DIRECTORS AND TRUSTEES

         We paid the following amounts as cash compensation, including benefits,
to our eight executive officers during the year ended December 31, 2002. We paid
no compensation to the members of LEP's management committee, LCIF's board of
trustees, or LCL's board of directors.

<TABLE>
<CAPTION>
                                                                         TRUSTEES
                                                                            AND
                                                                         DIRECTORS   SALARIES (1)     TOTAL
                                                                       ------------  ------------  ------------

<S>                                                                    <C>           <C>           <C>
Executive officers.................................................... $         --  $  2,214,672  $  2,214,672
Trustees and Directors................................................           --            --            --
                                                                       ------------  ------------  ------------
Total................................................................. $         --  $  2,214,672  $  2,214,672
                                                                       ============  ============  ============
</TABLE>

(1) Includes salaries, cash bonuses benefits and perquisite allowances paid to
executive officers.

         During 2002, we provided $172,900 for pension, retirement or other
similar benefits for our eight executive officers.

                          EMPLOYEES AND LABOR RELATIONS

         As of December 31, 2002, we had 2,455 employees, of which approximately
74% were employed under collective bargaining agreements with unions that
represent the hourly workers at all of our mining operations except at Obed
Mountain mine. After giving effect to the transfer of our metallurgical coal
operations to Fording on February 28, 2003, we have approximately 1,800
employees, including employees at the Genesee, Highvale and Whitewood mines that
we intend to acquire from SCP II as part of the Prairie Assets.

          We believe that our relationships with our employees and our unions
are good. The following is a summary of the collective bargaining agreements for
the mines we operated during 2002, as well as the collective bargaining
agreements for the Prairie Assets, which we expect to acquire from SCP II during
2003:

<TABLE>
<CAPTION>
                                                                           CONTRACT         CONTRACT     UNIONIZED
                                               UNION                          EXPIRY            TERM     EMPLOYEES (1)
                             ---------------------------------------    ------------------  -----------  --------------


<S>                          <C>                                         <C>                  <C>               <C>
Boundary Dam / Bienfait..    United Mine Workers of America Local 7606   June 30, 2003        4 years            321
Poplar River - Hourly....    International Brotherhood of Electrical
                             Workers Local 2067                          November 30, 2004    3 years            130
Poplar River - Office Staff  Communications, Energy and Paperworkers
                             Union of Canada Local 649                   March 31, 2005       3 years              5
Paintearth / Sheerness...    International Union of Operating Engineers
                             Local 955                                   March 31, 2003       33 months          148
Highvale (2)(4)..........    United Steelworkers of America Local 1595   March 31, 2004       3 years            383
Line Creek (3)...........    International Union of Operating Engineers
                             Local 155C                                  May 31, 2005         4 years            408
Luscar Mine (3)..........    United Mine Workers of America Local 1656   June 30, 2002        4 years            284
Coal Valley..............    International Union of Operating Engineers
                             Local 955                                   February 29, 2004    2 years            119
Gregg River..............    International Union of Operating Engineers
  .......................    Local 955                                   April 30, 2004       2 years             22
Whitewood (4)(5).........    United Steelworkers of America Local 1595   September 30, 2005   46 months           62
</TABLE>

(1) As at December 31, 2002 except for Whitewood mine.


                                       68
<PAGE>

(2)      Employees transferred to Fording after mining contract with TransAlta
         expired on December 31, 2002.
(3)      Employees transferred to Fording on February 28, 2003.
(4)      Employees transferred to us in connection with our acquisition of the
         Prairie Assets.
(5)      Number of employees as at March 31, 2003

         During 2002, we successfully renewed five collective bargaining
agreements, covering our hourly employees at the Coal Valley, Poplar River,
Gregg River and Luscar mines, as well as our staff employees at Poplar River
mine. We are currently negotiating with the union representing our employees at
Paintearth and Sheerness mines, whose collective bargaining agreement with us
expired on March 31, 2003. We are preparing for negotiations with the union
representing our employees at the Boundary Dam and Bienfait mines, whose
collective bargaining agreement with us will expire on June 30, 2003.

ITEM 7     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

                           OWNERSHIP OF CAPITAL STOCK

         In June 2001 Luscar Energy Partnership completed its acquisition of all
of the outstanding securities of LCIF. Prior to this acquisition, LCIF had
outstanding 90,700,000 trust units and $100 million of convertible debentures.
Pursuant to a formal takeover bid under Canadian law, followed by a second-stage
compulsory acquisition, LEP purchased all of the trust units of LCIF that it did
not already own, for an aggregate consideration of approximately $240 million
cash and 25 million restricted voting shares of Sherritt International
Corporation. LEP also acquired approximately $96 million principal amount of the
convertible debentures of LCIF at 105% of par. The remaining convertible
debentures of LCIF were redeemed by LCIF at 105% of par. As a result of these
transactions, LCIF is wholly-owned by LEP. As a result of the acquisition and
the provisions of a unanimous shareholders agreement between LCIF and Luscar
Management Corporation, LCIF also acquired, for nominal consideration, all of
our common shares, and we became wholly owned by LCIF.

         Luscar Energy Partnership is a general partnership under the laws of
the Province of Ontario, Canada, of which the partners are special purpose,
wholly-owned subsidiaries of Sherritt International Corporation and Ontario
Teachers' Pension Plan Board. Each of the two partners holds a 50% economic
interest in Luscar Energy Partnership.

         Sherritt International Corporation is a publicly traded company
incorporated under the laws of New Brunswick, Canada. Its executive offices are
located in Toronto, and its restricted voting shares, which are its primary
equity security, are traded on the Toronto Stock Exchange. Sherritt's authorized
share capital consists of an unlimited number of restricted voting shares and
100 multiple voting shares. As at June 23, 2003, there were 131,134,389
restricted voting shares outstanding. To the knowledge of Sherritt, no person or
company beneficially owns, directly or indirectly, or exercises control or
direction over, voting securities carrying more than 10% of the voting rights
attached to any class of voting securities of Sherritt, except that, as at
December 31, 2002, there were 100 multiple voting shares outstanding, all of
which are owned by Ian W. Delaney, the chairman and a director of Sherritt. The
terms of the multiple voting shares provide that upon a vote for the election of
directors of Sherritt, the votes attaching to the multiple voting shares, if
exercised, would be sufficient to elect a majority of the board of directors of
Sherritt. Since their issuance, Mr. Delaney has not exercised the votes carried
by the multiple voting shares, and accordingly the board of directors of
Sherritt has been elected by the votes of the holders of the restricted voting
shares.

         Sherritt, with assets of over $2 billion, is a diversified Canadian
resource company that operates in Canada and internationally. Sherritt, directly
and through its subsidiaries, in addition to its ownership interest in us, owns
50% of a vertically-integrated nickel/cobalt metals business, an oil and gas
exploration, development and production business with reserves in Cuba and
elsewhere, and a power generation business, which finances, constructs and
operates gas-fired electricity generation plants in Cuba. Sherritt also has
interests in cellular telecommunications, soybean-based food processing,
agriculture and tourism in Cuba.



                                       69

<PAGE>
         Ontario Teachers' Pension Plan Board is a corporation without share
capital, established by the Teachers' Pension Act of the Province of Ontario. It
administers the pension plan for approximately 154,000 current teachers and
89,000 retired teachers and their families. The plan is the second largest
pension fund in Canada, with total assets at December 31, 2002 exceeding $66
billion.

                           RELATED PARTY TRANSACTIONS

                              PARTNERSHIP AGREEMENT

         Luscar Energy Holdings Ltd., a wholly owned subsidiary of Sherritt, and
OTPPB SCP Inc., a wholly owned subsidiary of Teachers', are parties to the LEP
partnership agreement under which they hold 50% interests in LEP. LEP is a
general partnership governed by the laws of Ontario. Under the terms of the
partnership agreement, Sherritt and Teachers' agreed to the transaction whereby
they acquired us. Under the terms of the partnership agreement, a management
committee manages LEP. Sherritt appoints three members to the management
committee and Teachers' appoints one member. Decisions of the management
committee are made by majority action that must include, in every case, the
approval of the Teachers' appointee.

         Also pursuant to the partnership agreement, Sherritt and Teachers' have
agreed to enter into a more detailed partnership agreement embodying the terms
set forth in the existing partnership agreement as described above, plus other
terms to which the parties may agree.

         The partners have the right to sell their interests in LEP subject to
the requirement that they first offer that interest to the other party. After
February 20, 2003, either partner has the right to make an offer to the other
partner to buy or sell its interest. The partner receiving the offer will then
have to buy the other partner's interest or sell its interests to the other
partner, in each case at the price specified by the partner initiating the
transaction. The partnership agreement will terminate upon the occurrence of
specified events, including December 31, 2011 (unless otherwise extended by the
partners), a change of control of Sherritt or upon the election of a partner if
the other partner proposes to sell its interest to a third party. Upon
termination, the partnership will be liquidated or its assets and liabilities
will be divided pro rata between the partners.

                            ADMINISTRATION AGREEMENT

         LEP and Sherritt are parties to an administration agreement under which
LEP appointed Sherritt to be LEP's exclusive manager for a period ending
December 31, 2011, unless earlier terminated. The administration agreement
delegated to Sherritt responsibility over LEP's day-to-day administration,
except that such delegation will not reduce or derogate from the authority of
the management committee of LEP. Sherritt must be specifically authorized by LEP
to enter into any agreements or arrangements purporting to bind LEP. LEP will
pay Sherritt an administration fee equal to Sherritt's reasonable direct costs
and expenses plus 10%. LEP may terminate the agreement on six months notice to
Sherritt, or 30 days notice in the event of a default, breach, misrepresentation
or liquidation by Sherritt.

                     RECLAMATION SECURITY SUPPORT AGREEMENT

         Sherritt and Teachers' are parties to an agreement with us for a senior
unsecured credit facility. This facility is available in respect of certain mine
reclamation security obligations and will be joint and several obligations of
Teachers' and Sherritt. At our request, Sherritt and Teachers' will post or
cause to be posted on our behalf the security required or, alternatively, will
advance sufficient funds to us to permit us to post the required security as
cash collateral. The facility is a two-year revolving credit facility, renewable
for additional one-year periods at our option. The amount available under the
facility is $50.0 million. Amounts outstanding under the facility bear interest
at rates tied to short-term market interest rates in Canada and our ratio of
debt to operating earnings before interest, taxes, depreciation and
amortization. We paid to Sherritt and Teachers' a commitment fee at the closing
of the offering of the Senior Notes and we will pay them a standby fee
thereafter.


                                       70

<PAGE>
         This facility is unsecured and ranks pari passu with the obligations
under the Senior Notes. Luscar Coal Ltd. is the borrower under this facility. It
is guaranteed by the same entities that are guaranteeing the Senior Notes. The
facility contains typical affirmative and negative covenants, financial
covenants and events of default for a facility of this nature, which will in any
event be no more restrictive than the covenants and events of default applicable
to the Senior Notes. We believe that the terms of the facility are similar to
those we could negotiate on an arm's-length basis with a lender not affiliated
with us.

ITEM 8     FINANCIAL INFORMATION

         See Item 18 - Financial Statements.

ITEM 9     THE OFFER AND LISTING

         Not applicable.

ITEM 10    ADDITIONAL INFORMATION

                     MEMORANDUM AND ARTICLES OF ASSOCIATION

         We are a corporation incorporated under the Business Corporations Act
(Alberta). There are no restrictions on the business that we may carry on. Our
articles provide that our board of directors shall consist of a minimum of one
director and a maximum of 15 directors.

         Our authorized share capital consists of an unlimited number of common
shares and an unlimited number of special shares. The holders of common shares
and special shares are entitled to dividends, if as and when declared by the
directors, but no dividends shall be declared on either the common shares or the
special shares unless dividends are declared on the other class. At any time
that a dividend is declared on our shares, the dividend declared on the special
shares must be 2.5 times the dividend declared on the common shares. The common
shares are entitled to one vote per common share at meetings of the holders of
our common shares. Upon liquidation, the holders of common shares and special
shares are entitled equally to receive such of our assets as are distributable
to the holders of the common shares and special shares. Under the Business
Corporations Act (Alberta) a special resolution of the shareholders is required
to amend the rights of any class of shares. Except as described in the preceding
sentence or otherwise in the Business Corporations Act (Alberta), the holders of
special shares shall not be entitled to vote. Upon termination of LCIF, any
holder of special shares shall be entitled to covert that holder's special
shares into common shares on the basis of one common share for each special
share converted. An invitation for the public to subscribe for our securities is
prohibited, and our number of shareholders is limited to 50 persons, exclusive
of our and our affiliates' employees and former employees who became
shareholders while so employed.

                               MATERIAL CONTRACTS

                           SASKPOWER PROMISSORY NOTES

         In connection with the development of mine-mouth operations at the
Boundary Dam and Poplar River mines, Manalta issued two promissory notes to
acquire assets from SaskPower. We acquired Manalta in 1998. The first promissory
note had an aggregate principal amount of $45.0 million, an interest rate of
12.75% and matured in May 2003. The 12.75% promissory note was secured by one of
our draglines at the Boundary Dam mine. Our annual interest payment was $5.7
million per year, and we had a sinking fund obligation requiring us to deposit
$450,000 per year. Under the terms of our long-term coal supply contract related
to the Boundary Dam mine, SaskPower directly reimbursed us for substantially all
of each interest and sinking fund payment we made, resulting in a net cost to us
of $500,000 per year. As at December 31, 2002, the market value of the sinking
fund was $25.7 million. At maturity, the difference between the aggregate
principal amount of the 12.75% promissory note and the sinking fund balance of


                                       71
<PAGE>
$26.2 million was paid by us and we received a payment from SaskPower pursuant
to the related long-term coal supply contract equal to such payment.

         The second promissory note has an aggregate principal amount of $89.3
million, an interest rate of 9.625% and matures in December 2004. The 9.625%
promissory note is secured by the Poplar River mine assets that were acquired by
Manalta from SaskPower at the time the note was issued. Our annual interest
payment is $8.6 million per year, and we have a sinking fund obligation
requiring us to deposit $893,000 per year. Under the terms of our long-term coal
supply contract related to the Poplar River mine, SaskPower directly reimburses
us for substantially all of each interest and sinking fund payment we make,
resulting in a net cost to us of $893,000 per year. As at December 31, 2002, the
market value of the sinking fund was $44.5 million. At maturity, the difference
between the aggregate principal amount of the 9.625% promissory note and the
sinking fund balance at that time will be paid by us and we will receive a
payment from SaskPower pursuant to the related long-term coal supply contract
equal to such payment.

                                  SENIOR NOTES

         The Senior Notes were issued in aggregate principal amount of
U.S.$275,000,000 as a single series of securities under an indenture dated as of
October 10, 2001 among Luscar Coal Ltd., as issuer, Luscar Energy Partnership,
Luscar Coal Income Fund, Luscar Ltd. and 3718492 Coal Ltd., as guarantors, and
Bank One Trust Company, N.A., as trustee. Interest on the Senior Notes accrues
at the rate of 9.75% per annum and is payable in arrears on April 15 and October
15 of each year, commencing on April 15, 2002. The Senior Notes are our general
unsecured obligations, are pari passu in right of payment with any of our future
indebtedness and are unconditionally guaranteed by LEP and all of its material
subsidiaries other than us. Each guarantee of the Senior Notes is a general
unsecured obligation of the guarantor and is pari passu in right of payment with
any future senior indebtedness of that guarantor.

         The following is a summary of the covenants in the Senior Notes
indenture. The Senior Notes indenture contains typical affirmative and negative
covenants and financial covenants. These covenants restrict our ability to incur
liens and amend the indenture governing the Senior Notes without the consent of
the holders of a majority in principal amount of the Senior Notes, and in some
cases, each affected holder of Senior Notes. The Senior Notes indenture contains
customary events of default, including upon a change of control.

         The Senior Notes indenture requires us to maintain compliance with a
number of financial ratios on a quarterly basis. The fixed charge coverage
ratio, which is the ratio of consolidated cash flow to the fixed charges of LEP,
must be greater than or equal to 2.0 to 1.0. Additionally, the current ratio,
which is the ratio of current assets to current liabilities, must be greater
than or equal to 1.0. As of December 31, 2002, we were in compliance with the
ratio covenants as well as all other covenants under the Senior Notes indenture.

         Additionally, the Senior Notes indenture restricts our ability to
declare or pay dividends or make other payments or distributions on account of
our equity interests; to acquire or retire for value any of the equity interests
of LEP or any parent of LEP; to make any payment of interest or principal on, to
acquire or retire for value indebtedness that is subordinated to the Senior
Notes or the guarantees of the Senior Notes, except a payment of interest or
principal at its stated maturity or any payment on indebtedness otherwise
permitted or to make any restricted investment. However, we may make "restricted
payments" if, at the time of and after giving effect to the restricted payment:

         -        we are not in default under the credit facility and the
                  restricted payment would not cause a default;

         -        we would, at the time of the restricted payment and after
                  giving pro forma effect to the restricted payment as if the
                  restricted payment had been made at the beginning of the


                                       72
<PAGE>
                  applicable four-quarter period, have been permitted to incur
                  at least $1.00 of additional indebtedness under the fixed
                  charge coverage ratio test set forth above; and

         -        the restricted payment, together with the aggregate amount of
                  all other restricted payments made by us and the guarantors
                  after the date of the indenture, is less than the sum, without
                  duplication, of 50% of our consolidated net income, plus 100%
                  of the aggregate net cash proceeds received by us since the
                  date of the indenture from the sale of equity interests or as
                  a contribution to our common equity capital, plus any cash
                  return of capital received from the sale of any restricted
                  investment that was made after the date of the indenture, plus
                  the fair market value of our investments in any unrestricted
                  subsidiaries which are redesignated as restricted
                  subsidiaries, plus $5.0 million.

         Generally, we and our guarantors may not make any restricted payment,
incur any debt, or issue any disqualified or preferred stock unless (i) after
giving effect to the incurrence, the aggregate of the amount of debt and the
gross proceeds from the issuance of the disqualified or preferred stock does not
exceed $10,000,000 and (ii) the fixed charge coverage ratio for our most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which this additional debt is
incurred or this disqualified or preferred stock is issued would have been at
least 2.0 to 1, determined on a pro forma basis, as if the additional debt had
been incurred or the disqualified or preferred stock or had been issued, as the
case may be, at the beginning of the four-quarter period.

         However, the Senior Notes indenture permits the following debt:

         -        existing indebtedness;

         -        the Senior Notes;

         -        capital lease obligations, mortgage financings or purchase
                  money obligations, in an aggregate principal amount not to
                  exceed 5% of consolidated net tangible assets;

         -        refinancing indebtedness in exchange for, or the net proceeds
                  of which are used to refund, refinance or replace indebtedness
                  (other than intercompany indebtedness) that was permitted by
                  the indenture for the Senior Notes;

         -        intercompany indebtedness and the issuance of any disqualified
                  or preferred stock to LEP or any restricted subsidiary that is
                  expressly subordinated to the prior payment in full in cash of
                  all of our and our guarantors' obligations;

         -        hedging obligations;

         -        intercompany guarantees otherwise permitted to be incurred;

         -        the accrual of interest, the accretion or amortization of
                  original issue discount, the payment of interest on any
                  indebtedness in the form of additional indebtedness with the
                  same terms, and the payment of dividends on disqualified or
                  preferred stock in the form of additional shares of the same
                  class of disqualified or preferred stock;

         -        indebtedness arising from or pursuant to agreements providing
                  for indemnification, adjustment of purchase price or similar
                  obligations incurred in connection with the disposition of any
                  business, assets or restricted subsidiary of LEP or any of its
                  restricted subsidiaries and not exceeding the gross proceeds
                  there from, other than guarantees of indebtedness incurred by
                  any person acquiring all or any portion of this business or
                  assets or restricted subsidiary of LEP or any of its
                  restricted subsidiaries;


                                       73
<PAGE>
         -        statutory reclamation obligations, surety or appeal bonds,
                  performance bonds or other obligations of a like nature; and

         -        indebtedness in an aggregate principal amount (or accreted
                  value, as applicable) at any time outstanding not to exceed
                  $10.0 million.

         Under the terms of the Senior Notes indenture, neither we nor our
parents LEP and LCIF may: (1) consolidate or merge with or into another person
(whether or not we, LEP or LCIF are the surviving corporation); or (2) sell,
assign, transfer, convey or otherwise dispose of all or substantially all of the
properties or assets of us, LEP or LCIF and our restricted subsidiaries taken as
a whole, in one or more related transactions, to another person; unless:

         (1) the surviving person or the person acquiring the assets is either:
         us, LEP, LCIF or a corporation organized or existing under the laws of
         Canada or any province or territory thereof, the United States, any
         state of the United States or the District of Columbia;

         (2) the surviving person or the person acquiring the assets assumes all
         of the obligations under the Senior Notes indenture;

         (3) immediately after the transaction no default or event of default
         exists; and

         (4) LEP or the person formed by or surviving the consolidation or
         merger (if other than LEP, LCIF or us), or to which the sale,
         assignment, transfer, conveyance or other disposition has been made:

                  (a) has consolidated net worth immediately after the
                  transaction equal to or greater than the consolidated net
                  worth of LEP immediately preceding the transaction; and

                  (b) will, on the date of the transaction after giving pro
                  forma effect thereto and any related financing transactions as
                  if the same had occurred at the beginning of the applicable
                  four-quarter period, be permitted to incur at least $1.00 of
                  additional Indebtedness pursuant to the fixed charge coverage
                  ratio test set forth above.

         In addition, we, LEP and LCIF may not lease all or substantially all of
its properties or assets, in one or more related transactions, to any other
person. However, this restriction does not apply to the disposition of assets
between the guarantors and us or between the guarantors.

                              BANK CREDIT FACILITY

         Our bank credit facility is a revolving 364-day operating credit
facility permitting maximum aggregate borrowings of $100 million, subject to a
borrowing base. The borrowing base is a calculation that provides credit
availability by adding $25.0 million plus percentages of the value of various
types of accounts receivable and coal inventories. Interest rates are tied to
short-term market interest rates in Canada and our ratio of debt to operating
earnings before interest, taxes, depreciation and amortization. As at December
31, 2002, $62.5 million of the new credit facility was used to support letters
of credit which have been issued in order to satisfy our statutory reclamation
obligations. The new credit facility allows for up to $75 million of letters of
credit to be outstanding.

         Luscar Coal Ltd. is the borrower under the bank credit facility. The
bank credit facility is guaranteed by the same entities that are guaranteeing
the Senior Notes. The bank credit facility is secured by our accounts
receivable, our coal inventory and a $25.0 million charge on a dragline.

         The terms of the bank credit facility were intended to be substantially
similar to the terms of the indenture governing the Senior Notes. The following
is a summary of the covenants in the bank credit facility. The bank credit
facility contains typical affirmative and negative covenants and financial


                                       74

<PAGE>
covenants. These covenants restrict our ability to incur liens and amend the
indenture governing the Senior Notes without the consent of the lenders under
the bank credit facility. The bank credit facility contains customary events of
default, including upon a change of control.

         The bank credit facility requires us to maintain compliance with a
number of financial ratios on a quarterly basis. The fixed charge coverage
ratio, which is the ratio of consolidated cash flow to the fixed charges of LEP,
must be greater than or equal to 2.0 to 1.0. The lenders have the option to
convert the bank credit facility to a demand credit facility if the fixed charge
coverage ratio is less than 2.5 to 1.0. Additionally, the current ratio, which
is the ratio of current assets to current liabilities, must be greater than or
equal to 1.0. As of December 31, 2002, we were in compliance with the ratio
covenants as well as all other covenants under the bank credit facility.

         Additionally, the bank credit facility restricts our ability to declare
or pay dividends or make other payments or distributions on account of our
equity interests; to acquire or retire for value any of the equity interests of
LEP or any parent of LEP; to make any payment of interest or principal on, to
acquire or retire for value indebtedness that is subordinated to the Senior
Notes or the guarantees of the Senior Notes, except a payment of interest or
principal at its stated maturity or any payment on indebtedness otherwise
permitted or to make any restricted investment. However, we may make "restricted
payments" if, at the time of and after giving effect to the restricted payment:

         -        we are not in default under the credit facility and the
                  restricted payment would not cause a default;

         -        we would, at the time of the restricted payment and after
                  giving pro forma effect to the restricted payment as if the
                  restricted payment had been made at the beginning of the
                  applicable four-quarter period, have been permitted to incur
                  at least $1.00 of additional indebtedness under the fixed
                  charge coverage ratio test set forth above; and

         -        the restricted payment, together with the aggregate amount of
                  all other restricted payments made by us and the guarantors
                  after the date of the indenture, is less than the sum, without
                  duplication, of 50% of our consolidated net income, plus 100%
                  of the aggregate net cash proceeds received by us since the
                  date of the indenture from the sale of equity interests or as
                  a contribution to our common equity capital, plus any cash
                  return of capital received from the sale of any restricted
                  investment that was made after the date of the indenture, plus
                  the fair market value of our investments in any unrestricted
                  subsidiaries which are redesignated as restricted
                  subsidiaries, plus $5.0 million.

         Generally, we and our guarantors may not make any restricted payment,
incur any debt, or issue any disqualified or preferred stock unless (i) after
giving effect to the incurrence, the aggregate of the amount of debt and the
gross proceeds from the issuance of the disqualified or preferred stock does not
exceed $10,000,000 and (ii) the fixed charge coverage ratio for our most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which this additional debt is
incurred or this disqualified or preferred stock is issued would have been at
least 2.0 to 1, determined on a pro forma basis, as if the additional debt had
been incurred or the disqualified or preferred stock or had been issued, as the
case may be, at the beginning of the four-quarter period.

         However, the bank credit facility permits the following debt:

         -        existing indebtedness;

         -        the Senior Notes;

         -        capital lease obligations, mortgage financings or purchase
                  money obligations, in an aggregate principal amount not to
                  exceed 5% of consolidated net tangible assets;


                                       75

<PAGE>
         -        refinancing indebtedness in exchange for, or the net proceeds
                  of which are used to refund, refinance or replace indebtedness
                  (other than intercompany indebtedness) that was permitted by
                  the indenture for the Senior Notes;

         -        intercompany indebtedness and the issuance of any disqualified
                  or preferred stock to LEP or any restricted subsidiary that is
                  expressly subordinated to the prior payment in full in cash of
                  all of our and our guarantors' obligations;

         -        hedging obligations;

         -        intercompany guarantees otherwise permitted to be incurred;

         -        the accrual of interest, the accretion or amortization of
                  original issue discount, the payment of interest on any
                  indebtedness in the form of additional indebtedness with the
                  same terms, and the payment of dividends on disqualified or
                  preferred stock in the form of additional shares of the same
                  class of disqualified or preferred stock;

         -        indebtedness arising from or pursuant to agreements providing
                  for indemnification, adjustment of purchase price or similar
                  obligations incurred in connection with the disposition of any
                  business, assets or restricted subsidiary of LEP or any of its
                  restricted subsidiaries and not exceeding the gross proceeds
                  there from, other than guarantees of indebtedness incurred by
                  any person acquiring all or any portion of this business or
                  assets or restricted subsidiary of LEP or any of its
                  restricted subsidiaries;

         -        statutory reclamation obligations, surety or appeal bonds,
                  performance bonds or other obligations of a like nature; and

         -        indebtedness in an aggregate principal amount (or accreted
                  value, as applicable) at any time outstanding not to exceed
                  $10.0 million.

         Under the terms of the bank credit facility, neither we nor our parents
LEP and LCIF may: (1) consolidate or merge with or into another person (whether
or not we, LEP or LCIF are the surviving corporation); or (2) sell, assign,
transfer, convey or otherwise dispose of all or substantially all of the
properties or assets of us, LEP or LCIF and our restricted subsidiaries taken as
a whole, in one or more related transactions, to another person; unless:

         (1) the surviving person or the person acquiring the assets is either:
         us, LEP, LCIF or a corporation organized or existing under the laws of
         Canada or any province or territory thereof, the United States, any
         state of the United States or the District of Columbia;

         (2) the surviving person or the person acquiring the assets assumes all
         of the obligations under the bank credit facility;

         (3) immediately after the transaction no default or event of default
         exists; and

         (4) LEP or the person formed by or surviving the consolidation or
         merger (if other than LEP, LCIF or us), or to which the sale,
         assignment, transfer, conveyance or other disposition has been made:

                  (a) has consolidated net worth immediately after the
                  transaction equal to or greater than the consolidated net
                  worth of LEP immediately preceding the transaction; and

                  (b) will, on the date of the transaction after giving pro
                  forma effect thereto and any related financing transactions as
                  if the same had occurred at the beginning of the


                                       76

<PAGE>
                  applicable four-quarter period, be permitted to incur at least
                  $1.00 of additional Indebtedness pursuant to the fixed charge
                  coverage ratio test set forth above.

         In addition, we, LEP and LCIF may not lease all or substantially all of
its properties or assets, in one or more related transactions, to any other
person. However, this restriction does not apply to the disposition of assets
between the guarantors and us or between the guarantors.

                         LUSCAR LTD. SUBORDINATED NOTES

         LCIF holds a $350.0 million aggregate principal amount of 12.5%
subordinated notes due 2026 and $293.0 million aggregate principal amount of
7.5% subordinated notes due 2027, both of which are indebtedness of Luscar Ltd.
Interest on the notes is payable quarterly. Since October 1999, the interest
rates on the notes have been temporarily made floating rates subject to a
maximum of the interest rates noted above. The floating rates are based on
Luscar Ltd.'s forecast distributable cash flow for the year. The notes will
remain floating rate until Luscar Ltd.'s ratio of senior debt to operating
earnings before interest, taxes, depreciation and amortization is less than 3.0
to 1.0 for two consecutive quarters. The Luscar Ltd. subordinated notes are
subordinated to Luscar Ltd.'s senior debt, including trade payables. On October
10, 2001, LCIF and Luscar Ltd. amended the 12.5% subordinated notes and the 7.5%
subordinated notes to effectively remove their covenants and substantially all
of their default provisions. Luscar Ltd. and LCIF each guarantee our obligations
under the 9.75% Senior Notes due October 15, 2011; therefore, the Luscar Ltd.
subordinated notes are subordinated to the guarantees of the 9.75% senior notes
due October 15, 2011.

                                EXCHANGE CONTROLS

         The Investment Canada Act (the "ICA") applies to an acquisition of
control, directly or indirectly and through one or more transactions, of a
"Canadian business" by a "non-Canadian," as each of those terms is defined in
the ICA. The ICA requires the investor to give notice of the investment to
Investment Canada or, above certain monetary thresholds, to file an application
for review and approval by Investment Canada of the investment as one that is
likely to be of net benefit to Canada based upon certain prescribed factors.

         Apart from the ICA, there are, at the date hereof, no other limitations
imposed by Canadian law or the articles or by-laws of the Company on the right
of non-resident or foreign owners to hold or vote securities of the Company.
There are, at the date hereof, no other decrees or regulations in Canada which
restrict the export or import of capital, including foreign exchange controls,
or that affect the remittance of dividends, interest or other payments to
non-resident holders of the Company's securities except as discussed below under
"Material U.S. Tax Consequences to U.S. Holders" and "Material Canadian Tax
Consequences to U.S. Holders."

                       MATERIAL INCOME TAX CONSIDERATIONS

                 MATERIAL U.S. TAX CONSEQUENCES TO U.S. HOLDERS

         The following are the material U.S. federal income tax consequences
relevant to the purchase, ownership and disposition of our Senior Notes by a
"U.S. Holder" (as defined below) who holds the Senior Notes as capital assets.
This discussion is limited to U.S. Holders of Senior Notes. The discussion does
not address all aspects of U.S. federal income taxation that may be relevant to
U.S. Holders in light of their particular circumstances or to U.S. Holders that
are subject to special tax rules (such as financial institutions, insurance
companies, tax-exempt organizations, dealers in securities or foreign
currencies, persons that will hold the Senior Notes as a position in a
"straddle," or as part of a hedging, conversion or other integrated transaction
for tax purposes) and does not address U.S. federal estate or gift, state, local
or non-U.S. tax considerations. This discussion is based upon the Internal
Revenue Code of 1986, as amended, Treasury regulations promulgated there under,
and administrative and judicial interpretations of the foregoing, all as of the
date hereof. Any of such authorities may be repealed, revoked or modified so



                                       77
<PAGE>
as to result in U.S. federal income tax consequences different from those
discussed below, possibly with retroactive effect. Persons considering the
purchase, ownership or disposition of Senior Notes are urged to consult their
own tax advisors concerning the U.S. federal income tax consequences in light of
their particular situation, as well as any consequences arising under federal
estate or gift tax rules or under the laws of any state, local or any other
taxing jurisdiction.

         As used herein, the term "U.S. Holder" means (i) a beneficial owner of
a Senior Note that is a citizen or individual resident of the United States,
(ii) a corporation or partnership created or organized in or under the laws of
the United States or any political subdivision thereof, (iii) an estate whose
income is includible in gross income for U.S. federal income tax purposes
regardless of its source, or (iv) a trust (A) that validly elects to be treated
as a United States person for U.S. federal income tax purposes or (B) if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust.

         INTEREST

         A U.S. Holder of a Senior Note will be required to report interest paid
or accrued on the Senior Note (including any amounts required to be paid in
accordance with the terms of the Senior Notes in respect of Canadian withholding
taxes and any Canadian tax withheld) as ordinary interest income for U.S.
federal income tax purposes in accordance with the U.S. Holder's method of tax
accounting. Such income generally will be treated as foreign source passive
income (or, in the case of certain U.S. Holders, financial services income) for
foreign tax credit purposes. A U.S. Holder may generally claim either a
deduction or, subject to certain limitations, a foreign tax credit, in respect
of any foreign tax imposed on such interest payments for U.S. federal income tax
purposes. The rules relating to foreign tax credits and the timing thereof are
complex and U.S. Holders are urged to consult their tax advisors with regard to
the availability of a foreign tax credit and the application of the foreign tax
credit limitations to their particular situations.

         MARKET DISCOUNT

         If a U.S. Holder of a Senior Note that was purchased at a "market
discount" thereafter realizes gain upon the sale, exchange or retirement of the
Senior Note, such gain will be taxed as ordinary income to the extent of the
lesser of such gain or the portion of the market discount that accrued during
the period that the U.S. Holder held such Senior Note. In the case of a Senior
Note, "market discount" generally will be the amount by which a U.S. Holder's
purchase price for a Senior Note is less than the original issue price of the
Senior Note, subject to a statutory de minimis exception. The market discount
rules also provide that a U.S. Holder who acquires a Senior Note at a market
discount may be required to defer a portion of any interest expense that
otherwise may be deductible on any indebtedness incurred or maintained to
purchase or carry such Senior Note until the U.S. Holder disposes of the Senior
Note in a taxable transaction.

         A U.S. Holder of a Senior Note acquired at a market discount may elect
to include market discount in gross income, for U.S. federal income tax
purposes, as the discount accrues either on a straight-line basis or on a
constant interest rate basis. This current inclusion election, once made,
applies to all market discount obligations acquired on or after the first day of
the first taxable year to which the election applies, and may not be revoked
without the consent of the Internal Revenue Service ("IRS"). If a U.S. Holder of
a Senior Note makes such an election, the foregoing rules with respect to the
recognition of ordinary income on sales and other dispositions of such debt
instruments, and with respect to the deferral of interest deductions on
indebtedness incurred or maintained to purchase or carry such debt instruments,
would not apply.

         AMORTIZABLE BOND PREMIUM

         A U.S. Holder that purchases a Senior Note for an amount in excess of
the Senior Note's principal amount may elect to treat such excess as an
"amortizable bond premium," in which case the amount of interest on a Senior
Note required to be included in income each year by the U.S. Holder will


                                       78
<PAGE>
be reduced by the amount of amortizable bond premium allocable (based on the
Senior Note's yield to maturity) to such year. Any election to amortize bond
premium shall apply to all debt instruments (other than tax-exempt debt
instruments) held by the U.S. Holder at the beginning of the first taxable year
to which the election applies or thereafter acquired by the U.S. Holder, and may
not be revoked without the consent of the IRS.

         DISPOSITION

         Upon the sale, exchange or retirement of a Senior Note, a U.S. Holder
generally will recognize a gain or loss equal to the difference between the
amount realized and the U.S. Holder's tax basis in the Senior Note. A U.S.
Holder's tax basis in a Senior Note generally will be the holder's purchase
price for the Senior Note increased by the amount of market discount, if any,
that the U.S. Holder previously elected to include in income on an annual basis
with respect to the Senior Note, and decreased by the amount of any amortizable
bond premium applied to reduce interest on the Senior Note. A gain or loss
recognized by a U.S. Holder on the sale, exchange or retirement of a Senior Note
will be a capital gain or loss (except to the extent attributable to accrued but
unpaid interest which will be taxable as such). A capital gain recognized by a
non-corporate U.S. Holder, including an individual, upon a disposition of a
Senior Note that has been held for more than one year will generally be subject
to tax at a maximum U.S. federal income rate of 20% or, in the case of a Senior
Note that has been held for one year or less, will be subject to tax at ordinary
income rates. Such gain or loss generally will be U.S. source. The deductibility
of capital losses is subject to limitations.

         BACKUP WITHHOLDING

         A U.S. Holder of a Senior Note may be subject to backup withholding at
a rate of 30% (subject to phased-in reductions and potential increase in 2010)
with respect to interest paid on the Senior Notes and proceeds from the sale,
exchange, redemption or retirement of the Senior Note, unless such holder (a) is
a corporation or falls within certain other exempt categories and, when
required, demonstrates its exempt status or (b) provides a correct taxpayer
identification number and otherwise complies with applicable requirements of the
backup withholding rules. A U.S. Holder of a Senior Note who does not provide
the Issuer with such holder's correct taxpayer identification number may be
subject to penalties imposed by the IRS.

         Backup withholding tax is not an additional tax. Any amount withheld
under the backup withholding rules from a payment to a U.S. Holder will be
allowed as a refund or a credit against such U.S. Holder's U.S. federal income
tax liability, provided that the required information is timely furnished to the
IRS.

               MATERIAL CANADIAN TAX CONSEQUENCES TO U.S. HOLDERS

         The following are the principal Canadian federal income tax
considerations generally applicable to a person (a "non-Canadian holder") who
holds Senior Notes and who, for the purposes of the Income Tax Act (Canada) (the
"Canadian Tax Act") and at all relevant times, is not resident and is not deemed
to be resident in Canada, holds Senior Notes as capital property, deals at arm's
length with us and does not use or hold and is not deemed to use or hold the
Senior Notes in carrying on business in Canada. This discussion does not apply
to financial institutions (as defined in the Canadian Tax Act) or to insurers
that are not resident in Canada and carry on an insurance business in Canada and
elsewhere.

         This discussion is based on the current provisions of the Canadian Tax
Act and the regulations there under, all specific proposals to amend the
Canadian Tax Act and the regulations there under publicly announced by the
Minister of Finance (Canada) prior to the date hereof and our understanding of
the published administrative practices of the Canada Customs and Revenue Agency.
This discussion does not take into account or anticipate any other changes in
law or administrative practice, whether by legislative, government or judicial
decision or action and does not take into account provincial, territorial or
foreign income tax legislation or considerations. Non-Canadian holders are
therefore urged to consult their own tax advisors with respect to their
particular circumstances.


                                       79

<PAGE>
         Under the Canadian Tax Act, payments by us to a non-Canadian holder of
principal, interest (including Special Interest) and premium, if any, on the
Senior Notes will be exempt from Canadian withholding tax.

         No other taxes on income (including taxable capital gains) will be
payable by a non-Canadian holder under the Canadian Tax Act solely as a
consequence of the ownership, acquisition or disposition of Senior Notes.

                              DOCUMENTS ON DISPLAY

         Documents referred to in this annual report on Form 20-F may be
inspected without charge at the public reference facilities maintained by the
Securities and Exchange Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of all or any part of the registration
statement may be obtained from such office upon the payment of the fees
prescribed by the Securities and Exchange Commission. The Securities and
Exchange Commission maintains a website that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission. The address of the
site is http://www.sec.gov.

ITEM 11    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

                                   MARKET RISK

         Commodity price risk. In order to manage price volatility related to
certain products we use in our mining operations, we occasionally enter into
short-term arrangements that fix the prices we pay for our diesel fuel, natural
gas and electric power requirements. Commodity price risks associated with those
products used in our mining activities are not material to our consolidated
financial position, results of operations or liquidity. At our mine-mouth
utility operations, the price escalation or pass-through provisions of our coal
supply agreements offset these commodity price risks.

At December 31, 2002, we had no outstanding fixed price commodity purchase
arrangements.

         Interest rate risk. Going forward, substantially all of our external
borrowings will be fixed rate borrowings. We will continue to be obligated under
an interest rate swap for $100.0 million, which fixes our interest rate under
our previous floating rate debt at 5.72% plus the applicable interest rate
margin. As at December 31, 2002, the unrealized loss on the interest rate swap
contract based on dealer quotes was $2.9 million. Because of the fixed interest
rates under our new long-term debt structure, this interest rate swap no longer
qualifies as a hedge against floating interest rates. The unrealized loss was
charged to earnings during the fourth quarter of 2001. During 2002, all changes
in the fair value of the interest rate swap contract were charged to earnings.

         Foreign currency risk. Most of our export coal revenue is sold under
sales contracts denominated in United States dollars. In prior years, we entered
into a forward sale agreement for a portion of our expected export revenue cash
flows, all of which were fulfilled on or before December 31, 2002. We currently
have no forward sale agreements for foreign currencies.

         We pay interest on the Senior Notes in United States dollars. Upon
maturity, the principal amount of the Senior Notes will be payable in United
States dollars.

         The net gains or losses caused by foreign currency fluctuations and
resulting from forward sale agreements have been as follows:


                                       80
<PAGE>
<TABLE>
<CAPTION>
                                                                        FOREIGN EXCHANGE GAINS/(LOSSES)
                                                            -------------------------------------------------------
                                                                   FLUCTUATIONS                FORWARD SALES
                                                                      $000's                      $000's
<S>                                                                    <C>                          <C>
YEAR ENDED
    December 31, 2002.................................                   (336)                       (1,835)
    December 31, 2001.................................                   (988)                       (6,003)
    December 31, 2000...................                               (1,142)                        2,858
    December 31, 1999.................................                    569                         4,867
    December 31, 1998.................................                 (1,132)                       (4,986)
</TABLE>



         Gains and losses related to the translation of the Senior Notes are
presented separately in the financial statements. Gains and losses related to
forward sales agreements, all of which expired on or before December 31, 2002,
are included in revenue while other gains and losses from foreign currency
fluctuations are included in other income.

ITEM 12    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

         Not applicable.

                                     PART II

ITEM 13    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

         None.

ITEM 14    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
           PROCEEDS

         Not applicable.

ITEM 15    CONTROLS AND PROCEDURES

         Each of LEP and LCL has evaluated the effectiveness of the design and
operation of its disclosure controls and procedures for the accurate and timely
reporting of required information about it and its consolidated subsidiaries.
Such evaluations were performed under the supervision of management, including
the chief executive officer and chief financial officer, of each company. Each
of LEP and LCL has concluded that its respective disclosure controls and
procedures were effective as at December 31, 2002 and as at March 31, 2003.
Subsequent to March 31, 2003, we began to convert to a new information system.
Our conversion procedures have been designed to maintain the integrity of our
internal controls and, as of the date of this report, we believe that the
conversion process has had no material adverse impact on our internal controls.

ITEM 16   [RESERVED]


                                       81
<PAGE>
                                    PART III

ITEM 17    FINANCIAL STATEMENTS

         Not applicable.

ITEM 18    FINANCIAL STATEMENTS [UPDATE LISTING]

         The following financial statements, together with the reports of the
Independent Auditors thereon, are filed as part of this annual report:

LUSCAR ENERGY PARTNERSHIP
  CONSOLIDATED FINANCIAL STATEMENTS
       Auditors' report
       Consolidated balance sheets
       Consolidated statement of earnings
       Consolidated statement of cash flows
       Notes to consolidated financial statements

LUSCAR COAL LTD.
  CONSOLIDATED FINANCIAL STATEMENTS
       Auditor's reports
       Consolidated balance sheets
       Consolidated statements of deficit
       Consolidated statements of loss
       Consolidated statements of cash flows
       Notes to consolidated financial statements

LUSCAR COAL INCOME FUND
  FINANCIAL STATEMENTS
       Auditors' report
       Balance sheets
       Statements of earnings
       Statements of unit holders' equity
       Statements of cash flows
       Notes to financial statements




                                       82
<PAGE>
ITEM 19    EXHIBITS

         The following documents are filed as part of this annual report:

     EXHIBIT NO.  EXHIBIT

         1.1      Luscar Coal Ltd. Articles of Incorporation (incorporated by
                  reference to Exhibit 3.1 of the Luscar Coal Ltd. Registration
                  Statement on Form F-4 (Registration No. 333-14072))
         1.2      Luscar Coal Ltd. By-Laws (incorporated by reference to Exhibit
                  3.2 of the Luscar Coal Ltd. Registration Statement on Form F-4
                  (Registration No. 333-14072))
         1.3      Luscar Energy Partnership Agreement, as amended (incorporated
                  by reference to Exhibit 3.3 of the Luscar Coal Ltd.
                  Registration Statement on Form F-4 (Registration No.
                  333-14072))
         1.4      Luscar Coal Income Fund Declaration of Trust, as amended and
                  supplemented (incorporated by reference to Exhibit 3.4 of the
                  Luscar Coal Ltd. Registration Statement on Form F-4
                  (Registration No. 333-14072))
         1.5      Luscar Ltd. Articles of Amalgamation (incorporated by
                  reference to Exhibit 3.5 of the Luscar Coal Ltd. Registration
                  Statement on Form F-4 (Registration No. 333-14072))
         1.6      Luscar Ltd. By-Law (incorporated by reference to Exhibit 3.6
                  of the Luscar Coal Ltd. Registration Statement on Form F-4
                  (Registration No. 333-14072))
         1.7      3718492 Canada Inc. Articles of Amalgamation (incorporated by
                  reference to Exhibit 3.7 of the Luscar Coal Ltd. Registration
                  Statement on Form F-4 (Registration No. 333-14072))
         1.8      3718492 Canada Inc. By-Law (incorporated by reference to
                  Exhibit 3.8 of the Luscar Coal Ltd. Registration Statement on
                  Form F-4 (Registration No. 333-14072))
         2.1      Indenture, dated as of October 10, 2001, among Luscar Coal
                  Ltd., the Guarantors (as defined therein) and Bank One Trust
                  Company, N.A., as Trustee (incorporated by reference to
                  Exhibit 4.1 of the Luscar Coal Ltd. Registration Statement on
                  Form F-4 (Registration No. 333-14072))
         2.2      Exchange and Registration Rights Agreement, dated October 10,
                  2001 by and among Luscar Coal Ltd., Luscar Energy Partnership,
                  Luscar Coal Income Fund, Luscar Ltd., 3718492 Canada Inc. and
                  Goldman, Sachs & Co. (incorporated by reference to Exhibit 4.2
                  of the Luscar Coal Ltd. Registration Statement on Form F-4
                  (Registration No. 333-14072))
         4.1      Reclamation Security Support Agreement dated October 10, 2001,
                  among Luscar Coal Ltd., Ontario Teachers' Plan Pension Board
                  and Sherritt International Corporation (incorporated by
                  reference to Exhibit 10.1 of the Luscar Coal Ltd. Registration
                  Statement on Form F-4 (Registration No. 333-14072))
         4.2      Revolving Credit Agreement, dated as of October 5, 2001,
                  between Luscar Coal Ltd., The Bank of Nova Scotia, BNP Paribas
                  (Canada), Bank of Montreal and Luscar Energy Partnership
                  (incorporated by reference to Exhibit 10.2 of the Luscar Coal
                  Ltd. Registration Statement on Form F-4 (Registration No.
                  333-14072))
         4.3      First Amending Agreement to Revolving Credit Agreement dated
                  October 5, 2001, between Luscar Coal Ltd., The Bank of Nova
                  Scotia, BNP Paribas (Canada) and Bank of Montreal (as
                  Lenders), and the Bank of Nova Scotia (as Administrative
                  Agent), dated as of October 4, 2002
         4.4      Combination Agreement between Fording Inc., Teck Cominco
                  Limited, Westshore Terminals Income Fund, Ontario Teachers'
                  Pension Plan Board and Sherritt International Corporation,
                  dated January 12, 2003 (incorporated by reference to Exhibit
                  Number 3 to Amendment Number 4 to Statement on Schedule 13D
                  filed January 21, 2003, filed by Ontario Teachers' Pension
                  Plan Board)
         7.1      Statement regarding Computation of Ratios
         8.1      List of Subsidiaries of the Registrants


                                       83
<PAGE>
                                   SIGNATURES

         The registrants hereby certify that they meet all of the requirements
for filing on Form 20-F and that they have duly caused and authorized the
undersigned to sign this annual report on their behalf.




Date: June 27, 2003


LUSCAR COAL LTD

By:    /s/ Dennis G. Maschmeyer
       ------------------------
       Name: Dennis G. Maschmeyer
       Title: President and Chief Executive Officer



LUSCAR ENERGY PARTNERSHIP

By:    /s/ Dennis G. Maschmeyer
       ------------------------
       Name: Dennis G. Maschmeyer
       Title: President and Chief Executive Officer




                                       84
<PAGE>
                                 CERTIFICATIONS

   I, Dennis G. Maschmeyer, certify that:

   1. I have reviewed this annual report on Form 20-F of Luscar Energy
Partnership;

   2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

   3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

   4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

   a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

   b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

   c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

   5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

   a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

   b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

   6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date:             June 27, 2003




Signature:        /s/ Dennis G. Maschmeyer
                  -----------------------------------
                  President and Chief Executive Officer


                                       85
<PAGE>
                                 CERTIFICATIONS

   I, Jowdat Waheed, certify that:

   1. I have reviewed this annual report on Form 20-F of Luscar Energy
Partnership;

   2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

   3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

   4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

   a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

   b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

   c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

   5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

   a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

   b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

   6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date:             June 27, 2003




Signature:        /s/ Jowdat Waheed
                  -----------------------------------
                  Senior Vice President and
                  Chief Financial Officer



                                       86
<PAGE>
                                 CERTIFICATIONS

   I, Dennis G. Maschmeyer, certify that:

   1. I have reviewed this annual report on Form 20-F of Luscar Coal Ltd.;

   2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

   3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

   4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

   a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

   b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

   c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

   5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

   a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

   b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

   6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date:             June 27, 2003




Signature:        /s/ Dennis G. Maschmeyer
                  -----------------------------------
                  President and Chief Executive Officer



                                       87
<PAGE>
                                 CERTIFICATIONS

   I, Joseph W. Bronneberg, certify that:

   1. I have reviewed this annual report on Form 20-F of Luscar Coal Ltd.;

   2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

   3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

   4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

   a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

   b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

   c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

   5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

   a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

   b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

   6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date:             June 27, 2003




Signature:        /s/ Joseph W. Bronneberg
                  -----------------------------------
                  Vice President Finance and
                  Chief Financial Officer



                                       88
<PAGE>
                                LUSCAR COAL LTD.

                  CERTIFICATION PURSUANT TO 18 U.S.C. SS. 1350
                   (SECTION 906 OF SARBANES-OXLEY ACT OF 2002)


In connection with the Annual Report of Luscar Coal Ltd. (the "Company") on Form
20-F for the year ended December 31, 2002, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), each of the undersigned
certifies that the Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and
that the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.

Date:             June 27, 2003




Signature:        /s/ Dennis G. Maschmeyer
                  -----------------------------------
                  President and Chief Executive Officer


Date:             June 27, 2003




Signature:        /s/ Joseph W. Bronneberg
                  -----------------------------------
                  Vice President Finance and
                  Chief Financial Officer


A signed original of this written statement required by Section 906 has been
provided to Luscar Coal Ltd. and will be retained by Luscar Coal Ltd. and
furnished to the Securities and Exchange Commission or its staff upon request.


                                       89
<PAGE>
                            LUSCAR ENERGY PARTNERSHIP

                  CERTIFICATION PURSUANT TO 18 U.S.C. SS. 1350
                   (SECTION 906 OF SARBANES-OXLEY ACT OF 2002)


In connection with the Annual Report of Luscar Energy Partnership (the
"Company") on Form 20-F for the year ended December 31, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), each of
the undersigned certifies that the Report fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m
or 78o(d)) and that the information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of the
Company.


Date:             June 27, 2003




Signature:        /s/ Dennis G. Maschmeyer
                  --------------------------------------------
                  President and Chief Executive Officer


Date:             June 27, 2003




Signature:        /s/ Jowdat Waheed
                  -----------------------------------
                  Senior Vice President and
                  Chief Financial Officer


A signed original of this written statement required by Section 906 has been
provided to Luscar Energy Partnership and will be retained by Luscar Energy
Partnership and furnished to the Securities and Exchange Commission or its staff
upon request.





                                       90
<PAGE>

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S>                                                                 <C>
LUSCAR ENERGY PARTNERSHIP
 CONSOLIDATED FINANCIAL STATEMENTS
   Independent auditors' reports............................        F-4
   Consolidated balance sheets..............................        F-5
   Consolidated statements of earnings......................        F-6
   Consolidated statements of cash flows....................        F-7
   Notes to consolidated financial statements...............        F-8

LUSCAR COAL LTD.
 CONSOLIDATED FINANCIAL STATEMENTS
   Independent auditors' reports............................       F-39
   Consolidated balance sheets..............................       F-40
   Consolidated statements of deficit.......................       F-41
   Consolidated statements of loss..........................       F-41
   Consolidated statements of cash flows....................       F-42
   Notes to consolidated financial statements...............       F-43

LUSCAR COAL INCOME FUND
 FINANCIAL STATEMENTS
   Auditors' report.........................................       F-76
   Balance sheets...........................................       F-77
   Statements of earnings...................................       F-78
   Statements of unitholders' equity........................       F-79
   Statements of cash flows.................................       F-80
   Notes to financial statements............................       F-81
</TABLE>

                                       F-1

<PAGE>

                      (This page intentionally left blank)

                                       F-2

<PAGE>

CONSOLIDATED FINANCIAL STATEMENTS OF

LUSCAR ENERGY PARTNERSHIP

DECEMBER 31, 2002 AND 2001

                                       F-3

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Partners of
Luscar Energy Partnership

         We have audited the consolidated balance sheets of Luscar Energy
Partnership as at December 31, 2002 and 2001 and the consolidated statements of
earnings and cash flows for the year ended December 31, 2002 and for the period
from February 20, 2001 to December 31, 2001. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

         In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Partnership as at
December 31, 2002 and 2001 and the results of its operations and its cash flows
for the year ended December 31, 2002 and for the period from February 20, 2001
to December 31, 2001 in accordance with Canadian generally accepted accounting
principles.

Edmonton, Canada
February 4, 2003 except as to Note 21
which is as of March 31, 2003

(signed) Deloitte & Touche LLP
Chartered Accountants

            COMMENT FOR US READERS ON CANADA-US REPORTING DIFFERENCES

         In the United States of America, reporting standards for auditors
require the addition of an explanatory paragraph (following the opinion
paragraph) when financial statements have been restated, such as the restatement
described in Note 19 to the consolidated financial statements of Luscar Energy
Partnership. Our report to the Partners of Luscar Energy Partnership dated
February 4, 2003, except as to Note 21 which is as of March 31, 2003, is
expressed in accordance with Canadian reporting standards which do not require a
reference to such events in the auditors' report when the restatement is
properly accounted for and adequately disclosed in the financial statements.

Edmonton, Canada
February 4, 2003 except as to Note 21
which is as of March 31, 2003

(signed) Deloitte & Touche LLP
Chartered Accountants

                                       F-4

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                AS AT             AS AT
                                                             DECEMBER 31       DECEMBER 31
                                                                2002              2001
                                                            -------------     -------------
(in thousands of Canadian dollars)
<S>                                                         <C>               <C>
ASSETS

CURRENT
   Cash and cash equivalents...........................     $      73,713     $      60,331
   Accounts receivable.................................            61,992            92,384
   Income taxes recoverable............................             1,755             6,484
   Inventories [note 4]................................            86,072            70,337
   Overburden removal costs............................            29,404            28,225
   Prepaid expenses....................................             4,354             4,766
                                                            -------------     -------------
                                                                  257,290           262,527
Capital assets [note 5]................................         1,282,717         1,319,971
Other assets [note 6]..................................            25,897            30,033
                                                            -------------     -------------
                                                            $   1,565,904     $   1,612,531
                                                            =============     =============

LIABILITIES AND PARTNERS' EQUITY

CURRENT
   Trade accounts payable and accrued charges..........     $      36,987     $      40,596
   Accrued interest payable............................             8,824             9,970
   Accrued payroll and employee benefits...............             8,879            12,671
   Income taxes payable................................             1,421             1,105
   Current portions of
     Long-term debt [note 7]...........................            24,837             2,980
     Financial instruments [note 18]...................             2,941             4,324
     Accrued reclamation costs [note 8]................            17,392            21,002
     Future income taxes [note 13].....................             3,335             2,800
                                                            -------------     -------------
                                                                  104,616            95,448
Long-term debt [note 7]................................           484,780           517,632
Financial instruments [note 18]........................                 -             2,823
Accrued reclamation costs [note 8].....................            28,052            30,843
Future income taxes [note 13]..........................           419,293           468,822
                                                            -------------     -------------
                                                                1,036,741         1,115,568
                                                            -------------     -------------

PARTNERS' EQUITY
   Partners' equity [note 9]...........................           529,163           496,963
                                                            -------------     -------------
                                                            $   1,565,904     $   1,612,531
                                                            =============     =============
</TABLE>

See accompanying notes

                                       F-5

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                       CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                                                     YEAR             PERIOD
                                                                     ENDED             ENDED
                                                                 DECEMBER 31,       DECEMBER 31,
                                                                     2002              2001
                                                                 -------------     -------------
(in thousands of Canadian dollars)                                                  (see note 1)
<S>                                                              <C>               <C>
REVENUE.....................................................     $     597,114     $     408,899
EXPENSES AND OTHER INCOME
   Cost of sales............................................           469,016           307,438
   Selling, general and administrative expenses.............            14,509             8,277
   Depreciation and amortization [notes 5 and 6]............            90,064            57,000
   Foreign currency translation (gain) loss [note 10].......            (4,021)            8,415
   Interest expense [note 11]...............................            52,716            31,466
   Other income [note 12]...................................            (9,776)           (1,972)
                                                                 -------------     -------------
LOSS BEFORE INCOME TAXES....................................           (15,394)           (1,725)
Income tax recovery [note 13]...............................           (47,594)          (23,975)
                                                                 -------------     -------------
NET EARNINGS FOR THE PERIOD.................................     $      32,200     $      22,250
                                                                 =============     =============
</TABLE>

See accompanying notes

                                       F-6

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                        YEAR             PERIOD
                                                                        ENDED             ENDED
                                                                     DECEMBER 31,      DECEMBER 31,
                                                                        2002              2001
                                                                    -------------     -------------
(in thousands of Canadian dollars)
<S>                                                                 <C>               <C>
OPERATING ACTIVITIES
Net earnings for the period....................................     $      32,200     $      22,250
Non-cash items:
   Depreciation and amortization...............................            90,064            57,000
   Future income taxes [note 13]...............................           (48,994)          (25,772)
   Pension expense in excess of funding........................             4,439                 -
   Accrued reclamation costs...................................            (6,401)           (4,977)
   Foreign currency translation (gain) loss [note 10]..........            (3,453)            8,401
   Interest income earned on sinking funds.....................            (4,215)           (3,862)
   Financial instruments.......................................            (4,206)               63
   Gain on disposal of capital assets..........................            (1,242)           (1,714)
   Other.......................................................                 6                 -
Change in non-cash working capital [note 17]...................            10,388           (20,383)
                                                                    -------------     -------------
                                                                           68,586            31,006
                                                                    -------------     -------------

INVESTING ACTIVITIES
Capital asset purchases........................................           (51,035)          (16,605)
Proceeds on disposal of capital assets.........................             1,894                32
Other investments..............................................            (1,096)           (1,242)
Investment in Luscar Coal Income Fund..........................                 -          (351,193)
                                                                    -------------     -------------
                                                                          (50,237)         (369,008)
                                                                    -------------     -------------

FINANCING ACTIVITIES
Operating line of credit.......................................                 -           (29,825)
Deferred financing costs incurred..............................            (1,640)          (16,957)
Long-term debt issued..........................................                 -           429,660
Capital contribution by partners...............................                 -           357,209
Repayments of long-term debt...................................            (3,095)         (341,768)
                                                                    -------------     -------------
                                                                           (4,735)          398,319
                                                                    -------------     -------------

Change in cash position........................................            13,614            60,317
Foreign currency translation (loss) gain [note 10].............              (232)               14
Cash position, beginning of period.............................            60,331                 -
                                                                    -------------     -------------
Cash position, end of period...................................     $      73,713     $      60,331
                                                                    =============     =============

Interest paid..................................................     $      62,663     $      37,619
Income taxes paid..............................................     $       2,159     $         855
</TABLE>

See accompanying notes

                                       F-7

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

1.       ORGANIZATION

         Luscar Energy Partnership ("LEP") was formed on February 20, 2001, as a
general partnership under the laws of the Province of Ontario. At its inception,
LEP was named "Sherritt Coal Partnership". OTPPB SCP Inc. ("OTPPB"), a
subsidiary of the Ontario Teachers' Pension Plan Board, and Luscar Energy
Holdings Ltd., a subsidiary of Sherritt International Corporation ("Sherritt")
each own 50 percent of the general partnership interests in LEP, either directly
or indirectly. Profits and losses of LEP are allocated to or borne by the
partners according to their respective partnership interests. On August 9, 2001,
LEP changed its name to "Luscar Energy Partnership".

         LEP was formed to acquire all of the trust units and convertible
debentures of Luscar Coal Income Fund ("LCIF"). On March 8, 2001, LEP made a
formal offer to acquire 100% of the trust units and convertible debentures of
LCIF. On May 11, 2001, LEP held sufficient trust units and convertible
debentures to enable LEP to acquire the remaining trust units and cause LCIF to
redeem the remaining convertible debentures. As at June 30, 2001, LEP held all
issued and outstanding securities of LCIF. The acquisition has been accounted
for as if LEP acquired full ownership of LCIF effective May 11, 2001.

         The consolidated statements of earnings and cash flows are for the year
ended December 31, 2002 with comparative figures for the period from February
20, 2001 to December 31, 2001. LEP had no operations prior to the acquisition of
LCIF on May 11, 2001.

2.       ACCOUNTING POLICIES

         LEP prepares its financial statements following Canadian generally
accepted accounting principles. As described in Note 19, these principles differ
in certain respects from generally accepted accounting principles in the United
States. The following significant accounting policies are presented to assist
the reader in evaluating these financial statements and, together with the
notes, should be considered an integral part of the financial statements.

USE OF ESTIMATES

         In preparing LEP's financial statements, management is required to make
estimates and assumptions that affect the reported amount of assets and
liabilities, the disclosure of contingent liabilities at the date of the
financial statements, and the reported amount of revenues and expenses during
the reporting periods. Actual results could differ from these estimates.

         In particular, the amounts recorded for depreciation and amortization
of mining properties and for reclamation, site restoration and mine closure are
based on estimates of coal reserves and future costs. These estimates and those
related to the cash flows used to assess impairment of capital assets are
subject to measurement uncertainty, and the impact on the financial statements
of future periods could be material. Such estimates and assumptions have been
made using careful judgments, which, in management's opinion, are within
reasonable limits of materiality.

                                       F-8

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of LEP and
its subsidiaries. Interests in joint ventures are accounted for using the
proportionate consolidation method, whereby consolidated accounts include LEP's
share of joint venture assets, liabilities, revenues, expenses and cash flows.

REVENUE RECOGNITION

         Revenue is recognized when title to the coal passes to the customer.
For domestic coal sales to power generating utility customers, this occurs when
the coal is delivered to the generating station; for other domestic customers,
this generally occurs when the coal is loaded at the mine. For export coal
sales, this generally occurs when coal is loaded onto marine vessels at terminal
locations.

CASH AND CASH EQUIVALENTS

         Cash and cash equivalents include cash on hand and in banks as well as
all highly liquid short-term securities with original maturities of three months
or less.

OVERBURDEN REMOVAL COSTS

         Costs of removing overburden are charged to earnings at average cost
when the coal is produced. Costs incurred related to future production are
recorded as current assets.

INVENTORIES

         Coal inventories are valued at the lower of average production cost and
net realizable value. Average production cost includes labor, supplies,
equipment costs, direct and allocable indirect operating overhead and, in the
case of coal inventory held at port terminal facilities, rail transportation and
applicable wharfage costs.

         Mine supplies are recorded at the lower of average cost and replacement
cost.

RECLAMATION

         Estimated future expenditures for reclamation, site restoration and
mine closure are charged to earnings on a unit of production basis over the
expected life of each mine's reserves. Amounts charged to earnings but not yet
paid are included in accrued reclamation costs. Reclamation expenditures are
included in current liabilities to the extent that they are planned within the
next year.

CAPITAL ASSETS

         Capital assets are recorded at cost less accumulated depreciation and
amortization, calculated using the straight-line method over the estimated life
of the asset, ranging from three to forty years as follows:

<TABLE>
<S>                                                <C>
Mining properties............................      3 - 40 years
Plant and buildings..........................      5 - 40 years
Equipment....................................      3 - 35 years
</TABLE>

                                       F-9

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

         Mining properties include acquisition costs, lease payments,
development costs and major expansion costs related to producing mines,
properties under development, and properties held for future development. Mine
development costs incurred to access reserves at producing mines and properties
under development are capitalized when incurred, to be amortized over the life
of such reserves. Ongoing pre-development costs related to properties held for
future development are expensed as incurred, including property carrying costs,
lease payments, drilling and other exploration costs. Acquisition costs for
mining properties to be held for future development are capitalized.

         The carrying values of mining properties are periodically reviewed
using projected undiscounted cash flows and any resulting write-downs are
charged to earnings at the time of determination.

         Interest on funds borrowed to construct capital assets is capitalized
if the construction period exceeds one year. Repair and maintenance costs
related to capital assets are expensed as incurred.

DEFERRED FINANCING COSTS

         Financing costs incurred to arrange credit facilities are deferred and
amortized on a straight-line basis over the period to maturity of the related
debt.

INCOME TAXES

         LEP's subsidiary corporations follow the liability method of tax
allocation in accounting for income taxes. Under this method, future income
taxes are recognized for future income tax consequences attributable to
differences between the financial statement carrying values of assets and
liabilities and their respective income tax basis. Future income tax assets and
liabilities are measured using substantively enacted income tax rates expected
to apply to taxable income in the years in which recovery or settlement of
temporary differences is expected. The effect on future income tax assets and
liabilities of a change in tax rates is included in income in the period in
which the change occurs.

         LCIF is a unit trust for income tax purposes and as such is only
taxable on any taxable income not allocated to LEP. Any taxable income of LEP is
taxed in the hands of the individual corporate partners.

FOREIGN CURRENCY

         Transactions and balances denominated in a foreign currency are
translated using the temporal method, whereby monetary balances are translated
at the rate of exchange at the balance sheet date; non-monetary balances are
translated at historic exchange rates; and revenues and expenses are translated
at prevailing exchange rates. The resulting gains and losses are included in
earnings in the current year.

POST EMPLOYMENT BENEFITS

         The majority of employees are covered under defined contribution
pension plans, the cost of which is recognized at the time services are rendered
by the employees.

         LEP uses the projected benefit method prorated on service to account
for the cost of defined benefit pension plans. Pension costs are based on
management's best estimate of expected plan investment performance, salary
escalation and retirement age of employees. The discount rate used to determine
the accrued benefit

                                      F-10

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

obligation is based on market interest rates as at the measurement date on high
quality debt instruments with cash flows that match the timing and amount of
expected benefit payments. For purposes of calculating the expected return on
plan assets, those assets are valued at market-related value. Valuation
allowances are calculated using a five-year average fair value. Changes in the
valuation allowance are recognized in income immediately. The net actuarial gain
(loss) over 10 percent of the greater of the benefit obligation and the
market-related value of plan assets is amortized over the remaining service life
of active employees.

FINANCIAL INSTRUMENTS

         Unless otherwise disclosed, the fair value of financial instruments
approximates their carrying value in these financial statements.

Currency Risk

Forward currency exchange contracts were utilized to manage the risk associated
with future revenue flows denominated in United States dollars. Revenue matched
to such forward currency exchange contracts is recorded at the related contract
exchange rates in the period the contracts are settled. Since the foreign
exchange contracts expired during the year, LEP is exposed to foreign exchange
fluctuations on its United States dollar denominated sales and interest expense
on its Senior Notes.

Credit Risk

         The Company provides credit to its customers in the normal course of
its operation. Credit risks are minimized to the extent that customers include
major domestic utilities and accounts receivable on export sales are generally
insured under government export development programs or secured by letters of
credit.

Interest Rate Risk

         The long-term debt bears fixed interest rates and consequently, the
cash flow exposure is not significant.

DERIVATIVE FINANCIAL INSTRUMENTS

         LEP does not enter into derivative financial instruments for foreign
currency, interest and energy. LEP has assumed certain derivative financial
instruments as part of its acquisition of LCIF effective May 11, 2001 as
disclosed in note 18.

                                      F-11

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

3.       BUSINESS ACQUISITION

         On February 20, 2001, the partners contributed 5,701 trust units issued
by LCIF, which LEP recorded at their estimated fair value of $3.07 per unit. The
fair value of the trust units was estimated by reference to the market price of
the trust units at the time of the transfer. The consideration for the 84,999
remaining units included cash of $239,994 and 25,000 restricted voting shares of
Sherritt International Corporation, which were contributed to LEP at a fair
value of $4.00 per share. The fair value of the restricted voting shares of
Sherritt was estimated by reference to the market price of the shares prior to
the offer to acquire the trust units. The convertible debentures were purchased
or redeemed for cash of $105 per $100 of principal amount. The total
consideration paid to acquire the securities of LCIF is summarized below:

<TABLE>
<S>                                                                    <C>
Trust units contributed by partners.................................   $        17,504
Trust units acquired, at cost.......................................           339,994
Convertible debentures acquired or redeemed, at cost................           105,000
Costs incurred in connection with the acquisition...................             9,000
                                                                       ---------------
Total consideration.................................................   $       471,498
                                                                       ===============
</TABLE>

         LEP has prepared consolidated financial statements for the period
commencing after the effective date of the acquisition. The allocation to the
underlying assets and liabilities of LCIF and its wholly owned subsidiaries,
Luscar Coal Ltd. ("LCL") and Luscar Ltd., is as follows:

<TABLE>
<S>                                                                    <C>
Working capital (including cash of $2,801)..........................   $        90,551
Capital assets......................................................         1,357,934
Pension surplus and other assets....................................            12,623
                                                                       ---------------
                                                                             1,461,108
                                                                       ---------------
Long-term debt......................................................           428,167
Future income taxes.................................................           497,537
Financial instruments...............................................             7,084
Deferred reclamation costs..........................................            56,822
                                                                       ---------------
                                                                               989,610
                                                                       ---------------
Purchase price......................................................   $       471,498
                                                                       ===============
</TABLE>

4.       INVENTORIES

<TABLE>
<CAPTION>
                                                         AS AT              AS AT
                                                      DECEMBER 31        DECEMBER 31
                                                         2002               2001
                                                    --------------     ---------------
<S>                                                  <C>               <C>
Coal at mine....................................     $      38,976     $        27,840
Coal at port....................................            16,557              14,157
Mine supplies...................................            30,539              28,340
                                                     -------------     ---------------
                                                     $      86,072     $        70,337
                                                     =============     ===============
</TABLE>

                                      F-12

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

5.       CAPITAL ASSETS

<TABLE>
<CAPTION>
                                                              AS AT DECEMBER 31, 2002             AS AT DECEMBER 31, 2001
                                                         --------------------------------    --------------------------------
                                                                            ACCUMULATED                         ACCUMULATED
                                                                            DEPRECIATION                        DEPRECIATION
                                                                                AND                                  AND
                                                              COST          AMORTIZATION          COST          AMORTIZATION
                                                         --------------   ---------------    --------------    --------------
<S>                                                      <C>              <C>                <C>               <C>
Producing mining properties..........................    $    1,054,044   $       103,044    $    1,049,987    $       44,434
Plant and buildings..................................            45,839             8,652            44,754             4,836
Equipment............................................           287,337            12,867           255,894             1,709
Equipment under capital lease........................             8,733             2,171             7,070               253
Non-producing mining properties......................            14,008               510            13,573                75
                                                         --------------   ---------------    --------------    --------------
                                                         $    1,409,961   $       127,244    $    1,371,278    $       51,307
                                                         --------------   ---------------    --------------    --------------
Net book value.......................................             $    1,282,717                      $    1,319,971
                                                                  ==============                      ==============
</TABLE>

         Depreciation and amortization provided in the accounts amounted to
$87,631 and $56,244 for year ended December 31, 2002 and period ended December
31, 2001, respectively.

6.       OTHER ASSETS

<TABLE>
<CAPTION>
                                                                              AS AT             AS AT
                                                                           DECEMBER 31       DECEMBER 31
                                                                              2002              2001
                                                                          -------------     -------------
<S>                                                                       <C>               <C>
Deferred financing costs, net of accumulated amortization...............  $      17,896     $      18,689
Defined benefit pension plans...........................................          1,245             5,685
Investments and other assets............................................          6,756             5,659
                                                                          -------------     -------------
                                                                          $      25,897     $      30,033
                                                                          =============     =============
</TABLE>

         Deferred financing costs are amortized over the term of the related
financing. Amortization in the amount of $2,433 and $756 has been provided
against deferred financing costs for the year ended December 31, 2002 and period
ended December 31, 2001, respectively.

         Investments and other assets include real estate properties, prepaid
royalties and amounts recoverable from domestic customers in future years.

          LEP sponsors defined benefit and defined contribution pension
arrangements covering substantially all of its employees. The majority of its
employees are members of defined contribution plans; however, unionized
employees at two mines are members of active defined benefit pension plans. LEP
has several other defined benefit pension plans, in which most members have
elected to convert their entitlement to defined contribution plans. LEP uses
actuarial reports and updates prepared by independent actuaries for funding and
accounting purposes. LEP has no other retirement or post-employment benefits.

                                      F-13

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

         The following is a summary of the significant actuarial assumptions
used to calculate periodic pension expense and obligations under the defined
benefit pension plans as at December 31, 2002:

<TABLE>
<S>                                                                    <C>
Expected long-term rate of return on plan assets.....................           7.00%
Discount rate on pension obligations.................................           7.00%
Rate of compensation increases.......................................    3.50 - 4.50%
Average remaining service period of active employees.................  10 - 15 years
</TABLE>

         LEP's net pension plan expense is as follows:

<TABLE>
<CAPTION>
                                                                YEAR             PERIOD
                                                                ENDED             ENDED
                                                             DECEMBER 31       DECEMBER 31
                                                                2002              2001
                                                            -------------     -------------
<S>                                                         <C>               <C>
Current service cost       - defined benefit...........     $       1,577     $       1,374
                           - defined contribution......             6,133             3,597
Interest cost..........................................             3,362             2,338
Expected return on plan assets.........................            (3,822)           (2,567)
Amortization of net actuarial loss.....................                24                 -
Amortization of net transitional obligation............               687                 -
Loss on plan settlement................................                 -             2,672
Provision for loss on plan transfer....................             3,541                 -
Increase in valuation allowance at end of year.........               223               931
                                                            -------------     -------------
Net pension plan expense...............................     $      11,725     $       8,345
                                                            =============     =============
</TABLE>

                                      F-14

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

         Information about LEP's defined benefit pension plans, in aggregate, is
as follows:

<TABLE>
<CAPTION>
                                                                     YEAR             PERIOD
                                                                     ENDED             ENDED
                                                                  DECEMBER 31       DECEMBER 31
                                                                     2002              2001
                                                                 -------------     -------------
<S>                                                              <C>               <C>
Accrued benefit obligation
   Balance, beginning of year (2001 - May 11)..............      $      47,228     $      49,880
   Current service costs...................................              1,577             1,374
   Interest cost...........................................              3,362             2,338
   Benefits paid...........................................             (1,565)           (6,834)
   Actuarial loss..........................................              2,081               414
   Sale of interest in Line Creek mine.....................                  -                56
                                                                 -------------     -------------
   Balance, end of period..................................             52,683            47,228
                                                                 -------------     -------------
Plan assets
   Fair value, beginning of year (2001 - May 11)...........             55,150            56,019
   Actual return on plan assets............................             (6,137)            4,283
   Employer contributions..................................                481             1,626
   Benefits paid...........................................             (1,565)           (6,834)
   Sale of interest in Line Creek mine.....................                  -                56
                                                                 -------------     -------------
   Fair value, end of period...............................             47,929            55,150
                                                                 -------------     -------------
Funded status - (deficiency) surplus.......................             (4,754)            7,922
Unamortized net actuarial loss (gain)......................              7,153            (1,306)
                                                                 -------------     -------------
Accrued benefit pension asset..............................      $       2,399     $       6,616
Valuation allowance........................................             (1,154)             (931)
                                                                 -------------     -------------
Net accrued benefit pension asset..........................      $       1,245     $       5,685
                                                                 =============     =============
</TABLE>

         The accrued benefit obligations and fair value of plan assets for
pension plans with accrued benefit obligations in excess of plan assets were
$37,620 and $29,421 respectively as at December 31, 2002 and $18,148 and $16,498
respectively as at December 31, 2001.

         During 2001, LEP settled its obligations for all former employees
participating in a defined benefit pension plan, and a loss on settlement of
$2,672 is included in pension expense.

                                      F-15

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

7.       LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                                               AS AT             AS AT
                                                                                            DECEMBER 31       DECEMBER 31
                                                                                               2002              2001
                                                                                           -------------     -------------
<S>                                                                                        <C>               <C>
Senior Notes, at issue date...........................................................     $     429,660     $     429,660
Cumulative foreign currency translation loss since issue date [note 10]...............             4,730             8,415
                                                                                           -------------     -------------
Senior notes, at balance sheet date...................................................           434,390           438,075
                                                                                           -------------     -------------

12.75% promissory note, due May 18, 2003..............................................            45,000            45,000
Less sinking fund.....................................................................           (22,930)          (21,214)
                                                                                           -------------     -------------
                                                                                                  22,070            23,786
                                                                                           -------------     -------------

9.625% promissory note, due December 30, 2004.........................................            89,300            89,300
Less sinking fund.....................................................................           (41,999)          (38,158)
                                                                                           -------------     -------------
                                                                                                  47,301            51,142
                                                                                           -------------     -------------

Capital lease obligations.............................................................             5,856             7,609
                                                                                           -------------     -------------

Long-term debt........................................................................           509,617           520,612
Current portion of long-term debt.....................................................           (24,837)           (2,980)
                                                                                           -------------     -------------
                                                                                           $     484,780     $     517,632
                                                                                           =============     =============
</TABLE>

SENIOR NOTES

         On October 10, 2001, LEP issued US$275,000 of 9.75% senior notes due
October 15, 2011 ("Senior Notes"). The proceeds of $429,660 from the Senior
Notes were used to repay all of LEP's existing bank credit facilities of
$349,271, the costs of $16,957 related to the offering, and the balance of
$63,432 was retained to finance LEP's ongoing operating and capital
requirements. Concurrently, LEP arranged a $100,000 credit facility ("Senior
Credit Agreement") with a syndicate of Canadian chartered banks, under which
letters of credit totaling $62,000 were issued at that time to replace letters
of credit which had been issued under LEP's bank credit facilities.

         The Senior Notes bear interest at 9.75% per annum, which is payable
semi-annually commencing April 15, 2002 until the principal amount becomes due
on October 15, 2011. The Senior Notes are senior unsecured obligations and will
rank equally with all other senior unsecured obligations.

         Under the provisions of the Senior Notes, additional amounts will be
payable if payments are subject to withholding or deduction for taxes. The
additional amounts will be sufficient such that the net amount received by the
holders of the Senior Notes will not be less than the amount the holder would
have received if such taxes had not been withheld or deducted. In the event that
LEP is obligated to make such deductions or withholdings, LEP will have the
option to redeem the Senior Notes for the principal amount.

         LEP has the option to redeem all or a portion of the Senior Notes after
October 15, 2006 at a redemption price of 104.875% of the principal amount,
declining to 103.250% after October 15, 2007, to 101.625% after October 15, 2008
and at par after October 15, 2009. Prior to October 15, 2006, LEP has the option
to redeem all or a portion of the Senior Notes for the principal amount plus an
applicable premium equal to the greater of 1% of the principal amount and the
excess of: (i) the net present value, at the redemption date, of the redemption
price of 104.875% on October 15, 2006 together with all required interest
payments through October 15, 2006, computed using a discount rate equal to the
yield to maturity of United States Treasury securities maturing on or about
October 15, 2006, plus

                                      F-16

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

50 basis points; over (ii) the principal amount of the Senior Notes. On or
before October 15, 2004 LEP may redeem up to 35% of the Senior Notes at 109.75%
of the principal amount with the net cash proceeds of specified sales of common
equity interests. Upon the occurrence of a change in control, the holders of
Senior Notes may require LEP to purchase the Senior Notes for 101% of the
principal amount. To the extent there are excess proceeds from specified types
of asset sales, LEP or the holders of Senior Notes may elect to redeem or
repurchase a portion of the Senior Notes at 100% of the principal amount.

         The indenture under which the Senior Notes were issued contains
covenants which restrict the ability of LEP to (i) incur additional indebtedness
and issue equity; (ii) make investments; (iii) declare or pay dividends or other
distributions; (iv) incur payment restrictions that other parties may impose;
(v) conduct transactions with affiliates; (vi) make asset sales or use proceeds
from permitted asset sales; (vii) incur liens; and (viii) consolidate or merge
with, or into, or transfer all or substantially all of an entity's assets, to
another person.

         The estimated fair value of the Senior Notes as at December 31, 2002
and December 31, 2001, based on quoted market values, is $465,319 and $453,408,
respectively.

SENIOR CREDIT AGREEMENT

         The Senior Credit Agreement with a syndicate of Canadian chartered
banks consists of a revolving 364-day operating credit facility that permits
maximum aggregate borrowings of $100,000, subject to a borrowing base which
includes accounts receivable, coal inventories and a $25,000 charge on a
dragline. Up to $75,000 of the credit facility may be used to secure letters of
credit. Interest rates payable or advances under the facility are based on prime
lending rates plus interest rate margins which range from 0.25% to 1.25%
depending on LEP's ratio of debt to operating earnings before depreciation and
amortization (EBITDA). To date, there have been no advances made under this
facility and $62,499 of letters of credit, providing reclamation security, have
been issued. The lenders have a right to convert the facility to a demand
facility until LEP's fixed charge coverage ratio, calculated on a rolling
12-month basis, exceeds 2.50. In October 2002, the Senior Credit Agreement was
renewed until October 4, 2003 under the same terms and conditions.

BANK CREDIT FACILITIES

         At the time of the acquisition, LCL was indebted to a Canadian
chartered bank for $360,950 that included drawings of $21,200 under an operating
line of credit and $339,750 of non-revolving term credit facilities. LEP made
principal repayments of $5,000 on each of June 30 and September 30, 2001 and
repaid all amounts outstanding under these bank credit facilities using the
proceeds from the Senior Notes on October 10, 2001. Letters of credit issued
under the operating line of credit were cancelled on October 10, 2001 and
replaced with letters of credit issued under the Senior Credit Agreement.

                                      F-17

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

PROMISSORY NOTES

         The promissory notes were issued to finance the acquisition of a
dragline and the Poplar River mine in conjunction with long-term coal supply
agreements with a Crown corporation. A chattel mortgage on the dragline secures
the 12.75% promissory note and the assets, rights and agreements related to the
Poplar River mine secure the 9.625% promissory note. The promissory notes and
the acquired assets are integral to the coal supply agreements and amounts paid
to LEP for coal supplied include reimbursement for substantially all of the
semi-annual interest and sinking fund payments made in respect of the promissory
notes. At maturity, LEP is obligated to repay the promissory notes, net of
related sinking funds. Under the provisions of the coal supply agreements, the
Crown corporation will immediately reimburse LEP for the net repayment as a
component of the coal price. LEP is required to make annual sinking fund
payments of $450 on the 12.75% promissory note and $893 on the 9.625% promissory
note.

         The sinking funds, which are held by the note trustee as collateral for
the promissory notes, are primarily invested in fixed income securities issued
by federal and provincial governments that mature at or near the maturity date
of the related promissory notes. The carrying values of the sinking funds are
based on cumulative annual contributions plus accrued investment income. The
fair value of the assets held by the sinking funds as at December 31, 2002 and
December 31, 2001 were $70,267 and $62,213, respectively.

         On May 18, 2003, the promissory note for $45 million at 12.75% becomes
due and payable. Under the terms of a coal supply agreement, the projected
$21,000 excess of the principal amounts over the sinking fund balance, is
recoverable from the Crown corporation and will be included in other income in
2003. At December 31, 2002, the $22,070 excess of the principal amount over the
sinking fund balance is included in the current portion of long-term debt.

CAPITAL LEASE OBLIGATIONS

         Obligations under capital leases on specific mining equipment bear
interest at rates ranging from 6.17% to 7.10%. These capital leases mature
between 2004 and 2005 and are repayable by blended monthly payments of principal
and interest.

SCHEDULED LONG-TERM DEBT REPAYMENTS

<TABLE>
<CAPTION>
                                                                            AS AT DECEMBER 31, 2002
                                                             --------------------------------------------------
                                                                                                     CAPITAL
                                                                 SENIOR          PROMISSORY           LEASE
                                                                  NOTES             NOTES          OBLIGATIONS
                                                             --------------    --------------    --------------
<S>                                                          <C>               <C>               <C>
2003......................................................   $             -   $       22,964    $        2,201
2004......................................................                 -           46,407             2,381
2005......................................................                 -                -             1,844
2006......................................................                 -                -                 -
2007 and thereafter.......................................           434,390                -                 -
                                                             ---------------   --------------    --------------
                                                             $       434,390   $       69,371             6,426
                                                             ===============   ==============
Less interest included therein............................                                                  570
                                                                                                 --------------
Present value of minimum capital lease payments...........                                       $        5,856
                                                                                                 ==============
</TABLE>

                                      F-18

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

8.       ACCRUED RECLAMATION COSTS

<TABLE>
<CAPTION>
                                                                      YEAR             PERIOD
                                                                      ENDED             ENDED
                                                                   DECEMBER 31       DECEMBER 31
                                                                      2002              2001
                                                                  -------------     -------------
<S>                                                               <C>               <C>
Balance, beginning of period.................................     $      51,845     $           -
Obligations assumed on May 11, 2001..........................                 -            56,822
Reclamation cost provision...................................            14,552             9,700
Expenditures incurred........................................           (20,953)          (14,677)
                                                                  -------------     -------------
Balance, end of period.......................................            45,444            51,845
Current portion..............................................            17,392            21,002
                                                                  -------------     -------------
                                                                  $      28,052     $      30,843
                                                                  =============     =============
</TABLE>

9.       PARTNERS' EQUITY

<TABLE>
<CAPTION>
                                                                      YEAR             PERIOD
                                                                      ENDED             ENDED
                                                                   DECEMBER 31       DECEMBER 31
                                                                      2002              2001
                                                                  -------------     -------------
<S>                                                               <C>               <C>
Opening partners' equity.....................................     $     496,963     $           -
Trust units contributed on February 20, 2001, at fair value..                 -            17,504
Cash and Sherritt shares contributed effective May 11, 2001..                 -           457,209
                                                                  -------------     -------------
                                                                        496,963           474,713
Net earnings for the period..................................            32,200            22,250
                                                                  -------------     -------------
                                                                  $     529,163     $     496,963
                                                                  =============     =============
</TABLE>

10.      FOREIGN CURRENCY TRANSLATION

         Foreign current translation gains and losses consist of the following:

<TABLE>
<CAPTION>
                                                                      YEAR             PERIOD
                                                                      ENDED             ENDED
                                                                   DECEMBER 31       DECEMBER 31
                                                                      2002              2001
                                                                  -------------     -------------
<S>                                                               <C>               <C>
Foreign currency translation (gain) loss on
   Senior Notes.............................................      $      (3,685)    $       8,415
   US dollar cash balances..................................                232               (14)
   Working capital balances.................................               (568)               14
                                                                  -------------     -------------
                                                                  $      (4,021)    $       8,415
                                                                  =============     =============
</TABLE>

         In 2001, foreign currency translation gains and losses on United States
dollar cash balances and other working capital balances were included in other
income. Foreign currency translation gains and losses and other income have been
reclassified to conform to the current disclosure.

                                      F-19

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

11.      INTEREST EXPENSE

<TABLE>
<CAPTION>
                                                                      YEAR             PERIOD
                                                                      ENDED             ENDED
                                                                   DECEMBER 31       DECEMBER 31
                                                                      2002              2001
                                                                  -------------     -------------
<S>                                                               <C>               <C>
Senior Notes.................................................     $      42,092     $       9,492
Promissory notes net of sinking fund interest income.........            10,117             5,467
Financial instruments [note 18]..............................               330             5,644
Capital leases...............................................               252               189
Operating line of credit.....................................               365             1,038
Long-term bank debt..........................................             3,004            13,562
Income tax reassessments.....................................            (1,799)             (646)
Retroactive Boundary Dam contract settlement.................                 -            (2,083)
Investment income............................................            (1,543)           (1,743)
Other........................................................              (102)              546
                                                                  -------------     -------------
                                                                  $      52,716     $      31,466
                                                                  =============     =============
</TABLE>

         Interest expense on promissory notes for the year ended December 31,
2002 is net of $4,215 income earned on the related sinking fund assets ($3,862
for period ended December 31, 2001).

12.      OTHER INCOME

Other income consists of the following:

<TABLE>
<CAPTION>
                                                                      YEAR             PERIOD
                                                                      ENDED             ENDED
                                                                   DECEMBER 31       DECEMBER 31
                                                                      2002              2001
                                                                  -------------     -------------
<S>                                                               <C>               <C>
Settlement for coal conveyor ................................     $     (10,100)    $           -
Net pension plan expense ....................................             2,361               947
Other income ................................................            (2,037)           (2,919)
                                                                  -------------     -------------
                                                                  $      (9,776)    $      (1,972)
                                                                  =============     =============
</TABLE>

On December 31, 2002, LCL settled a legal dispute relating to the engineering,
design, manufacture and commissioning of a coal conveyor system at Line Creek
mine. $5,100 of the $10,100 settlement is included in accounts receivable at
December 31, 2002 and was received subsequent to year end.

Net pension plan expense excludes certain current service and other costs, which
are included in cost of sales.

                                      F-20

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

13.      INCOME TAXES

<TABLE>
<CAPTION>
                                                                                               AS AT              AS AT
                                                                                            DECEMBER 31        DECEMBER 31
                                                                                               2002               2001
                                                                                           -------------     ---------------
<S>                                                                                        <C>               <C>
Future income tax liabilities
    Capital assets....................................................................     $     446,230     $       493,352
    Overburden removal costs..........................................................             9,555               9,234
    Deferred financing costs deducted for tax in excess of
         accounting deductions........................................................             1,149                   -
    Accounting pension surplus........................................................             3,716               4,100
    Other.............................................................................             2,000                   -
                                                                                           -------------     ---------------
                                                                                                 462,650             506,686
                                                                                           -------------     ---------------
Future income tax assets
    Accrued reclamation and other items not currently deductible......................            21,761              18,586
    Deferred financing costs deductible for tax purposes..............................             1,084                   -
    Net operating losses carried forward..............................................            17,177              16,478
                                                                                           -------------     ---------------
                                                                                                  40,022              35,064
                                                                                           -------------     ---------------
Net future income tax liability.......................................................           422,628             471,622
Less:  current portion of future income tax liabilities...............................             3,335               2,800
                                                                                           -------------     ---------------
                                                                                           $     419,293     $       468,822
                                                                                           =============     ===============
</TABLE>

         The provisions for future income taxes differs from the result that
would be obtained by applying the combined Canadian federal and provincial
statutory income tax rates to loss before income taxes. This difference is
explained below:

<TABLE>
<CAPTION>
                                                                                               YEAR              PERIOD
                                                                                               ENDED              ENDED
                                                                                            DECEMBER 31        DECEMBER 31
                                                                                               2002               2001
                                                                                           -------------     ---------------
<S>                                                                                        <C>               <C>
Loss before income taxes..............................................................     $     (15,394)    $        (1,725)
Statutory income tax rate.............................................................             43.40%              44.26%
                                                                                           -------------     ---------------
Expected tax recovery.................................................................     $      (6,681)    $          (763)
Effect on income tax of:
    Flow through of income tax recoveries from subsidiary.............................           (38,739)            (17,566)
    Excess of statutory resource allowance over non-deductible Crown charges..........            (4,634)             (7,443)
    Large corporations tax............................................................             2,460               1,797
                                                                                           -------------     ---------------
Income tax recovery...................................................................     $     (47,594)    $       (23,975)
                                                                                           =============     ===============

Current...............................................................................             1,400               1,797
Future................................................................................           (48,994)            (25,772)
                                                                                           -------------     ---------------
Income tax recovery...................................................................     $     (47,594)    $       (23,975)
                                                                                           =============     ===============
</TABLE>

                                      F-21

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

         LEP's subsidiary companies have the following deductions available to
claim against future taxable income:

<TABLE>
<CAPTION>
                                                                                              MAXIMUM             AS AT
                                                                                              ANNUAL           DECEMBER 31
                                                                                           RATE OF CLAIM          2002
                                                                                           -------------     ---------------
<S>                                                                                        <C>               <C>
Undepreciated capital cost............................................................           25%         $       270,637
Canadian development expense..........................................................           30%                   2,511
Canadian exploration expense..........................................................          100%                   3,214
Deferred financing expense............................................................           20%                  12,801
Other.................................................................................           10%                   6,898
                                                                                                             ---------------
                                                                                                             $       296,061
                                                                                                             ===============
</TABLE>

         LEP's subsidiary companies have non-capital losses carried forward
which expire in the following years:

<TABLE>
<CAPTION>
                                                                                                                  AS AT
                                                                                                               DECEMBER 31
                                                                                                                  2002
                                                                                                             ---------------
<S>                                                                                                          <C>
2003.................................................................................................        $        12,367
2004.................................................................................................                  1,576
2005.................................................................................................                 20,538
2006.................................................................................................                      -
2007.................................................................................................                      -
2008.................................................................................................                  3,120
2009.................................................................................................                  2,042
                                                                                                             ---------------
                                                                                                             $        39,643
                                                                                                             ===============
</TABLE>

         The income tax benefits of the above items have been recognized in the
accounts.

14.      RELATED PARTY TRANSACTIONS

         LEP has undertaken to compensate Sherritt for administration services
at Sherritt's direct cost plus 10 percent and to reimburse both partners for all
third-party costs incurred in connection with LEP's offer to acquire securities
of LCIF. During the year ended December 31, 2002, LEP incurred $403 for such
services and costs which are included in selling, general and administrative
expenses ($828 for the period from February 20 to December 31, 2001).

15.      REVENUES

         LEP owns and operates surface mines located in western Canada,
producing coal for consumption by domestic and foreign customers. LEP's mining
operations are accounted for as one segment having similar economic and
operating characteristics, customers and operations, and have been aggregated
for the purpose of revenue reporting. Metallurgical figures include incidental
thermal coal byproduct at Line Creek mine. Prior period figures have been
restated to conform to this presentation.

                                      F-22

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

         Revenues from metallurgical and thermal mines are as follows:

<TABLE>
<CAPTION>
                                                               YEAR ENDED                        PERIOD ENDED
                                                               DECEMBER 31                        DECEMBER 31
                                                                  2002                               2001
                                                    --------------------------------   --------------------------------
                                                                             TONNES                             TONNES
                                                        REVENUES             SHIPPED      REVENUES              SHIPPED
                                                    --------------           -------   --------------           -------
<S>                                                 <C>                      <C>       <C>                      <C>
Thermal..........................................   $      443,066            33,554   $      298,120            21,288
Metallurgical....................................          154,048             2,410          110,779             1,731
                                                    --------------           -------   --------------           -------
                                                    $      597,114            35,964   $      408,899            23,019
                                                    ==============           =======   ==============           =======
</TABLE>

         Disclosures with respect to geographic areas are as follows:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED                        PERIOD ENDED
                                                                    DECEMBER 31                        DECEMBER 31
                                                                       2002                               2001
                                                         --------------------------------   --------------------------------
                                                                                  TONNES                             TONNES
                                                            REVENUES              SHIPPED      REVENUES              SHIPPED
                                                         --------------           -------   --------------           -------
<S>                                                      <C>                      <C>       <C>                      <C>
Geographic areas
    Japan............................................    $       78,004             1,505   $       55,326               981
    Korea............................................            38,204               956           43,009             1,022
    United States....................................            36,769               435           27,249               306
    South America....................................            28,391               455           22,380               422
    Europe...........................................            22,682               360           10,774               168
    Other............................................            34,134               682            3,171                56
                                                         --------------           -------   --------------           -------
    Total export.....................................           238,184             4,393          161,909             2,955
    Canada...........................................           357,449            31,571          243,341            20,064
                                                         --------------           -------   --------------           -------
LCL                                                             595,633            35,964          405,250            23,019
    Foreign exchange contracts.......................             1,481                 -            3,649                 -
                                                         --------------           -------   --------------           -------
LEP                                                      $      597,114            35,964   $      408,899            23,019
                                                         ==============           =======   ==============           =======
</TABLE>

         Export coal sales are generally denominated in United States currency.

         Revenues are derived from significant customers and in some cases,
substantially all production from a particular mine is sold to one customer. The
number of customers each accounting for more than 10 percent of revenue is as
follows:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED                        PERIOD ENDED
                                                                  DECEMBER 31                        DECEMBER 31
                                                                     2002                               2001
                                                       ------------------------------     ------------------------------
                                                                            NUMBER OF                          NUMBER OF
                                                          REVENUES          CUSTOMERS        REVENUES          CUSTOMERS
                                                       --------------       ---------     --------------       ---------
<S>                                                    <C>                  <C>           <C>                  <C>
Major customers
    Metallurgical...................................   $       21,473           1         $       67,563           3
    Thermal.........................................   $      249,931           3         $      163,131           3
</TABLE>

         Credit risks are minimized to the extent that customers include major
domestic utilities and accounts receivable on export sales are generally insured
under government export development programs or secured by letters of credit.

                                      F-23

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

16.      JOINT VENTURES

         LEP conducts a portion of its exploration, development and mining
operations through its 50 percent interests in the Cardinal River joint venture
(which operates the Luscar mine and Cheviot project) and the Line Creek joint
venture (which operates the Line Creek mine). A portion of LEP's cash flow from
operations, operating margin, and capital expenditures is derived from the joint
ventures. LEP's share of operating expenses related to mining activities is
included in the cost of inventories and charged to operations as revenues are
recognized.

<TABLE>
<CAPTION>
                                                                                               AS AT              AS AT
                                                                                            DECEMBER 31        DECEMBER 31
                                                                                               2002               2001
                                                                                           -------------     ---------------
<S>                                                                                        <C>               <C>
Share of assets and liabililties of joint ventures
    Current assets....................................................................     $      70,306     $        58,866
    Current liabilities...............................................................           (13,572)            (14,148)
                                                                                           -------------     ---------------
    Working capital...................................................................            56,734              44,718
    Capital assets, net of accumulated depreciation and amortization..................            65,728              70,297
    Accrued reclamation costs.........................................................           (11,091)            (10,147)
    Obligations under capital lease...................................................            (1,427)             (2,320)
    Accrued pension benefit obligation................................................              (769)               (611)
                                                                                           -------------     ---------------
                                                                                           $     109,175     $       101,937
                                                                                           =============     ===============
</TABLE>

<TABLE>
<CAPTION>
                                                                                               YEAR              PERIOD
                                                                                               ENDED              ENDED
                                                                                            DECEMBER 31        DECEMBER 31
                                                                                               2002               2001
                                                                                           -------------     ---------------
<S>                                                                                        <C>               <C>
Share of revenues, expenses and cash flows of joint ventures
    Revenue...........................................................................     $     154,047     $       110,779
    Expenses..........................................................................           148,417             105,430

Cash flows from:
    Operations........................................................................     $       1,799     $       (92,166)
    Investing activities..............................................................            (3,481)             (3,666)
    Financing activities..............................................................             1,456                   -
</TABLE>

                                      F-24

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

17.      STATEMENT OF CASH FLOWS

         The consolidated statement of cash flows has been prepared to reflect
only cash flows from operating, investing and financing activities and exclude
certain non-cash transactions, which are disclosed elsewhere in these financial
statements.

<TABLE>
<CAPTION>
                                                                                               YEAR              PERIOD
                                                                                               ENDED              ENDED
                                                                                            DECEMBER 31        DECEMBER 31
                                                                                               2002               2001
                                                                                           -------------     ---------------
<S>                                                                                        <C>               <C>
Changes in non-cash working capital
    Accounts receivable...............................................................     $      30,392     $        (8,485)
    Inventories.......................................................................           (15,735)             (8,036)
    Overburden removal costs..........................................................            (1,179)                866
    Prepaid expenses..................................................................               412                (537)
    Trade accounts payable and accrued charges........................................            (3,609)              4,154
    Accrued interest payable..........................................................            (1,146)             (2,131)
    Accrued payroll and employee benefits.............................................            (3,792)             (6,214)
    Income taxes......................................................................             5,045                   -
                                                                                           -------------     ---------------
                                                                                           $      10,388     $       (20,383)
                                                                                           =============     ===============
</TABLE>

<TABLE>
<CAPTION>
                                                                                               YEAR              PERIOD
                                                                                               ENDED              ENDED
                                                                                            DECEMBER 31        DECEMBER 31
                                                                                               2002               2001
                                                                                           -------------     ---------------
<S>                                                                                        <C>               <C>
Non-cash amounts excluded from statement of cash flows
    Investing activities:
         Investment in Luscar Coal Income Fund........................................     $           -     $       117,504
    Financing activities:
         Capital contributions by partners............................................     $           -     $       117,504
</TABLE>

                                      F-25

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

18.      FINANCIAL INSTRUMENTS

         LEP assumed certain financial instruments as part of its acquisition of
Luscar effective May 11, 2001. The financial instruments were recorded as
liabilities to reflect their fair value on the acquisition date.

<TABLE>
<CAPTION>
                                                                                               AS AT              AS AT
                                                                                            DECEMBER 31        DECEMBER 31
                                                                                               2002               2001
                                                                                           -------------     ---------------
<S>                                                                                        <C>               <C>
Interest rate swap, at fair market value..............................................     $       2,941     $         5,644
Forward currency exchange contracts, at book value....................................                 -               1,503
                                                                                           -------------     ---------------
                                                                                                   2,941               7,147
Less: current portion.................................................................             2,941               4,324
                                                                                           -------------     ---------------
                                                                                           $           -     $         2,823
                                                                                           =============     ===============
</TABLE>

         The interest rate swap with a Canadian chartered bank, maturing on
December 31, 2003, was originally entered into by LCL to fix the rate of
interest on $100,000 of floating rate long-term bank debt at 5.72% per annum
plus the applicable interest rate margin. At May 11, 2001, LEP acquired the
interest rate swap and recorded the swap at fair value. The carrying value of
the swap was amortized over the remaining term of the swap because the swap was
used to hedge floating interest rates on long-term bank debt. Therefore, the
amortization of the interest rate swap and net settlements were recorded as
interest expense on long-term bank debt. On October 10, 2001, LEP repaid all of
the floating rate long-term bank debt for which the swap was used to hedge
floating interest rates. Therefore, the interest rate swap was restated to its
fair value as of that date and subsequent changes in the fair value and net
settlements under the interest rate swap are recorded as other interest expense.
During the year ended December 31, 2002, interest expense included $330 ($5,644
for period ended December 31, 2001) related to the amortization and revaluation
of the interest rate swap.

         LEP does not trade in derivative securities for profit; therefore,
gains and losses relating to forward currency exchange contracts are recognized
as revenues as at the settlement dates. As at December 31, 2002, there were no
outstanding contracts relating to these hedging activities.

19.      U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

         The consolidated financial statements of LEP have been prepared in
accordance with Canadian GAAP. Canadian GAAP differs from United States GAAP in
the following respects:

A.       STATEMENT OF EARNINGS

<TABLE>
<CAPTION>
                                                                                               YEAR              PERIOD
                                                                                               ENDED              ENDED
                                                                                            DECEMBER 31        DECEMBER 31
                                                                                               2002               2001
                                                                                           -------------     ---------------
                                                                                                                (restated)
<S>                                                                                        <C>               <C>
Net earnings under Canadian GAAP......................................................     $      32,200     $        22,250
Impact of United States GAAP:
    Derivative financial instruments (a)..............................................                 -                 190
    Income tax rate change (b)........................................................              (692)             13,388
    Pension valuation allowance (c)...................................................               654                 528
                                                                                           -------------     ---------------
Net earnings under United States GAAP.................................................     $      32,162     $        36,356
                                                                                           =============     ===============
</TABLE>

                                      F-26

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

B.       STATEMENT OF COMPREHENSIVE INCOME

         Comprehensive income is measured in accordance with Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). This standard defines comprehensive income as all changes in equity other
than those resulting from investments by owners and distributions to owners. The
concept of comprehensive income does not exist under Canadian GAAP. LEP's
comprehensive earnings determined in accordance with United States GAAP would be
as follows:

<TABLE>
<CAPTION>
                                                                                            YEAR ENDED        PERIOD ENDED
                                                                                            DECEMBER 31        DECEMBER 31
                                                                                               2002               2001
                                                                                           -------------     ---------------
                                                                                                               (restated)
<S>                                                                                        <C>               <C>
(i)  CURRENT YEARS
Net earnings under United States GAAP.................................................     $      32,162     $        36,356
Other comprehensive income net of tax:
    Minimum pension liability (c).....................................................            (1,533)                  -
                                                                                           -------------     ---------------
Comprehensive income..................................................................     $      30,629     $        36,356
                                                                                           =============     ===============

(ii)  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Balance, beginning of year............................................................     $           -     $             -
Change for the year...................................................................            (1,533)                  -
                                                                                           -------------     ---------------
Balance, end of year..................................................................     $      (1,533)    $             -
                                                                                           =============     ===============
</TABLE>

C.       CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                               AS AT              AS AT
                                                                                            DECEMBER 31        DECEMBER 31
                                                                                               2002               2001
                                                                                           -------------     ---------------
                                                                                                               (restated)
<S>                                                                                        <C>               <C>
Assets
    Current assets....................................................................     $     257,290     $       262,527
    Capital assets....................................................................         1,308,723           1,347,394
    Other assets......................................................................            89,947              89,933
                                                                                           -------------     ---------------
                                                                                           $   1,655,960     $     1,699,854
                                                                                           =============     ===============
Liabilities and partners' equity
    Current liabilities...............................................................     $     104,616     $        95,448
    Long-term debt (d) ...............................................................           549,709             577,004
    Other liabilities.................................................................            31,183              36,627
    Future income taxes...............................................................           429,472             479,706
    Partners' equity..................................................................           542,513             511,069
    Accumulated other comprehensive loss..............................................            (1,533)                  -
                                                                                           -------------     ---------------
                                                                                           $   1,655,960     $     1,699,854
                                                                                           =============     ===============
</TABLE>

                                      F-27

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

(a)      DERIVATIVE FINANCIAL INSTRUMENTS

         Under United States GAAP, LEP is required to adopt Statement of
Financial Accounting Standards No. 133 (SFAS 133) and its related amendments
SFAS 137 and SFAS 138. SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at fair value. Derivatives that are not designated
as hedges for accounting purposes must be adjusted to fair value through income.
If the derivative is designated and is effective as a hedge for accounting
purposes, depending on the nature of the hedge, changes in the fair value of
derivatives are either offset against the change in the fair value of hedged
underlying assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a hedging derivative's change in fair value
is recognized in earnings immediately.

         Effective May 11, 2001, the date of acquisition of LCIF and LCL by LEP,
the hedging activities and other derivative financial instruments of LCL are
included in the consolidated financial results of LEP. This included an interest
rate swap contract used to manage interest rate risk on long-term debt, forward
currency exchange contracts, which are utilized to manage the economic risk
associated with future revenue flows denominated in United States dollars, and
fixed price energy purchase contracts covering future committed and anticipated
energy requirements. Because LEP did not anticipate the need to prepare its
financial statements in accordance with United States GAAP, LEP has not prepared
the documentation required to qualify these instruments for hedge accounting.

         Effective May 11, 2001, under Canadian GAAP, LEP recorded the purchase
of the interest rate swap and forward currency exchange contracts as a liability
of $7,084. Under United States GAAP, an additional liability of $3,131 ($3,302
as at December 31, 2001 and $3,411 as at May 11, 2001) was recorded as part of
the United States GAAP purchase price representing the fair value of certain
fixed price energy purchase contracts that met the definition of a derivative
under SFAS 133. On December 31, 2002, the fair value of all financial
instruments and purchase contracts that met the definition of a derivative under
SFAS 133 was $6,072 ($10,108 at December 31, 2001) recorded in other
liabilities. In 2002, there was no change in the fair value of these derivatives
that is not already included in Canadian GAAP net earnings. In 2001, the change
in fair value from May 12, 2001 to December 31, 2001 was a loss of $341 ($190
net of tax) that was only recorded in earnings for United States GAAP purposes.

         LEP assumed these energy contracts with Canadian corporations, which
were intended to hedge the future cost of the committed and anticipated power
requirements for its mining operations. As at December 31, 2002, LEP had no
fixed price contracts outstanding for energy purchases.

(b)      INCOME TAX RATE CHANGE

         A reduction in income tax rates was substantively enacted in the period
January 1, 2001 to May 11, 2001 and was enacted in the period May 12, 2001 to
December 31, 2001. Under Canadian GAAP, the reduction in income tax rates has
been reflected in the purchase price equation (Note 3). However, under United
States GAAP, net earnings for the period ended December 31, 2001 include $13,388
related to the benefit of the tax rate reduction. Net earnings for the year
ended December 31, 2002 include $692 of amortization expense related to the
corresponding asset. Under United States GAAP, capital assets increase by
$22,875 ($24,121 at December 31, 2001) and future income tax liabilities
increase by $10,179 ($10,733 at December 31, 2001) at December 31, 2002.

                                      F-28

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

(c)      PENSION PLANS

         Canadian GAAP requires recognition of a pension valuation allowance for
any excess of the prepaid benefit expense over the expected future benefit.
Changes in the pension valuation allowance are recognized in the Consolidated
Statement of Earnings. United States GAAP does not specifically address pension
valuation allowances. In 2002, United States regulators determined that such
allowances would not be permitted under United States GAAP. In light of these
recent developments, LEP retroactively eliminated the effects of recognizing
pension valuation allowances in prior years. Accordingly, LEP's net earnings
under United States GAAP have been increased by $528 for the period ended
December 31, 2001.

         United States GAAP also requires the recognition of a minimum pension
liability for defined benefit plans. The initial recognition and subsequent
adjustments to the minimum pension liability are reflected in comprehensive
income.

(d)      PROMISSORY NOTES

         Under United States GAAP, the offsetting of assets and liabilities in
the balance sheet is not permitted except when a right of setoff exists. A right
of setoff requires that each of two parties owes the other determinable amounts
and that the reporting party has the right to set off the amount owed with the
amount owed by the other party. The sinking funds, which have been setoff
against the promissory notes under Canadian GAAP, do not qualify for offsetting
under United States GAAP. The sinking funds are therefore reflected as other
assets under United States GAAP.

(e)      EMPLOYEE TERMINATION BENEFITS

         United States GAAP requires additional disclosure regarding employee
termination provisions. The information provided below relates to provisions for
employee terminations made by LCL.

<TABLE>
<CAPTION>
                                                                                               NUMBER OF
                                                                                               EMPLOYEES         AMOUNT
                                                                                               ---------      -----------

<S>                                                                                            <C>            <C>
Balance, May 11, 2001...................................................................          371         $     4,841
Paid during 2001........................................................................          (11)                (94)
Adjustments 2001........................................................................          (92)             (1,900)
                                                                                                  ---         -----------
Balance, December 31, 2001..............................................................          268         $     2,847
Paid during 2002........................................................................          (86)             (2,184)
Accrued during 2002.....................................................................           75               1,645
                                                                                                  ---         -----------
Balance, December 31, 2002..............................................................          257         $     2,308
                                                                                                  ===         ===========
</TABLE>

         Adjustments to the estimated provisions for employee termination
benefits reflect resignations and transfers of employees to other mining
operations. During the period from February 20 to December 31, 2001 and the year
ended December 31, 2002, LEP adjusted the estimated provisions for employee
termination benefits to reflect resignations and transfers of employees to other
LEP mining operations. During 2002, employee termination provisions for Luscar
mine were updated to reflect the extension of the planned closure date until
late 2003. Additional employee termination provisions will be accrued over the
remaining service of the affected employees.

                                      F-29

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

(f)      OTHER DISCLOSURES

         United States GAAP does not permit the disclosure of the subtotals of
operating earnings before depreciation and amortization and earnings before
interest and foreign exchange loss in the consolidated statements of earnings.
Furthermore, United States GAAP does not permit the disclosure of the subtotal
of the cash provided by operating activities before change in non-cash working
capital in the consolidated statements of cash flows.

(g)      NEW ACCOUNTING STANDARDS

         SFAS NO. 143--ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In June
2001, the Financial Accounting Standards Board approved Statement No. 143 (SFAS
143), "Accounting for Asset Retirement Obligations". That standard requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS 143 is applicable for years beginning after June 15, 2002.
LEP has not yet determined the effects of the new standard, if any, on its
financial statements.

         SFAS NO. 145--RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64, AMENDMENT
OF FASB STATEMENT N. 13, AND TECHNICAL CORRECTIONS. In May 2002, the Financial
Accounting Standards Board approved SFAS No. 145 ("SFAS 145"), "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." Among other things, under the provisions of SFAS 145,
gains and losses from the early extinguishment of debt are no longer classified
as an extraordinary item, net of income taxes, but are included in the
determination of pretax earnings. The effective date for SFAS 145 is for fiscal
years beginning after May 15, 2002, with early application encouraged. Upon
adoption, all gains and losses from the extinguishment of debt previously
reported as an extraordinary item shall be reclassified to pretax earnings. It
is anticipated that the adoption of SFAS 145 will have no impact on the
financial position or results of operations of LEP.

         SFAS NO. 146--ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES. In July 2002, the Financial Accounting Standards Board approved
Statement of Financial Accounting Standard No. 146 ("SFAS 146"), "Accounting for
Costs Associated with Exit or Disposal Activities". This statement addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force "EITF") has set forth in EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between SFAS 146 and EITF 94-3 is that
SFAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred versus the EITF
94-3 where a liability was recognized on the date an entity committed to an exit
plan. SFAS 146 is effective for exit and disposal activities that are initiated
after December 31, 2002. LEP has not yet determined the effects of the new
standard, if any, on its financial statements.

                                      F-30

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

         FASB INTERPRETATION NO. 45 - GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. This interpretation expands the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability for the fair value of an obligation assumed under a guarantee. In
general, FIN 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability, or
equity security of the guaranteed party. Certain guarantee contracts are
excluded from both the disclosure and recognition requirements of this
interpretation. Other guarantees are subject to the disclosure requirements of
FIN 45 but not to the recognition provisions and include, among others, a
guarantee accounted for as a derivative instrument under SFAS 133. The
disclosure requirements of FIN 45 are effective for LEP as of December 15, 2002,
and require disclosure of the nature of the guarantee, the maximum potential
amount of future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of FIN 45 are to
be applied prospectively to guarantees issued or modified after December 31,
2002. LEP has not yet determined the effects of the new standard, if any, on its
financial statements.

         CICA HANDBOOK SECTION 3063 - IMPAIRMENT OF LONG LIVED ASSETS AND 3475 -
DISPOSAL OF LONG LIVED ASSETS AND DISCONTINUED OPERATIONS. In 2002, the Canadian
Institute of Chartered Accountants (CICA) issued handbook section 3063 -
Impairment of Long Lived Assets and 3475 - Disposal of Long Lived Assets and
Discontinued Operations to harmonize with SFAS 144. The standards will require
an impairment loss to be recognized when the carrying amount of an asset held
for use exceeds the sum of undiscounted cash flows. The impairment loss would be
measured as the amount by which the carrying amount exceeds the fair value of
the asset. An asset held for sale is to be measured at the lower of carrying
cost or fair value less cost to sell. In addition, this guidance broadens the
concept of a discontinued operation and eliminates the ability to accrue
operating losses expected between the measurement date and the disposal date.
Section 3063 is effective for fiscal years beginning on or after April 1, 2003,
and Section 3475 applies to disposal activities initiated by an enterprise's
commitment to a plan on or after May 1, 2003. Management does not expect the
adoption of the new standard to have a material impact on its financial
statements.

         ACG NO. 13 - HEDGING RELATIONSHIPS. In 2002, the Accounting Standards
Board of the CICA issued Accounting Guideline No. 13 that increases the
documentation, designation and effectiveness criteria to achieve hedge
accounting. The guideline requires the discontinuance of hedge accounting for
hedging relationships established that do not meet the conditions at the date it
is first applied. It does not change the method of accounting for derivatives in
hedging relationships, but requires fair value accounting for derivatives that
do not qualify for hedge accounting. The new guideline is applicable for fiscal
years commencing July 1, 2003.

                                      F-31

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

20.      CONDENSED CONSOLIDATING INFORMATION

The following condensed consolidated information is provided for the year ended
December 31, 2002 and period ending December 31 2001. In 2001, LEP had no
operations prior to the acquisition of LCIF on May 11, 2001 and the statement of
earnings and cash flow data of LCIF and LCL in that year is for the period May
12, 2001 to December 31, 2001.

(a) CONDENSED CONSOLIDATING BALANCE SHEET

<TABLE>
<CAPTION>
                                                                             AS AT DECEMBER 31, 2002
                                              -------------------------------------------------------------------------------------
                                                  LUSCAR         LUSCAR COAL      LUSCAR ENERGY     CONSOLIDATING     CONSOLIDATED
                                                 COAL LTD.       INCOME FUND       PARTNERSHIP         ENTRIES             LEP
                                              --------------   --------------    --------------    --------------    --------------
(in thousands of Canadian dollars)
<S>                                           <C>              <C>               <C>               <C>               <C>
ASSETS
CURRENT
 Cash and cash equivalents........            $        6,894   $          121    $       66,698    $            -    $       73,713
 Accounts receivable..............                    61,992                -                 -                 -            61,992
 Income taxes recoverable.........                     1,464                -               291                 -             1,755
 Inventories......................                    86,072                -                 -                 -            86,072
 Overburden removal costs.........                    29,404                -                 -                 -            29,404
 Prepaid expenses.................                     4,366              (58)               48                (2)            4,354
 Due from related parties.........                     5,040                -            (5,040)                -                 -
                                              --------------   --------------    --------------    --------------    --------------
                                                     195,232               63            61,997                (2)          257,290
Investments in related parties...                          -          502,075           384,091          (886,166)                -
Capital assets...................                  1,321,906                -                 -           (39,189)        1,282,717
Other assets.....................                     23,093            1,559             9,000            (7,755)           25,897
                                              --------------   --------------    --------------    --------------    --------------
                                              $    1,540,231   $      503,697    $      455,088    $     (933,112)   $    1,565,904
                                              ==============   ==============    ==============    ==============    ==============

LIABILITIES AND PARTNERS' EQUITY
CURRENT
 Trade accounts payable and accrued charges.  $       36,462   $           55    $          482    $          (12)   $       36,987
 Accrued interest payable...................           8,824                -                 -                 -             8,824
 Accrued payroll and employee benefits......           8,879                -                 -                 -             8,879
 Income taxes payable.......................           1,421                -                 -                 -             1,421
 Current portions of
       Long-term debt......................           24,837                -                 -                 -            24,837
       Financial instruments...............            2,941                -                 -                 -             2,941
       Accrued reclamation costs...........           17,392                -                 -                 -            17,392
       Future income taxes.................            3,335                -                 -                 -             3,335
 Due to related parties.....................             245            3,947            (3,947)             (245)                -
                                              --------------   --------------    --------------    --------------    --------------
                                                     104,336            4,002            (3,465)             (257)          104,616
Accrued pension benefit obligation.........            5,627                -                 -            (5,627)                -
Long-term debt.............................          484,780                -                 -                 -           484,780
Convertible debentures.....................                -           96,053                 -           (96,053)                -
Subordinated notes due to LCIF.............          642,969                -                 -          (642,969)                -
Accrued reclamation costs..................           28,052                -                 -                 -            28,052
Future income taxes........................          419,293                -                 -                 -           419,293
                                              --------------   --------------    --------------    --------------    --------------
                                                   1,685,057          100,055            (3,465)         (744,906)        1,036,741
PARTNERS' EQUITY...........................         (144,826)         403,642           458,553          (188,206)          529,163
                                              --------------   --------------    --------------    --------------    --------------
                                              $    1,540,231   $      503,697    $      455,088    $     (933,112)   $    1,565,904
                                              ==============   ==============    ==============    ==============    ==============
</TABLE>

                                      F-32

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

<TABLE>
<CAPTION>
                                                                            AS AT DECEMBER 31, 2001
                                              -------------------------------------------------------------------------------------
                                                  LUSCAR         LUSCAR COAL      LUSCAR ENERGY    CONSOLIDATING      CONSOLIDATED
                                                 COAL LTD.       INCOME FUND       PARTNERSHIP        ENTRIES              LEP
                                              --------------   --------------    --------------    --------------    --------------
<S>                                           <C>              <C>               <C>               <C>               <C>
ASSETS
Current
 Cash and cash equivalents..................  $           10   $           63    $       62,169    $       (1,911)   $       60,331
 Accounts receivable........................          92,384                -                 -                 -            92,384
 Income taxes recoverable...................           6,300                -               184                 -             6,484
 Inventories................................          70,337                -                 -                 -            70,337
 Overburden removal costs...................          28,225                -                 -                 -            28,225
 Due from related parties...................          32,244                -           (32,244)                -                 -
 Prepaid expenses...........................           4,786                -                 -               (20)            4,766
                                              --------------   --------------    --------------    --------------    --------------
                                                     234,286               63            30,109            (1,931)          262,527
Investments in related parties.............                -          555,985           442,186          (998,171)                -
Capital assets.............................        1,406,274                -                 -           (86,303)        1,319,971
Other assets..............................            26,703            2,176             9,000            (7,846)           30,033
                                              --------------   --------------    --------------    --------------    --------------
                                              $    1,667,263   $      558,224    $      481,295    $   (1,094,251)   $    1,612,531
                                              ==============   ==============    ==============    ==============    ==============

LIABILITIES AND PARTNERS' EQUITY
Current
 Bank indebtedness..........................  $        1,911   $            -    $            -    $       (1,911)   $            -
 Trade accounts payable and accrued charges.          39,584              435             1,100              (523)           40,596
 Accrued interest payable...................           9,970                -                 -                 -             9,970
 Accrued payroll and employee benefits......          12,671                -                 -                 -            12,671
 Income taxes payable.......................           1,105                -                 -                 -             1,105
 Current portion of financial instruments...           2,822                -                 -             1,502             4,324
 Current portion of long-term debt..........           2,980                -                 -                 -             2,980
 Accrued reclamation costs..................          21,002                -                 -                 -            21,002
 Due to related parties.....................             245                -                 -              (245)                -
 Future income taxes........................           2,800                -                 -                 -             2,800
                                              --------------   --------------    --------------    --------------    --------------
                                                      95,090              435             1,100            (1,177)           95,448
Long-term debt.............................          517,632                -                 -                 -           517,632
Convertible debentures.....................                -          100,000                 -          (100,000)                -
Subordinated notes due to LCIF.............          642,969                -                 -          (642,969)                -
Financial instruments......................            2,823                -                 -                 -             2,823
Accrued reclamation costs..................           30,843                -                 -                 -            30,843
Future income taxes........................          468,822                -                 -                 -           468,822
                                              --------------   --------------    --------------    --------------    --------------
                                                   1,758,179          100,435             1,100          (744,146)        1,115,568
Partners' equity...........................          (90,916)         457,789           480,195          (350,105)          496,963
                                              --------------   --------------    --------------    --------------    --------------
                                              $    1,667,263   $      558,224    $      481,295    $   (1,094,251)   $    1,612,531
                                              ==============   ==============    ==============    ==============    ==============
</TABLE>

                                      F-33

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

(b) CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31, 2002
                                              ------------------------------------------------------------------------------------
                                                  LUSCAR         LUSCAR COAL      LUSCAR ENERGY     CONSOLIDATING    CONSOLIDATED
                                                 COAL LTD.       INCOME FUND       PARTNERSHIP         ENTRIES            LEP
                                              --------------   --------------    --------------    --------------   --------------
(in thousands of Canadian dollars)
<S>                                           <C>              <C>               <C>               <C>              <C>
REVENUE....................................   $      595,633   $            -    $            -    $        1,481   $      597,114
EXPENSES AND OTHER INCOME
    Cost of sales..........................          469,016                -                 -                 -          469,016
    Selling, general and administrative
     expenses..............................           13,619               58               832                 -           14,509
    Equity pickup..........................                -           53,910            31,985           (85,895)               -
    Depreciation and amortization..........           93,774              613                 -            (4,323)          90,064
    Write-down of capital assets...........           42,791                -                 -           (42,791)               -
    Foreign currency translation gain......           (4,021)               -                 -                 -           (4,021)
    Intercompany interest expense (income).           31,769          (22,596)           (9,666)              493                -
    Interest expense (income) .............           54,259                -            (1,543)                -           52,716
    Other (income) expense.................           (4,070)               -                34            (5,740)          (9,776)
                                              --------------   --------------    --------------    --------------   --------------
(LOSS) EARNINGS BEFORE INCOME TAXES........         (101,504)         (31,985)          (21,642)          139,737          (15,394)
Income tax recovery........................          (47,594)               -                 -                 -          (47,594)
                                              --------------   --------------    --------------    --------------   --------------
NET (LOSS) EARNINGS........................   $      (53,910)  $      (31,985)   $      (21,642)   $      139,737   $       32,200
                                              ==============   ==============    ==============    ==============   ==============
</TABLE>

<TABLE>
<CAPTION>
                                                                       PERIOD ENDED DECEMBER 31, 2001
                                              ------------------------------------------------------------------------------------
                                                  LUSCAR         LUSCAR COAL      LUSCAR ENERGY    CONSOLIDATING     CONSOLIDATED
                                                 COAL LTD.       INCOME FUND       PARTNERSHIP        ENTRIES            LEP
                                              --------------   --------------    --------------    --------------   --------------
<S>                                           <C>              <C>               <C>               <C>              <C>
REVENUE....................................   $      405,252   $            -    $            -    $        3,647   $      408,899
EXPENSES AND OTHER INCOME
    Cost of sales..........................          307,438                -                 -                 -          307,438
    Selling, general and administrative
     expenses..............................           10,199               82               865            (2,869)           8,277
    Equity pickup..........................                -           25,010            (2,847)          (22,163)               -
    Depreciation and amortization..........           67,665              339                 -           (11,004)          57,000
    Foreign currency translation loss......            8,415                -                 -                 -            8,415
    Intercompany interest expense (income).           31,920          (28,168)           (3,752)                -                -
    Interest expense (income)..............           33,209                -            (1,743)                -           31,466
    Other (income) expenses................           (1,821)            (110)               12               (53)          (1,972)
                                              --------------   --------------    --------------    --------------   --------------
(LOSS) EARNINGS BEFORE INCOME TAXES........          (51,773)           2,847             7,465            39,736           (1,725)
Income tax recovery........................          (26,763)               -                 -             2,788          (23,975)
                                              --------------   --------------    --------------    --------------   --------------
NET (LOSS) EARNINGS........................   $      (25,010)  $        2,847    $        7,465    $       36,948   $       22,250
                                              ==============   ==============    ==============    ==============   ==============
</TABLE>

                                      F-34

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

(c)  CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31, 2002
                                              ----------------------------------------------------------------------------------
                                                  LUSCAR         LUSCAR COAL     LUSCAR ENERGY    CONSOLIDATING    CONSOLIDATED
                                                 COAL LTD.       INCOME FUND      PARTNERSHIP        ENTRIES            LEP
                                              --------------   --------------   --------------   --------------   --------------
(in thousands of Canadian dollars)
<S>                                           <C>              <C>              <C>              <C>              <C>
OPERATING ACTIVITIES
Net (loss) earnings for the period..........  $      (53,910)  $      (31,985)  $      (21,642)  $      139,737   $       32,200
Non-cash items:
    Depreciation and amortization...........          93,774              613                -           (4,323)          90,064
    Write-down of capital assets............          42,791                -                -          (42,791)               -
    Future income taxes.....................         (48,994)               -                -                -          (48,994)
    Pension expense in excess of funding....          10,158                -                -           (5,719)           4,439
    Accrued reclamation costs...............          (6,401)               -                -                -           (6,401)
    Foreign currency translation gain.......          (3,453)               -                -                -           (3,453)
    Interest income earned on sinking funds.          (4,215)               -                -                -           (4,215)
    Financial instruments...................          (2,704)               -                -           (1,502)          (4,206)
    Equity pickup...........................               -           53,910           31,985          (85,895)               -
    Gain on disposals of capital assets.....          (1,242)               -                -                -           (1,242)
    Other...................................               1                -                -                5                6

Change in non-cash working capital..........          10,990             (318)            (772)             488           10,388
                                              --------------   --------------   --------------   --------------   --------------
                                                      36,795           22,220            9,571                -           68,586
                                              --------------   --------------   --------------   --------------   --------------
INVESTING ACTIVITIES
Capital asset purchases.....................         (51,035)               -                -                -          (51,035)
Proceeds on disposal of capital assets......           1,894                -                -                -            1,894
Other investments...........................          (1,096)               -                -                -           (1,096)
                                              --------------   --------------   --------------   --------------   --------------
                                                     (50,237)               -                -                -          (50,237)
                                              --------------   --------------   --------------   --------------   --------------
FINANCING ACTIVITIES
Deferred financing costs incurred...........          (1,640)               -                -                -           (1,640)
Due to (from) related parties...............          27,204            3,947          (31,151)               -                -
Convertible debenture.......................               -           (3,947)           3,947                -                -
Repayments of long-term debt ...............          (3,095)               -                -                -           (3,095)
Distribution to LEP.........................               -          (22,162)          22,162                -                -
                                              --------------   --------------   --------------   --------------   --------------
                                                      22,469          (22,162)          (5,042)               -           (4,735)
                                              --------------   --------------   --------------   --------------   --------------

Change in cash position.....................           9,027               58            4,529                -           13,614
Foreign currency translation loss...........            (232)               -                -                -             (232)
Cash position, beginning of period..........          (1,901)              63           62,169                -           60,331
                                              --------------   --------------   --------------   --------------   --------------
Cash position, end of period................  $        6,894   $          121   $       66,698   $            -   $       73,713
                                              ==============   ==============   ==============   ==============   ==============
</TABLE>

                                      F-35

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

<TABLE>
<CAPTION>
                                                                         PERIOD ENDED DECEMBER 31, 2001
                                              ----------------------------------------------------------------------------------
                                                  LUSCAR         LUSCAR COAL     LUSCAR ENERGY    CONSOLIDATING    CONSOLIDATED
                                                 COAL LTD.       INCOME FUND      PARTNERSHIP        ENTRIES            LEP
                                              --------------   --------------   --------------   --------------   --------------
<S>                                           <C>              <C>              <C>              <C>              <C>
OPERATING ACTIVITIES
Net (loss) earnings for the period..........  $      (25,010)  $        2,847   $        7,465   $       36,948   $       22,250
Non-cash items:
    Depreciation and amortization...........          67,665              339                -          (11,004)          57,000
    Future income taxes.....................         (28,560)               -                -            2,788          (25,772)
    Accrued reclamation costs...............          (4,977)               -                -                -           (4,977)
    Interest income earned on sinking funds.          (3,862)               -                -                -           (3,862)
    Financial instruments...................               -                -                -               63               63
    Foreign currency translation loss.......           8,401                -                -                -            8,401
    Interest on convertible debentures......               -            1,978                -           (1,978)               -
    Equity pickup...........................               -           25,010           (2,847)         (22,163)               -
    Gain on disposals of capital assets.....          (1,714)               -                -                -           (1,714)

    Change in non-cash working capital......          (4,909)         (30,111)          19,291           (4,654)         (20,383)
                                              --------------   --------------   --------------   --------------   --------------
                                                       7,034               63           23,909                -           31,006
                                              --------------   --------------   --------------   --------------   --------------
INVESTING ACTIVITIES
Capital asset purchases.....................         (16,605)               -                -                -          (16,605)
Proceeds on disposal of capital assets......              32                -                -                -               32
Other investments...........................          (1,242)               -                -                -           (1,242)
Investment in Luscar Coal Income Fund.......               -                -         (351,193)               -         (351,193)
                                              --------------   --------------   --------------   --------------   --------------
                                                     (17,815)               -         (351,193)               -         (369,008)
                                              --------------   --------------   --------------   --------------   --------------
FINANCING ACTIVITIES
Deferred financing costs incurred...........         (16,957)               -                -                -          (16,957)
Long-term debt issued.......................         429,660                -                -                -          429,660
Operating line of credit....................         (29,825)               -                -                -          (29,825)
Due from (to) related parties...............         (32,244)               -           32,244                -                -
Long-term debt repaid.......................        (341,768)               -                -                -         (341,768)
Capital contributions by partners...........               -                -          357,209                -          357,209
                                              --------------   --------------   --------------   --------------   --------------
                                                       8,866                -          389,453                -          398,319
                                              --------------   --------------   --------------   --------------   --------------

Change in cash position.....................          (1,915)              63           62,169                -           60,317
Foreign currency translation gain...........              14                -                -                -               14
Cash position, beginning of period..........               -                -                -                -                -
                                              --------------   --------------   --------------   --------------   --------------
Cash position, end of period................  $       (1,901)  $           63   $       62,169   $            -   $       60,331
                                              ==============   ==============   ==============   ==============   ==============

Cash position consists of:
Cash and cash equivalents...................               -               63           62,169           (1,901)          60,331
Bank indebtedness...........................          (1,901)               -                -            1,901                -
                                              --------------   --------------   --------------   --------------   --------------
Cash position, end of period................  $       (1,901)  $           63   $       62,169   $            -   $       60,331
                                              ==============   ==============   ==============   ==============   ==============
</TABLE>

         The Canadian-US GAAP differences related to this financial information
are described in the notes to the financial statements of the consolidating
entities.

         LCL's consolidated financial information presented above includes its
subsidiaries, Luscar Ltd. and 3718492 Canada Inc. Separate condensed
consolidating information for these subsidiaries is not presented because LCL
has no independent assets or operations. The subsidiaries' guarantees are full
and unconditional and joint and several and any subsidiaries other than the
subsidiary guarantors are minor.

                                      F-36

<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except for per unit amounts)

21.      SUBSEQUENT EVENT

On January 13, 2003, LEP agreed to transfer substantially all of its
metallurgical coal assets to Fording Canadian Coal Trust ("Fording Trust"). On
February 28, 2003, LEP made a distribution of $15,000 in cash and LEP's
interests in Luscar mine, Cheviot project, Neptune Bulk Terminals (Canada) Ltd.,
and certain non-producing metallurgical coal properties. The partners of LEP
immediately transferred these assets to Fording Trust for 221 trust units plus a
cash payment for working capital balances. Also on February 28, 2003, LEP
transferred its 50% joint venture interest in Line Creek mine to Fording Trust
for 2,979 trust units plus a cash payment for working capital balances.

Revenue, gross margin, total assets and capital expenditures for transferred
metallurgical coal assets and ongoing thermal operations are as follows:

<TABLE>
<CAPTION>
                                                                                               YEAR              PERIOD
                                                                                               ENDED              ENDED
                                                                                            DECEMBER 31        DECEMBER 31
                                                                                               2002               2001
                                                                                           -------------     ---------------
<S>                                                                                        <C>               <C>
Revenue
    Thermal...........................................................................     $     443,066     $       298,120
    Metallurgical.....................................................................           154,048             110,779
                                                                                           -------------     ---------------
                                                                                           $     597,114     $       408,899
                                                                                           =============     ===============

Operating margin
    Thermal...........................................................................     $     114,358     $        88,165
    Metallurgical.....................................................................            13,740              13,296
                                                                                           -------------     ---------------
                                                                                           $     128,098     $       101,461
                                                                                           =============     ===============

Capital expenditures
    Thermal...........................................................................     $      48,300     $        14,458
    Metallurgical.....................................................................             2,735               2,147
                                                                                           -------------     ---------------
                                                                                           $      51,035     $        16,605
                                                                                           =============     ===============
</TABLE>

<TABLE>
<CAPTION>
                                                                                               AS AT              AS AT
                                                                                            DECEMBER 31        DECEMBER 31
                                                                                               2002               2001
                                                                                           -------------     ---------------
<S>                                                                                        <C>               <C>
Total assets
    Thermal...........................................................................     $   1,428,305     $     1,482,483
    Metallurgical.....................................................................           137,599             130,048
                                                                                           -------------     ---------------
                                                                                           $   1,565,904     $     1,612,531
                                                                                           =============     ===============
</TABLE>

On March 25, 2003, LCL announced that production would be suspended at the Obed
Mountain mine. Costs associated with the suspension of operations are estimated
at $6,300.

                                      F-37

<PAGE>

Consolidated Financial Statements

LUSCAR COAL LTD.

DECEMBER 31, 2002 AND 2001

                                      F-38

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Shareholders of
Luscar Coal Ltd.

         We have audited the consolidated balance sheets of Luscar Coal Ltd. as
at December 31, 2002 and 2001 and the consolidated statements of deficit, loss
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

         In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at December
31, 2002 and 2001 and the results of its operations and its cash flows for the
years then ended in accordance with Canadian generally accepted accounting
principles.

Edmonton, Canada
February 4, 2003 except as to Note 22
which is as of March 31, 2003

(signed) Deloitte & Touche LLP
Chartered Accountants

            COMMENT FOR US READERS ON CANADA-US REPORTING DIFFERENCES

         In the United States of America, reporting standards for auditors
require the addition of an explanatory paragraph (following the opinion
paragraph) when financial statements have been restated, such as the restatement
described in Note 20 to the consolidated financial statements of Luscar Coal
Ltd. Our report to the Shareholders of Luscar Coal Ltd. dated February 4, 2003,
except as to Note 22 which is March 31, 2003, is expressed in accordance with
Canadian reporting standards, which do not require a reference to such events in
the auditors' report when the restatement is properly accounted for and
adequately disclosed in the financial statements. As discussed in Note 2 to the
consolidated financial statements, in 2001 Luscar Coal Ltd. Implemented changes
in revenue recognition, coal inventory and exploration and development cost
accounting principles.

Edmonton, Canada
February 4, 2003 except as to Note 22
which is as of March 31, 2003

(signed) Deloitte & Touche LLP
Chartered Accountants

                                      F-39

<PAGE>

LUSCAR COAL LTD.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                               AS AT             AS AT
                                                                                            DECEMBER 31        DECEMBER 31
                                                                                               2002               2001
                                                                                           -------------     ---------------
(in thousands of Canadian dollars)
<S>                                                                                        <C>               <C>
ASSETS
Current
    Cash and cash equivalents.........................................................     $       6,894     $            10
    Accounts receivable...............................................................            61,992              92,384
    Income taxes recoverable..........................................................             1,464               6,300
    Inventories [note 3]..............................................................            86,072              70,337
    Overburden removal costs..........................................................            29,404              28,225
    Prepaid expenses..................................................................             4,366               4,786
    Due from related parties [note 14]................................................             5,040              32,244
                                                                                           -------------     ---------------
                                                                                                 195,232             234,286
Capital assets [note 4]...............................................................         1,321,906           1,406,274
Other assets [note 5].................................................................            23,093              26,703
                                                                                           -------------     ---------------
                                                                                           $   1,540,231     $     1,667,263
                                                                                           =============     ===============

LIABILITIES AND SHAREHOLDERS' DEFICIT
Current
    Bank indebtedness.................................................................     $           -     $         1,911
    Trade accounts payable and accrued charges........................................            36,462              39,584
    Accrued interest payable..........................................................             8,824               9,970
    Accrued payroll and employee benefits.............................................             8,879              12,671
    Income taxes payable..............................................................             1,421               1,105
    Current portions of
         Long-term debt [note 6]......................................................            24,837               2,980
         Financial instruments [note 18]..............................................             2,941               2,822
         Accrued reclamation costs [note 7]...........................................            17,392              21,002
         Future income taxes [note 13]................................................             3,335               2,800
    Due to related party [note 14]....................................................               245                 245
                                                                                           -------------     ---------------
                                                                                                 104,336              95,090
Accrued pension benefit obligation....................................................             5,627                   -
Long-term debt [note 6]...............................................................           484,780             517,632
Subordinated notes due to LCIF [note 8]...............................................           642,969             642,969
Financial instruments [note 18].......................................................                 -               2,823
Accrued reclamation costs [note 7]....................................................            28,052              30,843
Future income taxes [note 13].........................................................           419,293             468,822
                                                                                           -------------     ---------------
                                                                                               1,685,057           1,758,179
                                                                                           -------------     ---------------
SHAREHOLDERS' DEFICIT
    Share capital [note 9]............................................................            14,191              14,191
    Deficit...........................................................................          (159,017)           (105,107)
                                                                                           -------------     ---------------
                                                                                                (144,826)            (90,916)
                                                                                           -------------     ---------------
                                                                                           $   1,540,231     $     1,667,263
                                                                                           =============     ===============
</TABLE>

See accompanying notes

                                      F-40

<PAGE>

LUSCAR COAL LTD.

                       CONSOLIDATED STATEMENTS OF DEFICIT

<TABLE>
<CAPTION>
                                                                         YEAR ENDED        YEAR ENDED        YEAR ENDED
                                                                        DECEMBER 31       DECEMBER 31       DECEMBER 31
                                                                           2002              2001              2000
                                                                        -----------       -----------       -----------
                                                                                                            (restated)
(in thousands)                                                                                               (note 2)
<S>                                                                     <C>               <C>               <C>
Deficit, beginning of year, as previously reported ..............        $(105,107)        $ (94,235)          (69,843)
Adjustment to reflect adoption of liability method of accounting
     for income taxes [note 2]...................................                -                 -              (380)
Adjustment to reflect change in accounting policy for revenue
     recognition and coal inventory [note 2].....................                -                 -               921
Adjustment to reflect change in accounting policy for exploration
     and development expenditures [note 2].......................                -                 -             2,187
                                                                         ---------         ---------         ---------
Deficit, beginning of year, as restated..........................         (105,107)          (94,235)          (67,115)
Net loss.........................................................          (53,910)          (10,872)          (27,120)
                                                                         ---------         ---------         ---------
Deficit, end of year.............................................        $(159,017)        $(105,107)          (94,235)
                                                                         =========         =========         =========
</TABLE>

See accompanying notes

                                      F-41

<PAGE>

LUSCAR COAL LTD.

                         CONSOLIDATED STATEMENTS OF LOSS

<TABLE>
<CAPTION>
                                                               YEAR ENDED        YEAR ENDED        YEAR ENDED
                                                              DECEMBER 31       DECEMBER 31       DECEMBER 31
                                                                  2002              2001              2000
                                                              -----------       -----------       -----------
                                                                                                   (restated)
(in thousands of Canadian dollars)                                                                  (note 2)
<S>                                                           <C>               <C>               <C>
REVENUE .................................................      $ 595,633         $ 635,534         $ 657,052
EXPENSES AND OTHER INCOME
     Cost of sales ......................................        469,016           484,843           534,286
     Selling, general and administrative expenses .......         13,619            14,538            14,733
     Take-over response costs ...........................              -             9,875                 -
     Depreciation and amortization [notes 4 and 5] ......         93,774           100,023           105,941
     Write-down of capital assets [note 4] ..............         42,791                 -            45,808
     Foreign currency translation (gain) loss [note 10]..         (4,021)            8,415                 -
     Interest expense [note 11] .........................         86,028            89,148            63,642
     Other income [note 12] .............................         (4,070)           (1,660)           (1,953)
                                                               ---------         ---------         ---------
LOSS BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST ...       (101,504)          (69,648)         (105,405)
Income tax recovery [note 13] ...........................        (47,594)          (58,776)          (45,472)
                                                               ---------         ---------         ---------
LOSS BEFORE NON-CONTROLLING INTEREST ....................        (53,910)          (10,872)          (59,933)
Non-controlling interest [note 19] ......................              -                 -            32,813
                                                               ---------         ---------         ---------
NET LOSS ................................................      $ (53,910)        $ (10,872)        $ (27,120)
                                                               =========         =========         =========
</TABLE>

See accompanying notes

                                      F-42

<PAGE>

LUSCAR COAL LTD.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED     YEAR ENDED     YEAR ENDED
                                                                DECEMBER 31    DECEMBER 31    DECEMBER 31
                                                                   2002            2001           2000
                                                                -----------    -----------    -----------
                                                                                              (restated)
(in thousands of Canadian dollars)                                                             (note 2)
<S>                                                             <C>            <C>            <C>
OPERATING ACTIVITIES
Net loss .................................................       $ (53,910)     $ (10,872)     $ (27,120)
Non-cash items:
     Depreciation and amortization [notes 4 and 5] .......          93,774        100,023        105,941
     Write-down of capital assets [note 4] ...............          42,791              -         45,808
     Future income taxes [note 13] .......................         (48,994)       (59,151)       (47,569)
     Pension expense in excess of funding ................          10,158              -              -
     Accrued reclamation costs [note 7] ..................          (6,401)        (4,400)         5,669
     Foreign currency translation (gain) loss [note 10]...          (3,453)         8,272              -
     Interest income earned on sinking funds [note 11]....          (4,215)        (5,009)        (3,813)
     Financial instruments [note 18] .....................          (2,704)         5,644        (11,290)
     (Gain) loss on disposal of capital assets ...........          (1,242)           168            182
     Other ...............................................               1              -              -
Change in non-cash working capital [note 17] .............          10,990          3,348        (16,442)
                                                                 ---------      ---------      ---------
                                                                    36,795         38,023         18,553
                                                                 ---------      ---------      ---------

INVESTING ACTIVITIES
Capital asset purchases ..................................         (51,035)       (27,938)       (17,822)
Proceeds on the sale of interest in Line Creek mine ......               -              -         56,726
Proceeds on disposal of capital assets ...................           1,894            508          3,349
Other investments ........................................          (1,096)         1,602         (1,172)
                                                                 ---------      ---------      ---------
                                                                   (50,237)       (25,828)        41,081
                                                                 ---------      ---------      ---------

FINANCING ACTIVITIES
Operating line of credit .................................               -        (45,434)         1,244
Deferred financing costs incurred ........................          (1,640)       (16,959)             -
Long-term debt issued ....................................               -        429,660         13,341
Due to (from) related party [note 14] ....................          27,204       (349,271)             -
Repayments of long-term debt .............................          (3,095)       (32,244)       (74,736)
                                                                 ---------      ---------      ---------
                                                                    22,469        (14,248)       (60,151)
                                                                 ---------      ---------      ---------

Change in cash position ..................................           9,027         (2,053)          (517)
Foreign currency translation (loss) gain [note 10] .......            (232)           143              -
Cash position, beginning of period .......................          (1,901)             9            526
                                                                 ---------      ---------      ---------
Cash position, end of period .............................       $   6,894      $  (1,901)     $       9
                                                                 =========      =========      =========

Interest paid ............................................       $  94,432      $ 100,404      $  69,750
Income taxes paid (recovered) ............................       $   2,159      $  (2,030)     $   2,604
</TABLE>

See accompanying notes

                                      F-43

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

1.       ORGANIZATION AND FINANCIAL STATEMENT PRESENTATION

         Luscar Coal Ltd. ("LCL") owns and operates surface coal mines in
western Canada and also operates a surface coal mine owned by a third party.

         Since May 11, 2001, Luscar Energy Partnership ("LEP", formerly known as
Sherritt Coal Partnership) has controlled LCL, through its wholly owned
subsidiary, Luscar Coal Income Fund ("LCIF"), which holds all of the common
shares, special shares and subordinated notes of LCL and its wholly owned
subsidiary, Luscar Ltd. Prior to May 11, 2001, Luscar Management Corporation
("LMC"), a company wholly owned by the senior management of LCL., had owned the
common shares of LCL and LCIF held the special shares and subordinated notes.
Before LEP acquired control of LCIF on May 11, 2001, LCIF was a broadly
distributed, publicly traded income fund and LCL., LCIF and LMC were parties to
a unanimous shareholders agreement. That agreement governed the operation of
Luscar Ltd. and provided that LCIF had representation on the Luscar Ltd. Board
of Directors and that 98 percent of Luscar Ltd.s free cash flow, after debt
servicing costs and replacement capital needs, was paid to LCIF.

         On March 8, 2001, LEP formally offered to acquire 100% of the trust
units and convertible debentures of LCIF. On May 11, 2001, LEP held sufficient
trust units and convertible debentures to enable LEP to acquire the remaining
trust units and cause LCIF to redeem the remaining convertible debentures. As at
June 30, 2001, LEP held all issued and outstanding securities of LCIF. The
acquisition has been accounted for as if LEP acquired full ownership of LCIF
effective May 11, 2001. During the course of the acquisition, LCIF acquired the
common shares of LCL for one dollar pursuant to the unanimous shareholders'
agreement. The consolidated financial statements for LEP include the results of
LCL subsequent to May 11, 2001. These consolidated financial statements as at
and for the year ended December 31, 2001 do not include adjustments to the
carrying values of LCL's assets, liabilities, earnings or cash flows resulting
from or indicated by the acquisition of control of LCIF by LEP or of LCL by
LCIF.

2.       ACCOUNTING POLICIES

         LCL's financial statements have been prepared following Canadian
generally accepted accounting principles. As described in Note 20, these
principles differ in certain respects from generally accepted accounting
principles in the United States. The following significant accounting policies
are presented to assist the reader in evaluating these financial statements and,
together with the following notes, should be considered an integral part of the
financial statements.

USE OF ESTIMATES

         In preparing LCL's financial statements, management is required to make
estimates and assumptions that affect the reported amount of assets and
liabilities, the disclosure of contingent liabilities at the date of the
financial statements, and the reported amount of revenues and expenses during
the reporting periods. Actual results could differ from these estimates.

         In particular, the amounts recorded for depreciation and amortization
of mining properties and for reclamation, site restoration and mine closure are
based on estimates of coal reserves and future costs. These estimates, and those
related to the cash flows used to assess impairment of capital assets, are
subject to measurement uncertainty and the impact on the financial statements of
future periods could be material. Such estimates and assumptions have been made
using careful judgments, which, in management's opinion, are within reasonable
limits of materiality.

                                      F-44

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of LCL and
its subsidiaries. Interests in joint ventures are accounted for using the
proportionate consolidation method, whereby consolidated accounts include LCL's
share of joint venture assets, liabilities, revenues, expenses and cash flows.

REVENUE RECOGNITION

         Revenue is recognized when title to the coal passes to the customer.
For domestic coal sales to power generating utility customers this occurs when
the coal is delivered to the generating station; for other domestic customers,
this generally occurs when the coal is loaded at the mine. For export coal
sales, this generally occurs when coal is loaded onto marine vessels at terminal
locations.

CASH AND CASH EQUIVALENTS

         Cash and cash equivalents include cash on hand and in banks as well as
all highly liquid short-term securities with original maturities of three months
or less.

BANK INDEBTEDNESS

         Bank indebtedness consists of bank overdrafts and cheques issued and
outstanding in excess of the bank balance.

OVERBURDEN REMOVAL COSTS

         Costs of removing overburden are charged to earnings at average cost
when the coal is produced. Costs incurred related to future production are
recorded as current assets.

INVENTORIES

         Coal inventories are valued at the lower of average production cost and
net realizable value. Average production cost includes labor, supplies,
equipment costs, direct and allocable indirect operating overhead and, in the
case of coal inventory held at port terminal facilities, rail transportation and
applicable wharfage costs.

         Mine supplies are recorded at the lower of average cost and replacement
cost.

RECLAMATION

         Estimated future expenditures for reclamation, site restoration and
mine closure are charged to earnings on a unit of production basis over the
expected life of each mine's reserves. Amounts charged to earnings but not yet
paid are included in accrued reclamation costs. Reclamation expenditures are
included in current liabilities to the extent they are planned within the next
year.

                                      F-45

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

CAPITAL ASSETS

         Capital assets are recorded at cost less accumulated depreciation and
amortization, calculated using the straight-line method over the estimated life
of the asset, ranging from three to forty years as follows:

<TABLE>
<S>                                   <C>
Mining properties ............        3 - 40 years
Plant and buildings ..........        5 - 40 years
Equipment ....................        3 - 35 years
</TABLE>

         Mining properties include acquisition costs, lease payments,
development costs and major expansion costs related to producing mines,
properties under development, and properties held for future development. Mine
development costs incurred to access reserves at producing mines and properties
under development are capitalized when incurred, to be amortized over the life
of such reserves. Ongoing pre-development costs related to properties held for
future development are expensed as incurred, including property carrying costs,
lease payments, drilling and other exploration costs. Acquisition costs for
mining properties to be held for future development are capitalized.

         The carrying values of mining properties are periodically reviewed
using projected undiscounted cash flows and any resulting write-downs are
charged to earnings at the time of determination.

         Interest on funds borrowed to construct capital assets is capitalized
if the construction period exceeds one year. Repair and maintenance costs
related to capital assets are expensed as incurred.

DEFERRED FINANCING COSTS

         Financing costs incurred to arrange credit facilities are deferred and
amortized on a straight-line basis over the period to maturity of the related
debt.

INCOME TAXES

         LCL follows the liability method of tax allocation in accounting for
income taxes. Under this method, future income taxes are recognized for future
income tax consequences attributable to differences between the financial
statement carrying values of assets and liabilities and their respective income
tax basis. Future income tax assets and liabilities are measured using
substantively enacted income tax rates expected to apply to taxable income in
the years in which recovery or settlement of temporary differences is expected.
The effect on future income tax assets and liabilities of a change in tax rates
is included in income in the period in which the change occurs.

FOREIGN CURRENCY

         Transactions and balances denominated in a foreign currency are
translated using the temporal method, whereby monetary balances are translated
at the rate of exchange at the balance sheet date; non-monetary balances are
translated at historic exchange rates; and revenues and expenses are translated
at prevailing exchange rates. The resulting gains and losses are included in
income in the current year.

                                      F-46

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

POST EMPLOYMENT BENEFITS

         The majority of employees are covered under defined contribution
pension plans, the cost of which is recognized at the time services are rendered
by the employees.

         LCL uses the projected benefit method prorated on service to account
for the cost of defined benefit pension plans. Pension costs are based on
management's best estimate of expected plan investment performance, salary
escalation and retirement age of employees. The discount rate used to determine
the accrued benefit obligation is based on market interest rates as at the
measurement date on high quality debt instruments with cash flows that match the
timing and amount of expected benefit payments. For purposes of calculating the
expected return on plan assets, those assets are valued at market-related value.
Valuation allowances are calculated using a five-year average fair value.
Changes in the valuation allowance are recognized in income immediately. The net
actuarial gain (loss) over 10 percent of the greater of the benefit obligation
and the market-related value of plan assets is amortized over the remaining
service life of active employees.

         Effective January 1, 2000, LCL adopted the requirements of The Canadian
Institute of Chartered Accountants' (CICA) Section 3461, Employee Future
Benefits in accounting for its post employment benefit programs. As permitted
under these rules, these requirements have been adopted on a prospective basis.
Transitional assets and liabilities that arose from such prospective application
are being amortized on a straight-line basis:

         -        in the case of active defined benefit pension plans, over the
                  average remaining service period of active employees;

         -        in the case of inactive defined benefit pension plans, over
                  the average remaining life expectancy of the plan members; and

         -        in the case of defined benefit plans, other than pensions,
                  over a ten-year period from the transition date.

         Prior to January 1, 2000, pension costs included the amortization of
past service costs, experience gains and losses, and pension surplus which were
being amortized over the estimated remaining service lives of the active members
of such plans.

FINANCIAL INSTRUMENTS

         Unless otherwise disclosed, the fair value of financial instruments
approximates their carrying value in these financial statements.

Currency Risk

         Forward currency exchange contracts were utilized to manage the risk
associated with future revenue flows denominated in United States dollars.
Revenue matched to such forward currency exchange contracts is recorded at the
related contract exchange rates in the period the contracts are settled. Since
the foreign exchange contracts expired during the year, LCL is exposed to
foreign exchange fluctuations on its United States dollar denominated sales and
interest expense on its Senior Notes.

                                      F-47

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

Credit Risk

         The Company provides credit to its customers in the normal course of
its operation. Credit risks are minimized to the extent that customers include
major domestic utilities and accounts receivable on export sales are generally
insured under government export development programs or secured by letters of
credit.

Interest Rate Risk

         The long-term debt bears fixed interest rates and consequently, the
cash flow exposure is not significant.

DERIVATIVE FINANCIAL INSTRUMENTS

         LCL no longer enters into derivative financial instruments for foreign
currency, interest and energy. LCL assumed certain derivative financial
instruments as part of its acquisition of LCIF effective May 11, 2001 as
disclosed in note 18. As at December 31, 2002 certain financial instruments were
outstanding as disclosed in note 18.

CHANGES IN ACCOUNTING POLICIES

(A)      REVENUE RECOGNITION AND COAL INVENTORY VALUATION

         During 2001, LCL reviewed its revenue recognition and coal inventory
valuation accounting policies in the context of U.S. SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (`SAB 101"). In
accordance with the guidance of SAB 101 and the February 2001 Ontario Securities
Commission Staff Notice 52-701 regarding revenue recognition, LCL changed its
revenue recognition and coal inventory valuation accounting policies.
Previously, LCL recognized revenue when coal was shipped from the minesite,
either directly to the customer or to port facilities, provided that contractual
sales commitments were in place.

         LCL recognizes revenue when title passes to the customer. Furthermore,
LCL previously recorded coal inventory at production cost including direct
variable overhead, and in the case of coal inventory held at port terminal
facilities, at its net realizable value in accordance with its previous revenue
recognition policy. LCL now records coal inventory at production cost which
includes direct and allocable indirect overhead and in the case of coal
inventory held at port terminal facilities, rail transportation and applicable
wharfage costs.

         These changes in policy have been adopted retroactively and the
consolidated balance sheet at December 31, 2000 and the consolidated statement
of earnings, deficit and cash flows for the year ended December 31, 2000 has
been restated accordingly. The effect of these changes in accounting policies is
summarized as follows:

Balance sheet

<TABLE>
<CAPTION>
                                                      AS AT
                                                   DECEMBER 31
                                                       2000
                                                   -----------
<S>                                                <C>
Increase (decrease) in:
   Coal settlements receivable ..............        $(24,247)
   Inventory ................................          29,046
   Future income taxes ......................           1,624
   Non-controlling interest .................           2,159
   Deficit ..................................          (1,016)
</TABLE>

                                      F-48

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

Statement of earnings

<TABLE>
<CAPTION>
                                                 YEAR ENDED
                                                 DECEMBER 31
                                                     2000
                                                 -----------
<S>                                              <C>
Increase (decrease) in earnings:
   Revenue ..................................       $  38
   Cost of sales ............................         320
   Income tax recovery ......................        (121)
   Non-controlling interest .................        (142)
   Loss for the period ......................          95
</TABLE>

(B)      EXPLORATION AND DEVELOPMENT COSTS

         During 2001, LCL changed its accounting policies for exploration and
development costs related to properties held for future development. Previously,
LCL capitalized all costs related to properties held for future development
including property acquisition costs, lease payments, drilling and other
exploration related costs. Such costs were reclassified as mining properties
when mine development commenced. Costs related to uneconomic properties held for
future development were charged to earnings in the year of determination.

         Costs related to properties held for future development are expensed as
incurred, including property carrying costs, lease payments drilling and other
exploration costs, and other pre-development costs. Acquisition costs for
properties held for future development are capitalized and the carrying values
of acquired properties are periodically received using projected undiscounted
cash flows. Any resulting write-downs are charged to earnings at the time of
determination.

         This change in accounting policy has been adopted retroactively and the
consolidated balance sheet at December 31, 2000 and the consolidated statement
of earnings, deficit and cash flows for the year ended December 31, 2000, have
been restated accordingly. The effect of this change in accounting policy is
summarized as follows:

Balance sheet

<TABLE>
<CAPTION>
                                                                AS AT
                                                             DECEMBER 31
                                                                 2000
                                                             -----------
<S>                                                          <C>
Increase (decrease) in:
   Capital assets - deferred exploration ..............        $(19,913)
   Capital assets - non-producing properties ..........           1,760
   Future income taxes ................................          (8,544)
   Non-controlling interest ...........................          (8,419)
   Deficit ............................................           1,090
</TABLE>

                                      F-49

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

Statement of earnings

<TABLE>
<CAPTION>
                                                                       YEAR ENDED
                                                                      DECEMBER 31
                                                                         2000
                                                                      -----------
<S>                                                                   <C>
Increase (decrease) in earnings:
     Cost of sales .............................................        $(1,528)
     Write-down and loss on disposal of capital assets .........            935
     Income tax recovery .......................................            268
     Non-controlling interest ..................................         (2,952)
     Loss for the period .......................................         (3,277)
</TABLE>

3.       INVENTORIES

<TABLE>
<CAPTION>
                                       AS AT          AS AT
                                    DECEMBER 31    DECEMBER 31
                                       2002           2001
                                    -----------    -----------
<S>                                   <C>            <C>
Coal at mine .................        $38,976        $27,840
Coal at port .................         16,557         14,157
Mine supplies ................         30,539         28,340
                                      -------        -------
                                      $86,072        $70,337
                                      =======        =======
</TABLE>

4.       CAPITAL ASSETS

<TABLE>
<CAPTION>
                                                   AS AT DECEMBER 31, 2002             AS AT DECEMBER 31, 2001
                                                -----------------------------       -----------------------------
                                                                 ACCUMULATED                         ACCUMULATED
                                                                 DEPRECIATION                        DEPRECIATION
                                                                     AND                                  AND
                                                   COST          AMORTIZATION          COST          AMORTIZATION
                                                ----------       ------------       ----------       ------------
<S>                                             <C>               <C>               <C>              <C>
Producing mining properties ............        $1,520,979        $  508,996        $1,515,501        $  423,642
Plant and buildings ....................            71,522            40,465            69,684            29,767
Equipment ..............................           419,135           160,329           386,337           132,153
Equipment under capital lease ..........            12,586             6,024            10,922             4,106
Non-producing mining properties ........            14,008               510            13,573                75
                                                ----------        ----------        ----------        ----------
                                                $2,038,230        $  716,324        $1,996,017        $  589,743
                                                ----------        ----------        ----------        ----------
Net book value .........................                 $1,321,906                          $1,406,274
                                                         ==========                          ==========
</TABLE>

         Depreciation and amortization provided in the accounts amounted to
$91,959 and $92,369 for the years ended December 31, 2002 and 2001,
respectively.

         As at December 31, 2002, LCL reviewed the carrying value of mining
properties. Management determined that reductions in export thermal coal prices
have impaired the carrying value of certain assets related to the Company's Coal
Valley and Obed Mountain mines. The carrying values of these assets have been
reduced by $42,791.

                                      F-50

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

5.       OTHER ASSETS

<TABLE>
<CAPTION>
                                                                          AS AT          AS AT
                                                                       DECEMBER 31    DECEMBER 31
                                                                           2002          2001
                                                                       -----------    -----------
<S>                                                                    <C>            <C>
Deferred financing costs, net of accumulated amortization .......        $16,337        $16,513
Defined benefit pension plans ...................................              -          4,531
Investments and other assets ....................................          6,756          5,659
                                                                         -------        -------
                                                                         $23,093        $26,703
                                                                         =======        =======
</TABLE>

         Deferred financing costs are amortized over the term of the related
financing. Amortization of deferred financing costs in the amount of $1,815 and
$7,654 was provided for the years ended December 31, 2002 and 2001 respectively.

         Investments and other assets include real estate properties, prepaid
royalties and amounts recoverable from domestic customers in future years.

         LCL sponsors defined benefit and defined contribution pension
arrangements covering substantially all of its employees. The majority of its
employees are members of defined contribution plans; however, unionized
employees at two mines are members of active defined benefit pension plans. LCL
has several other defined benefit pension plans, in which most members have
elected to convert their entitlement to defined contribution plans. LCL uses
actuarial reports and updates prepared by independent actuaries for funding and
accounting purposes. LCL has no other retirement or post-employment benefits.

         The following is a summary of the significant actuarial assumptions
used to calculate periodic pension expense and obligations under the defined
benefit pension plans as at December 31, 2002:

<TABLE>
<S>                                                                      <C>
Expected long-term rate of return on plan assets ................                 7.00%
Discount rate on pension obligations ............................                 7.00%
Rate of compensation increases ..................................          3.50 - 4.50%
Average remaining service period of active employees ............        10 - 15 years
</TABLE>

                                      F-51

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

         LCL's net pension plan expense is as follows:

<TABLE>
<CAPTION>
                                                                       YEAR ENDED        YEAR ENDED
                                                                      DECEMBER 31       DECEMBER 31
                                                                          2002              2001
                                                                      -----------       ------------
<S>                                                                   <C>               <C>
Current service cost - defined benefit..............................   $     1,577      $      2,267
                     - defined contribution.........................         6,133             5,755
Interest cost.......................................................         3,362             3,293
Expected return on plan assets......................................        (3,822)           (3,850)
Amortization of net transitional obligation.........................         6,406                56
Amortization of net actuarial loss..................................            24                 -
Loss on plan settlement.............................................             -             2,672
Provision for loss on plan transfer.................................         3,541                 -
Increase in valuation allowance at end of year......................           223               931
                                                                       -----------      ------------
Net pension plan expense............................................   $    17,444      $     11,124
                                                                       ===========      ============
</TABLE>

           Information about LCL's defined pension benefit plans, in aggregate,
is as follows:

<TABLE>
<S>                                                                    <C>              <C>
Accrued benefit obligation
     Balance, beginning of year.....................................   $    47,228      $     49,311
     Current service costs..........................................         1,577             2,267
     Interest cost..................................................         3,362             3,293
     Benefits paid..................................................        (1,565)           (7,305)
     Actuarial loss (gain)..........................................         2,081            (1,195)
     Sale of interest in Line Creek mine............................             -               857
                                                                       -----------      ------------
     Balance, end of year...........................................        52,683            47,228
                                                                       -----------      ------------
Plan assets
     Fair value, beginning of year..................................        55,150            57,983
     Actual return on plan assets...................................        (6,137)            1,073
     Employer contributions.........................................           481             2,542
     Benefits paid..................................................        (1,565)           (7,305)
     Sale of interest in Line Creek mine............................             -               857
                                                                       -----------      ------------
     Fair value, end of year........................................        47,929            55,150
                                                                       -----------      ------------
Funded status - (deficiency) surplus................................        (4,754)            7,922
     Unamortized net actuarial loss (gain)..........................         9,388              (487)
     Unamortized net transitional asset.............................        (9,107)           (1,973)
                                                                       ------------     -------------
Accrued benefit pension (liability) asset...........................   $    (4,473)     $      5,462
     Valuation allowance............................................        (1,154)             (931)
                                                                       ------------     ------------
Net accrued benefit pension (liability) asset.......................   $    (5,627)     $      4,531
                                                                       ===========      ============
</TABLE>

         Included in the above are defined benefit pension plans with accrued
benefit obligations in excess of plan assets as follows:

<TABLE>
<CAPTION>
                                               YEAR ENDED     YEAR ENDED
                                              DECEMBER 31    DECEMBER 31
                                                  2002           2001
                                              -----------    -----------
<S>                                           <C>            <C>
Accrued benefit obligation .............        $37,620        $18,148
Fair value of plan assets ..............         29,421         16,498
                                                -------        -------
Funded status - deficit ................        $ 8,199        $ 1,650
                                                =======        =======
</TABLE>

                                      F-52

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

         During 2002, LCL settled its obligations for all the former employees
participating in defined benefit pension plans and a provision for loss on plan
transfer of $3,541 is included in pension expense, as disclosed above.

6.       LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                                          AS AT             AS AT
                                                                                       DECEMBER 31       DECEMBER 31
                                                                                          2002               2001
                                                                                       -----------       -----------
<S>                                                                                    <C>               <C>
Senior Notes, at issue date ....................................................        $ 429,660         $ 429,660
Cumulative foreign currency translation loss since issue date [note 10] ........            4,730             8,415
                                                                                        ---------         ---------
Senior Notes, at balance sheet date ............................................          434,390           438,075
                                                                                        ---------         ---------

12.75% promissory note, due May 18, 2003 .......................................           45,000            45,000
Less sinking fund ..............................................................          (22,930)          (21,214)
                                                                                        ---------         ---------
                                                                                           22,070            23,786
                                                                                        ---------         ---------

9.625% promissory note, due December 30, 2004 ..................................           89,300            89,300
Less sinking fund ..............................................................          (41,999)          (38,158)
                                                                                        ---------         ---------
                                                                                           47,301            51,142
                                                                                        ---------         ---------

Capital lease obligations ......................................................            5,856             7,609
                                                                                        ---------         ---------

Long-term debt .................................................................          509,617           520,612
Current portion of long-term debt ..............................................          (24,837)           (2,980)
                                                                                        ---------         ---------
                                                                                        $ 484,780         $ 517,632
                                                                                        =========         =========
</TABLE>

SENIOR NOTES

         On October 10, 2001, LCL issued US$275,000 of 9.75% senior notes due
October 15, 2011 ("Senior Notes"). The proceeds of $429,660 from the Senior
Notes were used to repay all of LCL's existing bank credit facilities of
$349,271, the underwriting fees of $16,957 related to the offering, and the
balance of $63,432 was retained to finance LCL's ongoing operating and capital
requirements. Concurrently, LCL arranged a $100,000 credit facility ("Senior
Credit Agreement") with a syndicate of Canadian chartered banks, under which
letters of credit totaling $62,000 were issued at that time to replace letters
of credit which had been issued under LCL's bank credit facilities.

         The Senior Notes bear interest at 9.75% per annum, which is payable
semi-annually commencing April 15, 2002 until the principal amount becomes due
on October 15, 2011. The Senior Notes are LCL's senior unsecured obligations and
will rank equally with all of LCL's senior unsecured obligations. Each of LEP,
LCIF and all of LCL's current and future material subsidiaries unconditionally
guarantee the Senior Notes, jointly and severally. The obligations of the
guarantors are unsecured and will rank equally with all other senior unsecured
indebtedness of the guarantors.

         Under the provisions of the Senior Notes, additional amounts will be
payable if payments made by LCL or the guarantors are subject to withholding or
deduction for taxes. The additional amounts will be sufficient such that the net
amount received by the holders of the Senior Notes will not be less than the
amount the holder would have

                                      F-53

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

received if such taxes had not been withheld or deducted. In the event that LCL
is obligated to make such deductions or withholdings, LCL will have the option
to redeem the Senior Notes for the principal amount.

         LCL has the option to redeem all or a portion of the Senior Notes after
October 15, 2006 at a redemption price of 104.875% of the principal amount,
declining to 103.250% after October 15, 2007, to 101.625% after October 15, 2008
and at par after October 15, 2009. Prior to October 15, 2006, LCL has the option
to redeem all or a portion of the Senior Notes for the principal amount plus an
applicable premium equal to the greater of 1% of the principal amount and the
excess of: (i) the net present value, at the redemption date, of the redemption
price of 104.875% on October 15, 2006 together with all required interest
payments through October 15, 2006, computed using a discount rate equal to the
yield to maturity of United States Treasury securities maturing on or about
October 15, 2006, plus 50 basis points; over (ii) the principal amount of the
Senior Notes. On or before October 15, 2004 LCL may redeem up to 35% of the
Senior Notes at 109.75% of the principal amount with the net cash proceeds of
specified sales of common equity interests. Upon the occurrence of a change in
control, the holders of Senior Notes may require LCL to purchase the Senior
Notes for 101% of the principal amount. To the extent there are excess proceeds
from specified types of asset sales, LCL or the holders of Senior Notes may
elect to redeem or repurchase a portion of the Senior Notes at 100% of the
principal amount.

         The indenture under which the Senior Notes were issued contains
covenants which restrict the ability of LCL and the guarantors to (i) incur
additional indebtedness and issue equity; (ii) make investments; (iii) declare
or pay dividends or other distributions; (iv) incur payment restrictions that
other parties may impose; (v) conduct transactions with affiliates; (vi) make
asset sales or use proceeds from permitted asset sales; (vii) incur liens; and
(viii) consolidate or merge with, or into, or transfer all or substantially all
of an entity's assets, to another person.

         The estimated fair value of the Senior Notes as at December 31, 2002
and 2001 is $465,319 and $453,408 respectively based on quoted market values.

SENIOR CREDIT AGREEMENT

         The Senior Credit Agreement with a syndicate of Canadian chartered
banks consists of a revolving 364 day operating credit facility that permits
maximum aggregate borrowings of $100,000, subject to a borrowing base which
includes accounts receivable, coal inventory and a $25,000 charge on a dragline.
Up to $75,000 of the credit facility may be used to secure letters of credit.
Interest rates payable or advances under the facility are based on prime lending
rates plus interest rate margins which range from 0.25% to 1.25% depending on
LCL's ratio of debt to operating earnings before depreciation and amortization.
To date, there have been no advances made under this facility and $62,499 of
letters of credit, providing reclamation security, have been issued. The lenders
have the right to convert the facility to a demand facility until LEP's fixed
charge coverage ratio, calculated on a rolling 12 month basis, exceeds 2.50. In
October 2002, the Senior Credit Agreement was renewed until October 4, 2003
under the same terms and conditions.

BANK CREDIT FACILITIES

         At December 31, 2000, LCL was indebted to a Canadian chartered bank for
$375,750, which included drawings of $29,500 under an operating line of credit
and $346,250 of non-revolving term credit facilities. LCL made principal
repayments of $5,000 on each of March 31, June 30 and September 30, 2001 and
repaid all amounts outstanding under these bank credit facilities using the
proceeds from the Senior Notes on October 10, 2001. Letters of credit issued
under the operating line of credit were cancelled on October 10, 2001 and
replaced with letters of credit issued under the Senior Credit Agreement.

                                      F-54

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

PROMISSORY NOTES

         The promissory notes were issued to finance the acquisition of a
dragline and the Poplar River mine in conjunction with long-term coal supply
agreements with a Crown corporation. A chattel mortgage on the dragline secures
the 12.75% promissory note and the assets, rights and agreements related to the
Poplar River mine secure the 9.625% promissory note. The promissory notes and
the acquired assets are integral to the coal supply agreements and amounts paid
to LCL for coal supplied include reimbursement for substantially all of the
semi-annual interest and sinking fund payments made in respect of the promissory
notes. At maturity, LCL is obligated to repay the promissory notes, net of
related sinking funds. Under the provisions of the coal supply agreements, the
Crown corporation will immediately reimburse LCL for the net repayment as a
component of the coal price. LCL is required to make annual sinking fund
payments of $450 on the 12.75% promissory note and $893 on the 9.625% promissory
note.

         The sinking funds, which are held by the note trustee as collateral for
the promissory notes, are primarily invested in fixed income securities issued
by federal and provincial governments that mature at or near the maturity date
of the related promissory notes. The carrying values of the sinking funds are
based on cumulative annual contributions plus accrued investment income. The
fair value of the assets held by the sinking funds as at December 31, 2002 and
December 31, 2001 were $70,267 and $62,213 respectively.

         On May 18, 2003 the promissory note for $45 million at 12.75% becomes
due and payable. Under the terms of a coal supply agreement, the projected
$21,000 excess of the principal amounts over the sinking fund balance, is
recoverable from the Crown corporation and will be included in other income in
2003. At December 31, 2002, the $22,070 excess of the principal amount over the
sinking fund balance is included in the current portion of long-term debt.

CAPITAL LEASE OBLIGATIONS

         Obligations under capital leases on specific mining equipment bear
interest at rates ranging from 6.17% to 7.10%. These capital leases mature
between 2004 and 2005 and are repayable by blended monthly payments of principal
and interest.

SCHEDULED LONG-TERM DEBT REPAYMENTS

<TABLE>
<CAPTION>
                                                                      AS AT DECEMBER 31, 2002
                                                          -------------------------------------------
                                                                                           CAPITAL
                                                              SENIOR       PROMISSORY       LEASE
                                                              NOTES          NOTES        OBLIGATIONS
                                                          ------------    ------------    -----------
<S>                                                       <C>             <C>             <C>
2003....................................................  $          -    $     22,964    $     2,201
2004....................................................             -          46,407          2,381
2005....................................................             -               -          1,844
2006....................................................             -               -              -
2007 and thereafter.....................................       434,390               -              -
                                                          ------------    ------------    -----------
                                                          $    434,390    $     69,371          6,426
                                                          ============    ============
Less interest included therein..........................                                          570
                                                                                          -----------
Present value of minimum capital lease payments.........                                  $     5,856
                                                                                          ===========
</TABLE>

                                      F-55

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

7.       ACCRUED RECLAMATION COSTS

<TABLE>
<CAPTION>
                                                   YEAR            YEAR
                                                  ENDED           ENDED
                                               DECEMBER 31      DECEMBER 31
                                                  2002             2001
                                               -----------      -----------
<S>                                            <C>              <C>
Balance, beginning of year .............        $ 51,845         $ 56,245
Reclamation cost provision .............          14,552           14,698
Expenditures incurred ..................         (20,953)         (19,098)
                                                --------         --------
Balance, end of year ...................          45,444           51,845
Current portion ........................          17,392           21,002
                                                --------         --------
                                                $ 28,052         $ 30,843
                                                ========         ========
</TABLE>

8.       SUBORDINATED NOTES DUE TO LCIF

<TABLE>
<CAPTION>
                                                             AS AT           AS AT
                                                          DECEMBER 31      DECEMBER 31
                                                             2002             2001
                                                          -----------      -----------
<S>                                                       <C>              <C>
7.5% subordinated notes, due October 1, 2027 ..........     $292,969        $292,969
12.5% subordinated notes, due December 31, 2026 .......      350,000         350,000
                                                            --------        --------
                                                            $642,969        $642,969
                                                            ========        ========
</TABLE>

         Interest on the subordinated notes is payable quarterly. Effective
October 1, 1999, LCL and LCIF agreed to reduce the interest rate on the
subordinated notes until LCL's ratio of senior debt to operating earnings before
depreciation and amortization is less than 3 to 1 for two consecutive calendar
quarters. The effective interest rate under the subordinated notes is determined
by multiplying the coupon interest rate by an interest rate adjustment factor.
This factor is calculated by dividing LCL's forecast distributable cash for the
year by the interest amount otherwise payable under the subordinated notes. The
interest rate adjustment factor averaged 0.4834 for the year ended December 31,
2002 (0.6292 for the year ended December 31, 2001)

         Except as otherwise provided, the subordinated notes are not redeemable
or repayable prior to maturity. LCL has the option to elect to satisfy its
obligation to repay the subordinated notes on maturity by the issue of equity
securities of LCL having a value equal to the outstanding subordinated notes.

         From time to time beginning in 2017, LCL and LCIF will jointly review
LCL's remaining coal resources, the economic conditions relating to the coal
industry and the business prospects of LCL. If either party is of the opinion
that LCL would be unable to refinance the subordinated notes upon maturity on
similar terms and conditions, then LCL shall commence principal repayments such
that the subordinated notes are fully repaid upon maturity. In that event, LCL's
available cash shall be utilized to the extent required to fund such repayments
in lieu of dividends on its common and special shares.

         In the event that restrictions under the Business Corporations Act
(Alberta) preclude LCL from distributing its available cash in the form of
dividends or return of capital, LCL may make principal repayments on the 7.5%
subordinated notes. Such principal repayments may not exceed the amounts LCL
would have distributed in the form of dividends or return of capital, were it
not for such restrictions.

                                      F-56

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

         The note indenture enables LCL to redeem certain of the 7.5%
subordinated notes before maturity if the holder of such notes is indebted to
LCL by offsetting the amount of such indebtedness against the principal amount
of the 7.5% subordinated notes redeemed.

         As discussed in Note 1, LCL became a wholly owned subsidiary of LCIF,
which acquired all of LCL's common shares pursuant to the unanimous
shareholders' agreement.

9.       SHARE CAPITAL

AUTHORIZED

         Authorized share capital consists of an unlimited number of common
shares and an unlimited number of non-voting special shares. Special shares are
entitled to receive a dividend per share equal to 2.5 times the amount of any
dividend paid per common share. In the event of dissolution of LCIF, the special
shares are convertible into common shares on a one for one basis. The holders of
special shares are entitled to share equally with the holders of common shares
in any distribution of assets upon liquidation, dissolution or winding up of LCL
or other distribution of LCL's assets among its shareholders.

ISSUED

         The issued share capital consists of 1,000 common shares, issued for
aggregate consideration of one dollar, and 7,600 special shares, issued for
aggregate consideration of $14,191. There was no change in the share capital
during the years ended December 31, 2002 and 2001.

10.      FOREIGN CURRENCY TRANSLATION

         Foreign current translation gains and losses consist of the following:

<TABLE>
<CAPTION>
                                                                      YEAR           YEAR
                                                                     ENDED          ENDED
                                                                  DECEMBER 31     DECEMBER 31
                                                                      2002           2001
                                                                  -----------     -----------
<S>                                                               <C>             <C>
Foreign currency translation (gain) loss on
     Senior Notes ..........................................        $(3,685)        $ 8,415
     US dollar cash balances ...............................            232            (143)
     Working capital balances ..............................           (568)            143
                                                                    -------         -------
                                                                    $(4,021)        $ 8,415
                                                                    =======         =======
</TABLE>

         In 2001, foreign currency translation gains and losses on US dollar
cash balances and other working capital balances were included in other income.
Foreign currency translation gains and losses and other income has been
reclassified to conform to the current disclosure.

                                      F-57

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

11.      INTEREST EXPENSE

         Interest expense consists of the following:

<TABLE>
<CAPTION>
                                                         YEAR ENDED       YEAR ENDED       YEAR ENDED
                                                         DECEMBER 31      DECEMBER 31      DECEMBER 31
                                                            2002             2001             2000
                                                         -----------      -----------      -----------
<S>                                                      <C>              <C>              <C>
Senior Notes .....................................        $ 42,092         $  9,492         $      -
Promissory notes net of sinking fund interest ....          10,117            9,323           10,520
Financial instruments ............................             330            5,644                -
Capital Leases ...................................             252              292            1,105
Operating line of credit .........................             365            1,895            2,319
Long-term bank debt ..............................           3,004           25,432           40,255
Income tax reassessments .........................          (1,799)          (3,124)              77
Retroactive Boundary Dam contract settlement .....               -           (2,083)               -
Other ............................................            (102)             (98)          (1,834)
                                                          --------         --------         --------
Other interest ...................................          54,259           46,773           52,442
Subordinated notes ...............................          31,769           42,375           11,200
                                                          --------         --------         --------
                                                          $ 86,028         $ 89,148         $ 63,642
                                                          ========         ========         ========
</TABLE>

         Interest expense on promissory notes for the years ended December 31,
2002, 2001 and 2000 is net of $4,215, $5,009 and $3,813, respectively, in income
earned on the related sinking fund assets.

12.      OTHER INCOME

Other income consists of the following:

<TABLE>
<CAPTION>
                                                        YEAR ENDED       YEAR ENDED     YEAR ENDED
                                                       DECEMBER 31      DECEMBER 31    DECEMBER 31
                                                          2002             2001           2000
                                                       -----------      -----------    -----------
(in thousands of Canadian dollars)
<S>                                                    <C>              <C>             <C>
Settlement for coal conveyor ...................        $(10,100)        $     -         $     -
Net pension plan expense .......................           8,101             536            (969)
Other expense (income) .........................          (2,071)         (2,196)           (984)
                                                        --------         -------         -------
                                                        $ (4,070)        $(1,660)        $(1,953)
                                                        ========         =======         =======
</TABLE>

On December 31, 2002, LCL settled a legal dispute relating to the engineering,
design, manufacture and commissioning of a coal conveyor system at Line Creek
mine. $5,100 of the $10,100 settlement is included in accounts receivable at
December 31, 2002 and was received subsequent to year end.

Net pension plan expense excludes certain current service and other costs, which
are included in cost of sales.

                                      F-58

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

13.      INCOME TAXES

         The components of the net future income tax liability are as follows:

<TABLE>
<CAPTION>
                                                                                AS AT           AS AT
                                                                             DECEMBER 31     DECEMBER 31
                                                                                2002            2001
                                                                             -----------      ---------
<S>                                                                          <C>             <C>
Future income tax liabilities
     Capital assets ..................................................        $446,230        $493,352
     Overburden removal costs ........................................           9,555           9,234
     Deferred financing costs deducted for tax in excess of
     accounting deductions ...........................................           1,149               -
     Accounting pension surplus ......................................           3,716           4,100
     Other ...........................................................           2,000               -
                                                                              --------        --------
                                                                               462,650         506,686
                                                                              --------        --------
Future income tax assets
     Accrued reclamation and other items not currently deductible ....          21,761          18,586
     Deferred financing costs deductible for tax purposes ............           1,084               -
     Net operating losses carried forward ............................          17,177          16,478
                                                                              --------        --------
                                                                                40,022          35,064
                                                                              --------        --------
Net future income tax liability ......................................         422,628         471,622
Less:  current portion of future income tax liabilities ..............           3,335           2,800
                                                                              --------        --------
                                                                              $419,293        $468,822
                                                                              ========        ========
</TABLE>

         The provisions for income taxes differ from the result that would be
obtained by applying the combined Canadian federal and provincial statutory
income tax rates to loss before income taxes and non-controlling interest. This
difference is explained below:

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED         YEAR ENDED        YEAR ENDED
                                                                                    DECEMBER 31        DECEMBER 31       DECEMBER 31
                                                                                        2002               2001              2000
                                                                                    -----------        -----------       -----------
<S>                                                                                 <C>                <C>               <C>
Loss before income taxes and non-controlling interest ..........................     $(101,504)         $(69,648)         $(105,405)
Statutory income tax rate ......................................................         43.40%            44.26%             45.17%
                                                                                     ---------          --------          ---------
Expected income tax (recovery) .................................................     $ (44,053)         $(30,826)         $ (47,611)
Effect on income tax of:
     Excess of statutory resource allowance over
     non-deductible Crown charges ..............................................        (4,634)           (8,467)            (2,045)
     Reduction in future income taxes resulting from statutory
     rate reductions ...........................................................        (2,999)          (17,549)                 -
     Large corporations tax ....................................................         2,460             2,820              2,992
     Unrealized foreign currency translation (gains) losses ....................        (1,599)            3,725                  -
     Other .....................................................................         3,231            (8,479)             1,192
                                                                                     ---------          --------          ---------
Income tax (recovery) ..........................................................     $ (47,594)         $(58,776)         $ (45,572)
                                                                                     =========          ========          =========
     Current ...................................................................         1,400               375              2,097
     Future ....................................................................       (48,994)          (59,151)           (47,569)
                                                                                     ---------          --------          ---------
Income tax (recovery) ..........................................................     $ (47,594)         $(58,776)         $ (45,572)
                                                                                     =========          ========          =========
</TABLE>

         Included in the other line item in the reconciliation table above are
tax provisions and tax recoveries in respect of potential and actual income tax
reassessments.

                                      F-59

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

         LCL has the following deductions available to claim against future
taxable income:

<TABLE>
<CAPTION>
                                                                                     MAXIMUM            AS AT
                                                                                     ANNUAL          DECEMBER 31
                                                                                  RATE OF CLAIM         2002
                                                                                  -------------      -----------
<S>                                                                               <C>                <C>
Undepreciated capital cost......................................................       25%           $   270,637
Canadian development expense....................................................       30%                 2,511
Canadian exploration expense....................................................      100%                 3,214
Deferred financing expense......................................................       20%                12,801
Other...........................................................................       10%                 6,898
                                                                                                     -----------
                                                                                                     $   296,061
                                                                                                     ===========
</TABLE>

         LCL has non-capital losses carried forwards which expire in the
following years:

<TABLE>
<CAPTION>
                                                                                                        AS AT
                                                                                                     DECEMBER 31
                                                                                                        2002
                                                                                                     -----------
<S>                                                                                                  <C>
2003............................................................................                     $    12,367
2004............................................................................                           1,576
2005............................................................................                          20,538
2006............................................................................                               -
2007............................................................................                               -
2008............................................................................                           3,120
2009............................................................................                           2,042
                                                                                                     -----------
                                                                                                     $    39,643
                                                                                                     ===========
</TABLE>

         The income tax benefits of the above items have been recognized in the
accounts.

                                      F-60

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

14.      RELATED PARTY TRANSACTIONS

<TABLE>
<CAPTION>
                                                                                      AS AT             AS AT
                                                                                   DECEMBER 31       DECEMBER 31
                                                                                      2002              2001
                                                                                  -------------      -----------
<S>                                                                               <C>                <C>
Due from Luscar Energy Partnership..............................................     $ 5,040           $ 32,244
Due to LCIF.....................................................................         245                245
</TABLE>

         Periodically, LCL makes advances to or receives advances from related
parties, including LEP and LCIF. Except as noted such advances are repayable
upon demand and do not bear interest. During 2001, LCL advanced $11,930 to LCIF
to enable LCIF to pay the costs of LCIF's response to the takeover bid described
in Note 1. LCIF repaid these advances from its cash available for distribution
on June 30, 2001 and September 30, 2001. Prior to the issue of the Senior Notes
on October 10, 2001, LEP advanced its surplus cash to LCL, which used the funds
to reduce its operating line of credit. On October 10, 2001 LCL advanced $61,980
of the proceeds from the Senior Notes to LEP at an interest rate of 2.5%,
against which amounts owed by LCL to LEP were offset. The resulting net amount
was offset against further advances made by LEP to LCL to provide funds for
LCL's general operating requirements. On a continuing basis, LCL advances its
surplus cash to LEP and, as at December 31, 2002, LEP was indebted to LCL for
the net amount of $5,040 ($32,244 as at December 31, 2001).

15.      REVENUES

         LCL owns and operates surface mines located in western Canada,
producing coal for consumption by domestic and foreign customers. LCL's mining
operations are accounted for as one segment having similar economic and
operating characteristics, customers and products, and have been aggregated for
the purpose of revenue reporting. Metallurgical figures include incidental
thermal coal byproduct at Line Creek mine. Prior period figures have been
restated to conform to this presentation.

         Revenues from metallurgical and thermal mines are as follows:

<TABLE>
<CAPTION>
                                           YEAR ENDED              YEAR ENDED            YEAR ENDED
                                           DECEMBER 31             DECEMBER 31           DECEMBER 31
                                              2002                    2001                  2000
                                    ------------------------  --------------------    ------------------
                                       SALES                    SALES                   SALES
                                      REVENUE      TONNES      REVENUE     TONNES      REVENUE    TONNES
                                    -----------   --------    ---------   --------    ---------   ------
<S>                                 <C>           <C>         <C>         <C>         <C>         <C>
Thermal..........................   $   441,585    33,554     $ 455,016    33,691     $ 391,480   32,393
Metallurgical....................       154,048     2,410       180,518     2,970       265,572    4,990
                                    -----------   --------    ---------   --------    ---------   ------
                                    $   595,633    35,964     $ 635,534    36,661     $ 657,052   37,383
                                    ===========   ========    =========   ========    =========   ======
</TABLE>

                                      F-61

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

    Disclosures with respect to geographic areas are as follows:

<TABLE>
<CAPTION>
                                                       YEAR ENDED                YEAR ENDED              YEAR ENDED
                                                       DECEMBER 31               DECEMBER 31             DECEMBER 31
                                                          2002                      2001                    2000
                                                -----------------------   -----------------------  -----------------------
                                                   SALES                     SALES                   SALES
                                                  REVENUE      TONNES       REVENUE      TONNES     REVENUE       TONNES
                                                -----------  ----------   -----------  ----------  ----------  -----------
<S>                                             <C>          <C>          <C>          <C>         <C>         <C>
Geographic areas
  Japan...................................      $    78,004       1,505   $    85,768       1,572  $  148,797        3,019
  Korea...................................           38,204         956        80,870       1,799      62,656        1,586
  United States...........................           36,769         435        35,656         376      52,887          642
  South America...........................           28,391         455        33,622         704      49,030        1,264
  Europe..................................           22,682         360        20,615         349      20,181          415
  Other...................................           34,134         682        13,268         241      12,613          261
                                                -----------  ----------   -----------  ----------  ----------  -----------
  Total export............................          238,184       4,393       269,799       5,041     346,164        7,187
  Canada..................................          357,449      31,571       365,735      31,620     310,888       30,196
                                                -----------  ----------   -----------  ----------  ----------  -----------
                                                $   595,633      35,964   $   635,534      36,661  $  657,052       37,383
                                                ===========  ==========   ===========  ==========  ==========  ===========
</TABLE>

         Export coal sales are generally denominated in United States currency.

         Revenues are derived from significant customers and in some cases
substantially all production from a particular mine is sold to one customer. The
number of customers, each accounting for more than 10% of revenue by type of
coal, is as follows:

<TABLE>
<CAPTION>
                                                      YEAR ENDED                 YEAR ENDED              YEAR ENDED
                                                      DECEMBER 31                DECEMBER 31             DECEMBER 31
                                                         2002                       2001                    2000
                                                ----------------------     -----------------------  ----------------------
                                                   SALES     NUMBER OF        SALES      NUMBER OF    SALES      NUMBER OF
                                                  REVENUE    CUSTOMERS       REVENUE     CUSTOMERS   REVENUE     CUSTOMERS
<S>                                             <C>          <C>           <C>           <C>        <C>          <C>
Major customers
  Thermal.................................      $  249,931       3         $   254,457       3      $  317,679       4
  Metallurgical...........................      $   21,473       1         $   105,387       3          56,497       2
</TABLE>

         Credit risks are minimized to the extent that customers include major
domestic utilities and accounts receivable on export sales are generally insured
under government export development programs or secured by letters of credit.

                                      F-62

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

16.      JOINT VENTURES

         LCL conducts a portion of its exploration, development and mining
operations through its 50% interests in the Cardinal River joint venture (which
operates the Luscar mine and Cheviot project) and the Line Creek joint venture
which operates the Line Creek mine. A portion of LCL's cash flow from
operations, operating margin and capital expenditures is derived from the joint
ventures. LCL's share of operating expenses related to mining activities is
included in the cost of inventories and charged to operations as revenues are
recognized.

<TABLE>
<CAPTION>
                                                                                               AS AT              AS AT
                                                                                            DECEMBER 31        DECEMBER 31
                                                                                               2002               2001
                                                                                           -------------       -----------
<S>                                                                                        <C>                 <C>
Share of assets and liabililties of joint ventures
  Current assets....................................................................       $      70,306       $    58,866
  Current liabilities...............................................................             (13,572)          (14,148)
                                                                                           --------------      -----------
  Working capital...................................................................              56,734            44,718
  Capital assets, net of accumulated depreciation and amortization..................              65,728            70,297
  Accrued reclamation costs.........................................................             (11,091)          (10,147)
  Obligations under capital lease...................................................              (1,427)           (2,320)
  Accrued pension benefit obligation................................................                (769)             (611)
                                                                                           -------------       -----------
                                                                                           $     109,175       $   101,937
                                                                                           =============       ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                                            YEAR ENDED         YEAR ENDED
                                                                                            DECEMBER 31        DECEMBER 31
                                                                                               2002               2001
                                                                                           ------------        -----------
<S>                                                                                        <C>                 <C>
Share of expenses and cash flows of joint ventures
  Revenue...........................................................................       $    154,047        $   177,343
  Expenses..........................................................................            148,417            166,253

Cash flows from:
  Operations........................................................................       $      1,799        $    21,635
  Investing activities..............................................................             (3,481)            (5,389)
  Financing activities..............................................................              1,456            (16,520)
</TABLE>

                                      F-63

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

17.      STATEMENTS OF CASH FLOWS

         The consolidated statements of cash flows have been prepared to reflect
only cash flows from operating, investing and financing activities and exclude
certain non-cash transactions, which are disclosed elsewhere in these financial
statements.

<TABLE>
<CAPTION>
                                                                           YEAR ENDED       YEAR ENDED      YEAR ENDED
                                                                           DECEMBER 31      DECEMBER 31     DECEMBER 31
                                                                              2002             2001            2000
                                                                           -----------     ------------     -----------
<S>                                                                        <C>             <C>              <C>
Changes in non-cash working capital
   Accounts receivable..............................................       $    30,392     $    (22,490)    $     1,939
   Income taxes recoverable and payable.............................             5,152            2,015             412
   Inventories......................................................           (15,735)           5,135              44
   Overburden removal costs.........................................            (1,179)           1,234            (229)
   Prepaid expenses.................................................               420            4,141          (1,409)
   Trade accounts payable and accrued charges.......................            (3,122)           6,987         (18,188)
   Accrued interest payable.........................................            (1,146)           9,492               -
   Accrued payroll and employee benefits............................            (3,792)          (3,165)          1,318
   Due to related parties...........................................                 -               (1)           (399)
                                                                           -----------     ------------     -----------
                                                                           $    10,990     $      3,348     $   (16,442)
                                                                           ===========     ============     ===========
</TABLE>

18.      FINANCIAL INSTRUMENTS

         Financial instruments are as follows:

<TABLE>
<CAPTION>
                                                                              AS AT           AS AT
                                                                           DECEMBER 31     DECEMBER 31
                                                                              2002            2001
                                                                           -----------     -----------
<S>                                                                        <C>             <C>
Interest rate swap, at fair market value...........................        $     2,941     $     5,645
Less: current portion..............................................              2,941           2,822
                                                                           -----------     -----------
                                                                           $         -     $     2,823
                                                                           ===========     ===========
</TABLE>

         The interest rate swap with a Canadian chartered bank, maturing
December 31, 2003, was originally entered into to fix the rate of interest on
$100,000 of floating rate long-term bank debt at 5.72% per annum plus the
applicable interest rate margin. Because the swap was used to hedge floating
interest rates on long-term bank debt, the swap had no carrying value and net
settlements under the swap were recorded as interest expense on long-term bank
debt. On October 10, 2001, LCL repaid all of the floating rate long-term bank
debt for which the swap was used to hedge floating interest rates. Therefore,
the interest rate swap was restated to its fair value as of that date and
subsequent changes in the carrying value and net settlements under the interest
rate swap are recorded as other interest expense. During the year ended December
31, 2002 interest expense included $330 ($5,644 for the year ended December 31,
2001) related to the amortization and revaluation of the interest rate swap.

         LCL does not trade in derivative securities for profit; therefore gains
and losses relating to forward currency exchange contracts are recognized as
revenues as at the settlement dates. As at December 31, 2002, there were no
outstanding contracts related to these hedging activities.

                                      F-64

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

19.      NON-CONTROLLING INTEREST

         Prior to the acquisition of control by LEP effective May 11, 2001, LCIF
had a non-controlling interest that consisted of 9,000 special shares of LCL's
subsidiary, Luscar Ltd. The amount of the non-controlling interest consisted of
amounts paid by LCIF for the special shares, which were allocated to contributed
surplus, less the cumulative share of Luscar Ltd.'s losses allocated to the
special shares and cumulative dividends paid on the special shares held by LCIF.
Effective May 11, 2001, LCIF acquired a controlling interest in Luscar Ltd.

<TABLE>
<CAPTION>
                                                                                              AS AT           AS AT
                                                                                           DECEMBER 31     DECEMBER 31
                                                                                              2002            2001
                                                                                          ------------     -----------
<S>                                                                                       <C>              <C>
Investment in special shares of Luscar Ltd. Including amount allocated to
   contributed surplus...............................................................     $          -     $   180,534
Share of LCL's deficit...............................................................                -         (49,234)
Cumulative share of Luscar Ltd.'s losses allocated to special shares.................                -        (123,890)
Cumulative dividends paid on special shares..........................................                -          (7,410)
                                                                                          ------------     -----------
Non-controlling interest.............................................................     $          -     $         -
                                                                                          ============     ===========
</TABLE>

20.      UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

         The consolidated financial statements of LCL have been prepared in
accordance with Canadian GAAP. Canadian GAAP differs from United States GAAP in
the following respects:

A.       STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                                                        YEAR ENDED       YEAR ENDED     YEAR ENDED
                                                                        DECEMBER 31      DECEMBER 31    DECEMBER 31
                                                                           2002             2001           2000
                                                                        -----------    -------------    -----------
                                                                                         (RESTATED)
<S>                                                                     <C>            <C>              <C>
Net loss under Canadian GAAP........................................    $   (53,910)   $     (10,872)   $   (27,120)
Impact of United States GAAP:
   Reduction of depreciation of mining properties (a)...............              -              253            691
   Comprehensive revaluation (b)....................................         28,048            6,761              -
   Pension valuation allowance (c)..................................            654              528             61
   Additional pension expense (c)...................................              -                -           (102)
   Change in accounting policies (e)................................              -            3,176           (238)
   Derivative financial instruments (f).............................         (2,252)          (5,151)             -
   Write-down of mining properties (g)..............................              -                -          7,557
   Share of adjustments attributable to non-controlling interest....              -                -         (8,246)
                                                                        -----------    -------------    -----------

Net loss under United States GAAP...................................    $   (27,460)   $      (5,305)   $   (27,397)
                                                                        ===========    =============    ===========
loss per share:
   Common shares....................................................    $     (0.55)   $       (0.11)   $     (1.04)
   Special shares...................................................    $     (3.54)   $       (0.68)   $     (6.69)
</TABLE>

                                      F-65

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

B.       STATEMENTS OF COMPREHENSIVE INCOME

         Comprehensive income is measured in accordance with Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). This standard defines comprehensive income as all changes in equity other
than those resulting from investments by owners and distributions to owners. The
concept of comprehensive income does not exist under Canadian GAAP. LCL's
comprehensive earnings determined in accordance with United States GAAP would be
as follows:

<TABLE>
<CAPTION>
                                                                        YEAR ENDED       YEAR ENDED     YEAR ENDED
                                                                        DECEMBER 31      DECEMBER 31    DECEMBER 31
                                                                           2002             2001           2000
                                                                        -----------      -----------    -----------
                                                                                          (RESTATED)
<S>                                                                     <C>              <C>            <C>
(I)  CURRENT YEARS
Net loss under United States GAAP..................................     $   (27,460)     $    (5,305)   $   (27,397)
Other comprehensive income net of tax:
  Minimum pension liability (c)....................................          (1,827)             543            188
  Derivative financial instruments (f).............................             303             (492)             -
                                                                        -----------      -----------    -----------
Comprehensive loss.................................................     $   (28,984)     $    (5,254)   $    26,609
                                                                        ===========      ===========    ===========

(II)  ACCUMULATED OTHER COMPREHENSIVE LOSS

Balance, beginning of year.........................................     $      (509)     $      (543)   $      (731)
Cumulative effect of adoption of SFAS 133 (f)......................               -              (17)             -
Change for the year................................................          (1,524)              51            188
                                                                        -----------      -----------    -----------
Balance, end of year...............................................     $    (2,033)     $      (509)   $       543
                                                                        ===========      ===========    ===========
</TABLE>

C.       CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                           AS AT           AS AT
                                                                                         DECEMBER 31    DECEMBER 31
                                                                                            2002           2001
                                                                                         -----------    -----------
                                                                                                         (RESTATED)
<S>                                                                                      <C>            <C>
Assets
   Current assets..................................................................      $   196,112    $   233,406
   Capital assets..................................................................        1,309,169      1,342,761
   Other assets....................................................................           94,886         87,759
                                                                                         -----------    -----------
   ................................................................................      $ 1,600,167    $ 1,663,926
                                                                                         ===========    ===========

Liabilities and shareholders' equity
    Current liabilities............................................................      $   101,794    $    99,870
    Accrued pension benefit obligation.............................................            6,800              -
    Long-term debt.................................................................        1,192,678      1,222,794
    Other liabilities..............................................................           28,052         30,843
    Future income taxes............................................................          432,164        455,392
    Share capital..................................................................           14,191         14,191
    Deficit........................................................................         (173,479)      (158,655)
    Accumulated other comprehensive loss...........................................           (2,033)          (509)
                                                                                         -----------    -----------
                                                                                         $ 1,600,167    $ 1,663,926
                                                                                         ===========    ===========
</TABLE>

                                      F-66

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

(a)      DEPRECIATION OF MINING PROPERTIES

         Under United States GAAP, as a result of the write-down of mining
properties in 1999, depreciation and amortization of mining properties was not
reduced in 2002, but was reduced by $377 ($253 net of tax) and $1,044 ($691 net
of tax) for the years ended December 31, 2001 and December 31, 2000,
respectively.

(b)       COMPREHENSIVE REVALUATION

         Under Canadian GAAP the application of pushdown accounting to reflect
the comprehensive revaluation of an acquired entity's assets and liabilities is
optional in preparing the acquired entity's financial statements. Under United
States SEC requirements, purchase transactions that result in an entity becoming
substantially wholly owned establish a new basis of accounting for the purchased
assets and liabilities of the entity and the entity's financial statements must
be prepared on a pushed-down basis thereafter. As a result of the acquisition of
control of LCIF and LCL, effective May 11, 2001 for accounting purposes, United
States GAAP requires the Canadian GAAP consolidated financial statements to be
adjusted for those assets, liabilities, revenues and expenses impacted by the
pushed down acquisition adjustments. Sherritt and OTTPB did not incur debt to
finance the capitalization of the partnership. As a result of the acquisition
adjustments required by United States GAAP, assets, liabilities, revenues and
expenses as at and for the years ended December 31, 2002 and December 31, 2001
were impacted as follows:

<TABLE>
<CAPTION>
                                                                                         AS AT          AS AT
                                                                                      DECEMBER 31    DECEMBER 31
                                                                                         2002           2001
                                                                                      -----------    -----------
<S>                                                                                   <C>            <C>
BALANCE SHEET
Increase (decrease):
   Capital assets - mining properties..............................................   $   (12,737)   $   (59,852)
   Other assets - pension surplus..................................................         6,864          1,158
   Accrued liabilities.............................................................          (867)          (867)
   Future income tax liability.....................................................        12,871        (11,902)
   Retained earnings - push down adjustment........................................       (52,686)       (52,686)
   Retained earnings - post acquisition effect of push down on earnings............        34,809          6,761
</TABLE>

<TABLE>
<CAPTION>
                                                                                      YEAR ENDED     YEAR ENDED
                                                                                      DECEMBER 31    DECEMBER 31
                                                                                         2002           2001
                                                                                      -----------    -----------
<S>                                                                                   <C>            <C>
STATEMENT OF EARNINGS
Increase (decrease) in earnings:
    Depreciation and amortization - mining properties..............................   $    47,115    $     2,830
    Pension surplus................................................................         5,706          2,963
    Amortization of deferred financing costs.......................................             -          6,336
    Future income tax provision....................................................       (24,773)        (5,368)
</TABLE>

                                      F-67

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

(c)      PENSION PLANS

         Canadian GAAP requires recognition of a pension valuation allowance for
any excess of the prepaid benefit expense over the expected future benefit.
Changes in the pension valuation allowance are recognized in the Consolidated
Statement of Loss. United States GAAP does not specifically address pension
valuation allowances. In 2002, United States regulators determined that such
allowances would not be permitted under United States GAAP. In light of these
recent developments, LCL retroactively eliminated the effects of recognizing
pension valuation allowances in prior years. Accordingly, LCL's losses under
United States GAAP have been decreased by $528 and $63, respectively, for the
years ended December 31, 2001 and December 31, 2000.

         United States GAAP also requires the recognition of a minimum pension
liability for defined benefit plans. The initial recognition and subsequent
adjustments to the minimum pension liability are reflected in comprehensive
income.

         Under United States GAAP, LCL is required to present its results for
1999 and subsequent periods as if the pension requirements of Statement of
Financial Accounting Standards No. 87 (SFAS 87) had been applied during 1999
with effect from January 1, 1999. Accordingly, LCL has adjusted its earnings for
2000 to reflect the application of SFAS 87. Effective January 1, 2000, LCL
adopted CICA section 3451, "Employee Future Benefits" (see note 2), which
substantially harmonized Canadian and United States GAAP, eliminating
differences in 2001 and 2002.

(d)      INCOME TAX RATE REDUCTION

         A reduction in income tax rates was substantively enacted in the period
January 1, 2001 to May 11, 2001 and was later enacted in the period May 12, 2001
to December 31, 2001. Under Canadian GAAP, the reduction in income tax rates,
which resulted in a decrease of $13,831 in future income tax liability, must be
reflected in the period it was substantively enacted. Under United States GAAP,
the reduction in income tax rates cannot be reflected until the period it is
enacted. In addition, capital assets increase by $24,920 and future income tax
liabilities increase by $24,920 at May 11, 2001 under United States GAAP.

(e)      CHANGE IN ACCOUNTING POLICIES

         In fiscal 2001, LCL changed its accounting policy for revenue
recognition and coal inventory valuation. Under United States GAAP, a change in
accounting policy resulting from the guidance of SAB 101 is required to be
accounted for as an adjustment to earnings in the year of the change. The change
was accounted for retroactively under Canadian GAAP resulting in an increase in
shareholders' equity at December 31, 1998 of $143 and a restatement of earnings
for 1999 and 2000. The cumulative effect of this change in accounting policy is
reflected as a change in earnings for the year ended December 31, 2001 under
United States GAAP.

(f)      DERIVATIVE FINANCIAL INSTRUMENTS

         Under United States GAAP, LCL is required to adopt Statement of
Financial Accounting Standards No. 133 (SFAS 133) and its related amendments
SFAS 137 and SFAS 138, with effect from January 1, 2001. SFAS 133 requires that
all derivative instruments be recorded on the balance sheet at fair value.
Subsequent to January 1, 2001, derivatives that are not designated as hedges for
accounting purposes must be adjusted to fair value through income. If the
derivative is designated and is effective as a hedge for accounting purposes,
depending on the nature of the hedge, changes in the fair value of derivatives
are either offset against the change in the fair value of hedged underlying
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income

                                      F-68

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

until the hedged item is recognized in earnings. The ineffective portion of a
hedging derivative's change in fair value is recognized in earnings immediately.

         The hedging activities and other derivative financial instruments of
LCL include an interest rate swap contract used to manage interest rate risk on
long-term debt, forward currency exchange contracts, which are utilized to
manage the economic risk associated with future revenue flows denominated in
United States dollars, and fixed price energy purchase contracts covering future
committed and anticipated energy requirements. Because LCL did not anticipate
the need to prepare its financial statements in accordance with United States
GAAP, LCL has not prepared the documentation required to qualify these
instruments for hedge accounting.

         In accordance with the transition provisions of SFAS 133, LCL recorded
a cumulative-effect type adjustment of $30 ($17 net of tax) in accumulated other
comprehensive income to recognize the effective portion of the fair value of all
derivatives that were designated as cash-flow type hedges as at December 31,
2000. For the year ended December 31, 2002, LCL recorded a loss of $534 ($303
net of tax) as an adjustment to comprehensive other income (gain of $883 ($492
net of tax) for the year ended December 31, 2001).

         As at December 31, 2002, LCL had no fixed price contracts outstanding
for energy purchases.

(g)      WRITE-DOWN OF MINING PROPERTIES

         Under Canadian GAAP, an impairment test is applied to determine whether
mining properties should be written-down. The impairment test is applied when
conditions indicate that the estimated future net cash flow from the properties
may be less than their net carrying amount, less the related accumulated
provision for future removal and site restoration costs and future income taxes.
The impairment test ensures that the carrying value of mining properties does
not exceed the sum of the estimated undiscounted future net cash flows from the
related assets.

         In 2000, LCL recorded a write-down of its Gregg River mining assets of
$25,266 and a related tax saving of $8,560 under Canadian GAAP. Under United
States GAAP, $7,557 is this write-down net of tax was provided for in the 1999
impairment provision.

(h)      PROMISSORY NOTES

         Under United States GAAP, the offsetting of assets and liabilities in
the balance sheet is not permitted except when a right of setoff exists. A right
of setoff requires that each of two parties owes the other determinable amounts
and that the reporting party has the right to set off the amount owed with the
amount owed by the other party. The sinking funds, which have been setoff
against the promissory notes under Canadian GAAP, do not qualify for offsetting
under United States GAAP. The sinking funds are therefore reflected as other
assets under United States GAAP.

                                      F-69

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

(i)      EMPLOYEE TERMINATION BENEFITS

         United States GAAP requires additional disclosure regarding employee
termination provisions. The information provided below relates to provisions for
employee terminations made by LCL.

<TABLE>
<CAPTION>
                                                                                    NUMBER OF
                                                                                    EMPLOYEES      AMOUNT
                                                                                    ---------    ----------
<S>                                                                                 <C>          <C>
Balance, December 31, 1999......................................................          9      $   11,514
Paid during 2000................................................................       (203)        (14,264)
Accrued during 2000.............................................................        647           9,172
Adjustment 2000.................................................................        (16)           (939)
                                                                                    -------      ----------
Balance, December 31, 2000......................................................        437      $    5,483
Paid during 2001................................................................        (77)           (736)
Adjustments 2001................................................................        (92)         (1,900)
                                                                                    -------      ----------
Balance, December 31, 2001......................................................        268      $    2,847
Paid during 2002................................................................        (86)         (2,184)
Accrued during 2002.............................................................         75           1,645
                                                                                    -------      ----------
Balance, December 31, 2002......................................................        257      $    2,308
                                                                                    =======      ==========
</TABLE>

         Adjustments to the estimated provisions for employee termination
benefits reflect resignations and transfers of employees to other mining
operations. During 2002, employee termination provisions for Luscar mine were
updated to reflect the extension of the planned closure date until late 2003.
Additional employee termination provisions will be accrued over the remaining
service of the affected employees.

(j)      OTHER DISCLOSURES

         United States GAAP does not permit the disclosure of the subtotals of
operating earnings before depreciation and amortization and before interest and
foreign currency translation loss in the consolidated statements of earnings.
Furthermore, United States GAAP does not permit the disclosure of the subtotal
of the cash provided by operating activities before change in non-cash working
capital in the consolidated statements of cash flows.

(k)      NEW ACCOUNTING STANDARDS

         SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In June
2001, the Financial Accounting Standards Board approved Statement No. 143 (SFAS
143), "Accounting for Asset Retirement Obligations". That standard requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS 143 is applicable for years beginning after June 15, 2002.
LCL has not yet determined the effects of the new standard, if any, on its
financial statements.

         SFAS NO. 145 - RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64,
AMENDMENT OF FASB STATEMENT N. 13, AND TECHNICAL CORRECTIONS. In May 2002, the
Financial Accounting Standards Board approved SFAS No. 145 ("SFAS 145"),
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections." Among other things, under the provisions of SFAS
145, gains and losses from the early

                                      F-70

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

extinguishment of debt are no longer classified as an extraordinary item, net of
income taxes, but are included in the determination of pretax earnings. The
effective date for SFAS 145 is for fiscal years beginning after May 15, 2002,
with early application encouraged. Upon adoption, all gains and losses from the
extinguishment of debt previously reported as an extraordinary item shall be
reclassified to pretax earnings. It is anticipated that the adoption of SFAS 145
will have no impact on the financial position or results of operations of LCL.

         SFAS NO. 146 - ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES. In July 2002, the Financial Accounting Standards Board approved
Statement of Financial Accounting Standard No. 146 ("SFAS 146"), "Accounting for
Costs Associated with Exit or Disposal Activities". This statement addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force "EITF") has set forth in EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between SFAS 146 and EITF 94-3 is that
SFAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred versus the EITF
94-3 where a liability was recognized on the date an entity committed to an exit
plan. SFAS 146 is effective for exit and disposal activities that are initiated
after December 31, 2002. LCL has not yet determined the effects of the new
standard, if any, on its financial statements.

         FASB INTERPRETATION NO. 45 - GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. This interpretation expands the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability for the fair value of an obligation assumed under a guarantee. In
general, FIN 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability, or
equity security of the guaranteed party. Certain guarantee contracts are
excluded from both the disclosure and recognition requirements of this
interpretation. Other guarantees are subject to the disclosure requirements of
FIN 45 but not to the recognition provisions and include, among others, a
guarantee accounted for as a derivative instrument under SFAS 133. The
disclosure requirements of FIN 45 are effective for LCL as of December 15, 2002,
and require disclosure of the nature of the guarantee, the maximum potential
amount of future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of FIN 45 are to
be applied prospectively to guarantees issued or modified after December 31,
2002. LCL has not yet determined the effects of the new standard, if any, on its
financial statements.

         CICA HANDBOOK SECTION 3063 - IMPAIRMENT OF LONG LIVED ASSETS AND 3475 -
DISPOSAL OF LONG LIVED ASSETS AND DISCONTINUED OPERATIONS. In 2002, the CICA
issued handbook section 3063 - Impairment of Long Lived Assets and 3475 -
Disposal of Long Lived Assets and Discontinued Operations to harmonize with SFAS
144. The standards will require an impairment loss to be recognized when the
carrying amount of an asset held for use exceeds the sum of undiscounted cash
flows. The impairment loss would be measured as the amount by which the carrying
amount exceeds the fair value of the asset. An asset held for sale is to be
measured at the lower of carrying cost or fair value less cost to sell. In
addition, this guidance broadens the concept of a discontinued operation and
eliminates the ability to accrue operating losses expected between the
measurement date and the disposal date. Section 3063 is effective for fiscal
years beginning on or after April 1, 2003, and Section 3475 applies to disposal
activities initiated by an enterprise's commitment to a plan on or after May 1,
2003. Management does not expect the adoption of the new standard to have a
material impact on its financial statements.

                                      F-71

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

         AcG NO. 13 - HEDGING RELATIONSHIPS. In 2002, the Accounting Standards
Board of the CICA issued Accounting Guideline No. 13 that increases the
documentation, designation and effectiveness criteria to achieve hedge
accounting. The guideline requires the discontinuance of hedge accounting for
hedging relationships established that do not meet the conditions at the date it
is first applied. It does not change the method of accounting for derivatives in
hedging relationships, but requires fair value accounting for derivatives that
do not qualify for hedge accounting. The new guideline is applicable for fiscal
years commencing July 1, 2003.

21.      COMPARATIVE FIGURES

         Certain comparative figures for prior periods have been reclassified to
conform to the presentation in the current period's financial statements.

                                      F-72

<PAGE>

LUSCAR COAL LTD.

                          NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

22.      SUBSEQUENT EVENT

On January 13, 2003, LCL agreed to transfer substantially all of its
metallurgical coal assets to Fording Canadian Coal Trust ("Fording Trust"). On
February 28, 2003, LCL received a cash payment of $7,735 from 1564706 Ontario
Limited in exchange for LCL's interests in Luscar mine, Cheviot project, Neptune
Bulk Terminals (Canada) Ltd., and certain non-producing metallurgical coal
properties. Also on February 28, 2003, LCL transferred its 50% joint venture
interest in Line Creek mine to Fording Trust for 2,979 trust units plus a cash
payment for working capital balances.

Revenue, gross margin, total assets and capital expenditures for transferred
metallurgical coal assets and ongoing thermal operations are as follows:

<TABLE>
<CAPTION>
                                                               YEAR             YEAR                YEAR
                                                               ENDED            ENDED               ENDED
                                                            DECEMBER 31      DECEMBER 31         DECEMBER 31
                                                               2002             2001                2000
                                                          --------------    --------------     ---------------
<S>                                                       <C>                <C>               <C>
Revenue
   Thermal............................................    $      441,585     $     455,016     $       391,480
   Metallurgical......................................           154,048           180,518             265,572
                                                          --------------    --------------     ---------------
   ...................................................    $      595,633     $     635,534     $       657,052
                                                          ==============    ==============     ===============

Operating margin
   Thermal............................................    $      112,877     $     129,246     $       124,149
   Metallurgical......................................            13,740            21,445              (1,383)
                                                          --------------    --------------     ---------------
   ...................................................    $      126,617     $     150,691     $       122,766
                                                          ==============    ==============     ===============

Capital expenditures
   Thermal............................................    $       48,300     $      23,097     $        13,303
   Metallurgical......................................             2,735             4,841               4,520
                                                          --------------    --------------     ---------------
   ...................................................    $       51,035     $      27,938     $        17,822
                                                          ==============    ==============     ===============
</TABLE>

<TABLE>
<CAPTION>
                                                                                 AS AT              AS AT
                                                                              DECEMBER 31        DECEMBER 31
                                                                                 2002               2001
                                                                            --------------     ---------------
<S>                                                                          <C>               <C>
Total assets
   Thermal.............................................................      $   1,402,632     $     1,537,215
   Metallurgical.......................................................            137,599             130,048
                                                                            --------------     ---------------
                                                                             $   1,540,231     $     1,667,263
                                                                            ==============     ===============
</TABLE>

On March 25, 2003, LCL announced that production would be suspended at the Obed
Mountain mine. Costs associated with the suspension of operations are estimated
at $6,300.

                                      F-73

<PAGE>

FINANCIAL STATEMENTS

LUSCAR COAL INCOME FUND

                                      F-74

<PAGE>

                      (This page intentionally left blank)

                                      F-75
<PAGE>

                                AUDITORS' REPORT

To the Trustees of
Luscar Coal Income Fund

         We have audited the balance sheets of Luscar Coal Income Fund as at
December 31, 2000 and 1999 and the statements of earnings, unitholders' equity
and cash flows for each of the years in the three year period ended December 31,
2000. These financial statements are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

         We conducted our audits in accordance with Canadian and United States
generally accepted auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.

         In our opinion, these financial statements present fairly, in all
material respects, the financial position of the Fund as at December 31, 2000
and 1999 and the results of its operations and its cash flows for each of the
years in the three year period ended December 31, 2000 in accordance with
Canadian generally accepted accounting principles.

Edmonton, Canada                               (signed) Ernst & Young LLP
February 16, 2001                              Chartered Accountants

                  COMMENT FOR US READERS ON CANADA-US REPORTING
                                   DIFFERENCES

         In the United States, reporting standards for auditors require the
addition of an explanatory paragraph (following the opinion paragraph) outlining
changes in accounting principles that have been implemented in the financial
statements. As discussed in Note 1 to the financial statements, in 2000 the Fund
implemented a change in the method of accounting for income taxes to conform to
the new Canadian Institute of Chartered Accountants Handbook, Section 3465, and
in 2001 implemented a change in revenue recognition and coal inventory and
exploration and development cost accounting policies.

Edmonton, Canada                               (signed) Ernst & Young LLP
February 16, 2001                              Chartered Accountants

                                      F-76

<PAGE>

LUSCAR COAL INCOME FUND

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                             AS AT            AS AT          AS AT
                                                                            MAY 11,       DECEMBER 31,   DECEMBER 31,
(in thousands)                                                               2001             2000           1999
                                                                             ----             ----           ----
                                                                         (unaudited)       (restated)     (restated)
                                                                           (note 8)         (note 1)       (note 1)
<S>                                                                     <C>               <C>            <C>
ASSETS
  Cash   ..........................................................     $       2,792     $        809   $        313
  Due from Luscar [note 7].........................................             6,152              246            645
  Investment in Luscar [note 3]....................................           579,745          565,607        625,540
  Deferred financing costs.........................................             2,572            2,795          3,417
                                                                        -------------     ------------   ------------
                                                                        $     591,261     $    569,457   $    629,915
                                                                        =============     ============   ============

LIABILITIES AND EQUITY
Accounts payable and accrued charges...............................     $          --     $        350   $        527
Due to Luscar [note 7].............................................            11,930               --             --
Accrued interest on convertible debentures.........................             3,618               --             --
Convertible debentures, net of equity portion
  [note 4].........................................................            33,206           35,539         41,532
                                                                        -------------     ------------   ------------
                                                                               48,754           35,889         42,059
                                                                        -------------     ------------   ------------
Equity
  Convertible debentures [note 4]..................................            66,794           64,461         58,468
  Unitholders' equity [note 5].....................................           475,713          469,107        529,388
                                                                        -------------     ------------   ------------
                                                                              542,507          533,568        587,856
                                                                        -------------     ------------   ------------
                                                                        $     591,261     $    569,457   $    629,915
                                                                        =============     ============   ============
</TABLE>

See accompanying notes

                                      F-77

<PAGE>

LUSCAR COAL INCOME FUND

                             STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                                                       SIX
                                                      JANUARY 1,     MONTHS          YEAR            YEAR         YEAR
                                                        2001 TO       ENDED          ENDED           ENDED        ENDED
                                                        MAY 11,     JUNE 30,       DEC. 31,        DEC. 31,     DEC. 31,
(in thousands)                                           2001         2000           2000            1999         1998
                                                         ----         ----           ----            ----         ----
                                                      (unaudited)  (restated)     (restated)      (restated)   (restated)
                                                       (note 8)    (unaudited)     (note 1)        (note 1)     (note 1)
                                                                    (note 1)
<S>                                                   <C>          <C>            <C>           <C>            <C>
Income
   Interest on Luscar subordinated
     notes [note 3]...............................    $    8,668   $     5,569    $   11,200    $     59,593   $    54,336
   Other .........................................            26            39            84              67            11
   Interest on installments receivable............            --            --            --              --         1,454
                                                      ----------   -----------    ----------    ------------   -----------
                                                           8,694         5,608        11,284          59,660        55,801
                                                      ----------   -----------    ----------    ------------   -----------
Expenses
   Administration costs [note 7]..................           100           563         1,010           1,234           886
   Take over response costs [note 7]..............        12,285            --            --              --            --
   Interest
      Convertible debentures [note 4].............         1,286         2,077         4,007           4,564         1,260
      Luscar loans to finance acquisition.........            --            --            --              --         5,844
      Amortization of deferred financing costs....            72           120           240             276            76
                                                      ----------   -----------    ----------    ------------   -----------
                                                          13,743         2,760         5,257           6,074         8,066
                                                      ----------   -----------    ----------    ------------   -----------
Earnings (loss) before the undernoted.............        (5,049)        2,848         6,027          53,586        47,735
Equity in net earnings (loss) of Luscar...........        14,138       (34,140)      (59,933)       (143,608)       (7,040)
                                                      ----------   -----------    ----------    ------------   -----------
Net earnings (loss) for the period................    $    9,089   $   (31,292)   $  (53,906)   $    (90,022)  $    40,695
                                                      ==========   ===========    ==========    ============   ===========
</TABLE>

See accompanying notes

                                      F-78

<PAGE>

LUSCAR COAL INCOME FUND

                       STATEMENTS OF UNITHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                       SIX
                                                      JANUARY 1,     MONTHS          YEAR            YEAR         YEAR
                                                        2001 TO       ENDED          ENDED           ENDED        ENDED
                                                        MAY 11,     JUNE 30,       DEC. 31,        DEC. 31,     DEC. 31,
(in thousands)                                           2001         2000           2000            1999         1998
                                                         ----         ----           ----            ----         ----
                                                      (unaudited)  (restated)     (restated)      (restated)   (restated)
                                                       (note 8)    (unaudited)     (note 1)        (note 1)     (note 1)
                                                                    (note 1)
<S>                                                   <C>          <C>            <C>           <C>            <C>
Balance, beginning of period,
   as originally stated...........................    $  475,056   $   536,425    $  536,425    $    688,573   $   506,945
Adjustment to reflect adoption of
   liability method of accounting for
   income taxes by Luscar [note 1]................            --        (1,176)       (1,176)            148            --
Adjustment to reflect change of
   accounting policies for revenue
   recognition and coal inventory
   by Luscar [note 1].............................         3,155         2,917         2,917             971           669
Adjustment to reflect change of
   accounting policy for exploration
   and development expenditures by
   Luscar [note 1]................................        (9,104)       (8,778)       (8,778)        (15,748)      (15,510)
                                                      ----------   -----------    ----------    ------------   -----------
Balance, beginning of period,
   as restated....................................       469,107       529,388       529,388         673,944       492,104
Trust units issued on acquisition of
   Manalta [note 2]...............................            --            --            --              --       207,060
Net earnings (loss) for the period................         9,089       (31,292)      (53,906)        (90,022)       40,695
Amortization of deferred
   financing costs................................          (151)         (191)         (382)           (347)          (78)
Accretion charge to increase carrying
   amount of convertible debentures
   in equity [note 4].............................        (2,332)       (2,923)       (5,993)         (5,436)       (1,288)
Distributions paid................................            --            --            --         (48,751)      (64,549)
                                                      ----------   -----------    ----------    ------------   -----------
Balance, end of period............................    $  475,713   $   494,982    $  469,107    $    529,388   $   673,944
                                                      ==========   ===========    ==========    ============   ===========
</TABLE>

See accompanying notes

                                      F-79

<PAGE>

LUSCAR COAL INCOME FUND

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                      SIX
                                                      JANUARY 1,     MONTHS          YEAR            YEAR         YEAR
                                                        2001 TO      ENDED          ENDED           ENDED        ENDED
(in thousands, except per unit                          MAY 11,     JUNE 30,       DEC. 31,        DEC. 31,     DEC. 31,
AMOUNTS)                                                 2001         2000           2000            1999         1998
                                                         ----         ----           ----            ----         ----
                                                                   (restated)
                                                      (unaudited)  (unaudited)    (restated)      (restated)   (restated)
                                                       (note 8)     (note 1)       (note 1)        (note 1)     (note 1)
<S>                                                   <C>          <C>            <C>           <C>            <C>
OPERATING ACTIVITIES
Net earnings (loss) for the period.................   $    9,089   $   (31,292)   $  (53,906)   $    (90,022)  $    40,695
Non-cash items:
    Dividends from Luscar..........................           --            --            --              --        25,066
    Equity in net (earnings) loss of
       Luscar......................................      (14,138)       34,140        59,933         143,608         7,040
    Interest on convertible
       debentures not included in
       interest expense............................       (2,332)       (2,923)       (5,993)         (5,436)       (1,902)
    Repayment of advances from Luscar
       for acquisition costs.......................           --            --            --              --        (4,533)
    Interest on installments receivable............           --            --            --              --        (1,454)
                                                      ----------   -----------    ----------    ------------   -----------
Distributable cash.................................       (7,381)          (75)           34          48,150        64,912
Accrued interest on convertible debentures.........        3,618            --            --              --            --
Accrued interest receivable from Luscar............       (5,906)           --            --              --            --
Accrued expenses due to Luscar.....................       11,930            --            --              --            --
Other items not affecting cash.....................         (278)         (201)           63             515           219
                                                      ----------   -----------    ----------    ------------   -----------
                                                           1,983          (276)           97          48,665        65,131
                                                      ----------   -----------    ----------    ------------   -----------
INVESTING ACTIVITIES
Acquisition of Manalta [note 2]....................           --            --            --            (659)     (348,000)
Investment in Luscar [note 3]......................           --            --            --              --       (37,598)
                                                      ----------   -----------    ----------    ------------   -----------
                                                              --            --            --            (659)     (385,598)
                                                      ----------   -----------    ----------    ------------   -----------
FINANCING ACTIVITIES
Repayment of amount due from Luscar................           --           399           399             639            --
Distributions to unitholders.......................           --            --            --         (48,751)      (64,549)
Issue of convertible debentures....................           --            --            --              --       100,000
Issue costs on convertible debentures..............           --            --            --              --        (3,000)
Loan from Luscar...................................           --            --            --              --       250,445
Installments receivable collected..................           --            --            --              --        37,525
                                                      ----------   -----------    ----------    ------------   -----------
                                                              --           399           399         (48,112)      320,421
                                                      ----------   -----------    ----------    ------------   -----------
Change in cash position............................        1,983           123           496            (106)          (46)
Cash position, beginning of period.................          809           313           313             419           465
                                                      ----------   -----------    ----------    ------------   -----------
Cash position, end of period.......................   $    2,792   $       436    $      809    $        313   $       419
                                                      ==========   ===========    ==========    ============   ===========
Cash distributions per unit........................   $       --   $        --    $       --    $      0.537   $    1.0215
Interest paid......................................   $       --   $     5,000    $   10,000    $     10,000   $     8,392
</TABLE>

See accompanying notes

                                      F-80

<PAGE>
LUSCAR COAL INCOME FUND

                         NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Luscar Coal Income Fund ("LCIF") prepares its financial statements
following Canadian generally accepted accounting principles. As described in
Note 9, these principles differ in certain respects from generally accepted
accounting principles in the United States. The following significant accounting
policies are presented to assist the reader in evaluating these financial
statements and, together with the following notes, should be considered an
integral part of the financial statements.

ORGANIZATION

          LCIF is an open ended trust, created by a Declaration of Trust under
the laws of the Province of Alberta, which holds securities in Luscar Coal Ltd.
("Luscar") and its subsidiary Luscar Ltd. Income derived by LCIF from these
investments, net of expenses, is distributed to unitholders of LCIF on a
quarterly basis. The beneficiaries of LCIF are the holders of the trust units.

BASIS OF PRESENTATION

          Effective October 1, 1998, LCIF acquired all the outstanding
installment receipts and trust units of Manalta Coal Income Trust ("MCIT"), the
owner of all of the common shares and certain notes payable of Manalta Coal Ltd.
("Manalta"), a major western Canadian coal producer.

          As contemplated in the acquisition, the following transactions took
place to effect the integration of the acquisition:

     -   on October 1, 1998, MCIT distributed all the common shares and
         substantially all of the subordinated notes of Manalta to LCIF;

     -   the sole common shareholder of Luscar Ltd., Luscar Management
         Corporation, incorporated a new holding company, Luscar Coal Ltd., on
         December 11, 1998 and on December 31, 1998 transferred the common
         shares of Luscar Ltd. to Luscar Coal Ltd. in exchange for common shares
         of Luscar Coal Ltd.;

     -   on January 1, 1999, LCIF transferred the common shares of Manalta to
         Luscar Coal Ltd. in exchange for special shares of Luscar Coal Ltd; and

     -   on January 1, 1999, Luscar Ltd. and Manalta were amalgamated to form a
         new company named Luscar Ltd. in which LCIF holds subordinated notes
         and special shares.

         As a result of these transactions, LCIF acquired ownership of Manalta
on October 1, 1998 and transferred this ownership to Luscar Coal Ltd on January
1, 1999. Therefore, the accounts of Manalta have not been consolidated because
ownership was temporary as the terms of the financing required that Manalta be
transferred to Luscar Coal Ltd. The consolidated financial statements of Luscar
Coal Ltd., including the accounts of Manalta with effect from October 1, 1998,
are presented as a supplement to these financial statements Therefore, these
financial statements have been prepared on the basis that LCIF invested in
additional special shares and subordinated notes in Luscar Coal Ltd. and Luscar
Ltd. to facilitate the acquisition of Manalta by Luscar Coal Ltd effective
October 1, 1998 at a purchase price equivalent to LCIF's cost of acquiring
Manalta.

USE OF ESTIMATES

          The measurement of certain assets and liabilities is dependent upon
future events whose outcome will not be fully known until future periods.
Therefore the preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. In particular, future cash flows from Luscar
and other information used to assess the carrying value of LCIF's investment in
Luscar are subject to measurement uncertainty and the impact on the financial
statements of future periods could be material.

          These financial statements include financial statements for interim
periods, which have been prepared without audit. Such interim financial
statements and the accompanying notes include estimates necessary to fairly

                                      F-81

<PAGE>
LUSCAR COAL INCOME FUND

                         NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)


present the financial position and results of operations, which may not be
indicative of results of operations for other periods.

SPECIAL SHARES OF LUSCAR AND SUBORDINATED NOTES

          LCIF accounts for its investment in special shares of Luscar using the
equity method of accounting. Under this method, the cost of the investment is
increased (decreased) by the portion of Luscar's earnings (loss) attributable to
the special shares, and reduced by the dividends paid by Luscar on the shares.
Should LCIF's cumulative share of Luscar losses and dividends received exceed
its investment in special shares of Luscar, such excess is applied to reduce the
carrying value of LCIF's investment in subordinated notes of Luscar. Interest
income on the notes is recorded on an accrual basis as earned. Interest is
receivable quarterly on March 31, June 30, September 30 and December 31.

DEFERRED FINANCING COSTS

          Deferred financing costs are being amortized on a straight-line basis
over the term of the convertible debentures. The amortization of these costs is
included in interest expense and as a charge to unitholders' equity in
proportion to the amounts of the convertible debentures classified as debt and
equity respectively.

INCOME TAXES

          LCIF is a unit trust for income tax purposes and as such is only
taxable on any taxable income not allocated to the unitholders. As any taxable
income is allocated to the unitholders, no provision for income taxes on the
earnings of LCIF is required. Income tax obligations relating to distributions
from LCIF are the obligations of the unitholders.

FAIR VALUE OF FINANCIAL INSTRUMENTS

          The carrying value of LCIF's financial assets and liabilities are
considered to approximate fair values except as otherwise disclosed in these
financial statements. Cash is comprised of bank balances held with a major
Canadian financial institution and earns interest at rates relative to bank
prime rates.

CHANGES IN ACCOUNTING POLICIES

(a)       INCOME TAXES

          Effective January 1, 2000, Luscar changed its method of accounting for
income taxes from the deferral method to the liability method as required by The
Canadian Institute of Chartered Accountants' Section 3465, Accounting for Income
Taxes. As permitted under these rules, the change has been adopted retroactively
and Luscar has restated its consolidated balance sheets at December 31, 1999 and
1998 and its consolidated statements of loss, deficit and cash flows for the
year ended December 31, 1999 and 1998 accordingly.

          The effect of Luscar's adoption of the liability method on LCIF's
financial statements was to increase LCIF's investment in Luscar and
unitholders' equity at December 31, 1998 by $148, increase LCIF's equity in the
loss of Luscar for the year ended December 31, 1999 by $1,324 and decrease the
investment in Luscar and unitholders' equity at December 31, 1999 by $1,176.

(b)       REVENUE RECOGNITION AND COAL INVENTORY VALUATION

          Luscar has reviewed its revenue recognition and coal inventory
valuation accounting policies in the context of U.S. SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). In
accordance with the guidance of SAB 101, and the guidance of the February 2001
Ontario Securities Commission Staff Notice 52-701 regarding revenue recognition,
Luscar changed its revenue recognition and coal inventory

                                      F-82

<PAGE>
LUSCAR COAL INCOME FUND

                         NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)


valuation accounting policies. Previously, Luscar recognized revenue when coal
was shipped from the minesite, either directly to the customer or to port
facilities, provided that contractual sales commitments were in place.

          Luscar now recognizes revenue when title passes to the customer.
Furthermore, Luscar previously recorded coal inventory at production cost
including direct variable overhead, and in the case of coal inventory held at
port terminal facilities, at its net realizable value. Luscar now records coal
inventory at production cost which includes direct and allocable indirect
overhead and in the case of coal inventory held at port terminal facilities,
rail transportation and applicable wharfage costs.

          These changes in policy have been adopted retroactively and Luscar has
restated its consolidated balance sheets at December 31, 2000 and December 31,
1999 and its consolidated statements of earnings, deficit and cash flows for the
periods ended December 31, 2000, June 30, 2000, December 31, 1999 and December
31, 1998 accordingly.

          The effect of these changes in accounting policy on LCIF's financial
statements was to decrease LCIF's equity in the loss of Luscar by $302, $1,946
and $238 for the years ended December 31, 1998, 1999 and 2000 respectively and
increase the investment in Luscar and unitholders' equity at December 31, 2000
by $3,155.

(c)       EXPLORATION AND DEVELOPMENT COSTS

          Effective January 1, 2001 Luscar has changed its accounting policies
for exploration and development costs related to exploration properties.
Previously, Luscar capitalized all costs related to exploration properties
including property acquisition costs, lease payments, drilling and other
exploration related costs. Such costs were reclassified as mining properties
when mine development commenced. Costs related to uneconomic exploration
properties were charged to earnings in the year of determination.

          Costs related to exploration properties held for future development
are expensed as incurred, including property carrying costs, lease payments,
drilling and other exploration costs, and other pre-development costs.
Acquisition costs for exploration properties are initially capitalized until
management can determine whether development of the property would be economic.
In the year of determination, costs related to uneconomic exploration properties
are charged to earnings while costs related to economic exploration properties
are reclassified as mining properties.

          This change in accounting policy has been adopted retroactively and
Luscar has restated its consolidated balance sheets at December 31, 2000 and
December 31, 1999 and its consolidated statements of earnings, deficit and cash
flows for the periods ended December 31, 2000, September 30, 2000, December 31,
1999 and December 31, 1998 accordingly.

          The effect of the change in accounting policy on LCIF's financial
statements was to increase LCIF's equity in the loss of Luscar by $238 for the
year ended December 31, 1998, decrease its equity in the loss of Luscar by
$6,970 for the year ended December 31, 1999, increase its equity in the loss of
Luscar by $326 for the year ended December 31, 2000 and decrease the investment
in Luscar and unitholders' equity at December 31, 2000 by $9,104.

2.        ACQUISITION OF MANALTA COAL INCOME TRUST

          Effective October 1, 1998, LCIF acquired all of the outstanding
installment receipts and trust units of MCIT for $562,647, including acquisition
costs of $7,587. The purchase price was comprised of cash of $348,000, costs of
$7,587 which were paid directly by Luscar and 34,800 trust units of LCIF valued
at $207,060 based on the closing trading value of the trust units on the Toronto
Stock Exchange for the day preceding the acquisition date.

          As indicated in Note 1, LCIF acquired MCIT and subsequently
transferred MCIT's ownership of Manalta to Luscar on January 1, 1999 in exchange
for special shares of Luscar. LCIF did not consolidate the accounts of Manalta
for the period from October 1, 1998 to December 31, 1998 because LCIF's
ownership of Manalta was

                                      F-83

<PAGE>
LUSCAR COAL INCOME FUND

                         NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)


temporary as the terms of the financing required that Manalta be transferred to
Luscar Coal Ltd.. Since LCIF can significantly influence Luscar, LCIF accounts
for its investment in Luscar, including the special shares received in exchange
for the common shares of Manalta, using the equity method.

          Because LCIF acquired and retained ownership of the outstanding trust
units of MCIT, MCIT's accounts (excluding those of Manalta as described above)
are consolidated effective October 1, 1998. The identifiable net assets of MCIT
included subordinated notes due from Manalta to MCIT and other amounts payable
to Manalta by MCIT that were eliminated upon consolidation in MCIT's
consolidated financial statements as at September 30, 1998. The following table
presents the adjustments made upon the acquisition of MCIT, the transfer of
ownership of Manalta to Luscar Coal Ltd. effective October 1, 1998 and the
residual net assets of MCIT retained by LCIF on October 1, 1998.

                                      F-84

<PAGE>
LUSCAR COAL INCOME FUND

                         NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)


<TABLE>
<CAPTION>
                                                                                                           MANALTA         NET
                                                           MCIT                                          TRANSFERRED      ASSETS
                                                       SEPTEMBER 30,    ACQUISITION       MCIT AS         TO LUSCAR      RETAINED
                                                           1998        ADJUSTMENTS(a)    ACQUIRED         COAL LTD.       BY LCIF
                                                           ----        -------------     --------         ---------       -------
<S>                                                     <C>              <C>           <C>               <C>             <C>
Current assets......................................    $   100,750      $  14,126     $    114,876      $   126,420     $ (11,544)
Capital assets......................................        750,574        387,450        1,138,024        1,138,024             -
Pension surplus.....................................          7,162          1,701            8,863            8,863             -
Investment in 7.5% subordinated notes of Manalta....              -              -                -                -       560,000
Investment in Manalta common shares
  (subsequently exchanged for special shares of
   Luscar)                                                        -              -                -                -        14,191
                                                        -----------      ---------     ------------      -----------     ---------
Total assets........................................        858,486        403,277        1,261,763        1,273,307       562,647
                                                        ===========      =========     ============      ===========     =========

Current liabilities.................................        109,699            992          110,691          110,691             -
7.5% subordinated notes due to MCIT.................              -              -                -          560,000             -
Long-term debt......................................        113,977              -          113,977          113,977             -
Future income taxes.................................              -        404,291          404,291          404,291             -
Foreign currency forward contracts..................              -         44,397           44,397           44,397             -
Accrued reclamation costs...........................         28,163         (2,403)          25,760           25,760             -
                                                        -----------      ---------     ------------      -----------     ---------
Total liabilities...................................        251,839        447,277          699,116        1,259,116             -
Equity..............................................        606,647        (44,000)         562,647           14,191       562,647
                                                        -----------      ----------    ------------      -----------     ---------
Total liabilities and equity........................    $   858,486      $ 403,277     $  1,261,763      $ 1,273,307     $ 562,647
                                                        ===========      =========     ============      ===========     =========
</TABLE>

(a) Acquisition adjustments reflect fair value adjustments to acquired assets
and liabilities and the adoption of the liability method of accounting for
income taxes.

          The identifiable net assets of MCIT acquired at assigned values
accounted for as a purchase were as follows:

<TABLE>
<S>                                                                                       <C>
7.5% subordinated notes of Manalta....................................................    $     560,000
Common shares of Manalta (subsequently exchanged for special shares of Luscar)........           14,191
Accounts payable and accrued liabilities..............................................          (11,544)
                                                                                          -------------
Purchase price........................................................................    $     562,647
                                                                                          =============
</TABLE>

          Subsequent to the acquisition, and upon the reorganization and
integration of the businesses of Luscar Ltd. and Manalta as described in Note 1,
the subordinated notes of Manalta were reduced to $292,969 (see Note 3) by
offsetting $267,031 in respect of indebtedness owed to Luscar Ltd. by LCIF.

3.        INVESTMENT IN LUSCAR

<TABLE>
<CAPTION>
                                                                          AS AT              AS AT              AS AT
                                                                          MAY 11,           DEC. 31,           DEC. 31,
                                                                           2001               2000               1999
                                                                           ----               ----               ----
                                                                        (unaudited)        (restated)         (restated)
                                                                         (note 8)           (note 1)           (note 1)
<S>                                                                    <C>              <C>                <C>
Equity investment
    Special shares, at cost
       Luscar Ltd. (9,000 shares)..................................    $     180,534    $      180,534     $       180,534
       Luscar Coal Ltd. (7,600 shares).............................           14,850            14,850              14,850
    Accumulated equity in losses applied to special
       shares......................................................         (148,105)         (148,105)           (148,105)
    Accumulated dividends received.................................          (47,279)          (47,279)            (47,279)
                                                                       -------------    --------------     ---------------
                                                                                  --                --                  --
                                                                       -------------    --------------     ---------------
Subordinated notes
    12.5% due December 31, 2026....................................          350,000           350,000             350,000
    7.5% due October 1, 2027.......................................          292,969           292,969             292,969
                                                                       -------------    --------------     ---------------
    Subordinated notes, at cost....................................          642,969           642,969             642,969
    Accumulated equity in losses applied to subordinated notes.....          (63,224)          (77,362)            (17,429)
                                                                       -------------    --------------     ---------------
                                                                             579,745           565,607             625,540
                                                                       -------------    --------------     ---------------
                                                                       $     579,745    $      565,607     $       625,540
                                                                       =============    ==============     ===============
</TABLE>

                                      F-85

<PAGE>
LUSCAR COAL INCOME FUND

                         NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)


          In 1998, LCIF received 7,600 special shares in Luscar Coal Ltd. in
exchange for the common shares of Manalta Coal Ltd.

         The 19,363 Luscar Ltd. special shares owned by LCIF at September 30,
1998 were exchanged for 9,000 special shares in Luscar Ltd. created upon the
amalgamation of Luscar Ltd. and Manalta Coal Ltd.

          Net proceeds of $37,525 received September 30, 1998 from the
collection of installments receivable, plus $73 of funds from the initial
installment not required for costs of the issue, were used to acquire additional
special shares of Luscar Ltd. at a price of $9.57 per share, as determined by
negotiation between LCIF and Luscar.

          The special shares of Luscar Coal Ltd. and Luscar Ltd. are non-voting.
The provisions relating to these shares result in LCIF being entitled to 98% of
the total dividends paid by Luscar. In the event of dissolution of LCIF, the
special shares are convertible into common shares of the issuer on a one for one
basis. The holders of special shares are entitled to share equally with the
holders of the common shares in any distribution of the assets of the issuer
upon the liquidation, dissolution or winding-up of the issuer or other
distribution of its assets among its shareholders.

          Luscar has the option to elect to satisfy its obligation to repay the
notes on maturity by the issue of equity securities of Luscar having a value
equal to the outstanding notes. From time to time, beginning in 2017, Luscar and
LCIF will jointly review Luscar's remaining coal resources, the economic
conditions relating to the coal industry and the business prospects of Luscar.
If either party is of the opinion that Luscar would be unable to refinance the
subordinated notes upon maturity on similar terms and conditions, then Luscar
shall commence principal repayments such that the subordinated notes are fully
repaid upon maturity. In that event, Luscar's available cash shall be utilized
to the extent required to fund such repayments in lieu of dividends on its
common and special shares. Otherwise, the notes are not redeemable at the option
of Luscar or the holders thereof prior to maturity.

          Effective October 1, 1999 LCIF entered into an agreement with Luscar
to temporarily reduce the interest rates on the subordinated notes until
Luscar's ratio of senior debt to earnings before interest, income taxes,
depreciation and amortization ("EBITDA") reaches targeted levels of less than
3.0 to 1 for two consecutive quarters. This is expected to allow Luscar to
increase the principal repayments of its bank indebtedness by $15,000 annually
until the targeted senior debt to EBITDA ratio is reached. Additional bank
indebtedness repayments for the period from January 1, 2001 to May 11, 2001
amounted to $3,750 ($15,000 in 2000 and $3,750 in 1999). The effective interest
rate of the subordinated notes is determined by multiplying the coupon interest
rate by an interest rate adjustment factor which is determined by dividing
Luscar's forecast distributable cash for the year by the amount of interest
otherwise payable under the subordinated notes. The interest rate adjustment
factor was 0.8000 from April 1, 2001 to May 11, 2001, 0.1704 from January 1,
2000 to March 31, 2001, and 0.6269 from October 1, 1999 to December 31, 1999.

          In the event Luscar is unable to distribute its available cash by way
of reduction of capital or payment of dividends due to restrictions contained in
the Business Corporations Act (Alberta), Luscar may make principal repayments on
the 7.5% notes not to exceed the amounts Luscar would have distributed were it
not for such restrictions. In addition, Luscar may redeem certain of the 7.5%
subordinated notes before maturity if the holder of such notes is indebted to
Luscar, by offsetting the amount of such indebtedness against the principal
amount of the 7.5% subordinated notes redeemed.

          The subordinated notes and special shares are not traded in public
markets and therefore their fair values are not readily available. However, the
collective fair value of LCIF's investment in these financial assets can be
estimated by reference to the market capitalization of the units and convertible
debentures since LCIF's principal asset is its investment in the notes and
special shares. At December 31, 2000 the market capitalization of the units and
convertible debentures based on the closing quoted trading price was $251,923.
The comparable value at December 31, 1999 was $342,611.

                                      F-86

<PAGE>
LUSCAR COAL INCOME FUND

                         NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)


4.        CONVERTIBLE DEBENTURES

          LCIF issued $100,000 of 10% convertible unsecured senior subordinated
debentures in September 1998 to partially fund the Manalta acquisition.

          The debentures mature June 30, 2005 and bear interest at an annual
rate of 10% payable semi-annually on June 30 and December 31 in each year. The
debentures are unsecured senior subordinated obligations and are subordinated in
right of payment to all existing and future senior indebtedness of LCIF.

          The debentures are convertible into trust units of LCIF at the option
of the holder at any time prior to maturity at a conversion price of $6.75 per
unit and may be redeemed by LCIF after June 30, 2000 and prior to maturity under
certain conditions. LCIF also has the option to satisfy its obligation to pay
the principal amount of the debentures either upon redemption or at maturity by
the issuance of trust units.

          The convertible debentures are being accounted for as a compound
financial instrument as LCIF has the right to redeem the debentures by issuing
trust units. The liability component of the debentures at the date of issue was
calculated as the net present value of the interest payments at 10% to maturity.
The remaining principal amount of the debentures was classified as equity.
Interest expense is determined on the liability component with such component
being reduced by future interest payments. The equity component of the
convertible debentures is increased each year over the term to full face value
by charges to unitholders' equity.

          The convertible debentures are listed on The Toronto Stock Exchange
and at December 31, 2000, were trading at 80.50% of par value and at December
31, 1999 at 95.0% of par value. As discussed in Note 8, substantially all of the
convertible debentures were acquired by LEP and the remaining convertible
debentures were redeemed with cash advanced by LEP.

5.        TRUST UNITS

AUTHORIZED

          The Declaration of Trust provides that an unlimited number of units
may be issued. Each unit represents an equal undivided beneficial interest in
any distributions from LCIF and in the net assets in the event of termination or
wind-up. All units are the same class with equal rights and privileges. Units
may be issued for consideration payable in installments with such units being
held as security for unpaid installments.

          Units are redeemable at the holder's option at amounts related to
market prices at the time, subject to a maximum of $250 in cash redemptions in
any particular calendar month. The Trustees may waive this limitation at their
sole discretion. Redemptions in excess of this amount shall be paid by way of a
distribution in specie of a pro rata number of Luscar subordinated notes and
special shares of Luscar. As discussed in Note 8, all of the trust units were
acquired by LEP.

ISSUED

          The issued and outstanding trust units of LCIF are comprised of 90,700
units issued for aggregate consideration of $735,728.

6.        DISTRIBUTIONS TO UNITHOLDERS

          Distributions to unitholders on a per unit basis were as follows:

<TABLE>
<CAPTION>
                                          2000                     1999                    1998
                                          ----                     ----                    ----
                                    UNITS     $/UNIT         UNITS     $/UNIT        UNITS      $/UNIT
                                    ------    ------         ------    ------        ------     ------
<S>                                 <C>       <C>            <C>       <C>           <C>        <C>
March 31.............               90,700     0.00          90,700    0.1500        55,900     0.2500
June 30..............               90,700     0.00          90,700    0.1500        55,900     0.2600
September 30.........               90,700     0.00          90,700    0.1500        55,900     0.2975
December 31..........               90,700     0.00          90,700    0.0875        90,700     0.2140
</TABLE>

                                      F-87

<PAGE>
LUSCAR COAL INCOME FUND

                         NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)


         There were no distributions made in the period from January 1, 2001 to
May 11, 2001.

                                      F-88

<PAGE>
LUSCAR COAL INCOME FUND

                         NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)


         LCIF is able to deduct, for income tax purposes, costs of the issue of
units and convertible debentures on a straight-line basis over a five-year
period. At December 31, 2000 LCIF has available approximately $4,597 of such
amounts, which are deductible over the next two years, plus approximately $6,339
of tax losses available for carryforward until 2007. These deductions and tax
losses are eligible to reduce the taxable portion of distributions to
unitholders.

7.       RELATED PARTY TRANSACTIONS

         Amounts due from Luscar are non-interest bearing and have no set terms
of repayment. Included in the amount due from Luscar as at May 11, 2001 is
$5,906 in respect of accrued interest on the Luscar subordinated notes for the
period from April 1, 2001 to May 11, 2001. The amount due to Luscar as at May
11, 2001 of $11,930 is non-interest bearing and has no set terms of repayment.

         LCIF had an administrative services agreement with MC Management Inc.,
a company controlled by one of the Trustees of LCIF, to administer LCIF. The
agreement was for a term to June 30, 2001 and subject to termination upon six
months notice. The fees were $125 per year for 2000 and 1999 and $115 for 1998.
For the period from January 1, 2001 to May 11, 2001 fees of $63 were paid and
the contract was terminated at that time for no additional consideration.

         Luscar advanced funds to LCIF during 1998 to finance a portion of the
Manalta acquisition costs and associated costs. Interest, based on Luscar's
borrowing rates, amounting to $5,844 was paid by LCIF to Luscar in 1998. The
advances were repaid on December 31, 1998. Luscar also advanced $11,930 to LCIF
during the period ended May 11, 2001 to enable LCIF to pay the costs of
responding to the takeover bid launched in March 2001 (see Note 8). These
advances will be repaid out of future interest income before distributions are
made to unitholders. The costs of LCIF's value maximization process, in response
to the takeover offer, during the period ended May 11, 2001 totaled $12,285 and
were charged to earnings.

         LCIF reimburses Luscar for investor relations activities performed on
behalf of LCIF in the amount of $100 per annum plus disbursements. Such costs
amounted to $113 for the year ended December 31, 2000, $108 for 1999, and $108
for 1998. These transactions are recorded at their exchange amounts.

8.       BASIS OF PRESENTATION OF UNAUDITED INTERIM FINANCIAL STATEMENTS

         On March 8, 2001, Luscar Energy Partnership ("LEP", formerly known as
Sherritt Coal Partnership) made a formal offer to acquire 100% of the trust
units and convertible debentures of LCIF. On May 11, 2001, LEP held sufficient
trust units and convertible debentures to enable LEP to acquire the remaining
trust units and cause LCIF to redeem the remaining convertible debentures. As at
June 30, 2001, LEP held all issued and outstanding securities of LCIF. The
acquisition has been accounted for as if LEP acquired full ownership of LCIF
effective May 11, 2001. During the course of the acquisition, LCIF acquired the
common shares of Luscar for one dollar pursuant to a unanimous shareholders'
agreement. These financial statements account for LCIF's investment in Luscar
using the equity method until May 11, 2001. Future financial statements for LCIF
and its wholly owned subsidiary will be consolidated in the financial statements
of LEP. Accordingly, these financial statements present the financial position
of LCIF as at May 11, 2001 and the results of its operations and its cash flows
for the period from January 1, 2001 to May 11, 2001 with comparative information
for the six month period ended June 30, 2000.

                                      F-89

<PAGE>
LUSCAR COAL INCOME FUND

                         NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)


9.       UNITED STATES ACCOUNTING GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

         These financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"), which in most
respects, conform to United States GAAP. Canadian GAAP differs from US GAAP in
the following respects:

STATEMENTS OF EARNINGS

         The following table reconciles net earnings (loss) as reported in the
accompanying statements of earnings to net earnings (loss) that would have been
reported had the financial statements been prepared in accordance with US GAAP.

<TABLE>
<CAPTION>
                                                           JANUARY 1,     SIX MONTHS         YEAR              YEAR
                                                            2001 TO         ENDED           ENDED             ENDED
                                                             MAY 11,       JUNE 30,        DEC. 31,          DEC. 31,
                                                              2001           2000            2000              1999
                                                              ----           ----            ----              ----
                                                          (unaudited)     (unaudited)
<S>                                                     <C>              <C>            <C>               <C>
Net earnings (loss) under Canadian
   GAAP  ...........................................    $        9,089   $    (31,292)  $      (53,906)   $      (90,022)
Impact of US GAAP:
   Interest on convertible debentures (a)............           (2,332)        (2,923)          (5,993)           (5,436)
   Amortization of deferred financing
      charges on convertible debentures (a)..........             (151)          (191)            (382)             (347)
   LCIF's equity in net earnings (loss) of
      Luscar measured under US GAAP (b)..............   $      (18,161)  $      9,575   $        7,908    $      (13,442)
                                                        -------------- --------------   --------------    --------------
Net earnings (loss) and comprehensive income
 for the period in accordance with US GAAP...........   $      (11,555)  $    (24,831)  $      (52,373)   $     (109,247)
                                                        ==============   ============   ==============    ==============
</TABLE>

         Balance sheet items which vary, in conformity with US GAAP and SEC
requirements:

<TABLE>
<CAPTION>
                                                                       AS AT              AS AT              AS AT
                                                                      MAY 11,            DEC. 31,           DEC. 31,
                                                                       2001                2000               1999
                                                                       ----                ----               ----
                                                                    (unaudited)
<S>                                                               <C>                <C>                 <C>
Assets:
Investment in Luscar(b)......................................     $      555,008     $       559,031     $      611,126
Liabilities:
Convertible debentures(a)....................................            100,000             100,000            100,000
Redeemable trust units(c)....................................            735,728             735,728            735,728
Equity:
Convertible debentures(a)....................................                 --                  --                 --
Unitholders' equity(deficit)(b),(c)..........................     $     (284,752)    $      (273,197)    $     (220,754)
</TABLE>

                                      F-90

<PAGE>
LUSCAR COAL INCOME FUND

                         NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)


(a)      CONVERTIBLE DEBENTURES

         In accordance with US GAAP, the convertible debentures are required to
be accounted for as a debt obligation with related interest charges reflected in
income. Accordingly, the portion of the convertible debentures reflected as
equity, the amortization of deferred financing charges recorded in equity and
the accretion charge to increase the carrying amount of convertible debentures
recorded in equity under Canadian GAAP are reclassified as a debt obligation,
amortization of deferred financing expenses and interest expense respectively.

(b)      EQUITY IN EARNINGS (LOSSES) OF LUSCAR

         The measurement of LCIF's equity investment in Luscar would differ as a
result of measuring the earnings of Luscar in accordance with US GAAP. The
summarized effect of these individual differences and their effect on LCIF's
financial statements are reflected in the tables above.

(c)      UNITHOLDERS' EQUITY

         Under US GAAP and the requirements of the SEC, redeemable preferred
shares whose redemption is outside the control of the issuer are required to be
presented outside shareholders' equity. These requirements have been applied to
the issued and outstanding trust units and accordingly, the effect of this
difference on LCIF's liabilities and equity is included in the balance sheet
table presented above.

(d)      OTHER DISCLOSURES

         United States GAAP does not permit the disclosure of the subtotal of
distributable cash in the statements of cash flows.

(e)      NEW ACCOUNTING STANDARDS

         SFAS NO. 141-BUSINESS COMBINATIONS; SFAS NO. 142 -GOODWILL AND OTHER
INTANGIBLE ASSETS. In June 2001, the Financial Accounting Standards Board
approved Statement No. 141, Business Combinations (SFAS 141), and Statement No.
142, Goodwill and Other Intangible Assets (SFAS 142). Those statements will
change the accounting for business combinations and goodwill. SFAS 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Use of the pooling-of-interests method will be
prohibited. SFAS 142 changes the accounting for goodwill from an amortization
method to an impairment only approach. Thus, amortization of goodwill, including
goodwill recorded in past business combinations, will cease upon adoption of
that Statement. SFAS 142 will be applicable for fiscal years beginning after
December 15, 2001; however earlier adoption is permitted for companies with
fiscal years beginning on or after March 15, 2001. LCIF has not recorded any
goodwill and has no intangibles on its balance sheet and amortization expenses
will not be impacted by SFAS No. 142. LCIF has not yet determined any other
effects of the new standards, if any on its financial statements.

         SFAS NO. 143-ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In June 2001,
the Financial Accounting Standards Board approved Statement No. 143 (SFAS 143),
Accounting for Asset Retirement Obligations. That standard requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially recorded, the
entity capitalizes a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
SFAS 143 is applicable for years beginning after June 15, 2002. LCIF has not yet
determined the effects of the new standard, if any, on its financial statements.


                                      F-91

<PAGE>
LUSCAR COAL INCOME FUND

                         NOTES TO FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

(in thousands, except per unit amounts)


10.      COMPARATIVE FIGURES

         Certain comparative figures have been reclassified to conform to the
presentation in the 2001 financial statements.

                                      F-92