<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, 2004
                                       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 ENERGY PARTNERSHIP
--------------------------------------------------------------------------------
             (Exact name of Registrant as Specified in Its Charter)

                                       N/A
--------------------------------------------------------------------------------
                 (Translation of Registrant's Name into English)

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

                            LUSCAR ENERGY PARTNERSHIP
                                1133 YONGE STREET
                                TORONTO, ONTARIO
                                 CANADA M4T 2Y7

                    (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.

                                      NONE

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>
          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...............................................    18
          Item 5     Operating and Financial Review and Prospects.............................    51
          Item 6     Directors, Senior Management and Employees...............................    74
          Item 7     Major Shareholders and Related Party Transactions........................    77
          Item 8     Financial Information....................................................    78
          Item 9     The Offer and Listing....................................................    78
          Item 10    Additional Information...................................................    78
          Item 11    Quantitative and Qualitative Disclosures about Market Risk...............    87
          Item 12    Description of Securities Other Than Equity Securities...................    87
Part II   Item 13    Defaults, Dividend Arrearages and Delinquencies..........................    88
          Item 14    Material Modifications to the Rights of Security Holders and Use
                     of Proceeds..............................................................    88
          Item 15    Controls and Procedures..................................................    88
          Item 16    Reserved.................................................................    88
          Item 16A   Audit Committee Financial Expert.........................................    88
          Item 16B   Code of Ethics...........................................................    88
          Item 16C   Principal Accountant Fees and Services...................................    89
          Item 16D   Exemptions from the Listing Standards for Audit Committees...............    89
          Item 16E   Purchases of Equity Securities by the Issuer and Affiliated
                     Purchasers...............................................................    89
Part III  Item 17    Financial Statements.....................................................    90
          Item 18    Financial Statements.....................................................    90
          Item 19    Exhibits.................................................................    91
</TABLE>

<PAGE>

                                  INTRODUCTION

      References to "Luscar", "LEP", "our company," "we," "us" and "our" in this
annual report refer to Luscar Energy Partnership 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 "LCL" in this
annual report are references to Luscar Coal Ltd. and its consolidated
subsidiaries. LEP acquired LCIF and LCL effective May 11, 2001 and, as a result
of the acquisition, LCL became a wholly owned subsidiary of LCIF. The sole
purpose of LCIF is to invest in LCL. LEP and LCIF have no independent operations
or assets and Luscar Ltd., LCL's direct subsidiary, is the only entity in our
corporate structure that has operations. References to "LL" in this annual
report are references to Luscar Ltd. LEP, LCIF and LL are guarantors of the LCL
Senior Notes due October 15, 2011, which we refer to as the "Senior Notes" or
the "notes." We sometimes refer to LEP, LCIF and LL as LCL's "guarantors."
Generally accepted accounting principles do not permit Luscar to consolidate the
LEP financial statements with the financial statements of LCIF and LCL prior to
May 11, 2001. We are including in this annual report consolidated financial
statements for LEP. Previously, LEP's SEC reporting had included LCL's financial
statements based on a commitment to include LCL financial statements until LEP's
consolidated statements included three years of results of LCL's operations. The
results of LEP, as presented in this document, include the results of LCL for
the three full years of 2002, 2003 and 2004. We prepare audited financial
statements for LEP, which contain condensed consolidating information for LCIF,
LCL and LL. See "Item 4 - Information on the Company" in this annual report for
further discussion of our corporate structure.

      As a result of the transfer of metallurgical assets to the Fording
Canadian Coal Trust ("FCCT") in the first quarter of 2003, and the acquisition
of the Prairie Assets in the fourth quarter of 2003, certain information in the
financial statements for prior periods has been reclassified to conform to the
presentation format adopted subsequent to these transactions. This annual report
discloses information regarding our former metallurgical coal assets to the
extent necessary to describe us when we still owned these assets. Results for
the metallurgical assets have been disclosed as discontinued operations. The
revised presentation provides a more representative picture of our ongoing
operations.

      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.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 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 or 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 a 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.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 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.

"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.

"LL" refers to Luscar Ltd. and its subsidiaries, the only entity in the Luscar
corporate structure that has operations.

"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 717305 Coal Income Trust (formerly 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.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 3 -
<PAGE>

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

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

"NON-RESERVE COAL" means coal quantities that have not been economically
evaluated or if economically evaluated are not expected to be mined economically
based on current technology and market conditions.

"OVERBURDEN" means materials that overlie a mineral deposit.

"PRAIRIE ASSETS" refers to certain assets and operations acquired by SCAI from
Fording on February 28, 2003 under the Combination Agreement (and the shares of
SCAI subsequently acquired by LL on October 17, 2003), including a 50% interest
in the Genesee mine, the Highvale-Whitewood mining contract, certain coal and
potash royalty agreements, and substantial non-producing coal and mineral
properties.

"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 corporation wholly owned by
SCP II, which owned the Prairie Assets until they were acquired by LL during the
fourth quarter of 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
held 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 LL's $115 million senior credit facility with
four Canadian chartered banks that was signed on February 4, 2004 (renewed on
January 31, 2005). This facility replaces LCL's $100 million senior credit
agreement and SCAI's $15 million credit facilities that were due to expire on
February 29, 2004.

"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.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 4 -
<PAGE>

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

"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.

"TEACHERS" refers to Ontario Teachers' Pension Plan Board, a corporation without
share capital, established by the Teachers' Pension Act of Ontario, which
administers the pension plan for approximately 158,000 current teachers and
97,000 retired teachers and their families.

"THERMAL COAL" means coal used for its heating value in 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.

"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>

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                      - 5 -
<PAGE>

                                     PART I

ITEM 1  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

        Not applicable for an annual report.

ITEM 2  OFFER STATISTICS AND EXPECTED TIMETABLE

        Not applicable for an annual report.

ITEM 3  KEY INFORMATION

                             SELECTED FINANCIAL DATA

                            LUSCAR ENERGY PARTNERSHIP

                HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

      The table on the following page 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 as well as "Management's Discussion
and Analysis of Financial Condition and Results of Operation" included in "Part
1 - Item 5 - Operating and Financial Review and Prospects" of this annual
report.

      In March 2003, the CICA issued new accounting rules dealing with asset
retirement obligations, which came into effect for Luscar in the fiscal year
beginning on January 1, 2004. This change in accounting policy was applied
retroactively and accordingly, the financial statements of prior periods were
restated. For information on the cumulative impact of the new accounting
standard as it pertains to LEP, see note 3 of LEP's consolidated financial
statements included later in this document.

      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 22 to LEP's consolidated financial statements
included elsewhere in this annual report.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 6 -
<PAGE>

LUSCAR ENERGY PARTNERSHIP
SELECTED CONSOLIDATED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                  YEAR ENDED      YEAR ENDED      YEAR ENDED       MAY 11 TO
                                                 DECEMBER 31,    DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                     2004            2003            2002            2001
                                                 ------------    ------------    ------------    ------------
                                                              (IN THOUSANDS OF CANADIAN DOLLARS)
<S>                                              <C>             <C>             <C>             <C>
STATEMENTS OF EARNINGS DATA
Canadian GAAP (a) (b)
Revenue                                          $    500,803    $    376,060    $    443,067    $    298,120
Cost of Sales                                         350,355         268,925         317,132         200,466

Net earnings from continuing operations                62,545          94,890          25,971          17,812
Discontinued operations                                 5,463          19,130           3,044           3,340
Net earnings for the period                            68,008         114,020          29,015          21,152
US GAAP (a) (c)
Net earnings for the period                      $     64,059    $    100,401    $     32,162    $     36,356

OTHER FINANCIAL AND OPERATING DATA
Canadian GAAP (b)
Cash flows from:
Operating activities (d)                         $    121,122    $     91,017    $     68,586    $     31,006
Financing activities (d)                             (111,235)        257,577          (4,735)        398,319
Investing activities (d)                              (13,668)       (398,907)        (50,237)       (369,008)
Capital expenditures (d)                               16,310          25,005          51,035          16,605

BALANCE SHEET DATA (AT PERIOD OR YEAR END)
Canadian GAAP (a) (b)
Cash and cash equivalents                        $     17,218    $     21,750    $     73,713    $     60,331
Capital assets                                      1,346,249       1,405,306       1,284,353       1,323,013
Total assets                                        1,494,714       1,571,927       1,567,540       1,615,573
Credit facility                                        12,000          12,000               -           1,911
Long-term debt (including current portion)            362,895         412,276         509,617         520,612
Partners' equity                                      621,962         620,022         490,003         460,988
Distribution to partners                               66,068          33,962               -               -
US GAAP (a) (c)
Total assets                                     $  1,514,708    $  1,639,770    $  1,655,960    $  1,699,854
Partners' equity                                      639,267         641,276         542,513         511,069
</TABLE>

NOTES:

      (a)   The results for 2001 through 2003 have been restated for the effects
            of discontinued operations.

      (b)   Effective January 1, 2004 we adopted CICA 3110 - Accounting for
            Asset Retirement Obligations under Canadian GAAP. The Canadian GAAP
            results for 2001 through 2003 have been restated to reflect the
            impact of this accounting pronouncement.

      (c)   Effective January 1, 2003 we adopted FAS 143 - Accounting for Asset
            Retirement Obligations under US GAAP. A cumulative effect of
            adoption was recorded in the US GAAP earnings for the year ended
            2003.

      (d)   The cash flow figures (including capital expenditures in the period)
            include the results of the discontinued operations.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 7 -
<PAGE>

                               EXCHANGE RATE DATA

      Unless otherwise specified or the context otherwise requires, all dollar
amounts in this annual report, including the financial statements herein, are
expressed in Canadian dollars.

      The following table sets forth, for each of the years indicated, the
exchange rate of the United States dollar into Canadian dollars at the end of
each such year, the average exchange rate during such year and the range of high
and low rates for each such year. These rates are set forth by 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,
                                        ----------------------
                         2004        2003        2002         2001        2000
                        ------      ------      ------       ------      ------
<S>                     <C>         <C>         <C>          <C>         <C>
Low                     0.7158      0.6349      0.6200       0.6241      0.6414
High                    0.8493      0.7738      0.6619       0.6697      0.6969
End of Year             0.8310      0.7738      0.6329       0.6279      0.6669
Average                 0.7682      0.7139      0.6368       0.6457      0.6732
</TABLE>

<TABLE>
<CAPTION>
                                                            LAST SIX MONTHS
                         -------------------------------------------------------------------------------------
                             MAY           APRIL         MARCH        FEBRUARY       JANUARY       DECEMBER
                         ------------   ------------  -------------  ------------  -------------  ------------
<S>                      <C>            <C>           <C>            <C>           <C>            <C>
Low                         0.7872         0.7957         0.8024        0.7961         0.8050        0.8064
High                        0.8082         0.8233         0.8322        0.8134         0.8346        0.8435
End of Month                0.7992         0.7957         0.8269        0.8133         0.8067        0.8310
</TABLE>

On June 14, 2005, the inverse of the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York was Cdn$1.00 per US$0.7966.

                 PRESENTATION OF FINANCIAL AND OTHER INFORMATION

      Unless otherwise indicated, 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 22 to the audited consolidated financial statements.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 8 -
<PAGE>

                                  RISK FACTORS

      Our business, financial condition or results of operations could suffer
material adverse effects due to any of the following risks. We have described
the specific risks that we consider material to our business but the risks
described below are not the only ones we face. We do not discuss risks that
would generally be equally applicable to companies in other industries, due to
the general state of the economy, markets, or other factors. Additional risks
not known to us or that we now consider immaterial may also impair our business
operations.

WE RELY ON A SMALL NUMBER OF KEY CUSTOMERS TO WHOM WE SELL A LARGE AMOUNT OF
COAL; THE LOSS OF A KEY CUSTOMER WOULD HAVE A NEGATIVE IMPACT ON EARNINGS.

      Eight of the mines that we owned during 2004 derived substantially all of
their revenue from a single customer or a group of affiliated customers. These
customers are TransAlta Corporation ("TransAlta"), Alberta Power (2000) Ltd.
("ATCO"), Saskatchewan Power Corporation ("SaskPower"), EPCOR Generation Inc.
("EPCOR"), and Ontario Power Generation Inc. ("Ontario Power"). Our coal
shipments to these customers accounted for 76% of our revenues during 2004 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.

      The 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, LL 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 12% of our 2004 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. 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.

OUR DOMESTIC THERMAL COAL SALES ARE DEPENDENT ON THE ELECTRICITY GENERATION
INDUSTRY IN ALBERTA AND SASKATCHEWAN. A CHANGE IN THIS INDUSTRY WOULD IMPACT OUR
EARNINGS.

      Demand for our domestic thermal coal depends primarily on coal consumption
by the electric utility industry in Alberta and Saskatchewan. 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.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 9 -
<PAGE>

WE ARE HIGHLY LEVERAGED AND HAVE SIGNIFICANT DEBT SERVICE REQUIREMENTS.

      We have long-term indebtedness and significant debt service obligations.
As at December 31, 2004, we had total liabilities of $872.8 million and a debt
to equity ratio of 1.4 to 1.0; it should be noted that our liabilities do not
include $52.2 million in letters of credit issued. The indenture governing the
Senior Notes and the Senior Credit Facility permit LCL and its subsidiaries to
incur additional indebtedness, including secured indebtedness, subject to
limitations. See "Item 10 - Additional Information -- Material Contracts".

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

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

      -     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.

THE RIGHT TO RECEIVE PAYMENT ON THE SENIOR NOTES AND THE GUARANTEES RANK BEHIND
OUR SECURED INDEBTEDNESS, WHICH MAY REDUCE THE LIKELIHOOD THAT HOLDERS OF THE
SENIOR NOTES 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
LCL's and the guarantors' secured indebtedness to the extent of the assets
securing such indebtedness. The Senior Notes are senior unsecured obligations,
and the guarantees are senior unsecured obligations of the guarantors. The
Senior Notes and the guarantees rank equally with all of LCL's and the
guarantors' senior unsecured indebtedness. As at December 31, 2004, LCL,
together with the guarantors, (1) had $31.9 million of outstanding secured debt
(2) had $12.0 million drawn on the Senior Credit Facility and (3) had
outstanding letters of credit of $52.2 million against our Senior Credit
Facility. As at December 31, 2004, the Senior Credit Facility allowed total
secured borrowings of up to $115.0 million. In addition, the indenture governing
the Senior Notes permits LCL 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 LCL,
holders of LCL's Senior Notes will participate with all other holders of LCL's
indebtedness and the indebtedness of the guarantors in the assets remaining
after the guarantors and LCL have paid all of the obligations under any secured
indebtedness. In any of these cases, these assets may be insufficient to pay all
of LCL's and the guarantors' creditors and holders of LCL's Senior Notes are
likely to receive less, ratably, if any, than our secured creditors.

      On February 4, 2004, LL signed a Senior Credit Facility with a syndicate
of Canadian chartered banks consisting of a revolving 364 day operating credit
facility that permits maximum aggregate borrowings of $115.0 million. The Senior
Credit Facility was renewed January 31, 2005 under substantially the same terms.
See "Item 10 - Additional Information -- Material Contracts".

WE MAY NOT BE ABLE TO RETAIN AND DEVELOP SUFFICIENT COAL RESERVES TO MEET OUR
BUSINESS REQUIREMENTS WHICH COULD MATERIALLY AND ADVERSELY IMPACT OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

      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, either our utility
customers or we often need to obtain land access rights from third parties to
mine our coal

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reserves. The acquisition of these rights could increase our costs. The failure
to acquire these rights could prevent us from mining a particular coal reserve.
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.

      Many of our properties, including the new 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 when we have evaluated the feasibility of
mining and we have concluded that the coal cannot be economically mined based on
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 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.

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:

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

      -     employee health and safety;

      -     mining and other permit and license requirements;

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

      -     land use fees and royalties.

      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

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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. Russian ratification of the Kyoto
Protocol on November 18, 2004 caused the treaty to come into legal force on
February 16, 2005. In December 2002, the Government of Canada ratified the Kyoto
Protocol. On April 13, 2005, the Government of Canada launched the first phase
of the Kyoto compliance strategy with the release of a report entitled: Moving
forward on Climate Change: A Plan for Honouring our Kyoto Commitment. The
Government of Canada has not yet developed a specific regulatory framework to
support this plan.

      The Province of Alberta has recently passed the Climate Change and
Emissions Management Act ("the Act"). Portions of the Act that have been
proclaimed provide the legislative framework to establish a system for
management of greenhouse gases in the Province of Alberta. Regulations regarding
emissions offsets and targets for emissions reductions of specified gases, for
different sectors of the Alberta economy will be developed. It is proposed that
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, will be developed. Additionally, the Province of Ontario has
publicly stated its intent to phase out the use of coal fired power plants
within the province.

      If the power plants that we supply are subjected to any requirements 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;

      -     variations in geological conditions;

      -     natural disasters;

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      -     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 participate in a comprehensive insurance program provided by Sherritt
which includes all risks property insurance with a dominant limit of liability
of US$150 million and various sublimited coverages, and a property damage
deductible of US$7.5 million per occurrence (except where lower deductibles are
required pursuant to our contracts), subject to an overall program annual
aggregate of US$10 million. Business interruption coverage is also included
subject to a 30 day waiting period with no aggregate applicable. Liability
insurance is provided with limits of liability in the amount of US$150 million
with a minimal per occurrence deductible.

      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. Any of these
risks or conditions could have a negative impact on the cash available from our
operations and our financial position.

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

      We have experienced substantial price fluctuations in our export coal
business in the past and we expect that such fluctuations will continue.
Previously, our export market included sales of both metallurgical and thermal
coal from several mine sites, but now we own only one export thermal coal mine;
Coal Valley. As a result, we expect that our ongoing exposure to the cyclicality
of the export coal business will continue.

      Our export markets include customers in Japan and other Pacific Rim
countries, the United States, and a South American country. 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 of our mines, all of which would reduce our cash flow
from operations.

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 could result which would have an adverse effect on our results of
operations and our financial condition.

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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. Work stoppages or other labor disruptions 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 coal. 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.

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 $74.0
million during 2004, 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.

      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.

      LCL's US$275 million of Senior Notes are denominated in United States
currency and LCL is obligated to make semi-annual interest payments in United
States currency. Upon maturity on October 15, 2011, LCL 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 of production at our export thermal coal operations, the net exposure
of the Senior Notes 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 "Part 1 - Item 3 - Key
Information - Selected Financial Data - Exchange Rate Data".

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, 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

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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 Coal Valley 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.

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
burning 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 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.

ASSET RETIREMENT OBLIGATIONS, SUCH AS RECLAMATION AND MINE CLOSURE COSTS, COULD
ADVERSELY AFFECT OUR CASH FLOW FROM OPERATIONS.

      We have estimated asset retirement obligations, which we believe will meet
current regulatory requirements. These future obligations are estimated by us
using closure plans and other similar studies which outline the requirements
that will be carried out to meet the obligations. Because the obligations are
dependent on the laws and regulations of Canada and its provinces, the
requirements could change resulting from amendments in the laws and regulations.
Because the estimate of obligations is based on future expectations, a number of
assumptions and judgments are made by management in the determination of these
provisions.

      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 Senior Credit Facility. For amounts outstanding under
these letters of credit, see "Item 10 - Additional Information - Material
Contracts - Senior 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.

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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 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 deregulated, however, the
government introduced new regulations during November 2002 which were amended in
April 2005 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.

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 (operations presently idled) and Bienfait
mines. The electric utility industry in Alberta was deregulated in January 2001
resulting in a significant increase in our cost of electricity. 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.

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

      LCIF owns all of LCL's 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 LCL's
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 holders of the Senior Notes.

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

      LCL and the guarantors 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, LCL's directors,
officers, significant employees and the independent registered chartered
accountants named in this annual report reside outside of the United States.

      It may not be possible, therefore, for investors to effect service of
process within the United States upon LCL, 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

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<PAGE>

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:

      -     production and sales volumes;

      -     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 Bow City power project and the coal gasification project;

      -     the effect on Luscar of new accounting pronouncements;

      -     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 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.

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ITEM 4 INFORMATION ON THE COMPANY

                                  OUR BUSINESS

                                    OVERVIEW

      We are the largest coal producer in Canada, operating mines that produce
most of Canada's domestic thermal coal. We currently 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, our mines produced more than 38 million tonnes of coal during 2004,
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, EPCOR, SaskPower and TransAlta, the major
electricity generators in the provinces of 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 current production from our owned
mines. During the prior year, we acquired the Prairie Assets, which included
additional proven and probable coal reserves in Alberta. We feel that the
acquisition of the Prairie Assets has enhanced 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

      Luscar began operations in 1911 as Mountain Park Coal Company Limited,
which initially supplied coal to the domestic railway, industrial and home
markets. Luscar began supplying power plants in Alberta in 1949 and in
Saskatchewan in 1971. Luscar entered the export metallurgical coal market in
1970 and the export thermal coal market in 1978. Luscar 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 diverse markets through new
mine developments and acquisitions. Prior to 1996, Luscar was a private company.
In 1996, LL was 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 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 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 create significant
operating cost synergy as well as to reduce corporate overhead costs.

      During 2001, pursuant to a take-over bid and a secondary-stage compulsory
acquisition, LEP acquired all the outstanding securities of LCIF 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 LL. 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

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 18 -
<PAGE>

existing bank indebtedness and to increase our cash position to fund operations
and future growth. At the same time, we negotiated the initial $100 million
Senior Credit Facility.

      On February 28, 2003, under the terms of the Combination Agreement with
Fording, 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% interest in the Genesee mine, the
Highvale-Whitewood mining contract, certain coal and potash royalty agreements,
and substantial non-producing coal and mineral properties. From February 28,
2003 to October 17, 2003, we managed and operated the Prairie Assets on behalf
of SCAI under a management agreement.

      On October 17, 2003 we acquired the Prairie Assets by acquiring all the
shares of SCAI, a corporation wholly owned by SCP ll. LEP, LCL, LL, SCAI and SCP
II are all owned, as to 50% each directly or indirectly, by Sherritt and
Teachers. The acquisition by us, effected by an internal reorganization among
our entities and their subsidiaries, involved a distribution by us to Sherritt
and Teachers of approximately 3.0 million units of Fording Canadian Coal Trust
and $70.0 million in cash. The remaining portion of the acquisition was effected
through an equity investment by Sherritt and Teachers in LEP. Following these
transactions we no longer hold any FCCT units.

CORPORATE INFORMATION

      The adjacent diagram illustrates our current corporate and debt structure.

                                  [FLOW CHART]

      LEP is a general partnership that was formed by wholly-owned subsidiaries
of each of Teachers and Sherritt for the purpose of acquiring LCIF. Teachers is
a corporation established by legislation of the Province of Ontario and is
charged with administering one of the largest pension funds in Canada, with
total assets as at December 31, 2004 of more than $84 billion. Sherritt is a
diversified resource company, with assets as at December 31, 2004 of nearly $2.6
billion 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 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

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                                                              2004 Annual Report

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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 LCL and its subsidiaries. LCL is a holding company
that owns all of the common shares of LL. LCL's operations are conducted by LL,
which also guarantees the Senior Notes on a senior basis. SCP II formerly owned
all of the share capital of SCAI, which held the coal and mineral properties
previously owned by Fording until those shares of SCAI were purchased by LL in
the fourth quarter of 2003 on the winding up of SCAI. 3718492 Canada Inc. is a
non-operating, wholly owned subsidiary of LL that holds a $61 million,
non-interest bearing demand note issued by LL.

      The registered and principal offices of Luscar Ltd., Luscar Coal Ltd. and
Luscar Coal Income Fund are located at 1600 Oxford Tower, 10235 -- 101 Street,
Edmonton, Alberta, Canada, T5J 3G1. The telephone number is (780) 420-5810. 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 the metallurgical coal assets to Fording, we sold
both thermal and metallurgical coal in domestic and international markets. As a
result of the Fording transactions, we no longer have metallurgical coal assets.
In connection with the disposition of our metallurgical coal assets, we agreed
with Fording that we would not operate, own, lease or contract mine any assets
or business involving metallurgical coal in Canada for a period of 5 years from
February 28, 2003 except for assets or businesses that primarily produce thermal
coal but where metallurgical coal is produced incidentally from such operations
("by-product metallurgical coal"). We have further agreed that we will only be
permitted to sell by-product metallurgical coal if Fording acts as marketing
agent with respect to those sales.

      Similarly, in connection with the purchase by Fording of our metallurgical
coal assets, Fording, has agreed with us that they will not operate, own, lease
or contract mine any assets or business involving thermal coal in Canada for a
period of 5 years from February 28, 2003, except for assets or businesses that
primarily produce metallurgical coal but where thermal coal is produced
incidentally from such operations or when such coal is blended so as to be
marketed as metallurgical coal ("by-product thermal coal"). We have further
agreed with Fording that we will be appointed, subject to approval by Fording's
independent trustees, as the marketing agent of Fording with respect to certain
by-product thermal coal sales by Fording to new customers within Canada.

      We generate a substantial portion of our revenue from long-term contracts
with ATCO, EPCOR, SaskPower and TransAlta, the major electricity generators in
Alberta and Saskatchewan. The remaining terms of these contracts range from 5 to
more than 20 years. We service these contracts from 5 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
economical 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 nearly
75% of the electricity generated in Alberta and Saskatchewan in 2004. We expect
that these power plants will continue to operate at 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

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ranging from 2009 until 2026, except 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 annual 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 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 coal producer in Canada, producing most of
Canada's thermal coal, and we are one of the largest coal producers in North
America. We supply substantially all the coal to electric utilities in Alberta
and Saskatchewan, and the coal we produced accounted for nearly 75% of the
electricity generated in these provinces in 2004. We acquired the Prairie
Assets, which solidify our position in these markets. In addition, we currently
supply almost all of the coal 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 2004 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 believe that the demand for
coal will increase because of the announced intention of some parties, including
TransAlta 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 and TransAlta commissioned a third generating unit at their Genesee
facility in the first quarter of 2005, which is to 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 and
major chemical producing facilities which use large quantities of natural gas
that can be replaced by coal to produce heavy oil and oil from tar-sands as well
as other petro-chemicals.

      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 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 (50 years),
Ontario Power (27 years), SaskPower (35 years), and TransAlta (34 years).
Through our acquisition of a 50% interest in the Genesee mine as part of the
Prairie Assets, we now have a long-term relationship with EPCOR, our customer
and partner.

      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.
We believe we are one of the most efficient mining companies in North America.
At the mines we currently operate, we utilize draglines, which are the lowest
cost surface

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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
continuing our implementation of an intensive cost-reduction and efficiency
program at all of our operations.

      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
disease, catastrophic collapse, underground explosions and fires.

      EXPERIENCED MANAGEMENT

      Many of 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 $84 billion of total assets as at December 31, 2004. Sherritt,
with assets of $2.6 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) 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 the granting of several awards
by government and industry organizations. 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.

      HEALTH AND SAFETY

      Our safety performance continues to improve. For example, during 2004 we
operated 1.5 million man-hours (176 days) without a safety incident. We have
shown that an excellent safety record can be maintained over the long term. Our
Paintearth mine is the current holder of the prestigious John T. Ryan Safety
Trophy awarded by the Canadian Institute of Mining, Metallurgy and Petroleum for
outstanding performance in safety. The Genesee and Sheerness mines are previous
holders of the award. The Genesee and Paintearth mines have operated since
inception, 16 and 10 years respectively, without a lost time safety incident.
The provinces have primary jurisdiction over health and safety matters at coal

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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 have established a health and safety
management program directed at the health and safety of our employees. This
program consists of a policy, established best practices, regular audits, the
integration of health and safety procedures with operating procedures, employee
training and incident tracking and investigation. In addition, all mines have
emergency response crews that are trained in advanced first aid and in
responding to emergency rescue situations.

                               BUSINESS STRATEGIES

      The key components of our strategy include:

      FOCUS ON THERMAL COAL PRODUCTION

      Substantially all of our mining operations are related to the production
of thermal coal. Our equipment and customer base at most of these operations are
very 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 continue the
implementation of efficiencies at all of our operations, which we expect will
improve the profitability of our business. Our major customers are utilities,
which are the predominant electricity suppliers in Alberta, Saskatchewan and
northwestern Ontario. They have invested significant resources in supplying
coal-fired electricity to the regions they serve.

      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 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. 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 practices and efficiency programs.
We have completed a mine-by-mine operational review in order to maximize
production efficiency and have implemented 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, we have
introduced a comprehensive suite of standard operating procedures which
incorporates industry best practices and which has resulted in a more than 20%
increase in dragline productivity. As part of a plan to reduce maintenance costs
and increase equipment utilization, we signed a long-term mine support equipment
agreement with Finning (Canada), a division of Finning International Inc.
("Finning") and Kramer Ltd. ("Kramer"), which involves the acquisition,
financing, servicing, and parts supply related to new mobile support equipment.

      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

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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. During the fourth quarter of 2004, we approved the
expansion of the Coal Valley mine to 4.0 million clean tonnes per year, doubling
its thermal coal production capacity. The mine is scheduled to be at full
capacity by the second quarter of 2006. The $75.3 million project involves
doubling the coal wash plant capacity and adding additional mining equipment.
The expansion at Coal Valley is expected to produce an additional 1.0 million
tonnes in 2005 and a further 1.0 million tonnes in 2006. The 450 megawatts of
new capacity at the Genesee power plant, which was commissioned in early 2005,
will require approximately 1.2 million additional tonnes of coal in 2005. We
have embarked on an applied research project to develop the process technology
required to beneficiate and gasify our coal. Alberta Energy Research Institute
is providing a portion of the funding for the project. If this project is
successful it could lead to the development of new mines from our reserve and
non-reserve coal.

      As part of the Prairie Asset acquisition in 2003, we acquired the mineral
rights near Bow City, Alberta along with engineering and environmental studies.
The project contemplates the construction of two 500 MW generating units within
the station and the associated dragline mine development. We are moving the
project forward towards regulatory approval. In order to facilitate the
potential submission of an application to provincial regulatory authorities in
the spring of 2006, forecast spending in 2005 and 2006 is expected to be
approximately $7.0 million. The field work is progressing and is expected to be
completed in 2005. The Bow City Project (formerly called the Brooks Project) is
located 145 kilometres southeast of Calgary, Alberta. The project contains 92.2
million tonnes of proven and 73.6 million tonnes of probable subbituminous
thermal coal reserves. In January 2005, we released the required Public
Disclosure Document and the Environmental Impact Assessment Report Proposed
Terms of Reference to the regulatory agencies and the affected stakeholders. The
total capital cost of the project is estimated at $2.4 billion.

                               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
10,000 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 at the Coal Valley and Obed Mountain mines is bituminous thermal coal.

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      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. We do not produce any
metallurgical coal following the transfer of our metallurgical coal assets to
Fording in February 2003.

      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 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 close to 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- or diesel-powered backhoes 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 and often more cost
efficient to mine coal seams that are located close to the surface than deeper
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/backhoe 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/backhoe mining is typically better
for shallow coal seams in hilly or mountainous terrain. Truck/backhoe mining
systems are also generally capable of digging to greater depths than dragline
mining systems. 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 returned 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 employ dragline mining at all of our mines. This method uses large
capacity electric-powered walking 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 backhoes 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.

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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.

      The Coal Valley mine uses truck/backhoe mining operations to access coal
seams at greater depths than can be reached by the dragline alone. This method
uses large diesel-powered backhoes 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 backhoes 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. The pit is subsequently reclaimed 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 be reclaimed as a
lake to provide a recreational area or new fish habitat.

                          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 Coal Valley mine has a
processing plant as does the idled Obed Mountain mine. At the Bienfait, Highvale
and Whitewood mines, we operate processing plants that crush and size the coal
to customer specifications.

                               COAL TRANSPORTATION

      At the Paintearth, Boundary Dam, Sheerness, Genesee, Highvale and
Whitewood mines, trucks transport coal directly from the mine to the adjacent
power plants. We own a short-line railroad that transports coal from our Poplar
River mine to the near-by power plant.

      We deliver thermal coal by rail to both domestic and international
customers. For the thermal coal that we ship for export, we bear the rail
freight costs to the port as well as the terminal handling and ship loading
costs at port. The majority of our export sales are made free on board vessel
where our customer arranges for the ocean transport and bears the ocean freight
costs to final destination. Following the disposition of our metallurgical coal
assets and the indefinite suspension of operations at the Obed Mountain mine, we
now have two major rail transportation contracts for our Coal Valley mine, which
have remaining terms of 1 and 3 years respectively. We also hold 2 rail
transportation contracts for our Bienfait lignite char deliveries.

      The coal we transport by ship is loaded through bulk-products terminals on
the west coast of Canada, primarily pursuant to long-term contracts. Until
February 28, 2003, we owned a 23.2% interest in Neptune, at the 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. In addition, for westbound
metallurgical shipments, we had contracts with Westshore Terminals ("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 specified limits.

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                                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 2003 was approximately 4.9
billion tonnes (2004 totals were not available at the time of filing). 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 because 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, Taiwan, 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 Limited, Mitsubishi Corporation, China National Coal Industry
Import & Export (Group) Corporation, Anglo American Limited, Rio Tinto Limited,
Glencore International AG and Xstrata PLC. We exported metallurgical coal from
1970 until 2003 and have exported thermal coal since 1979. We, and Canada in
general, are relatively small players in the international thermal coal markets,
but we provide diversity of supply and reliable coal quality to these markets.

      EXPORT 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 export trade of coal for the five years,
2000 through 2004.

<TABLE>
<CAPTION>
                                         WORLD EXPORT TRADE(1)
                                    --------------------------------
                                    2004   2003   2002   2001   2000
                                    ----   ----   ----   ----   ----
                                          (millions of tonnes)
<S>                                 <C>    <C>    <C>    <C>    <C>
Metallurgical(2)                     201    203    200    202    207
Thermal                              512    491    437    427    379
                                    ----   ----   ----   ----   ----
Total                                713    694    637    629    586
                                    ====   ====   ====   ====   ====
</TABLE>

NOTES:

(1) Obtained from Barlow Jonker Pty. Ltd.; figures for 2004 are projections.

(2) Includes coking and pulverized coal injection coals.

      International export markets accounted for approximately 713 million
tonnes of coal in 2004, according to projections done by Barlow Jonker Pty Ltd.
The bulk of export coal is delivered to customers by ship. The seaborne coal
export market represents one of the largest volumes of world trade for a single
commodity.

      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

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 27 -
<PAGE>

the origin of the coal, quality and the specific logistics and commercial
considerations of the particular buyer and seller.

      For the last ten years (1995 to 2004), the prices for export thermal coal
delivered to Japan were as follows:

<TABLE>
<CAPTION>
                                                    JAPANESE COAL PRICING
                  2004     2003    2002     2001     2000    1999     1998    1997     1996     1995
                 ------   ------  ------   ------   ------  ------   ------  ------   -------  ------
                                     (U.S.$ per tonne for fiscal years beginning April 1)
<S>              <C>      <C>     <C>      <C>      <C>     <C>      <C>     <C>      <C>      <C>
Thermal (1)      43.35    26.75   28.85    34.50    28.75   29.95    34.50   37.65    40.30    40.30
</TABLE>

Notes:

(1)   Reference price for 28,050 KJ/Kg gross as received basis Canadian
      bituminous thermal coal sold to Japanese power utilities free on board
      vessel at Newcastle, Australia. Prices are from publications of The Tex
      Report Ltd. and Barlow Jonker Pty. Ltd.

      CANADIAN COAL MARKETS

      Canadian coal production was 66.0 million tonnes in 2004, according to
Statistics Canada, with substantially all coal production based in western
Canada. The Coal Association of Canada reports that Canadian coal consumption
was 59.4 million tonnes in 2003 (more recent figures were unavailable at the
time of filing this document), of which greater than 90% was thermal coal.
Canadian coal producers supply the majority of domestic coal consumption. Coal
imports totaled 22.5 million tonnes in 2003, according to the Coal Association
of Canada (2004 information was not yet available), most of which was imported
from the United States to supply coal to power plants in the southern Ontario
market. In 2004, Canadian coal exports were 27.1 million tonnes, according to
Statistics Canada, of which approximately 90% is metallurgical coal.

      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. Coal accounted for nearly 78% of Alberta's electricity
generation in 2004, according to the Alberta Electric Energy Industry Statistics
and 67% of Saskatchewan's electricity generation in 2004, according to
SaskPower. The mines we operate supplied substantially all of the coal consumed
by the power plants in these two provinces during 2004.

      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, which 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
than the western provinces. According to Ontario Power's annual report, 33% of
their generating capacity in 2003 was from coal-fired generating units. 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 provincial government in Ontario has
stated it intends to eliminate coal-fired generation in the province by 2007,
including the plants we supply, and has commenced the shutdown of certain
facilities in 2005.

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                     - 28 -

<PAGE>

      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. We supply substantially all
of the coal consumed by the ten coal-fired power plants operating in Alberta and
Saskatchewan. Seven of these power plants hold long-term contracts that, in most
cases, will continue for most of the remaining useful lives of the power plants.
In January 2004, Luscar entered into a 5 year coal supply agreement with the
Milner Power Limited Partnership for the supply of coal to the H.R. Milner power
station from the Coal Valley mine. Luscar's five-year contract, which expires in
December 2007, to mine at TransAlta's Highvale and Whitewood mines, supplies the
remaining three power plants.

      Northwestern Ontario has two coal-fired power plants that are supplied by
rail from the Bienfait mine in southern Saskatchewan. These power plants also
have access to coal from the Powder River Basin in the United States. We have
been the primary coal supplier to these power plants since the early 1980s and
retain that business on the basis of competitive pricing. We recently concluded
a new three year contract to supply most of the coal consumed by these two power
`plants from 2005 through 2007. Northwestern Ontario also has access to
hydro-power that at times limits the demand for coal-fired electricity
generation from these power plants.

      The Coal Valley mine in Alberta has shipped thermal coal to the southern
Ontario market, which is also served by United States coal producers on the
basis of competitive pricing. Ontario also generates substantial amounts of
electricity by water, nuclear, natural gas and other means. No shipments from
Coal Valley to this market are expected in 2005. Other markets for Coal Valley
include the Milner power station in Alberta, compliance coal markets in the
United States and other North American and Pacific Rim electric power
generators.

      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 factors) the geology of the coal field, the quality of the coal,
the anticipated mining cost, the 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.

      The following table sets forth Canadian domestic consumption of coal for
the five years, 1999 through 2003:

<TABLE>
<CAPTION>

        CANADIAN DOMESTIC THERMAL COAL CONSUMPTION
       --------------------------------------------
 2003        2002        2001         2000        1999
                         (thousands of tonnes)
<S>         <C>         <C>          <C>         <C>
59,379      61,856      60,477       56,623      53,733
</TABLE>

      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,
the commissioning of new generating plants and growing receptiveness of India to
importing coal. According to Barlow Jonker, Asian demand was 260 million tonnes
in 2004 compared with

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                     - 29 -

<PAGE>

241 million tonnes in 2003. They go on to project that Asian demand will
increase to 281 million tonnes in 2005.

      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. This
situation has changed significantly due to continued increased demand and
Chinese supply limitations.

      First quarter 2005 spot prices in United States Dollars remain at high
levels in comparison to the past 10 years but are 17% lower than the historic
peak reached in July 2004. Historically, prices for export thermal coal markets
have been cyclical and Canadian suppliers have little influence on pricing due
to the limited volumes shipped. Japanese contract prices for export thermal coal
increased by approximately 60% during 2004 due to the tight supply conditions at
the time of contract settlement and Luscar estimates that Japanese contract
prices increased a further 20% or more for the 2005 contract year. In light of
current market conditions, Luscar announced the expansion of production capacity
from the Coal Valley mine to 4.0 million tonnes by mid 2006.

      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, 2004 are outlined
below. Because of our acquisition of Manalta, we service some of our customers
and their power plants under two contracts.

<TABLE>
<CAPTION>

                                                                                ANNUAL TONNAGE
                                        CUSTOMER           REMAINING            (IN THOUSANDS)
                                      RELATIONSHIP          TERM OF         -----------------------
    MINE            CUSTOMER             SINCE             CONTRACT          MINIMUM       MAXIMUM
 ----------         ---------         ------------     ----------------      -------       -------
<S>                 <C>               <C>              <C>                   <C>           <C>
                                                          until 2006           1,450         1,812
                                                           2007-2012             698           863
                                                       -------------         -------       -------
 Paintearth         ATCO                 1955             until 2007           1,104         1,400
                                                           2008-2009           1,104         1,300
                                                           2010-2012           1,104         1,250

  Sheerness         ATCO                 1955             until 2026             900         2,000
                                                       -------------         -------       -------
                    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>

Notes:

(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 relate 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 purchase, as well as, in some cases, fixed monthly payments that are
unrelated to tonnage delivered. These contracts also provide for the
pass-through 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.

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                      -30-
<PAGE>

      Six of our eight long-term coal supply contracts are not 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 2010
for the Poplar River contract and in 2014 for one of the Boundary Dam contracts.

      LUSCAR MINING OPERATIONS

      During 2004, we had interests in ten mining operations and development
projects in British Columbia, Alberta and Saskatchewan. Nine mines were
operational, while the Obed Mountain Mine suspended production in 2003 in
response to the weak international thermal coal market. Five mines are mine
mouth mines and supply adjacent power plants. Two mines serve domestic and
international utilities and industrial customers. Two mines are operated on a
contract basis and supply adjacent power plants. We have a 50% interest in the
other mine.

      The following is a summary of the thermal coal mines operated by Luscar
during 2004:

<TABLE>
<CAPTION>
                     MINE                        ANNUAL
                  COMMENCED   SURFACE   2004   PRODUCTION                    MAJOR
     MINE         OPERATION    AREA     SALES   CAPACITY                    CUSTOMER
-------------     --------- ----------  -----  ----------    --------------------------------------
                            (hectares)  (millions of tonnes)
<S>               <C>       <C>         <C>    <C>           <C>
THERMAL COAL
Boundary Dam        1973         8,706    6.4         6.5    Adjacent power plants
Sheerness           1985         7,000    3.8         4.0    Adjacent power plant
Poplar River        1978        11,885    3.5         4.0    Adjacent power plant
Paintearth          1981         5,120    2.9         3.5    Adjacent power plant
Bienfait            1905        10,045    1.7         2.8    Domestic utilities and industrial
                                                             customers
Coal Valley (1)     1978        19,699    1.7         2.7    International and domestic utilities
Obed Mountain (2)   1984         7,460    0.0         1.5    International and domestic utilities
                                                             and industrial customers
Genesee             1988        20,304    4.1         5.6    Adjacent power plant
Highvale (3)        1970            -    12.8        13.0    Contract mining for adjacent power
                                                             plants
Whitewood (3)       1956            -     1.6         2.8    Contract mining for adjacent power
                                                             plant
</TABLE>

Notes:

(1)   Coal Valley capacity is expected to increase to 2.7 million tonnes in
      2005, then 4.0 million tonnes in 2006.

(2)   Production was suspended in 2003 at the Obed Mountain Mine.

(3)   Highvale and Whitewood are contract mine operations owned by TransAlta.

      In domestic thermal coal markets, we 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 lower than margins from mines we
own. We also sell lesser quantities of coal to domestic industrial customers and
to overseas electric utilities and industrial customers.

      We have not been involved in the production and sale of metallurgical coal
since February 28, 2003. Prior to that date, most of our metallurgical coal
sales were sold to overseas and North American steel producers. In March 2003,
we announced the indefinite suspension of production at the Obed Mountain mine
in response to the weak international thermal coal market at that time.

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                     - 31 -
<PAGE>

      Thermal coal sales for the most recent five years were as follows:

<TABLE>
<CAPTION>
                           2004     2003        2002     2001      2000
                          -------  -------     -------  -------   -------
                                         (THOUSANDS OF TONNES)
<S>                       <C>      <C>         <C>      <C>       <C>
DOMESTIC
Mine mouth                 20,715   19,093(1)   16,083   16,198    15,476
Contract mining            14,544   12,247(2)   12,704   12,175    12,491
Other thermal               1,817    2,217       2,605    3,139     2,022
                          -------  -------     -------  -------  --------

Total domestic sales       37,076   33,557      31,392   31,512    29,989

                          -------  -------     -------  -------  --------
Export thermal sales        1,454    1,610       2,162    2,459     2,990
                          -------  -------     -------  -------  --------
Total thermal coal sales   38,530   35,167      33,554   33,971    32,979
                          =======  =======     =======  =======  ========
</TABLE>

Notes:

(1)   Includes sales from Genesee since acquisition by SCP II on February 28,
      2003.

(2)   Includes volumes delivered from the Highvale and Whitewood mines since
      acquisition by SCP II on February 28, 2003.

      We operate mines situated in two 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. Our Coal Valley and Obed Mountain mines are situated in the
foothills of the Canadian Rockies west of Edmonton, Alberta. The 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. 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 Bow City, are all within a short distance
of established communities and are accessible by road. The development
properties lack most required services. We anticipate providing these services
during mine construction.

      The Bow City project is located in an agricultural region in southern
Alberta. 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.

      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 to meet customer
specifications. Coal processing entails an additional expense but results in a
higher-value product. The Coal Valley and Obed Mountain mines operate coal
processing plants. At the Bienfait mine, we operate a processing plant that
crushes and sizes the coal to customer specifications.

      All of the operating 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.

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                     - 32 -
<PAGE>

      THERMAL COAL PRODUCTION

      Annual coal production (including production from the former Fording
operations) for the last five years was as follows:

<TABLE>
<CAPTION>
                           2004     2003     2002     2001    2000
                         -------  -------  -------  -------  -------
                                    (THOUSANDS OF TONNES)
<S>                      <C>      <C>      <C>      <C>      <C>
THERMAL

BITUMINOUS
   Coal Valley mine        1,651    1,234    1,789    1,514    1,088
   Obed Mountain mine          -      413    1,351    1,410    1,485

SUBBITUMINOUS
   Paintearth mine         2,896    2,984    3,021    3,215    2,754
   Sheerness mine          3,810    3,810    3,589    3,643    3,577
   Highvale mine (1)(2)   12,829   12,442   12,698   11,690   12,491
   Genesee (1)             4,142    3,557    3,553    3,497    3,542
   Whitewood (1)           1,605    1,967    2,812    2,094    1,974

LIGNITE
   Poplar River mine       3,461    3,391    3,427    3,382    3,489
   Boundary Dam mine       6,157    5,913    6,193    6,354    5,915
   Bienfait mine           1,623    2,047    1,834    2,008    1,778

                         -------  -------  -------  -------  -------
                          38,174   37,758   40,267   38,807   38,093
                         =======  =======  =======  =======  =======
</TABLE>
Notes:

(1)   Acquired by SCAI (and subsequently by Luscar in October 2003) on February
      28, 2003, from Fording pursuant to the Combination Agreement.

(2)   Operated by Manalta and Luscar 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.

      Testing at Coal Valley and Bienfait, both of which transport coal to
distant customers, 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.

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                     - 33 -
<PAGE>

      OPERATING MINES

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

                                     [MAP]

      COAL VALLEY MINE

      The Coal Valley mine is located approximately 100 kilometres south of
Edson, Alberta, in the foothills of the Rocky Mountains. We commenced operations
at this mine site in 1978 and 2004 sales were 1.7 million tonnes. Luscar
currently operates 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 Luscar's
adjacent processing plant, where it is crushed, cleaned, and dried. From the
processing plant, the coal is transported by rail

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                     - 34 -
<PAGE>

directly to customers or to port facilities for further transportation by ship.
Luscar owns or leases 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 metre 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 metres. The other seams range in
thickness from 2.4 to 6.7 metres. As at December 31, 2004, the Coal Valley mine
had 15.5 million tonnes of proven reserves and 7.2 million tonnes of probable
reserves.

      On January 5, 2005, Luscar announced a $75 million expansion of the Coal
Valley mine to 4.0 million tonnes of coal per year, doubling thermal coal
production capacity at the mine. The mine is scheduled to be at full capacity by
the second quarter of 2006, and its production is slated for export markets. The
expansion project involves doubling the coal wash plant capacity and adding
mining equipment. The approximately $50 million required for mining equipment
will be lease financed, with the remaining capital requirements being funded by
Luscar.

      OBED MOUNTAIN MINE

      In March 2003, in response to low export selling prices and demand, we
suspended production indefinitely at the Obed Mountain mine and the coal
preparation plant and certain other mining equipment are now mothballed. The
mine commenced operations in 1984 and we acquired it in 1989. This mine formerly
supplied bituminous thermal coal to a variety of international and domestic
utilities and industrial customers. Before production was suspended, we operated
a dragline and three electric shovels to remove overburden and to load coal onto
a fleet of coal haulers. Raw coal was hauled to our adjacent processing plant,
where it was crushed, cleaned and dried. From the processing plant, coal was
conveyed to a storage and rail load-out facility by an 11 kilometer long
overland conveyor for transportation by rail directly to customers or to port
facilities.

      The Obed Mountain mine is located approximately 30 kilometers east of
Hinton, Alberta in the foothills of the Rocky Mountains. This mine's annual
production capacity is 1.5 million tonnes but 2004 sales were nil. The Obed
Mountain mine had 4.7 million tonnes of proven reserves as at December 31, 2004.
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 used to 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'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 2004 sales were 2.9 million
tonnes. The mine had 55.1 million tonnes of proven reserves as at December 31,
2004. 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.

      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 that are
owned by our customer. We are responsible for dragline operation and
maintenance. ATCO 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 acquisition
of the Prairie Assets, we acquired certain royalty interests on coal produced
from the Paintearth mine, in respect of which ATCO pays royalties.

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                     - 35 -
<PAGE>

      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. The power plant is jointly owned by
ATCO, TransAlta Corporation and TransAlta Power, L.P. 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
subbituminous coal at the Sheerness mine is in two seams having a thickness
varying between 0.5 and 1.9 meters. The mine's annual production capacity is 4.0
million tonnes and 2004 sales were 3.8 million tonnes. This mine had 64.1
million tonnes of proven reserves and 7.1 million tonnes of probable reserves as
at December 31, 2004.

      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 acquisition of the Prairie Assets, we acquired
certain royalty interests on coal produced from the Sheerness mine, in respect
of which ATCO and TransAlta pay royalties.

      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 current year sales were 3.5
million tonnes. This mine had 140.0 million tonnes of proven reserves and 8.1
million tonnes of probable reserves as at December 31, 2004. 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
two long-term contracts. The first contract expires in 2009, and provides for
annual sales of 2.0 million tonnes. The second contract, expiring in 2024,
provides for annual sales of 4.2 million tonnes through 2012 and 3.8 million
tonnes during the remainder of the contract. We commenced mining operations in
1973. 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. This mine's annual production capacity is 6.5
million tonnes and 2004 sales were 6.4 million tonnes. The Boundary Dam mine had
83.6 million tonnes of proven reserves as at December 31, 2004. 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.

      The mine has six draglines, four of which are currently being used 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 was transferred to SaskPower in May 2003 pursuant to the terms
of the coal supply agreement.

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                     - 36 -
<PAGE>

      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 Inc.'s Atikokan and Thunder Bay power plants under a
contract that expires at the end of 2007. The provincial government in Ontario
has stated that it intends to eliminate coal-fired power generation in the
province by 2007, including the plants we supply. The mine also sells coal to
several smaller domestic customers and supplies the char plant with coal.
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 2004 sales were 1.7 million
tonnes. This mine had 69.5 million tonnes of proven reserves as at December 31,
2004. 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 by a front-end loader onto a fleet of
coal haulers. 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 132,000
tonnes, which expire in 2008 and 2013. In 2003, we entered into a ten year
contract with an existing customer, one of the purposes of which was to expand
the capacity of the char facilities to meet additional sales demand. The $7
million expansion completed in 2003 increased the annual production capacity of
the char facility by approximately 35,000 tonnes to 137,000 tonnes. Sales in
2004 were 123,000 tonnes.

      The principal market for charcoal is the manufacturing process of charcoal
briquettes for the barbecue market. Competitive products for briquette
manufacturing include wood char, anthracite and other coal chars. Competitors to
charcoal briquettes include propane, natural gas and electric barbecues.

      GENESEE MINE

      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 (a public utility company owned by the
City of Edmonton) Genesee power plant under a long-term contract that continues
as long as there is economic coal within the mining area. EPCOR and TransAlta
completed the 450 MW expansion to the power plant in December 2004. The Genesee
mine commenced operations in 1988. The mine's annual production capacity is now
5.6 million tonnes and 2004 sales were 4.1 million tonnes.

      Luscar and EPCOR each own a 50% interest in the equipment and facilities
at this mine. Luscar's share of proven reserves was 55.0 million tonnes and
probable reserves of 68.7 million tonnes at Genesee as at December 31, 2004. 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. 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. Effective February 28, 2003, SCAI acquired from Fording certain
royalty interests on coal produced from the Genesee mine, in respect of which
EPCOR pays royalties, which were subsequently acquired by us in October, 2003.

      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
sales for the current year were 12.8 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-

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                     - 37 -
<PAGE>

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

      LCL and its predecessor, Manalta, 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, which subsequently assigned it to Luscar on October
17, 2003. Under the terms of the contract, approximately $18 million of capital
expenditures are required for certain mining equipment, which will be reimbursed
by TransAlta over the life of the contract. The current five-year mining
contract expires December 31, 2007, or earlier subject to a 90-day termination
notice provision. 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 the operator for costs associated with terminating the
mining contract. Also as part of the acquisition of the Prairie Assets, SCAI
acquired certain royalty interests on coal produced from the Highvale mine, in
respect of which TransAlta pays royalties to us. These royalty interests were
subsequently transferred to Luscar on October 17, 2003.

      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 Wabamun power plant. TransAlta has announced plans to phase out
the generating capacity of the Wabamun power plant by 2010, beginning with a
shutdown of 150 MW of capacity which occurred in late 2002 and a further 130 MW
of generating capacity was phased out on December 31, 2004. The mine's annual
production capacity is 2.8 million tonnes and 2004 sales were 1.6 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 subject to a 90-day termination notice provision.
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.
Effective February 28, 2003, SCAI acquired from Fording certain royalty
interests on coal produced from the Whitewood mine, in respect of which
TransAlta pays royalties, which were subsequently acquired by Luscar in October,
2003.

      THIRD PARTY ROYALTY ARRANGEMENTS

      Some of the assets acquired from Fording included extensive coal and
mineral holdings in Alberta and Saskatchewan. Luscar and other third parties are
mining some of these coal and mineral holdings under royalty agreements that
have been assigned to us in addition to royalty agreements that Luscar had
entered into with certain coal customers prior to the Fording transaction.
Royalty rates are negotiated on a property by property basis and are based on
coal/mineral volumes mined. In some cases, mining plans and production volumes
are controlled by third parties and are beyond our control. Royalty agreements
with third parties provide that all reclamation and environmental liabilities
with respect to these properties are the responsibility of the party undertaking
the mining activity.

      We own significant freehold reserves and non-reserve potash assets in
Saskatchewan which are reported below. These reserves and non-reserve assets are
leased to potash mining companies that have the unilateral right to mine the
leased reserves and non-reserve assets. We earn royalty payments for this
production based on the market price of potash, the quality of the potash that
is produced during a given period and the proportion of our mineral rights owned
within the overall mining area.

      In 2004, revenue from third party royalties was $30.4 million, including
royalties from 3.2 million tonnes of potash, valued at $5.0 million, and 8.9
million tonnes of thermal coal, valued at $25.4 million.

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                     - 38 -
<PAGE>

We now conduct all of the coal mining operations on these properties but none of
the mining of potash or other minerals.

                             DEVELOPMENT PROPERTIES

      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 some of
these properties.

      BOW CITY MINE AND POWER PROJECT

      The Bow City project (formerly called the Brooks project) is located 145
kilometers southeast of Calgary, Alberta. This project contains 92.2 million
tonnes of proven and 73.6 million tonnes of probable subbituminous thermal coal
reserves. In January 2005, Luscar released the required Public Disclosure
Document and the Environmental Impact Assessment Report Proposed Terms of
Reference to the regulatory agencies and the affected stakeholders. The project
contemplates the construction of two 500 MW generating units within the station
and the associated dragline mine development. The total capital cost of the
project is estimated at $2.4 billion.

      UNDEVELOPED COAL PROPERTIES

      We also have significant coal resources that may be developed into
reserves in the future. We acquired non-reserve assets in the Heatburg, Judy
Creek South and Camrose-Ryley coal fields in 2003, 2001 and 2000 respectively.
Additional Camrose-Ryley resources were acquired as part of the Fording
transaction in 2003. The Camrose-Ryley property is located 83 km southeast of
Edmonton, Alberta, adjacent to the Beaverhill project. With the addition of coal
leases previously held by Fording, plus the transfer of reserves from the
Beaverhill project, Camrose-Ryley now has 335.4 million tonnes of measure
resources, 49.8 million tonnes of indicated resources, and 57.8 million tonnes
of inferred resources that are situated just south of the main Canadian National
Railway line. The Judy Creek South property includes 126.4 million tonnes of
indicated resources and 70.7 million tonnes of inferred resources adjacent to an
existing transmission line that serves the oil sands projects near Fort
McMurray, Alberta. The Heatburg project is centrally located in the province of
Alberta, 35 km east of Red Deer, near Joffre. The property contains over 421
million tonnes of low ratio coal, of which 185.5 million tonnes are proven
reserves. The coal reserves and resources in Canada are mostly held in fee
simple. Certain of these properties also include rights to other minerals.

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                     - 39 -
<PAGE>

                                  COAL RESERVES

      Our coal reserves are classified based upon the Geological 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 (the "GSC
Standards").

      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 Senior Vice President, Howard Ratti,
P.Eng. 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").

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                     - 40 -
<PAGE>

      The following table summarizes our coal reserves associated with operating
mines and on development properties as of December 31, 2004:

<TABLE>
<CAPTION>
                                                        SULFUR          CALORIFIC
                           PROVEN (1)  PROBABLE (2)  CONTENT % (3)  VALUE (KJ/KG) (4)
                           ---------   -----------   ------------   ------------------
                                              (millions of tonnes)
<S>                        <C>         <C>           <C>            <C>
BITUMINOUS THERMAL
Coal Valley mine                 15.5           7.2           0.25             30,500
Obed Mountain mine                4.7             -           0.50             30,000
Telkwa                           30.6           3.1           0.97             33,000
SUBBITUMINOUS
Paintearth mine                  55.1             -           0.42             20,700
Sheerness mine                   64.1           7.1           0.50             20,000
Genesee mine (5)                 55.0          68.7           0.23             22,500
Sundance                         20.0             -           0.23             22,500
Heatburg                        185.5         235.8           0.39             21,500
Bow City                         92.2          73.6           0.61             23,300
Whitewood mine                   16.5             -           0.23             22,500
LIGNITE
Poplar River mine               140.0           8.1           0.60             14,300
Boundary Dam mine                83.6             -           0.55             16,600
Bienfait mine                    69.5             -           0.40             17,900
                           ----------  ------------

Total reserves                  832.3         403.6
                           ==========  ============
</TABLE>

Notes:

(1)   "Proven" means those reserves for which tonnage is computed from
      dimensions revealed in outcrops, trenches, underground workings or drill
      holes and for which the sites for inspection, sampling and measurement are
      so spaced with respect to the complexity of the seam geometry within the
      deposit that the size and shape of the deposit is established to within a
      level of confidence of 90%.

(2)   "Probable" means those reserves for which tonnage is computed partly from
      specific measurements, and partly from projections for a reasonable
      distance on geological evidence, and for which the sites available for
      inspection, measurement and sampling are too widely or otherwise
      inappropriately spaced to be classified as "proven". The confidence level
      for reported probable tonnage is between 80% and 90%.

(3)   Estimated sulfur by weight, contract specification for bituminous coals
      and 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)   Reflects Luscar's 50% share.

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                     - 41 -
<PAGE>

      RECONCILIATION OF COAL RESERVES

      Our proven and probable coal reserves decreased from 1,270.4 million
tonnes as at December 31, 2003 to 1,235.9 million tonnes as at December 31,
2004. Factors affecting the change in reserve volumes include 2004 production
volumes, reclassification of reserves to resources and increases 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 AS AT                                       RESERVES AS AT
                              DECEMBER 31,     PRODUCTION                          DECEMBER 31,
                                  2003           IN 2004          ADJUSTMENTS          2004
                             ---------------   ------------      --------------   ---------------
                                                   (millions of tonnes)
<S>                          <C>               <C>               <C>              <C>
PROVEN
Coal Valley mine (1)                     5.4           (1.7)               11.8              15.5
Obed Mountain mine                       4.7              -                   -               4.7
Telkwa mine project                     30.6              -                   -              30.6
Paintearth mine (2)                     80.1           (2.9)              (22.1)             55.1
Sheerness mine                          67.7           (3.8)                0.2              64.1
Genesee (3)                             62.4           (2.1)               (5.3)             55.0
Whitewood (4)                              -              -                16.5              16.5
Bow City                                92.2              -                   -              92.2
Heatburg (7)                           185.5              -                   -             185.5
Sundance                                22.5           (2.5)                  -              20.0
Poplar River mine                      143.5           (3.5)                  -             140.0
Boundary Dam mine (5)                   93.3           (6.2)               (3.5)             83.6
Bienfait mine (6)                       73.4           (1.6)               (2.3)             69.5
PROBABLE
Coal Valley mine (1)                     9.8              -                (2.6)              7.2
Telkwa mine project                      3.1              -                   -               3.1
Sheerness mine                           7.3              -                (0.2)              7.1
Genesee (3)                             70.4              -                (1.7)             68.7
Bow City                                73.6              -                   -              73.6
Heatburg (7)                           235.8              -                   -             235.8
Poplar River mine                        9.1              -                (1.0)              8.1
                             ---------------   ------------      --------------   ---------------
TOTAL                                1,270.4          (24.3)(8)           (10.2)          1,235.9
                             ===============   ============      ==============   ===============
</TABLE>

Notes:

(1)   Coal Valley was re-evaluated by a third party consultant. A geological
      model was built using all available drill information. New pit designs,
      recoveries and economics were incorporated in the updated reserve
      calculations.

(2)   A re-evaluation of the Paintearth mine, including the acquired Fording
      coal leases, was completed in 2004. This resulted in the downsizing of the
      overall combined reserve by 21.9 million tonnes.

(3)   Reflects Luscar's share of the total reserve. The 2003 reserves were
      adjusted to account for a minimum coal thickness cutoff in the geological
      model.

(4)   Section 19, Township 53, Range 4, West of the 4 Meridian, has now been
      included within the Whitewood mine license area. The coal rights belong
      exclusively to Luscar.

(5)   The coal leases for the E1/2 of Section 1, Twp2, Rge 7, W of 2 lie outside
      the permit boundary. The 5.4 million tonnes of reserve included in these
      leases was discounted.

(6)   Bienfait mine includes 27.6 million tonnes from the Bienfait area, and
      41.9 million tonnes from the adjacent Pinto property.

(7)   210.6 million tonnes moved to resource -- based upon outdated feasibility
      study done by Fording. Current numbers reflect the volumes calculated in a
      new geological/economic model created by a third party consultant in 2004.

(8)   Total production is not equal to Luscar coal production in 2004 of 38.2
      million tonnes because some of Luscar's production comes from reserves
      that do not belong to Luscar.

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                     - 42 -
<PAGE>

      POTASH RESERVES

      The reserve estimates set out below have been prepared by A. Dave
Mackintosh, P. Geo. (of ADM Consulting) a member of the Saskatchewan Association
of Professional Engineers and Geoscientists. A technical report prepared in
accordance with the requirements of the National Instrument will be filed on
SEDAR by Sherritt.

      The following table sets forth our proven and probable reserves of potash
as at December 31, 2004.

                    POTASH RESERVES AS AT DECEMBER 31, 2004
                            (millions of tonnes) (1)

<TABLE>
<CAPTION>
                                                    TOTAL RESERVES (4)
                                                      PROVEN/PROBABLE      GRADE (3)
                                                    ------------------     ---------
<S>                                                 <C>                    <C>
MINERALS
Potash (2)                                                         243         21-25%
</TABLE>

Notes:

(1)   Reserves are reported exclusive of interests of third parties.

(2)   Reserves are tonnage remaining after reductions for geologic features and
      excavation and mining losses. Potash reserves are in active mine permit
      areas operated by third parties.

(3)   All grades are reported as a percentage (by weight) of material as a
      percentage of K2O (potassium oxide) equivalent.

(4)   Numbers have been rounded.

      REAL PROPERTY

      The following table lists significant mineral rights held by Luscar as at
December 31, 2004, other than coal and potash described above.

<TABLE>
<CAPTION>
                                                              FEE       CROWN LEASE    FREEHOLD
                                                             SIMPLE     AND LICENSE     LEASES     TOTAL
                                                           ---------    -----------   ----------  -------
<S>                                                        <C>          <C>           <C>         <C>
MINERAL HOLDINGS (thousands of hectares)
Coal
     Alberta                                                   693.7           60.4          3.2    757.3
     Saskatchewan                                                3.5              -            -      3.5
Potash
     Saskatchewan                                                1.2              -            -      1.2
All Mines and Minerals
     Saskatchewan                                               55.0              -            -     55.0
All Mines and Minerals except Petroleum & Natural Gas
     Alberta                                                    13.9              -            -     13.9
     Saskatchewan                                                4.8              -            -      4.8
     Manitoba                                                    0.2              -            -      0.2
                                                           ---------    -----------  -----------  -------
TOTAL (1)                                                      772.3           60.4          3.2    835.9
                                                           =========    ===========  ===========  =======
</TABLE>

Notes:

(1)   Numbers have been rounded.

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                     - 43 -
<PAGE>

EXPLORATION AND DEVELOPMENT

      Luscar spent $1.5 million on exploration of active mine sites and near
term development projects in 2004. No money was spent in 2004 on undeveloped
coal resources. Development expenditures in 2004 included $0.7 million at the
Coal Valley mine, $0.3 million at the Poplar River mine, $0.4 million at the
Boundary Dam mine, and $0.1 million at other sites.

LAND TENURE

      Coal reserves and leases in Canada are generally under the jurisdiction of
provincial governments. We gain access to the 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 and provide us the exclusive right to mine them. 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. There is a renewal fee of $625 per lease every fifteen years. New
Crown coal leases on lands in Category 4 of "A Coal Development Policy for
Alberta, 1976" are 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. When a crown coal lease is renewed for a further fifteen
year term, it is accompanied by a recording fee of $100. When a road allowance
lease is renewed every fifteen years, it is accompanied by a recording fee of
$30. 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

                                                      Luscar Energy Partnership
                                                             2004 Annual Report

                                     - 44 -
<PAGE>

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 2004, 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 average annual rental is currently $20.00 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 Luscar's freehold mineral interests held in
British Columbia.

      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 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 acquired in October 2003, from SCAI, the Bow City Mine project for
which Fording had commenced permitting activities. In January 2005, we released
the required Public Disclosure Document

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<PAGE>

and the Environmental Impact Assessment Report Proposed Terms of Reference to
the regulatory agencies and the affected stakeholders. The project contemplates
the construction of two 500 MW generating units within the station and the
associated dragline mine development. We are not aware of any matters that would
hinder our ability to secure the permits for the Bow City mine project.

                         ENVIRONMENT, HEALTH AND SAFETY

      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. In March 2003, the CICA issued new
accounting rules dealing with these types of liabilities and called them asset
retirement obligations. The new accounting pronouncements came into effect for
Luscar in the fiscal year beginning on January 1, 2004. The provisions for asset
retirement obligations for the year ended December 31, 2004 are set out in note
12 to the consolidated financial statements, which information is incorporated
herein by reference.

      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;

      -     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 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 regulatory requirements 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 environment,
health and safety 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 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 encompass the provinces of Alberta and Saskatchewan. In
general, both provinces have similar environmental legislation. Both provinces
have requirements for environmental impact assessments of new projects or major
expansions. These assessments typically involve extensive

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<PAGE>

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 Utilities 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 passed the Climate Change and
Emissions Management Act ("Bill 37"). When enacted, Bill 37 will provide the
legislative framework to establish a system 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 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. The Government of Alberta is contemplating a move to a "risk
based" security model where the operators' assets to liability ratio will be
used to determine the need for and amount of security.

      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 is in the process of implementing
a reclamation bonding system for coal mining. We have submitted a proposal to
the Saskatchewan government with respect to the performance of future
reclamation activities at our mines. The Saskatchewan government will determine
if any letters of credit are required upon completion of the reclamation
program.

      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

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<PAGE>

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 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.

      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. The Government of Canada ratified the Kyoto Protocol in
December of 2002 and brought the Kyoto Protocol into force in April of 2005. The
implications of this implementation are not fully understood by the Government
of Canada or industry at this time and joint discussions continue.

      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.

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<PAGE>

      ENVIRONMENTAL MANAGEMENT AND COMPLIANCE

      We are committed to meeting our 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 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.

      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

      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 have established a health
and safety management program directed at the health and safety of our
employees. This program consists of a policy, established best practices,
regular audits, the integration of health and safety procedures with operating
procedures, employee training and incident tracking and investigation. 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 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.

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<PAGE>

      CANADIAN 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.

                                 TAX REGULATION

      For the purpose of income tax treatment at the federal and provincial
levels, LCL's 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 enacted by the federal budget will be phased in over
several years as follows:

<TABLE>
<CAPTION>
                                                             2003       2004       2005       2006       2007
                                                           -------    -------    -------    -------    -------
<S>                                                        <C>        <C>        <C>        <C>        <C>
Corporate income tax rate                                       27%        26%        25%        23%        21%
Corporate surtax                                              1.12%      1.12%      1.12%      1.12%      1.12%
Deductible percentage of existing 25% resource allowance        90%        75%        65%        35%         0%
Deductible percentage of royalties and mining taxes             10%        25%        35%        65%       100%

Capital tax rate                                             0.225%     0.200%     0.175%     0.125%    0.0625%
Capital deduction threshold ($ millions)                   $    10    $    50    $    50    $    50    $    50
</TABLE>

      For Alberta corporate income tax purposes the 25% resource allowance will
remain in place until December 31, 2006 and crown royalties remain
non-deductible.

      The corporate structure of our owners and our subsidiaries is such that
Luscar Ltd., LCL's 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 which 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.

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<PAGE>

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.

                                    OVERVIEW

      We are the largest coal producer in Canada, operating mines that produce
most of Canada's domestic thermal coal. We currently 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, our mines produced more than 38 million tonnes of coal during 2004,
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, EPCOR, SaskPower and TransAlta, the major
electricity generators in the provinces of 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 current production from our owned
mines. During 2003, we acquired the Prairie Assets, which included additional
proven and probable coal reserves in Alberta. We maintain that the acquisition
of the Prairie Assets has enhanced 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.

      We refer to our Boundary Dam, Paintearth, Poplar River, Sheerness and
Genesee mines 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. 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 acquisition of the Prairie Assets,
we have reacquired this contract as well as the mining contract at the Whitewood
mine. This contract with TransAlta will expire on December 31, 2007.

      Prior to the Fording transaction, our export revenue was derived from
metallurgical and thermal coal sold to customers outside of Canada. Our
continuing operations now include the two foothill mines, Coal Valley and Obed
Mountain, which generate export thermal coal sales. We have long-term
relationships with most of our export customers and our export sales are under
contracts of one to five

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<PAGE>

years in duration, with prices being negotiated annually. Coal-fired electricity
generation, primarily in the Pacific Rim, is the principal factor influencing
demand for our thermal coal exports and the demand depends on global economic
conditions. Resurgence of the Asian economies in 2000, combined with rising
energy prices, led to an increase in demand and higher prices for export coals
in 2001. However, in 2002 there was oversupply in the export thermal coal
market, which resulted in intense competition amongst world suppliers and
significant price decline. As a result, we decided in March, 2003 to suspend
production indefinitely at the Obed Mountain mine. As well, late in 2002, we
reduced production levels at Coal Valley to 1.2 million tonnes annually. In
light of current market conditions, on January 5, 2005, Luscar announced the
expansion of production from the Coal Valley mine to 4.0 million tonnes by 2006.
The mine is scheduled to be at full capacity by the second quarter of 2006, and
its production is slated for export markets.

      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 foothill 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 foothill mines, Coal Valley and Obed
Mountain. 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 with
Fording, we no longer operate any metallurgical mines, but are still responsible
for the reclamation of the Gregg River mine.

      We incur significant rail transportation and wharfage costs to deliver
coal to our export customers. These costs will be significantly less 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 on-going 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. No such reductions have been required in the past couple of years.

      CORPORATE STRUCTURE

      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, LCL and LL. As of May 11, 2001,
LEP began accounting for both LCIF and LCL as wholly owned subsidiaries. As a
result of the acquisition, LCL became a wholly owned subsidiary of LCIF. The
sole purpose of LCIF is to invest in LCL. 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.

      LEP and LCIF have no independent operations or assets and LL, LCL's direct
subsidiary, is the only entity in our corporate structure that has operations.
Generally accepted accounting principles do not

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<PAGE>

permit LEP to consolidate its financial statements with the financial statements
of LCIF and LCL prior to May 11, 2001. Included in the prior year annual report
were financial statements of LEP and LCL. Previously, LEP's SEC reporting had
included LCL's financial statements based on a commitment to include LCL
financial statements until LEP's consolidated statements included three years of
results of LCL's operations. The results of LEP, as presented in this document,
include the results of LCL for the three full years of 2002, 2003 and 2004. We
prepare audited financial statements for LEP, which contain condensed
consolidating information for LCIF, LCL and LL.

      As a result of the transfer of LCL's metallurgical coal assets to Fording
and the acquisition of the Prairie Assets, substantially all of our continuing
operations consist of thermal coal sales to domestic customers, principally to
mine-mouth power generators in western Canada. Accordingly, we no longer provide
separate information on our domestic and export operations. Instead, we are
providing separate information where necessary 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.

                             KEY PERFORMANCE DRIVERS

      In order to measure performance compared to world leading mining
practices, we have implemented the following key performance indicators:

<TABLE>
<CAPTION>
DRIVER                                                 MEASURE                        2004 OBJECTIVE
------                           --------------------------------------------------   --------------
<S>                              <C>                                                  <C>
SAFETY                           Total recordable incidents                           Less than 1.0
                                 Lost time incidents                                        0.0

EQUIPMENT EFFICIENCY             BCMs per BCM of bucket capacity                      295 K BCM/BCM

EQUIPMENT MAINTENANCE            % World class maintenance                                   90%
                                 %  Manhours on planned jobs                                 85%
                                 %  Compliance to preventative maintenance schedule          95%

RECLAMATION                      Year end leveling backlog (HA)                           2,452
                                 Year end coversoil backlog (HA)                          3,515

CASH FROM OPERATING ACTIVITIES   Cash from operating activities                          $112.8
($ MILLIONS)
</TABLE>

      SAFETY

      An important part of our efficiency and effectiveness initiatives launched
in the spring of 2003 is the ongoing improvement in safety performance. We have
achieved significant improvements in our safety record over the last year. By
way of example, during 2004, we went 1.5 million man-hours (176 days) without a
safety incident. We have shown that an excellent safety record can be maintained
over the long term. Our Paintearth mine is the current holder of the prestigious
John T. Ryan Safety Trophy awarded by the Canadian Institute of Mining,
Metallurgy and Petroleum for outstanding performance in safety. The Genesee and
Sheerness mines are previous holders of the award. The Genesee and Paintearth
mines have operated since inception, 16 and 10 years respectively, without a
lost time safety incident. The Total Recordable Injury ("TRI") index in 2004 was
0.38, down from the same period in 2003 when the TRI was 1.00. Year to date Lost
Time Incidents ("LTI") in 2004 was 0.32, down from the same period in 2003 when
the LTI was 0.44.

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<PAGE>

      EQUIPMENT EFFICIENCY

      We operate 22 draglines and are the second largest dragline operator
worldwide. Dragline operation is critical to overall productivity and continued
to be a key focus in 2004. In 2004, dragline productivity reached 295 thousand
BCMs per BCM of bucket capacity, a 22% improvement since the introduction of
efficiency measures in May 2003.

      During 2004, we installed productivity monitoring equipment systems on 10
draglines.

      EQUIPMENT MAINTENANCE

      The maintenance initiative focuses on reducing the level of costly
unscheduled maintenance and reviewing the application of Reliability Centered
Maintenance ("RCM") to critical dragline components. The 2004 target was to
increase the level of manpower devoted to planned jobs to 85% and increase the
level of compliance with planned maintenance schedules to 95%. The application
of RCM to increase productivity and reduce operating costs continues to be
pursued with RCM analysis on 80% of critical components of major production
equipment to be completed by the end of 2005 with implementation of the results
to be completed in 2006.

      The mining support equipment partnership arrangement with Finning and
Kramer was finalized in the second quarter of 2004. The 5-year plan contemplates
significant recapitalization of the support equipment fleet commencing in 2004
with 30 new units scheduled to be operational in 2004. Under the partnership
arrangement, lower pricing, lower component rebuild and parts costs, lower
service costs and lower operating costs will be achieved.

      Performance of the support equipment fleets will be further enhanced by
the use of condition based monitoring and productivity systems, which will be an
integral part of the new equipment fleet. A task force is currently examining
the infrastructure required to establish communication data links between the
equipment, other parts of the mine site, corporate office and the JD Edwards
system. Once this information is more widely available it will allow equipment
fleets to be managed more efficiently.

      RECLAMATION

      During 2004, we retired 968 hectares of leveling and 587 hectares of
topsoiling, including amounts associated with the Luscar mine. An agreement was
reached between Luscar, Consol Energy Inc. and the Elk Valley Coal Corporation
which transferred responsibility for all remaining reclamation at the Luscar
mine to Elk Valley Coal. Completion of this agreement positively impacted the
amount of lands reclaimed. The reclamation backlog targets for 2004 were
exceeded. The leveling backlog was reduced to 2,373 hectares, ahead of the
target of 2,452 hectares. The coversoil backlog was reduced to 3,367 hectares,
ahead of the target of 3,515 hectares.

      CASH FROM OPERATING ACTIVITIES

      We exceeded the 2004 target of $112.8 million by $8.3 million for the year
ended December 31, 2004.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 54 -
<PAGE>

                              RESULTS OF OPERATIONS

      SELECTED ANNUAL INFORMATION

      The following table presents a summary of LEP's consolidated operating
results for each of the most recent three years ended December 31, 2002 to
December 31, 2004. In March 2003, the CICA issued new accounting rules dealing
with asset retirement obligations, which came into effect for Luscar in the
fiscal year beginning on January 1, 2004. This change in accounting policy was
applied retroactively and accordingly, the financial statements of prior periods
were restated. For information on the cumulative impact of the new accounting
standard as it pertains to LEP, see note 3 of LEP's consolidated financial
statements included later in this document.

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                           ----------------------------------
                                              2004        2003        2002
                                           ----------  ----------  ----------
                                                (in thousands of dollars)
<S>                                        <C>         <C>         <C>
Revenue from continuing operations         $  500,803  $  376,060  $  443,067
Net earnings from continuing operations        62,545      94,890      25,971
Net earnings                                   68,008     114,020      29,015

Total assets                                1,494,714   1,571,927   1,567,540
Long-term debt                             $  362,895  $  412,276  $  509,617

DISC OPS AMOUNT:                                5,463      19,130       3,044
CHECK:                                          5,463      19,130       3,044
</TABLE>

YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003 (MILLIONS
OF DOLLARS)

<TABLE>
<CAPTION>
                   2004        2003
                 --------    --------
<S>              <C>         <C>
Revenue          $  500.8    $  376.1
Cost of Sales    $  350.4    $  268.9
</TABLE>

      Revenue. LEP's revenue from continuing operations in 2004 increased to
$500.8 million from $376.1 million in 2003, or 33%. This increase was due
primarily to the inclusion of a full year of results from the Prairie Assets in
2004 compared to 2003 when their results were only included in LEP results
subsequent to October 17, 2003. Additionally, revenues at the Coal Valley mine
increased significantly in 2004 as production was increased in response to the
strong export market for coal. The increase at Coal Valley was mostly offset by
the decrease in revenues at Obed Mountain mine where operations were suspended
in 2003. Revenues at the mine mouth operations remained quite consistent
compared with the results of 2003.

      Cost of sales. LEP's cost of sales increased during 2004 to $350.4 million
from $268.9 million in 2003, or 30%. The increase in costs is mostly attributed
to the inclusion of cost of sales from the operations of the Prairie Assets for
the full year in 2004 compared to the smaller period of October 17, 2003 through
December 31, 2003 for the prior year. This was combined with an increase in
production at Coal Valley in 2004 that caused an increase to cost of sales and
then was offset by the decrease in cost of sales at Obed where operations were
suspended. Inventory levels in 2004 were not significantly different than 2003
levels as coal inventory at the mine sites and ports decreased from the previous
year by $2.5 million.

      Production of thermal coal during 2004 was 38.2 million tonnes compared
with 23.2 million tonnes in 2003. This increase was due almost entirely to the
production at the Prairie Asset mine sites acquired from SCAI and the increases
and decreases in production at Coal Valley and Obed as mentioned above.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 55 -
<PAGE>

AVERAGE PRICES AND COSTS PER TONNE

<TABLE>
<CAPTION>
                                           YEAR ENDED
                                          DECEMBER 31,
                                        2004        2003
                                      --------    --------
<S>                                   <C>         <C>
(in Canadian dollars per tonne)

Realized price                        $  13.00    $  15.83
Cost of sales                             9.09       11.32
                                      --------    --------
                                      $   3.91    $   4.51
</TABLE>

      For the year ended December 31, 2004, the average realized price for coal
sales was lower than the prior year due to the inclusion for a full year of
lower priced contract mining revenue from the Highvale and Whitewood mines. This
was partially offset by higher export thermal shipments and the inclusion of
royalty revenue from the Prairie Assets for a full year in 2004.

      Average cost of sales per tonne for the year ended December 31, 2004 was
lower than the prior year because of the inclusion of lower-cost contract mining
in the sales from the Highvale and Whitewood mines, which was partially offset
by higher shipments and higher unit production costs at the export thermal coal
operations.

<TABLE>
<CAPTION>
                                        2004     2003
                                        ----     ----
<S>                                     <C>      <C>
Selling, general and administrative     18.1     24.3
</TABLE>

      Selling, general and administrative expenses. LEP's selling, general and
administrative expenses in 2004 decreased to $18.1 million from $24.3 million in
2003, or 25%. In April 2003, following the transfer of our metallurgical coal
assets, we took a number of significant actions to enhance the profitability our
thermal coal business. We announced a series of organizational changes which
resulted in the reduction of 110 full time and contract employees at our
Edmonton office and some of our mine sites. The cost of these reductions was
recorded in the second quarter of 2003. No such expenses were required in 2004.

<TABLE>
<CAPTION>
                                  2004      2003
                                  -----     ----
<S>                               <C>       <C>
Depreciation and amortization     113.1     96.4
</TABLE>

      Depreciation and amortization. LEP's depreciation and amortization expense
in 2004 increased to $113.1 million from $96.4 million in 2003, or 17%.
Depreciation expense increased because of the impact of the acquisition of the
Prairie Assets by LEP in October 2003. Additionally, as a result of the
implementation of the asset retirement obligations accounting rules in 2004, an
increase in depreciation and amortization occurred. Amortization of asset
retirement obligation assets in 2004 was $11.3 million higher in 2004 than in
the retroactively restated figures of 2003. Concurrent with the implementation
of the asset retirement obligations accounting rules, LEP undertook a
comprehensive review of the estimated useful lives of capital assets and as a
result depreciation in the 2004 calendar year decreased by $10.6 million.

<TABLE>
<CAPTION>
                                          2004     2003
                                          ----     ----
<S>                                       <C>      <C>
Asset retirement obligation accretion      7.1      6.9
</TABLE>

      Asset retirement obligations accretion. As a result of the implementation
of the asset retirement obligations accounting rules in 2004, LEP now records
accretion expense on the asset retirement obligations on the income statement.
In 2004, LEP's accretion expense was $7.1 million and in the restated figures
for 2003 it was $6.9 million.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 56 -
<PAGE>

<TABLE>
<CAPTION>
                     2004     2003
                     ----     ----
<S>                  <C>      <C>
Interest expense     45.3     46.5
</TABLE>

      Interest expense. During 2004, interest expense at LEP was $45.3 million
compared with $46.5 million in 2003, a decrease of $1.2 million. Interest
expense at LEP comprises interest paid to the Senior Note holders and other
third parties. Interest on the Senior Notes decreased by $2.5 million to $34.8
million in 2004 from $37.3 million in 2003 due to gains in the Canadian dollar
that decreased the amount owed in US dollars. The interest on the promissory
notes decreased comparatively by $2.1 million in 2004 due to the repayment of
one of the notes in May 2003. These decreases were partially offset by an
increase in capital lease interest of $0.7 million and an increase in interest
and renewal fees paid on reclamation security of $1.7 million. Additionally in
2004, interest income on financial instruments and other investments was much
less than in 2003, which created an increase in net interest expense of $1.8
million.

<TABLE>
<CAPTION>
                                      2004     2003
                                      ----     ----
<S>                                   <C>      <C>
Foreign currency translation gain     23.6     79.4
</TABLE>

      Foreign currency translation gain. Foreign currency translation gains pand
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 $23.6 million in 2004 compared to a $79.4 million gain in
2003 is largely due to the impact on the Senior Notes of the changes in the
value of the Canadian dollar, which strengthened significantly in 2003 and to a
lesser extent in 2004.

<TABLE>
<CAPTION>
                 2004     2003
                 ----     ----
<S>              <C>      <C>
Other income     52.7     21.1
</TABLE>

      Other income. Other income at LEP in 2004 increased to $52.7 million from
$21.1 million in 2003. In December 2004, our second and final promissory note
worth $89.3 million was repaid. Under the terms of the coal supply agreement,
the $39.4 million excess of the principal amounts over the sinking fund balance
was recovered from our customer and included in other income in the fourth
quarter of 2004. During May 2003, a promissory note for $45.0 million was repaid
for a gain of $21.4 million that was included in other income in the second
quarter of 2003.

      Additionally, LEP recorded a gain on the settlement of asset retirement
obligations in 2004 that was greater than the gain in 2003 by $7.5 million and a
gain on the disposal of capital assets that was $3.6 million greater than 2003.
LEP also received a one-time insurance premium refund in the second quarter of
2004 for $2.7 million as a result of improved safety performance. These gains
were partially offset by $6.0 million in distributions from the FCCT that were
received in 2003 but not in 2004.

<TABLE>
<CAPTION>
                        2004     2003
                        ----     ----
<S>                     <C>      <C>
Income tax recovery     19.4     61.2
</TABLE>

      Income tax recovery. LEP's income tax recovery in 2004 decreased to $19.4
million from $61.2 million in 2003, or 68%. Our provision for income tax
includes current taxes and future income taxes. Tax expenses and recoveries at
LEP are primarily non-cash.

      An income tax recovery of $19.4 million on earnings from continuing
operations before tax of $43.1 million was recorded for the year ended December
31, 2004. We recorded an income tax recovery of $61.2 million on earnings from
continuing operations of $33.7 million last year as a result of a
substantially-enacted federal income tax rate change for resource companies and
a decrease in future income taxes that arose as a result of the acquisition of
the Prairie Assets as explained below.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 57 -
<PAGE>

      Following the acquisition of the Prairie Assets in 2003, which are
primarily situated in Alberta, our effective tax rate has decreased resulting in
a decrease in our future income taxes. Previously, our operations generated a
greater proportion of taxable income from Saskatchewan, a higher tax-rate
jurisdiction. Capital taxes are based on net capital employed in the business at
year-end, which has increased due to the acquisition of the Prairie Assets.

<TABLE>
<CAPTION>
                                          2004     2003
                                          ----     ----
<S>                                       <C>      <C>
Earnings from discontinued operations      5.5     19.1
</TABLE>

      Discontinued operations. The results of the discontinued operations (the
metallurgical coal assets transferred to Fording on February 28, 2003) comprise
earnings of $5.5 million in 2004 compared to earnings of $19.1 million in 2003.
The 2004 results from discontinued operations are due exclusively to gains
recorded in 2004 as a result of the June 2004 settlement agreement for the
settlement of issues such as working capital adjustments, obligations for
reclamation activities, severance liabilities and other payments made under the
agreement. The 2003 earnings reflect earnings of $1.3 million from the
metallurgical operations of the first two months of the 2003 calendar year and a
gain of $17.8 million, net of taxes of $6.3 million, on the disposal.

<TABLE>
<CAPTION>
                 2004     2003
                 ----     -----
<S>              <C>      <C>
Net earnings     68.0     114.0
</TABLE>

      Net earnings. LEP's net earnings of $68.0 million in 2004 are a
significant decrease when compared to the net earnings of $114.0 million in
2003. This represents a decrease of $46.0 million or 40%. The decrease in
earnings is due to the factors discussed above with the most significant being
the decrease in foreign currency gain of $55.8 million.

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 (MILLIONS
OF DOLLARS)

<TABLE>
<CAPTION>
              2003         2002
            --------     --------
<S>         <C>          <C>
Revenue     $  376.1     $  443.1
</TABLE>

      Revenue. LEP's revenue from continuing operations in 2003 decreased to
$376.1 million from $443.1 million in 2002, or 15%. This decrease was due to the
loss of revenue from the Highvale contract that was in existence through all of
2002 until it expired on December 31, 2002, and then only since October 17, 2003
when we acquired the Prairie Assets by acquiring the shares of SCAI resulting in
a net decrease in revenue of $47.0 million in 2003 compared to 2002.
Additionally, the decrease can be attributed to lower revenue of $46.8 million
from our Coal Valley and Obed Mountain mines, which were affected by oversupply
in export thermal coal markets. This was partially offset by additional revenue
from the new Prairie Assets and increased mine-mouth revenue. In addition,
mine-mouth revenue increased as a recovery of a $7.3 million Boundary Dam crown
royalty reassessment was recorded in the first quarter of 2003.

<TABLE>
<CAPTION>
                  2003      2002
                  -----     -----
<S>               <C>       <C>
Cost of sales     268.9     317.1
</TABLE>

      Cost of sales. LEP's cost of sales decreased during 2003 to $268.9 million
from $317.1 million in 2002, or 15%. The reduction in cost was attributed to
inclusion of cost of sales from the operation at Highvale for the period of
October 17, 2003 through December 31, 2003, compared to a full year of
operations in 2002 which resulted in a decrease in cost of sales of $44.4
million in 2003 compared to 2002. This was combined with fewer export thermal
coal shipments during 2003 which resulted in lower cost of sales of $32.0
million in 2003 compared to 2002. Partially offsetting the lower costs was the
reduction of the carrying value of export thermal inventories by $8.4 million
during the year to reflect lower estimated net realizable value as a result of
the weak export markets as well as the strength of the Canadian dollar.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 58 -
<PAGE>

2003 cost of sales were also impacted by the $7.3 million Crown royalty charge
at the Boundary Dam mine and severance costs of $5.0 million related to the
reduction of 110 employees associated with the decision to suspend operations at
the Obed Mountain mine along with additional costs from the new Prairie Assets
and increased mine-mouth costs.

      Production of thermal coal during 2003 was 23.2 million tonnes compared
with 33.8 million tonnes in 2002.

<TABLE>
<CAPTION>
                                        2003     2002
                                        ----     ----
<S>                                     <C>      <C>
Selling, general and administrative     24.3     13.1
</TABLE>

      Selling, general and administrative expenses. LEP's selling, general and
administrative expenses in 2003 increased to $24.3 million from $13.1 million in
2002, or 85%. In April 2003, following the transfer of our metallurgical coal
assets, we took a number of significant actions to enhance the profitability our
thermal coal business. We announced a series of organizational changes which
resulted in the reduction of 110 full time and contract employees at our
Edmonton office and some of our mine sites. The cost of these staff reductions
was $10.0 million and was recorded in the second quarter of 2003.

<TABLE>
<CAPTION>
                                  2003     2002
                                  ----     ----
<S>                               <C>      <C>
Depreciation and amortization     96.4     94.7
</TABLE>

      Depreciation and amortization. LEP's depreciation and amortization expense
in 2003 increased to $96.4 million from $94.7 million in 2002, or 2%.
Depreciation expense increased because of the impact of the acquisition of the
Prairie Assets and the transfer of the metallurgical assets in 2003.

<TABLE>
<CAPTION>
                                           2003     2002
                                           ----     ----
<S>                                        <C>      <C>
Asset retirement obligations accretion      6.9      6.3
</TABLE>

      Asset retirement obligations accretion. As a result of the implementation
of the asset retirement obligations accounting rules in 2004, LEP now records
accretion expense on the asset retirement obligations on the income statement.
In restated figures for 2003, LEP's accretion expense was $6.9 million and in
the restated figures for 2002 it was $6.3 million.

<TABLE>
<CAPTION>
                     2003     2002
                     ----     ----
<S>                  <C>      <C>
Interest expense     46.5     52.7
</TABLE>

      Interest expense. During 2003, interest expense at LEP was $46.5 million
compared with $52.7 million in 2002. Interest expense comprises interest paid to
the Senior Note holders and other third parties. Interest on the Senior Notes
decreased to $37.3 million in 2003 from $42.1 million in 2002 due to gains in
the Canadian dollar that decreased the amount owed in US dollars. Interest on
our promissory notes decreased comparatively by $2.3 million in 2003 due to the
repayment of one of the notes in May 2003. In 2002, interest expense was reduced
by a $1.8 million recovery related to income tax reassessments.

<TABLE>
<CAPTION>
                                      2003     2002
                                      ----     ----
<S>                                   <C>      <C>
Foreign currency translation gain     79.4      4.0
</TABLE>

      Foreign currency translation gain. 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 $79.4 million in 2003 compared to a $4.0 million gain in
2002 is largely due to the impact on the Senior Notes of a significantly
stronger Canadian dollar.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 59 -
<PAGE>

<TABLE>
<CAPTION>
                 2003     2002
                 ----     ----
<S>              <C>      <C>
Other income     21.1     10.0
</TABLE>

      Other income. Other income at LEP in 2003 increased to $21.1 million from
$10.0 million in 2002. During May 2003, a promissory note for $45.0 million was
repaid. Under the terms of a coal supply agreement, the $21.4 million excess of
the principal amounts over the sinking fund balance was recovered from our
customer and included in other income in the second quarter of 2003. $6.0
million in distributions from the FCCT were also received in 2003. This is
partially offset by the gain of $10.1 million on a legal settlement related to a
coal conveyor that was booked in 2002.

<TABLE>
<CAPTION>
                        2003     2002
                        ----     ----
<S>                     <C>      <C>
Income tax recovery     61.2     52.9
</TABLE>

      Income tax recovery. LEP's income tax recovery in 2003 increased to $61.2
million from $52.9 million in 2002, or 16%. Our provision for income tax
includes current taxes and future income taxes.

      Of the $61.2 million recovered in 2003, $58.1 million of future taxes
recoverable is attributable to the enactment of Canadian taxation legislation
that affects resource sector taxation. Resource company income tax rates are
being reduced from 28% to 21% over a period of 5 years. In addition, a federal
income tax provision disallowing the deduction of provincial crown royalties
will be eliminated and actual provincial crown royalties will become deductible
for federal income tax purposes. The net impact of the changes is expected to be
a reduction in federal income tax rates.

      Following the acquisition of the Prairie Assets, which are primarily
situated in Alberta, our effective tax rate has decreased resulting in a
decrease in our future income taxes. Previously, our operations generated a
greater proportion of taxable income from Saskatchewan, a higher tax-rate
jurisdiction. Capital taxes are based on net capital employed in the business at
year-end, which has increased due to the acquisition of the Prairie Assets. For
the year, capital taxes were $3.4 million compared to 2002 of $2.4 million.

<TABLE>
<CAPTION>
                                          2003     2002
                                          ----     ----
<S>                                       <C>      <C>
Earnings from discontinued operations     19.1     3.0
</TABLE>

      Discontinued operations. The results of the discontinued operations (the
metallurgical coal assets transferred to Fording on February 28, 2003) comprise
earnings of $19.1 million in 2003 compared to earnings of $3.0 million in 2002.
The 2003 earnings reflect earnings of $1.3 million from the operations of the
first two months of the 2003 calendar year and a gain of $17.8 million, net of
taxes of $6.3 million and selling expenses of $0.7 million, on the disposal.

<TABLE>
<CAPTION>
                 2003      2002
                 -----     ----
<S>              <C>       <C>
Net earnings     114.0     29.0
</TABLE>

      Net earnings. LEP's net earnings of $114.0 million in 2003 are a
significant increase when compared to the net earnings of $29.0 million in 2002.
There was a significant increase in earnings due to the factors discussed above
with the most significant being the increase in foreign currency gain of $75.4
million.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 60 -
<PAGE>

      SUMMARY OF QUARTERLY RESULTS

      The following table presents a summary of LEP's consolidated operating
results for each of the most recent eight quarters up to and including the
quarter ended December 31, 2004. In March 2003, the CICA issued new accounting
rules dealing with asset retirement obligations, which came into effect for
Luscar in the fiscal year beginning on January 1, 2004. This change in
accounting policy was applied retroactively and accordingly, the financial
statements of prior periods were restated. For information on the cumulative
impact of the new accounting standard as it pertains to LEP, see note 3 of LEP's
consolidated financial statements included later in this document.

<TABLE>
<CAPTION>
                           DEC.         SEPT.        JUNE         MARCH        DEC.        SEPT.        JUNE       MARCH
                           2004         2004         2004         2004         2003        2003         2003       2003
                        ----------   ----------   ----------   ----------   ----------   ---------   ---------   ---------
                                                         (in thousands of Canadian dollars)
<S>                     <C>          <C>          <C>          <C>          <C>          <C>         <C>         <C>
Revenue from
continuing operations   $  130,854   $  120,484   $  122,979   $  126,486   $  113,937   $  87,150   $  84,785   $  90,188
Earnings (loss) from
continuing operations   $   41,415   $   16,251   $   (5,646)  $   10,525   $    6,788   $  (3,444)  $  87,781   $   3,765
Net earnings (loss)     $   44,909   $   16,167   $   (3,593)  $   10,525   $    6,788   $  (3,444)  $  87,781   $  22,895

</TABLE>

      The analysis of financial results for the most recent eight quarters is
generally consistent with the consolidated financial results and summary of
annual information presented above.

      In general, the quarterly results fluctuate from the annual results due to
the impact of fluctuating export thermal coal prices, sales volumes and foreign
exchange gains and losses. In December 2004, a promissory note was retired
resulting in a gain recorded in other income of $39.4 million. In addition, a
promissory note was retired in the June 2003 quarter resulting in other income
of $21.4 million. A gain on the sale of the metallurgical assets, net of tax, of
$17.8 million was recorded in the March 2003 quarter as earnings from
discontinued operations. Further details in respect of historical quarterly
results can be found in LEP's quarterly reports, the Form 6-K, filed on EDGAR.

      LIQUIDITY AND CAPITAL RESOURCES

      Net cash provided from operating activities for LEP was $121.1 million in
2004 compared to $91.0 million in 2003, an increase of $30.1 million or 33%.
During 2004, net earnings were significantly less than in 2003; however this
difference was mostly eliminated after factoring in the non-cash gains on
foreign currency. In 2004, non-cash future income tax recoveries decreased by
$34.7 million, creating an increase in cash from operating activities in 2004.
As well in 2004, depreciation and amortization expense was $15.8 million higher
than in 2003, creating an increase in cash from operating activities in 2004.
Additionally in 2004, the gain on disposal of capital assets did not include the
$17.8 million non-cash gain on the disposal of the metallurgical assets that was
included in net earnings in 2003. However in 2004, LEP recorded a $6.0 million
non-cash gain on the Fording settlement and the gain on asset retirement
obligations increased by $7.5 million over the prior year. The change in
non-cash working capital balance decreased from $46.3 million in 2003 to $16.3
million in 2004. In 2004, this balance reflects a decrease of $9.9 million in
accounts receivable and an increase in trade accounts payable and accrued
charges of $6.0 million. In 2003, this figure reflected a large decrease in
inventories and overburden removal costs due to the transfer of the
metallurgical assets.

      LEP's 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 have
been smaller as our business is now comprised of predominantly mine-mouth
operations. We also expect our accounts payable balances to fluctuate depending
on the timing of payrolls and of equipment purchases.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 61 -
<PAGE>

      LEP incurs 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. LEP's capital
expenditures were $16.3 million in 2004, compared to $25.0 million in 2003. In
2004, spending was primarily to maintain and upgrade mine operations, and was
lower than last year when capital expenditures also included costs to expand the
Char facility. The expansion of the Char facility was completed during the first
quarter of 2004.

      As part of a plan to reduce maintenance costs and increase equipment
utilization, we signed a long-term mine support equipment agreement with Finning
and Kramer, which involves the leasing of new mobile support equipment. During
2004, we entered into capital leases for new equipment totaling $23.8 million.
These were reported as additions to capital assets and long-term debt. We also
entered into $21.0 million of operating leases for mine support equipment and
$2.1 million for an office lease during the year.

      After considering the acquisition of the Prairie Assets by acquiring the
shares of SCAI, we expect that, for the foreseeable future, LEP's 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 future will be sufficient to
meet these needs.

      Capital expenditures are expected to be approximately $47.9 million in
2005. Additionally, we expect to acquire equipment worth approximately $25.2
million through capital leases. We also expect to acquire approximately $31.6
million in assets under operating leases. As of December 31, 2004, our
outstanding capital commitments were not significant and were incurred in the
ordinary course of business.

      LEP's investing activities used cash of $13.7 million in 2004 compared
with $398.9 million in 2003. The significant decrease is due to the acquisition
of the Prairie Assets in 2003 that was primarily funded by acquiring the shares
of SCAI which included a $70.0 million cash payment by LEP and an additional
$298.6 million used to acquire the promissory notes due from LCL.

      During 2004, LEP's financing activities used cash of $111.2 million. This
balance includes $65.0 million of distributions to the partners and net debt
repayments of $46.2 million primarily due to the maturity of the SaskPower
9.625% promissory note in December 2004. During 2003, our financing activities
generated cash of $257.6 million made up mostly of a $298.6 million equity
contribution from the partners used to acquire the promissory note due from LCL
as well as the acquisition of the $12.0 million credit facility and partially
offset by distributions to the partners of $27.0 million and net debt repayments
of $24.0 million.

      Effective February 4, 2004 LL signed a Senior Credit Facility with a
syndicate of Canadian chartered banks consisting of a revolving 364 day
operating credit facility that permits maximum aggregate borrowings of $115.0
million. This facility replaces LCL's $100.0 million senior credit agreement and
SCAI's $15.0 million credit facility that was due to expire on February 29,
2004. Terms of the new Senior Credit Facility are substantially the same as the
terms of the facilities that were replaced. This senior credit agreement has
since been renewed on January 31, 2005. Please see "Item 10 - Additional
Information - Material Contracts" for more detail about the terms of our
indebtedness.

      The Senior 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. 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, 2004, we were in compliance with the
ratio covenants as well as all other covenants under the Senior Credit Facility.

      On December 30, 2004, the 9.625% promissory note with a Crown corporation
for $89.3 million matured and was paid. Under the terms of the coal supply
agreement, the $39.4 million excess of the principal amount over the sinking
fund balance was recovered from our customer and included in other

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                                                              2004 Annual Report

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<PAGE>

income in the fourth quarter of 2004. Now that this promissory note has been
repaid, revenues under the Poplar River coal supply agreement will decrease by
approximately $8.6 million per annum, offsetting the elimination of interest
costs under the promissory note.

      On May 18, 2003, the 12.75% promissory note with a Crown corporation for
$45.0 million matured and was paid resulting in the $21.4 million excess of the
principal amount over the sinking fund balance being recorded as a gain in other
income in the second quarter of 2003.

      LEP's long-term debt of $362.9 million has declined by $49.4 million since
December 31, 2003 due primarily to the repayment of the 9.625% promissory note.
The decrease was also influenced by the carrying value of the Senior Notes that
fluctuate with the exchange rates and was partially offset by the $19.8 million
increase in capital lease obligations as a result of the number of capital
leases entered into in 2004. The carrying value of the Senior Notes of $331.0
million reflects current foreign exchange rates as at December 31, 2004. On
December 31, 2003, the Senior Notes had a carrying value of $355.4 million. 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.

      Our owners had the ability, up until October 15, 2004, under the trust
indenture governing the Senior Notes to contribute equity to LEP and use the
proceeds to call up to 35% of the Senior Notes currently outstanding at a price
of US$109.75. Our owners' decided not to exercise that option. After October 15,
2006, the trust indenture governing the Senior Notes allows the Issuer to redeem
all or part of the notes at a price of US$104.875 with prior notice of not less
than 30 or more than 60 days. Our owners are evaluating their options and will
notify us if they decide to proceed with calling the notes after October 15,
2006.

      To optimize the corporate tax structure, LCL's operating subsidiary, LL,
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.
LL and LCIF each guarantee LCL's obligations under the Senior Notes, therefore
the LL subordinated notes are subordinated to the guarantees of the Senior
Notes. Going forward, the LL subordinated notes will remain outstanding and the
interest payments received by LCIF will be distributed to LEP.

      We believe that LEP's 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.

      EMPLOYEE TERMINATIONS

      As of December 31, 2004 a severance of provision of $0.4 million relating
to ten employees existed. 2004 severance payments of $1.4 million related to
corporate organization changes and the suspension of operations at the Obed
mine, which were accrued in 2003. During 2004, the remaining severance provision
of $2.7 million at Luscar mine was reversed under the metallurgical coal
agreement as production started at the Cheviot mine. The remaining severance
provision of $0.4 million relates to employees at the Gregg River and Obed
mines. The provision related to the Gregg River mine was paid during the first
quarter of 2005 and the remaining balance at the Obed mine is expected to be
paid within the next two years.

      Severance costs were reported in operating costs, selling, general and
administrative expenses and discontinued operations.

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                                                              2004 Annual Report

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<PAGE>

                             ADDITIONAL DISCLOSURES

      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 discussion of the differences between Canadian GAAP and U.S.
GAAP, see note 22 of the LEP audited consolidated financial statements included
under elsewhere in this annual report.

      CRITICAL ACCOUNTING ESTIMATES

      The preparation of financial statements requires us to estimate the effect
of various matters that are inherently uncertain as of the date of the interim
financial statements. Each of these required estimates varies in regard to the
level of judgment involved and its potential impact on our reported financial
results. Estimates are deemed critical when a different estimate could have
reasonably been used or where changes in the estimate are reasonably likely to
occur from period to period, and would materially impact our financial
condition, changes in financial condition or results of operations. Our
significant accounting policies are discussed in Note 2 of the LEP audited
consolidated financial statements. Critical estimates inherent in these
accounting policies are discussed in the following paragraphs.

Inventories

      Coal inventories are valued at the lower of average production cost and
net realizable value. Net realizable value is based on trends in coal prices at
the end of the period. The process of estimating inventory quantity is complex;
requiring significant assumptions, estimates and decisions regarding
engineering, geophysical and geological data. A revision or change to any of
these inputs could result in an impairment of the carrying amount of our
inventories and reduction in net earnings for the period. For example, a 1%
change in the quantity of inventories would result in a $0.2 million impact on
net earnings.

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

Capital assets

      Capital assets comprise the largest component of our assets and as such
the capitalization of costs, the determination of estimated recoverable amounts
and the amortization of these assets have a significant effect on our financial
statements. Proven and probable reserves are determined based on professional
evaluations provided by internal or external qualified persons. The estimate of
these reserves may change based on additional knowledge gained subsequent to the
initial assessment. This may include results from the reconciliation of actual
production data against the original reserve estimates, or the impact of
economic factors such as changes in the price of coal or the cost of components
of production. A change in the original estimate of reserves would result in a
change in the rate of amortization of the related assets or could result in
impairment of the assets resulting in a write down.

      In the first quarter of 2004, LEP undertook a comprehensive review of the
estimated useful lives of capital assets. As a result of this review the
depreciation and amortization of capital assets was reduced and this change
decreased depreciation and amortization by an estimated $10.6 million for the
year ended December 31, 2004.

Accounts and loans receivable

      Eight of our mines derive substantially all of their revenue from single
customers or groups of affiliated customers. The loss of one or more of these
customers could potentially result in the closure of the respective mine, the
loss of the mining contract or, in some cases, the sale of the mine to the
customer.

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<PAGE>

      Management reviews the collectibility of accounts receivable on a regular
basis and records an allowance for doubtful accounts if necessary. No allowance
for doubtful accounts has been recorded at the end of the current year.
Significant deterioration in any of the above noted factors could materially
change this estimate.

Asset impairment

      We evaluate long-lived assets for impairment when events or changes in
circumstances indicate that the related carrying amounts may not be recoverable.
A long-lived asset is considered to be impaired if the total undiscounted
estimated future cash flows are less than the carrying value of the asset. The
amount of the impairment is determined based on discounted estimated future cash
flows. Future cash flows are determined based on management's estimates of
future results relating to the long-lived assets. These estimates include
various assumptions, which are updated on a regular basis as part of the
internal planning process.

      We regularly review our investments to determine whether a permanent
decline in the fair value below the carrying value has occurred. In determining
whether a permanent decline has occurred, management considers a number of
factors that would be indicative of a permanent decline including (i) a
prolonged decrease in the fair value below the carrying value, (ii) severe or
continued losses in the investment and (iii) various other factors such as
liquidity which may be indicative of a decline in value of the investment. The
consideration of these factors requires management to make assumptions and
estimates about future financial results of the investment. These assumptions
and estimates are updated by management on a regular basis.

Asset retirement obligations

      Government regulations require the removal or remediation of the effects
of our mining activities on the environment at our current and former mine sites
by reclaiming all disturbed lands and dismantling and removing production
facilities. We have estimated these asset retirement obligations, which we
believe will meet current regulatory requirements. However this process requires
us to make several estimates and judgments with respect to activities that will
occur many years into the future. Because these obligations are partly dependent
on the laws of Canada and its provinces, amendments to the law may alter our
obligations.

      These future obligations are estimated by management using mine closure
plans and other similar studies which outline the requirements that will need to
be completed to meet the obligations. We record these asset retirement
obligations in our consolidated financial statements by discounting the present
value of estimated cash flows. In making this calculation of estimated cash
flows, numerous assumptions are made around the timing of reclamation
activities, equipment costs and productivity rates, inflation factors, credit
adjusted discount rates and demolition costs. Additionally, accounting
requirements require the calculation of the asset retirement obligations to use
fair value estimates of the associated costs which also requires the use of some
assumptions by management. A change in any of these assumptions could impact the
asset retirement obligations as well as, consequently, our capital assets and
our net income.

      It is difficult to determine the impact of changes in any of our
assumptions. As a result, we have not provided a sensitivity analysis of the
impact a change in our assumptions would have on our financial results. The
assumptions used in the calculation of our asset retirement obligations are
reviewed by management annually and revised for changes in estimates,
assumptions and regulatory requirements. We believe, therefore, that our current
assumptions are reasonable.

Income taxes

      The determination of our ability to utilize tax loss carry forwards to
offset future income taxes payable requires management to exercise judgment and
make certain assumptions about our future

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performance. Changes in economic conditions and other factors could result in
revisions to the estimates of the benefits to be realized or the timing of
utilizing the losses.

Post employment benefits

      Our post-retirement benefits include defined benefit and defined
contribution plans. Defined contribution plans are post-employment benefit plans
under which we pay fixed contributions into a fund and have no obligation to
make any further contributions. No reserve is booked for such plans.

      The determination of the cost and obligations associated with defined
benefit plans requires the use of various assumptions. We retain independent
actuarial experts to prepare the calculations and to advise on the selection of
assumptions. We must select assumptions such as the expected return on assets
available to fund pension obligations, the discount rate to measure obligations,
the projected age of employees upon retirement, and the expected rate of future
compensation. These assumptions are re-evaluated each year, and variations
between actual results and the results based on the assumptions for any period
will affect reported amounts in future periods.

      The discount rate used to determine the accrued benefit obligation is an
interest rate based on high quality corporate bonds with cash flows that match
expected payments or an interest rate inherent in the amount at which the
accrued benefit obligation could be settled. The discount rate used to calculate
our projected benefit obligation with respect to defined benefit plans was 6.25%
in 2003 and 2004, a decrease from 7.00% in 2002.

      Expected returns on assets are determined using the expected rate of
return on plan assets and the value of plan assets. The fair value of the plan
assets is equal to the market value on that date. The long-term rate of return
on plan assets assumption is based on a mix of historical market returns from
debt and equity securities. In 2004, the expected return of plan assets was
7.00%. This rate is a reflection of our assets allocation: in 2004, 67% of plan
assets were invested in equities; 29% of plan assets were invested in debt
securities with the remainder of plan assets invested in cash and other
securities.

      Actuarial gains and losses arise from the difference between actual
long-term rate of return on plan assets for a period and the expected long-term
rate of return on assets on plan assets for that period, or from changes in
actuarial assumptions used to determine the accrued benefit obligation.
Actuarial gains and losses that exceed 10% of the higher of the projected
benefit obligation and the fair value of the plan, are amortized over the
expected remaining service periods of active plan participants. The average
remaining service period of active employees covered by our pension plans range
from 13 to 22 years.

      Our net pension plan cost was $7.5 million in 2004. Pension expense
includes the net of our best estimate of the cost of benefits provided, interest
cost of projected benefits, return on plan assets, amortization of experience
gains or losses and plan amendments, and changes in the valuation allowance.

      RECENTLY ISSUED ACCOUNTING STANDARDS

      Several new accounting pronouncements have been issued by the Canadian
Institute of Chartered Accountants ("CICA") as well as the Financial Accounting
Standards Board ("FASB") in the United States. For further discussion on these
recently issued accounting standards and their impact on our financial
statements, see notes 3 and 22 of the LEP audited consolidated financial
statements.

      The highlights of the impact of the new pronouncements are as follows.

Asset Retirement Obligations

      In March 2003, the CICA issued Section 3110, "Asset Retirement
Obligations". These new accounting rules came into effect for fiscal years
beginning on or after January 1, 2004 for LEP. This

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<PAGE>

change in accounting policy was applied retroactively and accordingly, the
financial statements of prior periods were restated.

      These rules address financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standards apply to legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development and use of the asset. The rules require that the
estimated fair value of an asset retirement obligation be recognized as a
liability in the period incurred. A corresponding amount is added to the
carrying amount of the associated asset and depreciated over the asset's useful
life. The liability is accreted over time through charges to earnings to reflect
changes in its present value. This differs from the previous practice, which
involved accruing for the estimated reclamation, site restoration, and mine
closure liability through charges to earnings on a unit of production basis over
the expected life of each mine's reserves.

      As required by the CICA, this policy was implemented by LEP on January 1,
2004, on a retroactive basis. The impact of the adoption of this accounting
policy on prior year amounts is disclosed in note 3 of the LEP audited
consolidated financial statements. The Canadian pronouncement is very similar to
the Statement No. 143 ("SFAS 143") that was issued in June 2001 by the FASB and
adopted by LEP on January 1, 2003 for US GAAP. The differences that have arisen
due to the timing differences in adoption dates are summarized in note 22 of the
LEP audited consolidated financial statements.

Consolidation of Variable Interest Entities

      In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires that the assets,
liabilities and results of variable interest entities be consolidated into the
financial statements of the entity that has the controlling financial interest.
FIN 46 also provides the framework for determining whether a variable interest
entity should be consolidated based on voting interest or significant financial
support provided to it. In December 2003, the FASB issued FIN 46(R), amending
the guidance in FIN 46 as well as the transition guidance. As a foreign private
issuer, and based on our interpretation of the revised transition guidance, we
are required to adopt the guidance in FIN 46(R) for the current period ending
December 31, 2004. We have thoroughly assessed the implications of this standard
and have concluded that its adoption does not have an impact on the LEP
financial statements.

      In June 2003, the CICA issued a comparable pronouncement, Accounting
Guideline No. 15, "Consolidation of Variable Interest Entities" ("AcG-15").
AcG-15 is effective for reporting periods beginning on or after November 1, 2004
and will be adopted by Luscar for the quarter ended March 31, 2005. LEP
management has concluded that the adoption of the Canadian guideline will,
similar to the adoption of FIN 46R in the current financial statements, have no
impact on the LEP financial statements.

Generally Accepted Accounting Principles

      CICA Handbook Section 1100, "Generally Accepted Accounting Principles",
was issued in October 2003, and was effective for LEP for the fiscal year
beginning January 1, 2004. The section establishes standards for financial
reporting in accordance with generally accepted accounting principles ("GAAP")
and clarifies the relative authority of various accounting pronouncements and
other sources within GAAP. The adoption of this section did not have a material
impact on the financial statements.

General Standards of Financial Statement Presentation

      In July 2003, the CICA issued Section 1400, "General Standards of
Financial Statement Presentation", which was effective for LEP for the fiscal
year beginning on January 1, 2004. This standard clarifies what constitutes fair
presentation in accordance with GAAP, which involves providing sufficient
information in a clear and understandable manner about certain transactions or
events of such size, nature and incidence that their disclosure is necessary to
understand LEP's financial statements. This standard is reflected in the LEP
consolidated financial statements.

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Revenue Recognition

      In December 2003, the CICA issued EIC Abstract 141, "Revenue Recognition"
("EIC 141"), that incorporates the principles and summarizes the guidance in the
SEC's Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). The abstract also provides interpretative guidance on
the application of CICA Handbook Section 3400, "Revenue". This abstract has been
applied prospectively commencing January 1, 2004.

      In December 2003, the SEC issued Staff Accounting Bulletin 104, "Revenue
Recognition" ("SAB 104"). SAB 104 revises or rescinds certain guidance included
in previously issued staff accounting bulletins in order to make this
interpretative guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations relating to revenue recognition.
This bulletin was effective immediately upon issuance. Our revenue recognition
policies comply with EIC 141, SAB 101, and SAB 104 therefore the adoption of
these new pronouncements had no impact on our financial statements.

Impairment and Disposal of Long Lived Assets and Discontinued Operations

      In 2002, the CICA issued Section 3063, "Impairment of Long-lived Assets"
and Section 3475, "Disposal of Long Lived Assets and Discontinued Operations" to
harmonize with the FASB's Statement of Financial Accounting Standard No. 144.
Section 3063 is effective for fiscal years beginning on or after April 1, 2003
and establishes standards for the recognition, measurement and disclosure of the
impairment of long-lived assets. Section 3475 applies to disposal activities
initiated by an enterprise's commitment on or after May 1, 2003 and establishes
standards for the recognition, measurement, presentation and disclosure of the
disposal of long-lived assets and discontinued operations. There were no
significant impairment losses recorded in respect of long-lived assets and
discontinued operations in the year.

Hedging Relationships

      In 2003, the CICA issued Accounting Guideline 13, "Hedging Relationships",
("AcG-13") which deals with the identification, documentation, designation and
effectiveness of hedges and also the discontinuance of hedge accounting, but
does not specify hedge accounting methods. AcG-13 is applicable to hedging
relationships in effect for fiscal years beginning on or after July 1, 2003. The
implementation of this guideline in 2004 did not materially change the
accounting policies in use and as a result, it did not have an impact on the
financial statements. Emerging Issues Committee ("EIC") Abstract 128,
"Accounting for Trading, Speculative or Non-hedging Derivative Financial
Instruments", requires most freestanding derivative financial instruments that
do not qualify for hedge accounting under Accounting Guideline 13, to be
recognized in the balance sheet at fair value. The adoption of this abstract had
no impact on the financial statements.

Interim Financial Statements

      Effective June 30, 2004, the CICA revised Section 1751, "Interim Financial
Statements", which requires certain disclosures in interim financial statements
of benefit costs as determined by Section 3461, Employee Future Benefits. These
disclosures were provided by LEP in our interim quarterly filings beginning in
the Form 6-K for the six months ended June 30, 2004.

Employee Future Benefits Disclosures

      In December 2003, the FASB issued SFAS No. 132-R, "Employers' Disclosures
about Pensions and Other Postretirement Benefits--an amendment of FASB
Statements No. 87, 88, and 106", a revision of SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132-R"), to
include increased disclosure as to the plan assets, benefit obligations, cash
flows, benefit costs and other relevant information. The provisions of SFAS No.
132 remain in effect until the provisions

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<PAGE>

of this Statement are adopted, with SFAS 132-R becoming effective for fiscal
years ending after December 15, 2003, except for disclosure of information about
foreign plans, and future benefit payments, which was effective for fiscal years
ending after June 15, 2004. We chose to early adopt the disclosure requirements
from SFAS 132-R and, beginning in the year ended December 31, 2003, all the
disclosure requirements have been made in our financial statements.

Accounting for Stripping Costs Incurred during Production in the Mining Industry

      During 2004, deliberations began on EITF 04-6, "Accounting for Stripping
Costs Incurred during Production in the Mining Industry". In the mining
industry, companies may be required to remove overburden and other mine waste
materials to access mineral deposits. The costs of removing overburden and waste
materials are often referred to as "stripping costs." During the development of
a mine (before production begins), it is generally accepted in practice that
stripping costs are capitalized as part of the depreciable cost of building,
developing, and constructing the mine. Those capitalized costs are typically
amortized over the productive life of the mine using the units-of-production
method.

      A mining company may continue to remove overburden and waste materials,
and therefore incur stripping costs, during the production phase of the mine.
Questions have been raised about the appropriate accounting for stripping costs
incurred during the production phase, and diversity in practice exists. In
response to these questions, the EITF has undertaken a project to develop an
Abstract to address the questions and clarify the appropriate accounting
treatment for stripping costs under US GAAP.

      In March 2005, the EITF reached a consensus on this issue and concluded
that stripping costs incurred after production has commenced are a component of
inventory cost subject to the provisions of American Institute of Certified
Public Accountants Accounting Research Bulletin No. 43, Restatement and Revision
of Accounting Research Bulletins, Chapter 4, "Inventory Pricing." Based upon
this consensus, these stripping costs should be considered costs of inventory
under a full absorption costing system and recognized as a component of
inventory to be recognized in costs of sales in the same period as the revenue
from the sale of the inventory. Additionally, capitalization of such costs would
be appropriate only to the extent inventory exists at the end of a reporting
period. The guidance in this consensus is effective for financial statements
issued for fiscal years beginning after December 15, 2005, with early adoption
permitted. We are currently evaluating the impact of EITF 04-6 on our financial
statements, but we do not believe that the conclusions reached on this issue
will impact our current treatment of stripping costs.

Accounting Changes and Error Corrections

      In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections" ("SFAS 154"), which replaces Accounting Principles Board Opinions
No. 20 "Accounting Changes" and SFAS 3, "Reporting Accounting Changes in Interim
Financial Statements--An Amendment of APB Opinion No. 28." SFAS 154 provides
guidance on the accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application as the required method for
reporting a change in accounting principle and the reporting of a correction of
an error. SFAS 154 is effective for accounting changes and a correction of
errors made in fiscal years beginning after December 15, 2005, and is therefore
required to be adopted by LEP for the year beginning on January 1, 2006. We are
currently evaluating the effect that the adoption of SFAS 154 will have on our
consolidated financial statements, under US GAAP, but do not expect it to have a
material impact.

Other Anticipated Accounting Policy Changes

      Other accounting standards already issued by the CICA and the FASB, which
are expected to take effect in 2005, are not anticipated to have a significant
impact on our financial statements.

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<PAGE>

                     CONTRACTUAL OBLIGATIONS AND COMMITMENTS

      The following table presents a summary of our long-term debt and other
commitments including payment due date for each of the next five fiscal years
and thereafter:

<TABLE>
<CAPTION>
                                                       LESS THAN      2 TO 3       4 TO 5     MORE THAN
                                             TOTAL       1 YEAR        YEARS        YEARS      5 YEARS
                                           ---------   ----------   ----------   ----------   ----------
                                                        (IN MILLIONS OF CANADIAN DOLLARS)
<S>                                        <C>         <C>          <C>          <C>          <C>
Long-term debt (excluding capital lease,
 pension, and other obligations)           $   556.8   $     32.3   $     64.5   $     64.5   $    395.5
Obligations under capital leases                32.4          8.1         13.7         10.6            -
Operating leases                                19.3          4.6          8.6          6.1            -
Pension funding                                 13.7          2.5          5.4          5.8            -
Asset retirement obligations
(undiscounted cash flow)                       148.0         13.4         13.9         19.3        101.4
Pension deficit obligation                       3.1          1.0          2.1            -            -
Purchase commitments                             3.8          3.8            -            -            -
                                           ---------   ----------   ----------   ----------   ----------
                                           $   777.1   $     65.7   $    108.2   $    106.3   $    496.9
                                           =========   ==========   ==========   ==========   ==========
</TABLE>

Long-term Debt

      Long-term debt includes 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. Payment obligations are not discounted and include related
interest.

Obligations under Capital Lease

      Obligations under capital leases on specific mining equipment bear
interest at rates ranging from 4.6% to 6.6%, with a weighted average interest
rate of 5.2%. These capital leases mature between 2005 and 2009 and are
repayable by blended monthly payments of principal and interest. Payment
obligations are not discounted and include related interest.

Operating Leases

      We have long-term operating leases for buildings, vehicles and equipment.

Pension Funding

      Pension funding amounts represent our anticipated contributions to defined
benefit pension plans over the next 5 years. The net expense relating to our
obligations for pensions and post-retirement benefits was $6.0 million for the
year ended December 31, 2004.

Asset Retirement Obligations

      Asset retirement obligations payments have not been discounted.

Pension Deficit Obligation

      The pension deficit obligation relates primarily to obligations under the
Line Creek defined benefit pension plans, which were under funded at the date of
sale from LCL to Fording Canadian Coal Trust. Following the completion of an
actuarial valuation, the total obligation was determined to be $5.2 million.

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This amount is repayable in equal installments over 5 years and outstanding
amounts bear interest at 6.5% per annum. The first two installments of $1.0
million were paid during the second quarter of 2004 after the finalization of
the actuarial valuation. Payment obligations are not discounted and include
related interest.

Purchase Commitments

      As at December 31, 2004, we are committed to the acquisition under capital
lease of equipment worth $3.8 million. The equipment arrived in January 2005 and
the option to cancel had expired in November 2004.

                         OFF BALANCE SHEET ARRANGEMENTS

Financial Instruments

      As at December 31, 2004 (and December 31, 2003), LEP had no outstanding
foreign exchange or commodity options, futures or forward contracts. We have the
ability to address our price-related exposures through the limited use of
options, futures and forward contracts, but generally do not enter into such
arrangements.

      As at December 31, 2004, LEP had no fixed price commodity purchase
arrangements outstanding. At the end of the prior year, LEP had outstanding
fixed price commodity purchase arrangements representing a total commitment of
$2.8 million that were fulfilled in 2004.

      Most sales to the export market are transacted in US dollars and therefore
are sensitive to foreign exchange exposure when commitments to deliver coal are
quoted in a foreign currency. Derivative financial instruments are not used to
reduce LEP's exposure to fluctuations in foreign exchange rates.

Guarantees

      During 2003, we adopted the CICA Accounting Guideline 14, Disclosure of
Guarantees. This policy requires the disclosure of information regarding certain
types of guarantee contracts that require payments contingent on specified types
of future events. All significant guarantee contracts are disclosed within the
notes to the LEP consolidated financial statements.

      In conjunction with the disposition of the metallurgical coal assets (as
described in note 5 of our consolidated financial statements), LEP retained
certain liabilities in respect of the metallurgical coal assets. These included:

      -     Asset retirement obligations for certain closed mines and previously
            mined areas. These extend for an unlimited period of time and the
            maximum potential liability depends upon the outcome of future
            contingent events, the nature and likelihood of which cannot be
            determined at this time. These liabilities were settled in 2004 as a
            result of the June 18, 2004 settlement agreement. As part of the
            settlement, the Corporation was required to pay $1.6 million to
            completely settle this matter.

      -     Severance liabilities for employees in anticipation of the permanent
            shutdown of the Luscar mine in combination with a decision not to
            proceed with the Cheviot project. These extend to February 2005, up
            to a maximum of approximately $2.2 million. In the fourth quarter of
            2004, the Corporation's residual liability was removed reflecting
            the commencement of production from the Cheviot lands during this
            period and LEP has no further obligation with respect to this
            matter.

      -     Employment liabilities for former employees arising from operations
            prior to the transfer and severance obligations for other former
            employees not hired by the purchaser, for which no liability has
            been recorded by LEP.

      -     General indemnities were given for negligence and claims arising
            prior to the transfer. In addition, indemnities were provided to the
            purchaser and a joint venture partner in respect of a transfer of a
            portion of the metallurgical coal assets between entities controlled
            by LCL

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 71 -
<PAGE>

            immediately preceding the closing of the Fording Arrangement. The
            indemnities extend for an unlimited period of time and the maximum
            potential liability cannot be determined at this time. No amounts
            have been accrued with respect to these indemnities.

      In connection with a borrowing facility, we have provided an indemnity in
respect of transactions related to the extension of credit and environmental
indemnities in respect of our properties to the lender. The indemnities extend
for an unlimited period of time and the maximum potential liability cannot be
determined at this time. No amounts have been accrued with respect to these
indemnities.

      As a result of the Manalta Coal acquisition in 1998, Luscar assumed an
indemnity agreement for a subsidiary of Manalta called Chinook Coals that was
the grantor of an indemnity agreement on a land sale to Sarcee Holdings. The
agreement stipulates that Chinook Coals will assume any responsibility or
liability for the mine shaft and mine site that is underneath the land that was
sold; as well as indemnifying Sarcee Holdings for any current or future claims
that could arise - effectively the buyer is fully released from any
responsibility therefore. This agreement is valid and enforceable until 2086. No
amounts have been accrued with respect to these indemnities.

      An environmental indemnity was included as part of the asset sales
agreement, when we sold the Specialty Products division in September 2003. We,
as the vendor, have indemnified the purchaser of (and from) any and all damages,
losses, obligations and liabilities which may be suffered or incurred as a
result of any environmental contamination or condition that existed prior to the
closing date of the sale. This indemnity exists regardless of whether the
condition was known to the parties at the time of agreement or not. An
environmental site assessment was completed prior to the sale in order to
provide a base line of environmental conditions in order to provide some clarity
and support for the indemnity. No amounts have been accrued with respect to
these indemnities.

      The impact of each of the indemnities listed above is dependent on future
events that cannot be determined making it difficult to quantify the maximum
liability.

                                     OUTLOOK

      We are the largest coal producer in Canada, operating mines that produce
most of Canada's domestic thermal coal. We own 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 produce approximately 38.5 million tonnes of coal, making us one of
the largest coal producers in North America.

      A significant portion of our earnings from continuing operations are
derived from thermal coal sales to domestic customers, principally under
long-term contracts to mine-mouth power generators in western Canada, and
royalty income derived from coal and potash mining operations in Alberta and
Saskatchewan. The remaining earnings from continuing operations is derived from
export sales, contract mining at the Highvale and Whitewood mines, sales of coal
to Canadian utilities delivered by rail, and sales of thermal coal and char to
industrial customers.

      Thermal coal production, a record 38.2 million tonnes in 2004, is expected
to increase to 40 million tonnes in 2005 as a result of expansions at the Coal
Valley and Genesee mines. The 450 megawatts of new capacity at the Genesee power
plant, which was commissioned in early 2005, will require approximately 1.2
million additional tonnes of coal in 2005. During the fourth quarter, we
approved the expansion of the Coal Valley mine to 4.0 million tonnes per year,
doubling its thermal coal production capacity. The mine is scheduled to be at
full capacity by the second quarter of 2006. The $75.3 million project involves
doubling the coal wash plant capacity and adding additional mining equipment.
The expansion at Coal Valley is expected to produce an additional 1.0 million
tonnes in 2005 and a further 1.0 million tonnes in 2006.

      Our program to implement world best mining practices, which is designed to
exploit the similarities of each of our mining operations and enhance overall
efficiencies, is expected to result in

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 72 -
<PAGE>

reduced operating costs, enhanced productivity, increased profitability and cash
flow in 2005 and subsequent years.

      Capital expenditures are expected to be approximately $47.9 million in
2005. In addition, equipment worth approximately $25.2 million is expected to be
acquired through capital leases. We also expect to acquire approximately $31.6
million in assets under operating leases.

      As part of the thermal asset acquisition in 2003, we acquired the mineral
rights near Bow City, Alberta along with engineering and environmental studies.
The project contemplates the construction of two 500 MW generating units within
the station and the associated dragline mine development. We are moving the
project forward towards regulatory approval. In order to facilitate the
potential submission of an application to provincial regulatory authorities in
the spring of 2006, forecast spending in 2005 and 2006 is expected to be
approximately $7.0 million. The field work is progressing and is expected to be
completed in 2005.

      We have embarked on an applied research project to develop the process
technology required to beneficiate and gasify our coal. Alberta Energy Research
Institute is providing a portion of the funding for the project.

      Cash flow from operations is expected to be sufficient to meet our
existing and ongoing contractual obligations and commitments.

      Readers may access other information about LEP and its subsidiaries,
including previous annual and quarterly filings, as well as other disclosure
documents, reports, statements or other information that LEP files with the U.S.
Securities and Exchange Commission through EDGAR at www.sec.gov/edgar or at our
web site at www.luscar.com. We are not incorporating the information on our web
site into this annual report and our web site should not be considered part of
this annual report.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 73 -
<PAGE>

ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

      On February 11, 2005 we announced the appointment of Patrice Merrin Best
as our President and CEO, succeeding Dennis Maschmeyer who stepped down on
December 31, 2004, having reached retirement age. Howard Ratti, Senior
Vice-President, and Garnet Clark, Vice-President and Chief Financial Officer of
LCL assumed the same positions at LEP as well.

      We also made changes to our four-member management committee. Jowdat
Waheed, previously LEP's Senior Vice President and Chief Financial Officer,
assumed the position of Chairman. Also included on the Committee is Brian J.
Gibson, Senior Vice-President, Active Equities, Teachers along with Samuel W.
Ingram, Senior Vice-President, General Counsel and Corporate Secretary and Guy
I. Bentinck, Senior Vice-President, Finance and Chief Financial Officer, both of
Sherritt. Concurrent with these changes, Brian J. Gibson and Guy I. Bentinck
were appointed as members of our audit committee.

               EXECUTIVE OFFICERS AND MANAGEMENT COMMITTEE OF LEP

      The following table sets forth information concerning the executive
officers and management committee of LCL's ultimate parent, LEP. The management
committee consists of four members. Under the terms of the partnership
agreement, three of the members (Messrs. Waheed, Ingram, and Bentinck) are
appointed by Sherritt and one member (Mr. Gibson) is appointed by Teachers.
Additionally, decisions of the management committee are made by majority action
that must include, in every case, the approval of the Teachers appointee.
Members of the management committee and audit 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>
Jowdat Waheed         42    Chairman and Management Committee Member
Brian Gibson          49    Management Committee Member and Audit Committee Member
Samuel Ingram, Q.C.   60    Senior Vice President, General Counsel and Corporate Secretary
                            and Management Committee Member
Guy Bentinck          38    Management Committee Member and Audit Committee Member
Patrice Merrin Best   56    President and Chief Executive Officer
Howard Ratti          50    Senior Vice President
Garnet Clark          44    Vice President, Finance and Chief Financial Officer
Deanna Horton         49    Vice President, Investor Relations and Corporate Affairs
Abe Rubinfeld         52    Assistant Secretary
Dave Randhawa         40    Corporate Controller
</TABLE>

      The following sets forth certain information relating to the principle
occupations of the members of the management committee and audit committee as
well as the officers of LEP, for the past five years.

      Mr. Waheed was appointed President and Chief Executive Officer and a
director of Sherritt as of January 2005. From March 2004 until December 2004, he
served as Executive Vice President and Chief Operating Officer as well as Chief
Financial Officer until May 2004. In May 2000, Mr. Waheed was appointed Senior
Vice President and Chief Financial Officer of Sherritt. In 2001, Mr. Waheed
became a director of LCL, a trustee of LCIF, a member of the LEP management
committee and Senior Vice President and chief financial officer of LEP. In 2005,
Mr. Waheed was appointed Chairman of LEP and LCL.

      Mr. Gibson has served as Senior Vice President, Active Equities, of
Teachers since June 2000. Prior to that, he served as Vice President, active
equities. Mr. Gibson first served as a management committee member from 2001 to
2003 and was reappointed again in 2004. Mr. Gibson was also appointed to the
audit committee of LEP in 2004.

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                                                              2004 Annual Report

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<PAGE>

      Mr. Ingram has served as Senior Vice President, General Counsel and
Corporate Secretary of Sherritt since 1995. He was appointed Vice President,
General Counsel and Corporate Secretary of LCL in 2003. In 2005, Mr. Ingram was
appointed a member of the management committee of LEP. In 2001, Mr. Ingram was
elected as a director of LCL and appointed as a trustee, secretary of LCIF and
Senior Vice President, General Counsel and Corporate Secretary of LEP.

      Mr. Bentinck has served as Senior Vice President and Chief Financial
Officer of Sherritt since May 2004. Prior to that, he served as Vice President,
Finance of Sherritt from May 2003 to May 2004 and prior to that, Controller of
Sherritt. Mr. Bentinck was appointed a member of the management committee of LEP
and a member of the audit committee of LEP in 2005.

      Ms. Merrin Best was appointed President and Chief Executive Officer of LEP
and LCL in February 2005. Previously she served as Executive Vice President of
LCL from March 2004. Prior thereto, Ms. Merrin Best served as Executive Vice
President and Chief Operating Officer of Sherritt from 1999 until March 2004. In
2001, Ms. Merrin Best was elected as a director of LCL.

      Mr. Ratti was appointed Senior Vice President of LEP in February 2005 and
Senior Vice President of LCL in March 2004. Mr. Ratti served as Vice President,
Operations of LCL from 2003 until March 2004. Mr. Ratti served as Vice
President, Mountain mines and Engineering from 2001 until 2003 and prior thereto
he held the position of Vice President and General Manager, Engineering and
Operations of Luscar Ltd.

      Mr. Clark was appointed Vice President, Finance and Chief Financial
Officer of LEP in February 2005. He was appointed Vice President, Finance and
Chief Financial Officer of LCL in 2003. Prior to that, Mr. Clark served as Chief
Financial Officer of Sherritt's oil and gas division from 2001 to 2003 and
served as Chief Financial Officer of Sherritt's metals joint venture from 1994
to 2000.

      Ms. Horton has served as Vice President, Investor Relations and Corporate
Affairs for Sherritt since September 2004 and was appointed Vice President,
Investor Relations and Corporate Affairs of LEP in February 2005. Prior to
September 2004, Ms. Horton served as Minister and Deputy head of mission and as
Minister-counselor (economic) at the Canadian embassy in Tokyo.

      Mr. Rubinfeld was appointed Assistant Secretary of LEP in February 2005.
He has served as Senior Corporate Counsel of Sherritt since 1999.

      Mr. Randhawa was appointed Controller of LEP in February 2005 and prior to
that he served as Controller of LCL since 2002. Prior to that, Mr. Randhawa
served as Controller of Sherritt's metals joint venture.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                     - 75 -
<PAGE>

         CASH COMPENSATION OF EXECUTIVE OFFICERS, DIRECTORS AND TRUSTEES

      LEP paid the following amounts as cash compensation, including benefits,
to our four executive officers during the year ended December 31, 2004. This
table includes compensation paid to our former executive officers. We paid no
compensation to the members of LEP's management committee or LCL's board of
directors.

<TABLE>
<CAPTION>
                        TRUSTEES
                           AND
                        DIRECTORS  SALARIES (1)     TOTAL
                        ---------  ------------  -----------
<S>                     <C>        <C>           <C>
Executive officers      $       -  $  1,656,167  $ 1,656,167
Trustees and Directors          -             -            -
                        ---------  ------------  -----------
Total                   $       -  $  1,656,167  $ 1,656,167
                        ---------  ------------  -----------
</TABLE>

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

      During 2004, we provided $166,343 for pension, retirement or other similar
benefits for our executive officers.

                          EMPLOYEES AND LABOR RELATIONS

      As of December 31, 2004, we had 1,657 employees, of which approximately
73% were employed under collective bargaining agreements with unions that
represent the hourly workers at all of our mining operations except at the
Genesee and Obed Mountain mines.

      We believe that our relationships with our employees and our unions are
positive. The following is a summary of the collective bargaining agreements for
the mines we operated during 2004:

<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    30-Jun-06       3 years           310
Poplar River - Hourly        International Brotherhood of Electrical
                             Workers Local 2067                           30-Nov-07       3 years           139
Poplar River - Office Staff  Communications, Energy and Paperworkers
                             Union of Canada Local 649                    31-Mar-08       3 years             3
Paintearth / Sheerness       International Union of Operating Engineers
                             Local 955                                    31-Mar-06       3 years           151
Highvale                     United Steelworkers of America Local 1595    31-Mar-09       5 years           362
Coal Valley                  International Union of Operating Engineers
                             Local 955                                    28-Feb-09       5 years           176
Gregg River                  International Union of Operating Engineers
                             Local 955                                    30-Apr-05        1 year             7
Whitewood                    United Steelworkers of America Local 1595    30-Sep-05      46 months           68
</TABLE>

Note:
(1) As at December 31, 2004.

      During 2004, we successfully renewed three collective bargaining
agreements, covering our hourly employees at the Coal Valley, Gregg River and
Highvale mines. The Gregg River contract expired on April 30, 2005, and was not
renewed as final reclamation activities at the mine were substantially
completed. In addition, in 2005, we have successfully renewed the collective
bargaining agreement with the Communications, Energy and Paperworkers unionized
employees at the Poplar River mine.

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                                                              2004 Annual Report

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<PAGE>

ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

                              PARTNERSHIP STRUCTURE

      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 and Teachers. Each of the two partners
holds a 50% economic interest in Luscar Energy Partnership.

      Sherritt is a publicly traded company incorporated under the laws of New
Brunswick, Canada. Its executive offices are located in Toronto, and its common
shares are traded on the Toronto Stock Exchange. Sherritt's authorized share
capital consists of an unlimited number of common shares. As at December 31,
2004, there were 131,381,776 common shares outstanding. To the knowledge of
Sherritt, no person or company beneficially owns, directly or indirectly, or
exercises control or direction over, common shares carrying more than 10% of the
voting rights attached to the securities of Sherritt.

      Sherritt, with assets of over $2.6 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 soybean-based food processing, agriculture and tourism businesses
in Cuba.

      Teachers is a corporation without share capital, established by the
Teachers' Pension Act of Ontario. It administers the pension plan for
approximately 158,000 current teachers and 97,000 retired teachers and their
families. The plan is the second largest pension fund in Canada, with total
assets at December 31, 2004 exceeding $84 billion.

                           RELATED PARTY TRANSACTIONS

      PARTNERSHIP AGREEMENT

      Luscar Energy Holdings Ltd., a wholly owned subsidiary of Sherritt, and
OTPPB SCP Inc., an indirectly held 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, 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.

      The partners have the right to sell their interest 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 on December 31, 2011
(unless otherwise extended by the partners) upon the occurrence of specified
events, 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 either 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 for LEP's day-to-day administration, except
that such delegation will not reduce or derogate from the authority of the
management committee of LEP.

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                                                              2004 Annual Report

                                      - 77 -
<PAGE>

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 or of
Sherritt.

      RECLAMATION SECURITY SUPPORT AGREEMENT

      Sherritt and Teachers are parties to an agreement with LCL 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 LCL's 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 facility has been extended to
October 10, 2005. 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.

      This facility is unsecured and ranks pari passu with the obligations under
the Senior Notes. LCL 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 since this is an annual report and we do not have any
publicly traded shares.

ITEM 10 ADDITIONAL INFORMATION

                               MATERIAL CONTRACTS

      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
JP Morgan Chase Bank N.A. (formerly 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 LCL's 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 LCL. 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

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                      - 78 -
<PAGE>

holder of Senior Notes. The Senior Notes indenture contains customary events of
default, including 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. As of December 31, 2004, 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 LCL's ability to
declare or pay dividends or make other payments or distributions on account of
LCL's 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, LCL may make
"restricted payments" if, at the time of and after giving effect to the
restricted payment:

      -     LCL is not in default under the credit facility and the restricted
            payment would not cause a default;

      -     LCL 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 LCL 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 LCL since the date of the indenture from
            the sale of equity interests or as a contribution to LCL's 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 LCL's investments in
            any unrestricted subsidiaries which are redesignated as restricted
            subsidiaries, plus $5.0 million.

      Generally, LCL and the 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 LCL's 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; o 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 LCL's and the guarantors' obligations;

      -     hedging obligations;

      -     intercompany guarantees otherwise permitted to be incurred;

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                                                              2004 Annual Report

                                      - 79 -
<PAGE>

      -     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 Senior Notes indenture, neither LEP nor our
subsidiaries, LCL and LCIF, may: (1) consolidate or merge with or into another
person (whether or not LEP, LCL 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 LEP, LCIF, LCL and LCL's 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:
      LEP, LCIF, LCL 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 LCL), 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, LEP, LCL 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 LCL or between the guarantors.

                             SENIOR CREDIT FACILITY

      Effective February 4, 2004 LL signed a senior credit agreement with a
syndicate of Canadian chartered banks consisting of a revolving 364 day
operating credit facility that permits maximum aggregate borrowings of $115.0
million, subject to a borrowing base, which includes accounts receivable, coal
inventory, a $25.0 million charge on a dragline, and a general assignment of
LL's assets. The facility is split into two tranches, the reclamation letter of
credit facility ("Reclamation LC facility") and the working capital facility. Up
to $65.0 million of reclamation letters of credit can be issued under the
Reclamation LC facility. Under the working capital facility, up to $50.0 million
in advances may be made, including up to $25.0 million in letters of credit.
Interest rates payable or advances under the facility are based on prime lending
rates plus interest rate margins ranging from 0.25% to 1.25% depending on LEP's
ratio of debt to operating earnings before interest, depreciation and
amortization ("EBITDA"). This facility replaces LCL's $100.0 million senior
credit agreement and SCAI's $15.0 million credit facilities that were due to
expire on February 29, 2004.

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      LL is the borrower under the Senior Credit Facility. The Senior Credit
Facility is guaranteed by LEP, LCIF and LCL. The Senior Credit Facility is
secured by LL's accounts receivable, coal inventory and a $25.0 million charge
on a dragline.

      The terms of the Senior 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 Senior Credit Facility. The Senior Credit
Facility 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 lenders under
the senior credit facility. The Senior Credit Facility contains customary events
of default, including upon a change of control.

      The Senior 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. 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, 2004, we were in compliance with the
ratio covenants as well as all other covenants under the Senior Credit Facility.

      Additionally, the Senior 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:

      -     LL is not in default under the credit facility and the restricted
            payment would not cause a default;

      -     LL 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, LL and the 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 $10.0 million 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 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;

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      -     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 Senior Credit Facility, neither LEP nor its
subsidiaries, LCL and LCIF, may: (1) consolidate or merge with or into another
person (whether or not LEP, LCL 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 LEP, LCIF, LCL and their 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:
      LEP, LCIF, LCL 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 LCL), 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, LEP, LCL 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 LCL or between the guarantors.

                           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 second promissory note had an aggregate
principal amount of $89.3 million, an interest rate of 9.625% and matured in
December 2004.

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      The 9.625% promissory note was 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 was $8.6 million per year, and we had a sinking fund
obligation requiring us to deposit $0.9 million per year. Under the terms of our
long-term coal supply contract related to the Poplar River 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 $0.9 million per year. Under
the terms of the coal supply agreement, the $39.4 million excess of the
principal amounts over the sinking fund balance was recovered from the Crown
Corporation and included in other income in the fourth quarter of 2004.

                         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 LL. 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 LL's forecast
distributable cash flow for the year. The notes will remain floating rate until
LL'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 LL subordinated notes are subordinated to LL's senior debt,
including trade payables. On October 10, 2001, LCIF and LL amended the 12.5%
subordinated notes and the 7.5% subordinated notes to effectively remove their
covenants and substantially all of their default provisions. LL and LCIF each
guarantee our obligations under the 9.75% Senior Notes due October 15, 2011;
therefore, the LL 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 our company on the right
of non-resident or foreign owners to hold or vote securities of our 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 our 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

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<PAGE>

the foregoing, all as of the date hereof. Any of such authorities may be
repealed, revoked or modified so 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 earned
or accrued on the Senior Note (including any amounts required to be earned 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 or general
category 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

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amount of interest on a Senior Note required to be included in income each year
by the U.S. Holder will 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 15% 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 28% (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 LCL 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 thereunder, all specific proposals to amend the Canadian Tax
Act and the regulations thereunder publicly announced by the Minister of Finance
(Canada) prior to the date hereof and our understanding of the published
administrative practices of the Canada 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

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<PAGE>

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.

      Under the Canadian Tax Act, any payments made by LCL 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 U.S.
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 www.sec.gov. The documents are also available on the Luscar website at
www.luscar.com.

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<PAGE>

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.

      As at December 31, 2004, we had no outstanding fixed price commodity
purchase arrangements.

      Interest rate risk. Our 9.75% Senior Notes are not subject to interest
rate changes as the interest rate is fixed for the term of the debt.

      There is $12.0 million outstanding on the working capital facility which
is part of our senior credit agreement. Interest rates payable or advances under
the facility are based on prime lending rates plus interest rate margins ranging
from 0.25% to 1.25% depending on LEP's ratio of debt to operating earnings
before interest, depreciation and amortization ("EBITDA"). A 1% decrease in
prime lending rates would decrease our annual interest payments by $0.1 million.

      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
forward sale agreements 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 in 2011, the principal amount of the Senior Notes will be payable in
United States dollars. We estimate that had the value of the Canadian dollar
increased by US$0.01 at December 31, 2004, the value of our US dollar
denominated long-term debt as at December 31, 2004 would have decreased
approximately $3.9 million and resulted in an increase to earnings of the same
amount. We also estimate that had the value of the Canadian dollar increased by
US$0.01, the annual interest payment amounts on our long-term debt as at
December 31, 2004 would have decreased by approximately $0.4 million.

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

      The estimated fair value of the Senior Notes at December 31, 2004 was
Cdn$360.3 million (2003 - Cdn$388.5 million). The fair value of the Senior Notes
is determined based upon the quoted market values. This estimated fair value may
differ from the amount which could be realized in an immediate settlement of
these notes. The bid price for the Senior Notes, based on quoted market values
as at December 24, 2004, was U.S. $113.50 with a current yield of 8.59%. At the
end of the prior year, the bid price was U.S. $113.00 with a current yield of
8.63%, based on quoted market values as at January 2, 2004.

ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

      Not applicable for an annual report.

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PART II

ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

      None.

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

      None.

ITEM 15 CONTROLS AND PROCEDURES

      DISCLOSURE CONTROLS AND PROCEDURES

      Disclosure controls and procedures are defined by the Securities and
Exchange Commission as those controls and other procedures that are designed to
ensure that information required to be disclosed by the company in the reports
that it files or submits under the Securities Exchange Act of 1934 ("Exchange
Act") is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that the information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company's management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.

      We have evaluated the effectiveness of the design and operation of its
disclosure controls and procedures. Such evaluations were performed under the
supervision of management, including the Chief Executive Officer and Chief
Financial Officer. We have concluded that our disclosure controls and procedures
were effective as at December 31, 2004.

      CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

      Our evaluation did not identify any changes in internal controls over
financial reporting during the period covered by this annual report that have
materially affected, or are reasonably likely to materially affect, our controls
over financial reporting.

ITEM 16 [RESERVED]

ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT

      Our Management Committee has not designated an Audit Committee financial
expert as defined under the Sarbanes-Oxley Act of 2002 and the rules of the SEC.
We believe the skills, experience and education of the Audit Committee members
qualify them to carry out their duties as members of the Audit Committee. In
addition, the Audit Committee has the ability on its own to retain independent
accountants, financial advisors or other consultants, advisors and experts
whenever it deems appropriate.

ITEM 16B CODE OF ETHICS

      All personnel are required to strictly comply with the provisions of our
code of ethics, which results in full, fair, accurate, timely and understandable
disclosure of financial information and compliance with applicable laws, rules
and regulations. The code of ethics is posted on our website at www.luscar.com.
We will post any amendments or waivers thereto within five business days of such
amendment or waiver.

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                                                              2004 Annual Report

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<PAGE>

ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The following table summarizes the fees charged by Deloitte & Touche LLP,
our independent registered chartered accountants, for certain services rendered
to us during the most recent two years.

<TABLE>
<CAPTION>
                          YEAR ENDED          YEAR ENDED
                         DECEMBER 31,        DECEMBER 31,
                             2004                2003
                        ----------------   ----------------
                                  (IN THOUSANDS)
<S>                     <C>                <C>
Audit fees (1)          $          1,109   $            865
Audit-related fees (2)               315                284
Tax fees (3)                          94                  6
All other fees (4)                     4                  -
                        ----------------   ----------------
Total                   $          1,522   $          1,155
                        ================   ================
</TABLE>

Notes:
(1)   "Audit fees" means the aggregate fees billed in each of the fiscal years
      listed for professional services rendered by our principal auditors for
      the audit of our interim and annual financial statements.

(2)   "Audit-related fees" means the aggregate fees billed in each of the fiscal
      years listed for assurance and related services rendered by our principal
      auditors for the audit of our financial information.

(3)   "Tax fees" means the aggregate fees billed in each of the fiscal years
      listed for professional services rendered by our principal auditors for
      tax compliance, tax advice and tax planning.

(4)   "All other fees" means the aggregate fees billed in each of the fiscal
      years listed for products and services provided our principal auditor,
      other than the services reported under audit fees, audit-related fees and
      tax fees.

      The Audit Committee approves the engagement terms for all audit and
non-audit services to be provided by LEP's external accountants before such
services are provided to our company or any of our subsidiaries. The terms of
engagement and scope of the annual audit of the financial statements are agreed
to by the Audit Committee in advance of the engagement of the auditors in
respect of the annual audit. The auditors are not permitted to provide non-audit
services that would compromise their independence or violate any laws or
regulations that would affect their appointment as auditors.

      The Audit Committee approved one hundred percent (100%) of the services
provided as described in the table above.

ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

      Not applicable.

ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

      None.

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                      - 89 -

<PAGE>

PART III

ITEM 17 FINANCIAL STATEMENTS

      We have elected to provide financial statements for the financial year
ended December 31, 2004 and the related information pursuant to Item 18.

ITEM 18 FINANCIAL STATEMENTS

      LEP's financial statements have been prepared on the basis of accounting
principles generally accepted in Canada and comply in all material respects with
accounting principles generally accepted in the United States, except as set
forth in "Selected Financial Data" and Note 22 to the Consolidated Financial
Statements.

LUSCAR ENERGY PARTNERSHIP
    CONSOLIDATED FINANCIAL STATEMENTS

      Report of Independent Registered Chartered Accountants
      Consolidated balance sheets
      Consolidated statements of earnings and partners' equity
      Consolidated statements of cash flows
      Notes to consolidated financial statements

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                      - 90 -
<PAGE>

ITEM 19 EXHIBITS

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

<TABLE>
<CAPTION>
EXHIBIT NO.   EXHIBIT
-----------   -------
<S>           <C>
 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))

 7.1          Statement regarding Computation of Ratios

 8.1          List of Subsidiaries of the Registrant

10.1          Certification of Luscar Energy Partnership Chief Executive Officer and Chief Financial Officer
              pursuant to 18 U.S.C. Section 1350

10.2          Sworn written statement of Luscar Energy Partnership Chief Executive Officer

10.3          Sworn written statement of Luscar Energy Partnership Chief Financial Officer
</TABLE>

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                      - 91 -

<PAGE>

                                   SIGNATURES

      The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.

                                              LUSCAR ENERGY PARTNERSHIP

                                              By: /s/ Garnet Clark
                                                  ------------------------------
Date: June 20, 2005                           Name: Garnet Clark
                                              Title: Vice President, Finance
                                                     and Chief Financial Officer

                                                       Luscar Energy Partnership
                                                              2004 Annual Report

                                      - 92 -
<PAGE>
                          INDEX TO FINANCIAL STATEMENTS


LUSCAR ENERGY PARTNERSHIP

  CONSOLIDATED FINANCIAL STATEMENTS

     Report of Independent Registered Chartered Accountants                F-4
     Consolidated balance sheets                                           F-5
     Consolidated statements of earnings and partners' equity              F-6
     Consolidated statements of cash flows                                 F-7
     Notes to consolidated financial statements                            F-8











                                       F-1
<PAGE>










                      (This page intentionally left blank)













                                      F-2
<PAGE>


CONSOLIDATED FINANCIAL STATEMENTS OF

LUSCAR ENERGY PARTNERSHIP

DECEMBER 31, 2004, 2003 AND 2002


















                                      F-3
<PAGE>


             REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Partners of
Luscar Energy Partnership

         We have audited the consolidated balance sheets of Luscar Energy
Partnership (the "Partnership") as at December 31, 2004 and 2003 and the
consolidated statements of earnings and partners' equity and cash flows for each
of the years in the three year period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight
Board (United States). These 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, 2004 and 2003 and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 2004 in
accordance with Canadian generally accepted accounting principles.

         The Partnership is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Partnership's internal control over financial reporting. Accordingly, we express
no such opinion.



Deloitte & Touche LLP
Independent Registered Chartered Accountants
Edmonton, Canada
June 8, 2005

   COMMENT BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS FOR US READERS ON
                        CANADA-US REPORTING DIFFERENCES

         The standards of the Public Company Accounting Oversight Board (United
States) for auditors require the addition of an explanatory paragraph (following
the opinion paragraph) when there are changes in accounting principles that have
been implemented in the financial statements such as those described in Note 3
to the financial statements of Luscar Energy Partnership. Our report to the
Partners of Luscar Energy Partnership, dated June 8, 2005 is expressed in
accordance with Canadian reporting standards, which do not require a reference
to such changes in accounting principles in the report of independent registered
chartered accountants when the change is properly accounted for and adequately
disclosed in the financial statements.



Deloitte & Touche LLP
Independent Registered Chartered Accountants
Edmonton, Canada
June 8, 2005




                                      F-4





<PAGE>
LUSCAR ENERGY PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                      AS AT             AS AT
                                                                   DECEMBER 31,      DECEMBER 31,
                                                                       2004             2003
                                                                   ------------  -------------------
(in thousands of Canadian dollars)                                               (Restated - Note 3)

<S>                                                                <C>               <C>
ASSETS
CURRENT
      Cash and cash equivalents                                    $   17,218         $   21,750
      Accounts receivable                                              52,221             62,087
      Income taxes recoverable                                          1,269              1,096
      Future income taxes [note 16]                                     4,850              3,896
      Inventories [note 6]                                             40,005             43,816
      Overburden removal costs                                          2,687              4,199
      Prepaid expenses                                                  2,310              2,073
                                                                   ----------         ----------
                                                                      120,560            138,917
Capital assets [note 7]                                             1,346,249          1,405,306
Other assets [note 10]                                                 27,905             27,704
                                                                   ----------         ----------
                                                                   $1,494,714         $1,571,927
                                                                   ==========         ==========
LIABILITIES AND PARTNERS' EQUITY
CURRENT
      Credit facility [note 11]                                    $   12,000         $   12,000
      Trade accounts payable and accrued charges                       41,229             38,648
      Accrued interest payable                                          6,686              7,219
      Accrued payroll and employee benefits                             9,994             10,332
      Due to related parties [note 17]                                    402              1,236
      Income taxes payable                                                495              2,472
      Current portions of
            Long-term debt [note 11]                                    7,796             46,342
            Asset retirement obligations [note 12]                     23,576             17,829
                                                                   ----------         ----------
                                                                      102,178            136,078
Accrued pension obligations [note 8]                                    6,058              4,956
Long-term debt [note 11]                                              355,099            365,934
Asset retirement obligations [note 12]                                 76,707             90,509
Future income taxes [note 16]                                         332,710            354,428
                                                                   ----------         ----------
                                                                      872,752            951,905

Guarantees, commitments and contingencies [notes 24 and 25]                 -                  -

PARTNERS' EQUITY
      Partners' equity                                                621,962            620,022
                                                                   ----------         ----------
                                                                   $1,494,714         $1,571,927
                                                                   ==========         ==========
</TABLE>

See accompanying notes

                                      F-5
<PAGE>

LUSCAR ENERGY PARTNERSHIP

            CONSOLIDATED STATEMENTS OF EARNINGS AND PARTNERS' EQUITY

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                                    2004              2003                  2002
                                                                 ---------    ------------------    -------------------
(in thousands of Canadian dollars)                                            (Restated - Note 3)   (Restated - Note 3)
<S>                                                              <C>               <C>               <C>
REVENUE                                                          $ 500,803         $ 376,060             $ 443,067
EXPENSES AND OTHER INCOME
   Cost of sales                                                   350,355           268,925               317,132
   Selling, general and administrative expenses                     18,133            24,262                13,149
   Depreciation and amortization                                   113,109            96,361                94,704
   Asset retirement obligations accretion                            7,104             6,888                 6,314
   Foreign currency translation gain [note 13]                     (23,643)          (79,433)               (4,021)
   Interest expense [note 14]                                       45,337            46,488                52,716
   Other income [note 15]                                          (52,732)          (21,096)               (9,956)
                                                                 ---------         ---------             ---------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAXES                                                        43,140            33,665               (26,971)
Income tax recovery [note 16]                                      (19,405)          (61,225)              (52,942)
                                                                 ---------         ---------             ---------
NET EARNINGS FROM CONTINUING OPERATIONS                             62,545            94,890                25,971
Discontinued operations [note 5]                                     5,463            19,130                 3,044
                                                                 ---------         ---------             ---------
NET EARNINGS FOR THE YEAR                                           68,008           114,020                29,015
                                                                 ---------         ---------             ---------

Partners' equity, beginning of year, as previously stated          659,087           529,163               496,963
Change in accounting policy for asset retirement
obligations [notes 3 & 12]                                         (39,065)          (39,160)              (35,975)
                                                                 ---------         ---------             ---------
Partners' equity, beginning of year, as restated                   620,022           490,003               460,988
Net earnings for the year                                           68,008           114,020                29,015
Distribution to partners                                           (66,068)          (33,962)                    -
Net equity contribution from acquisition of SCAI [note 4]                -            49,961                     -
                                                                 ---------         ---------             ---------
PARTNERS' EQUITY, END OF YEAR                                    $ 621,962         $ 620,022             $ 490,003
                                                                 =========         =========             =========
</TABLE>


See accompanying notes

                                      F-6
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                                  2004              2003               2002
                                                               ---------         ---------           ---------
(in thousands of Canadian dollars)                                          (Restated - Note 3)  (Restated - Note 3)
<S>                                                            <C>               <C>               <C>
OPERATING ACTIVITIES
Net earnings for the year                                      $  68,008         $ 114,020            $  29,015
Non-cash items:
   Depreciation and amortization                                 113,109            97,320              101,888
   Asset retirement obligations accretion [note 12]                7,104             6,888                6,314
   Future income taxes                                           (22,672)          (57,388)             (52,942)
   Foreign currency translation loss (gain) [note 13]            (23,669)          (77,330)              (3,453)
   Gain on disposal of capital assets                             (4,126)          (24,524)              (1,242)
   Gain on settlement of asset retirement obligations             (7,642)             (192)                (580)
   Gain on Fording settlement                                     (6,047)                -                    -
   Pension expense in excess of funding                            1,102             5,493                4,439
   Financial instruments                                               -              (239)              (4,206)
   Interest income earned on sinking funds                        (2,940)           (3,689)              (4,215)
   Other                                                            (365)              445                    6
Asset retirement obligations costs                               (17,045)          (16,071)             (16,826)
Change in non-cash working capital [note 20]                      16,305            46,284               10,388
                                                               ---------         ---------            ---------
                                                                 121,122            91,017               68,586
                                                               ---------         ---------            ---------
INVESTING ACTIVITIES
Capital asset purchases                                          (16,310)          (25,005)             (51,035)
Proceeds on disposal of capital assets                             5,262             1,068                1,894
Other assets                                                      (2,620)            4,279               (1,096)
Sherritt Coal Acquisition Inc. asset transfer [note 4]                 -           (70,000)                   -
Promissory notes of LCL acquired from partners [note 4]                -          (298,605)                   -
Credit facility acquired [note 4]                                      -           (12,000)                   -
Cash acquired [note 4]                                                 -             1,356                    -
                                                               ---------         ---------            ---------
                                                                 (13,668)         (398,907)             (50,237)
                                                               ---------         ---------            ---------
FINANCING ACTIVITIES
Repayments of long-term debt                                     (46,235)          (24,038)              (3,095)
Distribution to partners                                         (65,000)          (27,000)                   -
Operating line of credit                                               -            12,000                    -
Financial instruments                                                  -            (2,702)                   -
Long-term debt issued                                                  -               712                    -
Equity contribution from partners [note 4]                             -           298,605                    -
Deferred financing costs incurred                                      -                 -               (1,640)
                                                               ---------         ---------            ---------
                                                                (111,235)          257,577               (4,735)
                                                               ---------         ---------            ---------

Change in cash and cash equivalents                               (3,781)          (50,313)              13,614
Effect of foreign exchange rate changes on
cash and cash equivalents [note 13]                                 (751)           (1,650)                (232)
Cash and cash equivalents, beginning of year                      21,750            73,713               60,331
                                                               ---------         ---------            ---------
Cash and cash equivalents, end of year                         $  17,218         $  21,750            $  73,713
                                                               =========         =========            =========

Interest paid                                                  $  46,379         $  49,486            $  62,663
Income taxes paid                                              $   1,570         $   1,972            $   2,159
</TABLE>

See accompanying notes

                                      F-7
<PAGE>
LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

1.    ORGANIZATION AND FINANCIAL STATEMENT PRESENTATION

      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., a subsidiary of the
Ontario Teachers' Pension Plan Board ("Teachers"), 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.

      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. LEP had no
operations prior to the acquisition of LCIF on May 11, 2001.

      On October 17, 2003 LEP acquired thermal coal assets through the
acquisition of the shares of Sherritt Coal Acquisition Inc ("SCAI"), a
subsidiary of Sherritt Coal Partnership II ("SCPII") by Luscar Ltd. ("LL"). LEP,
LL, SCAI, and SCPII are all owned, as to 50% each, directly or indirectly, by
Sherritt and Teachers. The acquisition by LL, effected by an internal
reorganization among all these entities and their subsidiaries, involved a
distribution by LL to Sherritt and Teachers of approximately 3.0 million units
of Fording Canadian Coal Trust ("FCCT") formerly held by LL and $70.0 million in
cash. The remaining portion of the acquisition was effected through an equity
investment by Sherritt and Teachers in LEP. Further information on this
transaction is included in Note 4.

      The consolidated statements of earnings and partners' equity and cash
flows are for the year ended December 31, 2004 with comparative figures for the
years ended December 31, 2003 and 2002.

2.    SIGNIFICANT ACCOUNTING POLICIES

      LEP prepares its financial statements following Canadian generally
accepted accounting principles. As described in Note 22, these principles differ
in certain respects from generally accepted accounting principles in the United
States of America. 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.

PRINCIPLES OF CONSOLIDATION

      The financial statements of entities which are controlled by LEP either
directly or indirectly, through wholly-owned subsidiaries, are consolidated.
Interests in joint ventures are accounted for using the proportionate
consolidation method, whereby consolidation accounts include LEP's share of
joint venture assets, liabilities, revenues, expenses and cash flows.

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 and the reported amount of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.

                                      F-8
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

      In particular, the amounts recorded for depreciation and amortization of
mining properties and for asset retirement obligations 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. Estimates are also used in determining the quantities of coal
inventories, collectibility of accounts receivable, the ability to utilize tax
carry forwards in future income tax calculations, and the calculation of post
employment benefits on our defined benefit pension plans. Such estimates and
assumptions have been made using careful judgments, which, in management's
opinion, are within reasonable limits of materiality.

REVENUE RECOGNITION

      Sales revenue is recognized when title to the coal passes to the customer
and risk of loss 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 occurs when the coal is
loaded at the mine. For export coal sales, this occurs when coal is loaded onto
marine vessels at terminal locations. Royalty revenues are recognized when the
underlying commodity is extracted.

CASH AND CASH EQUIVALENTS

      Cash and cash equivalents include cash on hand and in banks as well as all
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 as a cost of inventory and recognized in cost of sales in the
same period as the revenue from the sale of the inventory.

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.

ASSET RETIREMENT OBLIGATIONS

      Effective January 1, 2004, LEP retroactively adopted the CICA Handbook
Section 3110, "Asset Retirement Obligations". This pronouncement applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development, and use of the asset.
The rules require that the estimated fair value of an asset retirement
obligation be recognized as a liability in the period incurred. A corresponding
amount is added to the carrying amount of the associated asset and depreciated
over the asset's useful life. The liability is accreted over time through
charges to earnings to reflect changes in its present value. This differs from
the previous practice, which involved accruing for the estimated reclamation,
site restoration, and mine closure liability through charges to earnings on a
unit of production basis over the expected life of each mine's reserves.

                                      F-9
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for 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>
Producing mining properties                                   3 - 40 years
Plant and buildings                                           5 - 40 years
Equipment                                                     3 - 35 years
Equipment under capital lease                                 3 -  7 years
Non-producing mining properties                                    0 years
Intangible assets                                             5 - 42 years
Asset retirement obligations                                  1 - 3  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.

      Plant and buildings and equipment are amortized over their estimated
useful lives, while equipment under capital lease is amortized over the term of
the lease. Intangible assets include royalty generating resource properties and
are amortized over their respective estimated useful lives. Repair and
maintenance costs related to capital assets are expensed as incurred.

Asset Impairment

      The carrying values of mining properties and intangible assets are
reviewed when events or changes in circumstances indicate that the carrying
amounts of the assets may not be recoverable, using projected undiscounted cash
flows and any resulting write-downs are charged to earnings at the time of
determination. LEP management reviews and evaluates the carrying value of its
operating mines and development properties for impairment when events or changes
in circumstances indicate that the carrying amounts of related assets or groups
of assets may not be recoverable. If the total estimated future cash flows on an
undiscounted basis are less than the carrying amount of the asset, an impairment
loss is measured and recorded. Future cash flows are estimated based on
estimated future recoverable mine production, expected sales prices (considering
current and historical prices, price trends and related factors), production
levels, cash costs of production, capital and reclamation costs, all based on
detailed engineering life-of-mine plans. Future recoverable mine production is
determined from proven and probable reserves and measured, indicated and
inferred mineral resources after taking into account estimated losses during ore
processing and treatment. Estimates of recoverable production from measured,
indicated and inferred mineral interests are risk adjusted based on management's
relative confidence in converting such interests to proven and probable
reserves. All long-lived assets at a particular operation are considered
together for purposes of estimating future cash flows. In the case of
exploration stage mineral interests associated with greenfields exploration
potential, cash flows and fair values are individually evaluated based primarily
on recent exploration results and recent transactions involving sales of similar
properties. Assumptions underlying future cash flow estimates are subject to
risks and uncertainties. It is possible that changes in estimates could occur
which may affect the expected recoverability of these investments.

                                      F-10
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

EXPLORATION AND DEVELOPMENT COSTS

      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.

OTHER ASSETS

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

      Deferred project development costs include costs that are necessary in the
development of a potential acquisition or construction project. The
appropriateness of the carrying value of these costs is evaluated each reporting
period, and any unrecoverable amounts of capitalized costs for projects no
longer likely to occur are charged to expense in the current period.

      Other assets also include investments and other assets which include
long-term assets, real estate properties, prepaid royalties and amounts
recoverable from domestic customers in future years.

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.

                                      F-11
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

      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 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.

3.    CHANGES IN ACCOUNTING POLICIES

ASSET RETIREMENT OBLIGATIONS (SEE NOTE 12)

      In March 2003, the CICA issued new accounting rules dealing with asset
retirement obligations, which come into effect for fiscal years beginning on or
after January 1, 2004. This change in accounting policy was applied
retroactively and accordingly, the financial statements of prior periods were
restated. The rules address financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and use of the asset. The rules require that the
estimated fair value of an asset retirement obligation be recognized as a
liability in the period incurred. A corresponding amount is added to the
carrying amount of the associated asset and depreciated over the asset's useful
life. The liability is accreted over time through charges to earnings to reflect
changes in its present value. This differs from the previous practice, which
involved accruing for the estimated reclamation, site restoration, and mine
closure liability through charges to earnings on a unit of production basis over
the expected life of each mine's reserves.

      The new accounting policy was implemented on January 1, 2004 on a
retroactive basis with restatement of prior periods. The cumulative effect of
the new accounting standard on the balance sheet at December 31, 2003 was to
increase capital assets by $7,923, decrease accounts payable by $638, decrease
future income taxes by $19,359, increase asset retirement obligations by
$66,985, and decrease opening retained earnings by $39,065. For the year ended
December 31, 2003, the impact was a $95 increase in net earnings (year ended
December 31, 2002 - decrease in net earnings of $3,185).

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

      CICA Handbook Section 1100, Generally Accepted Accounting Principles, was
issued in October 2003, and is effective for fiscal years beginning January 1,
2004. The section establishes standards for financial reporting in accordance
with generally accepted accounting principles ("GAAP") and clarifies the
relative authority of various accounting pronouncements and other sources within
GAAP. There was no impact to these financial statements in adopting this new
standard.

GENERAL STANDARDS OF FINANCIAL STATEMENT PRESENTATION

      In July 2003, the CICA issued Section 1400, General Standards of Financial
Statement Presentation, which is effective for fiscal years beginning on January
1, 2004. This standard clarifies what constitutes fair presentation in
accordance with GAAP, which involves providing sufficient information in a clear
and

                                      F-12
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

understandable manner about certain transactions or events of such size, nature
and incidence that their disclosure is necessary to understand LEP's financial
statements. This standard is reflected in these consolidated financial
statements and there are no material differences as a result of the
implementation.

REVENUE RECOGNITION

      In December 2003, the CICA issued EIC Abstract 141, Revenue Recognition,
which incorporates the principles and summarizes the guidance in the U.S.
Securities and Exchange Commission Staff Accounting Bulletin 101, Revenue
Recognition in Financial Statements. The abstract also provides interpretative
guidance on the application of CICA Handbook Section 3400, Revenue. The abstract
has been applied prospectively commencing January 1, 2004. The adoption of this
abstract had no impact on these financial statements.

IMPAIRMENT AND DISPOSAL OF LONG LIVED ASSETS AND DISCONTINUED OPERATIONS

      In 2002, the CICA issued Section 3063, Impairment of Long-lived Assets,
and Section 3475, Disposal of Long Lived Assets and Discontinued Operations, to
harmonize with Statement of Financial Accounting Standard No. 144. Section 3063
is effective for fiscal years beginning on or after April 1, 2003 and
establishes standards for the recognition, measurement and disclosure of the
impairment of long-lived assets. Section 3475 applies to disposal activities
initiated by an enterprise's commitment on or after May 1, 2003 and establishes
standards for the recognition, measurement, presentation and disclosure of the
disposal of long-lived assets and discontinued operations. There were no
significant impairment losses recorded in respect of long-lived assets and
discontinued operations in the year.

HEDGING RELATIONSHIPS

      In 2003, the CICA issued Accounting Guideline 13, "Hedging Relationships",
("AcG-13") which deals with the identification, documentation, designation and
effectiveness of hedges and also the discontinuance of hedge accounting, but
does not specify hedge accounting methods. AcG-13 is applicable to hedging
relationships in effect for fiscal years beginning on or after July 1, 2003. The
implementation of this guideline in 2004 did not materially change the
accounting policies in use and as a result, it did not have an impact on the
financial statements. Emerging Issues Committee ("EIC") Abstract 128,
"Accounting for Trading, Speculative or Non-hedging Derivative Financial
Instruments", requires most freestanding derivative financial instruments that
do not qualify for hedge accounting under Accounting Guideline 13, to be
recognized in the balance sheet at fair value. The adoption of this abstract had
no impact on the financial statements.

4.    ACQUISITION

      On October 17, 2003 LL acquired 100% of the shares of Sherritt Coal
Acquisition Inc. (SCAI) a wholly owned subsidiary of Sherritt Coal Partnership
II (SCPII). LEP, LL, SCAI and SCPII are all owned, as to 50% each, directly or
indirectly, by Sherritt and Teachers. The sale was completed for total
consideration of $455,000. The transaction has been recorded in the financial
statements at the net asset carrying amount of $208,838. The difference of
$246,162 between the consideration paid and the carrying value of the assets
received was considered an equity distribution and charged to equity in 2003.
Subsequent to the purchase of SCAI, Sherritt and Teachers made a cash equity
contribution to LEP of $298,605, which was used to acquire the promissory notes
due from Luscar Coal Ltd. ("LCL").

                                      F-13
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

      Independent valuators provided an opinion that the transaction was fair
from a financial point of view to the holders of LCL's 9.75% senior notes based
upon and subject to, amongst other things, the scope of their review and
limitations and assumptions as outlined in their opinion letter and an indemnity
in certain circumstances. The opinion was one factor among many that the
management committee of LEP considered in contemplation of the transaction.

      The assigned fair values of the underlying net assets acquired are
summarized as follows:

<TABLE>
<S>                                                                             <C>
ACQUISITION FUNDING AND COST
Cash                                                                            $  70,000
Fording Canadian Coal Trust ("FCCT") units                                         86,395
Promissory notes                                                                  298,605
                                                                                ---------
                                                                                  455,000
                                                                                ---------
IDENTIFIABLE NET ASSETS ACQUIRED
Capital assets                                                                    228,264
Working capital                                                                     2,831
Cash                                                                                1,356
Short-term debt                                                                   (12,000)
Long-term debt                                                                     (6,043)
Future income taxes                                                                (5,570)
                                                                                ---------
                                                                                  208,838
                                                                                ---------
Consideration less net assets acquired                                            246,162
Equity impact from disposal of FCCT units, net of applicable taxes of $553          2,482
Less equity contribution from partners                                           (298,605)
                                                                                ---------
Net equity contribution                                                         $ (49,961)
                                                                                =========
</TABLE>

5.    DISCONTINUED OPERATIONS

      During the first quarter of 2003, LCL exchanged its metallurgical coal
assets and port facilities for units in the Fording Canadian Coal Trust
("FCCT"). LCL received 2,979,000 units of the trust and affiliates of Sherritt
and Teachers received 221,000 units of the trust for a total value of $100,801
in exchange for these assets. LCL received $16,156 related to the estimate of
working capital for the metallurgical assets. LEP recorded a gain of $17,812,
net of taxes of $6,346 and selling expenses of $744, on the disposal in the
first quarter of 2003.

      On June 18, 2004 LCL reached an agreement with Fording Inc., Elk Valley
Coal Partnership, and Consol Energy Inc. (and subsidiaries) settling the
majority of issues that had previously been outstanding related to the transfer
of the metallurgical coal assets to FCCT effective February 28, 2003. Certain
elements of the original sale agreement had not been finalized due to
differences in interpretation between the parties to the transaction. Settled
issues include working capital adjustments, certain payments made under the
agreement and obligations for reclamation activities. As a result of the
transferring of the reclamation liability for the Luscar mine to Elk Valley Coal
Partnership, we were able to reduce our reclamation bonding requirements by
$6,467.

      As a result of the settlement agreement, LEP recorded a gain of $2,053 net
of taxes of $476 in the second quarter of 2004 in discontinued operations. In
the third quarter of 2004, LEP recognized additional expenses related to the
settlement of $84 net of taxes of $45 in discontinued operations. During the
fourth quarter of 2004 LEP recognized an additional gain related to the
settlement of the remaining severance liability of $3,494, including a tax
recovery of $797, in discontinued operations.

                                      F-14
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

         The results of discontinued operations are as follows:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                             2004            2003                  2002
                                            -------    -------------------   -------------------
                                                       (Restated - Note 3)   (Restated - Note 3)
<S>                                         <C>        <C>                   <C>
Net income                                  $     -        $  1,318               $ 3,044
Gain arising from settlement agreement        5,463               -                     -
Gain on sale of assets (see below)                -          17,812                     -
                                            -------        --------               -------
                                            $ 5,463        $ 19,130               $ 3,044
                                            =======        ========               =======
</TABLE>

      The carrying values of the assets and liabilities related to the
discontinued operations were as follows:

<TABLE>
<CAPTION>
                                                           AS AT
                                                       FEBRUARY 28,
                                                           2003
                                                    -------------------
                                                    (Restated - Note 3)
<S>                                                 <C>
Accounts receivable                                      $  2,653
Inventories                                                24,594
Overburden removal costs                                   23,827
Capital assets                                             48,777
Other assets                                                1,823
                                                         --------
Total assets                                              101,674
                                                         --------

Bank overdraft                                              1,020
Accounts payable and accrued charges                       12,473
Asset retirement obligations                                6,892
Capital leases                                              2,189
Other liabilities                                           1,267
                                                         --------
Total liabilities                                          23,841
                                                         --------
Net assets related to discontinued operations            $ 77,833
                                                         ========

GAIN ON SALE OF ASSETS
Proceeds                                                 $100,801
Overburden removal costs                                  (23,827)
Capital assets                                            (48,777)
Other assets                                               (1,823)
Asset retirement obligations                                6,892
Capital leases                                              2,189
Other liabilities                                           1,267
Liabilities retained by LEP                               (11,820)
Taxes                                                      (6,346)
Selling expenses                                             (744)
                                                         --------
Gain on sale of assets                                   $ 17,812
                                                         ========
</TABLE>

                                      F-15
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

      Under the terms and conditions of the sale agreement, LEP retained
liabilities relating to severance, under funded pension plans, and accrued
reclamation costs in total of $11,820. Under the agreement reached on June 18,
2004 LEP transferred the reclamation liability for the Luscar mine to Elk Valley
Coal Partnership. In the fourth quarter of 2004, LEP recognized a gain on the
settlement of the severance liability at the Luscar mine. LEP currently retains
a liability relating to an under funded pension plan.

      Net cash flows relating to the discontinued operations presented on the
statements of cash flows are detailed as follows:

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                   2004         2003         2002
                                                  ------      --------      -------
<S>                                               <C>         <C>           <C>
Operating activities                              $ (948)     $ 21,689      $ 2,236
Investing activities                                   -          (313)      (3,667)
Financing activities                                   -       (21,889)       1,204
                                                  ------      --------      -------
Cash flows related to discontinued operations     $ (948)     $   (513)     $  (227)
                                                  ======      ========      =======
</TABLE>

      The gain on the Fording settlement agreement of $5,463 for 2004 includes a
non-cash gain of $6,047 and a future income tax recovery of $364 which results
in cash used in operating activities of $948.

      Included in depreciation and amortization on the LEP consolidated
statement of cash flows is nil in 2004 ($959 in 2003 and $7,184 in 2002) from
discontinued operations.

6.    INVENTORIES

<TABLE>
<CAPTION>
                          AS AT             AS AT
                      DECEMBER 31,       DECEMBER 31,
                          2004               2003
                      ------------       -------------
<S>                   <C>                <C>
Coal at mine            $ 19,012           $ 20,821
Coal at port                 221                933
Mine supplies             20,772             22,062
                        --------           --------
                        $ 40,005           $ 43,816
                        ========           ========
</TABLE>

                                      F-16
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

7.    CAPITAL ASSETS

<TABLE>
<CAPTION>
                                        AS AT DECEMBER 31, 2004             AS AT DECEMBER 31, 2003
                                      ----------------------------       -----------------------------
                                                      ACCUMULATED                         ACCUMULATED
                                                      DEPRECIATION                        DEPRECIATION
                                                          AND                                 AND
                                         COST         AMORTIZATION          COST          AMORTIZATION
                                      ----------      ------------       ----------       ------------
                                                                              (Restated - Note 3)
<S>                                   <C>             <C>                <C>              <C>
Producing mining properties           $1,018,634        $ 118,884        $1,010,604         $  66,356
Plant and buildings                       35,723            7,225            31,210             2,123
Equipment                                271,066           21,472           288,135            13,269
Equipment under capital leases            35,880            4,489             9,987               528
Non-producing mining properties            4,280                -             4,280                 -
Intangible assets                        140,078            9,921           140,078             4,636
Asset retirement obligations             100,109           97,530            88,385            80,461
                                      ----------        ---------        ----------         ---------
                                      $1,605,770        $ 259,521        $1,572,679         $ 167,373
                                      ----------        ---------        ----------         ---------
Net book value                                $1,346,249                          $1,405,306
                                      ===========================        ============================
</TABLE>

      As part of the disposition of the metallurgical assets to FCCT on February
28, 2003 (as described in note 5), capital assets with a total net book value of
$48,072 (cost of $206,890 and accumulated amortization of $158,818) were removed
from the above balances in 2003. In the SCAI acquisition (as described in note
4), capital assets with a net book value of $228,264 were acquired (including
the $140,078 in royalties that are treated as intangible assets) in 2003.

      Depreciation and amortization of tangible assets provided in the accounts
for the year ended December 31, 2004 amounted to $104,543 (2003 - $89,289 and
2002 - $92,271). Included in these amounts is depreciation on capital leases of
$3,961 (2003 -$624 and 2002 - $666).

      Concurrent with the implementation of the new accounting rules related to
asset retirement obligations, LEP undertook a comprehensive review of the
estimated useful lives of capital assets. As a result of this review, the
depreciation and amortization of producing mining properties was reduced
resulting in a reduction of $10,623 for the 2004 calendar year. The change in
estimated useful lives of producing mining properties was treated as a change in
accounting estimate and was, therefore, implemented on a prospective basis.

      Amortization of intangible assets provided in the accounts for the year
ended December 31, 2004 amounted to $5,285 (2003 - $4,636 and 2002 - nil).
Intangible assets are substantially comprised of royalty generating resource
properties. Estimated cumulative amortization of intangibles over the next five
years is $26,425 ($5,285 for each of the years 2005-2009). There is a $33,114
residual value associated with undeveloped properties in the intangible assets.
The weighted average amortization period is 26 years.

                                      F-17
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

8.    PENSION

      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. These defined benefit plans
are final-pay 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 provides 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:

<TABLE>
<CAPTION>
                                                               AS AT            AS AT             AS AT
                                                            DECEMBER 31,     DECEMBER 31,      DECEMBER 31,
                                                               2004             2003               2002
                                                            ------------     ------------      ------------
<S>                                                         <C>              <C>               <C>
Expected long-term rate of return on plan assets                    7.00%            7.00%             7.00%
Discount rate on pension obligations and benefit costs              6.25%            6.25%             7.00%
Rate of compensation increases                               3.50 - 4.50%     3.50 - 4.50%      3.50 - 4.50%
Inflation rate                                               2.50 - 4.00%     2.50 - 4.00%      3.50 - 4.00%
Average remaining service period of active employees        13 - 22 years    13 - 22 years     10 - 15 years
</TABLE>

      The long-term rate of return on plan assets assumption is based on a mix
of historical market returns from debt and equity securities.

      LEP's net pension plan expense is as follows:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                      2004          2003          2002
                                                    --------      --------      --------
<S>                                                 <C>           <C>           <C>
Current service cost - defined benefit              $  2,482      $  1,958      $  1,577
                     - defined contribution            4,125         4,399         6,133
Interest cost                                          3,669         3,321         3,362
Expected return on plan assets                        (3,487)       (2,918)       (3,822)
Amortization of net actuarial (gain) loss                260        (1,753)           24
Amortization of net transitional obligation                -             -           687
Loss on plan settlement                                    -         1,229             -
Provision for loss on plan transfer                        -             -         3,541
Increase in valuation allowance at end of year           428           769           223
                                                    --------      --------      --------
Net pension plan expense                            $  7,477      $  7,005      $ 11,725
                                                    ========      ========      ========
</TABLE>

                                      F-18
<PAGE>
      Information about LEP's defined benefit pension plans, in aggregate, is as
follows:

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                                   2004          2003
                                                 ---------    ----------
<S>                                              <C>          <C>
ACCRUED BENEFIT OBLIGATION
Balance, beginning of year                       $  57,242    $   52,683
Current service costs                                2,482         1,958
Interest cost                                        3,669         3,321
Benefits paid                                       (2,050)       (1,492)
Actuarial loss                                       3,584         2,294
Acquisitions, settlements and curtailments               -        (1,522)
                                                 ---------    ----------
Balance, end of period                              64,927        57,242
                                                 ---------    ----------

PLAN ASSETS
Fair value, beginning of year                       49,597        47,929
Actual return on plan assets                         5,363         5,186
Employer contributions                               2,488           750
Benefits paid                                       (2,050)       (1,493)
Acquisitions, settlements and curtailments               -        (2,775)
                                                 ---------    ----------
Fair value, end of period                           55,398        49,597
                                                 ---------    ----------
Funded status - deficit                             (9,529)       (7,645)
Unamortized net actuarial loss                       5,822         4,612
                                                 ---------    ----------
Accrued benefit pension (obligation) asset          (3,707)       (3,033)
Valuation allowance                                 (2,351)       (1,923)
                                                 ---------    ----------
Net accrued benefit pension (obligation) asset   $  (6,058)   $   (4,956)
                                                 =========    ==========
</TABLE>

      LEP's most recent funding valuations were prepared as of December 31,
2004, December 31, 2003, March 1, 2003, February 28, 2003 and December 31, 2001
on plan assets and benefit obligations. We will receive the next funding
valuations as of December 31, 2006.

      Included in the amounts above are individual defined benefit pension plans
with accrued benefit obligations in excess of the fair value of plan assets as
follows:

<TABLE>
<CAPTION>
                                            YEAR ENDED DECEMBER, 31
                                         2004          2003       2002
                                       ---------    ---------   --------
<S>                                    <C>          <C>         <C>
Accrued benefit obligations            $  48,404    $  44,106   $ 37,620
Fair value of plan assets                 35,872       33,109     29,421
                                       ---------    ---------   --------
Funded status - deficit                $  12,532    $  10,997   $  8,199
                                       =========    =========   ========
</TABLE>


                                      F-19
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

      Approximate asset allocations, by asset category, of LEP's significant
pension plans were as follows:

<TABLE>
<CAPTION>
                                             AS AT             AS AT
                          TARGET          DECEMBER 31,      DECEMBER 31,
                        ALLOCATIONS           2004              2003
                        -----------       ------------      ------------
<S>                     <C>               <C>               <C>
Equity securities           0-70%             67%               74%
Debt securities            30-70%             29%               23%
Other                       0-30%              4%                3%
                           -----             ---               ---
                             100%            100%              100%
                           =====             ===               ===
</TABLE>

      LEP's investment policy is to ensure that any funds available for
investment as part of the defined benefit plans are invested in a prudent
manner, which will provide reasonable investment returns for the beneficiaries
of the funds given full consideration of the desired level of risk to be taken
on the investment of the funds. The investment portfolio contains a diversified
blend of equity and fixed income investments. Investment funds are managed by
external fund managers based on policies mandated by the Pension Committee and
approved by the LEP Management Committee. Allowable and prohibited investment
types are also prescribed in Luscar's investment policy.

      Total cash payments for pensions for 2004, consisting of cash payments
made by LEP directly to employees, their beneficiaries or estates, payments to
the plans, and payments to a third-party service provider on behalf of the
employees was $6,576 (2003 - $6,562)

      Estimated future benefit payments, which reflect expected future service,
are expected to paid from either corporate assets or the qualified pension
trusts are $2,659 in 2005, $2,760 in 2006, $2,865 in 2007, $2,975 in 2008 and
$3,089 in 2009.

      Approximately $2,500 is expected to be contributed by LEP to the pension
plans during 2005.

                                      F-20
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

9.    EMPLOYEE TERMINATION BENEFITS

      The information provided below relates to provisions for employee
terminations made by LEP.

<TABLE>
<CAPTION>
                                                            NUMBER OF
                                                            EMPLOYEES      AMOUNT
                                                            ---------      -------
<S>                                                         <C>            <C>
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
Paid during 2003                                              (216)        (15,003)
Accrued during 2003                                            197          16,814
                                                              ----         -------
Balance, December 31, 2003                                     238         $ 4,119
Paid during 2004                                               (39)         (1,422)
Accrued during 2004                                             10             433
Adjustment arising from Fording settlement during 2004        (199)         (2,697)
                                                              ----         -------
Balance, December 31, 2004                                      10         $   433
                                                              ====         =======
</TABLE>

      2004 severance payments related to corporate organization changes and the
suspension of operations at the Obed mine, which were accrued in 2003. During
2004, the remaining severance provision at Luscar mine was settled under the
metallurgical coal agreement as production started at the Cheviot mine. The
remaining severance provision relates to employees at the Gregg River and Obed
mines. The provision related to the Gregg River mine was paid during the first
quarter of 2005 and the remaining balance at the Obed mine is expected to be
paid within the next two years.

      Severance costs were reported in operating costs, selling, general and
administrative expenses and discontinued operations.

10.   OTHER ASSETS

<TABLE>
<CAPTION>
                                                                      AS AT           AS AT
                                                                  DECEMBER 31,     DECEMBER 31,
                                                                      2004             2003
                                                                  ------------     ------------
<S>                                                               <C>              <C>
Deferred financing costs, net of accumulated amortization (a)       $ 13,042         $ 15,469
Deferred items  (b)                                                    8,673            7,367
Pension assets  (c)                                                    2,569            3,423
Investments and other assets (d)                                       3,621            1,445
                                                                    --------         --------
                                                                    $ 27,905         $ 27,704
                                                                    ========         ========
</TABLE>

      (a) Deferred financing costs are amortized over the term of the related
financing. For the year ended December 31, 2004, amortization in the amount of
$2,427 (2003 - $2,436 and 2002 - $2,433) has been provided against deferred
financing costs.

                                      F-21
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

      (b) Deferred items include overburden removal costs, deferred reclamation
recoveries and deferred project development costs. Overburden removal costs of
$2,319 (2003 - $3,567) are charged to earnings at average cost when the coal is
produced. Costs incurred related to production forecasted for greater than a
year are recorded as long-term assets. Deferred reclamation recoveries of $3,735
(2003 - $3,800) related to deferred reclamation revenue recoverable from
domestic customers in the future. Deferred project development costs of $2,620
(2003 - nil) relate to spending on the Bow City project.

      (c) Pension assets relate to pension assets associated with a contract
mining operation. For the year ended December 31, 2004, amortization in the
amount of $854 (2003 - nil and 2002 -nil) has been provided against pension
assets.

      (d) Investments and other assets include real estate properties and
prepaid royalties.

11.   LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                     AS AT             AS AT
                                                                  DECEMBER 31,     DECEMBER 31,
                                                                     2004              2003
                                                                  ------------     ------------
<S>                                                               <C>              <C>
Senior notes, at issue date                                       $    429,660     $    429,660
Cumulative foreign currency translation gain since issue date          (98,670)         (74,250)
                                                                  ------------     ------------
Senior notes, at balance sheet date                                    330,990          355,410

9.625% promissory note, due December 30, 2004                                -           89,300
Less sinking fund                                                            -          (46,191)
                                                                  ------------     ------------
                                                                             -           43,109

Capital lease obligations                                               28,785            8,957

Pension deficit obligation                                               3,120            4,800
                                                                  ------------     ------------
Long-term debt                                                         362,895          412,276
Current portion of long-term debt                                       (7,796)         (46,342)
                                                                  ------------     ------------
                                                                  $    355,099     $    365,934
                                                                  ============     ============
</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.

                                      F-22
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

      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 50 basis points; over (ii) the principal amount of the
Senior Notes. 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 at December 31, 2004 was
$360,296 (2003 - $388,540). The fair value of the Senior Notes is determined
based upon the quoted market values. This estimated fair value may differ from
the amount which could be realized in an immediate settlement of these notes.

SENIOR CREDIT AGREEMENT

      Effective February 4, 2004, LL signed a senior credit agreement with a
syndicate of Canadian chartered banks consisting of a revolving 364 day
operating credit facility that permits maximum aggregate borrowings of $115,000,
subject to a borrowing base, which included accounts receivable, coal
inventories, a $25,000 charge on a dragline, and a general assignment of LL's
assets. The facility was split into two tranches, the Reclamation Letter of
Credit ("LC") facility and the Working Capital facility. Up to $65,000 of
reclamation letters of credit can be issued under the Reclamation LC facility.
To date $50,609 of letters of credit, providing reclamation security, have been
issued. Under the Working Capital facility, up to $50,000 in advances may be
made, including up to $25,000 in letters of credit. As at December 31, 2004,
$12,000 in cash and $1,550 in letters of credit had been drawn against this
facility. Interest rates payable or advances under the facility are based on
prime lending rates plus interest rate margins ranging from 0.25% to 1.25%
depending on LEP's ratio of debt to operating earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The prime rate of our syndicate of
banks, as at December 31, 2004 was 4.25% (2003 - 4.50%). The senior credit
agreement was renewed January 31, 2005 under substantially the same terms and
conditions.

      Prior to the replacement of the credit facilities, as indicated above, LEP
and LCL were party to a senior credit agreement with a syndicate of Canadian
chartered banks consisting of a revolving 364 day operating credit facility that
permits maximum aggregate borrowings of $100,000, subject to a borrowing base,
which included accounts receivable, coal inventories and a $25,000 charge on a
dragline. Up to $75,000 of the credit facility was

                                      F-23
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

available to secure letters of credit. Interest rates payable or advances under
the facility were based on prime lending rates plus interest rate margins
ranging from 0.25% to 1.25% depending on LEP's ratio of debt to EBITDA. In
November 2003, the senior credit agreement was extended until February 29, 2004
under the same terms and conditions and then replaced February 4, 2004.

      Prior to the replacement of the credit facilities, as indicated above, and
as a result of the acquisition of the new thermal coal assets effective October
17, 2003, LEP and LCL assumed SCAI's senior credit agreement with a Canadian
chartered bank, consisting of a 364 day operating credit facility that permitted
maximum aggregate borrowings of $15,000, guaranteed by a partner of LEP. In
November 2003, this facility was extended until February 29, 2004 under the same
terms and conditions and then replaced February 4, 2004.

PROMISSORY NOTE

      On December 30, 2004, the promissory note for $89,300 at 9.625% became due
and payable. Under the terms of a coal supply agreement, the $39,350 excess of
the principal amount over the sinking fund balance was recovered from the Crown
Corporation and included in other income in 2004.

      The promissory note was issued to finance the acquisition of the assets,
rights and agreements related to the Poplar River mine in conjunction with
long-term coal supply agreements with a Crown corporation. The assets, rights
and agreements related to the Poplar River mine secure the 9.625% promissory
note. The promissory note and the acquired assets are integral to the Poplar
River mine coal supply agreement 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 note. Upon maturity on
December 30, 2004, LEP was obligated to repay the promissory note, net of the
related sinking fund. Under the provisions of the coal supply agreements, the
Crown Corporation was required to immediately reimburse LEP for the repayment as
a component of the coal price. Under the terms of the promissory note, LEP was
required to make annual sinking fund payments of $893 on the 9.625% promissory
note until repayment.

      The sinking fund, which is held by the note trustee as collateral for the
promissory note, is 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 value of the sinking fund is based on
cumulative annual contributions plus accrued investment income. The fair value
of the assets held by the sinking funds as at December 31, 2004 and December 31,
2003 were $nil and $47,316, respectively.

CAPITAL LEASE OBLIGATIONS

      Capital leases for new equipment totaling $23,799 were entered into for
the year ended December 31, 2004 as part of the long-term mine support equipment
agreement LEP entered into with Finning (Canada), a division of Finning
International Inc., and Kramer Ltd., which involves the leasing of equipment as
part of a plan to reduce the maintenance costs and increase equipment
utilization.

      Obligations under capital leases on specific mining equipment bear
interest at rates ranging from 4.58% to 6.59%, with a weighted average interest
rate of 5.16%. These capital leases mature between 2005 and 2009 and are
repayable by blended monthly payments of principal and interest. The current
portion of long-term debt includes $6,756 for these capital lease obligations.

                                      F-24
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

PENSION DEFICIT OBLIGATION

      The pension deficit obligation relates to obligations under the Line Creek
defined benefit pension plan, which was under funded at the date of transfer to
FCCT. Following the completion of an actuarial valuation, the total obligation
was determined to be $5,200. This amount is repayable in equal installments over
5 years and outstanding amounts bear interest at 6.5% per annum. The first two
installments $1,040 were paid during the second quarter of 2004, after the
finalization of the actuarial valuation. The current portion of long-term debt
includes $1,040 for this pension deficit obligation.

SCHEDULED LONG-TERM DEBT REPAYMENTS

<TABLE>
<CAPTION>
                                                                   AS AT DECEMBER 31, 2004
                                                    SENIOR NOTES     DUE TO FCCT     CAPITAL LEASE OBLIGATIONS
                                                    ------------     -----------     -------------------------
<S>                                                 <C>              <C>             <C>
2005                                                  $       -         $ 1,040            $  8,086
2006                                                          -           1,040               6,334
2007                                                          -           1,040               7,338
2008                                                          -               -               4,583
2009                                                          -               -               6,056
2010 and thereafter                                     330,990               -                   -
                                                      ---------         -------            --------
                                                      $ 330,990         $ 3,120              32,397
                                                      =========         =======
Less interest included therein                                                                3,612
                                                                                           --------
Present value of minimum capital lease payments                                            $ 28,785
                                                                                           ========
</TABLE>

12.   ASSET RETIREMENT OBLIGATIONS

      LEP's estimates of future asset retirement obligations are based on
reclamation standards that meet regulatory requirements. Elements of uncertainty
in estimating these amounts include potential changes in regulatory
requirements, decommissioning and reclamation alternatives, and amounts to be
recovered from other parties. Future reclamation, site restoration, and mine
closure costs are estimated to be $147,987. LEP technical personnel review these
estimates annually or more frequently as required by regulatory agencies. In
connection with future reclamation, site restoration, and mine closure costs,
LEP has provided financial assurances of $50,609 in the form of letters of
credit to satisfy current regulatory requirements.

                                      F-25
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

      The following are reconciliations of the beginning and ending liabilities
for asset retirement obligations for the years shown.

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                         2004               2003
                                                      -----------     ------------------
                                                                      (Restated - Note 3)
(in thousands of Canadian dollars)
<S>                                                   <C>             <C>
Asset retirement obligations, beginning of period     $   108,338         $  106,645
Additional liabilities incurred                            10,205             12,713
Accretion expense                                           7,104              6,888
Liabilities settled                                       (26,875)           (17,908)
Revisions in estimated cash flows                           1,511                  -
                                                      -----------         ----------
Asset retirement obligations, end of period           $   100,283         $  108,338
Less current portion                                      (23,576)           (17,829)
                                                      -----------         ----------
                                                      $    76,707         $   90,509
                                                      ===========         ==========
</TABLE>

      Key assumptions on which the carrying amount of the asset retirement
obligations is based are as follows:

   (i)   Total undiscounted amount of the estimated cash flow - $147,987

   (ii)  Expected timing of payment of cash flows is based on the life of mine
         plans and will be incurred between the current period and 2053.
         Approximately $46,640 of the estimated undiscounted cash flows will be
         spent on reclamation activities in the next five years with a majority
         of the remaining balance spent on site restoration and mine closure
         costs as the mine sites or related power plants close or when the coal
         reserves are exhausted.

   (iii) Asset retirement obligations are recognized when incurred and recorded
         as liabilities at fair value assuming a credit-adjusted risk-free rate
         of approximately 6 per cent on average.

13.   FOREIGN CURRENCY TRANSLATION

      Foreign current translation gains and losses consist of the following:

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                    2004        2003          2002
                                                 ---------    ---------    ---------
<S>                                              <C>          <C>          <C>
Foreign currency translation (gain) loss on:
   Senior Notes                                  $ (24,420)   $ (78,980)   $  (3,685)
   US dollar cash balances                             751        1,650          232
   Working capital balances                             26       (2,103)        (568)
                                                 ---------    ---------    ---------
                                                 $ (23,643)   $ (79,433)   $  (4,021)
                                                 =========    =========    =========
</TABLE>

                                      F-26
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

14.   INTEREST EXPENSE

      Interest expense (income) consists of the following:

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                    2004         2003        2002
                                                 ---------    ---------    ---------
<S>                                              <C>          <C>          <C>
Senior Notes                                     $  34,803    $  37,308    $  42,092
Promissory notes net of sinking fund interest        5,655        7,775       10,117
income
Capital leases                                         928          237          252
Reclamation security                                 3,917        2,239        3,369
Financial instruments [note 21]                          -         (240)         330
Investment income                                        -       (1,614)      (1,543)
Income tax reassessments                                 -            -       (1,799)
Other                                                   34          783         (102)
                                                 ---------    ---------    ---------
                                                 $  45,337    $  46,488    $  52,716
                                                 =========    =========    =========
</TABLE>

      Interest expense on promissory notes for the year ended December 31, 2004
is net of $2,940 in income earned on the related sinking fund assets ($3,689 for
the year ended December 31, 2003 and $4,215 for the year ended December 31,
2002).

15.   OTHER INCOME

      Other income consists of the following:

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                           2004             2003                     2002
                                                        ---------    --------------------     -------------------
                                                                      (Restated - Note 3)     (Restated - Note 3)
<S>                                                     <C>           <C>                     <C>
Gain on settlement of promissory note                   $ (39,350)       $ (21,379)               $      -
Gain on settlement of asset retirement obligations         (7,642)            (192)                   (580)
Gain on disposal of capital assets                         (4,126)            (539)                 (1,242)
Insurance premium refund                                   (2,706)               -                       -
Recovery of reclamation services                           (1,717)               -                       -
Net pension plan expense                                    1,079            4,556                   2,361
Deferred exploration                                        1,449            1,285                   1,978
Recovery of crown royalties                                     -           (1,460)                 (1,202)
Distributions from FCCT                                         -           (5,988)                      -
Settlement for coal conveyor                                    -                -                 (10,100)
Other expenses (income)                                       281            2,621                  (1,171)
                                                        ---------        ---------                --------
                                                        $ (52,732)       $ (21,096)               $ (9,956)
                                                        =========        =========                ========
</TABLE>

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

                                      F-27
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

16.   INCOME TAXES

      The components of the net future income tax liability are as follows:

<TABLE>
<CAPTION>
                                                                        AS AT                AS AT
                                                                     DECEMBER 31,        DECEMBER 31,
                                                                         2004                2003
                                                                     ------------     -------------------
                                                                                      (Restated - Note 3)
<S>                                                                  <C>              <C>
Future income tax liabilities
          Capital assets                                               $ 344,423           $ 373,179
          Overburden removal costs                                         1,632               2,624
          Deferred financing costs deducted for tax in excess of
          accounting deductions                                            2,236               1,511
          Accounting pension surplus                                       4,415               3,691
          Other                                                           18,694              13,521
                                                                       ---------           ---------
                                                                         371,400             394,526
                                                                       ---------           ---------

Future income tax assets
          Asset retirement obligations and other items not
          currently deductible                                            33,283              33,397
          Net capital losses carried forward                                 712                 732
          Net operating losses carried forward                             2,321               1,726
          Accounting pension liability                                     6,830               5,789
          Deferred financing costs deductible for tax purposes               394                   -
          Other                                                                -               2,350
                                                                       ---------           ---------
                                                                          43,540              43,994
                                                                       ---------           ---------
Net future income tax liability                                          327,860             350,532
Less: current portion of future income tax liabilities                    (4,850)             (3,896)
                                                                       ---------           ---------
                                                                       $ 332,710           $ 354,428
                                                                       =========           =========
</TABLE>

                                      F-28
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

      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 ENDED DECEMBER 31,
                                                           2004              2003                    2002
                                                        ---------     -------------------     -------------------
                                                                      (Restated - Note 3)     (Restated - Note 3)
<S>                                                     <C>           <C>                     <C>
Earnings (loss) from continuing operations
before income taxes                                     $  43,140         $  33,665               $ (26,971)
Statutory income tax rate                                   40.91%            42.43%                  43.40%
                                                        ---------         ---------               ---------
Expected tax payment (recovery)                            17,649            14,284                 (11,705)
Effect on income tax of:
             Flow through of income tax
             recoveries from subsidiary                   (33,663)          (74,947)                (38,854)
             Excess of statutory resource allowance
             over non-deductible Crown charges             (6,127)           (4,010)                 (4,843)
             Large corporations tax                         2,736             3,448                   2,460
                                                        ---------         ---------               ---------
Income tax recovery                                     $ (19,405)        $ (61,225)              $ (52,942)
                                                        =========         =========               =========

Current                                                     2,736             3,448                   1,400
Future                                                    (22,141)          (64,673)                (54,342)
                                                        ---------         ---------               ---------
Income tax recovery                                     $ (19,405)        $ (61,225)              $ (52,942)
                                                        =========         =========               =========
</TABLE>

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

<TABLE>
<CAPTION>
                                     MAXIMUM           YEAR ENDED
                                     ANNUAL           DECEMBER 31,
                                  RATE OF CLAIM           2004
                                  -------------       ------------
<S>                               <C>                 <C>
Undepreciated capital cost              25%            $ 222,274
Canadian development expense            30%              145,727
Canadian exploration expense           100%                6,137
Deferred financing expense              20%                7,603
Other                                   10%                6,802
                                                       ---------
                                                       $ 388,543
                                                       =========
</TABLE>

                                      F-29
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

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

<TABLE>
<CAPTION>
                                                                   YEAR ENDED
                                                                  DECEMBER 31,
                                                                      2004
                                                                  ------------
<S>                                                               <C>
2005                                                                $      -
2006                                                                       -
2007                                                                       -
2008                                                                   1,401
2009                                                                   2,038
2010                                                                   1,411
2011                                                                       -
2012                                                                       -
2013                                                                       -
2014                                                                   1,672
                                                                    --------
                                                                    $  6,522
                                                                    ========
</TABLE>

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

17.   RELATED PARTY TRANSACTIONS

      LEP has undertaken to compensate Sherritt for administration services at
Sherritt's direct cost plus 10 percent and to reimburse both Sherritt and
Teachers for all third-party costs incurred in connection with LEP's offer to
acquire securities of LCIF. During the year ended December 31, 2004, LEP
incurred $871 (2003 - $1,139 and 2002 -$403) for such services and costs which
are included in selling, general and administrative expenses. As at December 31,
2004, due to related parties included $402 (2003 - $1,236) for transactions with
Sherritt.

                                      F-30
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

18.   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. Revenue from discontinued operations has been
removed.

      Disclosures with respect to geographic areas are as follows:

<TABLE>
<CAPTION>
                                             YEAR ENDED                      YEAR ENDED                    YEAR ENDED
                                          DECEMBER 31, 2004               DECEMBER 31, 2003             DECEMBER 31, 2002
                                     ---------------------------     ---------------------------     ---------------------------
                                     REVENUES     TONNES SHIPPED     REVENUES     TONNES SHIPPED     REVENUES     TONNES SHIPPED
                                     --------     --------------     --------     --------------     --------     --------------
<S>                                  <C>          <C>                <C>          <C>                <C>          <C>
Geographic areas
      Total export                   $ 74,033          1,454         $ 64,613          1,610         $ 93,822           2,163
      Canada                          426,770         37,076          311,447         22,146          347,764          31,391
                                     --------         ------         --------         ------         --------          ------
LCL                                   500,803         38,530          376,060         23,756          441,586          33,554
      Foreign exchange contracts            -              -                -              -            1,481               -
                                     --------         ------         --------         ------         --------          ------
LEP                                  $500,803         38,530         $376,060         23,756          443,067          33,554
                                     ========         ======         ========         ======         ========          ======
</TABLE>

      Export coal sales are generally denominated in United States currency.

      Revenues are derived from significant customers and in many 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                           YEAR ENDED                             YEAR ENDED
                            DECEMBER 31, 2004                     DECEMBER 31, 2003                     DECEMBER 31, 2002
                     ---------------------------------     --------------------------------      ---------------------------------
                     REVENUES      NUMBER OF CUSTOMERS     REVENUES     NUMBER OF CUSTOMERS      REVENUES      NUMBER OF CUSTOMERS
                     --------      -------------------     --------     -------------------      --------      -------------------
<S>                  <C>           <C>                     <C>          <C>                      <C>           <C>
Major customers      $332,687               3              $237,909              2               $305,934               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 export insurance programs provided by a government agency or secured by
letters of credit.

                                      F-31
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

19.   JOINT VENTURES

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

      During the first quarter of 2003, LEP exchanged its interests in Cardinal
River joint venture and Line Creek joint venture for units in the FCCT (see Note
5 - Discontinued Operations).

<TABLE>
<CAPTION>
                                                                  AS AT            AS AT
                                                              DECEMBER 31,      DECEMBER 31,
                                                                  2004              2003
                                                              ------------      ------------
<S>                                                           <C>               <C>
Share of assets and liabilities of joint ventures
          Current assets                                        $      -         $       -
          Current liabilities                                          -                 -
                                                              -----------        ---------
          Working capital                                              -                 -
          Capital assets, net of accumulated amortization              -                 -
          Asset retirement obligations                                 -                 -
          Obligations under capital leases                             -                 -
          Accrued pension benefit obligation                           -                 -
                                                                --------         ---------
                                                                $      -         $       -
                                                                --------         ---------
</TABLE>

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                         2004           2003             2002
                                                        -------      ------------     ----------
                                                                       (for the
                                                                      period of
                                                                      January 1-
                                                                     February 28)
<S>                                                     <C>          <C>              <C>
Share of expenses and cash flows of joint ventures
   Revenue                                              $     -      $    29,258      $  154,047
   Expenses                                                   -           27,002         148,417

Cash flows from:
   Operations                                           $     -      $    21,689      $    2,236
   Investing activities                                       -             (313)         (3,667)
   Financing activities                                       -          (21,889)          1,204
</TABLE>

                                      F-32
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

20.   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 ENDED DECEMBER 31,
                                                       2004             2003             2002
                                                     ---------        ---------        ---------
<S>                                                  <C>              <C>              <C>
Changes in non-cash working capital
   Accounts receivable                               $  9,866         $  5,585         $ 30,392
   Inventories                                          3,811           42,905          (15,735)
   Overburden removal costs                             1,512           (2,188)          (1,179)
   Prepaid expenses                                    (1,869)           1,537              412
   Trade accounts payable and accrued charges           6,006              311           (3,609)
   Accrued interest payable                              (533)          (1,605)          (1,146)
   Accrued payroll and employee benefits                 (338)          (1,696)          (3,792)
   Income taxes                                        (2,150)           1,435            5,045
                                                     --------         --------         --------
                                                     $ 16,305         $ 46,284         $ 10,388
                                                     ========         ========         ========
</TABLE>

21.   FINANCIAL INSTRUMENTS

      Unless otherwise disclosed, the fair value of financial instruments
approximates the carrying value of 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 was recorded at the
related contract exchange rates in the period the contracts were settled. In
2002 foreign exchange contracts were used to partially offset the foreign
exchange fluctuations on United States dollar denominated sales. Subsequent to
2002, LEP is not party to any forward currency exchange contracts.

      Throughout 2003 and 2004, LEP was 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
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 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.

                                      F-33
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

DERIVATIVE FINANCIAL INSTRUMENTS

      LEP generally does not enter into derivative financial instruments for
foreign currency, interest and energy. However, 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.

      LEP was party to an interest rate swap with a Canadian chartered bank,
which matured 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 the entire 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, 2004, LEP recorded no interest expense
(2003 - recovery of $240; 2002 - expense of $330) related to the amortization
and revaluation of the interest rate swap.

                                      F-34
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

22.   UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

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

A.    STATEMENT OF EARNINGS AND PARTNERS' EQUITY

<TABLE>
<CAPTION>
                                                                YEAR ENDED            YEAR ENDED          YEAR ENDED
                                                                DECEMBER 31,         DECEMBER 31,        DECEMBER 31,
                                                                   2004                  2003                2002
                                                                ------------     -------------------  -------------------
                                                                                 (Restated - Note 3)  (Restated - Note 3)
<S>                                                             <C>              <C>                  <C>
Net earnings from continuing operations under
   Canadian GAAP                                                  $  62,545           $  94,890             $  25,971
Impact of United States GAAP:
   Cost of sales - Asset retirement obligations (a)                       -                   -               (11,486)
   Other income - Gain on asset retirement obligations (a)           (1,812)              2,529                  (580)
   Asset retirement obligations depreciation expense (a)             (3,168)                409                11,824
   Asset retirement obligations accretion expense (a)                  (806)             (1,356)                6,314
   Income tax rate change (b)                                        (1,246)             (1,246)               (1,246)
   Pension valuation allowance (c)                                      428                (260)                  654
   Derivative financial instruments (d)                                (161)                161                     -
   Earnings from SCAI operations (f)                                      -              20,535                     -
                                                                  ---------           ---------             ---------
Earnings from continuing operations
    before undernoted                                                55,780             115,662                31,451
                                                                  ---------           ---------             ---------
Cumulative effect of the application of asset
    retirement obligations for US GAAP (a)                                -             (47,060)                    -
Income tax recovery (expense)                                         2,816              12,669                (2,333)
Earnings from discontinued operations                                 5,463              19,130                 3,044
                                                                  ---------           ---------             ---------
Net earnings under United States GAAP                             $  64,059           $ 100,401             $  32,162
                                                                  ---------           ---------             ---------

Partners' equity, beginning of year                                 641,276             542,513               510,351
Distributions to partners                                           (66,068)            (33,962)                    -
Earnings from SCAI operations (f)                                         -             (17,637)                    -
Net equity contribution from acquisition of SCAI [note 4]                 -              49,961                     -
                                                                  ---------           ---------             ---------
Partners' equity, end of year                                     $ 639,267           $ 641,276             $ 542,513
                                                                  =========           =========             =========
</TABLE>

B.    STATEMENT OF COMPREHENSIVE INCOME (LOSS)

      Comprehensive income is measured in accordance with the FASB's 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 measurement of comprehensive income is not currently required
under Canadian GAAP.

                                      F-35
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

22.   UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

      LEP's comprehensive income (loss) 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,
                                                           2004               2003                    2002
                                                       ------------    -------------------     -------------------
                                                                       (Restated - Note 3)     (Restated - Note 3)
<S>                                                    <C>             <C>                     <C>
(i) CURRENT YEARS
Net earnings under United States GAAP                    $  64,059           $ 100,401              $  32,162
Other comprehensive income (loss) net of tax:
  Minimum pension liability adjustment (c)                  (2,783)              1,384                 (1,533)
                                                         ---------           ---------              ---------
Comprehensive income under United States GAAP            $  61,276           $ 101,785              $  30,629
                                                         =========           =========              =========

(ii) ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of year                               $    (149)          $  (1,533)             $       -
Change for the year                                         (2,783)              1,384                 (1,533)
                                                         ---------           ---------              ---------
Balance, end of year                                     $  (2,932)          $    (149)             $  (1,533)
                                                         =========           =========              =========
</TABLE>

C.    CONSOLIDATED BALANCE SHEET

      LEP's consolidated balance sheet determined in accordance with United
States GAAP would be as follows:

<TABLE>
<CAPTION>
                                                                         AS AT DECEMBER 31,
                                                                     2004                2003
                                                                 ------------     -------------------
                                                                                  (Restated - Note 3)
<S>                                                              <C>              <C>
Assets
    Current assets                                               $   120,560           $   139,078
    Capital assets (a), (b)                                        1,366,243             1,426,797
    Other assets (e)                                                  27,905                73,895
                                                                 -----------           -----------
                                                                 $ 1,514,708           $ 1,639,770
                                                                 ===========           ===========

Liabilities and partners' equity
    Current liabilities (e)                                      $    78,602           $   164,440
    Current portion of asset retirement obligations (a)               23,576                17,829
    Long-term debt                                                   355,099               365,934
    Accrued pension benefit obligations (c)                            8,669                 3,293
    Asset retirement obligations (a)                                  69,555                77,822
    Future income taxes (a), (b), (c), (d)                           342,872               369,325
    Partners' equity                                                 639,267               641,276
    Accumulated other comprehensive loss                              (2,932)                 (149)
                                                                 -----------           -----------
                                                                 $ 1,514,708           $ 1,639,770
                                                                 ===========           ===========
</TABLE>

                                      F-36
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

22.   UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

(a)   ASSET RETIREMENT OBLIGATIONS

      In June 2001, the Financial Accounting Standards Board ("FASB") approved
Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143").
LEP adopted SFAS 143 on January 1, 2003. LEP adopted the Canadian GAAP standards
for asset retirement obligations under CICA HB section 3110 effective January 1,
2004 and retroactively restated the Canadian GAAP results to account for this
policy change. The Canadian and US standards for asset retirement obligations
are substantially the same; however due to the difference in adoption dates,
different assumptions were used to determine the liability amount. This resulted
in differences in the asset and liability balances on adoption and will result
in different depreciation and accretion charges over time.

      The following is a reconciliation of the beginning and ending liability
balances for the corresponding periods for asset retirement obligations as
determined in accordance with United States GAAP:

<TABLE>
<CAPTION>
                                                                                                         YEAR ENDED
                                                                                                         DECEMBER 31,
                                                                                                 2004                  2003
                                                                                              -----------           -----------
<S>                                                                                           <C>                   <C>
Asset retirement obligations, opening balance                                                 $   95,651            $   94,507
Additional liabilities incurred                                                                   11,188                11,730
Accretion expense                                                                                  7,910                 8,244
Liabilities settled                                                                              (25,062)              (18,830)
Revisions in estimated cash flows                                                                  3,444                     -
                                                                                              ----------            ----------
Asset retirement obligations, ending balance                                                  $   93,131            $   95,651
                                                                                              ==========            ==========
</TABLE>

      If the change had occurred on January 1, 2002, the cumulative effect would
have been to increase capital assets by $1,046, decrease future income taxes by
$17,809, increase asset retirement obligations by $54,890 as at December 31,
2002 as well as recording a cumulative effect adjustment of $35,035 as a charge
to earnings in the year ended December 31, 2002. The total amount of recognized
asset retirement obligation liabilities would have been $106,735 at December 31,
2001. For the year ended December 31, 2002 the effect of adopting SFAS 143 in
addition to the cumulative effect would have been an increase in net earnings of
$3,835.

(b)   INCOME TAX RATE CHANGE

      A reduction in income tax rates was substantively enacted in the period
January 1, 2001 to May 11, 2001 but was not enacted until the period May 12,
2001 to December 31, 2001. Under Canadian GAAP, the reduction in income tax
rates was reflected in the LCIF purchase price equation in 2001. However, under
United States GAAP net earnings for the period ended December 31, 2001 included
$13,388 related to the benefit of the tax rate reduction.

      Under United States GAAP, capital assets increase by $20,383 (2003 -
$21,629) and future income tax liabilities increase by $9,071 (2003 - $9,625) at
December 31, 2004. Net earnings for the year ended December 31, 2004 includes
$692, net of tax of $554, (2003 - $692, net of tax of $554, and 2002 - $692, net
of tax of $554) of amortization expense related to the corresponding asset.

                                      F-37
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

22.   UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

(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 and Partner's Equity. 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, for the year ended December 31, 2004, LEP's earnings under United
States GAAP have been increased by $253, net of tax of $175, (a decrease to
earnings in 2003 of $144, net of tax of $116, and an increase to earnings in
2002 of $654).

      United States GAAP requires the recognition of a minimum pension liability
for defined benefit plans. The initial recognition and related adjustments to
the minimum pension liability are reflected in comprehensive income. For the
year ended December 31, 2004, LEP decreased comprehensive income by $2783 (an
increase in 2003 of $1,384 and a decrease in 2002 of $1,533).

(d)   DERIVATIVE FINANCIAL INSTRUMENTS

      Under United States GAAP, LEP adopted Statement of Financial Accounting
Standards No. 133 ("SFAS 133") as amended. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at fair value regardless of the
purpose and intent of holding them. 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 derivatives change in fair value
is recognized in earnings immediately. LEP has not designated any instruments as
hedges for United States GAAP purposes.

      As at December 31, 2004, LEP's final energy purchase contracts expired.
The impact of the derivative financial instruments on the LEP financial
statements was a decrease to LEP earnings of $91, net of tax of $70, in 2004
compared with an increase to LEP earnings of $91, net of tax of $70, in the year
ended December 31, 2003 and no impact on LEP earnings in the year ended December
31, 2002.

(e)   PROMISSORY NOTE

      Under United States GAAP, the offsetting of assets and liabilities in the
balance sheet is not permitted unless a right of offset exists. A right of
offset requires that each of two parties owe the other determinable amounts and
that the reporting party has the right to offset the amount with the amount owed
by the other party. The sinking fund, which has been setoff against the
promissory note under Canadian GAAP, does not qualify for offsetting under
United States GAAP. The sinking fund is therefore reflected as other assets
under United States GAAP, whereas it is a debit to current liabilities under
Canadian GAAP in 2003, however as the promissory note was settled in December
2004, there is no such adjustment required in 2004.

                                      F-38
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

22.   UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

(f)   INCOME FROM SCAI

      On October 17, 2003 LCL acquired 100% of the shares of Sherritt Coal
Acquisition Inc. ("SCAI") a wholly owned subsidiary of Sherritt Coal Partnership
II ("SCPII"). LEP, LCL, SCAI and SCPII are all owned, as to 50% each, directly
or indirectly, by Sherritt and Teachers. United States GAAP requires the
financial statements of the receiving entity to report the results of operations
for the period in which the transaction occurred as though the transaction had
occurred at the beginning of the period. As a result, the net income of SCAI of
$ 17,637, net of taxes of $2,898, for the period January 1, 2003 to October 16,
2003 has been included in earnings with a corresponding reduction in partners'
equity. Financial statements presented for prior years are required to be
restated to furnish comparative information during periods in which common
control existed. For the period October 24, 2002, the date SCAI was
incorporated, to December 31, 2002 SCAI had no operations and therefore the
impact on 2002 results was nil. Since the SCAI acquisition was completed in
2003, the results from the SCAI assets for the year ended December 31, 2004 are
the same under both Canadian and US GAAP.

(g)   RECENTLY RELEASED ACCOUNTING STANDARDS

      FIN 46R - CONSOLIDATION OF VARIABLE INTEREST ENTITIES

      In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires that the assets,
liabilities and results of variable interest entities be consolidated into the
financial statements of the entity that has the controlling financial interest.
FIN 46 also provides the framework for determining whether a variable interest
entity should be consolidated based on voting interest or significant financial
support provided to it. In December 2003, the FASB issued FIN 46(R), amending
the guidance in FIN 46 as well as the transition guidance. As a foreign private
issuer, and based on our interpretation of the revised transition guidance, we
are required to adopt the guidance in FIN 46(R) for the current period ending
December 31, 2004. LEP has thoroughly assessed the implications of this standard
and have concluded that its adoption does not have an impact on the LEP
financial statements.

      In June 2003, the CICA issued a comparable pronouncement, Accounting
Guideline No. 15, "Consolidation of Variable Interest Entities" ("AcG-15").
AcG-15 is effective for reporting periods beginning on or after November 1, 2004
and will be adopted by Luscar for the quarter ended March 31, 2005. LEP
management has concluded that the adoption of the Canadian guideline will,
similar to the adoption of FIN 46(R) as evidenced in this note, have no impact
on the LEP financial statements.

      In March 2005, the FASB issued FASB Staff Position FIN 46(R)-5, "Implicit
Variable Interests under FIN 46(R)" ("FSP FIN 46R-5"). FSP FIN 46R-5 provides
guidance for a reporting enterprise on whether it holds an implicit variable
interest in variable interest entities or potential variable interest entities
when specific conditions exist. This FSP is effective in the first period
beginning after March 3, 2005 in accordance with the transition provisions of
FIN 46R. LEP management is currently assessing the impact of the adoption of FSP
FIN 46R-5 on its results of operations and financial condition.

      SAB 104 - REVENUE RECOGNITION

      In December 2003, the SEC issued Staff Accounting Bulletin 104, "Revenue
Recognition" ("SAB 104"). SAB 104 revises or rescinds certain guidance included
in previously issued staff accounting bulletins in order to

                                      F-39
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

22.   UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

make this interpretative guidance consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations relating to
revenue recognition. This bulletin was effective immediately upon issuance.

      In December 2003, the CICA issued Emerging Issues Committee Abstract 141,
"Revenue Recognition" ("EIC 141"), that incorporates the principles and
summarizes the guidance in the SEC's Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). The abstract also provides
interpretative guidance on the application of CICA Handbook Section 3400,
"Revenue". This abstract has been applied prospectively commencing January 1,
2004. LEP's revenue recognition policies comply with EIC 141, SAB 101, and SAB
104 therefore the adoption of these new pronouncements had no impact on LEP's
financial statements.

      SFAS 151 - INVENTORY COSTS

      In November 2004, the FASB issued SFAS 151, "Inventory Costs" ("SFAS
151"), which clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material as they relate to inventory
costing and requires these items to be recognized as current period expenses.
Additionally, the allocation of fixed production overheads to the cost of
inventory should be based on the normal capacity of the production facilities.
The Standard is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. LEP does not believe that the application of SFAS
151 will have an impact on the consolidated financial statements under US GAAP.

      SFAS 153 - EXCHANGES OF NON-MONETARY ASSETS

      In December 2004, the FASB issued SFAS 153, "Exchanges of Non-Monetary
Assets" ("SFAS 153"), which deals with the accounting for the exchanges of
non-monetary assets and is an amendment of APB 29. SFAS 153 eliminates the
exception from using fair market value for non-monetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance, as defined. This
Standard is effective for non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. LEP management does not believe that the
application of SFAS 153 will have an impact on the consolidated financial
statements, under US GAAP.

      FIN 47 - ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT OBLIGATIONS

In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional Asset
Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the term Conditional
Asset Retirement Obligation, as used in SFAS 143, refers to a legal obligation
to perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the
control of the entity. Accordingly, an entity is required to recognize a
liability for the fair value of a Conditional Asset Retirement Obligation if the
fair value of the liability can be reasonably estimated. The Interpretation is
effective no later than the end of fiscal years ending after December 15, 2005.
LEP management is reviewing the Interpretation to determine the potential
impact, if any, on its consolidated financial statements.

      EIC 150 - DETERMINING WHETHER AN ARRANGEMENT CONTAINS A LEASE

      In December 2004, the EIC issued abstract 150, "Determining Whether an
Arrangement Contains a Lease", ("EIC 150"). EIC 150 provides guidance on how to
determine whether an arrangement contains a lease that is within the scope of
CICA Handbook Section 3065, "Leases". The guidance in EIC 150 is based on
whether the arrangement conveys to the purchaser the right to use a tangible
asset, and is effective for the Company for

                                      F-40
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

22.   UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

arrangements entered into or modified after January 1, 2005. Equivalent guidance
in U.S. GAAP has already been adopted by the Company. The impact of EIC 150 on
the Company's future results of operations and financial condition will depend
on the terms contained in contracts signed or contracts amended in the future.

      CICA HB 3855, 1530 & 3865 - FINANCIAL INSTRUMENTS, COMPREHENSIVE INCOME
AND HEDGES

      In January 2005, the CICA issued Section 3855, "Financial Instruments -
Recognition and Measurement," Section 1530, "Comprehensive Income", and Section
3865, "Hedges." The new standards will be effective for interim and annual
financial statements commencing in 2007. Earlier adoption is permitted. Most
significantly for LEP under Canadian GAAP, the new standards will introduce the
concept of comprehensive income to Canadian GAAP, a concept LEP has been
following under U.S. GAAP. Items such as the minimum pension liability
adjustment, mark-to-market adjustments on derivative instruments, as well as
other items potentially included in comprehensive income under US GAAP will now
be treated the same way under Canadian GAAP when these standards become
effective in 2007.

      SFAS 154 - ACCOUNTING CHANGES AND ERROR CORRECTIONS

      In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections" ("SFAS 154"), which replaces Accounting Principles Board Opinions
No. 20 "Accounting Changes" and SFAS 3, "Reporting Accounting Changes in Interim
Financial Statements -- An Amendment of APB Opinion No. 28." SFAS 154 provides
guidance on the accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application as the required method for
reporting a change in accounting principle and the reporting of a correction of
an error. SFAS 154 is effective for accounting changes and a correction of
errors made in fiscal years beginning after December 15, 2005, and is therefore
required to be adopted by LEP for the year beginning on January 1, 2006. LEP
management is currently evaluating the effect that the adoption of SFAS 154 will
have on its consolidated financial statements, under US GAAP, but does not
expect it to have a material impact.

      EMERGING ISSUES TASK FORCE COMMITTEE

      During 2004, the Emerging Issues Task Force ("EITF") formed a committee to
evaluate certain mining industry accounting issues.

      EITF 04-2 - WHETHER MINERAL RIGHTS ARE TANGIBLE OR INTANGIBLE ASSETS

      EITF 04-2 was issued in 2004 and concludes that mineral rights, which are
defined as the legal right to explore, extract and retain at least a portion of
the benefits from mineral deposits, are tangible assets. This consensus was
effective in the third quarter of 2004 and had no impact on the classification
of such assets in these financial statements for US GAAP.

      EITF 04-3 - VALUATION AND IMPAIRMENT OF MINERAL ASSETS

      In March 2004, the EITF reached a consensus that the authoritative
guidance under SFAS 141 requires a purchaser to assign value based on the
estimated fair values of the assets at the date of acquisition. Since the value
beyond proven and probable reserves (as well as any anticipated market price
fluctuations) is considered in the purchase price, the related value should be
assigned to the mining assets. For testing impairment, it also requires
companies to consider assumptions used in developing its internal budgets and
projections when testing the mining assets for impairment. The consensus
regarding the amount to allocate to mining assets in a

                                      F-41
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

22.   UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)

business combination and testing mining assets for impairment must be completed
prospectively after March 31, 2004. The consensus reached by the EITF on this
issue did not impact LEP's current operations, under US GAAP.

      EITF 04-6 - ACCOUNTING FOR STRIPPING COSTS INCURRED DURING PRODUCTION IN
THE MINING INDUSTRY

      During 2004, deliberations began on EITF 04-6, "Accounting for Stripping
Costs Incurred during Production in the Mining Industry". In the mining
industry, companies may be required to remove overburden and other mine waste
materials to access mineral deposits. The costs of removing overburden and waste
materials are often referred to as "stripping costs." During the development of
a mine (before production begins), it is generally accepted in practice that
stripping costs are capitalized as part of the depreciable cost of building,
developing, and constructing the mine. Those capitalized costs are typically
amortized over the productive life of the mine using the units-of-production
method.

      A mining company may continue to remove overburden and waste materials,
and therefore incur stripping costs, during the production phase of the mine.
Questions have been raised about the appropriate accounting for stripping costs
incurred during the production phase, and diversity in practice exists. In
response to these questions, the EITF has undertaken a project to develop an
Abstract to address the questions and clarify the appropriate accounting
treatment for stripping costs under US GAAP.

      In March 2005, the EITF reached a consensus on this issue and concluded
that stripping costs incurred after production has commenced are a component of
inventory cost subject to the provisions of American Institute of Certified
Public Accountants Accounting Research Bulletin No. 43, Restatement and Revision
of Accounting Research Bulletins, Chapter 4, "Inventory Pricing." Based upon
this consensus, these stripping costs should be considered costs of inventory
under a full absorption costing system and recognized as a component of
inventory to be recognized in costs of sales in the same period as the revenue
from the sale of the inventory. Additionally, capitalization of such costs would
be appropriate only to the extent inventory exists at the end of a reporting
period. The guidance in this consensus is effective for financial statements
issued for fiscal years beginning after December 15, 2005, with early adoption
permitted. We are currently evaluating the impact of EITF 04-6 on our financial
statements, but LEP management does not believe that the conclusions reached on
this issue will impact our current treatment of stripping costs.

                                      F-42
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

23.   CONDENSED CONSOLIDATING INFORMATION OF GUARANTORS

      On October 10, 2001, LCL issued US$275,000 of 9.75% senior notes due
October 15, 2011 ("Senior Notes"). The Senior Notes were issued as a single
series of securities under an indenture dated as of October 10, 2001 among LCL,
as issuer, LEP, LCIF, LL and 3718492 Coal Ltd., as guarantors, and JP Morgan
Chase Bank N.A. (formerly Bank One Trust Company, N.A.), as trustee.

      The Senior Notes are LCL's general unsecured obligations, and 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 LCL. 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. Each subsidiary guarantor is owned 100%, either
directly or indirectly, by LEP, the parent company guarantor. All guarantees are
full and unconditional and all guarantees are joint and several.

      The condensed consolidated information that follows reflects the
summarized financial information for LCL as the issuer of the Senior Notes as
well as each of the guarantors. The information for LL presented below includes
the results of its subsidiary, 3718492 Coal Ltd., since 3718492 Coal Ltd. is
considered a minor subsidiary and has no independent assets or operations. The
information that follows is presented in accordance with Canadian GAAP, but also
includes a reconciliation of the information in each column to US GAAP with
further details regarding the differences provided in this note as well as note
22 of these consolidated financial statements.

      The condensed consolidating information is provided for the year ended
December 31, 2004, as well as the comparative years ended on December 31, 2003
and December 31, 2002.

CONDENSED CONSOLIDATING BALANCE SHEET

                                      F-43
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

<TABLE>
<CAPTION>
                                                                        AS AT DECEMBER 31, 2004
                                        ----------------------------------------------------------------------------------------
                                        LUSCAR ENERGY      LUSCAR         LUSCAR      LUSCAR COAL   CONSOLIDATING   CONSOLIDATED
(in thousands of Canadian dollars)       PARTNERSHIP      COAL LTD.        LTD.       INCOME FUND      ENTRIES          LEP
                                        -------------   ------------   ------------   -----------   -------------   ------------
                                            Parent      Senior Notes    Subsidiary    Subsidiary
                                          Guarantor        Issuer        Guarantor     Guarantor
<S>                                     <C>             <C>            <C>            <C>           <C>             <C>
ASSETS
Cash and cash equivalents                $       (45)   $       120    $    14,729    $     2,414   $          -    $    17,218
Other current assets                             284             93        103,042             16            (93)       103,342
Investment in related parties                494,058              -              -        613,128     (1,107,186)             -
Loan receivable from LL                            -        330,990              -              -       (330,990)             -
Notes receivable from LCL                    298,605              -              -              -       (298,605)             -
Capital assets                                     -        576,943        792,967              -        (23,661)     1,346,249
Other assets                                   9,000          9,425         18,147            333         (9,000)        27,905
                                         -----------    -----------    -----------    -----------    -----------    -----------
                                         $   801,902    $   917,571    $   928,885    $   615,891    $(1,769,535)   $ 1,494,714
                                         ===========    ===========    ===========    ===========    ===========    ===========
LIABILITIES AND PARTNERS' EQUITY
Credit facility                          $         -    $         -    $    12,000    $         -    $         -    $    12,000
Promissory notes due to LEP                        -              -        298,605              -       (298,605)             -
Other current liabilities                    (90,319)        (4,866)       179,478          6,229           (344)        90,178
Long-term debt                                     -        330,990         24,109              -              -        355,099
Convertible debentures                             -              -              -         96,053        (96,053)             -
Intercompany loan due to LCL                       -              -        330,990              -       (330,990)             -
Subordinated notes due to LCIF                     -              -        642,969              -       (642,969)             -
Other long-term liabilities                        -        201,141        218,591              -         (4,257)       415,475
                                         -----------    -----------    -----------    -----------    -----------    -----------
                                             (90,319)       527,265      1,706,742        102,282     (1,373,218)       872,752
Partners' equity                             892,221        390,306       (777,857)       513,609       (396,317)       621,962
                                         -----------    -----------    -----------    -----------    -----------    -----------
                                         $   801,902    $   917,571    $   928,885    $   615,891    $(1,769,535)   $ 1,494,714
                                         ===========    ===========    ===========    ===========    ===========    ===========

Total assets - Canadian GAAP             $   801,902    $   917,571    $   928,885    $   615,891    $(1,769,535)   $ 1,494,714
Asset retirement obligations assets
(a)                                                -              -           (389)             -              -           (389)
Income tax rate change (b)                    20,383              -              -              -              -         20,383
Comprehensive revaluation (d)                      -              -          2,774              -         (2,774)             -
                                         -----------    -----------    -----------    -----------    -----------    -----------
Total assets - US GAAP                   $   822,285    $   917,571    $   931,270    $   615,891    $(1,772,309)   $ 1,514,708
                                         ===========    ===========    ===========    ===========    ===========    ===========

Total liabilities - Canadian GAAP        $   (90,319)   $   527,265    $ 1,706,742    $   102,282    $(1,373,218)   $   872,752
Asset retirement obligations (a)                   -              -         (5,091)             -              -         (5,091)
Income tax rate change (b)                     9,071              -              -              -              -          9,071
Pension valuation allowance (c)                    -              -         (1,291)             -              -         (1,291)
Minimum pension liability (c)                      -              -          1,881              -          1,051          2,932
Comprehensive revaluation (d)                      -              -         13,259              -        (13,259)             -
                                         -----------    -----------    -----------    -----------    -----------    -----------
Total liabilities - US GAAP              $   (81,248)   $   527,265    $ 1,715,500    $   102,282    $(1,385,426)   $   878,373
                                         ===========    ===========    ===========    ===========    ===========    ===========

Total partners' equity - Canadian GAAP   $   892,221    $   390,306    $  (777,857)   $   513,609    $  (396,317)   $   621,962
Changes in retained earnings relating
to:
Asset retirement obligations (a)                   -              -          4,702              -              -          4,702
Income tax rate change (b)                    11,312              -              -              -              -         11,312
Pension valuation allowance (c)                    -              -          1,291              -              -          1,291
Minimum pension liability (c)                      -              -         (1,881)             -         (1,051)        (2,932)
Comprehensive revaluation (d)                      -              -        (10,485)             -         10,485              -
                                         -----------    -----------    -----------    -----------    -----------    -----------
Total partners' equity - US GAAP         $   903,533    $   390,306    $  (784,230)   $   513,609    $  (386,883)   $   636,335
                                         ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>

                                      F-44
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

23.   CONDENSED CONSOLIDATING INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                        AS AT DECEMBER 31, 2003
                                    ------------------------------------------------------------------------------------------------
                                    LUSCAR ENERGY       LUSCAR            LUSCAR        LUSCAR COAL     CONSOLIDATING   CONSOLIDATED
(in thousands of Canadian dollars)   PARTNERSHIP       COAL LTD.           LTD.         INCOME FUND        ENTRIES          LEP
                                    -------------    -------------     ------------     -----------     -------------   ------------
                                        Parent        Senior Notes      Subsidiary      Subsidiary
                                      Guarantor          Issuer          Guarantor       Guarantor
<S>                                 <C>              <C>               <C>              <C>             <C>             <C>
ASSETS
Cash and cash equivalents            $        26      $       128      $    19,037      $     2,559      $         -     $    21,750
Other current assets                         184               93          116,890                -                -         117,167
Investment in related parties            466,670                -                -          585,127       (1,051,797)              -
Loan receivable from LL                        -          355,410                -                -         (355,410)              -
Notes receivable from LCL                298,605                -                -                -         (298,605)              -
Capital assets                                 -          608,068          820,035                -          (22,797)      1,405,306
Other assets                               9,000           (2,950)          29,708              946           (9,000)         27,704
                                     -----------      -----------      -----------      -----------      -----------     -----------
                                     $   774,485      $   960,749      $   985,670      $   588,632      $(1,737,609)    $ 1,571,927
                                     ===========      ===========      ===========      ===========      ===========     ===========
LIABILITIES AND PARTNERS' EQUITY
Credit facility                      $         -      $         -      $    12,000      $         -      $         -     $    12,000
Promissory notes due to LEP                    -                -          298,605                -         (298,605)              -
Other current liabilities                (47,874)          (2,853)         168,910            6,358             (463)        124,078
Long-term debt                                 -          355,410           10,524                -                -         365,934
Convertible debentures                         -                -                -           96,053          (96,053)              -
Intercompany loan due to LCL                   -                -          355,410                -         (355,410)              -
Subordinated notes due to LCIF                 -                -          642,969                -         (642,969)              -
Other long term liabilities                    -          219,259          235,669                -           (5,035)        449,893
                                     -----------      -----------      -----------      -----------      -----------     -----------
                                         (47,874)         571,816        1,724,087          102,411       (1,398,535)        951,905
PARTNERS' EQUITY                         822,359          388,933         (738,417)         486,221         (339,074)        620,022
                                     -----------      -----------      -----------      -----------      -----------     -----------
                                     $   774,485      $   960,749      $   985,670      $   588,632      $(1,737,609)    $ 1,571,927
                                     ===========      ===========      ===========      ===========      ===========     ===========
</TABLE>

                                      F-45
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

23.   CONDENSED CONSOLIDATING INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                AS AT DECEMBER 31, 2003
                                      ----------------------------------------------------------------------------------
                                        LUSCAR
                                        ENERGY       LUSCAR       LUSCAR      LUSCAR COAL   CONSOLIDATING   CONSOLIDATED
(in thousands of Canadian dollars)    PARTNERSHIP   COAL LTD.      LTD.       INCOME FUND     ENTRIES           LEP
                                      -----------   ---------   -----------   -----------   -------------   ------------
                                                      Senior
                                        Parent        Notes      Subsidiary    Subsidiary
                                       Guarantor      Issuer     Guarantor     Guarantor
<S>                                    <C>          <C>         <C>            <C>          <C>             <C>
Total assets - Canadian GAAP           $ 774,485    $ 960,749   $   985,670    $ 588,632    $ (1,737,609)   $ 1,571,927
Asset retirement obligations
assets (a)                                     -            -          (138)           -               -           (138)
Income tax rate change (b)                21,629            -             -            -               -         21,629
Comprehensive revaluation (d)                  -            -         3,638            -          (3,638)             -
Promissory note (e)                            -            -        46,191            -               -         46,191
Derivative financial
instruments (g)                                -            -           161            -               -            161
                                       ---------    ---------   -----------    ---------    ------------    -----------
Total assets - US GAAP                 $ 796,114    $ 960,749   $ 1,035,522    $ 588,632    $ (1,741,247)   $ 1,639,770
                                       =========    =========   ===========    =========    ============    ===========

Total liabilities - Canadian GAAP      $ (47,874)   $ 571,816   $ 1,724,087    $ 102,411    $ (1,398,535)   $   951,905
Asset retirement obligations (a)               -            -        (8,259)           -               -         (8,259)
Income tax rate change (b)                 9,625            -             -            -               -          9,625
Pension valuation allowance (c)                -            -        (1,038)           -               -         (1,038)
Minimum pension liability (c)                  -            -           137            -              12            149
Comprehensive revaluation (d)                  -            -        13,141            -         (13,141)             -
Promissory note (e)                            -            -        46,191            -               -         46,191
Derivative financial
instruments (g)                                -            -            70            -               -             70
                                       ---------    ---------   -----------    ---------    ------------    -----------
Total liabilities - US GAAP            $ (38,249)   $ 571,816   $ 1,774,329    $ 102,411    $ (1,411,664)   $   998,643
                                       =========    =========   ===========    =========    ============    ===========

Total partners' equity -
Canadian GAAP                          $ 822,359    $ 388,933   $  (738,417)   $ 486,221    $   (339,074)   $   620,022
Changes in retained earnings
relating to:
Asset retirement obligations (a)               -            -         8,121            -               -          8,121
Income tax rate change (b)                12,004            -             -            -               -         12,004
Pension valuation allowance (c)                -            -         1,038            -               -          1,038
Minimum pension liability (c)                  -            -          (137)           -             (12)          (149)
Comprehensive revaluation (d)                  -            -        (9,503)           -           9,503              -
Earnings from SCAI operations (f)              -            -             -            -               -              -
Derivative financial instruments (g)           -            -            91            -               -             91
                                       ---------    ---------   -----------    ---------    ------------    -----------
Total partners' equity - US GAAP       $ 834,363    $ 388,933   $  (738,807)   $ 486,221    $   (329,583)   $   641,127
                                       =========    =========   ===========    =========    ============    ===========
</TABLE>

(a)   ASSET RETIREMENT OBLIGATIONS

      In June 2001, the FASB approved SFAS 143, "Accounting for Asset Retirement
Obligations". LEP adopted SFAS 143 on January 1, 2003. LEP adopted the Canadian
GAAP standards for asset retirement obligations under CICA HB section 3110
effective January 1, 2004 and retroactively restated the Canadian GAAP results
to account for this policy change. The Canadian and US standards for asset
retirement obligations are substantially the same; however due to the difference
in adoption dates, different assumptions were used to determine the liability
amount. This resulted in differences in the asset and liability balances on
adoption and will result in different depreciation and accretion charges over
time.

                                      F-46
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

23.   CONDENSED CONSOLIDATING INFORMATION (CONTINUED)

(b)   INCOME TAX RATE CHANGE

      A reduction in income tax rates was substantively enacted in the period
January 1, 2001 to May 11, 2001 but was not enacted until the period May 12,
2001 to December 31, 2001. Under Canadian GAAP, the reduction in income tax
rates was reflected in the LCIF purchase price equation in 2001. Under United
States GAAP, capital assets at LEP increased by $20,383 (2003 - $21,629) and
future income tax liabilities at LEP increased by $9,071 (2003 - $9,625) at
December 31, 2004.

(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. Under United States GAAP, pension
liabilities at LEP decreased by $2,351 (2003 - $1,923) and future income tax
liabilities at LEP increased by $1,060 (2003 - $885) at December 31, 2004.

      United States GAAP requires the recognition of a minimum pension liability
for defined benefit plans. The initial recognition and related adjustments to
the minimum pension liability are reflected in comprehensive income. For the
year ended December 31, 2004, LEP decreased comprehensive income by $2,783 (an
increase to comprehensive income in 2003 of $1,384 and a decrease to
comprehensive income in 2002 of $1,533).

(d)   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 Teachers did not incur debt to
finance the capitalization of the partnership.

      As a result of the acquisition adjustments required by United States GAAP,
the assets, liabilities and partners' equity of LL as at December 31, 2004 and
December 31, 2003 were impacted as follows. The impact of these changes in the
LEP financial statements is eliminated upon consolidation.

                                      F-47
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

23.   CONDENSED CONSOLIDATING INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                            AS AT           AS AT
                                                                         DECEMBER 31,    DECEMBER 31,
                                                                            2004            2003
                                                                         ------------    ------------
<S>                                                                      <C>             <C>
BALANCE SHEET
Increase (decrease):
Capital assets - mining properties                                       $     2,774     $     3,638
Pension liabilities                                                           (4,256)         (5,054)
Accrued liabilities                                                             (867)           (867)
Future income tax liability                                                   18,382          19,062
Retained earnings - push down adjustment                                     (52,686)        (52,686)
Retained earnings - post acquisition affect of push down on earnings          42,201          43,183
</TABLE>

(e)   PROMISSORY NOTE

      Under United States GAAP, the offsetting of assets and liabilities in the
balance sheet is not permitted unless a right of offset exists. A right of
offset requires that each of two parties owe the other determinable amounts and
that the reporting party has the right to offset the amount with the amount owed
by the other party. The sinking fund, which has been setoff against the
promissory note under Canadian GAAP, does not qualify for offsetting under
United States GAAP. The sinking fund is therefore reflected as other assets
under United States GAAP, whereas it is a debit to current liabilities under
Canadian GAAP in 2003, however as the promissory note was settled in December
2004, there is no such adjustment required in 2004.

(f)   INCOME FROM SCAI

      On October 17, 2003 LCL acquired 100% of the shares of SCAI, a wholly
owned subsidiary of SCPII. LEP, LCL, SCAI and SCPII are all owned, as to 50%
each, directly or indirectly, by Sherritt and Teachers. United States GAAP
requires the financial statements of the receiving entity to report the results
of operations for the period in which the transaction occurred as though the
transaction had occurred at the beginning of the period. As a result, the net
income of SCAI of $ 17,637, net of taxes of $2,898, for the period January 1,
2003 to October 16, 2003 has been included in earnings with a corresponding
reduction in partners' equity.

(g)   DERIVATIVE FINANCIAL INSTRUMENTS

      Under United States GAAP, LEP adopted SFAS 133 as amended. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
fair value regardless of the purpose and intent of holding them. 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 derivatives change
in fair value is recognized in earnings immediately. LEP has not designated any
instruments as hedges for United States GAAP purposes.

      On December 31, 2004, LEP's final energy purchase contracts expired. As a
result, the derivative financial instruments had no impact on the LEP balance
sheet as at December 31, 2004, compared with an increase to current assets of
$161 and an increase to future income taxes of $70 as at December 31, 2003.

                                      F-48
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

23.   CONDENSED CONSOLIDATING INFORMATION (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31, 2004
                                          -----------------------------------------------------------------------------------------
                                          LUSCAR ENERGY       LUSCAR          LUSCAR     LUSCAR COAL   CONSOLIDATING   CONSOLIDATED
(in thousands of Canadian dollars)         PARTNERSHIP      COAL LTD.          LTD.      INCOME FUND      ENTRIES           LEP
                                          -------------    ------------    ----------    -----------   -------------   ------------
                                             Parent        Senior Notes    Subsidiary    Subsidiary
                                            Guarantor         Issuer        Guarantor    Guarantor
<S>                                       <C>              <C>             <C>           <C>           <C>             <C>
REVENUE                                      $      -        $      -      $  500,803     $      -      $       -        $500,803
EXPENSES AND OTHER INCOME
   Cost of sales                                    -               -         350,355            -              -         350,355
   Selling, general and administrative
   expenses                                     1,471               -          16,662            -              -          18,133
   Equity in net earnings of related
   parties                                    (27,388)        (39,385)              -      (28,001)        94,774               -
   Depreciation and amortization                    -          32,940          78,692          613            864         113,109
   Asset retirement obligations
   accretion                                        -               -           7,104            -              -           7,104
   Foreign currency translation
   gain                                             -               -         (23,643)           -              -         (23,643)
   Intercompany interest expense
   (income)                                   (43,945)        (37,257)         81,202            -              -               -
   Interest expense                                 -          34,803          10,534            -              -          45,337
   Other (income) expense                           -           1,100         (54,822)           -            990         (52,732)
                                             --------        --------      ----------     --------      ---------        --------
EARNINGS FROM CONTINUING
OPERATIONS BEFORE TAXES                        69,862           7,799          34,719       27,388        (96,628)         43,140
Income tax recovery                                 -         (20,202)            797            -              -         (19,405)
                                             --------        --------      ----------     --------      ---------        --------
NET EARNINGS FROM
CONTINUING OPERATIONS                          69,862          28,001          33,922       27,388        (96,628)         62,545
Discontinued operations                             -               -           5,463            -              -           5,463
                                             --------        --------      ----------     --------      ---------        --------
NET EARNINGS FOR THE YEAR                    $ 69,862        $ 28,001      $   39,385     $ 27,388      $ (96,628)       $ 68,008
                                             ========        ========      ==========     ========      =========        ========

Net earnings - Canadian GAAP                 $ 69,862        $ 28,001      $   39,385     $ 27,388      $ (96,628)       $ 68,008
Asset retirement obligations (a)                    -               -          (5,786)           -              -          (5,786)
Income tax rate change (b)                     (1,246)              -               -            -              -          (1,246)
Pension valuation allowance (c)                     -               -             428            -              -             428
Comprehensive revaluation (d)                       -               -          (1,662)           -          1,662               -
Derivative financial instruments (e)                -               -             197            -           (358)           (161)
Income tax recovery                               554               -           2,872            -           (610)          2,816
                                             --------        --------      ----------     --------      ---------        --------
Net earnings - US GAAP                       $ 69,170        $ 28,001      $   35,434     $ 27,388      $ (95,934)       $ 64,059
                                             ========        ========      ==========     ========      =========        ========
</TABLE>

                                      F-49
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

23. CONDENSED CONSOLIDATING INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31, 2003
                                           -----------------------------------------------------------------------------------------
                                           LUSCAR ENERGY      LUSCAR         LUSCAR      LUSCAR COAL    CONSOLIDATING   CONSOLIDATED
(in thousands of Canadian dollars)          PARTNERSHIP      COAL LTD.        LTD.       INCOME FUND       ENTRIES           LEP
                                           -------------   ------------    ----------    -----------    -------------   ------------
                                             Parent        Senior Notes    Subsidiary     Subsidiary
                                            Guarantor         Issuer        Guarantor     Guarantor
<S>                                        <C>             <C>             <C>           <C>            <C>             <C>
REVENUE                                      $       -                     $  376,060     $       -       $       -       $ 376,060
EXPENSES AND OTHER INCOME
   Cost of sales                                     -                        268,925             -               -         268,925
   Selling, general and administrative
    expenses                                     1,871                         22,378            13               -          24,262
   Equity in net earnings of related
   parties                                     (82,673)       (69,858)              -       (83,146)        235,677               -
   Depreciation and amortization                     -         43,790          51,082           613             876          96,361
   Asset retirement obligations
   accretion                                         -                          6,888             -               -           6,888
   Foreign currency translation gain                 -                        (79,433)            -               -         (79,433)
   Intercompany interest expense
   (income)                                    (16,755)       (39,986)         56,741             -               -               -
   Interest expense (income)                    (1,614)        37,308          10,794             -               -          46,488
   Other income                                    (85)         1,100         (24,590)         (153)          2,632         (21,096)
                                             ---------       --------      ----------     ---------       ---------       ---------
EARNINGS FROM CONTINUING
OPERATIONS BEFORE TAXES                         99,256         27,646          63,275        82,673        (239,185)         33,665
Income tax recovery                                  -        (55,500)         (5,725)            -               -         (61,225)
                                             ---------       --------      ----------     ---------       ---------       ---------
NET EARNINGS FROM CONTINUING
OPERATIONS                                      99,256         83,146          69,000        82,673        (239,185)         94,890
Discontinued operations                              -                            858             -          18,272          19,130
                                             ---------       --------      ----------     ---------       ---------       ---------
NET EARNINGS FOR THE YEAR                    $  99,256       $ 83,146      $   69,858     $  82,673       $(220,913)      $ 114,020
                                             =========       ========      ==========     =========       =========       =========

Net earnings - Canadian GAAP                 $  99,256       $ 83,146      $   69,858     $  82,673       $(220,913)      $ 114,020
Asset retirement obligations (a)                     -              -           1,582             -               -           1,582
Income tax rate change (b)                      (1,246)             -               -             -               -          (1,246)
Pension valuation allowance (c)                      -              -            (260)            -               -            (260)
Comprehensive revaluation (d)                        -              -          (3,707)            -           3,707               -
Derivative financial instruments (e)                 -              -            (197)            -             358             161
Earnings from SCAI operations (f)                    -              -          20,535             -               -          20,535
Cumulative effect of the application of
asset
retirement obligations for US GAAP (a)               -              -         (47,060)            -               -         (47,060)
Income tax recovery                                554              -          13,830             -          (1,715)         12,669
                                             ---------       --------      ----------     ---------       ---------       ---------
Net earnings from continuing operations
under US GAAP                                   98,564         83,146          54,581        82,673        (218,563)        100,401
Discontinued operations - US GAAP:
Comprehensive revaluation (d)                        -              -          10,506             -         (10,506)              -
                                             ---------       --------      ----------     ---------       ---------       ---------
Net earnings - US GAAP                       $  98,564       $ 83,146      $   65,087     $  82,673       $(229,069)      $ 100,401
                                             =========       ========      ==========     =========       =========       =========
</TABLE>

                                      F-50
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

23.   CONDENSED CONSOLIDATING INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31, 2002
                                         --------------------------------------------------------------------------------------
                                         LUSCAR ENERGY    LUSCAR          LUSCAR     LUSCAR COAL   CONSOLIDATING   CONSOLIDATED
(in thousands of Canadian dollars)        PARTNERSHIP    COAL LTD.         LTD.      INCOME FUND     ENTRIES           LEP
                                         -------------   ------------   ----------   -----------   -------------   ------------
                                             Parent      Senior Notes   Subsidiary   Subsidiary
                                           Guarantor       Issuer       Guarantor     Guarantor
<S>                                      <C>             <C>            <C>          <C>           <C>             <C>
REVENUE                                    $       -      $       -     $  441,586    $       -     $     1,481     $ 443,067
EXPENSES AND OTHER INCOME
   Cost of sales                                   -              -        317,132            -               -       317,132
   Selling, general and administrative
   expenses                                      832              -         12,259           58               -        13,149
   Equity in net loss of related
   parties                                    35,170         43,224              -       57,095        (135,489)            -
   Depreciation and amortization                   -         43,790         54,624          613          (4,323)       94,704
   Asset retirement obligations
   accretion                                       -              -          6,314            -               -         6,314
   Write-down of capital assets                    -              -         42,791            -         (42,791)            -
   Foreign currency translation gain               -              -         (4,021)           -               -        (4,021)
   Intercompany interest expense
   (income)                                   (9,666)       (45,111)        76,880      (22,596)            493             -
   Interest expense (income)                  (1,543)        42,092         12,167            -               -        52,716
   Other (income) expense                         34          1,100         (5,350)           -          (5,740)       (9,956)
                                           ---------      ---------     ----------    ---------     -----------     ---------
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE TAXES                      (24,827)       (85,095)       (71,210)     (35,170)        189,331       (26,971)
Income tax recovery                                -        (28,000)       (24,942)           -               -       (52,942)
                                           ---------      ---------     ----------    ---------     -----------     ---------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS                                   (24,827)       (57,095)       (46,268)     (35,170)        189,331        25,971
Discontinued operations                            -              -          3,044            -               -         3,044
                                           ---------      ---------     ----------    ---------     -----------     ---------
NET EARNINGS (LOSS) FOR THE YEAR           $ (24,827)     $ (57,095)    $  (43,224)   $ (35,170)    $   189,331     $  29,015
                                           =========      =========     ==========    =========     ===========     =========

Net earnings (loss) - Canadian GAAP        $ (24,827)     $ (57,095)    $  (43,224)   $ (35,170)    $   189,331     $  29,015
Asset retirement obligations (a)                   -              -          6,072            -               -         6,072
Income tax rate change (b)                    (1,246)             -              -            -               -        (1,246)
Pension valuation allowance (c)                    -              -            654            -               -           654
Comprehensive revaluation (d)                      -              -         52,821            -         (52,821)            -
Derivative financial instruments (e)               -              -         (3,974)           -           3,974             -
Income tax recovery (expense)                    554              -        (25,938)           -          23,051        (2,333)
                                           ---------      ---------     ----------    ---------     -----------     ---------
Net earnings (loss) - US GAAP              $ (25,519)     $ (57,095)    $  (13,589)   $ (35,170)    $   163,535     $  32,162
                                           =========      =========     ==========    =========     ===========     =========
</TABLE>

(a)   ASSET RETIREMENT OBLIGATIONS

      In June 2001, the FASB approved SFAS 143, "Accounting for Asset Retirement
Obligations". LEP adopted SFAS 143 on January 1, 2003. LEP adopted the Canadian
GAAP standards for asset retirement obligations under CICA HB section 3110
effective January 1, 2004 and retroactively restated the Canadian GAAP results
to account for this policy change. The Canadian and US standards for asset
retirement obligations are substantially the same; however due to the difference
in adoption dates, different assumptions were used to determine the liability
amount. This resulted in differences in the asset and liability balances on
adoption and will result in different depreciation and accretion charges over
time.

                                      F-51
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

23.   CONDENSED CONSOLIDATING INFORMATION (CONTINUED)

(b)   INCOME TAX RATE CHANGE

      A reduction in income tax rates was substantively enacted in the period
January 1, 2001 to May 11, 2001 but was not enacted until the period May 12,
2001 to December 31, 2001. Under Canadian GAAP, the reduction in income tax
rates was reflected in the LCIF purchase price equation in 2001. Net earnings
for the year ended December 31, 2004 at LEP includes $692, net of tax of $554,
(2003 - $692, net of tax of $554, and 2002 - $692, net of tax of $554) of
amortization expense related to the corresponding asset.

(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 and Partner's Equity. 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, for the year ended December 31, 2004, LEP's earnings under United
States GAAP have been increased by $253, net of tax of $175, (a decrease to
earnings in 2003 of $144, net of tax of $116, and an increase to earnings in
2002 of $654).

(d)   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 Teachers did not incur debt to
finance the capitalization of the partnership.

As a result of the acquisition adjustments required by United States GAAP,
revenues and expenses for the years ended December 31, 2004, December 31, 2003
and December 31, 2002 were impacted as follows. The impact of these changes in
the LEP financial statements is eliminated upon consolidation.

                                      F-52
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

23.   CONDENSED CONSOLIDATING INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                  YEAR ENDED      YEAR ENDED      YEAR ENDED
                                                                 DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                                     2004            2003            2002
                                                                 ------------    ------------    ------------
<S>                                                              <C>             <C>             <C>
STATEMENT OF EARNINGS
Increase (decrease) in earnings from continuing operations:
Depreciation and amortization - mining properties                 $     (864)     $     (876)     $   47,115
Pension expenses                                                        (798)         (2,831)          5,706
                                                                  ----------      ----------      ----------
Increase (decrease) in earnings before tax impact                     (1,662)         (3,707)         52,821
Future income tax provision                                              680           1,575         (24,773)
                                                                  ----------      ----------      ----------
Net impact on earnings from continuing operations                       (982)         (2,132)         28,048
Increase (decrease) in earnings from discontinued operations:
Gain on sale of met assets                                                 -          18,272               -
Future income tax provision                                                -          (7,766)              -
                                                                  ----------      ----------      ----------
Net impact on earnings from discontinued operations                        -          10,506               -

                                                                  ----------      ----------      ----------
Net impact on statement of earnings                               $     (982)     $    8,374      $   28,048
                                                                  ==========      ==========      ==========
</TABLE>

(e)   DERIVATIVE FINANCIAL INSTRUMENTS

      Under United States GAAP, LEP adopted SFAS 133 as amended. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
fair value regardless of the purpose and intent of holding them. 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 derivatives change
in fair value is recognized in earnings immediately. LEP has not designated any
instruments as hedges for United States GAAP purposes.

      As at December 31, 2004, LEP's final energy purchase contracts expired.
The impact of the derivative financial instruments on the LEP statement of
earnings was a decrease to LEP earnings of $91, net of tax of $70, in 2004
compared with an increase to LEP earnings of $91, net of tax of $70, in the year
ended December 31, 2003 and no impact on LEP earnings in the year ended December
31, 2002.

(f)   INCOME FROM SCAI

      On October 17, 2003 LCL acquired 100% of the shares of SCAI, a wholly
owned subsidiary of SCPII. LEP, LCL, SCAI and SCPII are all owned, as to 50%
each, directly or indirectly, by Sherritt and Teachers. United States GAAP
requires the financial statements of the receiving entity to report the results
of operations for the period in which the transaction occurred as though the
transaction had occurred at the beginning of the period. As a result, the net
income of SCAI of $ 17,637, net of taxes of $2,898, for the period January 1,
2003 to October 16, 2003 has been included in earnings with a corresponding
reduction in partners' equity.

                                      F-53
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

23.  CONDENSED CONSOLIDATING INFORMATION (CONTINUED)

(c) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31, 2004
                                            ----------------------------------------------------------------------------------------
                                            LUSCAR ENERGY      LUSCAR         LUSCAR      LUSCAR COAL   CONSOLIDATING   CONSOLIDATED
(in thousands of Canadian dollars)           PARTNERSHIP     COAL LTD.         LTD.       INCOME FUND      ENTRIES           LEP
                                            -------------   ------------    ----------    -----------   -------------   ------------
                                               Parent       Senior Notes    Subsidiary    Subsidiary
                                              Guarantor        Issuer       Guarantor      Guarantor
<S>                                         <C>             <C>             <C>           <C>           <C>             <C>
OPERATING ACTIVITIES
Net earnings for the year                     $  69,862      $  28,001      $  39,385      $  27,388      $ (96,628)     $  68,008
Non-cash items:
   Depreciation and amortization                      -         32,940         78,692            613            864        113,109
   Asset retirement obligations accretion             -              -          7,104              -              -          7,104
   Future income taxes                                -        (20,245)        (2,427)             -              -        (22,672)
   Foreign currency translation gain                  -              -        (23,669)             -              -        (23,669)
   Equity pickup                                (27,388)       (39,385)             -        (28,001)        94,774              -
   Gain on disposal of capital assets                 -              -         (4,126)             -              -         (4,126)
   Gain on settlement of ARO                          -              -         (7,642)             -              -         (7,642)
   Gain on Fording settlement                         -              -         (6,047)             -              -         (6,047)
   Pension expense in excess of funding               -          1,100           (776)             -            778          1,102
   Other                                              -              -         (3,305)             -              -         (3,305)
Asset retirement obligations costs                    -              -        (17,045)             -              -        (17,045)
Change in non-cash working capital              (42,545)        (2,419)        61,202           (145)           212         16,305
                                              ---------      ---------      ---------      ---------      ---------      ---------
                                                    (71)            (8)       121,346           (145)             -        121,122
                                              ---------      ---------      ---------      ---------      ---------      ---------
INVESTING ACTIVITIES
Capital asset purchases                               -              -        (16,310)             -              -        (16,310)
Proceeds on disposal of capital assets                -              -          5,262              -              -          5,262
Other assets                                          -              -         (2,620)             -              -         (2,620)
                                              ---------      ---------      ---------      ---------      ---------      ---------
                                                      -              -        (13,668)             -              -        (13,668)
                                              ---------      ---------      ---------      ---------      ---------      ---------
FINANCING ACTIVITIES
Repayments of long-term debt                          -              -        (46,235)             -              -        (46,235)
Distribution to partners                              -              -        (65,000)             -              -        (65,000)
                                              ---------      ---------      ---------      ---------      ---------      ---------
                                                      -              -       (111,235)             -              -       (111,235)
                                              ---------      ---------      ---------      ---------      ---------      ---------

Change in cash and cash equivalents                 (71)            (8)        (3,557)          (145)             -         (3,781)
Effect of foreign exchange rate changes
on cash and cash equivalents                          -              -           (751)             -              -           (751)
Cash and cash equivalents,
beginning of year                                    26            128         19,037          2,559              -         21,750
                                              ---------      ---------      ---------      ---------      ---------      ---------
Cash and cash equivalents, end of year        $     (45)     $     120      $  14,729      $   2,414      $       -      $  17,218
                                              =========      =========      =========      =========      =========      =========
</TABLE>

                                      F-54
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

23.   CONDENSED CONSOLIDATING INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31, 2003
                                             ---------------------------------------------------------------------------------------
                                             LUSCAR ENERGY     LUSCAR         LUSCAR       LUSCAR COAL   CONSOLIDATING  CONSOLIDATED
(in thousands of Canadian dollars)            PARTNERSHIP     COAL LTD.         LTD.       INCOME FUND      ENTRIES         LEP
                                             -------------   ------------   ----------     -----------   -------------  ------------
                                                Parent       Senior Notes   Subsidiary     Subsidiary
                                               Guarantor       Issuer        Guarantor      Guarantor
<S>                                          <C>             <C>            <C>            <C>           <C>            <C>
OPERATING ACTIVITIES
Net earnings for the year                      $  99,256      $  83,146      $  69,858      $  82,673      $(220,913)     $ 114,020
Non-cash items:
   Depreciation and amortization                       -         43,790         52,041              -          1,489         97,320
   Asset retirement obligations accretion              -              -          6,888              -              -          6,888
   Future income taxes                                 -        (55,549)        (1,839)             -              -        (57,388)
   Foreign currency translation gain                   -              -        (77,330)             -              -        (77,330)
   Equity pickup                                 (82,673)       (69,858)             -        (83,146)       235,677              -
   Gain on disposal of capital assets                  -              -         (6,252)             -        (18,272)       (24,524)
   Gain on settlement of ARO                           -              -           (192)             -              -           (192)
   Pension expense in excess of funding                -          1,100          1,534              -          2,859          5,493
   Other                                               -              -         (3,462)             -            (21)        (3,483)
Asset retirement obligations costs                     -              -        (16,071)             -              -        (16,071)
Change in non-cash working capital                13,745         (2,656)        33,103          2,911           (819)        46,284
                                               ---------      ---------      ---------      ---------      ---------      ---------
                                                  30,328            (27)        58,278          2,438              -         91,017
                                               ---------      ---------      ---------      ---------      ---------      ---------
INVESTING ACTIVITIES
Capital asset purchases                                -              -        (25,005)             -              -        (25,005)
SCAI asset transfer                              (70,000)             -              -              -              -        (70,000)
Promissory notes acquired from partners         (298,605)             -              -              -              -       (298,605)
Credit facility acquired                               -              -        (12,000)             -              -        (12,000)
Cash acquired                                          -              -          1,356              -              -          1,356
Proceeds on disposal of capital assets                 -              -          1,068              -              -          1,068
Other assets                                           -              -          4,279              -              -          4,279
                                               ---------      ---------      ---------      ---------      ---------      ---------
                                                (368,605)             -        (30,302)             -              -       (398,907)
                                               ---------      ---------      ---------      ---------      ---------      ---------
FINANCING ACTIVITIES
Operating line of credit                               -              -         12,000              -              -         12,000
Financial instruments                                  -              -         (2,702)             -              -         (2,702)
Long-term debt issued                                  -              -            712              -              -            712
Repayments of long-term debt                           -              -        (24,038)             -              -        (24,038)
Distribution to partners                         (27,000)             -              -              -              -        (27,000)
Equity contribution from partners                298,605              -              -              -              -        298,605
                                               ---------      ---------      ---------      ---------      ---------      ---------
                                                 271,605              -        (14,028)             -              -        257,577
                                               ---------      ---------      ---------      ---------      ---------      ---------

Change in cash and cash equivalents              (66,672)           (27)        13,948          2,438              -        (50,313)
Effect of foreign exchange rate on
cash and cash equivalents                              -              -         (1,650)             -              -         (1,650)
Cash and cash equivalents, beginning of year      66,698            155          6,739            121              -         73,713
                                               ---------      ---------      ---------      ---------      ---------      ---------
Cash and cash equivalents, end of year         $      26      $     128      $  19,037      $   2,559      $       -      $  21,750
                                               =========      =========      =========      =========      =========      =========
</TABLE>

                                      F-55
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

23.   CONDENSED CONSOLIDATING INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31, 2002
                                          ----------------------------------------------------------------------------------------
                                          LUSCAR ENERGY      LUSCAR         LUSCAR      LUSCAR COAL   CONSOLIDATING   CONSOLIDATED
(in thousands of Canadian dollars)         PARTNERSHIP     COAL LTD.         LTD.       INCOME FUND      ENTRIES           LEP
                                          -------------   ------------    ----------    -----------   -------------   ------------
                                             Parent       Senior Notes    Subsidiary    Subsidiary
                                            Guarantor        Issuer       Guarantor      Guarantor
<S>                                       <C>             <C>             <C>           <C>           <C>             <C>
OPERATING ACTIVITIES
Net earnings (loss) for the year            $ (24,827)     $ (57,095)     $ (43,224)     $ (35,170)     $ 189,331      $  29,015
Non-cash items:
   Depreciation and amortization                    -         43,790         61,808            613         (4,323)       101,888
   Write-down of capital assets                     -              -         42,791              -        (42,791)             -
   Accretion expense                                               -          6,314                                        6,314
   Future income taxes                              -        (29,339)       (23,603)             -              -        (52,942)
   Foreign currency translation gain                -              -         (3,453)             -              -         (3,453)
   Equity pickup                               35,170         43,224              -         57,095       (135,489)             -
   Gain on disposal of capital assets               -              -         (1,242)             -              -         (1,242)
   Gain on asset retirement obligations                            -           (580)                                        (580)
   Pension expense in excess of funding             -          1,100          9,058              -         (5,719)         4,439
   Financial instruments                            -              -         (2,704)             -         (1,502)        (4,206)
   Interest income on sinking funds                 -              -         (4,215)             -              -         (4,215)
   Other                                            -              -              1              -              5              6
Asset retirement obligations costs                                 -        (16,826)                                     (16,826)
Change in non-cash working capital            (31,923)        (1,530)        39,724          3,629            488         10,388
                                            ---------      ---------      ---------      ---------      ---------      ---------
                                              (21,580)           150         63,849         26,167              -         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)
Convertible debenture                           3,947              -              -         (3,947)             -              -
Repayments of long-term debt                        -              -         (3,095)             -              -         (3,095)
Distribution to LEP                            22,162              -              -        (22,162)             -              -
                                            ---------      ---------      ---------      ---------      ---------      ---------
                                               26,109              -         (4,735)       (26,109)             -         (4,735)
                                            ---------      ---------      ---------      ---------      ---------      ---------

Change in cash and cash equivalents             4,529            150          8,877             58              -         13,614
Effect of foreign exchange rate changes
on cash and cash equivalents                        -              -           (232)             -              -           (232)
Cash and cash equivalents,
beginning of year                              62,169              5         (1,906)            63              -         60,331
                                            ---------      ---------      ---------      ---------      ---------      ---------
Cash and cash equivalents, end of year      $  66,698      $     155      $   6,739      $     121      $       -      $  73,713
                                            =========      =========      =========      =========      =========      =========
</TABLE>

                                      F-56
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

24.   GUARANTEES

      During 2003, LEP adopted the CICA Accounting Guideline 14, Disclosure of
Guarantees. This policy requires the disclosure of information regarding certain
types of guarantee contracts that require payments contingent on specified types
of future events. All significant guarantee contracts are disclosed within the
notes to the LEP consolidated financial statements.

      In conjunction with the disposition of the metallurgical coal assets (as
described in note 5 of our consolidated financial statements), LEP retained
certain liabilities in respect of the metallurgical coal assets. These included:

      -     Site restoration liabilities for certain closed mines and previously
            mined areas. These extend for an unlimited period of time and the
            maximum potential liability depends upon the outcome of future
            contingent events, the nature and likelihood of which cannot be
            determined at this time. These liabilities were settled in 2004 as a
            result of the June 18, 2004 settlement agreement. As part of the
            settlement, the Corporation was required to pay $1.6 million to
            completely settle this matter.

      -     Severance liabilities for employees in anticipation of the permanent
            shutdown of the Luscar mine in combination with a decision not to
            proceed with the Cheviot project. These extend to February 2005, up
            to a maximum of approximately $2.2 million. In the fourth quarter of
            2004, the Corporation's residual liability was removed reflecting
            the commencement of production from the Cheviot lands during this
            period and LEP has no further obligation with respect to this
            matter.

      -     Employment liabilities for former employees arising from operations
            prior to the transfer and severance obligations for other former
            employees not hired by the purchaser, for which no liability has
            been recorded by LEP.

      -     General indemnities were given for negligence and claims arising
            prior to the transfer. In addition, indemnities were provided to the
            purchaser and a joint venture partner in respect of a transfer of a
            portion of the metallurgical coal assets between entities controlled
            by LEP immediately preceding the closing of the Fording Arrangement.
            The indemnities extend for an unlimited period of time and the
            maximum potential liability cannot be determined at this time. No
            amounts have been accrued with respect to these indemnities.

      In connection with a borrowing facility, we have provided an indemnity in
respect of transactions related to the extension of credit and environmental
indemnities in respect of our properties to the lender. The indemnities extend
for an unlimited period of time and the maximum potential liability cannot be
determined at this time. No amounts have been accrued with respect to these
indemnities.

      As a result of the Manalta Coal acquisition in 1998, Luscar assumed an
indemnity agreement for a subsidiary of Manalta called Chinook Coals that was
the grantor of an indemnity agreement on a land sale to Sarcee Holdings. The
agreement stipulates that Chinook Coals will assume any responsibility or
liability for the mine shaft and mine site that is underneath the land that was
sold; as well as indemnifying Sarcee Holdings for any current or future claims
that could arise - effectively the buyer is fully released from any
responsibility therefore. This agreement is valid and enforceable until 2086. No
amounts have been accrued with respect to these indemnities.

      An environmental indemnity was included as part of the asset sales
agreement, when we sold the Specialty Products division in September 2003. We,
as the vendor, have indemnified the purchaser of and from any and all damages,
losses, obligations and liabilities which may be suffered or incurred as a
result of any environmental contamination or condition that existed prior to the
Closing date of the sale. This indemnity exists regardless of whether the
condition is known to the parties at the time of agreement or not. An
environmental site

                                      F-57
<PAGE>

LUSCAR ENERGY PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2004

(in thousands, except for per unit amounts)

assessment was completed prior to the sale in order to provide a base line of
environmental conditions in order to provide some clarity and support for the
indemnity. No amounts have been accrued with respect to these indemnities.

      The impact of these indemnities is dependent on future events that cannot
be determined making it difficult to quantify the maximum liability.

25.   COMMITMENTS AND CONTINGENCIES

      LEP is committed to future annual lease payments in respect of its
operating leases for office space, equipment and vehicles. Minimum payments for
the next five years are as follows:

<TABLE>
<CAPTION>
(in thousands of Canadian dollars)
<S>                                                 <C>
2005                                                $ 4,554
2006                                                  4,278
2007                                                  4,278
2008                                                  4,278
2009                                                  1,817
Thereafter                                                -
                                                    -------
                                                    $19,205
                                                    =======
</TABLE>

      The original financed amount of the equipment currently being leased
through operating leases by LEP is $21,048 as at December 31, 2004 (December 31,
2003 - nil). The amount of expense recorded in selling, general and
administrative expense for operating leases for the year ended December 31, 2004
was $2,751 (2003 - $432 and 2002 - $432)

      Additionally, LEP is committed to the acquisition under capital lease of
equipment worth $3,793, which arrived in January 2005, for which the option to
cancel expired in November 2004.

26.   COMPARATIVE FIGURES

      Certain comparative figures for prior years have been reclassified to
conform to the presentation of the financial statements for the current year.

                                      F-58