Primary Energy Recycling Corporation announces third quarter 2007 results



    OAK BROOK, IL, Nov. 14 /CNW/ - Primary Energy Recycling Corporation (TSX:
PRI.UN) (the "Company") today released its financial results for the three and
nine months ended September 30, 2007. All amounts are in U.S. dollars unless
otherwise indicated.

    
    Summary

        -  Company seeking waiver from senior lenders to address a default
           under its senior debt Credit Agreement that is precluding payment
           of distributions to holders of Separate Subordinated Notes and
           Enhanced Income Securities (EISs).
        -  Revenue of $19.2 million in the third quarter of 2007 decreased
           9.2% from the third quarter of 2006 primarily due to reduced
           revenue at the Company's Harbor Coal facility.
        -  Lackluster performance at Harbor Coal facility continues to
           overshadow Company's otherwise strong operational results.
    

    "With the exception of Harbor Coal, our facilities performed within
normal expectations in the third quarter of 2007," said John Prunkl, President
of the Company's Manager. "The Company's solid foundation continues to be
negatively impacted by uneven performance at Harbor Coal. We continue to
pursue an amendment to the Harbor Coal agreement to simplify the tolling
formula, improve stability and increase predictability of cash flow from the
project.
    The Company has a strong liquidity position with sufficient cash
available to operate the business, and pay distributions to shareholders.
However, as we are not currently in compliance with covenants under the Credit
Agreement with senior lenders, payment of cash distributions to holders of
EISs and Separate Subordinated notes is precluded. The Company is actively
seeking a waiver of the default with the senior lenders thus allowing the
Company to consider payments of distributions to unit and note holders."
    In the third quarter of 2007, the Company earned revenue of
$19.2 million, a decrease of 9.2% from the third quarter of 2006 primarily due
to a decline in revenue at the Company's Harbor Coal facility related to a net
reduction associated with efficiency, volume and pricing of $0.4 million and a
reserve against revenue of $1.0 million based on adjusted consumption totals
impacted by inventory measurements conducted by the facility's host. The
decrease was also attributed to steam shortfalls due to boiler repair and
maintenance at North Lake's site host and a brief outage at the North Lake
facility in the current quarter. For the nine months ended September 30, 2007,
the Company earned revenue of $53.9 million, a decrease of 21.7% from same
period last year.
    Total operating and maintenance expense for the third quarter of 2007 was
$7.9 million, up 9.7% from the third quarter of 2006 due to additional
maintenance expenses primarily associated with repair activity at the Portside
and North Lake facilities. General and administrative expenses were
$2.7 million for the third quarter of 2007 compared to $2.5 million in the
third quarter of 2006. For the nine-month period, operating and maintenance
expenses were $22.5 million, a decrease of 8.7% from the nine-months ended
September 30, 2006. The Company's Harbor Coal facility experienced reduced
processing expenditures and lower prices for production commodities, including
oxygen, nitrogen and labor. For the nine-months ended September 30, 2007,
general and administrative expenses were $8.1 million compared to $7.3 million
for the nine months ended September 30, 2006. The increase noted is primarily
due to property tax benefits recorded in the prior period that are not
recurring.
    Third quarter 2007 earnings before interest, taxes, depreciation and
amortization ("EBITDA" -see non-GAAP Measures below) were $8.6 million
compared to $11.5 million in the third quarter of 2006, mainly due to the net
effect of the items discussed above. EBITDA for the nine-months ended
September 30, 2007 was $23.3 million compared to $36.9 million for the nine
months ended September 30, 2006. $3.3 million is attributed to higher than
expected commodity pricing and volume in 2006. In addition, there was
$6.3 million related to Harbor Coal negative coal inventory adjustments and
$3.4 million of outage impacts at North Lake.
    During the third quarter of 2007, operational difficulties associated
with the Harbor Coal facility, steam shortfalls due to boiler repair and
maintenance at North Lake's site host and a brief outage at the North Lake
facility impacted cash flow. As a result of operating shortfalls incurred on a
year-to-date basis, the Company is unable to remain in compliance with the
PERC Consolidated Leverage Ratio requirement under its Credit Agreement, which
is based on total funded debt as compared to the Company's trailing 12 months
EBITDA. The Company is restricted from paying distributions to EIS holders as
well as holders of the Separate Subordinated Notes so long as it is in default
under the Credit Agreement. Management is currently in active discussions with
lenders under the Credit Facility to determine if appropriate waivers can be
obtained.
    Distributable Cash for the third quarter of 2007 was $5.4 million or
$0.15 (Cdn$0.17) per EIS. Total distributions declared in the third quarter of
2007 were $5.0 million or $0.13 per EIS. At September 30, 2007, the Company
had total liquidity of $11.0 million.

    
    Summary of Distributable Cash
    -------------------------------------------------------------------------
                                                          Three         Nine
                                                         Months       Months
                                                          Ended        Ended
                                                      September    September
    (US$ thousands except per share data               30, 2007     30, 2007
     and as otherwise indicated)
    -------------------------------------------------------------------------
    Cash Provided by Operating Activities           $       (54) $     9,445
    -------------------------------------------------------------------------
    Cash Interest Expense                                 5,446       15,678
    -------------------------------------------------------------------------
    Changes in Operating Assets and Liabilities           3,440       (1,574)
    -------------------------------------------------------------------------
    Accretion of Asset Retirement Obligations               (54)        (162)
    -------------------------------------------------------------------------
    Interest on New Credit Facility                       2,874        8,418
    -------------------------------------------------------------------------
    Interest on separate subordinated notes                 464        1,392
    -------------------------------------------------------------------------
    Distributable Cash                              $     5,440  $    13,577
                                                   --------------------------
    -------------------------------------------------------------------------
    Hedge Rate (Cdn$/US$)                           $    1.1712  $    1.1694
    -------------------------------------------------------------------------
    Distributable Cash (Cdn$)                       $     6,371  $    15,877
                                                   --------------------------
    -------------------------------------------------------------------------
    Distributable Cash (Cdn$) per Common and
     Equivalent Common Share                        $      0.17  $      0.43
                                                   --------------------------
    -------------------------------------------------------------------------
    Excess (shortfall) Distributable Cash
     Earned (Cdn$) per Common and Equivalent
     Common Share                                   $      0.01  $     (0.25)
    -------------------------------------------------------------------------
    Payout Ratio                                          92.2%       158.3%
    -------------------------------------------------------------------------
    

    The Company's interim financial statements for the three and nine months
ended September 30, 2007 and Management's Discussion and Analysis, are
available at www.sedar.com or the Company's website
www.primaryenergyrecycling.com.

    Conference Call and Webcast

    Management will also host a conference call to further discuss the first
quarter results on Wednesday, November 14, 2007 at 11 a.m. (ET). Following
management's presentation, there will be a question and answer session. To
participate in the conference call, please dial 416-644-3427 or 1-800-594-
3790. A conference call replay will be available until 12 a.m. on November 21,
2007. The replay can be accessed by dialing 416-640-1917 or 1-877-289-8525 and
entering passcode 21252189 followed by the number sign. A webcast replay will
also be available for 90 days by accessing a link through the Investor
Information section at www.primaryenergyrecycling.com.

    Non-GAAP Measures

    Distributable Cash and EBITDA are not recognized measures under U.S. GAAP
or Canadian GAAP and do not have standardized meanings prescribed by U.S. GAAP
or Canadian GAAP. Therefore, Distributable Cash and EBITDA may not be
comparable to similar measures presented by other companies. See the
definitions of Distributable Cash and EBITDA in the Company's MD&A.

    Forward-Looking Statements

    When used in this news release, the words "anticipate", "expect",
"project", "believe", "estimate", "forecast" and similar expressions are
intended to identify forward-looking statements. Such statements are subject
to certain risks, uncertainties and assumptions pertaining, but not limited,
to operating performance, regulatory parameters, weather and economic
conditions and the factors discussed in the Company's public filings available
on SEDAR at www.sedar.com. These forward-looking statements are made as of the
date of this press release and the Company assumes no obligation to update or
revise them to reflect new events or circumstances.

    About Primary Energy Recycling Corporation

    Primary Energy Recycling Corporation owns a majority interest in Primary
Energy Recycling Holdings LLC ("PERH"). PERH, headquartered in Oak Brook,
Illinois, indirectly owns and operates four recycled energy projects and a
50 per cent interest in a pulverized coal facility (collectively, the
"Projects"). The Projects have a combined electrical generating capacity of
283 megawatts and a combined steam generating capacity of 1.8 MMlbs/hour. PERH
creates value for its customers by capturing and recycling waste energy from
industrial and electric generation processes and converting it into reliable
and economical electricity and thermal energy for its customers' use. For more
information, please see www.primaryenergyrecycling.com.


    
                     PRIMARY ENERGY RECYCLING CORPORATION
                         Management's Discussion and
          Analysis of Financial Condition and Results of Operations
                               (In US Dollars)

       Three Months and Nine Months Ended September 30, 2007 and 2006
    


    The following management's discussion and analysis of the financial
    condition and results of operations ("MD&A") of Primary Energy Recycling
    Corporation (the "Company") dated November 14, 2007 should be read in
    conjunction with the unaudited interim consolidated financial statements
    of the Company for the three months and nine months ended September 30,
    2007 and 2006. The Company's financial statements are prepared in
    accordance with accounting principles generally accepted in Canada
    ("Canadian GAAP"). All amounts described in this MD&A are in thousands of
    U.S. dollars, unless otherwise stated.

    Forward-Looking Statements

    Certain statements in this MD&A may constitute ''forward-looking
statements'', which reflect the expectations of management regarding future
growth, results of operations, performance and business prospects and
opportunities of the Company. Such forward-looking statements reflect current
expectations regarding future events and operating performance and speak only
as of September 30, 2007. These forward-looking statements involve significant
risks and uncertainties, and should not be read as guarantees of future
performance or results, and will not necessarily be accurate indications of
whether or not or the times at or by which such performance or results will be
achieved.
    A number of factors could cause actual results to differ materially from
the results discussed in the forward-looking statements, including, but not
limited to, the factors discussed under "Risk Factors" in this MD&A and in the
Company's Annual Information Form dated March 8, 2007. Additional information
relating to the Company, including its Annual Information Form, is available
on SEDAR at www.sedar.com. Although the forward-looking statements contained
in this MD&A are based upon what are believed to be reasonable assumptions,
investors cannot be assured that actual results will be consistent with these
forward-looking statements, and the differences may be material. These
forward- looking statements are made as of the date of this MD&A and the
Company assumes no obligation to update or revise them to reflect new events
or circumstances.

    Overview

    General

    The Company owns a majority interest in Primary Energy Recycling Holdings
LLC ("PERH") which is headquartered in Oak Brook, Illinois. PERH indirectly
owns and operates four recycling energy projects and a 50% interest in a
pulverized coal facility (collectively, the "Projects"). The Projects have a
combined electrical generating capacity of 283 megawatts and a combined steam
generating capacity of 1.8 MMlbs/hour. PERH creates value for its customers by
capturing and recycling waste energy from industrial processes and converting
it into reliable and economical electricity and thermal energy for its
customers' use.
    The Company owns 85.8% of the preferred interests and 83.0% of the common
interests in PERH, through its ownership of all of the issued and outstanding
Class A preferred membership interests and all of the issued and outstanding
Class A common membership interests of PERH. Primary Energy Ventures LLC (the
"Manager"), indirectly holds the remaining 14.2% of the preferred interests
and 17.0% of the common interests in PERH, through its ownership of all of the
issued and outstanding Class B preferred membership interests and all of the
issued and outstanding Class B common membership interests in PERH.

    Non-GAAP Measures

    Definitions of EBITDA and Distributable Cash

    References to "EBITDA" are to earnings before interest, taxes,
depreciation, amortization and certain other adjustments listed in the
reconciliation table provided herein. References to "Distributable Cash" are
to the amount of cash available for distribution and are based on operating
cashflow as adjusted for certain reconciling items considered relevant by
management. EBITDA and Distributable Cash are not recognized measures under
Canadian GAAP and do not have standardized meanings prescribed by Canadian
GAAP. Therefore, EBITDA and Distributable Cash may not be comparable to
similar measures presented by other issuers. In July 2007, the Canadian
Securities Administrators issued a replacement to National Policy 41-201
Income Trusts and Other Indirect Offerings to provide additional guidance with
respect to disclosures on Distributable Cash. We adopted these new
recommendations in the third quarter of 2007 which had no impact on
Distributable Cash.
    The Company intends to distribute substantially all cash generated from
operations subject to debt covenant compliance and excluding those amounts
required for operation of the business on an ongoing basis and subject to any
reserves deemed appropriate. EBITDA is utilized in measuring operating
performance and in determining compliance with debt covenants. Accordingly,
management believes that EBITDA and Distributable Cash are important measures
in evaluating the Company's performance. However, EBITDA and Distributable
Cash should not be construed as an alternative to net earnings or loss
determined in accordance with Canadian GAAP as an indicator of the Company's
performance or to cash flows from operating, investing and financing
activities, as a measure of liquidity and cash flows. A reconciliation of
Distributable Cash to cash flows from operating activities is provided under
the heading "Distributable Cash Summary".


    
    Results of Operations
    (in 000's of US$, except per share data)

                                                        Three Months Ended
                                                           September 30,
                                                    -------------------------
                                                         2007         2006
                                                    ------------ ------------
    Revenue:
      Capacity                                      $     9,018  $     9,018
      Energy Service                                     10,217       12,159
                                                    ------------ ------------
                                                         19,235       21,177

    Expenses:
      Operations and maintenance                          7,896        7,197
      General and administrative                          2,691        2,457
      Depreciation and amortization                      10,131        9,981
                                                    ------------ ------------

      Total Operating Expenses                           20,718       19,635
                                                    ------------ ------------
    Operating (loss) income                         $    (1,483) $     1,542

    Other (expense) income :
      Interest (expense) income, net                     (5,783)      (5,194)
      Realized and unrealized gain (loss)
       on derivative hedge contracts                      7,118       (2,279)
      Realized and unrealized (loss) gain
       on foreign currency translation                   (6,477)          23
                                                    ------------ ------------

    Loss before income taxes                             (6,625)      (5,908)
    Income tax benefit                                    1,113          363
                                                    ------------ ------------

    Loss before non-controlling interest                 (5,512)      (5,545)

    Non-controlling interest in class B Preferred          (431)        (381)
    Non-controlling interest in class B Common            1,809        1,751
                                                    ------------ ------------

    Net Loss                                        $    (4,134) $    (4,175)
                                                    ------------ ------------
                                                    ------------ ------------

    Weighted average number of shares outstanding    31,000,000   31,000,000
                                                    ------------ ------------
                                                    ------------ ------------
    Basic and Diluted net loss per share (Note 1)   $     (0.13) $     (0.14)
                                                    ------------ ------------
                                                    ------------ ------------

    Note 1: Basic and Diluted net loss per share has been calculated using
    the weighted average number of Common Shares outstanding of 31,000,000
    for the three months ended September 30, 2007 and September 30, 2006.
    

    Three Months Ended September 30, 2007 compared to Three Months Ended
    September 30, 2006

    The Company's revenue of $19.2 million in the third quarter of 2007
decreased $2.0 million, or 9.2% compared with revenue of $21.2 million for the
third quarter of 2006. This decrease is reflective of a decline in Energy
Service revenue at the Company's Harbor Coal facility totaling $1.4 million
comprised of reduced revenue based on efficiency of operations of $0.9 million
and volume of $0.5 million offset by increased revenue based on pricing of
$1.0 million which is due to the spread between the cost of coal supplied and
the prices of the fuels that coal replaces (coke, natural gas and fuel oil).
Additionally, Harbor Coal recorded a reserve against revenue of $1.0 million.
The amount of the reserve has been determined based on projected consumption
at the facility using results of physical inventory measurements conducted by
Harbor Coal's joint venture host customer. The remaining decrease in Energy
Service revenue of $0.6 million is primarily due to outage activity in the
current quarter at the Company's North Lake facility.
    Operating and maintenance expense for the third quarter of 2007 was
$7.9 million compared to $7.2 million for the third quarter of 2006, an
increase of $0.7 million or 9.7%. The increase was due to additional
maintenance expenses of $0.7 million primarily associated with outage repair
activity. As a percentage of revenue, operating and maintenance expenses
increased to 41.1% for the third quarter of 2007 from 34.0% for the third
quarter of 2006. General and administrative expense for the third quarter of
2007 was $2.7 million compared to $2.5 million for the third quarter of 2006,
an increase of $0.2 million or 9.5%. The increase is reflective of a reduction
in incentive fees of $0.2 million recorded in third quarter of 2006 that did
not recur in the third quarter of 2007. As a percentage of revenue, general
and administrative expenses increased to 14.0% for the third quarter of 2007
from 11.6% for the third quarter of 2006.
    Depreciation and amortization expense for the third quarter of 2007 was
$10.1 million compared to $10.0 million for the third quarter of 2006, an
increase of $0.1 million. As a percentage of revenue, depreciation and
amortization expense increased to 52.7% for the third quarter of 2007 from
47.1% for the third quarter of 2006.
    Operating loss for the third quarter of 2007 was $1.5 million compared to
operating income of $1.5 million for the third quarter of 2006, a decrease of
$3.0 million. The decrease was primarily driven by the net effect of the items
discussed above.
    Interest expense for the third quarter of 2007 was $5.8 million compared
to $5.2 million for the third quarter of 2006, an increase of $0.6 million.
The increase is comprised of $0.1 million of increased interest under the
senior debt Credit Facility primarily associated the revolver draw, increased
interest of $0.3 million on the Canadian denominated EIS and Separate
Subordinated Note debt and a reduction in interest income of $0.2 million.
    Realized and unrealized gain on derivative hedge contracts for the third
quarter of 2007 was $7.1 million compared to realized and unrealized loss on
derivative hedge contracts of $2.3 million for the third quarter of 2006. The
increase reflects the change in fair value of the foreign currency exchange
contracts and interest rate swap agreements held by the Company at
September 30, 2007.
    Realized and unrealized loss on foreign currency translation for the
third quarter of 2007 was $6.5 million compared to realized and unrealized
gain on foreign currency translation of $0.02 million for the third quarter of
2006. The increase in the realized and unrealized loss on foreign currency
translation primarily reflects the impact of the change in foreign exchange
rates used to convert the Subordinated Notes and the Separate Subordinated
Notes from Canadian dollars to U.S. dollars.
    The Company recorded an income tax benefit for the third quarter 2007 of
$1.1 million comprised of a current tax expense of $1.8 million related to
taxable income for the third quarter of 2007 and a future tax benefit of
$2.9 million based on the change in value of future tax assets and
liabilities. For the third quarter of 2006, the Company recorded a tax benefit
of $0.4 million based on the change in value of future tax assets and
liabilities.
    Non-controlling interest for the third quarter of 2007 was $1.4 million,
which was unchanged from the amount recorded in the third quarter of 2006.
These amounts represent the allocation of the non-controlling interest portion
of the consolidated net loss before non-controlling interest to the Class B
common interest and interest expense associated with distributions to the
Class B preferred non-controlling interest.
    Net loss for the third quarter of 2007 was $4.1 million compared to
$4.2 million for the third quarter of 2006, a decrease of $0.1 million. The
decrease was primarily driven by the net effect of the items discussed above.


    
    Results of Operations (in 000's of US$, except per share data)

                                                         Nine Months Ended
                                                           September 30,
                                                    -------------------------
                                                         2007         2006
                                                    ------------ ------------
    Revenue:
      Capacity                                      $    27,054  $    27,054
      Energy Service                                     26,814       41,743
                                                    ------------ ------------
                                                         53,868       68,797
    Expenses:
      Operations and maintenance                         22,511       24,650
      General and administrative                          8,101        7,275
      Depreciation and amortization                      30,393       29,983
                                                    ------------ ------------

      Total Operating Expenses                           61,005       61,908
                                                    ------------ ------------

    Operating (loss) income                         $    (7,137) $     6,889

    Other income (expense):
      Interest (expense) income, net                    (16,512)     (15,378)
      Realized and unrealized gain on
       derivative hedge contracts                        17,674        6,148
      Realized and unrealized loss on
       foreign currency translation                     (14,617)      (3,736)
                                                    ------------ ------------

    Loss before income taxes                            (20,592)      (6,077)
    Income tax benefit (expense)                          4,214         (593)
                                                    ------------ ------------

    Loss before non-controlling interest                (16,378)      (6,670)

    Non-controlling interest in class B Preferred        (1,221)      (1,143)
    Non-controlling interest in class B Common            2,544        4,196
                                                    ------------ ------------

    Net Loss                                        $   (15,055) $    (3,617)
                                                    ------------ ------------
                                                    ------------ ------------

    Weighted average number of shares outstanding    31,000,000   31,000,000
                                                    ------------ ------------
                                                    ------------ ------------
    Basic and Diluted net loss per share (Note 1)   $     (0.49) $     (0.12)
                                                    ------------ ------------
                                                    ------------ ------------

    Note 1: Basic and Diluted net loss per share has been calculated using
    the weighted average number of Common Shares outstanding of 31,000,000
    for the nine months ended September 30, 2007 and September 30, 2006.
    


    Nine Months Ended September 30, 2007 compared to Nine Months Ended
    September 30, 2006

    The Company's revenue of $53.9 million in the first nine months of 2007
decreased $14.9 million, or 21.7% compared with revenue of $68.8 million for
the first nine months of 2006. This decrease is reflective of a decline in
Energy Service revenue at the Company's Harbor Coal facility totaling
$12.8 million comprised of reduced revenue based on volume of $4.5 million,
pricing of $1.5 million which is due to the spread between the cost of coal
supplied and the prices of the fuels that coal replaces (coke, natural gas and
fuel oil) and decreased efficiency of operations of $0.5 million.
Additionally, Harbor Coal has experienced reductions in revenue of $6.3
million during the first nine months of 2007 as a result of consumption
adjustments recorded by the facility based on ongoing physical inventory
measurements conducted by Harbor Coal's joint venture host customer. The
remaining decrease in Energy Service revenue of $2.1 million is due primarily
to an unplanned turbine outage incurred at one operating facility during the
first nine months of 2007 and reduced generation at another operating facility
compared to the same period in the prior year.
    Operating and maintenance expense for the first nine months of 2007 was
$22.5 million compared to $24.6 million for the first nine months of 2006, a
decrease of $2.1 million or 8.7%. The Company's Harbor Coal facility
experienced lower prices for production commodities including oxygen, nitrogen
and labor of $2.9 million. These cost reductions were offset by increased
maintenance expenditures of $0.8 million primarily associated with unplanned
outage repair activity. As a percentage of revenue, operating and maintenance
expenses increased to 41.8% for the first nine months of 2007 from 35.8% for
the first nine months of 2006.
    General and administrative expense for the first nine months of 2007 was
$8.1 million compared to $7.3 million for the first nine months of 2006, an
increase of $0.8 million or 11.4%. The increase is reflective of 2006
reductions in property tax expense of $1.8 million inclusive of property tax
refunds that did not recur in 2007. The increase noted is offset by reduced
incentive fees of $0.6 million, professional fees of $0.2 million and plant
liability and insurance of $0.2 million. As a percentage of revenue, general
and administrative expenses increased to 15.0% for the first nine months of
2007 from 10.6% for the first nine months of 2006.
    Depreciation and amortization expense for the first nine months of 2007
was $30.4 million compared to $30.0 million for the first nine months of 2006,
an increase of $0.4 million. As a percentage of revenue, depreciation and
amortization expense increased to 56.4% for the first nine months of 2007 from
43.6% for the first nine months of 2006.
    Operating loss for the first nine months of 2007 was $7.1 million
compared to operating income of $6.9 million for the first nine months of
2006, a decrease of $14.0 million. The decrease was primarily driven by the
net effect of the items discussed above.
    Interest expense for the first nine months of 2007 was $16.5 million
compared to $15.4 million for the first nine months of 2006, an increase of
$1.1 million. The increase is primarily the result of an additional interest
of $0.6 million on the senior debt Credit Facility due to an increase in the
weighted average interest rate and increased interest of $0.5 million on the
Canadian denominated EIS and Separate Subordinated Note debt.
    Realized and unrealized gain on derivative hedge contracts for the first
nine months of 2007 was $17.6 million compared to $6.1 million for the first
nine months of 2006. The increase reflects the change in fair value of the
foreign currency exchange contracts and interest rate swap agreements held by
the Company at September 30, 2007.
    Realized and unrealized loss on foreign currency translation for the
first nine months of 2007 was $14.6 million compared to $3.7 million for the
first nine months of 2006. The increase in the realized and unrealized loss on
foreign currency translation primarily reflects the impact of the change in
foreign exchange rates used to convert the Subordinated Notes and Separate
Subordinated Notes from Canadian dollars to U.S. dollars.
    The Company recorded an income tax benefit for the first nine months 2007
of $4.2 million comprised of a current tax expense of $1.8 million related to
taxable income for the first nine months of 2007 and a future tax benefit of
$6.0 million based on the change in value of future tax assets and
liabilities. For the first nine months of 2006, the Company recorded a tax
expense of $0.6 million based on the change in value of future tax assets and
liabilities.
    Non-controlling interest for the first nine months of 2007 was
$1.3 million compared to $3.1 million for the first nine months of 2006. These
amounts represent the allocation of the non-controlling interest portion of
the consolidated net loss before non-controlling interest to the Class B
common interest and interest expense associated with distributions on the
Class B preferred non-controlling interest.
    Net loss for the first nine months of 2007 was $15.1 million compared to
$3.6 million for the first nine months of 2006, an increase of $11.5 million.
The increase was primarily driven by the net effect of the items discussed
above.

    
    Summary of Quarterly Results
    (In 000's of US$, except per share data)

                                4th          1st          2nd          3rd
                              Quarter      Quarter      Quarter      Quarter
                                2005         2006         2006         2006
                             ---------    ---------    ---------    ---------
    Revenues                 $ 23,234     $ 25,718     $ 21,902     $ 21,177
                             ---------    ---------    ---------    ---------
                             ---------    ---------    ---------    ---------
    Net income (loss)        $ (1,474)    $ (1,316)    $  1,874     $ (4,175)
                             ---------    ---------    ---------    ---------
                             ---------    ---------    ---------    ---------
    Net income (loss)
     per share               $  (0.05)    $  (0.04)    $   0.06     $  (0.14)
                             ---------    ---------    ---------    ---------
                             ---------    ---------    ---------    ---------

                                4th          1st          2nd          3rd
                              Quarter      Quarter      Quarter      Quarter
                                2006         2007         2007         2007
                             ---------    ---------    ---------    ---------
    Revenues                 $ 18,275     $ 16,727     $ 17,906     $ 19,235
                             ---------    ---------    ---------    ---------
                             ---------    ---------    ---------    ---------
    Net income (loss)        $(14,840)    $ (7,280)    $ (3,641)    $ (4,134)
                             ---------    ---------    ---------    ---------
                             ---------    ---------    ---------    ---------
    Net income (loss)
     per share               $  (0.48)    $  (0.24)    $  (0.12)    $  (0.13)
                             ---------    ---------    ---------    ---------
                             ---------    ---------    ---------    ---------
    

    Outstanding Share Data

    At October 31, 2007, the Company had 31,000,000 Common Shares
outstanding, of which 247,900 Common Shares were held separately and the
remaining 30,752,100 Common Shares were held as a component of EISs. Each EIS
consists of one Common Share and Cdn$2.50 principal amount of 11.75%
Subordinated Notes.

    Loss Per Share

    Basic loss per share is computed based on the weighted average number of
Common Shares outstanding. For the three months and nine months ended
September 30, 2007 and 2006, there were no potentially dilutive securities
issued and outstanding. Accordingly, diluted loss per share is equivalent to
basic loss per share.

    Liquidity and Capital Resources

    For the three months ended September 30, 2007, the Company recorded a
decrease in cash and cash equivalents of $0.3 million resulting in a balance
of $11.0 million as of September 30, 2007. The Company's primary source of
liquidity has historically been cash flow from operations. During the third
quarter of 2007 the Company's financial results were impacted by additional
negative inventory adjustments recorded by Harbor Coal's site host and to a
lesser extent, an unplanned outage activity at the Company's North Lake
facility. As a result of operating shortfalls incurred on a year to date
basis, the Company was unable to remain in compliance with the Consolidated
Leverage Ratio requirement of its Credit Facility which is based on the
Company's total funded debt as compared to the Company's trailing twelve
months EBITDA. As a result, the Company has classified all borrowings under
this facility as short term as of September 30, 2007. The Company is
restricted from paying distributions to EIS unit holders as well as to holders
of its Separate Subordinated Notes so long as it is in default under the
Credit Facility. The Credit Facility lenders have the right to call the
outstanding debt without further notice at any time during the period of non
compliance and if such right is exercised under the Credit Facility, the
outstanding debt held under the Subordinated Notes and Separate Subordinated
Notes will be subject to default provisions which also allow for acceleration
of the Subordinated Notes and Separate Subordinated Notes. Should the Credit
Facility lenders elect to exercise their right and call the debt, the Company
would be unable to satisfy the obligation without securing an alternative
financing arrangement.
    In the short term, absent the potential Credit Facility repayment
requirement as described above, management believes that cash funds to be
generated from ongoing operating activities and from existing assets will
allow the Company to meet its liquidity requirements. During the nine months
ended September 30, 2007, the Company has experienced one planned overhaul
with costs of approximately $0.9 million and one significant unplanned outage
resulting in lost revenue and repair expenses totaling approximately
$1.8 million. Over the long term, absent the potential Credit Facility
repayment requirement as described above, management believes available cash
funds, in addition to cash flow to be generated from future operations, will
be sufficient to finance the Company's known or foreseeable operating
liquidity and capital requirements as well as anticipated maintenance
requirements associated with the Company's facilities.

    Cash Flows for the Three Months and Nine Months Ended September 30, 2007

    Net cash used in operating activities for the three months ended
September 30, 2007 was $0.1 million, which resulted from a net loss of
$4.1 million, plus $7.5 million of net non-cash items charged to the
Consolidated Statement of Operations, less $3.5 million representing the net
change in the Company's operating assets and liabilities. The net non-cash
items consisted primarily of depreciation of property, plant and equipment and
amortization of intangible assets as well as gain and loss activity associated
with foreign currency translation and valuation of derivative hedge contracts.
The net change in operating assets and liabilities resulted primarily from
decreases in accounts receivable, inventory and other assets and accounts
payable. These uses of cash were offset by increases in accrued property taxes
and amounts owed to affiliates. Net cash provided by investing activities for
the three months ended September 30, 2007 was $1.3 million from cash
settlements of foreign currency exchange contracts and interest rate swaps.
Net cash used in financing activities for the three months ended September 30,
2007 was $1.6 million resulting from revolver debt financing of $3.0 million,
distribution payments of $3.8 million to holders of Common Shares and interest
and distribution payments of $0.8 million to holders of Class B common and
preferred membership interests in PERH.
    Net cash provided by operating activities for the nine months ended
September 30, 2007 was $9.4 million, which resulted from a net loss of
$15.1 million, plus $22.9 million of net non-cash items charged to the
Consolidated Statement of Operations, plus $1.6 million representing the net
change in the Company's operating assets and liabilities. The net non-cash
items consisted primarily of depreciation of property, plant and equipment and
amortization of intangible assets as well as gain and loss activity associated
with foreign currency translation and valuation of derivative hedge contracts.
The net change in operating assets and liabilities resulted primarily from a
decrease in accounts receivable, inventory and other assets and accounts
payable offset by increases in accrued property taxes, accrued expenses and
amounts owed to affiliates. These sources of cash were offset by increases in
amounts owed to affiliates. Net cash provided by investing activities for the
nine months ended September 30, 2007 was $2.2 million from cash settlements of
foreign currency exchange contracts and interest rate swaps. Net cash used in
financing activities for the nine months ended September 30, 2007 was
$16.3 million resulting from financing costs of $0.2 million, revolver debt
financing of $3.0 million, distribution payments of $14.7 million to holders
of Common Shares and interest and distribution payments of $4.4 million to
holders of Class B common and preferred membership interests in PERH.

    Cash Flows for the Three Months and Nine Months Ended September 30, 2006

    Net cash provided by operating activities for the three months ended
September 30, 2006 was $1.0 million, which resulted from net loss of
$4.2 million, plus $10.9 million of net non-cash items charged to the
Consolidated Statement of Operations, less $5.7 million representing the net
change in the Company's operating assets and liabilities. The net non-cash
items consisted primarily of depreciation of property, plant and equipment and
amortization of intangible assets as well as gain and loss activity associated
with valuation of derivative hedge contracts and non-controlling interest
allocations. The net change in operating assets and liabilities resulted
primarily from increases in accounts receivable and inventory and other assets
as well as reductions in accounts payable, accrued property taxes, accrued
expenses and amounts owed to affiliates. Net cash used in financing activities
for the three months ended September 30, 2006 was $7.2 million resulting from
distribution payments of $5.7 million to holders of Common Shares and interest
and distribution payments of $1.5 million to holders of Class B common and
preferred membership interests in PERH. Net cash provided by operating
activities for the nine months ended September 30, 2006 was $23.8 million,
which resulted from net loss of $3.6 million, plus $26.2 million of net non-
cash items charged to the Consolidated Statement of Operations, plus
$1.2 million representing the net change in the Company's operating assets and
liabilities. The net non-cash items consisted primarily of depreciation of
property, plant and equipment and amortization of intangible assets as well as
gain and loss activity associated with foreign currency translation and
valuation of derivative hedge contracts and non-controlling interest
allocations. The net change in operating assets and liabilities resulted
primarily from a decrease in accounts receivable and increases in accounts
payable, offset by reductions in accrued property taxes and amounts owed to
affiliates. Net cash used in financing activities for the nine months ended
September 30, 2006 was $21.0 million resulting from distribution payments of
$16.5 million to holders of Common Shares and interest and distribution
payments of $4.5 million to holders of Class B common and preferred membership
interests in PERH.

    Outstanding Debt

    At September 30, 2007, the amount of outstanding debt under the Credit
Facility was $138.0 million. During the third quarter of 2007, the Company
drew $3.0 million on its revolving credit facility. Also included in
outstanding debt is $96.5 million in Subordinated Notes and Separate
Subordinated Notes. The Credit Facility has a maturity date of August 24,
2009. The Subordinated Notes and Separate Subordinated Notes have a 12-year
term and are due and payable on August 24, 2017. The Credit Facility, as well
as the terms of the Subordinated Notes and Separate Subordinated Notes,
requires the Company to meet certain financial covenants including, among
other things, maintaining certain defined leverage and coverage ratios. During
the second quarter of 2007, the Credit Facility was amended to modify
specified covenant levels for the remainder of 2007 and the first quarter of
2008. As of September 30, 2007, the Company was not in compliance with the
Consolidated Leverage Ratio under the Credit Facility which is based upon the
Company's total funded debt as compared to the Company's trailing twelve
months EBITDA. As a result, the Company has classified all borrowings under
the Credit Facility as short term as of September 30, 2007. Management is
currently in discussions with the Credit Facility lenders to determine if
appropriate covenant waivers can be obtained.

    Cash Available for Distribution

    The Company pays interest on the Subordinated Notes and Separate
Subordinated Notes as stipulated and distributions on the Common Shares (when
declared) in equal monthly amounts.
    Declarations of distributions on the Common Shares are based on periodic
reviews of the Company's estimated annual earnings and related estimated
annual cash flows. For the three months and nine months ended September 30,
2007, the Company generated Cdn$6.4 million and Cdn$15.9 million,
respectively, of Distributable Cash and distributed Cdn$5.9 million and
Cdn$25.1 million, respectively, for a payout ratio of 92.2% and 158.3%,
respectively. For three months and nine months ended September 30, 2006, the
Company generated Cdn$9.7 million and Cdn$32.2 million, respectively, of
Distributable Cash and distributed Cdn$10.7 million and Cdn$31.5 million,
respectively, for a payout ratio of 111.0% and 97.8%, respectively. The Board
of Directors monitors the distribution policy of the Company with respect to
excess cash, forecasted cash flows, debt levels and spending plans for the
long term and may adjust distributions to retain appropriate liquidity for
business operations and to meet debt covenant requirements. As of
September 30, 2007, the Company is in violation of a Consolidated Leverage
Ratio covenant under the Credit Facility. As a result of the violation, the
Company is prohibited under the Credit Facility from making distributions to
holders of EISs Common Shares and Subordinated Notes. Management is currently
in discussions with the Credit Facility lenders to determine if appropriate
covenant waivers can be obtained. The Company's ability to make further
distributions will be dependent on obtaining appropriate waivers from the
lenders. Interest related to the Subordinated Notes and Separate Subordinated
Notes will continue to accrue as stipulated in the indenture governing the
Subordinated Notes (the "Indenture"). The Company's cumulative distributable
cash since its initial public offering in August of 2005 is approximately
$62.4 million. Total distributions declared, including distributions to non-
controlling interests during the same period reached approximately
$70.1 million representing a payout ratio of 112.3%. The short fall is the
result of cash distributions to EIS unit holders exceeding distributable cash
generated during the first and second quarters of 2007 due to reduced
financial results at the Company's Harbor Coal facility resulting from
inventory adjustments recorded by the facility's site host and unplanned
outage activity at the Company's North Lake facility. Funding of cash
distributions in excess of the amount of distributable cash generated has been
from cash on hand, settlement of working capital amounts and available debt
financing.

    
    Distributable Cash Summary
    (in 000's of US$, except per share data
     and as otherwise indicated)

                              Three Months Ended         Nine Months Ended
                                 September 30,             September 30,
                          ------------------------- -------------------------
                              2007         2006         2007         2006
                          ------------ ------------ ------------ ------------
    Reconciliation of
     cash flows from
     operating activities
     to Distributable
     Cash:
    Cash provided by
     operating activities $       (54) $       979  $     9,445  $    23,842
    Add:
    Cash interest
     expense(i)                 5,446        4,882       15,678       14,444
    Changes in operating
     assets and
     liabilities(ii)            3,440        5,712       (1,574)      (1,263)
    Accretion of asset
     retirement
     obligations(iii)             (54)         (50)        (162)        (151)
    Less: Interest on
     credit facility(i)         2,874        2,790        8,418        7,916
    Interest on separate
     subordinated notes(i)        464          464        1,392        1,392
                          ------------ ------------ ------------ ------------
    Distributable
     Cash (Note 1)        $     5,440  $     8,269  $    13,577  $    27,564
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------
    Per Common and
     equivalent Common
     Share (Note 2)       $      0.15  $      0.22  $      0.36  $      0.74
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------
    Interest on EIS
     Subordinated Notes   $     1,944  $     1,944  $     5,832  $     5,832
    Distributions on
     Common Shares              2,233        5,693       12,057       16,601
    Distributions on
     non-controlling
     Class B preferred
     interest                     380          381        1,140        1,143
    Distributions on
     non-controlling
     Class B common
     interest                     456        1,164        2,464        3,394
                          ------------ ------------ ------------ ------------
    Total distributions
     (Note 3)             $     5,013  $     9,182  $    21,493  $    26,970
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------
    Per Common and
     equivalent Common
     Share (Note 2)       $      0.13  $      0.25  $      0.58  $      0.72
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    Hedge rate (Cdn$ per
     US$) (Note 4)        $    1.1712  $    1.1671  $    1.1694  $    1.1691
    Distributable Cash
     (Cdn$) (Note 1)      $     6,371  $     9,651  $    15,877  $    32,225
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------
    Per Common and
     equivalent
     Common Share
     (Cdn$) (Note 2)      $      0.17  $      0.26  $      0.43  $      0.86
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    Excess (shortfall)
     distributable
     cash (Cdn$)          $       500  $    (1,066) $    (9,256) $       694
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------
    Per Common and
     equivalent
     Common Share
     (Cdn$) (Note 2)      $      0.01  $     (0.03) $     (0.25) $      0.02
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    Payout Ratio                92.2%       111.0%       158.3%        97.8%

    (i): To adjust cash flow from operating activities to reflect net cash
    interest prior to distributions on EIS Subordinated Notes

    (ii): Change in operating assets and liabilities is excluded from the
    computation of distributable cash as it would induce cash flow
    variability and affect underlying amount of cash flow from operating
    activities.

    (iii): To adjust for projected cash requirement associated with accretion
    of asset retirement obligations.

    Note 1: Distributable Cash is not a recognized measure under Canadian
    GAAP and does not have a standardized meaning prescribed by Canadian
    GAAP. Therefore, Distributable Cash may not be comparable to similar
    measures presented by other issuers. As the Company intends to distribute
    substantially all of its cash on an ongoing basis, management believes
    that Distributable Cash is an important measure in evaluating the
    Company's performance. Distributable Cash is not intended to be
    representative of cash flow or results of operations determined in
    accordance with Canadian GAAP.

    Note 2: Common and equivalent Common Share computation for Distributable
    Cash purposes assumes 31,000,000 Common Shares are outstanding for the
    full period and the conversion of Class B common interests into
    equivalent Common Shares. For the three months and nine month ended
    September 30, 2007 and 2006, the number of Common and equivalent
    Common Shares outstanding is 37,265,455.

    Note 3: Includes distributions declared, but not distributed in the
    reporting period.

    Note 4: Hedge rate is based on weighted average of outstanding hedge
    contracts in place in each respective period.


                                           Three         Nine
                                          Months       Months        Year
                                           Ended        Ended        Ended
                                        September    September     December
                                         30, 2007     30, 2007     31, 2006
                                       ------------ ------------ ------------

    Cash flows from operating
     activities                        $       (54) $     9,445  $    31,774
                                       ------------ ------------ ------------

    Net Loss                           $    (4,134) $   (15,055) $   (18,457)
                                       ------------ ------------ ------------
    Actual cash distributions paid
     or payable relating to the
     period                            $     5,013  $    21,493  $    36,150
                                       ------------ ------------ ------------
    Shortfall of cash flows from
     operating activities over cash
     distributions paid                $    (5,067) $   (12,048) $    (4,376)
                                       ------------ ------------ ------------
                                       ------------ ------------ ------------
    Shortfall of net loss over cash
     distributions paid                $    (9,147) $   (36,548) $   (54,607)
                                       ------------ ------------ ------------
                                       ------------ ------------ ------------
    

    Distributions declared exceeded net loss by $9.1 million for the third
quarter of 2007 and by $36.5 million for the nine months ended September 30,
2007. The Company does not use net income (loss) as a basis to evaluate or
determine distributions as net income (loss), (in accordance with GAAP)
includes expenses which do not affect cash. Distributions declared exceeded
cash flows from operating activities by $5.1 million for the third quarter of
2007 and by $12.1 million for the nine months ended September 30, 2007. To
determine cash available for distribution, the Company uses cash flows from
operating activities as adjusted for certain reconciling items. Any short
falls between cash available for distribution and actual distributions during
the nine month periods ended September 30, 2007 and 2006 have been funded by a
combination of existing cash on hand, settlement of outstanding working
capital balances and draws on credit facilities.

    Foreign Currency Exchange Contracts

    The Company has entered into forward contracts to purchase Canadian
dollars sufficient to make monthly distributions through September 2010 at the
initial distribution level to all EIS unit holders, including non-controlling
interests, as well as interest payments on the Separate Subordinated Notes.
Beginning with the May 2007 distribution declaration, the Canadian dollar
funding requirement for distributions per EIS was reduced to an annual rate of
Cdn$0.80 from Cdn$1.15. As of September 30, 2007, further distributions have
been suspended pending resolution of the debt covenant default under the
Credit Facility. The forward contracts for the Separate Subordinated Notes
have an exchange rate of Cdn$1.1713 to U.S. $1.00. The remaining forward
contracts have an exchange rate of Cdn$1.1712 to U.S. $1.00 and a rate of
Cdn$1.0840 to U.S. $1.00. For the three months and nine months ended September
30, 2007, contract settlements and the net impact of the change in the foreign
exchange rate on the aggregate value of the hedges resulted in realized and
unrealized net gains of $8.0 million and $18.3 million, respectively. For the
three months and nine months ended September 30, 2006, contracts settlements
and the net impact of the change in the foreign exchange rate on the aggregate
value of the hedges resulted in realized and unrealized net losses of
$0.8 million and realized and unrealized net gains of $5.9 million,
respectively. At September 30, 2007 and December 31, 2006, the fair value of
these contracts, respectively, was a net amount of $18.8 million (of which
$6.6 million is recorded in current assets) and $2.4 million (of which
$0.3 million is recorded in current assets).

    Interest Rate Swap Agreements

    The Company entered into interest rate swap agreements on August 31,
2005. The contracts were purchased to mitigate the cash flow risk associated
with the impact of changing interest rates on payments due under the Credit
Facility. The agreements do not qualify as a cash flow hedge for accounting
purposes and the change in the fair value of the derivative is recorded in
income. For the three months and nine months ended September 30, 2007,
contract settlements and the net impact of the change in the fair value of the
agreements resulted in realized and unrealized net losses of $0.9 million and
$0.6 million, respectively. For the three months and nine months ended
September 30, 2006, contract settlements and the net impact of the change in
the fair value of the agreements resulted in realized and unrealized net
losses $1.5 million and realized and unrealized net gains of $0.2 million,
respectively. At September 30, 2007 and December 31, 2006, the fair value of
these agreements, respectively, was a net amount of $0.03 million (of which
$0.2 million is recorded in current assets) and $0.9 million (of which
$0.4 million is recorded in current assets).

    Commitments and Contractual Obligations

    The following table reflects the Company's contractual obligations and
commitments related to outstanding indebtedness as of September 30, 2007,
including payments due for each of the next five years and thereafter.

    
    Maturities of debt are as follows (in 000's):

                            September
                            30, 2007
                             Balance       2007         2008        2009
                          ---------------------------------------------------
    Term Loan Facility    $   135,000  $   135,000  $         -  $         -
    Subordinated debt          96,502            -            -            -
                          ---------------------------------------------------
    Total                 $   231,502  $   135,000  $         -  $         -
                          ---------------------------------------------------
                          ---------------------------------------------------


                                            2010         2011     Thereafter
                                       --------------------------------------
    Term Loan Facility                 $         -  $         -  $         -
    Subordinated debt                            -            -       96,502
                                       --------------------------------------
    Total                              $         -  $         -  $    96,502
                                       --------------------------------------
                                       --------------------------------------
    

    The Company pays a management fee under the Management Agreement which
continues through August 2025. For a more detailed discussion, please see
"Transactions with Related Parties".
    The Company has no off-balance sheet debt or similar obligations.

    Transactions with Related Parties

    The Manager is engaged to provide management and administrative services
to the Company and its subsidiaries pursuant to the terms of the Management
Agreement for which it earns a fixed fee that adjusts annually based on
inflation factors. The Manager is also entitled to an incentive fee under the
Management Agreement. The incentive fee is designed to align the financial
interests of the Manager with those of the Company. The incentive fee for each
year will equal 25% of the product of (a) the excess of the Company's
Distributable Cash per Common Share and (b) the weighted average number of
EISs, Common Shares not represented by EISs and Class B Common Interests
outstanding for such fiscal year. The Management Agreement has an initial
20-year term which commenced August 24, 2005.
    A detailed description of the principal terms of the Management Agreement
is included in the Company's Annual Information Form dated March 8, 2007 and a
copy of the Management Agreement is available for review on SEDAR at
www.sedar.com.

    Critical Accounting Estimates

    The preparation of financial statements in conformity with Canadian GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and 7 expenses in the financial
statements. Management bases its estimates on historical experience and other
assumptions, which it believes are reasonable. If actual amounts are
ultimately different from these estimates, the revisions are included in the
Company's results of operations for the period in which the actual amounts
become known.
    Accounting policies are considered critical when they require management
to make assumptions about matters that are highly uncertain at the time the
estimate is made and when different estimates than those management reasonably
could have made have a material impact on the presentation of the Company's
financial condition, changes in financial condition or results of operations.
The following is a description of the Company's accounting policies that
management believes require subjective and complex judgments, and could
potentially have a material effect on reported financial condition and results
of operations.

    Property, Plant and Equipment

    Property, plant and equipment have been adjusted, giving effect to the
purchase method of accounting. Depreciation for all asset classes is recorded
on a straight-line basis over the estimated useful lives of the assets.
Generally, the estimated useful lives are 30 years for buildings, plant and
equipment. The estimated useful life of office furniture and equipment is
7 years. Leasehold improvements are amortized over the shorter of the lease
term or the estimated useful lives of the assets. Expenditures for maintenance
and repairs are charged to income as incurred. The carrying amount for
long-lived assets is reviewed whenever events or changes in circumstances
indicate that impairment may have occurred.

    Intangible Assets

    Identifiable intangible assets were fair valued based on valuation
techniques for the purpose of applying purchase accounting to the acquisition
of PERH on August 24, 2005 and represent contract rights associated with
customer contracts and nitrogen oxide allowances. The respective intangible
values are amortized over specified time horizons and evaluated for impairment
if events or changes in circumstances indicate that the asset might be
impaired. Fair value under Canadian GAAP is defined as "the amount of the
consideration that would be agreed upon in an arm's length transaction between
knowledgeable, willing parties who are under no compulsion to act". Assessing
the fair value of intangible assets requires management estimates on future
cash flows to be generated by the assets.

    Impairment of Long-Lived Assets

    Management continually evaluates whether events or circumstances have
occurred that indicate that the remaining estimated useful lives of property,
buildings and equipment may warrant revision or that the remaining balances
may not be recoverable. If this review indicates that the assets will not be
recoverable, as determined based on the undiscounted future cash flows from
the use of the assets, the carrying value of the assets will be reduced to
their estimated fair value.

    Asset Retirement Obligations

    The fair value of estimated asset retirement obligations is recognized in
the consolidated balance sheet when identified and a reasonable estimate of
fair value can be made. The asset retirement cost, equal to the estimated fair
value of the asset retirement obligation, is capitalized as part of the cost
of the related long-lived asset. The fair value of asset retirement
obligations depends on the total undiscounted amount of the estimated cash
flows required to settle the obligations and the appropriate credit-adjusted
risk-free discount rate. The asset retirement costs are amortized over the
asset's estimated useful life and included in depreciation expense on the
consolidated statement of operations and accumulated shareholders' deficit.
Increases in the asset retirement obligation resulting from the passage of
time are recorded as accretion of asset retirement obligation, and are
included in general and administrative expenses in the consolidated statement
of operations and shareholders' deficit. Actual expenditures incurred are
charged against the accumulated obligation.

    Revenue Recognition

    Revenue is recorded as services are delivered. Revenue is recorded on the
accrual basis and may include estimates for services delivered. Capacity
revenue represents the fixed revenue amounts established in the tolling
agreements with the Company's customers and is billed on a monthly basis.
Energy Service revenue represents the revenue earned based on measurements of
services performed and delivered each period. Harbor Coal's Revenue
determination is subject to inventory adjustments that are significant and
unpredictable. The Company provides estimates for doubtful accounts it deemed
necessary based on the aging category and specific knowledge of the customer's
ability to pay. No such allowances were recorded at September 30, 2007 and
2006.

    Future Income Taxes

    The Company utilizes the liability method of accounting for income taxes
under which future income tax assets and liabilities are recognized based upon
the differences between the tax basis of an asset or liability and its
reported amount in the financial statements. Future tax balances are
determined by using estimates of future tax rates expected to be in effect
when the taxes will actually be paid or refunds received.

    Accounting for Derivatives

    The Company evaluates derivatives in accordance with Accounting
Guideline 13 "Hedging Relationships" ("AcG-13"). For those derivatives that do
not qualify for hedge accounting under AcG-13 the derivative instrument is
recorded on the balance sheet as either an asset or liability measured at
estimated fair value, with changes in fair value recognized currently in
earnings.

    Risk Factors

    The Company's future performance and ability to generate sufficient cash
flow to meet its monthly cash distributions to holders of EISs, and the Common
Shares and Subordinated Notes represented thereby, involves a number of risks
and uncertainties. Any of these risks and uncertainties could have a material
adverse effect on results of operations, business prospects, financial
condition, the cash available for distribution to holders of EISs, Common
Shares, or Subordinated Notes or on the market price or value of EISs, Common
Shares or Subordinated Notes. The following is a list of some of the risks
facing the Company. Additional risks are discussed in the Company's Annual
Information Form dated March 8, 2007 and are available for review on SEDAR at
www.sedar.com.

    The Projects Depend on their Electricity and Thermal Energy Customers

    Each Project relies for its revenues on one or more tolling agreement,
lease agreement, or other agreement with its host. The amount of cash
available for distribution to holders of EISs, Common Shares and Subordinated
Notes is highly dependent upon customers under such agreements fulfilling
their contractual obligations. There is no assurance that these customers will
perform their obligations or make required payments on a timely basis. Each of
the Projects is dependent upon its industrial host's continuing operations at
those Projects. Under the revenue producing agreements governing each Project,
these hosts are not precluded from ceasing all operations at the Projects,
whether due to unforeseen circumstances, force majeure or at the discretion of
the host. Any such cessation of operations by a host at a Project would result
in customers ceasing purchases of thermal or electric energy from the
Projects.
    Certain Projects rely on their industrial hosts for waste fuel and derive
a significant portion of their revenue based on output rather than strictly on
capacity payments. Accordingly, these Projects rely on their industrial hosts
to maintain industrial operations at a high level of output. Various
conditions that are not within the control of the Company or the Project
operators, and may not be within the control of the host industrial companies,
may directly or indirectly result in significant reduction or cessation of
industrial operations at any given Project. These conditions include, but are
not limited to, competitive pressures, mergers or acquisitions, adverse
financial or economic conditions or events (including foreclosure, bankruptcy
or liquidation of the industrial company), environmental constraints or
incidents, weather conditions, labour actions, fuel shortages, equipment
malfunction or refurbishment, accidents or sabotages, mismanagement,
governmental action and force majeure. If any of the hosts were to materially
curtail or cease manufacturing operations that require energy from a Project,
a material portion of the Project's revenues could be interrupted or would
cease, and any contractual remedy or insurance coverage available to the
Company may not be sufficient to cover such shortfalls. Moreover, substantial
short or long-term changes in industrial operating levels short of material
curtailment or cessation of operations can result from decisions by management
of the industrial hosts. These changes are not predictable, and such changes
may produce material volatility in revenues from any of the Projects so
affected.

    Projects May Not Operate as Planned

    The revenue produced by the Projects is dependent, in whole or in part,
on the amount of electric energy and thermal energy generated by them. The
ability of the Projects to generate the maximum amount of energy to be
distributed to hosts is the primary determinant in the amount of cash that
will be distributed to the Company, and that will in turn be available for
distribution to holders of EISs, Common Shares and Subordinated Notes. With
respect to each of the Projects, there is a risk of equipment failure (of both
Project equipment and equipment operated by the host) for various reasons
including, without limitation, component failures, latent defect, design
error, operator error, weather conditions or force majeure which could
adversely affect revenues and cash available for distribution. For Project
equipment, it is expected that annual capital maintenance expenditures will
approximate historical spending levels and will be funded from cash generated
from operations. To the extent that maintenance spending corresponds to
historical requirements it is not anticipated that there will be a negative
impact on distributions. To the extent that such equipment requires either
longer than anticipated down times or unexpected capital requirements for
maintenance and repair, or suffers disruptions of energy generation for other
reasons, the amount of cash available for distribution may be adversely
affected.
    Neither PERH nor its subsidiaries control, or have contractual rights in
respect of, the operations of its customers. The host steel mills have the
ability to run their plants at their discretion. Since some of the Projects
are affected by the level of production at these host steel mills, a Projects'
performance may be impacted by the hosts' operational decisions. Such
operational decisions include, without limitation, production levels and which
blast furnaces the host steel mills choose to run.

    The Company has Limited Control Over the Harbor Coal Project

    The Projects are wholly-owned, indirectly, by the Company, with the
exception of the Harbor Coal Project. Harbor Coal LLC, an indirect subsidiary
of PERH, owns a 50% general partnership interest in PCI Associates which in
turn owns the Harbor Coal Project. Harbor Coal LLC has limited control over
the operation of the Harbor Coal Project. III/PCI, Inc., the other general
partner of PCI Associates and an affiliate of Ispat Inland Inc., manages the
operations of the Harbor Coal Project. Ispat Inland Inc. is an indirect
subsidiary of Mittal Steel.
    PERH's limited control results in a number of risks at the Harbor Coal
Project. These include commodity costs such as coke, coal, natural gas, oil
and oxygen costs, which can vary with market conditions; Mittal Steel
determines which commodity mix is used on a daily basis. Furthermore, Mittal
Steel determines the amount of hot metal produced per day for use in steel
production. These factors determine the profitability of the Harbor Coal
Project. PERH must also rely on the technical and management expertise of
III/PCI, Inc. to oversee operations and maintenance of the Project. PERH is
also reliant on accounting policies, procedures and financial reporting of
Mittal Steel as they impact the accounting and financial reporting of PCI
Associates. To the extent that III/PCI, Inc. does not fulfill its obligation
to manage the operations of the Harbor Coal Project, or is not effective in
doing so, the amount of cash available for distribution may be adversely
affected.

    Future Distributions are not Guaranteed

    The Company only source of cash flow for payment of dividends on its
Common Shares and interest on its Subordinated Notes, respectively, is
distributions on its membership interest in PERH. While the Company is
contractually obligated to make interest payments on the Subordinated Notes,
the Company's board of directors or PERH board of managers may, in their
respective discretion, amend or repeal the existing distribution policy
relating to equity distributions. Future equity distributions from these
companies, if any, will depend on, among other things, the results of
operations, cash requirements, financial condition, contractual restrictions,
business opportunities, provisions of applicable law and other factors that
the board of directors or managers may deem relevant. Either of these boards
of directors or managers may decrease the level of equity distributions
provided for in their existing distribution policies or entirely discontinue
such distributions. The Indenture and the Credit Facility contain significant
restrictions on the ability to make distributions, including if the Company
defers interest on the Subordinated Notes under the Indenture, restrictions on
the payment of dividends until the Company has paid all deferred interest,
together with accrued interest thereon.
    In addition, the Company's after-tax cash flow available for
distributions and interest payments would be reduced if the Subordinated Notes
were treated as equity rather than debt for U.S. federal income tax purposes.
In that event, the stated interest on the Subordinated Notes could be treated
as a dividend and would not be deductible by the Issuer for U.S. federal
income tax purposes. The inability to deduct interest on the Subordinated
Notes could materially increase the Company's taxable income and, thus, the
Company's U.S. federal and applicable state income tax liability. If this were
to occur, the Company's after-tax cash flow available for distributions and
interest payments may be reduced. The additional tax due to federal and state
authorities in that event could adversely affect the Company's financial
position, cash flows and liquidity, and could also adversely affect its
ability to continue as a going concern. In addition, non-U.S. holders of the
EISs could be subject to withholding taxes on the payment treated as dividends
on equity, which could subject the Company to additional liability for the
withholding taxes that it did not collect on such payments.

    
    Restrictive Covenants in the Credit Facility Could Impact the
    Business of the Company

    The Credit Facility and the Indenture contain restrictive covenants that
limit the discretion of the Company or Primary Energy Operations, LLC ("PEO"),
as the case may be, to among other things,

    -   incur additional indebtedness;

    -   make distributions in respect of the EISs or membership interests, as
        the case may be, or to make certain other restrictive payments or
        investments;

    -   sell assets;

    -   consolidate, merge, sell or otherwise dispose of all or substantially
        all of their assets;

    -   enter into transactions with affiliates;

    -   create liens; and

    - enter into new lines of businesses.
    

    In addition, the Credit Facility includes other and more restrictive
covenants and prohibits PEO and certain of its affiliates from prepaying its
other indebtedness, including the Company prepaying the Subordinated Notes,
while debt under the Credit Facility is outstanding. The agreement governing
the Credit Facility also requires PEO to achieve specified financial and
operating results and maintain compliance with specified financial ratios.
PEO's ability to comply with these ratios may be affected by events beyond its
control.
    A breach of any of the restrictive covenants in the Credit Facility or in
PEO's ability to comply with the required financial ratios could result in a
default under the Credit Facility. If a default occurs, the lenders under the
Credit Facility may elect to declare all borrowings outstanding under that
facility together with accrued interest and other fees, to be immediately due
and payable which would result in an event of default under the Indenture.
    See the Company's Annual Information Form dated March 8, 2007, which can
be found on SEDAR at www.sedar.com, for a full description of all of the
Company's risk factors, which factors are incorporated by reference herein.

    
    Recent Accounting Pronouncements

    The Canadian Accounting Standards Board has recently issued new Handbook
sections:

        -   1530, Comprehensive Income;

        -   3855, Financial Instruments - Recognition and Measurement; and

        -   3865, Hedges.

    Under these new standards, all financial assets should be measured at fair
value with the exception of loans, receivables and investments that are
intended to be held to maturity and certain equity investments, which should
be measured at cost. Similarly, all financial liabilities should be measured
at fair value when they are held for trading or they are derivatives. Gains
and losses on financial instruments measured at fair value will be recognized
in the income statement in the periods they arise with the exception of gains
and losses arising from:

        -  Financial assets held for sale, for which unrealized gains and
           losses are deferred in other comprehensive income until sold or
           impaired; and

        -  Certain financial instruments that qualify for hedge accounting.

    Sections 3855 and 3865 reference "other comprehensive income". Other
comprehensive income comprises revenues, expenses, gains and losses that are
excluded from net income. Unrealized gains and losses on qualifying hedging
instruments, foreign currency, and unrealized gains or losses on financial
instruments held for sale will be included in other comprehensive income and
reclassified to net income when realized. Comprehensive income and its
components will be required disclosure under the new standard.
    The adoption of these standards as of January 1, 2007 did not have a
material impact on the Company's consolidated financial statements.
    

    Capital Disclosures

    In December 2006, the CICA released new Handbook Section 1535, Capital
Disclosures, effective for interim and annual financial statements beginning
on or after October 1, 2007. Section 1535 establishes standards for disclosing
information about an entity's capital and how it is managed. It requires the
disclosure of information about an entity's objectives, policies and processes
for managing capital. The Company does not expect adoption of Section 1535 to
have a material impact on its consolidated financial statements.

    Financial Instruments - Disclosures and Presentation

    In December 2006, the CICA released new Handbook Section 3862, Financial
Instruments - Disclosures and Handbook Section 3863, Financial Instruments -
Presentations effective for interim and annual financial statements beginning
on or after October 1, 2007. Section 3862 requires entities to provide
disclosures in their financial statements that enable users to evaluate the
significance of financial instruments on the entity's financial position and
its performance and the nature and extent of risks arising from financial
instruments to which the entity is exposed during the period and at the
balance sheet date, and how the entity manages those risks. Section 3863
establishes standards for presentation of financial instruments and
non-financial derivatives. It deals with the classification of financial
instruments, from the perspective of the issuer, between liabilities and
equities, the classification of related interest, dividends, losses and gains,
and circumstances in which financial assets and financial liabilities are
offset. The Company does not expect adoption of Section 3862 and Section 3863
to have a material impact on its consolidated financial statements.

    Accounting Changes

    CICA Handbook Section 1506: Accounting Changes ("CICA 1506") effective
for fiscal years beginning on or after January 1, 2007 establishes standards
and new disclosure requirements for the reporting of changes in accounting
policies and estimates and the reporting of error corrections. CICA 1506
clarifies that a change in accounting policy can be made only if it is a
requirement under Canadian GAAP or if it provides reliable and more relevant
financial statement information. Voluntary changes in accounting policies
require retrospective application of prior period financial statements, unless
the retrospective effects of the changes are impracticable to determine, in
which case the retrospective application may be limited to the assets and
liabilities of the earliest period practicable, with a corresponding
adjustment made to opening retained earnings. At this time, we are not aware
of any pending accounting changes other than those mandated by the CICA.
Adoption of this standard did not have a material impact on the Company's
interim consolidated financial statements for the three months and nine months
ended September 30, 2007.

    Internal Control over Financial Reporting

    Internal control over financial reporting, designed by management, has
the objective to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with Canadian GAAP. No changes to the Company's
internal control over financial reporting have occurred during the nine months
ended September 30, 2007, that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.

    Additional Information

    Additional information relating to the Company, including the unaudited
interim consolidated financial statements for the three months and nine months
ended September 30, 2007 and 2006 and the Company's Annual Information Form
dated March 8, 2007, is available on SEDAR at www.sedar.com.


    
                    PRIMARY ENERGY RECYCLING CORPORATION

             Unaudited Interim Consolidated Financial Statements
                               (In US Dollars)

       Three Months and Nine Months Ended September 30, 2007 and 2006

    TABLE OF CONTENTS                                                Page No.
                                                                     --------
    Financial Statements (Unaudited)
    Consolidated Balance Sheets                                            3
    Consolidated Statements of Operations and
     Accumulated Shareholders' Deficit                                     4
    Consolidated Statements of Cash Flows                                  5
    Notes to Consolidated Financial Statements                        6 - 17



                    Primary Energy Recycling Corporation
                         CONSOLIDATED BALANCE SHEETS
                       (In thousands of U.S. dollars)
                                 (Unaudited)

                                                   September 30, December 31,
    ASSETS                                                 2007         2006
    ---------------------------------------------- --------------------------
    Current assets:
      Cash and cash equivalents                     $    10,950  $    15,640
      Accounts receivable                                 9,440        7,863
      Spare parts inventory                                 927          865
      Current portion of Future tax asset (Note 7)        2,117          824
      Current portion of foreign currency exchange
       contracts (Note 8)                                 6,575          269
      Current portion of interest rate swap
       contracts (Note 8)                                   178          427
      Other current assets                                  787          495
                                                   ------------- ------------
    Total current assets                                 30,974       26,383

    Non-current assets:
    Property, plant and equipment, net                  241,849      249,741
    Intangible assets, net                              157,309      179,811
    Long-term portion of Future tax asset (Note 7)          189            -
    Long-term portion of foreign currency exchange
     contracts (Note 8)                                  12,215        2,133
    Long-term portion of interest rate swap
     contracts (Note 8)                                       -          485
    Other non-current assets                                154          194
                                                   ------------- ------------
    Total assets                                    $   442,690  $   458,747
                                                   ------------- ------------
                                                   ------------- ------------
    LIABILITIES, NON-CONTROLLING INTEREST
     AND SHAREHOLDERS' EQUITY
    ----------------------------------------------
    Current liabilities:
      Accounts payable                              $       384  $     1,047
      Short-term debt (Note 2 and Note 3)               136,266            -
      Due to affiliates (Note 9)                            690          413
      Accrued property taxes                              6,560        3,622
      Accrued interest payable                            2,175        2,000
      Distributions payable                                 266        2,676
      Accrued expenses                                    2,298        1,361
                                                   ------------- ------------
    Total current liabilities                           148,639       11,119

    Long-term debt (Note 3)                              92,196      210,602
    Future tax liability (Note 7)                             -        4,566
    Asset retirement obligation                           3,113        2,951
    Long-term portion of interest rate swap
     contracts (Note 8)                                     146            -
                                                   ------------- ------------
    Total liabilities                                   244,094      229,238

    Commitments and contingencies (Note 4)
    Non-controlling preferred interest (Note 5)          13,225       13,225
    Non-controlling common interest (Note 5)             83,716       87,000
    Shareholders' equity:
    Common stock (Note 6)                               178,571      178,571
    Accumulated shareholders' deficit                   (76,916)     (49,287)
                                                   ------------- ------------
    Total shareholders' equity                          101,655      129,284
                                                   ------------- ------------
    Total liabilities, non-controlling
     interest and shareholders' equity              $   442,690  $   458,747
                                                   ------------- ------------
                                                   ------------- ------------

    The accompanying notes are an integral part of these unaudited interim
    consolidated financial statements; see liquidity and going concern
    disclosure reflected in Note No.2.



                    Primary Energy Recycling Corporation
                  CONSOLIDATED STATEMENTS OF OPERATIONS AND
                      ACCUMULATED SHAREHOLDERS' DEFICIT
     (In thousands of U.S. dollars, except share and per share amounts)
                                 (Unaudited)

                               Three Months Ended        Nine Months Ended
                                  September 30,             September 30,
                          ------------------------ --------------------------
                                 2007         2006         2007         2006
                          ------------ ------------ ------------ ------------

    Revenue:
      Capacity            $     9,018  $     9,018  $    27,054  $    27,054
      Energy Service           10,217       12,159       26,814       41,743
                          ------------ ------------ ------------ ------------
                               19,235       21,177       53,868       68,797
    Expenses:
      Operations and
       maintenance              7,896        7,197       22,511       24,650
      General and
       administrative           2,691        2,457        8,101        7,275
      Depreciation and
       amortization            10,131        9,981       30,393       29,983
                          ------------ ------------ ------------ ------------

    Operating (loss)
     income                    (1,483)       1,542       (7,137)       6,889
    Other (expense)
     income
      Interest expense,
       net                     (5,783)      (5,194)     (16,512)     (15,378)
      Realized and
       unrealized gain
       (loss) on
       derivative hedge
       contracts (Note 8)       7,118       (2,279)      17,674        6,148
      Realized and
       unrealized (loss)
       gain on foreign
       currency translation    (6,477)          23      (14,617)      (3,736)
                          ------------ ------------ ------------ ------------
    Loss before income
     taxes                     (6,625)      (5,908)     (20,592)      (6,077)
    Income tax benefit
     (expense) (Note 7)         1,113          363        4,214         (593)
                          ------------ ------------ ------------ ------------
    Loss before non-
     controlling interest      (5,512)      (5,545)     (16,378)      (6,670)
    Non-controlling
     interest in class B
     Preferred                   (431)        (381)      (1,221)      (1,143)
    Non-controlling
     interest in class B
     Common                     1,809        1,751        2,544        4,196
                          ------------ ------------ ------------ ------------

    Net Loss              $    (4,134) $    (4,175) $   (15,055) $    (3,617)
    Accumulated
     shareholders' deficit
     - beginning of period    (70,309)     (18,887)     (49,287)      (8,537)
    Distributions              (2,473)      (5,693)     (12,574)     (16,601)
                          ------------ ------------ ------------ ------------
    Accumulated
     shareholders' deficit
     - end of period      $   (76,916) $   (28,755) $   (76,916) $   (28,755)
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    Weighted average
     number of shares
     outstanding           31,000,000   31,000,000   31,000,000   31,000,000
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------
    Basic and Diluted net
     loss per share
     (Note 10)            $     (0.13) $     (0.14) $     (0.49) $     (0.12)
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------



                    Primary Energy Recycling Corporation
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
              (In thousands of U.S. dollars, unless specified)
                                 (Unaudited)

                               Three Months Ended        Nine Months Ended
                                  September 30,             September 30,
                          ------------------------ --------------------------
                                 2007         2006         2007         2006
                          ------------ ------------ ------------ ------------
    CASH FLOWS FROM
     OPERATING ACTIVITIES:
    Net loss              $    (4,134) $    (4,175) $   (15,055) $    (3,617)
    Adjustments to
     reconcile net loss
     to net cash provided
     by operating
     activities:
      Depreciation and
       amortization            10,131        9,981       30,393       29,983
      Realized and
       unrealized loss
       (gain) on foreign
       currency
       translation              6,607          (23)      14,617        3,736
      Realized and
       unrealized (gain)
       loss on foreign
       currency exchange
       contracts and
       interest rate swaps     (7,118)       2,279      (17,674)      (6,148)
      Noncash interest
       expense                    337          312          965          934
      Non-controlling
       Class B preferred
       interest                   431          381        1,221        1,143
      Non-controlling
       Class B common
       interest                (1,809)      (1,751)      (2,544)      (4,196)
      Income tax (benefit)
       expense                 (1,113)        (363)      (4,214)         593
      Accretion of asset
       retirement
       obligations                 54           50          162          151
      Changes in operating
       assets and
       liabilities:
        Accounts receivable    (2,436)        (704)      (1,577)       3,829
        Inventory and
         other assets            (586)        (410)        (314)        (264)
        Accounts payable       (1,874)        (113)        (664)         166
        Accrued property
         tax                    1,044         (789)       2,938       (1,625)
        Accrued interest
         payable                 (111)          20          (61)          85
        Accrued expenses         (106)      (2,044)         937          (81)
        Distributions
         payable                   38            -           38            -
        Amounts owed to
         affiliates               591       (1,672)         277         (847)
                          ------------ ------------ ------------ ------------
      Net cash (used in)
       provided by operating
       activities                 (54)         979        9,445       23,842
                          ------------ ------------ ------------ ------------
    CASH FLOWS FROM
     INVESTING ACTIVITIES:
      Cash settlement from
       foreign currency
       exchange contracts and
       interest rate swaps      1,266            -        2,178            -
      Capital expenditures          -          (18)           -          (18)
                          ------------ ------------ ------------ ------------
      Net cash provided by
       (used in) investing
       activities               1,266          (18)       2,178          (18)
                          ------------ ------------ ------------ ------------
    CASH FLOWS FROM
     FINANCING ACTIVITIES:
    Payments of deferred
     financing costs                -            -         (231)           -
    Proceeds from issuance
     of debt                    3,000            -        3,000            -
    Distributions on
     non-controlling
     Class B preferred
     interest                    (295)        (381)      (1,200)      (1,143)
    Distributions on
     non-controlling
     Class B common
     interest                    (503)      (1,164)      (3,148)      (3,346)
    Distributions on
     Common Shares             (3,763)      (5,693)     (14,734)     (16,482)
                          ------------ ------------ ------------ ------------
    Net cash used in
     financing activities      (1,561)      (7,238)     (16,313)     (20,971)
                          ------------ ------------ ------------ ------------
    Net (decrease) increase
     in cash                     (349)      (6,277)      (4,690)       2,853
    Cash and cash
     equivalents -
     beginning of period       11,299       21,220       15,640       12,090
                          ------------ ------------ ------------ ------------
    Cash and cash
     equivalents -
     end of period        $    10,950  $    14,943  $    10,950  $    14,943
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------
    Supplemental
     disclosure of cash
     flow information:
    Cash paid during
     the period for
     interest             $     5,558  $     5,268  $    16,423  $    15,144



                    Primary Energy Recycling Corporation
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (In thousands of U.S. dollars unless specified,
                     except share and per share amounts)
                                 (Unaudited)

    1. Description of Business

    Primary Energy Recycling Corporation (the "Company") was incorporated on
    June 10, 2005 under the laws of the Province of Ontario and continued
    under the laws of British Columbia. The Company initiated business
    activity on August 24, 2005 and owns a majority interest in Primary
    Energy Recycling Holdings, LLC ("PERH"). The non-controlling interest of
    PERH is held by Primary Energy Holdings, LLC ("PEH"), a wholly-owned
    subsidiary of Primary Energy Ventures, LLC (the "Manager" or "PEV").
    PERH, headquartered in Oak Brook, Illinois, indirectly owns and operates
    four recycled energy projects and a 50% interest in a pulverized coal
    facility all located in the United States (collectively, the "Projects").
    The Projects have a combined electrical generating capacity of
    283 megawatts and a combined steam generating capacity of 1.8 MMlbs/hour.
    PERH creates value for its customers by capturing and recycling waste
    energy from industrial processes and converting it into reliable and
    economical electricity and thermal energy for its customers' use. For
    additional information with respect to the business, please see the
    Company's public filings including its Annual Information Form dated
    March 8, 2007 available on SEDAR at www.sedar.com.

    2. Significant Accounting Policies

    Basis of Presentation

    The accompanying interim consolidated financial statements have been
    prepared in accordance with accounting principles generally accepted in
    Canada ("Canadian GAAP") for interim financial information and do not
    contain all of the disclosures required for annual financial statements.
    Accordingly, the interim consolidated financial statements and related
    notes included herein are unaudited and should be read in conjunction
    with the annual consolidated financial statements and related notes for
    the year ended December 31, 2006, included in the Company's 2006 Annual
    Report. These statements have been prepared following the same accounting
    policies and methods of computation as the annual consolidated financial
    statements of the Company for the year ended December 31, 2006 and
    include all normal recurring adjustments which management considers
    necessary for fair presentations. The results of the three and nine month
    periods ended September 30, 2007 reflect $1.1 million of tax expense
    applicable to prior periods which is specific to the non-controlling
    interest and accordingly allocated to non-controlling interest.
    Additionally, as described below, the Company has adopted the following
    changes in accounting policy.

    Liquidity and Going Concern

    These interim consolidated financial statements have been prepared using
    Canadian generally accepted accounting principles applicable to a going
    concern. On November 6, 2007 the Company received sufficient information
    from the host of its Harbor Coal facility (see Note 12) regarding
    inventory adjustments affecting the Company's consolidated financial
    results to determine that the financial results as of September 30, 2007
    would not be sufficient to allow the Company to be in compliance with the
    Consolidated Leverage Ratio debt covenant requirement on its
    $135.0 million Credit Facility. As a result of non-compliance, the
    Company was in immediate default of this debt and has classified all
    borrowings under this facility as short term as of September 30, 2007.
    The Company is in discussions with the Credit Facility lenders to obtain
    a waiver for the default. The Credit Facility lenders have the right to
    call the outstanding debt without further notice at any time during the
    period of non compliance and if such right is exercised under the Credit
    Facility, the outstanding debt held under the Subordinated and Separate
    Subordinated Notes will be subject to default provisions which also allow
    for acceleration of the Subordinated and Separate Subordinated Notes.
    Should the Credit Facility lenders elect to exercise their option and
    require immediate repayment of the debt, the Company would be unable to
    satisfy this obligation without securing an alternative financing
    arrangement. Management believes, but cannot guarantee, that a waiver can
    be obtained and if such waiver is not forthcoming the Company will be
    able to secure alternative financing sufficient to satisfy its
    obligations under the Credit Facility. Because of the default, the
    Company is required to reclassify the outstanding debt of $135.0 million
    under the Credit Facility from long term liabilities to short term on the
    balance sheet thus creating a working capital deficiency of
    $117.7 million. Management further notes that the short time period
    between the determination of non-compliance (November 6th) and the
    quarterly filing requirement (November 14th) has not allowed sufficient
    time for the Company to obtain appropriate waivers or secure alternative
    financing. Accordingly, until a wavier or alternative financing is
    secured, at this time, there is substantial doubt about the Company's
    ability to continue as a going concern. The financial statements do not
    include any adjustments that might result from the outcome of this
    uncertainty. Such adjustments could be material to the financial
    statements. The Company is restricted from paying distributions to EIS
    unit holders as well as to holders of its Separate Subordinated Notes so
    long as it's in default under the Credit Facility.

    Change in Accounting Policy

    Effective January 1, 2007, the Company adopted Handbook Sections 1506,
    "Accounting Changes", 1530, "Comprehensive Income", 3855 "Financial
    Instruments - Recognition and Measurement" and 3865 "Hedges" issued by
    the Canadian Institute of Chartered Accountants ("CICA"). The adoption of
    these standards did not have a material impact on the Company's interim
    consolidated financial statements.

    The Company prospectively adopted the CICA recommendations pertaining to
    financial instruments, which establish standards for the recognition,
    measurement, disclosure and presentation of financial assets, financial
    liabilities and non-financial derivatives. These recommendations require
    that fair value be used to measure financial assets that are held for
    trading or available for sale, financial liabilities that are held for
    trading and all derivative financial instruments. Other financial assets,
    such as loans and receivables and investments that are held to maturity
    and other financial liabilities are measured at their carrying value.
    This change in accounting had the following effect on the Company's
    interim consolidated financial statements for the three months and
    nine months ended September 30, 2007; reclassification of deferred
    financing fees from non-current assets to short-term and long-term debt
    (see Note 3).

    The Company prospectively adopted the CICA recommendations pertaining to
    hedges, which establish standards for the identification, designation,
    documentation and effectiveness of hedging relationships for the purpose
    of applying hedge accounting. The purpose of hedge accounting is to
    ensure that gains, losses, revenues and expenses from effective hedging
    relationships are recorded in the income statement in the same period.
    This change in accounting did not have a material impact on the Company's
    interim consolidated financial statements.

    The Company prospectively adopted the CICA recommendations regarding the
    reporting and disclosure of comprehensive income. Comprehensive income
    consists of changes in the equity of the Company from sources other than
    the Company's shareholders, and includes income of the Company, the
    foreign currency translation adjustment relating to self-sustaining
    foreign operations and unrealized gains and losses on changes in fair
    values of available-for-sale assets and effective cash flow hedging
    instruments. Other comprehensive income comprises revenues, expenses,
    gains and losses that are recognized in comprehensive income but are
    excluded from income of the period. This change in accounting did not
    have a material impact on the Company's interim consolidated financial
    statements.

    The Company adopted the CICA recommendations that prescribe the criteria
    for changing accounting policies, together with the accounting treatment
    and disclosure of changes in accounting policies, changes in accounting
    estimates and corrections of errors. This change in accounting did not
    have a material impact on the Company's interim consolidated financial
    statements.

    3. Debt

    Long-term debt consists of the following:
                                                   September 30, December 31,
                                                           2007         2006
                                                   ------------- ------------
    Term loan facility                              $   135,000  $   135,000
    Subordinated debt                                    96,502  $    82,376
    Less:
    Deferred finance fees                                (6,040)      (6,774)
    Reclassification of the term loan facility to
     short-term debt                                   (135,000)
    Reclassification of deferred finance fees
     associated with the term loan facility to
     short-term debt                                      1,734
                                                   ------------- ------------
    Total                                           $    92,196  $   210,602
                                                   ------------- ------------
                                                   ------------- ------------

    Credit Facility

    The Company's Credit Facility is comprised of a $135.0 million four-year
    term loan facility and a three-year $15.0 million revolving credit
    facility. $3.0 million of the revolving credit facility was drawn as of
    September 30, 2007. The Credit Facility bears interest at a rate equal to
    LIBOR or U.S. Base Rate, plus an applicable margin. The borrower may
    elect from time to time to convert Eurodollar rate loans to base rate
    loans or base rate loans to Eurodollar rate loans by providing
    appropriate notice to the Administrative Agent of the Credit Facility.
    For the three months and nine months ended September 30, 2007, the
    interest rate was defined using an average LIBOR rate of 5.36% plus 2.75%
    and 5.36% plus 2.75%, respectively. For the three months and nine months
    ended September 30, 2006, the interest rate was defined using an average
    LIBOR rate of 5.28% plus 2.75% and 4.93% plus 2.75%, respectively. The
    Credit Facility has a standby fee of 0.5% of the $12.0 million
    availability associated with the revolving credit facility. The Credit
    Facility is collateralized by the Company's interests in, and the assets
    of, all subsidiaries and Projects. The Credit Facility requires the
    Company to meet certain financial covenants including, among other
    things, maintaining certain defined leverage and coverage ratios. During
    the second quarter of 2007, the Credit Facility was amended to modify
    specified covenant levels for the remainder of 2007 and the first quarter
    of 2008. Beginning the second quarter of 2008 and thereafter, the pre-
    amendment covenant levels will continue to apply. As of September 30,
    2007, the Company was not in compliance with the Consolidated Leverage
    Ratio, which is based upon the Company's total funded debt as compared to
    the Company's trailing twelve months EBITDA. Management has provided the
    Credit Facility lenders with notice of the default and requested a
    waiver. The Credit facility lenders have the right to call the debt
    without further notice at any time during the period of non compliance.
    As a result, the Company has classified all borrowings and deferred
    finance fees under this facility as short term as of September 30, 2007.
    Management is in discussions with its lenders to determine if an
    appropriate waiver can be obtained.

    Subordinated and Separate Subordinated Notes

    In 2005, the Company issued Subordinated Notes (forming part of EISs) of
    U.S. $59.3 million or Cdn$71.25 million (as denominated in Canadian
    dollars using an exchange rate of Cdn$1.20235 per U.S. $1.00).
    Additionally in 2005, the Company issued the equivalent of U.S.
    $15.4 million or Cdn$18.5 million (denominated in Canadian dollars using
    an exchange rate of Cdn$1.20235 per U.S. $1.00) of Separate Subordinated
    Notes with a stated annual interest rate of 11.75% and a term of 12 years
    and an additional U.S. $5.3 million or Cdn$6.3 million (as denominated in
    Canadian dollars using an exchange rate of Cdn$1.17050 per US$1.00) of
    Subordinated Notes. The Subordinated Notes have a stated annual interest
    rate of 11.75% and a term of 12 years. Amounts payable under these notes
    in U.S. dollars have been adjusted to reflect the change in foreign
    exchange rates as of September 30, 2007 and 2006. For the three months
    and nine months ended September 30, 2007, the Company recorded a loss on
    foreign currency translation of $6.4 million and $14.1 million,
    respectively, related to these notes denominated in Canadian dollars. For
    the three months and nine months ended September 30, 2006, the Company
    recorded a gain on foreign currency translation of $0.02 million and a
    loss on foreign currency translation of $3.7 million, respectively,
    related to these notes denominated in Canadian dollars. The Subordinated
    Notes and Separate Subordinated Notes are collateralized by unsecured
    guarantees of the Company's subsidiaries and require the Company to meet
    certain financial covenants including, among other things, maintaining
    certain defined leverage and coverage ratios. As of September 30, 2007
    the Company was not in compliance with the Consolidated Leverage Ratio
    under its Credit Facility. As a result the Credit Facility lenders have
    the right to accelerate the total debt outstanding under the Credit
    Facility. In the event the Credit Facility lenders exercise this right it
    will result in the Subordinated Notes and Separate Subordinated Notes
    being subject to default provisions which also allow for acceleration of
    the Subordinated Notes and Separate Subordinated Notes. The Company is
    restricted from paying distributions to EIS unit holders as well as to
    holders of its Separate Subordinated Notes so long as it's in default
    under the Credit Facility. The Company has accrued all interest due
    associated with the debt portion of the EIS units as well as for the
    Separate Subordinated Notes as of September 30, 2007.

    Deferred Finance Fees

    The Company capitalizes costs associated with the issuance of debt
    instruments. These costs are amortized over the term of the debt. In
    connection with the debt issued and credit facilities entered into
    connection with the Company's initial public offering in August of 2005,
    the Company paid $8.5 million for financing fees that have been deferred
    and are being amortized over the term of the underlying credit
    facilities. Additionally, in June of 2007 the Company paid a fee of $0.2
    million associated with the amendment of the Credit Facility (described
    above). This fee has been deferred and is being amortized over the
    remaining life of the Credit Facility. For the three months and nine
    months ended September 30, 2007, the Company has amortized $0.4 million
    and $1.0 million, respectively, of deferred financing fees. For the three
    months and nine months ended September 30, 2006, the Company has
    amortized $0.3 million and $0.9 million, respectively, of deferred
    financing fees.

    4. Commitments and Contingencies

    Environmental Matters

    The Company's operations are subject to a number of federal, state and
    local laws and regulations relating to the protection of the environment
    and the safety and health of personnel and the public. Some of the
    Company's operations require environmental permits and controls to
    prevent and reduce air and water pollution, and these permits are subject
    to modification, renewal and revocation by issuing authorities. These
    requirements relate to a broad range of activities, including:

    -   Discharge of pollutants into the air, water and soil

    -   Identification, generation, storage, handling, transportation,
        disposal, record keeping, labeling and reporting of, and the
        emergency response in connection with, hazardous and toxic materials
        and wastes including asbestos

    -   Safety and health standards, practices and procedures that apply to
        the workplace and the operation of facilities

    One facility, Cokenergy LLC, ("Cokenergy") is a party to on going
    discussions with the Indiana Department of Environmental Management
    (IDEM) and the Indiana Attorney General's Office (IAGO) with respect to a
    Notice of Violation (NOV) that was issued to Cokenergy on April 5, 2007
    for alleged violations of permit S02 and particulate emissions limits.
    Cokenergy submitted its legal position indicating that the facility was
    in compliance with its permit and the malfunction provisions of the
    Indian Administrative Code. On November 1, 2007 the IAGO issued a
    response challenging Cokenergy's position recommending the matter be
    resolved by the parties entering into a proposed Agreed Order which is
    forthcoming. The Company has not received the order and is not aware of
    what terms and provisions may be proposed.

    5. Non-Controlling Interest

    The non-controlling interest holds 14.2% of the preferred interest and
    17.0% of the common interest in PERH through its Class B preferred and
    common interest ownership. On a collective basis, the non-controlling
    interest holds 15.4% of the combined total of preferred and common
    interests of PERH. Each Class B common interest is entitled to receive
    pro rata distributions as and when declared by the board of managers
    after payment in full of Class A preferred return and Class B preferred
    return. Upon formation of the Company, Class B investors contributed
    assets with a lower tax basis than fair value. A deferred tax liability
    associated with this difference in basis and an offsetting increase in
    property, plant and equipment and intangible asset value was recorded and
    ascribed to the non-controlling interest. The increases in basis of the
    property plant and equipment and intangible asset balances are being
    depreciated and amortized over the useful lives of these assets and are
    fully allocated to the non-controlling interest through the non-
    controlling interest in Class B Common line item of the Statement of
    Operations.

    6. Common Stock

    Each Enhanced Income Security ("EIS") consists of one Common Share and
    Cdn$2.50 of aggregate principal amount of 11.75% Subordinated Notes
    (Note 3). Each common shareholder is entitled to one vote per Common
    Share on matters presented to PERC common shareholders for consideration.

    7. Income Taxes Income tax (benefit) expense consists of the following:

                               Three Months Ended        Nine Months Ended
                                  September 30,             September 30,
                          ------------------------ --------------------------
                                 2007         2006         2007         2006
                          ------------ ------------ ------------ ------------
    Current tax provision:
    Federal               $     1,422  $      (116) $     1,448  $       160
    State                         378          (31)         385           42
                          ------------ ------------ ------------ ------------
    Total current tax           1,800         (147)       1,833          202
                          ------------ ------------ ------------ ------------
    Future tax provision:
    Federal                    (2,302)        (171)      (4,778)         309
    State                        (611)         (45)      (1,269)          82
                          ------------ ------------ ------------ ------------
    Total future tax           (2,913)        (216)      (6,047)         391
                          ------------ ------------ ------------ ------------
    Total tax (benefit)
     expense              $    (1,113) $      (363) $    (4,214) $       593
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    The principal items which cause the Company's effective tax rate to be
    greater than the Canadian statutory tax rate of 36.12% are the effect of
    the inclusion of the U.S federal and state income taxes that are greater
    than the Canadian statutory tax rate, the valuation allowance on the net
    operating loss and the tax accounting for the change in the non-
    controlling interest. These items are summarized as follows:

                               Three Months Ended        Nine Months Ended
                                  September 30,             September 30,
                          ------------------------ --------------------------
                                 2007         2006         2007         2006
                          ------------ ------------ ------------ ------------
    Income tax (benefit)
     expense at Canadian
     Statutory Rate:      $    (2,393) $    (2,133) $    (7,438) $    (2,195)
    Additional tax
     (benefit) expense
     from operations in
     countries with
     different income
     tax rates                   (290)        (259)        (901)        (266)
    Valuation Allowance         1,370        2,029        3,910        3,054
    Other non-deductible
     items                        200            -          215            -
                          ------------ ------------ ------------ ------------
    Total tax (benefit)
     expense              $    (1,113) $      (363) $    (4,214) $       593
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------


    Significant components of the future tax assets and (liabilities) are as
    follows:
                                                          As of        As of
                                                   September 30, December 31,
                                                           2007         2006
    Accrued Expenses                                $     2,189  $       997
                                                    ------------ ------------
    Current Future Tax Assets                             2,189          997

    Foreign Currency Translation                          6,671          950
    Asset Retirement Obligation                           1,261        1,195
    Intangible Assets                                     6,008        2,020
    Interest Rate Swap                                       59            -
    Net Operating Loss                                   14,833       10,923
    Valuation Allowance                                 (14,833)     (10,923)
                                                    ------------ ------------
    Long-Term Future Tax Assets                          13,999        4,165

    Interest Rate Swap                                      (72)        (173)
                                                    ------------ ------------
    Current Future Tax Liability                            (72)        (173)

    Fixed Assets                                        (13,546)      (8,326)
    Interest Rate Swap                                        -         (196)
    Investment in PCI                                      (264)        (209)
                                                    ------------ ------------
    Long-Term Future Tax Liability                      (13,810)      (8,731)
                                                    ------------ ------------
    Net Future Tax Asset (Liability)                $     2,306  $    (3,742)
                                                    ------------ ------------
                                                    ------------ ------------

    The Company has U.S. net operating loss carryforwards that will start to
    expire in 2026 and Canadian net operating loss carryforwards that will
    start to expire in 2016 and 2027. The Company has recorded a full
    valuation allowance on the net operating loss as it is more likely than
    not that the future asset will not be realized. At September 30, 2007 and
    December 31, 2006 the net current future tax asset balances were
    $2.1 million and $0.8 million, respectively. At September 30, 2007 the
    net long term future tax asset balance was $0.2 million and at
    December 31, 2006 the net long term future tax liability balance was
    $4.6 million.

    8. Derivative Instruments and Hedging Activities

    The Company utilizes certain derivative instruments to enhance its
    ability to manage risk relating to cash flow and interest rate exposure.
    Derivative instruments are entered into for periods consistent with the
    related underlying exposures and are not entered into for speculative
    purposes.

    Foreign Currency Exchange Contracts

    The Company has entered into foreign currency exchange forward contracts
    (the "Forward Contracts") to exchange U.S. dollars for Canadian dollars.
    The Canadian dollars are used to fund interest and cash distributions to
    EIS holders, the non-controlling interest and interest distributions to
    the Separate Subordinated Note holders. Beginning with the May 2007
    distribution declaration, the Canadian dollar funding requirement for
    distributions per EIS was reduced to an annual rate of Cdn$0.80 from
    Cdn$1.15. As of September 30, 2007, further distributions have been
    suspended pending resolution of the debt covenant default under the
    Credit Facility (see Note 2). The contracts are for a series of monthly
    payments through September 2010. At September 30, 2007, thirty-six sets
    of payments comprised of three monthly contracts remain open. The forward
    contracts applicable to distributions on the Separate Subordinated Notes
    have an exchange rate of Cdn$1.1713 to U.S. $1.00. The remaining forward
    contracts have an exchange rate of Cdn$1.1712 to U.S. $1.00 and a rate of
    Cdn$1.0840 to U.S. $1.00. The Company was not required to deposit any
    collateral with regard to these contracts. The forward contracts do not
    qualify as a cash flow hedge for accounting purposes, and the change in
    the fair value is reflected in income. At September 30, 2007, the fair
    value of the forward contracts was $18.8 million of which $6.6 million is
    recorded in current assets. At December 31, 2006, the fair value of the
    forward contracts was $2.4 million of which $0.3 million is recorded in
    current assets. The forward contracts have been entered into with a major
    Canadian bank as the counterparty.

    The following table summarizes the Company's forward foreign currency
    contracts with monthly settlement terms as of September 30, 2007:

    -------------------------------------------------------------------------
                                      US $ to be    Cdn$ to be  Cdn$ per US$
                         Number of     delivered      received     (weighted
    Contract Dates       Contracts  (in millions) (in millions)      average)
    -------------------------------------------------------------------------

    October 2007 -
     Dec 2007                    9           3.2           3.8      1.167312
    Jan 2008 - Dec 2008         36           3.2           3.8      1.167312
    Jan 2009 - Dec 2009         36           3.2           3.8      1.167312
    Jan 2010 - Sept 2010        27           3.2           3.8      1.167312

    -------------------------------------------------------------------------

    The risk associated with the forward contracts is the cost of replacing
    these instruments in the event of default by the counterparty. Management
    believes that this risk is remote.

    Interest Rate Swap Agreements

    The Company entered into interest rate swap agreements on August 31,
    2005. The contracts were purchased to mitigate the cash flow risk
    associated with the impact of changing interest rates or payments due
    under the Credit Facility. The agreements do not qualify as a cash flow
    hedge for accounting purposes and the change in the fair value of the
    derivative is recorded in income. At September 30, 2007 the fair value of
    these agreements was a net amount of $0.03 million of which $0.2 million
    is recorded in current assets. At December 31, 2006 the fair value of
    these agreements was a net amount of $0.9 million of which $0.4 million
    is recorded in current assets.

    9. Related Party Transactions

    The Company has a Management Agreement in place with the Manager. The
    Management Agreement has an initial 20-year term. The Manager provides
    various management and administrative services to the Company and its
    subsidiaries under terms defined in the Management Agreement. According
    to the terms of the Management Agreement, the Manager may earn an annual
    incentive fee based on sharing in financial performance above threshold
    levels. The incentive fee is paid annually and is designed to align the
    financial interests of the Manager with those of the Company. The
    financial threshold was not achieved for the nine months ended
    September 30, 2007 and accordingly an incentive fee was not accrued. For
    the nine months ended September 30, 2006 the Company recorded an
    incentive fee accrual of $0.6 million. For the three months and
    nine months ended September 30, 2007, in accordance with the Management
    Agreement, the Company recorded management fees of $0.8 million and
    $2.4 million, respectively. For the three months and nine months ended
    September 30, 2006, in accordance with the Management Agreement, the
    Company recorded management fees of $0.8 million and $2.3 million,
    respectively.

    As of September 30, 2007, the Company had a net payable due to the
    Manager and its affiliates of $0.7 million. The outstanding balance due
    at September 30, 2007 has subsequently been settled. The Company has a
    Right of First Offer ("ROFO") as defined in the Management Agreement that
    provides for the opportunity to purchase certain defined projects from
    the Manager. For additional disclosure please refer to the Company's
    Annual Information Form dated March 8, 2007, which is available on SEDAR
    at www.sedar.com.

    10. Basic and Diluted

    Net Loss Per Share Basic and Diluted net loss per share has been
    calculated using the weighted average number of Common Shares outstanding
    of 31,000,000 for the three months and nine months ended September 30,
    2007 and 2006. For the three months and nine months ended September 30,
    2007 and 2006, there were no potentially dilutive securities outstanding.

    11. Segment Reporting

    The Company owns and operates facilities designed to recycle waste energy
    under one operating segment. The Company serves as a single source of
    supply for its customers' related requirements. The Company's operations
    are located in the United States. All sales revenue is generated from the
    same geographic area.

    12. Investment in Joint Venture

    The Company has an indirect ownership interest in a joint venture through
    PERH's wholly owned subsidiary Harbor Coal LLC. Harbor Coal owns a 50%
    interest in PCI Associates, a partnership that operates a pulverized coal
    facility. The investment is accounted for using the proportionate
    consolidation method in accordance with Canadian GAAP requirements. The
    carrying value of Harbor Coal's interest in PCI Associates reflects a
    purchase price allocation to adjust the values ascribed to long term
    assets to fair value as of August 24, 2005. The excess purchase price
    allocated to fixed assets and intangibles has been recorded on the books
    of Harbor Coal. The consolidated financial statements for the three and
    nine months ended September 30, 2007 include $2.2 million and
    $6.4 million, respectively, of related depreciation and amortization. The
    consolidated financial statements for the three and nine months ended
    September 30, 2006 include $2.1 million and $6.3 million, respectively,
    of related depreciation and amortization.

    Revenue at PCI Associates is determined based upon the displacement of
    certain defined commodities by coal. The value of the displaced
    commodities net of the cost of coal utilized represents revenue. The
    amount of displacement is impacted by physical inventories of the
    commodities utilized by the joint venture's host which have historically
    been performed in the fourth quarter of each year. Historically the
    impact of the physical inventory adjustments recorded by the joint
    venture's host have been volatile and can be material. The joint venture
    host performs regular physical inventory counts over the course of the
    year. The amount of coal consumed also determines the fee paid to the
    Manager of the Partnership and is recorded in operating expenses. For the
    three months and nine months ended September 30, 2007, Harbor Coal has
    recorded revenue adjustments of $1.0 million and $6.3 million,
    respectively, based upon reduced consumption associated with physical
    inventory adjustments recorded by the facility's host. For the
    three months and nine months ended September 30, 2007, PCI Associates
    recorded $0.4 million and $1.3 million, respectively, of depreciation.
    Financial information representing Harbor Coal's share of PCI Associates
    is as follows:

                                                   September 30, December 31,
                                                           2007         2006
                                                   ------------- ------------
    Current assets                                 $      2,149  $       454
    Noncurrent assets                                    13,647       14,937
    Current liabilities                                   1,696        1,370
    Noncurrent liabilities                                    -            -

                               Three Months Ended        Nine Months Ended
                                  September 30,             September 30,
                          ------------------------ --------------------------
                                 2007         2006         2007         2006
                          ------------ ------------ ------------ ------------
    Revenue               $     6,259  $     7,594  $    14,878  $    27,696
    Operating Expenses          5,627        5,813       15,625       18,852
    Net Income (Loss)             639        1,788         (731)       8,859

    Cashflows provided by
     (used in) operating
     activities           $    (1,681) $     2,063  $       150  $    14,159
    Cashflows used in
     investing activities           -            -            -            -
    Cashflows provided by
     (used in) financing
     activities                 2,155       (2,053)         811      (14,055)

    





For further information:

For further information: V. Michael Alverson, Chief Financial Officer,
Primary Energy Ventures, (630) 371-0505, investorinfo@primaryenergy.com

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Primary Energy Recycling Corporation

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