Annual Financial Report - PAR

RNS Number : 7439K

UK Coal PLC

26 April 2010

UK COAL PLC

Annual Report and Accounts 2009

For RNS purposes graphs and page numbers have been omitted.

Contents

Highlights

Chairman's Statement

Operating and Financial Review (OFR)

· Business overview

· Strategy

· Objectives

· Mining

o Market overview

o Deep mines

o Surface mines

· Harworth Estates

· Financial Review

· Key Risks and uncertainties

· Corporate Social Responsibility

· Board of Directors

Directors' Report

Statement of Directors' Responsibilities

Corporate Governance

Directors' Remuneration Report

Independent Auditors' Report

Consolidated Income Statement

Statements of Comprehensive Income

Consolidated Statement of Changes in Shareholders' Equity

Company Statement of Changes in Shareholders' Equity

Balance Sheets

Statements of Cashflows

Notes to the Financial Statements

Highlights

	2009	2008

Income Statement

Total group revenue	316	392.5
Average sales price per Gigajoule (£/GJ)	1.87	1.92

Operating (loss) / profit before non-trading exceptional items and property revaluation reduction (£m)	(67.4)	1.8
Non-cash property revaluation reduction (£m)	(25.7)	-
Operating (loss) / profit before non-trading exceptional items (£m)	(93.1)	1.8
Operating loss (£m)	(106.2)	(2.2)
Loss before tax (£m)	(129.1)	(15.6)
Loss after tax (£m)	(127.5)	(15.7)
Loss per share (pence)	(72.9)	(10.0)


Balance Sheet

Net assets (£m)	152.8	300.4
Net assets per share (£)	0.51	1.91
Year end bank gearing (%)	75	46
Year end total gearing (%)	119	46

UK Coal is the largest producer of coal in the UK, and a significant supplier of energy to the UK's electricity industry. In the last year we mined approximately 15% of the total amount of coal burned in the UK, which is equivalent to the energy needed to provide around 5% of the country's electricity requirements.

One of Britain's largest brownfield site property developers, UK COAL owns a substantial land portfolio, which has major potential for redevelopment.

MINING

Deep Mining

The Group operates four deep mines, located in Central and Northern England. The Group has reserves and resources of approximately 100 million tonnes at these mines and further mineral potential in addition.

Surface Mining

The Group currently has three active surface mines and planning committee approvals or consents to mine a further three sites. We have applied for planning consents for a further three mines and expect to make applications for a further four sites during 2010. Total surface mining reserves and resources, subject to planning, are estimated at over 50 million tonnes.

HARWORTH ESTATES

UK COAL owns approximately 43,500 acres (17,600 hectares) of predominately agricultural land. Within this, around 4,500 acres (net) on 85 sites have been identified as offering the prospect for development into a mix of residential, business park, distribution, leisure and community developments over the medium to long term.

The Group's property interests, excluding the deep mine sites, at current open market value were valued at December 2009 at £394 million.

CHAIRMAN'S STATEMENT

2009 has been an extremely challenging year for the Group.

We took big strides in transitioning the production profile of our deep mining business, a transition which has been substantially completed in the current year with the commencement of production from the new seams at Kellingley and Thoresby. We put in place new long-term supply contracts on significantly improved terms with our electricity generator customers and added a major new customer, Scottish and Southern Energy. We also further strengthened our executive team with the appointment of a Board level Director of Mining, Gareth Williams, who brings considerable international mining experience to the Group. The positive effect of this appointment is already being felt. This followed the appointment of a dedicated, executive level, Safety Director. Together, these steps hold the potential to transform the safety, performance and profitability of our deep mining business, and we shall continue working hard to these ends during 2010 and beyond.

In parallel, although the current market conditions have affected property valuations, our property business has continued to perform well in progressing planning and has the ability to deliver very considerable up-lifts in value. Our Project Worth central case estimates the worth of our property in 2012 at £615 million and in 2014 at £820 million, which compare to the RICS valuations at December 2009 of £394 million.

With that background, we approached our shareholders, together with new institutional investors, last Autumn and secured a net £100 million capital raising, in order to finance the completion of the investment programmes in our mining business and to create a more stable financial position for the Group.

As we have previously reported, however, our financial results for last year have been substantially affected by geological issues in each of our deep mines, which significantly reduced production volumes and did so against the background of a subdued market price for coal in Europe. These difficulties were exacerbated in the last quarter by equipment unreliability and failures, noting in particular the incident leading to the loss of a life at Kellingley. These geological issues continued into the current year until the new seams at Kellingley and Thoresby, and the new face at Daw Mill, have been brought into production. This has inevitably reduced first quarter production compared to the same period last year.

With Kellingley now in full production in its new seam, Thoresby ramping up in its new seam and with Daw Mill having started its ramp up, we believe that the particular difficulties which have affected us over the past months are now behind us. We therefore look forward to increasing production volumes, and for the business to see the benefit of an improved market price for coal.

However, the lower production volumes to this point, and the consequential deferral of contract delivery commitments, have somewhat delayed the timing of when we will fully benefit from the new supply contracts that we have put in place. As a result, our cash performance has been significantly affected, with the result that our debt has increased with insufficient headroom for the Group.

To address this, we have arranged an increase of up to £20 million in our banking facilities, and a £10 million loan facility with Peel Holdings, to provide us with increased headroom, in particular over the next 7 months to reflect the peak funding, and therefore headroom, requirement for the Group.

We consider our debt levels to be too high and therefore intend to take advantage of the current strong market values for agricultural land to pursue the disposal of a significant proportion of our agricultural estate and to explore joint-venturing the development of a larger part of our brownfield land portfolio with the objective of reducing the absolute levels of bank debt and associated costs.

We report in greater detail on all these points, but I, and the whole Board, would like to thank our executive team and all our employees for the way they have faced the challenges of the last six months and for the substantial progress they have achieved in very difficult circumstances. The financial results for 2009 are not those we planned for; but we nevertheless believe UK COAL retains the key ingredients to provide a platform for profitable growth in the medium and longer term.

RESULTS

Reflecting the operational difficulties and non-cash reductions in the valuations of our properties, UK COAL is reporting for 2009 an operating loss before exceptional items of £93.1 million, compared to an operating profit of £1.8 million in 2008 and a loss before tax of £129.1 million, compared to a loss before tax of £15.6 million the year before.

In the year, the deficit on the Group's retirement benefit obligations has increased from £104.0 million at December 2008 to £220.8 million at December 2009. Although the assets have appreciated in value during the year, this appreciation has been more than offset by an increase in liabilities primarily resulting from a change in the actuarial assumption used to discount the future liabilities. As a result of this and the results in the year noted above, and despite the equity issue in October last year, there has been a reduction in net assets per share, from 191p at December 2008 to 51p at December 2009.

Our property business made good progress in planning during 2009 and benefited from the continued strength of agricultural land values. This helped offset the general market reductions in property values, which began to stabilise in the second half. Nonetheless, our property portfolio saw a £25.7 million reduction in its value, compared with a slight increase in 2008. While non-cash, this contributed to our operating loss, although the major impact was the movement of our mining business from a combined operating loss of £2.4 million in 2008 to a loss of £68.6 million in 2009.

Net bank debt, excluding restricted cash balances and generator loans/prepayments, at December 2009 was £114.3 million (2008: £137.1 million). Including generator loans/prepayments, but excluding restricted cash balances, net debt at December 2009 was £181.9 million (2008: £137.1 million). At the end of the first quarter 2010, net debt, including generator loans/prepayments but excluding restricted cash balances, was £236.0 million of which generator balances were £77.4 million.

For the first quarter of 2010, our deep mine production has been 0.8 million tonnes compared to 1.4 million tonnes in the first quarter of 2009. Surface mine production was 0.2 million tonnes compared to 0.3 million tonnes in the first quarter of 2009.

Safety has to be at the heart of everything that we do and, throughout our employee team there is a thorough commitment to safety. It is therefore deeply regrettable that we have to report the loss of life of two of our colleagues last year, although overall reportable injuries fell to 22.8 per 100,000 manshifts compared to 24.0 in 2008. The addition of a dedicated Safety Director reflects this commitment, but in itself is only a small part of our work to improve our safety culture.

MINING

Deep Mining

We have reached a very significant point for the Group's deep mining business.

The new seams at Kellingley and Thoresby, in which we have been investing over the last three years, are now producing coal and we can now start exiting the old seams at these mines, which have caused so much difficulty. At the same time, Daw Mill's new face has started its ramp up, after an exceptionally difficult installation. Meanwhile, Welbeck is continuing to mine out the last of its reserves and is now expected to cease production in May this year, with the majority of its employees being offered relocation to other mines.

This is resulting in a major and beneficial change in the profile of our deep mining operations. Together with the considerably increased development driveage designed to reduce the impact of future face changes and to improve the reliability of future production volumes, the key steps have now been put in place for a modern and efficient deep mining business - one with substantial and economically accessible reserves which is able to benefit fully from the significantly improved long-term supply contracts we have negotiated, once the old legacy contracts are exhausted.

We have already noted the appointment of Gareth Williams to the Board as Director of Mining, and the positive effect of his focus on furthering the process of turning the mining business around.

It has taken longer to get to this point than was originally planned and, as we have previously reported, production volumes in the last quarter of 2009 and this year to date have been impacted by the very difficult geology.

As we report below, we believe these difficulties are now being overcome.

Daw Mill

Daw Mill is the largest of our mines, delivering a production record of 3.2 million in 2008 and 2.9 million tonnes in 2009. It had a planned face change which was originally scheduled for January 2010, but is only now starting its ramp up. This was principally because of an unpredictable break in the rock strata above the new face line in December last year. Protecting the new face required a very significant amount of roof reinforcement - initially over 500 timber supports were positioned and ultimately over 1,200 additional cable bolts were inserted. Whilst this work was being undertaken, the geology continued to move and the floor rose by over 2 metres. This floor blow had to be removed before the powered roof supports could be put in place. All this work has now been safely and successfully completed.

With the start of production on its new 357 metres long face, which is expected to last circa 15 months, Daw Mill is expected to be able to return to, or exceed, its previous volumes of production from its former 295 metres long face.

Kellingley

At Kellingley, production on the last of the old panels in the Silkstone seam was originally scheduled to cease at the end of 2009. In October 2009, however, we suffered a loss of a life on its production face when a powered roof support descended without instruction. Initial investigations were unable to identify the cause, and the Health and Safety Executive issued a prohibition notice that prevented us from continuing to operate the face until we had replaced certain components of the roof supports that might have contributed to the accident. When the old panel restarted in November, it did not return to its previous output levels, in part because of larger and longer than expected faulting in the seam.

We have now, however, completed the ramp up of the new face in the new Beeston seam, and the old face is now in its salvage phase. The new face is therefore able to run at full output levels, and production is now some 40,000 tonnes a week, in line with expectations and significantly above Kellingley's performance over the past two years.

Thoresby

Thoresby has also now started producing from the first of its new Deep Soft faces, only slightly behind the original March schedule, and is currently in the last week of its ramp-up period. Before this, Thoresby had been operating in very difficult conditions, producing from 57's panel in the old Parkgate seam, nearly 13km from the pit bottom. Aware of the risk of interference from previous mine workings, from which we had suffered in 2008, we "rehanded" this panel, moving the large equipment from the gate most likely to suffer the impact of the former workings to the other gate. This was complex and time consuming. As we mined the panel back, we encountered a significantly larger than expected increase in the thickness of the dirt band which was present. This had a very significant impact on the saleable output from the old panel. It reduced the amount of coal extracted in a single cut as well as the speed of the cut, because of the greater density and weight of dirt than coal. Furthermore the dust generated by the dirt, given the inability to increase airflows to such a remote part of the mine, reduced the working time on the old face, to which the underground travelling time was already approaching 2 hours each way.

In contrast, the new Deep Soft panel now being mined at Thoresby is only around 3km from the pit bottom, dramatically reducing travelling times each way and significantly improving working temperatures. It also has only two coal conveyors to the pit bottom in contrast to the 57's nine coal conveyors. This is a marked change in environment and we look forward to seeing output rates from Thoresby going forwards return to at least historically achieved levels.

Welbeck

Welbeck is mining its final panel before closure during May 2010. The first half of the year involved this final panel being developed, but once this was completed, operating costs have reduced as development costs were no longer being incurred. As a result of this, production of 1.0 million tonnes has been achieved during 2009 compared to 0.9 million tonnes in the prior year with lower operating costs.

Surface Mining

Surface mining production in 2009 was 1.3 million tonnes, compared to 1.7 million tonnes in 2008, in particular because we deferred opening the consented mine at Park Wall North, Durham, reflecting levels of coal demand. Extraction costs, before depreciation, also rose sharply during the year to £1.75/GJ from £1.61/GJ in 2008, particularly because of the ratio of muck shifting to coal production in the first half. Overall surface mining made an operating profit of £1.9 million, compared to £10.4 million in 2008.

Planning applications and consents have continued to programme, and we look forward to the opening of 3 surface mines, Huntington Lane, Telford and Potland Burn, Northumberland, along with Park Wall North, Durham in 2010.

We have reviewed our Blair House, Fife site and, given its location and the nature of the coals in the site, coupled with our future plans and equipment availability, we are in the process of exploring the possible sale of this site.

Sales and Market

The international market price of coal was again very volatile last year. As the UK came out of the winter at the start of 2009, the impact of the recession showed in a 6.8 percent fall in electricity demand and a very significant fall in the price of gas, which encouraged generators to switch towards burning gas. Coal demand and the price for coal fell, albeit not to the historically low levels of our legacy contracts.

Our average selling price in 2009, therefore, while within the range we had guided to, was slightly lower than achieved in 2008 at £1.87/GJ, compared with £1.92/GJ.

The market price for coal has now risen from the lows it hit last year, and the forward price continues to reflect the long-term trend in increasing energy prices. Prices for delivery of coal in the rest of 2010 average around $80 per tonne, rising to $92 per tonne in 2011 and $104 per tonne in 2012, compared to an average of $70 in 2009. In the UK market, we continue to see the further benefit from the sterling dollar exchange rate.

Production sold from all mines in 2009 was 6.9 million tonnes compared to 7.9 million tonnes in 2008. We had hoped to reduce our stocks over the year. However this was not achieved, notably because, at the end of its panel, Daw Mill encountered coal with a higher level of ash than is usual for this mine, whose coal preparation plant was not set up to deal with the particular impurities. These stocks are now being cleared, either through separation, washing at other mines or through blending away with production from the new panel.

With the re-phasing of some deliveries that we missed in late 2009 and at the start of 2010, we have a slightly larger volume of older contracts than was originally expected. At the end of 2009, an amount of 6.8 million tonnes, at an average sales price of circa £1.63 per gigajoule was left to be delivered, of which 4.2 million tonnes is due for delivery in 2010. We nevertheless have now started benefiting, at first in a small way, from the significantly improved sale price terms of some of the new contracts that we announced in April 2009, and we see a significantly increasing benefit into 2011.

Overall

Overall, our mining businesses produced an operating loss before non-trading exceptional items of £68.6 million (2008: £2.4 million) with an operating loss in the deep mines business of £70.5 million (2008: £12.8 million) and an operating profit in surface mines of £1.9 million (2008: £10.4 million). For the first quarter of this year, our deep mine production has been 0.8 million tonnes compared to 1.4 million tonnes in the first quarter of 2009. Surface mine production was 0.2 million tonnes compared to 0.3 million tonnes in the first quarter of 2009.

	Production		Operating cost*		Production
	2009	2008	2009	2008	Q1 2010	Q1 2009
	m tonnes	m tonnes	(£m)	(£m)	m tonnes	m tonnes

Deep mines
Daw Mill	2.9	3.2	110.8	96.9	0.2	0.7
Kellingley	1.0	1.2	74.9	72.4	0.3	0.3
Thoresby	0.8	0.9	59.5	63.1	0.2	0.2
Welbeck	1.0	0.9	52.1	57.7	0.1	0.2
Total deep mines production/costs before stock movements	5.7	6.2	297.3	290.1	0.8	1.4
Stock movements	-	-	(6.3)	(3.0)	-	-
Total deep mines	5.7	6.2	291.0	287.1	0.8	1.4
Surface mines	1.3	1.7	55.8	63.1	0.2	0.3
Total mines	7.0	7.9	346.8	350.2	1.0	1.7

* before non trading exceptional items and depreciation

HARWORTH ESTATES

Harworth Estates has continued to make strong progress on its strategy of maturing planning consents for our 85 development sites. In 2009, we secured further planning approvals for around 330 homes, a golf course and hotel, and 4,600 sq m (50,000 sq ft) of business space. New planning applications were additionally made for around 2,000 homes and 114,000 sq m (1,230,000 sq ft) of business space.

Since the year end, we have received planning committee approval, subject to signing a Section 106 Planning Agreement and to not being called in by the Secretary of State, for our two applications at Waverley (off J33 M1, Rotherham). These are a new community of 3,890 homes including 15,000 sq m (165,000 sq ft) of associated leisure/retail/community, and a change of use on the Highfield Commercial area to allow a Government campus development of 60,000 sq m (645,000 sq ft) plus hotel and ancillary retail/leisure of 4,500 sq m (48,000 sq ft).

Property market values have clearly been affected by the financial crisis and recession. The strength of our planning progress has done much to offset this impact, and agricultural land values have continued to be strong. In the second half of the year, therefore, the RICS valuation of our portfolio increased by £11.6 million. For the year as a whole, however, as expected, the valuation fell and there was a £25.7 million reduction in valuation to £393.8 million at December 2009. This compared to £23,000 of unrealised gains and £3.7 million of realised gains in 2008 and more than accounted for Harworth Estates 2009 operating loss of £24.5 million, compared to an operating profit of £4.7 million in 2008.

Through Project Worth, our property portfolio has, the potential to contribute very substantial shareholder value. In line with last year, we have estimated the future worth of our properties using a number of cases - the central case, being an estimated worth of our property in 2012 at £615 million and in 2014 at £820 million (2008: £668 million and £886 million in 2012 and 2014 respectively).

Of our circa 43,500 acres of land, circa 28,000 acres is agricultural, much with little prospect of development potential even over the long term. While there are longer term coal resources under parts of this land, we do not believe the cost of holding those sites is warranted where the potential for coal extraction over the long term is more marginal. We, therefore now intend to realise some of this value by disposals of some of our surplus agricultural land, in doing so helping reduce our overall levels of debt.

We are also coming closer to the time when market conditions may become progressively more favourable for bringing larger portions of our brownfield estate into the development phase, and we are exploring a number of joint venture opportunities to optimise shareholder value whilst managing development risk and capital requirements.

GOING CONCERN

Your Board has always recognised that deep mining has a high operating risk compared to the majority of industries, and this has clearly been evident in the difficulties that our mines have experienced in recent times. We now have a consequentially higher level of bank borrowings and have needed to take into account the levels of working capital we require to finance our future operations. We have therefore held discussions with our financial providers and have increased our loan facilities by up to a further £30 million and extended the term of these facilities. The operating risks are set out in the Operating and Financial Review and we would also draw your attention to those matters which the Board has felt it appropriate to take into account in forming its conclusion on going concern, set out in the Directors' Report and in the Financial Statements.

CORPORATE ACTIVITY

On 9 March 2010, following press speculation, we announced that we had received a very preliminary approach regarding a potential merger transaction. The matter remains at a very early stage and we would continue to stress that there is no certainty that a transaction will result.

OUTLOOK

The start of 2010 has been difficult for the reasons given and has had a direct impact on first quarter revenues and levels of debt.

We have, however, now completed the developments of the new seams at Kellingley and Thoresby, and the output rates from these faces are indicating that they should achieve their expected production levels. We have also commenced the ramp-up of the new face at Daw Mill, and we believe this mine too should return to its high historic production levels. We expect to see all the ongoing deep mines increasing their production levels over the next month to full production, with an expectation of achieving production in 2010 of around 6 million tonnes from deep mines and a further 1.6 million tonnes from surface mines.

Our property business is performing in line with expectations and continues to hold the ability to deliver considerable shareholder value. The planned disposals of agricultural acreage are expected to help reduce the Group's indebtedness, while we also pursue our brownfield planning and joint venturing strategy.

It is the combination of a modern, efficient mining business with the ability to access the terms of our improved supply contracts and generate substantial profits and cash flows, together with the potential of our property portfolio, which we presented to our shareholders last Autumn. The difficulties in completing the transition of our deep mining business are clearly extremely unwelcome and there remain considerable challenges ahead, but we are determined to repay the trust placed in us by our shareholders.

DAVID JONES

CHAIRMAN 26 APRIL 2010

OPERATING AND FINANCIAL REVIEW (OFR)

BUSINESS OVERVIEW

UK Coal is the largest producer of coal in the UK, and a significant supplier of energy to the UK's electricity industry. In 2009 we mined 7.0 million tonnes and sold 6.9 million tonnes of coal, which represented approximately 15% of the total amount of coal burned in the UK. Predominantly our customers are in the electricity supply industry ("ESI") and our production therefore represented around 5% of the total energy used to supply the UK with electricity.

At the 2009 year end, the Group had four operational deep mines and four surface mines.

As a result of our heritage, we have a very large estate of around 43,500 acres (17,600 hectares) of land. This estate includes agricultural land which was originally acquired for its underlying coal reserves, and the sites of former mines and associated workings. The estate is largely focused on the UK coal fields along the A1/M1 corridor through Nottinghamshire and Yorkshire, and in Northumberland, although it also includes some very significant sites elsewhere.

Given their location and former use, these sites are often very well connected to road, rail and electricity networks, and represent an excellent opportunity for development of both residential and employment buildings, helping to meet the long-term needs of the UK.

As a result of our business and strategy, we make a significant contribution to the UK's energy needs, to the local communities where our operations are based and to social and economic regeneration programmes.

STRATEGY

The Group's purpose is to create shareholder value by accessing and mining reserves of coal where there is a clear prospect of creating substantial value over time and by realising the considerable value of our land portfolio through identifying optimum development opportunities, securing planning permissions, developing the sites and actively managing our estate.

The Group aims to be recognised as a safe and secure provider of energy and a leader in community regeneration partnerships in the UK.

OBJECTIVES

MINING

Deep mining

· To continually improve safety in our operations

· To reduce risk and variability in operational performance

· To optimise operating cost per tonne of output

· To achieve over time an optimum balance between long-term sales contracts and an ability to access short-term market prices for our coal

Surface mining

· To continually improve safety in our operations

· To increase surface mine production and to maintain a sustainable level of production over the longer term through planning applications and consents

· To maximise productivity and operating performance on our sites

· To maintain the high environmental standards of our mining schemes and maintain close working relationships with local communities

HARWORTH ESTATES

· To contribute to a programme of debt reduction by identifying and disposing of non-core land

· To identify a long-term supply of development sites and to promote these sites through the planning process

· To participate in the development of these sites partly through a programme of joint venture arrangements where this will optimise shareholder returns

· To manage actively and develop rental investment properties and maximise returns from these through asset enhancement, rental growth and/or disposal as appropriate.

REVIEW OF OPERATIONS BY BUSINESS

MINING

2009 has been a very difficult year for our mining business, with a variety of geological and operational issues being encountered at all four deep mines and at some surface mines, combined with a lull in market demand for coal, the result of which caused us to reconsider the timing of the start up of our Park Wall North, Durham surface mine which, as announced in July 2009, has been deferred into 2010.

The impact of these issues has been that revenue from the mining business for 2009 was £310.2 million (2008: £385.6 million) and operating loss before non-trading exceptional items was £68.6 million (2008: £2.4 million). The revenue is derived from deep mines sales of £250.2 million (2008: £309.1 million) and surface mines sales of £60.0 million (2008: £76.5 million). The operating loss before non-trading exceptional items is split as a deep mines loss of £70.5 million (2008: £12.8 million) and surface mines profit of £1.9 million (2008: £10.4 million). The gradual reduction in the relative amount of older legacy coal contracts, and some newer contracts have helped maintain the average realised sales price in a difficult coal market. Average realised sales per gigajoule was £1.87/GJ, which, although lower than the average of £1.92/GJ achieved in 2008 is still at an historically good level.

We have continued to invest heavily in our deep mines during the year in line with our strategy to increase the productivity and reduce the uncertainty of output from that business. We have accessed coal from the new seams at Kellingley and Thoresby, with the ramp up on Kellingley's new panel (501s) starting in March 2010 and on Thoresby's new panel (DS1) starting at the beginning of April 2010. Daw Mill's new face has now also started its ramp-up after an extraordinarily difficult and delayed installation.

Key Performance Indicators ( "KPIs" )

	2009	2008
Sales price per Gigajoule (£/GJ)	1.87	1.92
Tonnage sold (million tonnes)	6.9	7.9
Tonnage produced (million tonnes)	7.0	7.9

Market overview

The UK burned an estimated total of 43 million tonnes of steam coal in 2009, the vast majority of this being used to generate electricity. Overall consumption fell in the UK by 17% in 2009 compared to 2008, with demand in the electricity market adversely affected by a combination of the economic downturn, improved performance at nuclear stations and low gas prices which encouraged a switch to the burning of gas to generate electricity over the summer.

This downturn presented a lull in short term demand for our coal at certain points in the year, but this was mitigated by our mixture of sales contracts. The longer term demand for our product remains unaffected as the electricity generation market is heavily dominated by imports, and indigenous production, including our own 7.0 million tonnes last year, can only meet a portion of this demand, making the UK a substantial importer of coal. Demand will continue substantially to exceed our supply capacity throughout this decade.

Given the nature of the UK electricity supply industry, our predominant market, we continue to have a small number of significant customers. However, the recent retro-fitting of flue gas desulphurisation ("FGD") equipment onto more power stations to meet the requirements of the European Large Combustion Plant Directive ("LCPD") has expanded the number of sites able to burn coal mined in the UK, which typically has higher sulphur content than other coalfields generally around the world. This has allowed us to supply coal to Ferrybridge power station in 2009 for the first time since 2002.

The replacement legislation to the LCPD, the Industrial Emissions Directive ("IED") has been finalised in Council, but has still to receive its second reading in the European Parliament. The IED as it stands will allow UK generators flexibility to meet tightening sulphur dioxide and nitrogen oxide emission targets after 2015.

In 2009 the UK Government published its 'Framework for Clean Coal' which sets out how coal will play its part going forward in a low carbon economy. It concluded that new coal power stations are important in maintaining diversity and in the security of energy supplies and that the UK Government remains keen to keep coal in the energy mix as the UK becomes more dependent on gas imports.

Carbon capture and storage ("CCS") is key to the future of coal. CCS involves capturing the CO_² emitted from burning fossil fuels, transporting it and storing it safely in geological formations. CCS has the potential to reduce CO_² emissions from fossil fuel power stations by as much as 90%. The Government has announced that all new coal stations must demonstrate CCS on a portion of its capacity from the start of operations with the requirement to fit CCS to the remaining capacity by 2025. To assist this development, the Secretary of State at the Department of Energy and Climate Change ("DECC") confirmed in January 2010 that the Government would be willing to give financial support for four commercial demonstration schemes to kick start this development.

NW Europe Steam Coal Price

International coal prices for near term deliveries started 2009 at $81 per tonne, fell back to $61 per tonne in the spring before recovering to finish the year back at $80 per tonne. The main driver in the international market has been the return of demand in the Far East, especially in China where imports grew by 43 million tonnes, an increase of over 300%. This demand has kept coal prices relatively firm at a time of economic downturn and has seen a change of supply patterns with coal from as far away as Colombia moving into the Asian market. The strength of the US dollar against sterling has helped to mitigate the impact of these changes, themselves in part driven by the performance of the US dollar against producer nation currencies. In sterling terms, the price per tonne showed less volatility, starting 2009 at £54 per tonne (£2.15 per gigajoule), falling to £41 per tonne in the spring and recovering at the year end to £49 per tonne. At 16 April 2010 the average forward market price for coal for deliveries in the remainder of 2010 was $80 or £52 per tonne.

The short period of lower international prices experienced earlier in 2009 did encourage many buyers and coal traders to take advantage of the saving against higher future prices and to buy coal for burn at a later date. This resulted in coal stocks in the UK hitting a peak of just under 25 million tonnes in September. The flattening of the coal price forward curve towards the end of the year has curbed this type of transaction.

The longer term outlook for coal was less driven by these short term considerations, and the forward curve remains strongly supportive of a long term positive outlook for coal producers.

Historic steam coal prices together with the latest forward market prices for coal delivered to Amsterdam/Rotterdam/Antwerp ("ARA") are shown below. Large mining companies worldwide have been seen to be tailoring their short-term production to a period of reduced demand until global commodity consumption and economic growth is re-established. UK COAL also responded by taking the decision to defer the start up of one of its surface mines into the middle of 2010.

NW Europe Spot Steam Coal Price in $ per tonne

[Graph omitted due to constraints of reporting service]

NW Europe Spot Steam Coal Price expressed in £/GJ

[Graph omitted due to constraints of reporting service]

UK steam coal market

Coal delivered into the UK is priced off the ARA price shown above, converted into sterling, with the additional cost of delivery into the UK market then added. The average forward price for 2010 on the ARA market at 31 December 2009 was $87 per tonne. Converted into sterling at the then exchange rate of $1.61:£1 and into its calorific value by dividing the tonnes by 25.121, this equated to a forward sterling price of £2.15/GJ. The additional cost of delivery to the UK, brought this to a UK delivered price of over £2.40/GJ at that time.

The table below shows the UK steam coal market together with UK COAL's share. The table also highlights the market share of Russian imports into the UK over recent years.

UK Electricity Supply Industry ("ESI")

[Graph omitted due to constraints of reporting service]

As the table below shows, coal is the second most used fuel source after gas in UK electricity generation and is significantly larger than the other fuel sources.

Percent of electricity generated by fuel type	2009	2008	2007	2006
	%	%	%	%

Coal	28	32	35	38
Gas	45	48	43	37
Nuclear	18	13	15	18
Oil, hydro & renewables	9	7	7	7
Total	100	100	100	100

Source: DECC Energy Statistics (2009 figures based on provisional numbers)

Coal Contracts

The amended customer contracts announced in our 2008 Annual Report are in line with the Group's continued strategy to achieve a diverse mix of long term contracts with customers, with shorter term contracts or spot sales, allowing a balance between security of supply contracts with the ability to take advantage of international coal prices where beneficial.

Around 95% of the coal sold is delivered to Electricity Generator customers with the balance delivered to Coal4Energy and industrial markets.

The contractual commitments at the end of December 2009 stood at 28.4 million tonnes compared to 36.1 million tonnes at December 2008. The re-negotiation of certain contracts at the end of 2008 and signed at the start of 2009 resulted in increased cashflows into the business in 2009 and 2010. These benefits are treated as generator loans and prepayments which, together with implied interest, are to be repaid either out of later revenue or as separate repayments. A summary of our outstanding contractual commitments is given below.

In addition to the contractual commitments referred to above, options to purchase coal have also been granted to customers at fully floating prices in respect of the tonnes outlined in the table below.

The average realised sales price will be influenced over the following years by both the market price of coal and the proportion of older contracts still to be delivered. At December 2009, an amount of 6.8 million tonnes, at average sales price of circa £1.63/GJ was left to be delivered of which 4.2 million tonnes was to be delivered in 2010, 2.4 million tonnes in 2011 and the remaining 0.2 million tonnes in 2012.

Total commitments split into year of delivery

	TOTAL	2010	2011	2012	2013	2014	2015
	million tonnes	million tonnes	million tonnes	million tonnes	million tonnes	million tonnes	million tonnes
Fully floating***	4.1	1.3	1.4	1.3	0.1	-	-
Floating within caps and floors*	8.2	1.3	2.6	3.1	0.4	0.5	0.3
Fixed, subject to indexation**	5.5	3.6	1.7	0.2	-	-	-
Fixed, not subject to indexation	10.6	1.1	2.1	1.9	1.9	1.8	1.8
Total	28.4	7.3	7.8	6.5	2.4	2.3	2.1

Options to purchase coal granted at fully floating prices	3.0	-	0.5	0.5	1.0	1.0	-

* Caps and floor prices are subject to indexation**

** Indexation will be generally based off RPI changes

*** Fully floating tonnage is priced based upon API 2, being the industry benchmark coal price for NW Europe, plus a delivery premium (Aire Valley Marker or "AVM")

As a guide to the possible outcome in respect of contractual commitments alone, we have set out below the possible average outturn in revenue, expressed in £ per Gigajoule (£/GJ). In all cases indexation on coal prices, where applicable, in line with Bank of England RPI targets of 2% has been assumed on an annual basis. The actual sales price outcome will be dependent on inflation, the actual outcome for API2, the volume of coal delivered in any year which is not currently contracted and a number of other factors. The table excludes the effect of uncontracted or fully floating optional coal and is not intended to be a forecast of the expected overall realised sales price.

Indicative outcome of contractual commitments given varying market pricing

API 2 Assumptions* £/GJ	2010 £/GJ	2011 £/GJ	2012 £/GJ	2013 £/GJ	2014 £/GJ	2015 £/GJ

£3.00	2.13	2.50	2.96	2.55	2.50	2.49
£2.75	2.08	2.40	2.77	2.54	2.50	2.49
£2.50	2.04	2.34	2.67	2.54	2.50	2.49
£2.25	1.97	2.24	2.51	2.49	2.46	2.46
£2.00	1.92	2.15	2.35	2.47	2.45	2.45
£1.75	1.87	2.09	2.27	2.46	2.45	2.45
£1.50	1.83	2.05	2.22	2.46	2.45	2.45
*Each subject to 2% annual increase in line with RPI assumption

Although the number of gigajoules per tonne delivered varies by customer and mine, as a guide, in 2009, the Group averaged 23.8 gigajoules per tonne.

Actual revenues invoiced will differ from the above by the impact of generator loans and prepayments and repayments. The impact of these and other changes in contractual terms will increase or reduce cash flows by the following amounts.

£ million	2009	2010	2011	2012	2013	2014	2015
Increase/(decrease) in cashflow	69	27	(32)	(50)	(18)	(18)	(4)

DEEP MINES

Our deep mines business consists of the operational mines at Daw Mill (Warwickshire), Kellingley (Yorkshire) and Thoresby and Welbeck (Nottinghamshire). The mine at Welbeck has commenced mining its final panel and will be closed during 2010 once this is complete. The key performance indicators for this business are:-

Key Performance Indicators ( "KPIs" )


	2009	2008

Coal mined (million tonnes)	5.7	6.2
Revenue (£m)	250.2	309.1
Operating cost* (£m)	291.0	287.1
Operating cost per gigajoule* (£/GJ)	2.21	1.88
Loss before non-trading exceptional items (£m)	70.5	12.8
Face gap times (weeks)	6	33
Development driveage metres, excluding Welbeck	18,540	13,435
Reserves and resources (ongoing mines - million tonnes)	98	105

^* Operating cost before non-trading exceptional items and depreciation costs. Deep mine costs and revenues include those of the power operation. 2008 figures have been restated in the above table to incorporate these, with revenue of £4.6m and operating costs of £2.3m

Deep mining has a cost base largely fixed relative to production levels, and therefore the KPIs for the business focus on the output tonnage achieved from this cost base and the time spent in face gaps, when production is shifted between old and new coal panels. Other indicators which highlight the likelihood of future production being achieved are also monitored, in particular, the development metreage achieved, being the investment in future coal panels. As in other businesses, the realised sales price and the absolute costs of operating the business are also monitored.

Colliery Performance Summary:

	Production		Operating cost*		Production
	2009	2008	2009	2008	Q1 2010	Q1 2009
	m tonnes	m tonnes	(£m)	(£m)	m tonnes	m tonnes

Deep mines
Daw Mill	2.9	3.2	110.8	96.9	0.2	0.7
Kellingley	1.0	1.2	74.9	72.4	0.3	0.3
Thoresby	0.8	0.9	59.5	63.1	0.2	0.2
Welbeck	1.0	0.9	52.1	57.7	0.1	0.2
Total deep mines production/costs before stock movements	5.7	6.2	297.3	290.1	0.8	1.4
Stock movements	-	-	(6.3)	(3.0)	-	-
Total deep mines	5.7	6.2	291.0	287.1	0.8	1.4

^*Operating cost before non-trading exceptional items and depreciation, with central costs absorbed. Deep mine costs include the costs of the power operation, formerly reported separately. The 2008 costs here have been restated to incorporate these costs, which totalled £2.3m for that period

With the exception of Welbeck, which has developed its last panel during the year, we have invested more in 2009 in development at all deep mines than in 2008 as shown below. This has the impact of increasing spend in the short term, but will enable a smoother flow of future coal production, helping minimise face gaps and improving future production volumes.

Overall operating costs in the business have increased, in particular at Daw Mill, where development of future faces in the year has been significantly higher than in the previous year, with driveage of 4,191m in the year against 1,972m in the prior year. The costs of developing the first faces of the new seams at Kellingley (Beeston) and Thoresby (Deep Soft) are capitalised in line with our accounting policies.

	Development driveage
	2009	2008
	(metres)	(metres)

Deep mines
Daw Mill	4,191	1,972
Kellingley	6,498	5,646
Thoresby	7,851	5,817
Total excluding Welbeck	18,540	13,435
Welbeck	1,242	3,714

The primary objectives for the collieries continue to be to operate safely and to increase the reliability of production. This is being tackled with a set of initiatives:-

Improved safety performance: this remains our primary concern and underpins all of our working practices.

Improved operating hours: increased operating hours leverage off the largely fixed costs of operating a deep mine.

Increased operational reliability: whilst operational reliability will always continue to be a focus in a hostile operating environment with a multitude of single points of failure, planned preventative maintenance and replacement of older components reduces downtime.

Increased development work: as each of our mines usually operates a single face, it is important to ensure that the replacement face is available in time to start when the old face is finishing. As shown from the table of development driveage above, we have continued to invest in increased development labour hours and new development equipment to build a "bank" of development work to mitigate any development delays should these occur.

Increased panel sizes: longer facelines in particular improve operational performance, increasing the ratio of face cutting time to the turnaround times at either end. They also reduce the ratio of development work required to achieve the same output, helping the drive to build our development "bank". To this end the new panel (32's) for Daw Mill will, at 357 metres, be 62 metres longer than the last.

Daw Mill

Daw Mill started the year where the record breaking 2008 left off. It was mining through its 302's panel and was producing slightly ahead of expectations in a strong performance in the first half of 2009. This performance was aided by the improved reliability from the completion of the belt replacement programme which we commenced at the back end of 2008 in line with the initiatives outlined above.

However, production performance in the final quarter of 2009 was affected by a decrease in the reliability of the face equipment, which had been in continuous operation since January 2008. In addition, the panel retreated into an area where the seam started to thin and we had to mine a larger amount of ash than is usual for Daw Mill. Daw Mill's coal preparation plant is not designed to handle the nature and amount of ash contained in this output. Sales revenue consequently saw a fall at the tail end of 2009. The product, which was not immediately saleable in isolation, was put to stock and while some has been washed and blended with production at other mines, the remainder will be blended with Daw Mill production from the new face. Despite all these issues, Daw Mill still produced 2.9 million tonnes of coal during the year (2008: 3.2 million tonnes).

Development has been a priority at Daw Mill during 2009 to get ahead of the development required in order to maximise reserves and to minimise future face gaps. Work has been undertaken in developing the next two faces, 32s (now just started) and 303s (starting in mid 2011), during the year.

Despite this effort, the installation of 32s encountered very significant unforeseen delays following a break in the rock strata on the face line, coupled with substantial floor lift of over 2 metres. This movement resulted in the installation of 1,200 additional cable bolts, each of between 8 and 10 metres in length, over 500 timber supports and the excavation of over 15,000 tonnes of floor material.

Mitigating actions were taken, including the extraction of additional coal off the existing 302s panel at the start of 2010, but this face gap has had a large impact on working capital, not only as a result of the production gap, but also due to the additional hours and overtime required to deal safely with the issues. The face, which was initially expected to commence in January 2010 commenced in April 2010. Production on this face will now last until the middle of 2011. The 303s panel, which is already being developed, is scheduled to be ready to commence production in mid 2011.

Kellingley

Kellingley has worked its way through the last of the Silkstone coal during 2009, which as previously reported, has continued to be particularly problematic in both physical and environmental terms. The last face in this seam is just finishing and the first face of the new, more favourable, Beeston seam panels commenced in the first week of March 2010.

We were deeply saddened to report the loss of life of a colleague at Kellingley in October. Both the company and HSE conducted detailed investigations into the accident, and additional precautionary work was completed on the face equipment, after which recovery to a normalised level of production was slower than expected. This return to normalised production increased costs due to the effort required in that recovery.

Total production at Kellingley in 2009 was 1.0 million tonnes compared with 1.2 million tonnes in the previous year.

As noted above, the first face in the new Beeston seam, 501s, has now commenced and is now ramped up. As well as the development of this panel, significant development work has been undertaken during 2009 on the next face, 502s, and is progressing well with 2,900 metres of gate driven out of a total of 4,000 metres of gate and faceline, and is currently expected to be available for production in early 2011 when the 501s panel finishes.

Thoresby

As with Kellingley, Thoresby has been working the last of its existing seam, the Parkgate seam, prior to starting in a new seam, the Deep Soft, at the start of 2010. It too, like Kellingley, has continued to suffer from poor geology in the last panel in its old seam. Mitigating actions were undertaken before commencing the final face, 57s, in the first half of 2009, including changing the layout of the gates and replanning the mining work.

Regrettably in July, a colleague lost his life at Thoresby when a stack of pipes being unloaded underground slipped from the transport vehicle.

Production for the year was 0.8 million tonnes, compared to 0.9 million tonnes in 2008. As expected, we have been mining through a split seam for much of the second half of 2009, but the split has been far greater than anticipated and progress through this band has been slower than expected. One of the main problems encountered has been the dust produced at the face as a result of the split seam, and we had to reduce the daily man-hours worked on the face as a result, meaning that production could not be accelerated by increased effort.

Development work for the Deep Soft seam is now complete and production commenced in April 2010 following record-breaking development driveage in 2009. Driveage of 7,851m in the year, largely on the new Deep Soft faces DS1 and DS2, has been achieved in the year, compared to 5,817m in the prior year. This leaves the mine in good stead for the future in line with our strategy of improving the development banks at all our mines. Development on DS2 is on track to be available for production to commence in mid 2011.

Welbeck

As a result of the impending closure of the mine, a provision has been made in the 2009 financial statements for the closure costs. We are planning to retain as many of the experienced and motivated Welbeck workforce as possible, and a plan for their redeployment, either permanently or temporarily, at other mines to displace work carried out by contractors has been devised.

As a consequence of the closure, we have made an exceptional provision of £12.7 million of which redundancies account for £8.5 million with the balance relating to the write off of spares and other assets no longer required by the Group. These costs have been offset by a gain of £4.0 million on curtailment of pension benefits accruing to those individuals who cease to be active members as a result of the redundancies.

Electricity Generation from Methane

Methane is extracted from operating mines from a safety standpoint, and its use as a fuel source both contributes to our operations providing an economic fuel source and reduces the impact on the environment of venting methane, a greenhouse gas with approximately 21 times the environmental impact of CO₂.

During 2009, 147,260MWh of electricity was generated from 28MW installed capacity from methane extracted at both our operating and former mine workings. This is down 13% compared to the 165,834MWh generated in 2008 largely due to the lower activity at our operating mines, but still allowed us to effectively self supply over 50% of our deep mine electricity requirements.

Harworth

We continued into 2009 to explore the viability and funding of reopening our Harworth colliery at some time in the future. We estimate that Harworth has 54 million tonnes of resources and mineral potential. Exceptional costs of £3.5 million have been incurred during the year in the care and maintenance of the mine, together with the geological and seismic work carried out at the start of the year to assess the viability of reopening it.

In the light of the difficulties encountered in the other deep mines during the year, there are no current plans to reopen Harworth. However, we will continue to maintain the asset, albeit at a reduced level of cost.

PRODUCTIVITY AND FACE GAPS

There were 5 face changes in the year, incurring face gaps of 6 weeks (2008: 33 weeks). Face gaps consist of 2 weeks lost in the Thoresby face change and 4 weeks at Welbeck.

The Group invested significantly in improving its production development bank during 2009 in order to minimise future face gaps, with driveage in the year of 19,782m (2008: 17,149m). Excluding Welbeck, which ceased development activities in 2009 in advance of its closure in 2010, the three ongoing deep mines increased development metreage by 38% to 18,540m (2008: 13,435m) with increases in development work at all three mines.

Reserves and Resources

The reserves and resources available in the deep mine operations are critical to the long term prospects of the Group.

We estimate that we have approximately 98 million tonnes of reserves and resources at our ongoing mines of which 39 million tonnes of coal is accessible under the existing five year mining and investment plans. The additional resources will become accessible beyond this timeframe with investment required as necessary.

The only significant movements in our available reserves and resources during the year have been the output for the year at each mine. Our estimates as at December 2009 of our deep mine coal reserves are set out in the following table:

Ongoing colliery	Reserves	Resources	Total reserves and resources	Mineral potential	Total
	Million tonnes	Million tonnes	Million tonnes	Million tonnes	Million tonnes
Daw Mill	19	2	21	41	62
Kellingley	11	46	57	5	62
Thoresby	9	11	20	5	25
Welbeck	-	-	-	-	-
TOTAL	39	59	98	51	149

2008	45	60	105	50	155

Reserve Reserves which are accessible using the broad infrastructure in place at the current time and which are in the current five year mining plan.

Resource Reserves, which may require substantial development and other costs to allow accessibility and are not currently in the five year mining plan.

Mineral Coal that has been assessed (although possibly not to the same

potential extent as Reserve andResource coal) but for which UK COAL does not have any licences or planning permission to extract the deposits.

These figures must be treated with caution, being based on the Group's best estimates at the current time. A number of factors may cause the actual production to vary significantly from these estimates. These factors include, but are not limited to:

· Ongoing seismic surveying of reserves - this could result in either an increase or a decrease to the production estimates

· Geological problems - despite the improved seismic surveying being carried out, there remains a risk that a coal panel is subject to unforeseen geological problems which introduce production difficulties

· Sales price of future coal and cost increases - these could render production plans uneconomic or could allow extraction from areas previously believed to be unviable.

· Production requirements - the need to maintain continuous production can lead to early commencement of a new face, with coal consequently being left unmined.

SURFACE MINES

Our surface mining business has also had a challenging year in 2009. Production for the year was 1.3 million tonnes compared to 1.7 million tonnes in the prior year. Most of the difficulty was encountered in the first half of the year, where we experienced the need for a greater proportionate amount of "muckshift" effort (the lift of non-coal material in order to expose coal for extraction) than in 2008.

Mining operations at Sharlston completed in the first half of 2009. This meant that for the second half of 2009, we only mined out of four operational sites rather than the five we operated throughout 2008.

The impact of the above was offset by improved production at Steadsburn and Cutacre where higher quality, thicker seams were exposed and mined as expected.

As announced in our Interim Report in August, we took the decision to defer the mining of our Park Wall North site in Durham until 2010. We have continued successfully to progress our planning applications for future sites. We therefore look forward to the opening in 2010 of Huntington Lane, Telford, and Potland Burn, Northumberland, in addition to Park Wall North.

We have reviewed our Blair House, Fife site and given its location and the nature of the coals in the site, coupled with our future plans and equipment availability, we are in the process of exploring the possible sale of this site.

Key Performance Indicators ( "KPIs" )

	2009	2008

Coal mined (million tonnes)	1.3	1.7
Revenue (£m)	60.0	76.5
Operating cost (£m)*	55.8	63.1
Operating cost per Gigajoule (£/GJ)*	1.75	1.61
Operating profit before non-trading exceptional items (£m)	1.9	10.4
Sites with consent (number)†	6	8
Reserves on sites with planning consent (million tonnes)	5.8	6.8

* excluding non-trading exceptional items and depreciation

† includes sites where planning committee approval has been obtained and formal consent is pending, but excludes Blair House

Surface mines operations have a more variable cost base than deep mines. Surface mine operating costs stated above are after charging amortisation of mine development and restoration assets. The site by site cost per GJ will vary according to the nature of each site. The costs of planning gains and the coal yield at each site, along with variations associated to operating cost, efficiencies and weather, make year to year direct comparisons difficult. However, we incurred higher costs in the first half of 2009 due to the significant amount of work involved in muckshift as noted above, particularly at Cutacre where there was a greater than expected extent of unrecorded former underground workings exposed as we mined the site. Extraction costs in the second half of the year were greatly improved once the higher quality and thicker seams were exposed at Cutacre and Steadsburn.

Planning and Reserves

We are continuing to see a change in the success rate for surface mining consents with the various Local Authorities. Recognition is being given not only to the need for an indigenous supply of coal for both national and local requirements but also to the fact that the schemes are meeting high environmental standards both in design and operation.

We have now been successful in all nine of our last planning applications. Excluding Blair House, which is mentioned above, we currently have planning consents in place for six sites equivalent to 5.8 million tonnes, and applications already submitted for a further three sites equivalent to 2.7 million tonnes. We expect during 2010 to submit planning applications for a further four sites equivalent to 9.0 million tonnes.

Again excluding Blair House, we estimate that we have surface mine reserves where the Group controls the majority of a site through ownership and working rights agreements totalling 17.4 million tonnes of which 8.5 million tonnes relate to sites that are currently operational or in the short-term plan with the remainder in the medium-term plan. Planning consent (or committee approval) has been received to date for 5.8 million tonnes of the 8.5 million tonnes.

In addition, using the same basis as above, resources of 37.5 million tonnes have been estimated at sites for which additional geological and planning work is required to confirm with a reasonable level of certainty the tonnage available to mine. In some cases third party landowner agreements may be required to access some of this coal.

In total therefore, we estimate that we have reserves and resources of over 50 million tonnes. As a very substantial proportion of this is subject to planning consent, we continue to exercise caution in estimating how much will ultimately be recoverable. In the medium term, we estimate that we should recover around 2 million tonnes per annum for 10+ years.

We also estimate that we have the potential to access a further 34.6 million tonnes. To be more certain about the ability of the Group to extract all this coal the Group, in most instances, will need to acquire further control over the sites and to undertake a significant amount of geological and planning work. The outcome of these actions could materially change the coal available for extraction.

A summary of estimated remaining reserves at December 2009 (excluding Blair House) through the various stages of planning is set out in the table below:

million tonnes	Sites with planning consent (or committee approval)	Applications submitted for planning, decision awaited	Applications to be submitted in the following 12 months*



Cutacre	0.4	-	-
Steadsburn	0.6	-	-
Lodge House	0.6	-	-
Park Wall North	1.3	-	-
Potland Burn	2.0	-	-
Huntington Lane	0.9	-	-
Bradley	-	0.5	-
Butterwell	-	1.0	-
Minorca	-	1.2	-
Lodge House extension	-	-	0.8
Hoodsclose	-	-	2.2
Shortwood Farm	-	-	1.2
Highthorn	-	-	4.8

Total reserves in process 2009	5.8	2.7	9.0

Total reserves in process 2008	6.8	1.4	3.3

*Including tonnage not yet under the Group's control of 5.6 million tonnes

HARWORTH ESTATES

Our property division, Harworth Estates produced a loss of £24.5 million (2008: £4.7 million profit), including a loss on investment properties of £25.7 million (2008: £3.7 million gain), of which £25.7 million was unrealised (2008: £23,000). A further revaluation gain of £52,000 was taken directly to reserves (2008: £3.2 million), being the gains recognised on former operating properties transferred to investment property status on their ceasing to be operational sites.

Key Performance Indicators ("KPI's")

	2009	2008
RICS valuations of the property portfolio (£m)	393.8	422.3
Number of sites in Project Worth	85	77
2012 estimate of Project Worth (£m)	615	668
2014 estimate of Project Worth (£m)	820	886

Harworth Estates, manages approximately 43,500 acres (17,600 hectares) of freehold land, predominately in England, on behalf of various Group companies. The majority of the portfolio is located on the A1/M1 corridor from Leicestershire to Northumberland. There are, in addition, a small number of sites in Scotland, North West England and North Wales.

Harworth Estates has four key objectives:

· To contribute to a programme of debt reduction by identifying and disposing of non-core land

· To identify a long-term supply of development sites and to promote these sites through the planning process

· To participate in the development of these sites partly through a programme of joint venture arrangements where this will optimise shareholder returns

· To manage actively and develop rental investment properties and maximise returns from these through asset enhancement, rental growth and/or disposal as appropriate.

During the course of 2009 Harworth Estates continued its full planning activities with a view to ensuring that it maintains a healthy pipeline of future sites which can be offered into the market for sale, or developed out either directly or through joint ventures, as market conditions improve. The major submission in the year was our Harworth colliery site where we submitted a planning application for a mixed use scheme of circa 1,000 homes and 80,000 sq m (860,000 sq ft) of commercial, retail and ancillary retail.

	Residential	Commercial
	Homes	sq m	sq ft
Applications in system at Dec-08	4,208	215,789	2,322,805

Submitted in year	1,981	114,267	1,230,000
Consented in year*	332	4,645	50,000

Application in system at Dec-09	5,857	325,411	3,502,805
% increase in year	39%	51%	51%

* In addition. an 18 hole golf course and hotel has received consent

Since the year end, we have received planning committee approval, subject to signing a Section 106 Planning Agreement and to not being called in by the Secretary of State, for our two applications at Waverley (off J33 M1, Rotherham) being a new community of 3,890 homes including 15,000 sq m (165,000 sq ft) of associated leisure/retail/community, and a change of use on the Highfield Commercial area to allow a Government campus development of 60,000 sq m (645,000 sq ft) plus hotel and ancillary retail/leisure of 4,500 sq m (48,000 sq ft).

Despite a difficult environment in the first half of the year which saw our portfolio value decrease by around 10%, the second half saw a levelling out and we are pleased to report that the portfolio increased by 3% in this period, a testament to the division's performance in adding value through planning, strong asset management and related activities as well as positive market improvements. Harworth Estates continues to make a very satisfactory contribution to realising the Group's potential land value. The benefits of holding a mixed commercial and agricultural portfolio were seen with solid demand for freehold agricultural land and agricultural land values remained firm throughout the year generating an 8% increase in like-for-like value.

We continue to progress Project Worth, which is our programme to add value to the portfolio over time. As such, estimates of value from Project Worth are not reflected in the accounts. Project Worth has been reviewed and updated with our advisers DTZ in light of both market conditions and progress on the individual projects concerned. While we have seen improved conditions in the property market over the last few months there does, as last year, continue to be a wide ranging market uncertainty on recovery timing, values and volumes. We have therefore produced a range of estimates and, as in previous years, presented a central estimate of Worth from within this range of alternative outcomes. In line with last year we are presenting Worth at both 2012 and 2014 as the general market assumption that crystallising the Worth of the Portfolio will, due to the unprecedented market conditions experienced over the past two years, have delayed value accretion and subsequent realisation. The table and graph below sets out the central growth scenario assumptions and ranges of Worth for both 2012 and 2014. As can be seen, this central scenario is for an estimate of Worth of £820 million by 2014.

	2012	2014
	£m	£m

Base Case (no growth)	580	699
Central Growth Scenario	615	820
Downside Scenario	578	767
Upside Scenario	642	870

Project Worth outcome ranges

[Graph omitted due to constraints of reporting service]

The scenarios are based on the following assumptions:

· That the next peak of the housing market cycle will occur at the end of 2020;

· The central scenario assumes that real House Price Inflation (HPI) over the period to end 2020 from the Q3 previous peak will be 2.0%, with growth back-ended in the decade;

· The downside scenario assumes that real HPI over the period to end 2020 from the Q3 previous peak will be 0.75%, with growth back-ended in the decade and a much more prolonged lag before sustained house price recovery sets in;

· The upside scenario assumes that real HPI over the period to end 2020 from the Q3 previous peak will be 2.7%, with earlier recovery of strong real HPI growth than the central scenario;

· All the scenarios assume that the recovery in prices over the last 8 months peters out this year, but with inflation two of the scenarios give modest nominal HPI growth.

· The Commercial market is assumed to track the HPI scenario by circa 80% (this assumption has been arrived at by comparing the IPD All Region Total Returns index for Offices against our HPI assessment over the period 2009-2014).

We would emphasise that the residential and housing scenarios are not forecasts and are a tool to assess sensitivity to market recovery rather than being an accurate guide to market recovery. Indices do not exist to reflect exactly the Project Worth portfolio or land values in general.

PROPERTY VALUATIONS

A full independent valuation of our property portfolio has been undertaken as at December 2009 in accordance with appraisal and valuation standards published by the Royal Institution of Chartered Surveyors.

As previously, different valuation firms are engaged dependent on type and geographical location of the property being valued. BNP Paribas Real Estate (previously known as Atisreal) value all the Group's commercial, residential and development sites. Smiths Gore value the majority of the agricultural portfolio while Bell Ingram value our agricultural properties in the north of England and Scotland. These are the same firms used to value the portfolio as at last year end.

The commercial and residential land contained within the BNP Paribas valuation has been valued in a market with very little comparable evidence available. In accordance with RICS 'Red Book' guidance therefore the valuers made the following statement this year which is consistent with a significant number of other declarations made on portfolios throughout the country:

'Our valuation has been arrived at primarily after consideration of market evidence for similar property, although in the case of those properties where we consider market value will be informed by their ultimate redevelopment potential we have also undertaken development appraisals to estimate the residual value of the landholding after due regard to the cost of, and revenue from the development of the property.

'In such instances, on account of the sensitivity of the market value, to the detail of any future planning consent, and the potential for material variance in the actuality of development costs, as compared with our own estimates, together with the subjective nature of hope value, we must state that the values we have reported (consistent with the guidance of the Red Book), are subject to material uncertainty.'

The Harworth Estates portfolio RICS valuation at the year end is summarised in the table below:

		Dec-09	Dec-08	%	Dec-08
		£m	like-for-like		£m
Agricultural
	Mixed	110,923	103,582	7%	108,744
	Low grade	5,848	5,035	16%	5,045
		116,771	108,617	8%	113,788
Undeveloped land
	With planning	56,820	67,764	-16%	68,820
	Application submitted	73,550	93,182	-21%	90,250
	Without planning	80,354	79,408	1%	77,475
		210,724	240,354	-12%	236,545
Commercial land with rental income
	Part or fully developed	28,750	32,333	-11%	32,600
	In development	21,750	22,182	-2%	21,725
		50,500	54,515	-7%	54,325

Investment Properties at valuation		377,995	403,486	-6%	404,658

Operational
	Potential development	7,536	9,000	-16%	8,792
	Agricultural	1,298	1,218	7%	1,218
	Other	7,000	7,437	-6%	7,600

Operational Properties at valuation		15,834	17,655	-10%	17,610

Total Properties at valuation		393,829	421,141	-6%	422,268

The like-for-like percentage change from December 2008 comparatives are after property reclassification and take into account adjustments for asset sales of £9.2 million and purchase, development expenditure and depreciation of £8.1 million.

Active surface mine sites are included in the value above based on their restored land value of £15.8 million (2008: £17.6 million). For so long as sites, otherwise being held for their long term investment potential, are being used by the Group for its mining and other activities, these properties are recorded at cost less impairment and changes in valuations are not reflected in the balance sheet. As at December 2009, a total of £5.1 million (2008: £6.8 million) has not been included in the balance sheet as a result. Operating deep mine sites are not included in the above valuation.

PRINCIPAL DEVELOPMENT ACTIVITIES DURING 2009

Waverley / Orgreave, Rotherham

This major regionally significant former operational site now consists of three principal development areas, each a major scheme in its own right.

Advanced Manufacturing Park (AMP)

The AMP consists of a part built out serviced employment campus having approximately 23 hectares (57 acres) of remaining developable land. Evolution Park, an 8,700 sq m (94,000 sq ft) hybrid industrial development undertaken in a joint venture with Strategic Sites Limited was completed on part of the AMP in October 2008. Dormer Tools have taken occupation of the largest unit 1,750 sq m (18,800 sq ft), in February 2009. Five further units totalling 1,410 sq m (15,200 sq ft) have been occupied, leaving eight units remaining.

Along with our principal partners on the scheme, Yorkshire Forward, we continue to market the remaining plots to a wide range of suitable occupiers in the high technology metals and civil nuclear industries.

Highfield Commercial Business Park

Proposed 60,000 sq m (645,000 sq ft) Government Office Campus plus hotel 4,000 sq m (43,000 sq ft) and ancillary retail and leisure 500 sq m (5,000 sq ft) being jointly promoted with Helical Governetz. Rotherham's Planning Board at its meeting on 25 January 2010 resolved to grant consent, subject to completion of a Section 106 Planning Agreement and the Secretary of State deciding not to intervene. The application has been forwarded to the Government Office for Yorkshire and the Humber who will make a recommendation to the Secretary of State. Upon confirmation and issue of the consent and the identification of pre-lets, work will commence on the design and construction of the necessary infrastructure.

Waverley New Community

Planning application submitted in August 2008 for 3,890 new homes and around 15,000 sq m (165,000 sq ft) of associated leisure and retail and community uses. Rotherham's Planning Board at its meeting on 25 January 2010 resolved to grant consent, subject to completion of a Section 106 Planning Agreement and the Secretary of State deciding not to intervene. The application has been forwarded to the Government Office for Yorkshire and the Humber who will make a recommendation to the Secretary of State. Market conditions are being monitored and in due course the project will commence in all likelihood through a series of joint venture structures.

Baileycross Mixed Use Scheme, Pontefract (formerly known as Prince of Wales)

Planning consent for 917 residential units and 24,250 sq m (261,000 sq ft) of office, retail and community use was received on 11 June 2009. The development is likely to be phased and joint ventured over the coming years with the commencement of infrastructure to open up the site is expected to commence in 2012.

G Park Distribution Development, Lounge, Ashby de la Zouch

The agreement with Gazeley over the 79,000 sq m (850,000 sq ft) development site has been extended as a result of the time being taken to secure a decision on the planning application which Gazeley made for the site in August 2007. Gazeley have continued to promote the site in the Local Development Framework process and to support the planning application. The site was shortlisted in 2009 for the Hitachi maintenance ECML depot, but ultimately not selected.

Gascoigne Wood, Selby, Yorkshire

Our agents DTZ continue to market the 66 hectare (165 acre) rail connected site and have secured significant long and short term interest in the site. Short term agreements with DB Schenker (formerly EWS) and British Gypsum, which make use of the rail sidings and 20,400 sq m (220,000 sq ft) of covered storage yard, are in place. Detailed discussions are underway with a number of parties who wish to have a long term interest in the site making use of the high quality East Coast Mainline rail access and substantial power connectivity.

Rossington, Doncaster

We have continued to position the site as a major housing led regeneration scheme which could accommodate up to 1,700 homes on the former pit yard area. This is being promoted through Doncaster's Local Development Framework. In parallel with this work, we have been supporting the Council who are preparing to submit a funding bid to the Department of Transport in Q2 2010 to secure funding for the proposed new road between J3 of the M18 and Robin Hood Doncaster Airport. The 6 million sq ft Inland Port which is being promoted on adjoining land (by another developer) has secured a resolution to grant planning consent, subject to completing a Section 106 Agreement and the Secretary of State has recently decided not to intervene leaving the Council to issue the consent over the coming weeks. When implemented, that scheme will provide the first leg of the proposed new road and provide an improved access into the housing site.

Harworth Colliery, Harworth, Doncaster, South Yorkshire

A planning application was submitted Q4 2009 on a surplus area of the former Harworth Mine site, covering a gross area of approximately 60 hectares (125 acres). The proposal seeks consent for circa 1000 homes, 3,250 sq m (35,000 sq ft) of retail and 76,650 sq m (825,000 sq ft) of employment space. Determination is anticipated Q3 2010.

Yorkshire Main, Edlington, Doncaster

Outline planning consent was granted for a mixed use regeneration scheme at the Yorkshire Main site during the year. The application comprises 250 residential units together with 13,900 sq m (150,000 sq ft) of employment space.

Residential Development Site, Coalville, Leicestershire

Good progress has been made in promoting approximately 100 acres of residential development land as part of an urban extension to Coalville on land adjacent to the Ellistown site. We have been working with the adjoining landowner and North West Leicestershire District Council to provide the necessary evidence to enable the site to be allocated within the Council's new development plan.

Bleak House, Cannock

This site, close to the Birmingham Northern Relief Road, was partly a former surface mine site and is being promoted in response to the Regional Spatial Strategy (which sets out the need for substantial housing growth in the area) as suitable for a major residential development. 24 hectares (60 acres) of the restored site together with 36 hectares (90 acres) of adjoining land under third party ownership could provide up to 2,000 homes together with significant local infrastructure improvements. A planning application for an initial phase of the development will be prepared for late 2010. Our adjoining land at Bleak House is the subject of a wind farm application now being promoted through our wind farm Collaboration Agreement with Peel Energy.

Rufford, Nottinghamshire

In January 2009, Nottinghamshire County Council resolved to grant planning consent for a new Energy Recovery Facility at the former Rufford Colliery site. The application was submitted by Veolia who will build, own and operate the facility on a site leased from the Company.

The application was 'called in' by the Secretary of State and a Public Inquiry began in October 2009. However, a number of ecological issues were raised at the Inquiry and it was adjourned until later in 2010. In parallel to the Veolia proposals, we have prepared a planning application for a 24 hectare (60 acres) business park on land adjacent to the Veolia proposal. This planning application will be submitted imminently.

BUSINESS PARKS

Interest in the well established business parks of Asfordby, Whitemoor and Riccall has remained strong throughout 2009 despite the prevailing economic climate with occupancy rates of 92%, 61% and 58% respectively being maintained. Bilsthorpe has also seen significant improvements with the completion of a 4 hectare (10 acres) ground lease to Nottinghamshire County Council for the creation of a highways depot and a 0.6 hectare (1.5 acres) ground lease to Alkane Energy for a mines gas electricity generation facility, while occupancy rates for the built accommodation at Bilsthorpe have now achieved in excess of 50% with continued interest in the remaining available units and plots. Active asset management has been the main priority in 2009 and we have seen success in both lease renewals, being achieved to ensure continued levels of income, and rent reviews where we have experienced good growth. We expect the business park market to remain very competitive through 2010 but are confident that our properties, and continued emphasis on actively managing these assets, will add further value through lease renewals, improvements in occupancy levels and rent reviews.

PROPERTY DISPOSALS

Disposals during the year secured receipts of £8.6 million from the sale of 1,587 acres (642 hectares) of agricultural land and associated properties. All agricultural land sold had either been mined and was therefore surplus to operational requirements and/or had no prospect of medium term development. Due to market conditions during the year no development land was sold. We do however, continue to market a small number of commercial and residential development sites.

During the year we transferred 5.2 hectares (13 acres) of development land at Bates Staithes, Northumberland into a 50/50 joint venture with the HJ Banks Group which generated proceeds of £0.8 million. HJ Banks contributed a similar area of adjacent land into the JV. This combined parcel will be developed primarily for residential use. Site remediation is currently ongoing with funding from the Homes and Communities Agency to enable this significant regeneration project to be brought forward.

DEVELOPMENT AND MARKET CONDITIONS

Property market conditions during the first three quarters of 2009 continued to worsen albeit at a slower pace during Q3. Q4 saw a more stable market environment return with residential development land values stabilising and yields on commercial built out properties, especially prime, recovering markedly. While the property marketplace is showing signs of further recovery we remain cautious about the short term and as such, like many other major land owners and developers, we are continuing to restrict expenditure on infrastructure and are not undertaking speculative construction. We have however maintained full scale planning application and associated activities and will continue to do so throughout 2010. We remain confident that in due course market conditions will improve further, and as such we intend to remain capable and flexible enough to respond rapidly to those improvements.

PROJECT WORTH

Notwithstanding the market interruptions referred to above, we believe that there remains a significant opportunity, over time, for shareholders to benefit from growth in the worth of our property portfolio as it matures through the planning process and markets recover. Our planning and estates teams remain focussed on maximising opportunities to contribute to an increase in worth of the portfolio over the coming years. We will continue to invest appropriately and to work with some of the UK's leading technical consultants to mature the Project Worth planning portfolio.

At an appropriate stage, on each site, the optimum way forward will be considered to take the site from planning to the physical development stage. In recent months the Board has decided on a course to optimise stakeholder value by limiting future cash requirements on these sites and taking the benefit of specialisms and balance sheet strength of potential joint venture partners to bring forward physical development in a way that will maximise the benefit derived from improving market conditions.

Whilst Project Worth estimates, as reported above, currently include our agricultural portfolio with an assumed value of £125 million in 2012 and £138 million in 2014, it will, over the balance of the year, be refined to concentrate solely on the currently 85 development sites along with others that are identified over the coming months and years. This time next year the Project Worth portfolio will be reported accordingly.

Wind Power Projects

We continue to progress a number of potential wind farm sites through our collaboration agreement with Peel Wind Power, signed in November 2008. The collaboration agreement allows us to utilise Peel's existing expertise to investigate the potential for promoting viable wind turbine locations within the UK Coal portfolio. A number of substantial wind resource sites have been identified through this agreement and it is intended that these are taken forward, under the terms of the collaboration agreement, to ensure that planning consents are secured and the additional land value created from these consents is fully realised.

WASTE-TO-ENERGY SCHEMES

There has been substantial effort over the past six months to identify potentially valuable waste-to-energy opportunities within the Group's Project Worth development sites. Waste-to-energy projects typically are either stand-alone and of a substantial size or of a smaller scale in support of significant mixed use residential and commercial schemes. The Board believes that it may be in the Company's interests to develop a high value waste-to-energy programme on a joint venture basis with an appropriate specialist developer. In this regard and building on the successful wind farm collaboration agreement, the Company has held detailed discussions with Peel Environmental, the specialist in this area within the Peel Holdings group of companies. These discussions may result in the Company bringing forward, at a future date, a proposal to establish a joint venture in this area with Peel Environmental on the basis that it could be a related party transaction under the FSA's listing rules requiring shareholder approval. Until this occurs, it is planned that the Company and Peel Environmental will continue to collaborate in good faith to, we believe, the benefit of all shareholders in scaling the opportunities that such a joint venture might bring beyond the relevant land values that are targeted in Project Worth.

Description of material properties

A summary of the Group's material properties is set out on the following pages by location, development status and current market valuation band under RICS as at 26 December 2009.

Business parks/rented properties

Type and Location	Description of Property	RICS Valuation Band
Asfordby, Melton Mowbray Leicestershire	28 hectare (70 acre) rail connected mixed use business park with 25,700 sq m (275,000 sq ft) of commercial space built. Masterplan in place for a further 42,000 sq m (450,000 sq ft). Current rent roll is £1.017 million per annum plus service charge, and the site is 92 per cent let.	£10m-£20m
Gascoigne Wood, Sherburn in Elmet, Selby, North Yorkshire	100 hectare (245 acre) regionally significant strategic rail connected former deep mine complex with surrounding agricultural land. Planning consent approved for rail related distribution covering 24,000 sq m (254,000 sq ft). Potential for up to 93,000 sq m (1,000,000 sq ft) employment space on the site. Two leases granted. Rental income expected of £0.35 million per annum in 2009, with substantially greater potential in the medium term.	£10m-£20m
Bilsthorpe, North Nottinghamshire	25 hectare (62 acre) former colliery with outline planning consent. Detailed consent for 6,875 sq m (74,000 sq ft) B2 and B8 of which 4,300 sq m (46,000 sq ft) built and 54 per cent let. Two ground leases covering 4.7 hectares (11 acres) for mines, gas power generation and local authority highways depot. Rental approximately £0.12 million per annum plus service charge.	£5m-£7.5m
Whitemoor, Barlby, Selby, North Yorkshire	26 hectare (65 acre) former mine access site. Existing buildings on 9 hectares (23 acres) have been converted to a mixed use business park totalling a net area of approximately 7,600 sq m (82,100 sq ft). Annual income circa £0.22 million per annum plus service charge. 61 per cent let.	£2m-£5m
Riccall, Selby, North Yorkshire	42 hectare (104 acre) former mine access site. Existing buildings have been converted to create a mixed use business park on 9 hectares (22 acres) totalling a net area of approximately 7,350 sq m (78,600 sq ft). Rental income of £0.168 million per annum plus service charge. 58 per cent let with further negotiations ongoing.	£2m-£5m

Development properties with planning consent

Type and Location	Description of Property	RICS Valuation Band
Highfield Commercial, Waverley, Rotherham, South Yorkshire	Existing consent for mixed use business park comprising 51,250 sq m (552,000 sq ft) of B1, B2, B8 space, a hotel and ancillary retail. Revised application submitted with joint venture partner Helical Governetz Ltd. to accommodate Government office campus proposal comprising 60,000 sq m (646,000 sq ft) of B1, a hotel of 4,000 sq m (43,000 sq ft) and 500 sq m (5,000 sq ft) of ancillary retail. On 25 January 2010, the Planning Committee resolved to grant Outline Planning Permission, subject to the completion of a Section 106 Agreement and the Secretary of State deciding not to intervene.	£5m- £7.5m
Mid-Cannock, Staffordshire	10 hectare (25 acre) rail connected site, fully let on 50 year lease from April 2005.	£5m-£7.5m
Waverley Advanced Manufacturing Park (AMP) (off the Sheffield Parkway, J33 M1), Rotherham, South Yorkshire	Advanced Manufacturing Park, developed in partnership with Yorkshire Forward. Remaining developable land approximately 23 hectares (57 acres) which could accommodate up to approximately 73,000 sq m (786,000 sq ft). In addition the Group retains an interest in Evolution Park, an 8,700 sq m (94,000 sq ft) business park development joint venture with Strategic Sites Ltd. Currently 36 per cent occupied.	£5m-£7.5m
Tetron Point, Swadlincote, South Derbyshire	Fully restored surface mine site. Currently consented area substantially developed out as employment park through plot sales to third parties. Remaining 99 hectares (245 acres) includes consented 11.7 hectare (29 acre) rail head and ancillary land. Balance of land being considered for mixed use schemes, including leisure facility comprising 18 hole golf course with hotel and clubhouse (tenant selected for golf course, consent granted and work commencing 2010).	£2m-£5m
South Leicester Disposal Point, Ellistown, Leicestershire	Former 29 hectare (72 acre) operational site with a resolution to grant planning consent for 52,000 sq m (564,000 sq ft) of B1, B2 and B8 space, subject to completion of a Section 106 Agreement.	£2m-£5m
Baileycross, Phase I (off J32, M62), Pontefract, West Yorkshire	Planning consent secured for Phase 1 pit yard redevelopment, 917 residential units and 24,000 sq m (261,000 sq ft) of office, retail and community uses.	£10m-£20m

Other projects in the planning pipeline

Type and Location	Description of Property	RICS Valuation Band
Waverley/Orgreave, (off the Sheffield Parkway, J33 M1), Rotherham, South Yorkshire	New housing led mixed use community comprising 3,890 residential units and around 15,000 sq m (165,000 sq ft) of retail and leisure space plus community uses. On 25 January 2010, the Planning Committee resolved to grant Outline Planning Permission, subject to the completion of a Section 106 Agreement and the Secretary of State deciding not to intervene.	£20m-£50m
Baileycross, Phase II (off J32, M62), Pontefract, West Yorkshire	Phase II housing site of approximately 13 hectares (32 acres) provided as part of slurry extraction and reclamation scheme on adjoining spoil heap. Promoted through Wakefield's Local Development Framework, expect to be included in draft Allocations DPD in Q4 2010.	£2m-£5m
Cutacre, (off J4 M61), Bolton, Greater Manchester	80 hectare (200 acre) strategic employment site. Published version of Bolton's Core Strategy identifies Cutacre as a broad location for up to 80 hectares (200 acres) of employment land. It is anticipated this will be submitted to the Secretary of State Q2 2010 with an Examination in Public being held in Q3 2010.	£10m-£20m
Rossington Colliery, Doncaster, South Yorkshire	145 hectare (350 acre) former colliery. Housing led regeneration scheme which could accommodate approximately 1,700 new homes is being promoted through Doncaster's Local Development Framework process on former Pit Yard area comprising around 50 hectares (125 acres). There is potential for further development, subject to greenbelt review or remaining land interests.	£10m-£20m
Harworth Colliery, Harworth, North Nottinghamshire	Outline planning application submitted Q4 2009 for up to 996 residential units, 3,252 sq m of retail and 76,645 sq m of employment uses and community space on a site of approximately 60 hectares (148 acres). The application takes account of the potential to reopen this mine which would occupy the area proposed for employment space.	£10m-£20m
North Gawber, Barnsley, South Yorkshire	Brownfield 16 hectare (39 acre) former colliery. Planning application resubmitted in 2009 for 400 houses.	£5m-£7.5m
Lounge, A42, Ashby-de-la-Zouch, Leicestershire	42 hectare (104 acre) former coal disposal point with substantial rail infrastructure. Development agreement with Gazeley PLC. Planning application submitted for 79,000 sq m (850,000 sq ft) B8 major distribution scheme and in parallel site being promoted through the local authority's local development framework.	£5m-£7.5m
Bennerley, Broxtowe, Nottinghamshire	Rail connected former disposal point, substantially restored. Promotion through the local authority's local development framework for 30 hectare (75 acre) with good access to J26 M1.	£2m-£5m
Ellington/Lynemouth, Northumberland	11 hectare (27 acre) residential led regeneration scheme in South-East Northumberland Growth Point. Planning application for approximately 500 houses and 10 hectare (24.7 acre) of employment submitted February 2009. Initial scheme for workspace completed with grant aid from Castle Morpeth Borough Council and Northumberland Strategic Partnership. Now operating, 100 per cent occupancy of refurbished area.	£5m-£7.5m
Bates Staithes, Northumberland	5 hectare (12 acre) former coal disposal point. Joint venture with Banks Development for 327 house residential scheme. Planning application approved and work commenced to remediate the site within partnership with HCA.	£2m-£5m
Chatterley Valley, Stoke-on-Trent, Staffordshire	Rail connected 10 hectare (25 acre) former coal disposal point forming part of an approximately 65 acre joint venture with adjoining land owner. Outline planning consent granted 2008. 37,200 sq m (400,000 sq ft) on UK Coal land. Ongoing consideration of options for site following cessation of Prologis Agreement.	£2m-£5m
Yorkshire Main, Edlington, Doncaster, South Yorkshire	19 hectare (47 acre) restored colliery site. Outline planning consent granted for up to 250 homes and 1 hectare (10 acre) for employment use.	£5m-£7.5m
Additional Sites	54 schemes within the mid term project pipeline of early stage promotion and planning. These schemes have a current year end value of not more than £5.7 million each.	To £5.7m
	Head office & workshops	£5m-£7.5m

FINANCIAL REVIEW

Group revenues have fallen in the year to £316.0 million from £392.5 million in 2008. This is mainly a reflection of the lower volume of coal sales in 2009 than was achieved in 2008. Although there has been a lull in market demand for coal in response to falls in the price of gas, and a subsequent lowering of the market price for coal at various points during the year, the contracts with our core electricity generator customers have enabled us to increase the long-term contracted coal price and achieve an average sales price per gigajoule of £1.87/GJ, which although lower than the average of £1.92/GJ achieved in 2008 is still at an historically good level.

Overall, the Group loss before tax has increased to £129.1 million from £15.6 million in 2008. Operating loss before non-trading exceptional items, totalled £93.1 million compared to a profit of £1.8 million in 2008. Of this, the loss on revaluation of investment properties was £25.7 million for the year compared with a small gain of £23,000 in 2008.

The largest impact on the current year loss has been the increased loss made by the deep mining business. As outlined in the operating review, the deep mines have a largely fixed cost base relative to production levels, and so the lower level of output from the mines in 2009 (5.7 million tonnes) against that of 2008 (6.2 million tonnes) does not manifest itself in lower operating costs. In addition, also as outlined in the operating review, the Thoresby and Kellingley mines have continued to mine their way through difficult geology throughout the year pending completion of the investment in their new seams, while Daw Mill has focussed on increasing its development work, all of which has increased operating costs for 2009.

There have been non-trading exceptional items during the year resulting in a charge of £13.1 million in the period (2008: £4.1 million). The main charges/credits in the current year included:

· Welbeck closure costs

As previously reported, the closure of the Welbeck mine will take place in 2010, and a provision made for the associated costs has been made. The total charge in the year of £14.4 million consists of redundancy costs (£10.3 million), the write down of spare stores stock for that stock which would not be required by the three ongoing deep mines (£3.5 million) and impairment of fixed assets which would not be utilised elsewhere in the business (£0.6 million).

At the year end, £12.7 million of these costs remained unspent. There were no such costs or provisions in the prior year.

· Provision for HSE prosecution

The Health and Safety Executive ("HSE") has brought ten charges for alleged breaches of Health and Safety legislation against UK Coal Mining Limited following four fatalities in separate incidents in 2006 and 2007.

· Costs in relation to Harworth mine

Costs of £3.5 million (2008: £3.5 million) have been incurred in the care and maintenance of the Harworth mine, which is currently mothballed, together with some exploration costs incurred at the start of the year to prove its coal assets.

· Pension scheme curtailment

As a result of redundancies in respect of the Welbeck closure, there has been a curtailment gain of £4.0 million reflecting the reduction in the pension scheme deficit as the relevant members cease to be active members.

· Disposal of joint venture

There was a £6.5 million profit on disposal of the Group's share of Coal4Energy Limited, one of its joint ventures, in early 2009. The shares were sold to Hargreaves Services PLC, UK Coal's former joint venture partner.

Operating loss after these non-trading exceptional items for 2009 was £106.2 million compared with £2.2 million in 2008.

Loss per share for the period was 72.9 pence (2008: 10.0 pence).

Funding

As announced in the Annual Report for 2008, the Group entered into new or amended contractual arrangements with its generator customers. These have had the benefit of increasing cashflows to the Group in 2009 by £63.6 million. Interest on the outstanding amounts of £4.0 million has been accrued. There were no such balances in 2008.

During the year, the Group raised £99.7 million (net of expenses) through a firm placing to institutional and other professional investors, and a placing and open offer to certain qualifying shareholders. In total, 142,045,413 shares were issued at an issue price of 75 pence per share. The placing and the placing and open offer both completed on 9 October 2009. Information relating to share capital, including details of the firm placing and placing and open offer are shown in note 25 to the financial statements.

In addition to this equity raising, the Group has renewed and extended its banking facilities. The Group had circa £167 million of bank borrowing facilities and a further £17 million outstanding on finance leases as at 26 December 2009. The borrowing facilities include a revolving credit facility of £52 million, £110 million secured on property and £5 million secured on surface mining and other plant. The weighted average maturity of the facilities as at December 2009 was 2.3 years (2008: 2.2 years).

Since the year end, we have restructured our banking arrangements. The principal changes are:

§ to increase the amounts available under the £52 million revolving credit facility ("RCF") by an additional line of up to £20 million, reducing over the winter period;

§ to extend the maturity of the RCF to the end of July 2011, in line with the maturity date of the additional line;

§ to modify the financial profile of the HEWPL term loan facility, including providing the Group with the ability to roll up interest into the loan in the period to June 2011. Repayment of this facility will be £12 million in July 2011, together with rolled up interest, thereafter amortising at a rate of £2.5 million per quarter until final repayment in July 2013; and

§ to increase the effective interest rates on the HEPWL, HEAL and RCF facilities.

Over and above these extended bank facilities, we have agreed a further £10m of unsecured stand-by facility from Peel Holdings, which is available for drawing in the event that the RCF is fully drawn. This facility also expires at the end of July 2011.

The Group will apply property disposal proceeds, as and when received, in reducing its bank facilities, with consequent benefits to our cost of debt.

A summary of our principal current facilities, including the unamended EOS facility, is shown below:-

	Facility	Margin	Maturity
	£ million	over LIBOR

RCF Additional line	52¹ 20	300 -500 bps² 1,600bps	Jul-11 Jul-11
HEAL facility	46	400bps	May-12
HEWPL facility	43	900bps	Jul-13
EOS	22	300bps	May-12

Total	183

Notes

(1) Falling to £49.5 million in October 2010

(2) Margin dependent on level of committed facility

The above table excludes fully drawn finance leases and other small bank loans which totalled some £17 and £5 million respectively at 26 December 2010, and the Peel Holdings loan facility noted above.

The amendments to our existing banking arrangements described above, gives rise under IAS to the requirement to write off, in the 2010 financial year, the carrying value of the fees originally incurred in arranging the loans being circa £3.5 million, as well as the bank arrangement fees being charged in respect of the amendments, estimated at a similar level.

Financing expenses

Net finance expenses in the year increased to £24.6 million (2008: £14.9 million). During 2008, we started to apply hedge accounting on our interest rate swaps where possible and as a result, movements in the fair value of those swaps which were effective for hedge accounting purposes were charged to a hedging reserve. However, as the bank facilities were renewed and extended, the characteristics of the loans changed to such an extent that the interest rate swaps were no longer effective for hedge accounting purposes, and consequently from part way through 2009, all mark to market adjustments are now charged or credited to the income statement. Furthermore, all movements which had previously been charged to the hedging reserve are now being amortised to the income statement over the remaining life of the interest rate swap. As a result, there was a loss on interest rate swaps not effective for hedge accounting purposes of £1.4 million (2008: gain of £0.7 million), which consisted of amortisation of amounts previously charged to the hedge reserve of £3.1 million (2008: £nil) offset by mark to market credits of £1.7 million (2008: £0.7 million).

Excluding the change in fair value of interest rate swaps, finance expenses have increased from £18.6 million in 2008 to £23.9 million in 2009. As well as the £4.0 million interest charge on generator loans and prepayments outlined above, there was an increase in the interest cost on bank borrowings of £0.8 million to £12.6 million, and an increase in the cost of amortisation of bank loan issue costs of £1.1 million to £2.7 million, both reflecting the higher cost of the bank borrowings following renewal of the facilities during the year. Also included in Group financing expenses is a charge for the unwinding of discounts in relation to the provisions in the balance sheet of £3.6 million (2008: £4.3 million).

The Group has cash deposits which are held by our captive insurance company against insurance claims and, similarly, ring-fenced funds held on behalf of the Coal Authority securing surface damage claims resulting from mining. These totalled £19.1 million and £8.7 million respectively at December 2009 (2008: £20.4 million and £8.3 million). In addition to the ring-fenced funds held on behalf of the Coal Authority, a £10 million bond is held by the Coal Authority as further security against any possible surface damage claims. These deposits were secured against liabilities as at December 2009 of £16.2 million and £13.2 million respectively.

Despite the funds raised in the year and the lower level of bank borrowings (net of £13.7 million of unrestricted cash deposits) at December 2009 compared to the prior year, bank gearing at the year end has increased to 74.9% (2008: 45.6%). This is a result of the fall in the net assets value, being particularly adversely affected by the increase in the deficits on retirement benefit obligations of £116.8 million as well as the result for the year partly offset by the result of the equity raising.

Tax

The Group paid no corporation tax in 2009 (2008: £nil), but the tax credit for the year was £1.5 million (2008: charge of £0.1 million). The credit relates to consortium relief receivable of £0.5 million, and deferred tax credits of £1.0 million as outlined below. At December 2009, the Group had gross trading losses of £248.9 million (2008: £153.5 million) and gross timing differences of £166.0 million, arising largely from unclaimed or disclaimed capital allowances (2008: £138.5 million), both of which are available to offset against future profits in the mining business. These had a tax value of £69.7 million (2008: £43.0 million), and £46.4 million (2008: £38.8 million) respectively. Both of these have increased during the year due to the result for the year, and because capital allowances have been disclaimed where possible to allow flexibility for the future. The net deficit on the balance sheet in respect of retirement provisions also represents a tax timing difference of £61.8 million (2008: £29.1 million).

The Group had recognised a deferred tax asset of £35.8 million at December 2009 (2008: £36.1 million). The Group continues to review its deferred tax asset, given the nature of the business and its historic performance. The deferred tax credit in the income statement of £1.0 million relates to a deferred tax credit of £0.9 million on the amortisation (out of the hedging reserve) of previously effective hedge accounting movements outlined above, together with a net deferred tax credit of £0.1 million relating to the movement in the deferred tax asset recognised in the balance sheet. The latter reflects a deferred tax charge of £0.4 million on the movements in the mark to market hedges outlined above, offset by other deferred tax credits of £0.5 million.

The Group has in excess of £380 million of capital losses which can be offset against profits arising on disposals of properties currently held by the Group. These capital losses are sufficient to offset the vast majority of the deferred tax liability which would otherwise be required in respect of the investment properties leaving a small deferred tax liability which has been recognised in the financial statements of £0.4 million (2008: £0.8 million).

Group cash flows

	2009	2008
	£m	£m
Cash used in operations	(61.1)	(1.1)
Interest and financing cost	(17.5)	(13.8)
Cash used in operating activities	(78.6)	(14.9)
Purchase of property, plant and equipment (excluding assets financed by leases)	(53.2)	(25.8)
Pre-coaling expenditure for surface mines	(3.9)	(6.2)
Development costs of investment properties	(8.1)	(14.1)
Proceeds on disposal of property, plant and equipment	0.4	0.2
Proceeds on disposal of investment properties	8.5	6.0
Proceeds on disposal of shares in joint venture company	8.7	-
Net receipt from restricted funds	1.0	20.3
Other movements	0.5	2.1
Cash used in operating and investing activities	(124.7)	(32.4)
Proceeds from issue of ordinary shares	99.7	-
Net (repayment) / drawdown on bank loans	(59.2)	59.5
Net drawdown from generator loans and prepayments	63.6	-
Repayments of obligations under hire purchase and finance leases	(8.1)	(5.7)

(Decrease)/increase in cash	(28.7)	21.4

There was a net cash outflow from operating activities of £78.6 million (2008: £14.9 million). The Group has continued to invest heavily in the business in the year, spending £65.2 million (2008: £46.1 million) in total on investments. £53.2 million (2008: £25.8 million), with a further £17.2 million (2008: £nil) funded by finance lease, has been the invested in the mining business, predominantly in deep mining, £3.9 million (2008: £6.2 million) has been spent on pre-coaling expenses in surface mines and £8.1 million (2008: £14.1 million) on investment properties, mainly on the costs associated with gaining and fulfilling planning consents. The cash outflows from operations and investments have been offset by the equity funds raised in the latter part of the year of £99.7 million (net of expenses) and the cash benefits of £63.6 million arising from the renegotiated supply contracts with our generator customers which we announced last year.

Purchases of property, plant and equipment are stated above in accordance with IAS, excluding the value of assets acquired under finance lease. These totalled £17.2 million in the year (2008: £nil).

BALANCE SHEET

The net assets of the Group at December 2009 were £152.8 million compared to £300.4 million in 2008. The decrease in net assets is largely due to the trading loss for the year of £127.5 million (2008: £15.7 million), together with an increase in the deficit on retirement obligations of £116.8 million (2008: £30.8 million) which is discussed below, offset by the funds raised from the equity placing of £99.7 million (2008: £nil) as discussed above. Other significant movements in the balance sheet during 2008 are in provisions and investment properties. Investment properties have been discussed within the Operating and Financial Review.

Provisions

		2009	2008
		£ million	£ million
(i)	Employer and public liabilities	16.2	18.7
	Surface damage	13.2	13.4
(ii)	Restoration and closure costs of surface mines	39.3	59.4
(iii)	Restoration and closure costs of deep mines
	- shaft treatment and pit top	10.3	9.8
	- spoil heaps	2.9	2.9
	- pumping costs	5.4	5.3
	Ground/groundwater contamination	5.3	5.2
(iv)	Redundancy	9.1	1.2
		101.7	115.9

(i) Employer and public liabilities and surface damage provisions

Provisions are made for current and estimated obligations in respect of claims made by employees and contractors relating to accident or disease as a result of the business activities of the Group. This is managed by our captive insurance company, Harworth Insurance Company Limited, a UK based FSA registered company. As at December 2009, it held £19.1 million of cash deposits and £9.0 million of property assets to meet £16.2 million of liabilities.

Surface damage provision relates to the Group's liability to compensate for subsidence damage arising essentially from past deep mining operations. Claims can be lodged by the public up to six years after the date of relevant damage. The estimate is based on historical claims experience, following a detailed assessment of the nature of damage foreseen. The reduction in surface damage provisions is in line with the reduction in number of operating deep mines within the Group. As at December 2009, the Group had £8.7 million of ring-fenced deposits and an insurance bond for a further £10 million to provide security to meet £13.2 million of liabilities.

(ii) Surface mines

Pre-coaling costs in respect of surface mine activities are broadly the costs incurred in preparing the site for mining and related costs in respect of planning gain. These are treated as deferred costs on the balance sheet. During the course of the mining process these costs are written off over the expected production tonnage of the mine.

Restoration and rehabilitation provisions represent the expected cost of the reinstatement of soil and overburden, discounted for the time value of money.

This provision is created, and an equal and opposite non-current asset is created, when coaling commences. Along with other pre-coaling expenses, this asset is written off in proportion to the expected recoverable reserves of the mine.

Expenditures for restoration and rehabilitation are offset against the provisions as incurred. The unwinding of the discount for the time value of money is included within the finance cost.

As at December 2009, the Group had a non-current asset of £22.6 million (2008: £28.5 million), relating to expenditure on pre-coaling and similar expenses, deferred stripping costs and the recognition of restoration and rehabilitation liabilities on sites that had started coaling. At the same date, provisions for restoration and rehabilitation totalled £39.3 million (2008: £59.4 million) after expenditure of £21.2 million was incurred in the year.

(iii) Deep mines

We maintain provisions in respect of the costs of restoring our deep mines to the required standard and planning conditions. The amount provided represents the discounted net present value of the expected costs. Costs are charged to the provision as incurred and the unwinding of discount is included within the finance costs for the year. The provision can be broken down into operating and closed mines.

	£ million

Operating mines	17.4
Closed mines	6.5
	23.9

73% of the deep mines provision relates to the four mines classified as 'operating' which will be utilised after the point of closure. This includes provisions of £5.0 million for Welbeck colliery, which is scheduled to be closed in 2010, from which we expect to utilise £1.3 million in 2010, and £0.3 million in 2011, with the balance being utilised in subsequent years. Furthermore, we expect that we may utilise £2.1 million of the closed mine provision in 2010 and £1.1 million in 2011, representing predominantly the costs in respect of the Harworth and Rossington collieries, in part depending on any decision regarding the future of Harworth. The remaining balance of £3.3 million will be utilised beyond 2011.

(iv) Redundancy Provisions

Redundancy provisions are created when the decision to make the redundancies has been made and communicated, usually through the representatives of the workforce. The majority of the £9.1 million provided, arises in respect of redundancies arising as a result of the decision to close Welbeck. We expect to utilise all the redundancy provisions in 2010.

Retirement Benefit Obligations

The Group has a deficit of £220.8 million (2008: £104.0 million) on its defined benefit pension and retirement schemes which are now closed to new entrants but are required to be open for future service. All new employees who joined after the privatisation in 1994 are eligible to join defined contribution schemes.

The defined benefit pension and retirement schemes comprise two funded industry wide schemes, together with an unfunded concessionary fuel scheme. The above deficit includes a liability of £34.9 million (2008: £29.3 million) in relation to the unfunded concessionary fuel scheme. All of these schemes are valued annually by our independent actuaries, the Government Actuary's Department.

The schemes have been valued under International Accounting Standard 19 (IAS 19), using the projected unit method and discounting future scheme liabilities on the basis of AA-rated corporate bond yields of over 15 years. The discount rate used, net of inflation, was 2.2% (2008: 3.9%). Contributions are determined by a qualified actuary on the basis of triennial valuations, using the projected unit method. The most recent triennial valuations were at 31 December 2006 which were finalised during 2008.

Movements in the schemes in 2009 are set out below.

	Pension*	Concessionary fuel	Total
	£ million	£ million	£ million
December 2008	74.7	29.3	104.0
Contributions paid less current service cost	(8.3)	(0.4)	(8.7)
Change in fund value compared to expected return	(27.0)	1.9	(25.1)
Actuarial loss on liabilities	150.5	4.1	154.6
Gains on curtailment	(4.0)	-	(4.0)
December 2009	185.9	34.9	220.8

*Including Blenkinsopp scheme

There has been a significant increase in the deficit on the pension schemes of £111.2 million comprising:

· An actuarial loss on the funds' liabilities of £150.5 million arising from the change in actuarial assumptions. Principally, this is due to a decrease in the assumed discount rate from 6.5% in 2008 to 5.7% in 2009, and an increase in the assumed level of price inflation from 2.6% in 2008 to 3.5% in 2009. In real terms therefore, the real discount rate taking inflation into account has fallen from 3.9% in 2008 to 2.2% in 2009. The underlying discount rate has fallen due to decreases in AA-rated corporate bond yields which underpin the assumption.

· A gain in the year of £27.0 million due to returns on the funds' assets being higher than expected.

· Extra contributions above service cost of £8.3 million. In total, the Group paid £21.4 million to the schemes in 2009, covering both current service and deficit contributions, and expects to make contributions of around £22 million in 2010.

£118.6 million of the movement in the deficit on the pension schemes has been charged to the Consolidated Statement of Comprehensive Income ("SOCI") in the year.

There has also been a significant increase in the liability for the unfunded concessionary fuel scheme of £5.6 million. There are two main factors contributing to the increase:

· An actuarial loss due to a reduction in the real discount rate by 1.7% to 2.2% as outlined above, offset by an experience gain as the price of the coal products did not increase as much as was expected at the start of the year, and

· an interest cost of £1.9 million compared to £1.4 million in 2008.

The actuarial loss of £4.1 million has been charged to the SOCI.

Details relating to retirement benefit obligations, as presented in the 2009 annual report and the most recent actuarial valuation, are shown in note 24 to the financial statements.

KEY RISKS AND UNCERTAINTIES

We operate in a mining industry which carries inherent risk, and is subject to market and other external risks which cannot be fully controlled, mitigated or insured against. The risks set out below represent some of the principal risks and uncertainties identified by the Directors which exist within the Group that could materially affect our financial condition, performance, strategies and prospects. The following risk information is not intended to be a comprehensive overview of risks inherent within the business.

MINING RISK

Health, Safety and Environment

All of our mining operations are subject to potential health and safely risks, and the possibility of pollution of water, air or soil, or damage to surface assets.

A number of actions have been taken during the year to reduce the number of health and safety incidents occurring and to advance further the standards of environmental safety and protection. A Health and Safety Committee of the Board was established in 2008 to oversee and promote the importance of health and safety to the business, and during 2009 we appointed a Safety Director who reports directly to the Chief Executive and who now forms part of the Executive Management Committee. Health and safety training is provided to employees on an ongoing basis to ensure an awareness of safety issues across the Group. This is to reinforce management's focus on the importance of safety issues and create as safe a working environment as possible. We are confident that by working together with our entire workforce, we can improve on our Health and Safety performance.

The potential for other hazards underground are continually monitored, in particular the risks from methane gas and from fire, enabling immediate action to be taken in the event of any abnormal reading. There is only very limited insurance or insurance with high excess or uneconomic premiums available in the market against these risks which might normally be insurable in other industries.

Financing Risk

In part the Group finances its business through debt. The ability of the Group to raise funds on reasonable terms in the longer term depends on a number of factors, including general economic, political and capital market conditions and credit availability as well as business performance. There can be no assurance that financing for the Group in the longer term will be available or, if it is, that it will be available on terms that the Group considers acceptable. The maturity of the Group's debt profile at December 2009 is shown in Note 19 to the financial statements and the facilities available to the Group, including their maturities, are noted earlier in the Financial Review. Over the next 12 months there are no significant facility maturities. However, there is a longer term risk that the Group is unable to refinance its bank debt or is unable to obtain new or additional bank debt if this is required. In particular, the Group's new revolving credit facility expires in 15 months time in July 2011.

As is customary, our bank facilities are subject to covenants, in our cases focussing on loan to property value covenants. Although we are in compliance with these covenants, a fall in the valuations of our properties could have an impact on covenants leading to increased charges and possibly a limitation of facilities availability.

Major Unforeseeable Production Shortfalls or Geological Constraints

The operating costs of our deep mines are largely fixed relative to production levels. Output is therefore key to our short-term financial performance and indeed to the viability of the mines and the business.

In an operation as complex as a deep mine there are inevitable risks to production from the failure of equipment. We therefore seek to maintain adequate supplies of equipment spares to ensure that any downtime is limited and to operate at high levels of machine availability.

Our mining plans and development programmes are designed to minimise the time between one face finishing and a new face starting and production ramping to a normalised level (known as face gaps). During this time coal production may be limited and the economic impact is closely monitored. Historically development work has underperformed against long term requirements and therefore a significant element of our investment programme, both in capitalised and expensed spend, is aimed at increasing the amount of development 'bank', i.e., developments ready ahead of requirements, and thereby reducing the risk of face gaps.

Inherent to the nature of our business is the geology of the ground in which we are mining. Whilst bore holes are drilled, and modern surface and other surveys, including 3D seismic surveys, offer better information, we often face unexpected geological conditions. These may sometimes be revealed in part when the roadway gates are initially driven, or by knowledge from previous workings in the same area (for example in seams above or below those being mined), but frequently the extent of geological faulting or other conditions in the coal seam that have to be safely traversed are not totally predictable.

We manage our mining risks by having a well structured risk management policy and experienced personnel to ensure any operational difficulties are mitigated where possible to ensure a continuous production process throughout the year.

Fluctuations in Coal Prices

We are exposed to the risks of fluctuations in coal prices as our revenue and earnings are directly related to the prevailing prices for the coal produced.

We have mitigated this by the use of longer term customer contracts, both to ensure more certainty of demand and of price. Some of these contracts have, with the subsequent increase in the world price of coal, worked to our disadvantage. Our strategy is to move towards a balanced mix of longer term contracts on fixed, on capped and collared and on floating prices, and to maintain an element of shorter term contract and spot sales.

The Group has entered into some fixed price contracts, which in some cases are subject to RPI adjustment, resulting in a reduction in sales price in the event of deflation that might not be matched by commensurate falls in costs. The Group also entered into some nominal fixed price contracts where the sales price will not change even if inflation was higher than expected.

We also aim to reduce costs on a continuous basis and to maintain an efficient production process to maximise our returns throughout the price cycle.

PENSION RISK

Under the terms of the 1994 privatisation, those employees transferred to the employment of UK Coal Mining Limited ("UKCML") became members of one of two Industry Wide Defined Benefit Pension Schemes.

These schemes are sectionalised, meaning that UKCML has no unprovided liabilities in respect of the employees of other companies in the industry. UK Coal PLC and UKCML both have a responsibility in respect of these pension schemes under the Protected Persons Regulations under which it is not permitted to close off the schemes for future service.

Under IAS19, as noted in note 24 to the financial statements, these schemes have a combined deficit of £184.9 million. This deficit is, in accordance with IAS, calculated using a discount rate in line with the market rate for corporate bonds. Under the Technical Provisions, which are the basis for the triennial calculation of the pension liabilities for the Pensions Regulator and for agreement on funding rates with the Trustees, different rates, based on gilt yields, are employed. Depending on changes in these rates and investment performance to be incorporated into the next calculation, which is currently being worked on, a significantly higher deficit could lead to higher deficit contributions being needed in later years.

PROPERTY RISK

Property Market Downturn or Volatility

The value of our properties is exposed to changes in the property market and the valuation of the estate will fluctuate in part with the general market, and economic conditions in the UK and the continued impact of the global credit crisis have adversely impacted property values and liquidity in the property market. Our agricultural land has again seen an increase in value per acre, without any change in planning, reflecting the increase in values for this type of land, while the market for our brownfield estate has declined over the last 12 months.

The "immaturity", in planning terms, of our brownfield sites means that a considerable amount of value can be added by the work that we do in advancing them through the planning process. This has helped reduce the impact of the fall in the general market on the RICS value of these sites in 2009. However, the current market for this type of land remains at a low level of activity, making the disposals of land more challenging. Notwithstanding this, we remain exposed to movements in the general market and the risk that any such movement outweighs the planning gain.

Planning Approvals

The planning regime affects both Harworth Estates and our mining businesses, and any major changes could affect the business, either positively or negatively. We continue to see improvements in the planning environment, particularly in the planning regime surrounding the surface mine business, where greater recognition is being given both for the need of coal and the high environmental standards of the design and operation of the schemes. Of immediate impact, the resources available to planning authorities to process planning applications in a reasonable timescale continue to be a restraining factor on the Group, and in the development of activities meeting overall government targets and the Group's aspirations.

Corporate Social Responsibility

We take our Corporate and Social Responsibility ("CSR") seriously and are committed to implementing appropriate policies and systems across the Group. These include concern for employees and their health and safety, care for the environment and community involvement.

The Board has responsibility for CSR and is committed to developing and implementing appropriate policies to create and maintain long-term value for all stakeholders. This is important for the Group as it helps to minimise risk, ensure legal compliance, and further develop the Group's reputation. We regularly review our CSR policies in the light of the changing profile of the Group's business to both ensure that all stakeholders are properly represented and that each of our businesses acts appropriately with regard to its type of operations. We have become a member of 'Business in the Community' and commenced a process of engagement with them to both evaluate and further develop our CSR.

Our performance culture:

Corporate responsibility is integral to the way we do business, and our performance culture underpins everything that we do.

How we strive to work together towards achieving our business goals:

There are five fundamental ingredients that sustain our performance culture:

a. Safety and wellbeing

We place the highest emphasis on safety and health in our workplace.

b. Social and environmental impact

Respect for our environment, care for our communities and commitment to high ethical standards.

c. People

Developing and nurturing talent, empowering employees, encouraging teamwork, rewarding and recognising success.

d. Openness and transparency

Trust and co-operation is paramount. We embrace an ethical and democratic culture that encourages debate, challenge and respect - allowing clear and honest communication. We aim to instil and inspire pride, pace and passion among all employees throughout the company - across all levels, departments and divisions

e. Ambitious targets

Maximising value and customer satisfaction; striving to set the benchmark for delivering world-class performance.

Our stakeholders are very important to us and are intrinsic to our commitment to being socially and environmentally responsible.

We engage with our stakeholders in a number of ways:

· Employee surveys;

· Union discussions/agreements;

· Community investment;

· Working in partnership with NGOs, government, Health and Safety Executive, regulators

Health and Safety

The Board believes that the health and safety of our employees, and persons affected by our operations, is of prime importance and is committed to ensuring that we comply with all of our obligations and set standards higher than statutorily prescribed. In recognition of this, the Board has delegated specific authority and responsibility to its Safety Committee, which has oversight of operational safety and health management of the business.

All Directors are fully aware of the Group's and their own responsibilities towards health and safety and fully support and provide resource for systems and initiatives that promote health and safety.

The Chief Executive issues and periodically updates a personal health and safety statement to all employees. He regularly follows this up with programmes of face-to-face meetings with employees in all parts of the business, particularly those working in higher risk areas. Communication of key safety messages is recognised as being paramount to establish and improve safe working practice.

A Safety Director reporting to the Chief Executive, works closely with the Board, the Company Directors, Senior Managers and stakeholders to continually improve and develop health and safety policy and strategy.

The Directors deeply regret the fatal accidents at Thoresby colliery and Kellingley colliery involving experienced underground workmen in July and October 2009, and extend their most sincere sympathy for the tragic loss of these colleagues to their families and friends.

The management is dedicated to maintain and enhance controls and to make improvements throughout the Group's operational structure and activities recognising that it operates in an industry that has to control inherent hazards. The company invests significant resource both at Headquarters and at sites to provide health and safety advice to operational management.

Health and safety is an integral part of the management accountability process with clear reporting lines up to Board level. Health and safety training, risk assessment with appropriate Group and site control measures, health screening and the personalisation of individual's roles and responsibilities are the key measures used to ensure health and safety compliance. Internal audits are carried out at all sites. We have a programme of internal and safety audits covering key major hazard control measures which is carried out centrally.

We have a Health and Safety Manager (supported by competent health and safety professionals) who reports to the Safety Director with a direct reporting line to the Board which receives regular updates on our safety performance and health and safety strategy. Extensive Group-wide and local policies and procedures are in place and all employees are subject to ongoing health surveillance. Safety inductions are a requirement for all staff and contractors working on sites and risk assessments are carried out for all new working processes to be undertaken. Regular safety audits are conducted and the results of these are reviewed and signed-off by site managers. These are supplemented by regular visits from officers of the appropriate regulatory authorities. The Group is represented on a number of Industry / Health and Safety Executive (HSE) consultation and working parties which it fully supports.

We promote a high standard of safety and a healthy environment for all our employees and others who may be affected by our activities. Underlying health and safety statistics continue to demonstrate improvements in accident and ill health incidents which are reinforced by improving trends in disease related claims and an underlying reduction in our accident claims handling trend.

In 2009, two fatal injuries occurred within the Group compared with one in the previous year. There were 27 major injury accidents reported to the Health and Safety Executive, 26 in 2008. The overall reportable injury rate was 22.8 per 100,000 manshifts compared with 24.0 in 2008, 23.9 and 27.8 in 2007 and 2006 respectively. The target will always be to achieve Zero Incidents in all Health and Safety categories. Through the direction of management and the involvement of all our people and stakeholders the company will strive to make continuous improvements towards that goal.

All sites have appropriate emergency arrangements. The deep mines are members of the Approved National Mine Rescue Scheme.

We have occupational health providers who carry out extensive health surveillance in order to enhance our development of risk control strategies, as the health of our employees, within an ageing workforce, is key to the success of the business. Health surveillance includes a formal drugs and alcohol policy.

Health and safety training is, in the main, a standards based process and the programmes ensure all persons are updated with current best practice. Training is primarily contracted out to professional providers. A full review of the Group's health and safety training needs is being undertaken to ensure that the behavioural needs of our workforce are supported alongside our core training programmes. The company along with the industry is investing in new NVQ qualifications to meet future and continuing needs and to develop and demonstrate, against national standards, the competency of all our employees.

Employees

It is essential that we have a skilled and motivated workforce to ensure the long term success of the business. We aim to attract, retain and motivate the highest calibre of employees within a structure that encourages their development and personal initiative.

We currently employ 2,932 people (2008: 3,152). We have maintained our policy of maximising the re-deployment of skilled and experienced mineworkers.

We continue to review working practices to meet the ever changing needs of the business, backed by training and refresher courses to further develop employee skills and safe working practices.

Regular dialogue was also maintained with the mining trade unions, particularly at operational level where the specific requirements of each individual unit have more readily been addressed. As part of our communications strategy, we have continued to produce our NewScene newspaper on a regular basis, distributed free to employees to achieve a common awareness of the financial, economic and operational factors affecting business unit and Group performance. To further facilitate communication, we are updating our Group intranet facility with a view to improving colleagues' access to relevant information and promote the sharing of best practice throughout the Group.

We remain committed to all aspects of equal opportunities, recognising the value of a positive approach to diversity. To this end, we are committed to providing equal opportunity in recruitment, promotion, career development, training and reward to all employees without discrimination and continue to be supportive of the employment of disabled persons in accordance with their abilities and aptitudes, provided that they can be employed in a safe working environment.

Environment

The Environmental Policy commitments of the Group are to:

· Minimise pollution and comply with environmental legislation, and any agreements with external organisations in order to comply with ISO 14001;

· Maintain certification of environmental management systems to international standards at all mines, and progress certification in other areas of the business;

· Set and regularly review objectives and targets to achieve continual improvement in environmental performance, including a reduction in the use of natural resources;

· Use the principles of sustainable development to design new projects and restore completed sites to include long-term environmental or community benefits;

· Provide access to contact us about environmental issues, and give a prompt response;

· Ensure this policy is communicated to all employees, contractors and suppliers;

· Encourage the efficient use of coal with minimum emissions; and

· Maximise the use of other natural resources recovered with the coal.

Certification to ISO 14001 covers all surface and deep mined sites, our Mining Services department and Harworth Estates. Application of our certified system improves both the day to day operational procedures and longer-term environmental risk management over all our activities. Our Environmental Policy is reviewed by the Board, and both in-house and external audits ensure continued compliance. Monitoring and analysis of emissions to air, water and land, as well as the use of natural resources, are carried out and, where appropriate, programmes to reduce emissions, or to reduce the use of natural resources are designed and implemented. As new legislative regulations on waste and resources are introduced, our programmes to encourage reduction, re-use and re-cycling, continue to show positive benefits to the environment. In 2009 we achieved the Carbon Trust Standard as part of our ongoing commitment to minimising energy use across the company.

The Group's commitment to minimising greenhouse gas emissions continues, and is improved through projects such as the use of methane gas from deep mines to generate electricity, and where this is not feasible we flare the methane. This assists in the UK meeting its responsibilities to reduce greenhouse gas emissions under the Kyoto agreement, as well as reducing power costs on the Group's sites.

The Environment Department liaises with our suppliers through the purchasing function to look at ways of encouraging environmentally sustainable practices throughout the supply chain of growing significance is the need to reduce waste packaging. The Environment Manager is an active participant in the CBI East Midlands Environment Committee, which meets regularly with like-minded companies to share good environmental practice, and is a member of Business in the Community, Yorkshire and Humberside Environment Experts Group.

The success of our policies is judged internally by the use of performance indicators based on established criteria provided by DEFRA. These have been introduced throughout the ongoing mining sites where appropriate reduction programmes and data collection will help us achieve our objectives. Specific environmental success stories from ongoing mines over the past four years include; a 37% reduction in towns water use; a 25% reduction in surface water use; and a 26% reduction in the amount of waste sent to landfill.

Social and Community Issues

We have maintained our philosophy of supporting suitable community projects focused on the surface and deep mines and also on major property developments operating at the heart of the communities in which they are based. In addition to the Community Fund commitments providing support for projects to those living close to surface mine sites, charitable donations in the year totalled £51,546 (2008: £44,732).

During 2009, we again matched pound-for-pound the awards made by the Miners Welfare National Educational Fund to the families of former and current employees studying full-time at a university or college or on a designated course of higher education. Each year, the fund provides grants of around £50,000; in the 2009 academic year, the Fund sponsored 168 students with grants totalling more than £90,000, of which around £36,000 was "match funding" from UK COAL. This initiative has been warmly welcomed by the communities in which we work and by the individuals that have received the support. This figure is included in the charitable donations sum.

Contributions were also made to a wide range of individual and team activities, individual and group events and sporting and academic aspirations affecting all age groups. It is anticipated that a similar level of donations will be sustained in 2010.

Community fund projects associated with current operating surface mine schemes are providing access to funding totalling around £300,000 to be allocated to local good causes, while surface mines schemes with planning consent but where mining operations have yet to commence, will provide a further £1.3 million of community funding. If three schemes currently in the planning process are approved, a further £275,000 will be made available from them for local worthy causes during the operational life of those sites.

Each year we typically plant thousands of young trees on our restored surface mine sites and other land. In 2009, we planted over 38,000 trees on sites in Yorkshire; over 52,000 on sites in the North East and more than 57,000 on three sites in the Midlands. In the last decade, we have planted over 4 million trees - 1.15 million in the North East, 1.14 million in Yorkshire and around 1.9 million on sites in the Midlands. We have also planted around 0.4 million in Scotland and the North West.

Company Information and Advisors

Chairman Auditors

David Jones +* PricewaterhouseCoopers LLP

Benson House

Chief Executive 33 Wellington Street

Jon Lloyd +# Leeds

LS1 4JP

Executive Directors

David Brocksom

Gareth Williams

Non-executive Directors Financial Advisers

Peter Hazell ■+ * ‡ Gleacher Shacklock LLP

Michael Toms ■+ *# ‡ Cleveland House

Kevin Whiteman■+ *# ‡ 33 King Street

Owen Michaelson London

SW1Y 6RJ

Joint Stockbrokers

Numis Securities Limited

10 Paternoster Square

London

EC4M 7LT

Evolution Securities Limited

100 Wood Street

London

EC2V 7AN

Solicitors

Freshfields Bruckhaus Deringer

65 Fleet Street

Secretary and London

Registered Office EC4Y 1HS

Richard Cole

Harworth Park, Blyth Road Registrars

Harworth Equiniti Limited

Doncaster Aspect House

South Yorkshire Spencer Road

DN11 8DB Lancing

West Sussex

BN99 6DA

Company incorporated in England

and Wales with registered no. Bankers

2649340 Barclays Bank PLC

■Audit Committee 6 East Parade

+ Nomination Committee Leeds

*Remuneration Committee LS1 2UX

#Safety Committee

‡ Independent Non-Executive Director Lloyds TSB
6-7 Park Row

Leeds

LS1 1NX

Bank of Scotland

8^th Floor

40 Spring Gardens

Manchester

M2 1EN

Board of Directors

David Jones

Aged 67, he was appointed to the Board as a non-executive director in January 2003 and became Chairman in April 2003. He has extensive experience in the electricity supply industry and was Chief Executive at The National Grid Company PLC until March 2001. He is currently a non-executive director of United Utilities PLC.

Jon Lloyd

Aged 53, he was appointed as Chief Executive on 1 September 2007, having joined the Board as Property Director in July 2006. He is a Chartered Surveyor and was Head of Property at HBOS PLC. He was formerly Regional Managing Director for the North Region at DTZ Debenham Thorpe, and held senior roles at Yorkshire Water PLC, where he was Managing Director of Yorkshire Water Estates Limited, and Rosehaugh Heritage PLC.

David Brocksom

Aged 49, he was appointed Finance Director with effect from 18 September 2007. He qualified as a Chartered Accountant with Price Waterhouse and was previously Finance Director of Pace Micro Technology PLC and Avesco PLC. He is a non-executive director of Helius Energy PLC.

Gareth Williams

Aged 43, Gareth was appointed to the Board as Mining Director with effect from 15 February 2010. He has over 20 years experience in coal mining in a wide range of international roles with Anglo Coal, part of Anglo American PLC; he has been General Manager of some of Anglo's largest coal mines and Head of Operational Performance for Anglo Coal Canada and South America. Born in England, Gareth was raised and educated in New Zealand, gaining an honours degree in Mining Engineering at the University of Otago/Auckland in 1988.

Peter Hazell

Aged 61, Chairman of the property developers Argent Group PLC, he joined the Board in September 2003 as a non-executive director. He is also a non-executive director of Brit Insurance Holdings PLC and Smith & Williamson Limited and was until mid January 2010 a member of the Competition Commission. Previously he was UK Managing Partner of PricewaterhouseCoopers and spent his early career at Coopers & Lybrand and Deloitte Haskins & Sells. He is Chairman of the Audit Committee and the Senior Independent Director.

Mike Toms

Aged 56, he joined the Board as a non-executive director and Chairman of the Remuneration Committee with effect from 3 May 2006. He is a Chartered Surveyor, Town Planner and Economist by background and was formerly Group Director, Planning and Regulatory Affairs and Board member at BAA PLC. He is Chairman of Northern Ireland Electricity PLC, a non-executive director of Bellway PLC, a non-executive director of Birmingham Airport Holdings Limited and a non-executive director of Oxera Consulting Limited.

Kevin Whiteman

Aged 53, he is Chairman of Kelda Group Limited and joined the Board as a non-executive director on 1 June 2007. He secured a degree in mining engineering at University College, Cardiff and started his career at British Coal. He joined the National Rivers Authority in 1993, becoming Chief Executive in 1995, before spending a year as Regional Director of the Environment Agency. In 1997, he joined Yorkshire Water and was appointed Chief Executive of Kelda Group in 2002. He is Chairman of the Safety Committee.

Owen Michaelson

Aged 43, he was appointed to the Board as a non-executive director with effect from 2 October 2007. He is a Chartered Surveyor and is Corporate Development Director of the Peel Holdings Group of companies. He has specialised in the remediation and development of brownfield and contaminated land, waste management operations and power generation. He is a member of the Coal Forum and a former Chair of the RICS Waste Policy Panel.

DIRECTORS' REPORT

The directors present their report and the audited financial statements for 2009. These will be laid before the Annual General Meeting to be held on 25 June 2010. Details of all resolutions to be proposed at the 2010 Annual General Meeting are set out in the notice calling the meeting, which is enclosed with this report.

PRINCIPAL ACTIVITIES, BUSINESS REVIEW AND FUTURE DEVELOPMENTS

The principal activities of the Group comprise surface and underground coal mining, property regeneration and management and other related activities.

The Chairman's Statement and the Operating and Financial Review are incorporated by reference. These provide a review of the Group's business which includes the:

· Development and performance of the Group in the year and its position at the year end

· Principal risks and uncertainties faced by the Group

· Key Performance Indicators used to measure the Group's performance

· Environmental and employee priorities facing the Group

· Group's future development and outlook for 2010

DIVIDENDS PER ORDINARY SHARE

There was no interim dividend paid during the year (2008: £nil). The directors are not recommending the payment of a final dividend in respect of the 2009 financial year (2008: £nil).

LAND AND PROPERTY

The Group's investment property was revalued at the year end, full details of which are set out in the Operating and Financial Review.

DEVELOPMENT

The Group actively develops its mining and property portfolios, full details of which are found in the Operating and Financial Review and in the notes to the Accounts.

DIRECTORS

The directors who served during the year were: David Brocksom, Peter Hazell, David Jones, Jon Lloyd, Owen Michaelson, Mike Toms and Kevin Whiteman.

Gareth Williams was appointed Mining Director with effect from 15 February 2010 and will offer himself for re-election at the 2010 Annual General Meeting.

Under the Articles of Association, there is a process of rotation which ensures that approximately one third of all directors are required to retire and seek re-appointment at each Annual General Meeting. At the 2010 Annual General Meeting, Jon Lloyd and Kevin Whiteman will retire by rotation and will offer themselves (and are recommended by the Board) for re-election.

All executive directors have service contracts, which may be terminated by the Company on not more than twelve months' notice, for all non-executive directors the notice period is three months. There are no directors on fixed term contracts. There are no contractual clauses that give any of the directors an entitlement to compensation exceeding his due payment in lieu of notice. Details of indemnities from the Company and insurance taken out for the benefit of the directors are set out in the Corporate Governance Report.

The interests of the directors in the shares of the Company are shown in the report on directors' remuneration.

CHARITABLE DONATIONS

The contributions made by the Group during the year for charitable purposes were £51,546 (2008: £44,732). No political donations were made in 2009 (2008: £nil). Charitable donations made were predominantly to associations and charities involved with the coal industry and local communities.

EMPLOYEES

The Group's policy is to consult and discuss with employees on matters likely to affect their interests. A newspaper is produced and distributed free to all employees regularly. Information on matters of concern to employees is given periodically to achieve a common awareness on the part of all employees of the financial and economic factors affecting the Group's performance

DISABLED PERSONS

It is the Group's policy to give full and fair consideration to suitable applications for employment by disabled persons and all disabled persons are provided with training to assist in obtaining promotions and developing their career. Opportunities also exist for employees of the Group who become disabled, to continue in their employment or to be trained for other positions within the Group.

HEALTH AND SAFETY

UK Coal is committed to maintaining high standards of health and safety in every area of the business. It is the aim of the Group to exceed the requirements of the Health and Safety at Work Act 1974 and all other relevant health and safety legislation and has established a committee of the board to oversee health and safety. Details of the Group's commitment to health and safety are found in the Corporate Social Responsibility section.

TREASURY POLICY AND LIQUIDITY

The Group maintains borrowing lines estimated to be sufficient to cover forecast cash requirements. In this assessment, the Group only takes into account existing or renewing facilities and new facilities where these have received credit approval or equivalent.

The Group enters into hedging transactions required to cover the operations of the business. The principal function of the financial instruments held by the Group is to provide security, raise funds and mitigate some interest rate risks.

Details of financial risks in respect of market risk, credit risk and liquidity risk are set out in note 23 to the financial statements.

SUPPLIER PAYMENT POLICY

The Company and the Group does not follow any specific external code or standard on payment practice. Its policy is normally to pay suppliers according to terms of business agreed with them on entering into binding contracts and to keep to the payment terms providing the relevant goods or services have been supplied in accordance with the contracts.

The Group had 74 days' purchases outstanding at December 2009 (2008: 58 days) based on the average daily amount invoiced by suppliers during the year.

ETHICAL POLICY

UK Coal is committed to working with our employees, customers, suppliers and contractors to promote responsible working and trading practices. It also provides assistance to the wider community by way of financial support for charitable and other local causes. Further information regarding how the Group addresses social and community issues is shown in the report on corporate social responsibility.

QUALITY AND INTEGRITY OF PERSONNEL

It is the Group's policy to employ the highest calibre of management and staff and encourage the highest standards of personal integrity. Recruitment procedures are designed to identify and reward high calibre individuals.

SHARE CAPITAL, VOTING RIGHTS AND TRANSFER OF SHARES

Details of the structure of the Company's share capital and changes in the share capital during the year are disclosed in note 25 to the consolidated financial statements. On 9 October 2009, the share capital of the Company was increased from £1,572,527.47 to £2,992,981.60 in connection with a firm placing and placing and open offer. As a result of the firm placing and placing and open offer, 142,045,413 ordinary shares of 1 pence each were issued.

The rights and obligations attaching to the Company's ordinary shares are set out in the Company's Articles of Association, copies of which can be obtained from Companies House in the UK or by writing to the Company Secretary. In particular, subject to particular statutes and the Company's Articles of Association, shares may be issued with such rights or restrictions as the Board may determine.

Shareholders are entitled to attend, speak and vote at general meetings of the Company, to appoint one or more proxies and, if they are corporations, to appoint corporate representatives. On a show of hands at a general meeting every holder of ordinary shares present in person shall have one vote and every proxy present who has been duly appointed by a member entitled to vote on the resolution has one vote and on a poll, every member present in person or by proxy, shall have one vote for every ordinary share held. Further details regarding voting, including deadlines for voting, at the Annual General Meeting can be found in the notes to the Notice of the Annual General Meeting. No person is, unless the Board decides otherwise, entitled to attend or vote either personally or by proxy at a general meeting or to exercise any other shareholder rights if he or any person with an interest in shares has been sent a notice under section 793 of the Companies Act 2006 and has failed to supply the Company with the requisite information within the prescribed period.

Shareholders may receive a dividend and on a liquidation may share in the assets of the Company. The Company has one class of ordinary shares which carry equal voting rights and no contractual right to receive payment.

The instrument of transfer of a certificated share may be in any usual form or in any other form which the Board may approve. The Board may refuse to register any instrument of transfer of a certificated share which is not fully paid, provided that the refusal does not prevent dealings in shares in the Company from taking place on an open and proper basis. The Board may also refuse to register a transfer of certificated share unless the instrument of transfer: (i) is lodged, duly stamped (if stampable), at the registered office of the Company or any other place decided by the Board accompanied by the certificate for the share to which it relates and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer; (ii) is in respect of only one class of shares, (iii) is in favour of not more than four transferees. Transfers of uncertificated shares must be carried out using the relevant system and the Board can refuse to register a transfer of an uncertificated share in accordance with the regulations governing the operation of the relevant system and with UK legislation. Restrictions may also be imposed on certain Group employees who are required to seek approval from the Company before dealing in shares in accordance with the requirements of the Listing Rules of the United Kingdom Listing Authority.

There are no other limitations on the holding of ordinary shares in the Company and the Company is not aware of any agreements between holders of securities that may result in restrictions on the transfer of securities or on voting rights.

Details of employee share schemes can be found in the Directors' Remuneration Report.

SIGNIFICANT AGREEMENTS

The Companies Act 2006 requires us to disclose the following significant agreements that take effect, alter or terminate on a change of control of the Company:

The facility agreement dated 25 July 2007 for the committed term loan facility provided to Harworth Estates (Waverley Prince) Limited by Bank of Scotland relating to the redevelopment of the Prince of Wales and Waverley/Orgreave, Rotherham sites contains provisions entitling the lender to terminate the facilities (and demand immediate repayment of all outstanding amounts due from Harworth Estates (Waverley Prince) Limited) on a change of control of the Company.

The terms of the agreements dated 13 September 2007 for the committed revolving debt, property and stock facilities provided to UK Coal Mining Limited by Lloyds TSB Commercial Finance Limited (among others) include a termination event entitling the lenders to terminate the facilities (and demand immediate repayment of all outstanding amounts due from UK Coal Mining Limited) on a change of control of the Company.

The facility agreement dated 7 May 2008 for the term loan facility provided to EOS Inc. Ltd by Barclays Bank Plc includes a termination event entitling the Bank to terminate the facility (and demand immediate repayment of all outstanding amounts due from EOS Inc. Ltd) on a change of control of the Company.

The terms of the facility agreement provided to the Company by Peel Holdings Finance Limited include a mandatory prepayment provision causing the facility to be cancelled upon (and to become immediately due and payable five business days following) a change of control of the Company.

There are no agreements between the Company and its directors or employees that provide for compensation for loss of office or employment that occurs because of a takeover bid.

GOING CONCERN

The financial statements are prepared on the basis that the Group is a going concern. In forming its opinion as to going concern, the Board prepares a cash flow forecast based upon its assumptions as to production and trading as well as taking into account the available borrowing facilities in line with the Treasury Policy disclosed in the Directors' Report. The Board also prepares a number of alternative scenarios modelling the business variables and key risks and uncertainties as summarised in the operating and financial review. The key factors that have been considered in this regard are:

- The deep mines operate with a cost base which is largely fixed relative to production levels. Consequently, unexpectedly large interruptions or prolonged reductions in production can have a material adverse impact on cash flow. Recent performance has been illustrative of the difficulties inherent in deep mining operations and, in particular, the impact of unpredictable geological conditions and/or other operational issues on production volumes from our deep mines. The Board believes that these risks are now much reduced as Kellingley and Thoresby have started producing coal from their new seams and as Daw Mill has started the ramp up of its new face.

- Bank funding arrangements contain, in certain cases, covenants based upon interest cover, capital expenditure, loan to property value, adjusted net asset values and operating profits adjusted for property revaluations and depreciation in particular. Property valuations affect the loan to value covenants and net asset values and similarly net asset values are affected by operational performance. Breach of covenants could result in the need to pay down in part some of these loans or to a renegotiation of terms or, in extremis, a reduction or withdrawal of facilities by the banks concerned.

- Although the majority of coal production for the next 12 months is on fixed or capped/floor pricing bases, revenues in respect of certain floating rate contracts and uncontracted coal will vary based upon the market price for coal, which is expressed in dollars, and sterling/dollar exchange rates. These variables have, over the last year, proved to be very volatile and therefore there is a risk of unpredictability in coal revenues and cash flows.

The Board notes that the matters set out above indicate the existence of material uncertainties which may cast significant doubt over the Group's ability to continue as a going concern. Nevertheless, the Board confirms its belief that it is appropriate to use the going concern basis of preparation for these financial statements of the Group. The financial statements do not include the adjustments that would result if the Group or the parent company were unable to continue as a going concern.

AUDITORS AND DISCLOSURE OF INFORMATION TO AUDITORS

Each of the directors at the date of approval of this report confirms that, so far as the director is aware, there is no relevant audit information (being information needed by the Company's auditor in connection with preparing its report) of which the Company's auditors are unaware. In addition, each Director confirms that he has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

A resolution to reappoint PricewaterhouseCoopers LLP as auditors to the Company will be proposed at the Annual General Meeting.

By order of the Board

RICHARD COLE

COMPANY SECRETARY 26 April 2010

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the group and parent company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and the company and of the profit or loss of the group for that period.

In preparing these financial statements, the directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and accounting estimates that are reasonable and prudent;

· state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements;

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and the group and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the company and the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the directors, whose names and functions are detailed in the company and advisors section confirm that, to the best of their knowledge:

· the consolidated financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and loss of the group; and

· the Directors' Report includes a fair review of the development and performance of the business and the position of the group, together with a description of the principal risks and uncertainties that it faces.

Corporate Governance

The Company recognises the importance of, and is committed to, high standards of Corporate Governance and the following sections explain how the Company has applied the main and supporting principles set out in the Combined Code on Corporate Governance, issued by the UK Listing Authority. The Board confirms that the Company has complied with the provisions set out in the Combined Code throughout the year ended December 2009.

The Board of Directors

The Company is headed by a Board of Directors, comprising the Chairman, three executive directors and four non-executive directors, three of whom are determined by the Board to be independent. The Board recognises that Owen Michaelson, who is a Director of Peel Holdings which is the major shareholder in the Group, is not independent. The offices of Chairman and Chief Executive are held separately, and both officers have clearly defined roles and responsibilities.

The Chairman is responsible for the running of the Board including, but not limited to, ensuring that a fixed schedule of matters is exclusively retained for the Board's review and approval, and that a framework exists to allow the clear and timely dissemination of relevant information to all directors for such review to occur. The Chief Executive is responsible for running the Group's business and for implementing the Board strategies and policies. The Senior Independent Director is Peter Hazell.

The Board of the Company is responsible for setting the Group's objectives and policies and for the stewardship of the Group's resources. The Board is responsible to the shareholders for the overall management of the Group.

The Board considers its independent non-executive directors bring strong judgement and considerable knowledge and experience to the Board's deliberations. It is further considered that Owen Michaelson's skills and experience are extremely relevant to the business and he contributes to the realisation of the Group's strategy. The non-executive directors have no financial or contractual interests in the Company, other than interests in ordinary shares as disclosed in the Directors' Remuneration Report. Non-executive directors are offered the opportunity to attend meetings with major shareholders and would attend them if requested by major shareholders.

All directors have access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that Board procedures are complied with. The appointment and removal of the Company Secretary are matters for the Board as a whole. The Board has established a procedure under which any director, wishing to do so in furtherance of his duties, may take independent advice at the Company's expense.

The Company maintains an appropriate level of directors' and officers' insurance in respect of legal action against the directors. Further, there are indemnities between the Group and all directors and members of the Executive Management Committee in respect of costs and expenses suffered from an investigation by a regulatory body which are not covered by insurance.

The interests of the directors in the shares of the Company are shown in the Directors' Remuneration Report.

Attendance at Board Meetings

Attendance by individual directors at meetings of the Board and its Committees during 2009 is shown in the table below.

	Board		Audit		Remuneration		Nomination		Safety
	Possible	Actual	Possible	Actual	Possible	Actual	Possible	Actual	Possible	Actual
D H Jones	13	13	-	-	4	4	2	2	-	-
J S Lloyd	13	13	-	-	-	-	2	2	5	5
D G Brocksom	13	13	-	-	-	-	-	-	-	-
P F Hazell	13	12	4	4	4	4	2	2	-	-
R O Michaelson	13	13	-	-	-	-	-	-	-	-
M R Toms	13	12	4	4	4	4	2	2	5	4
K I Whiteman	13	13	4	3	4	4	2	2	5	5

Committees

The Group's governance structure ensures that all decisions are made by the most appropriate people, in such a way that the decision making process itself does not unnecessarily delay progress. The Board has delegated specific responsibilities to the Nomination, Remuneration, Audit and Safety committees, as described below. Each committee has terms of reference that the whole Board has approved, which can be found on the Company's website. Board and committee papers are circulated in advance of each meeting so that all Directors are fully briefed. Papers are supplemented by reports and presentations to ensure that Board members are supplied in a timely manner with the information they need.

Nomination Committee

The Nomination Committee leads the process for Board appointments by making recommendations to the Board about filling Board vacancies and appointing additional persons to the Board. The Committee also considers and makes recommendations to the Board on its composition, balance and membership and on the re-appointment by shareholders of any director under the retirement by rotation provisions in the Company's Articles of Association.

The Committee's members are the independent non-executive directors and the Chairman, together with the Chief Executive. Although the Chairman is also Chairman of the Committee, he will not chair the Committee when it deals with the appointment of a successor to the chairmanship. The Nomination Committee evaluates the balance of skills, knowledge and experience on the Board and, in the light of this evaluation, prepares a description of the roles and capabilities required for a particular appointment.

During the year the Committee engaged the services of external search consultants to assist with the recruitment of Gareth Williams as Mining Director and main board member and David Stewart as a member of the Executive Management Committee in the role of Human Resources Director.

The Board initially appoints all new directors, having first considered recommendations made to it by the Nomination Committee. Following such appointment, the director is required to retire and seek re-appointment at the next Annual General Meeting. There is a process of rotation, which ensures that approximately one third of all directors are required to retire and seek re-appointment at each Annual General Meeting.

The Nomination Committee considers succession planning for appointments to the Board and to senior management positions so as to maintain an appropriate balance of skills and experience both on the Board and in the Company.

Remuneration Committee

The composition and work of the Remuneration Committee are described in the Directors' Remuneration Report.

Audit Committee and Auditors

The Audit Committee comprises Peter Hazell (Chairman), Mike Toms and Kevin Whiteman. The Board is satisfied that Peter Hazell has recent and relevant financial experience and that all members of the Committee are independent non-executive directors. The Chairman, the Chief Executive, the Finance Director, the Group Internal Audit Manager and the external auditors are invited to attend meetings. The minutes of meetings of the Committee are circulated to all directors.

The Committee meets at least four times a year to review the Company's accounting and financial reporting practices, the work of the internal and external auditors and compliance with policies, procedures and applicable legislation. The Audit Committee also reviews the half year and annual financial statements before submission to the Board and periodically reviews the scope, remit and effectiveness of the internal audit function and the effectiveness of the Group's internal control systems. It also reviews "whistle-blowing" arrangements by which employees of the Group may, in confidence, raise concerns about possible financial or other improprieties. The terms of reference of the Audit Committee are available to shareholders on request and are also available on the Company's website. The Group Internal Audit Manager has a direct reporting line to the Committee.

The auditors throughout 2009 have been PricewaterhouseCoopers LLP.

Fees to PricewaterhouseCoopers LLP
	2009	2008
	£000	£000

Audit Fees	315	290
Other audit related fees	338	202
Tax compliance and advice services	38	111
	691	603

The Board recognises the importance of safeguarding auditor objectivity and has taken the following steps to ensure that auditor independence is not compromised:

• The Audit Committee reviews the audit appointment periodically;

• It is Group policy that the external auditors will not, as a general rule, provide consulting services. The external auditors provide audit-related services such as regulatory and statutory reporting as well as formalities relating to shareholder and other circulars;

• The external auditors may undertake due diligence reviews and provide assistance on tax matters given their knowledge of the Group's businesses. Such provision will, however, be assessed on a case by case basis so that the best placed adviser is retained. The Audit Committee monitors the application of the policy in this regard and keeps the policy under review;

• The Audit Committee reviews on a regular basis all fees paid for audit, and all consultancy fees, with a view to assessing reasonableness of fees, value of delivery, and any independent issues that may have arisen or may potentially arise in the future; and

• The auditors report to the Directors and the Audit Committee confirming their independence in accordance with Auditing Standards. PricewaterhouseCoopers LLP have been the Company's auditors for a number of years and the Committee is satisfied that they remain both effective and independent.

Safety Committee

The Board has a Safety Committee to assist it in ensuring that the Company complies with its health and safety obligations and to review and recommend to the Board strategic options that may enhance the policies, standards and processes that operate within the Group. The Committee comprises Kevin Whiteman (Chairman) Mike Toms and Jon Lloyd and meetings are attended by all relevant senior managers. Stuart Hoult was appointed Safety Director with effect from 1 January 2010 (and member of the Executive Management Committee) and has a direct reporting line to the Committee.

Other Meetings

In accordance with best practice, the Chairman has regular meetings with the non-executive directors without the executive directors being present.

A meeting of the non-executive directors, chaired by the Senior Independent Director (without the Chairman), takes place at least annually to appraise the Chairman's performance.

Directors' Development

All directors receive formal induction training on joining the Company and access to further training is made available. The Company provides the necessary internal and external resources to enable directors to develop and update their knowledge and capabilities.

Performance Evaluation

The Board and its committees have conducted a self-evaluation of their performance and effectiveness and have both identified and addressed matters requiring attention. The Chairman's performance is reviewed by the non-executive directors, led by the Senior Independent Director, after consultation with the executive directors. The Chairman has responsibility for the appraisal of the performance of the non-executive directors and the Chief Executive. The Chief Executive has responsibility to conduct a performance evaluation of executive directors and members of the Executive Management Committee.

Executive Management Committee

The Executive Management Committee was established to manage and co-ordinate all strategic and key operational issues. Its membership is as follows:

Chief Executive Jon Lloyd

Finance Director David Brocksom

Mining Director Gareth Williams

Company Secretary Richard Cole

Production Director Bill Tinsley

Human Resources Director David Stewart

Commercial Contracts Director Philip Garner

Safety Director Stuart Hoult

Directors Conflict of Interest Procedures

A director has a duty under the Companies Act 2006 (the 'CA 2006') to avoid a situation in which he has or can have a direct or indirect interest that conflicts or possibly may conflict with the interests of the Company. This duty is in addition to the existing duty that a director owes to the Company to disclose to the Board any transaction or arrangement under consideration by the Company. The Company's Articles of Association allow the directors to authorise conflicts and potential conflicts. The Board has a procedure when deciding whether to authorise a conflict or potential conflict of interest. Firstly, only independent directors (i.e. only those that have no interest in the matter under consideration) will be able to take the relevant decision. Secondly, in taking the decision the directors must act in a way they consider, in good faith, will be most likely to promote the Company's success. In addition, the directors will be able to impose limits or conditions when giving authorisation if they think this is appropriate.

Relations with shareholders

The Company maintains ongoing dialogue with major shareholders through regular presentations and meetings to outline the Group's trading environment and objectives and also offers them the opportunity to meet non-executive directors. The Senior Independent Director is available to all shareholders. Private investors are encouraged to attend the Annual General Meeting where they have the opportunity to question the Board.

Substantial Shareholdings in the Company

The directors have been notified of the following substantial shareholdings as at 26 April 2010

Company	No of Shares	% of Issued Share Capital
Goodweather Holdings Ltd *	84,639,470	28.28
UBS Investment Bank	16,209,608	5.42

* Member of Peel Holdings

Powers of Directors to Allot Shares

At the General Meeting of the Company held on 9 October 2009, the directors were authorised to allot new shares up to an aggregate nominal amount of £2,418,115 of which £1,420,454.13 was allotted in accordance with the terms of a capital raising approved by shareholders on 9 October 2009. A resolution to seek authority to allot up to an aggregate nominal amount of £997,660 will be proposed at the next Annual General Meeting (full details are available in the 2010 Notice of Annual General Meeting).

Purchase of own shares

At the Annual General Meeting of the Company held on 19 June 2009, shareholders gave the Company permission, until the conclusion of the next Annual General Meeting to the Company, to purchase up to 15,712,822 ordinary shares of 1 pence of the Company. No such purchases were made during the year. The directors will seek renewal of similar authority at the Annual General Meeting to be held on 25 June 2010 (full details are available in the 2010 Notice of Annual General Meeting).

Articles of Association

Changes to the Articles of Association of the Company must be approved by special resolution of the Company. Changes to the Articles of Association were approved at the 2009 Annual General Meeting and took effect on 1 October 2009.

Internal Control Risk Assessment

There is an ongoing process for identifying, evaluating and managing, but not eliminating, the significant risks of the Group, and this process has been in place throughout the year under review. Following a review by the Board, on 15 April 2010, of an updated strategic risk assessment and the effectiveness of the Group's system of internal controls, it concluded that there were no significant risks that had not been considered, nor any significant weaknesses in internal controls.

The updated assessment supplements ongoing dialogue between the Board and the directors and managers responsible for monitoring risks at an operational level. The Audit Committee receives regular reports from the Internal Audit and Health & Safety Management departments. These reports identify areas of risk exposure, recommendations made and actions implemented. They also highlight new areas of legislation that will impact on the risk profile of the Group, and provide positive assurance that procedures are working and assisting in the attainment of business objectives. Operational and financial risk management is delegated to directors and managers who are responsible for the day-to-day management of the business. The following controls are embedded in the procedures of the relevant business units:

Operational - detailed mining production and development plans are agreed on an annual basis and updated each month. Operational Review meetings are held with senior management to discuss performance against plan and to decide and implement any actions required. There are group-wide and local procedures to which compliance is monitored. Detailed operational plans are agreed annually for Harworth Estates with these reviewed on a monthly basis at a formal divisional Board meeting attended by all divisional directors and members of the Executive Management Committee.

Health & Safety- full details of the health and safety policies and practices of the Group are set out in the Corporate Social Responsibility section.

Environmental Management - full details of the environmental policies and practices of the Group are set out in the Corporate Social Responsibility section.

Financial (which assist in the consolidation of the Group's accounts) - these controls are considered under the following headings:

• Cost budgeting - The annual budget setting process includes a detailed review of each business unit and final budgets are approved by the Board. Costs and performance are monitored on a monthly basis against budgets. Monthly Operational Review meetings are held with senior management to discuss financial issues.

• Treasury - The terms of reference for the Treasury department are approved and kept under review by the Board. The Treasury department is responsible for placing deposits, for arranging borrowings and for making payments. These transactions are subject to director or senior management authorisation.

• Insurance risk - The Company holds insurance cover for all employer liability and public liability claims, which is issued by its captive insurance company, and which limits the Group's exposure to £100,000 per claim. All claims are subject to expert assessment and challenge and, where appropriate, independent medical and legal opinion.

• Capital expenditure - Board approval of all major capital projects is required. Smaller capital projects are approved by the Investment Committee, which is chaired by the Finance Director and comprises the executive directors. Senior executives are invited where appropriate. The Investment Committee reviews projects with a cost in excess of £100,000.

Assurance Procedures

Assurance is provided by the in-house team of Internal Auditors, Health & Safety Auditors and Environmental Auditors. This resource is supplemented by the HM Inspectorate of Mines (Health & Safety) and other Health & Safety Commission personnel, legal advisors and professional claims handlers (Insurance and Claims Management) and external environmental consultants (Environmental Management).

Reports are prepared and summarised at management level for reporting to the Board as either standing or intermittent agenda items.

The Audit Committee reviews internal audit reports and corporate governance matters. The internal audit plan is based on the annual assessment of risks as reviewed by the Board and is not limited to financial systems. Reports give an opinion of the risk and control profile of each audited system. The Safety Committee reviews all internal safety audits and approves an annual safety audit plan.

Going concern

As set out more fully in the Directors' Report, the directors have formed the conclusion that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. The financial statements have, therefore, been prepared on the going concern basis.

Annual General Meeting

The Board encourages shareholders to exercise their right to vote at the Annual General Meeting. The notice calling the meeting and related papers are sent to shareholders at least 20 working days before the meeting and separate resolutions are proposed on each substantially separate issue.

Shareholders are encouraged to participate through a question and answer session and individual directors or, where appropriate, the Chairman of the relevant committee, respond to those questions directly. Shareholders have the opportunity to talk informally to the directors before and after the formal proceedings.

Directors' Remuneration Report

* Denotes auditable elements of the Remuneration Report

Introduction

This report is made by the Board on the recommendation of the Remuneration Committee. The first part of the report provides details of UK Coal's Remuneration Policy. The second part provides details of the remuneration, service contracts and share interests of all the directors for the year ended December 2009. The Remuneration Report is un-audited unless otherwise disclosed. The Directors confirm that the Remuneration Report has been drawn up in accordance with the Companies Act 2006 and the Combined Code on Corporate Governance ('Combined Code').

The Remuneration Committee

Responsibility for reviewing Group remuneration strategy and policy, recommending any changes and approving individual remuneration packages for the Chairman, Executive Directors and members of the Executive Committee rests with the Remuneration Committee (the 'Committee'). The Committee consists of independent Non-Executive Directors and the Chairman and meets on at least two occasions each year. The members in 2009 were: Mike Toms (Committee Chairman) Peter Hazell, David Jones and Kevin Whiteman. The Committee may seek any information it requires from any employee or director, and all employees and directors are required to co-operate with any request made by the Committee. Richard Cole (Company Secretary) provided information to the Committee during the year.

The Remuneration Committee also meets without management and receives information and independent executive remuneration advice from specialist remuneration consultants, Hewitt New Bridge Street ('HNBS'), who were appointed by the Remuneration Committee. HNBS does not provide any other services to the Group. Neither the Chairman nor the Executive Directors participate in discussions relating to their own remuneration. The Remuneration Committee liaises with the Audit Committee where appropriate; this includes confirmation of the Group's financial performance to assist in determining whether performance targets and measures have been achieved and to ensure that the structure for the incentive arrangements throughout the Company are appropriate from a risk perspective. It also liaises with the Safety Committee in respect of safety targets for the annual bonus scheme.

The Remuneration Committee has terms of reference, approved by the Board, which are available from the Company Secretary and via the Company's website.

Directors' Remuneration Policy

The policy of the Committee recognises that the Company requires high quality and committed Executive Directors and other Senior Executives in order to deliver appropriate levels of performance. The Committee therefore conducts its work to determine the appropriate remuneration levels and structure consistent with the need to attract, motivate and retain executives of the high quality required to further the Company's interests and to optimise long-term shareholder value creation.

The Executive Directors' remuneration comprises a base salary, an annual performance bonus, participation in a Long Term Incentive Plan, a car or car allowance plus fuel card, pension contributions to a defined contribution pension scheme or a pension allowance, Life Assurance and health insurance. Bonus payments and benefits in kind are not pensionable.

This remuneration policy is expected to apply to 2010 and beyond.

The Company is required to seek shareholder approval for this report, and to put forward any new incentive schemes for shareholder approval at the Annual General Meeting. It is proposed to seek shareholder approval at the 2010 Annual General Meeting for a new Long Term Incentive Plan to replace the existing plan which expires in May 2010. Full details of the new LTIP are found in the Notice of meeting and Circular for the meeting.

The following paragraphs explain the operation of the main constituents of the remuneration policy.

Chairman

The Chairman receives fees commensurate with his duties, which include: managing the business of the Board and its Committees, maximising long-term shareholder value by reviewing short-term performance, risk management and long-term development of the Group, ensuring that corporate governance is in line with best practice, ensuring a management succession process is in place and working, making recommendations on the remuneration of all other Non-Executive Directors and agreeing with the Chief Executive the most appropriate role of the Chairman vis-à-vis stakeholders including government, shareholders, the financial community, customers, competitors, potential and actual partners, trade unions, employees, the media and the wider community. Following a review, it has been agreed that the Chairman's fee of £150,000 per annum will not increase in 2010.

Executive Directors

Remuneration mix

An appropriate balance is maintained between fixed remuneration and "at risk" (performance-related) remuneration. Performance-related remuneration is made up of short-term and long-term incentives (further details of which are given below) and represents approximately 40% of Jon Lloyd's, David Brocksom's and Gareth Williams' remuneration packages (based on target performance). If maximum performance thresholds are reached under the short-term and long-term incentives, performance-related remuneration represents approximately 55-60% of their packages.

Base Salaries

Executive Directors' salaries are reviewed by the Remuneration Committee on an annual basis. In determining salary levels for executives, due regard is given to external market data in similarly sized companies across a range of sectors, personal and company performance and pay and employment conditions within the Group. Executive Directors' salaries are targeted at broadly mid-market levels for similarly sized companies. It has been agreed that both Mr Lloyd and Mr Brocksom's salaries will, in 2010, remain at £375,000 and £234,675 per annum respectively. Mr Williams' base salary is £230,000 per annum.

Annual Bonus

The annual bonus provides an incentive opportunity in the range of 0% to 80% (Chief Executive) and 0% to 75% (for other Executive Directors) of base salary. At the start of the incentive year (1 January), the Remuneration Committee sets both the performance measures and targets based on the Group's business priorities. These targets ensure that incentives at the higher end of the range are payable only for demonstrably superior Group and individual performance.

The targets in 2009 were safety, cash flow, profit, group coal sales and personal performance. In light of the poor operational performance of the business there was no payment in respect of the first four targets and the bonus below is in respect of the personal performance element only. The bonuses payable were for the delivery of cash flows from commercial re-negotiations and the capital raising both of which have enabled the completion of major deep mine investments which will drive future shareholder value.

In respect of 2009, Jon Lloyd received a bonus of £36,000 (2008: £45,000) and David Brocksom received a bonus of £21,120 (2008: £24,641). The bonus for the period represents 9.6% of basic pay for Jon Lloyd and 9% of basic pay for David Brocksom.

In 2010 the following measures will be applied for each director in the proportions shown:

Safety

(%)

Cash Flow (%)

Profit

(%)

Deep & Surface Mines Production (%)

Personal

(%)

Jon Lloyd

David Brocksom

Gareth Williams

Long Term Incentive Plan ('LTIP')

No awards vested in 2009 due to performance conditions for awards granted in 2006 not being achieved. The Company's Total Shareholder return (TSR) targets for awards granted in 2007 (due to vest in 2010) have not been achieved and hence all awards have lapsed.

The current LTIP expires in May 2010, following which no further awards can be granted.

Accordingly, shareholder approval is being sought for a new LTIP at this year's Annual General Meeting and the annual award for 2010 will be granted under the new LTIP immediately after the AGM.

At the time of writing this report it is anticipated that the following policy will apply for LTIP awards in 2010:

Award value

Grant levels for 2010 will be 75% of base salary for Executive Directors (other than the Mining Director) and 65% for other members of the Executive Committee. Other senior executives (approximately 10-12 in total) occupying positions with a material influence on the Company's performance will receive grants worth, typically, 20-50% of base salary. The Committee considers that these Award levels will provide a broadly competitive overall package, when taking account of other elements of the package. Gareth Williams will receive an award in 2010 worth 100% of salary as agreed with him at the time of his recruitment.

Awards will take the form of a 'nil cost' option.

Performance conditions

There has been considerable thought given to the structure of the performance condition. Under the existing LTIP there has been a requirement for absolute TSR targets to be achieved. In the recent past the three-year target range has been either 25%-75% or 75%-150% growth, depending on the outlook for performance and the starting level of share price.

The Committee considered whether there would be any financial performance conditions which would reflect both the earnings-driven mining and the value-driven property sides to the business. We have looked into setting EPS ranges, assessing Net Asset Value (NAV) growth and relative measures such as comparing total property return versus a relevant investment property database index.

However, due to the ongoing volatility, both of our business and the markets in which we operate, the Committee considers that it would be preferable to set a performance condition based on a relative stock market measure of performance. Various benchmarks have been considered, but noting the lack of a natural comparator group, it is proposed to use the constituents of the FTSE All Share Index as at grant, minus financial services companies. Such an approach recognises that the company competes for capital with a wide range of other potential investments.

The performance condition for awards in 2010 will be based on a comparison of the Company's TSR against the constituents of the FTSE All Share Index as at the date of grant, excluding financial and investment companies. The performance period will be three years from the beginning of the financial year in which the award is granted. 25% of an award will vest if the company's TSR is ranked at the median of the comparator group, rising so that there will be full vesting if the Company's TSR is ranked at or above the upper quartile

In addition awards will not vest unless the Company's absolute TSR is positive over the three year performance period and the Committee is satisfied that there has been an improvement in the Company's financial performance over the three year performance period. This will take into account, amongst other things, cashflow, profit, NAV, dividend and gearing. In the event that the Committee, in its sole discretion, considers that there has not been an improvement, it may scale back the number of shares vesting by reference to the TSR performance condition by an amount it considers to be appropriate (but potentially to zero).

The fair value of the awards is estimated to be in the region of 60% of the face value of the shares as at the date of the award. On this basis the total IFRS 2 Share-based Payment charge to the Income Statement for the award to the three Executive Directors would be circa £380,000. The statutory fair value will be calculated as at the date of the award and disclosed next year in the notes to the Financial Statements.

Share usage

The new LTIP contains limits which control the issuance of new shares to satisfy share awards. Under the LTIP the limit restricts the issue of new shares under the LTIP and any other executive plan to an amount equivalent to no more than 5% of issued share capital over any ten year period. As at December 2009 the level of issuance of new shares was at 0.3% of the current issued share capital.

Shareholding Guideline

An executive shareholding guideline will be introduced for Executive Directors and other selected senior executives. To the extent awards vest under the LTIP, the executive will be required to retain no less than 50% of the net of tax value of the shares until a holding equivalent to 100% of salary is attained (50% of salary for other senior executives).

Performance Graph

[Graph omitted due to constraints of reporting service]

The above graph displays the value, by the end of 2009, of £100 invested in the Company on 31 December 2004 compared with the value of £100 invested in the FTSE Small Cap Index (excluding investment trusts). The other points are the values at intervening financial year-ends.

Other Terms and Conditions of Service

The Executive Directors' service contracts, including arrangements for early termination, are considered carefully by the Remuneration Committee and are designed to recruit, retain and motivate Executive Directors of the quality required to manage the Group. The Remuneration Committee considers that a notice period of no more than one year is appropriate.

In respect of Jon Lloyd employment will continue until terminated by the Company giving the Executive not less than twelve months written notice, or by the Executive giving the Company not less than six months written notice. David Brocksom's and Gareth Williams' contracts shall continue until either they or the company terminates it by not less than 12 months notice in writing.

When calculating termination payments, the Remuneration Committee takes into account a variety of factors including individual and Group performance, the obligation of the Executive Director to mitigate his own loss (for example by gaining new employment), the Executive Director's age and his length of service and the best interests of the Group. Should the Company terminate the contract of an Executive Director, compensation for loss of office is limited to the amounts payable under these notice periods. There are no special provisions for payments to Executive Directors on a change of control.

Any payments made pursuant to these provisions will be made less any deductions the employer is required to make and shall be in full and final settlement of any claims the Executive Director may have against the employer or any associated company arising out of the termination of employment except for any personal injury claim, any claim in respect of accrued pension rights or statutory employment protection claims.

Non-Executive Directors

The Board aims to recruit Non-Executive Directors of a high calibre with broad commercial and other relevant experience. Non-Executive Directors are appointed for an initial three-year period. The terms of their engagement are set out in a letter of appointment. The initial appointment and any subsequent re-appointment is subject to election or re-election by shareholders at the Annual General Meeting. The letters of appointment contain three-month notice periods.

Compensation for loss of office is limited to the amounts payable under these notice periods. The Board considers these notice periods appropriate given the skills and expertise of the Directors.

Non-Executive Directors are paid a basic fee of £40,000 per annum. Additional fees of £6,000 per annum are payable for chairing a committee. These fees will not be increased during 2010.

Non-Executive Directors are not eligible to participate in any of the Company's share schemes, incentive schemes or pension schemes.

Directors' Service Contracts and Letters of Appointment

	Contract Date	Un-expired Term (as at December 09)	Notice Period
Chairman
David Jones	12.12.08	2 years	3 months
Executive directors
Jon Lloyd	01.07.06	Rolling 1 year	1 year
David Brocksom	04.09.07	Rolling 1 year	1 year
Gareth Williams	15.02.10	Rolling 1 year	1 year
Non-executive directors
Peter Hazell	19.08.09	2 years 9 months	3 months
Owen Michaelson	01.10.07	9 months	3 months
Mike Toms	21.04.09	2 years 4 months	3 months
Kevin Whiteman	29.05.07	5 months	3 months

There are no liabilities in respect of directors' service contracts that require disclosure. Copies of directors' service contracts and agreements are available to shareholders for inspection at the Company's registered office by application to the Company Secretary.

Directors' Emoluments for the Year-Ended December 2009*

	Salary /Fees	Allowances	Annual Bonus	Benefits in Kind	Total 2009	Total 2008
	£000	£000	£000	£000	£000	£000
Chairman
David Jones	150	-	-	-	150	146
Executive directors
Jon Lloyd (i)	375	20	36	5	436	452
David Brocksom (ii)	235	10	21	5	271	275
Non-executive directors
Peter Hazell	46	-	-	-	46	43
Owen Michaelson	40	-	-	-	40	38
Mike Toms	46	-	-	-	46	43
Kevin Whiteman	46	-	-	-	46	43

(i) Jon Lloyd received a car allowance of £20,000 which is included in allowances above.

(ii) David Brocksom received a car allowance of £10,000 which is included in allowances above.

(iii) Other than disclosed in points (i) and (ii) above benefits in kind comprise car benefits, life assurance and health insurance.

Pension Contributions*

Executive Directors are entitled to receive a pension contribution at the rate of 30% of base salary. During the year Jon Lloyd was a member of the UK Coal money purchase pension scheme. The money purchase scheme does not provide additional post-retirement benefits (including contingent death benefits).

Pension contributions on behalf of executive directors were as follows:

	Pensions Contributions 2009	Pensions Contributions 2008
	£000	£000

Jon Lloyd	113	109
David Brocksom (i)	70	70
	183	179

(i) This was paid to Mr Brocksom's personal pension arrangements

Long Term Incentive Plan*

	Interest at Dec 2008(ii)	Interest awarded during the year (i)	Interest lapsed during the year	Interest matured during the year	Interest at Dec 2009 (ii)	Vesting date	End of performance period

Jon Lloyd
Executive LTIP 2007 (iii)	32,068	-	32,068	-	-	02.03.10	Dec 09
Executive LTIP 2007 (iii)	45,652	-	45,652	-	-	18.09.10	Dec 09
Executive LTIP 2008 (iii)	95,319	-	-	-	95,319	22.04.11	Dec 10
Executive LTIP 2009 (iv)	-	213,703	-	-	213,703	05.05.12	Dec 11
Total	173,039	213,703	77,720	-	309,022

David Brocksom
Executive LTIP 2007 (iii)	51,878	-	51,878	-	-	18.09.10	Dec 09
Executive LTIP 2008 (iii)	59,650	-	-	-	59,650	22.04.11	Dec 10
Executive LTIP 2009 (iv)	-	133,734	-	-	133,734	05.05.12	Dec 11
Total	111,528	133,734	51,878	-	193,384

(i) The share price at the date of the awards for Messrs Lloyd and Brocksom, on 5 May 2009, was 138p.

(ii) The exercise price of all outstanding awards is £nil. As a result of new shares being issued by the company in October 2009 (55,556,403 shares were issued by firm placing and 86,489,010 issued by placing and open offer at 75 pence each) all existing awards have been adjusted to take account of the placing and open offer element of the capital raising at the time they vest. The adjustment is calculated by multiplying the original number of shares under each award by 1.154 which was determined in accordance with the theoretical ex entitlement price ('TEEP') formula

(iii) The performance conditions for 2007 and 2008 awards require absolute TSR growth of between 25% and 75% for between 30% and 100% of an award to vest (with straight-line vesting between these points). In addition, the Company must achieve EPS growth of at least RPI+3% p.a. over the performance period. The TSR targets for 2007 have not been achieved and hence Messrs Lloyd's and Brocksom's awards have lapsed.

(iv) The performance conditions for 2009 awards require absolute TSR growth of between 75% and 150% for between 30% and 100% of an award to vest (with straight-line vesting between these points). In addition, the Company must achieve EPS growth of at least RPI+3% p.a. over the performance period.

Directors' Interests in Ordinary Shares*

The directors' beneficial interests in ordinary shares of the Company and its subsidiaries at the end of the financial year were as set out below. None of the directors had an interest in shares of the Company's subsidiaries during the year.

	Beneficial interest in ordinary shares at Dec 2009	Beneficial interest in ordinary shares at Dec 2008
David Jones	54,250	35,000
Jon Lloyd	38,750	25,000
David Brocksom	28,675	18,500
Peter Hazell	-	-
Owen Michaelson	40,084	25,861
Mike Toms	6,200	4,000
Kevin Whiteman	15,500	10,000

There have been no changes in Directors' interests in shares between the end of the year and 26 April 2010.

The market value of the Company's shares during the year ranged from 59.25p to 154.5p (on an unadjusted basis). The market value on 26 December 2009 was 64p.

External Appointments

The Remuneration Committee recognises the importance of allowing Executive Directors to take Non-Executive Director roles elsewhere. Mr Brocksom is a Non-Executive Director of Helius Energy PLC. He was appointed with effect from 1 December 2009 and received (and retained) fees of £3,000 in 2009.

This report has been approved by the Board for submission to shareholders at the Annual General Meeting to be held on 25 June 2010, and signed on behalf of the Board by Mike Toms.

By order of the Board

Mike Toms

Chairman, Remuneration Committee

26 April 2010

INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF UK COAL PLC

We have audited the financial statements of UK Coal PLC for the year ended 26 December 2009 which comprise the Consolidated Income Statement, the Group and Company Statements of Comprehensive Income, the Group and Company Balance Sheets, the Group and Company Statements of Cash Flows, the Consolidated and Company Statements of Changes in Shareholders' Equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

Respective responsibilities of directors and auditors

As explained more fully in the Directors' Responsibilities Statement set out on page 64, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of whether the accounting policies are appropriate to the Group's and the Parent Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.

Opinion on financial statements

In our opinion:

· the financial statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 26 December 2009 and of the Group's loss and Group's and Parent Company's cash flows for the year then ended;

· the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;

· the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and

· the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the lAS Regulation.

Going Concern

In forming our opinion on the financial statements, which is not qualified, we have considered the adequacy of the disclosures given in Note 1 to the financial statements concerning the ability of the Group and the Parent Company to continue as a going concern. We note that the matters set out in Note 1 to the financial statements indicate the existence of material uncertainties which may cast significant doubt over the ability of the Group and the Parent Company to continue as a going concern. The financial statements do not include the adjustments that would result if the Group or the Parent Company were unable to continue as a going concern.

Opinion on other matters prescribed by the Companies Act 2006

In our opinion:

· the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006;

· the information given in the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

· the information given in the Corporate Governance Statement set out on pages 65 to 70 with respect to internal control and risk management systems and about share capital structures is consistent with the financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following:

Under the Companies Act 2006 we are required to report to you if, in our opinion:

· adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

· the Parent Company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or

· certain disclosures of directors' remuneration specified by law are not made; or

· we have not received all the information and explanations we require for our audit; or

· a Corporate Governance Statement has not been prepared by the Parent Company.

Under the Listing Rules we are required to review:

· the Directors' Statement, set out on page 63, in relation to going concern; and

· the parts of the Corporate Governance Statement relating to the company's compliance with the nine provisions of the June 2008 Combined Code specified for our review.

Steve Denison (Senior Statutory Auditor)

for and on behalf of PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

Leeds

26 April 2010

Notes:

(a) The maintenance and integrity of the UK COAL PLC website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdiction

This information is provided by RNS

The company news service from the London Stock Exchange

END

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Annual Financial Report - PAR

Description of material properties

Business parks/rented properties

Development properties with planning consent

Other projects in the planning pipeline

Employees

The Environmental Policy commitments of the Group are to:

The Board of Directors

Attendance at Board Meetings

Committees

Nomination Committee

Remuneration Committee

Audit Committee and Auditors

Fees to PricewaterhouseCoopers LLP

Safety Committee

Other Meetings

Directors' Development

Performance Evaluation

Executive Management Committee

Relations with shareholders

Internal Control Risk Assessment

Environmental Management - full details of the environmental policies and practices of the Group are set out in the Corporate Social Responsibility section.

Financial (which assist in the consolidation of the Group's accounts) - these controls are considered under the following headings:

Assurance Procedures

Going concern

Annual General Meeting

Introduction

The Remuneration Committee

Directors' Remuneration Policy

Chairman

Executive Directors

Remuneration mix

Base Salaries

Long Term Incentive Plan ('LTIP')

Other Terms and Conditions of Service

Non-Executive Directors

Directors' Service Contracts and Letters of Appointment

Directors' Emoluments for the Year-Ended December 2009*

Pension Contributions*

£000

(i) This was paid to Mr Brocksom's personal pension arrangements

Long Term Incentive Plan*

Jon Lloyd

David Brocksom

Directors' Interests in Ordinary Shares*

External Appointments

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