Final Results

RNS Number : 1944C

UK Coal PLC

27 April 2012

 



27 April 2012

UK Coal

("UK Coal", the "Group" or the "Company")

Preliminary Results

For the year ended 31 December 2011

Key Points:

§ Total Group Revenue of £488.2 million (2010: £351.2m)

§ Operating profit/(loss) before non-trading exceptional items of £65.2m (2010: £(74.3m))

§ Profit/(loss) before tax of £58.0m (2010: £(124.6m))

§ Total production of 7.5m tonnes (2010: 7.2m tonnes), in line with expectations

§ Average sales price per Gigajoule (£/GJ): £2.48 (2010: £1.97)

§ Property sales of £67m achieved slightly ahead of book value

§ Group net bank debt reduced to £55m (2010: £141m)

§ Total net debt, including generator loan/prepayments reduced from £242m to £139m

Commenting on the results, Jonson Cox, Chairman, said:

"For the first time in four years UK Coal delivered a profitable year, with overall pre-tax profits of £58.0m, compared to the loss of £124.6m for 2010 and cumulative losses from 2008 to 2010 of £269m. This improved performance is in line with our Recovery Plan, with an increase in revenue from improved production, stock reductions and realised sales price, and from our initial steps in addressing our cost base. Our programme to reduce bank debt, through development and sale of the property portfolio succeeded in more than halving bank debt over the year. 

"However, recent operational performance at Daw Mill, the near-doubling of our pension deficit and the level of debt in the mining business have continued to highlight how much remains to be done to put the UK Coal mining business on a stable footing. The Company has announced its intention to seek the agreement of key economic stakeholders in the company to a restructuring of the Group, and a reduction in its debt, to create a long term stable financial footing for the business and to isolate the operating risk of each deep mine from the Group as a whole.

"Under this new structure, the Board believes that the value inherent in the mining business and value in the brownfield property portfolio can be realised for the benefit of all stakeholders."

Further Information

Analysts Presentation

A presentation to analysts is being held at Cardew Group, 12 Suffolk Street, London, SW1Y 4HG at 9.30am.

Press Call

A conference call for press is being held at 12.30pm:

Dial in Number: 020 3140 0698

Pin: 361102#

Enquiries

David Brocksom                                                Finance Director, UK Coal                            Tel: [phone]

Andrew Mackintosh                                       Director of Communications, UK Coal     Tel: [phone]

Anthony Cardew / Emma Crawshaw       Cardew Group                                                   Tel: [phone]

Notes to Editors:

UK COAL is a mining, property and power company employing c.2,500 people with its headquarters at Harworth Park, Harworth, near Doncaster, South Yorkshire.

Britain's biggest producer of coal, UK COAL operates three deep mines in the Midlands and Yorkshire, and surface mines in the North East, the North West and the Midlands.  Over 90% of the total annual output is sold to generate around 5% of Britain's electricity requirements.

The Group owns around 30,000 acres of land and other property. Harworth Estates, the property arm of the business, currently has plans to develop 85 sites covering a developable area of more than 4,000 acres, creating opportunities for building around 30,000 homes and 32 million square feet of business space over the next decade.

For more information, please go to:  www.ukcoal.com

Cautionary Statement:

This announcement contains forward-looking statements that are based on current expectations or beliefs, as well as assumptions about future events. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as anticipate, target, expect, estimate, intend, plan, goal, believe, will, may, should, would, could, is confident, or other words of similar meaning. Undue reliance should not be placed on any such statements because they speak only as at the date of this document and, by their very nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, and UK Coal's plans and objectives, to differ materially from those expressed or implied in the forward-looking statements.

UK Coal undertakes no obligation to revise or update any forward-looking statement contained within this announcement, regardless of whether those statements are affected as a result of new information, future events or otherwise, save as required by law and regulations.

CHAIRMAN'S STATEMENT

Results for 2011

For the first time in four years UK Coal delivered a profitable year, with overall pre-tax profits of £58.0m, compared to the loss of £124.6m for 2010 and cumulative losses from 2008 to 2010 of £269m. This improved performance is in line with our Recovery Plan, with an increase in revenue from improved production, stock reductions and realised sales price, and from our initial steps in addressing our cost base.

Net bank debt fell to £55 million at 31 December 2011 against £141m in 2010. This reflects the realisation of value from our property portfolio, with sales of £67m achieved at prices slightly ahead of book values.

Recovery Plan

In my statement last year I set out an assessment of UK Coal's business performance as I had found it on becoming Chairman in November 2010. Shortly afterwards, we announced the detailed priorities for the first steps of our Recovery Plan, which has delivered a profit in 2011. We have made some significant progress during the year:

i.     We were very clear that our highest priority was to improve the safety of our mining operations and made initial good progress.  Our All Accident Rate for 2011 improved by around 20%.   A fatality in September further accelerated our efforts, through our Critical Safety Review, on the changes that are needed around behaviours and working practices.

ii.    Our property business, Harworth Estates, performed well with net receipts from property disposals of £65m in the year.

iii.   We made substantial progress in addressing high, and unaffordable, workforce costs and the future service cost of the Group's defined benefit pension schemes. Service costs have been halved. Labour agreements reached during the year are expected to hold per capita employment costs broadly at 2010 levels until the end of 2013.

iv.   We started work on balancing long term security of sales contracts with more flexibility around market conditions.

v.    Good progress was made in improving financial and operational controls across all areas of the business. We continue to fight inefficiency and high costs, although much remains to be done.

vi.   We started work on rebuilding the management of the Company with significant new appointments to our mining team in the second half of the year.

vii.  At year end, net bank debt, excluding restricted funds, was reduced from £141m to £55m. Total net debt, excluding restricted funds but including loan prepayments, has reduced from £242m to £139m.

viii. By the end of 2011 we had completed the re-building of the Board, with the appointment of four new Non-Executive Directors since late 2010.  These appointments have contributed a fresh outlook and new determination to the Board.

Current progress

While there were significant achievements made in 2011, difficulties at Daw Mill from late 2011 highlighted how much remains to be done to put the UK Coal mining business on a stable footing.

We highlighted in April last year that the Company once again faced a potential three-month "face gap" at Daw Mill, following the four-month face gap in 2010 which cost the Company the majority of the £100m raised in October 2009. Our mining team developed a two-part mitigation strategy to avoid a 2011 face gap.

At the end of 2011, the element of mitigation which relied on extending the 32s face at Daw Mill failed as a result of combined geological, workforce and management problems. Work started in January 2012 on the second part of the mitigation strategy which was to commence the next face early.  The ramp-up of this face was very slow, taking three months in Q1 2012.

The high fixed cost structure inherent in our deep mines and a two week cash conversion cycle coupled with poor operational performance has an immediate impact on the Group's financial position. The current structure, whereby all mines are in the same corporate entity, can quickly result in one mine putting the entire Group at risk.

The problem of operational vulnerability is compounded by the level of our pension deficit and debt to customers and banks.  The pension deficit, under the principles used by the Trustees to determine future funding, has almost doubled from around £250m at the last valuation in 2009 to approximately £430m.

As a result, the Company has recently announced its intention to restructure the Group to isolate the operating risk of each deep mine from the Group as a whole and mitigate future financial uncertainty arising from operations at Daw Mill or other mines.  It was also announced that a consultation process has begun regarding the early closure of Daw Mill in 2014, subject to the option to retain Daw Mill under a new structure and operating model.

2012 restructuring

Our proposal to parties with an economic interest in UK Coal would entail a more formal separation of mining and property interests, each with an appropriate capital structure. The plan is intended to isolate the operating and financial risk of each deep mine from the Group as a whole and to address the funding and debt structure of the Group.

We have continued constructive discussions with our principal banking partners, Lloyds Banking Group, together with Barclays Bank, the Pension Funds,  our customers, the Department for Energy and Climate Change and the Coal Authority.  We are in the process of tabling our detailed plan to these parties.

Our intended plan involves a substantial reduction of the pension, and other, liabilities of UK Coal.   Under this plan, the Board believes that the value inherent in the mining business can be properly exploited for the benefit of all stakeholders.  A minority equity stake in the mining business, together with an interest in the future cash stream from the realisation of the property portfolio, would be offered in consideration for the reduction of pension scheme and, potentially, other stakeholder liabilities.

The Board believes that there is potential value to be realised from our substantial brownfield property portfolio through the development process. It is proposed that the property company would take over the bank debt of the Group and an agreed liability as part of a compromise of the pension scheme.  Our proposal is that equity funding, which will be ring fenced to the property business, will need to be raised for the period of time required to pay down bank debt whilst the development process releases this value.

The Board believes that this plan is the only practicable way to create a sustainable structure for the Group.  We recognise that this will require significant co-operation and support from all of those with an economic interest in the Group.  Without this support there would be a significant risk to the Group, and, in particular, to the continuation of the mining business.  We hope to be able to report on the result of our negotiations at our AGM in June.

Outlook

The reliance on coal in the current energy mix continues.  During this recent winter, mild as it was, coal generated around half of the electricity needed in the UK.  The proposed introduction of the carbon support price may reduce the demand for coal, but coal remains a key factor in keeping energy bills as low as possible.

In the short and medium term, as the UK manages the transition to a cleaner energy future, in a way that also maintains an affordable price for electricity, coal continues to be part of the energy mix.  With over 100 years of reserves left in the UK, it is important that we continue to use coal mined in the UK rather than relying solely on imported coal.

We have two immediate over-riding priorities:

i.     To operate the business safely and successfully, delivering the continuing targets of our recovery plan and in particular to improve production at Daw Mill where the recovery of 32s face still has to be achieved and the equipment transferred to 33s on a timely basis.

ii.    To set out and negotiate, with our very wide range of stakeholders, a new structure for the Group to enable it to continue into the medium and longer term.

UK Coal has made significant progress on achieving the objectives set at the beginning of the year. I believe we now have a realistic and practical solution for taking the Group forward and would like to thank all those at UK Coal who have contributed to this progress.

Jonson Cox

Chairman

27 April 2012

REVIEW OF OPERATIONS BY BUSINESS

Mining

General overview

Good progress was made in 2011 against the Group's Strategic Recovery Plan with a return to profitability. Revenue from the mining business for 2011 was £477.7 million (2010: £342.8 million) and operating profit before non-trading exceptional items was £54.5 million (2010: loss of £43.7 million).  The revenue is derived from sales from deep mine production of £366.3 million (2010: £276.7 million) and sales from surface mine production of £111.4 million (2010: £66.1 million).  The operating profit before non-trading exceptional items is split as a deep mines profit of £32.4 million (2010: loss of £44.1 million) and surface mines profit of £22.1 million (2010: £0.4 million).  With the continued replacement of lower priced contracts with new, better priced contracts during the year, the mining business was able to benefit from a strong market price and average realised sales price per Gigajoule rose by over 25% to £2.48/GJ (2010: £1.97/GJ).

Key performance indicators

						2011	2010
Sales price per Gigajoule (£/GJ)						2.48	1.97
Tonnage sold (million tonnes)						8.0	7.2
Tonnage produced (million tonnes)						7.5	7.2

Market overview 2011

The UK burned an estimated 45 million tonnes of steam coal in 2011, the vast majority of this to generate electricity. Overall, UK consumption was fairly static in comparison to 2010, which was boosted by extreme winter weather conditions. Towards the end of 2011 coal became the electricity generators fuel of choice as rising gas prices pushed down gas use enabling coal to increase its share of the fuel mix to around 30% in the year. As we enter 2012 the profit margins on gas plant have been further squeezed and some older gas stations have ceased generation.

The longer term demand for our product remains unaffected as the electricity generation market is heavily dominated by imports. Coal mined in the UK, including our own 7.5 million tonnes in 2011, can only meet a portion of this demand making the UK a substantial importer of coal. Demand in the UK will continue substantially to exceed our supply capacity throughout this decade.

In 2010, high stock levels held by UK generators resulted in a downturn in imports as they looked to bring these down to more manageable levels. 2011 saw a resumption of coal buying which led to imports rising by 22% to 32 million tonnes. UK power station stocks started and ended 2011 at around 13 million tonnes.

Given the nature of the UK electricity supply industry, our predominant market, we continue to have a small number of significant customers. All of our major customers have retrofitted flue gas desulphurisation ("FGD") onto their stations to meet the requirements of the European Large Combustion Plant Directive ("LCPD"). 

The replacement legislation to the LCPD, the Industrial Emissions Directive ("IED") has been approved in the European Parliament and the UK is currently working towards finalising its implementation. The IED will require further investment by the generators to meet the tightening sulphur dioxide and nitrogen oxide emission limit targets after 2015. However as it stands, the IED would allow UK generators, without further investment, some flexibility in their operational emissions but would limit their running hours in return.

In July 2011 the UK Government published its White Paper on 'Electricity Market Reform' ("EMR") consultation outlining how it intends to encourage investment in low carbon generation to meet its long term carbon reduction targets. The White Paper put forward four main principles to reach this goal; carbon price support, feed in tariffs, capacity mechanisms and emission performance standards. 

The UK Government intends to introduce its carbon price support mechanism in April 2013. This will reduce the competiveness of coal fired plant against other types of generation. UK Coal believes that this scheme is unnecessary as the Government's proposal to introduce feed in tariffs would deliver the same result.

UK Coal strongly believes that existing coal fired generation provides an essential low cost transition to the low carbon economy. The UK Government recognises the importance coal plays in providing diversity, security and flexibility in our energy supplies but has stated that ultimately coal can only play its part in the long term energy mix through carbon capture and storage ("CCS") enabled generators.

CCS involves capturing the CO² emitted from burning fossil fuels, transporting it and storing it safely in geological formations. CCS has the potential to reduce CO² emissions from fossil fuel power stations by as much as 90%. The emission performance standard proposals within the EMR proposals would force all new coal power stations to fit CCS to a proportion of its capacity from the start of operations.  However, CCS imposes a considerable power burden on generator stations, reducing the overall efficiency and cost effectiveness of coal as a source of energy.

Despite the disappointing news that the CCS scheme at Longannet would not go ahead, the UK Government has reaffirmed that £1 billion would be still be available to support CCS projects within the UK.  The Government has recently published the CCS roadmap and competition and we expect this to progress during 2012.

NW Europe steam coal price

International coal prices for near term deliveries started 2011 at $124 per tonne, remained above $120 per tonne until September before falling back to finish the year at $112 per tonne as mild weather across Europe affected demand.

The Far East remained the main driver in the international market. China's imports were up by 10% although this was partially offset by lower Japanese demand in the aftermath of the tsunami.

In sterling terms, the price per tonne followed a similar trend, starting 2011 at £79 per tonne (£3.13 per gigajoule), and finishing the year at £72 per tonne (£2.85 per gigajoule). As the mild winter progressed in Europe, coal stocks rose at generators, reflecting lower demand.  This resulted in a near term reduction in coal price and, as at 30 March 2012, the average forward market price for coal for deliveries in the remainder of 2012 was £67 per tonne.

UK steam coal market

Coal delivered into the UK is priced using the Amsterdam/Rotterdam/Antwerp (ARA) price which, for the process of showing a landed UK price, is converted into sterling with the additional cost of delivery into the UK then added. The average forward price for 2012 on the ARA market at 31 December 2011 was $112 per tonne. Converted into sterling at the then exchange rate of $1.56:£1 and into its calorific value by dividing the tonnes by 25.121, this equated to a forward sterling price of £2.86/GJ. The additional cost of delivery to the UK brought this to a UK delivered price of over £3.11/GJ.

 This table shows coal is the second most used fuel source in UK electricity generation.

Percentage of electricity generated by fuel type	2011	2010	2009	2008	2007	2006
	%	%	%	%	%	%
Gas	42	46	45	48	43	37
Coal	30	28	28	32	35	38
Nuclear	19	16	18	13	15	18
Oil, hydro and renewables	9	10	9	7	7	7
Total	100	100	100	100	100	100

Source: DECC Energy Statistics (2011 figures based on provisional numbers)

Coal contracts 

We aim to achieve a diverse mix of contracts with customers to provide a 'natural hedge' between security of supply and the ability to take advantage of international coal prices.

Around 95% of our coal sold is delivered to electricity generator customers with the balance delivered to domestic and industrial and steel making markets.

The contractual commitments at the end of December 2011 stood at 16.4 million tonnes compared to 21.2 million tonnes at December 2010. 

Sales are substantially contracted for 2012, in a mix of floating, floating within caps and collars and fixed contracts. We are half way through the process of selling coal for 2013.

Deep mines

Our deep mines business consists of the operational mines at Daw Mill (Warwickshire), Kellingley (Yorkshire) and Thoresby (Nottinghamshire).  Our deep mine at Welbeck ceased production in early 2010 and Harworth remains mothballed and its future is currently being reviewed. 

Key performance indicators

	2011	2010
Coal mined (million tonnes)	5.7	5.8
Revenue (£m)	366.3	276.7
Operating cost* (£m)	296.5	288.9
Operating cost* per tonne/per Gigajoule (£/tonne)/(£/GJ)	48.5/2.01	49.6/2.06
Operating cost** (£m)	333.9	320.8
Operating cost** per tonne/per Gigajoule (£/tonne)/(£/GJ)	54.6/2.26	55.1/2.28
Operating profit/(loss) before non-trading exceptional items (£m)	32.4	(44.1)
Development driveage metres	13,296	13,166

*  before depreciation and excluding non-trading exceptional items

** after depreciation but excluding non-trading exceptional items

Deep mining has a cost base that is largely fixed relative to production levels, and therefore the KPIs for the business focus on the operating costs and on the output tonnage achieved from this cost base. 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 revenue and the realised sales price are also monitored.

Colliery performance summary:

	Production		Operating cost*		Production
	2011	2010	2011	2010	Q1 2012	Q1 2011
	m tonnes	m tonnes	(£m)	(£m)	m tonnes	m tonnes
Deep mines
Daw Mill	2.1	2.6	113.8	109.1	0.3	0.7
Kellingley	2.3	1.5	89.0	83.6	0.5	0.5
Thoresby	1.3	1.5	79.3	77.1	0.2	0.4
Total ongoing deep mines production/costs before stock movements	5.7	5.6	282.1	269.8	1.0	1.6
Welbeck	-	0.2	-	14.6	-	-
Total deep mines production/ costs before stock movements	5.7	5.8	282.1	284.4	1.0	1.6
Stock movements	0.4	-	14.4	4.5	-	-
Total deep mines	6.1	5.8	296.5	288.9	1.0	1.6

^*Operating cost before non-trading exceptional items and depreciation, with central costs absorbed.

During the year deep mining invested £30 million in capital expenditure, of which £13.0 million and £10.0 million was in respect of new face equipment at Daw Mill and Thoresby respectively.  An additional £3.5 million and £1.3 million was invested to increase coal processing capacity at these two mines.

Overall costs before stock movements (excluding Welbeck) increased by 4.6%. This reflected the cost of increased production levels, rises in electricity and other power tariffs and the impact of increased developments costs on the profit and loss account. Developments in 2011 were wholly expensed at Kellingley and Thoresby rather than being capitalised to the balance sheet as in early 2010 as part of the access costs to new seams.

Development driveage (metres)			2011	2010
Deep mines
Daw Mill			2,454	2,844
Kellingley			5,407	5,763
Thoresby			5,435	4,559
Total			13,296	13,166

Daw Mill

As previously reported, 32s face was re-planned to work through a fault following further seismic information that showed it was possible to safely mine through, albeit at a slower rate than 2010.  This progressed well until late November when, as a result of the creation of steep gradients across the face, it became impossible to advance the powered roof supports. The continued slow recovery of 32's and the slow ramp up of the next coal panel left the mine with minimal production throughout December and poor production in Q1 2012.

We continue to work on the safe recovery of 32s. A decision will be made whether to continue mining or to salvage the face early for preparation of the 2013 panel, 33s, once certain milestones have been achieved. If 32s is not capable of being safely recovered and mined, it is possible that Daw Mill may have a face gap of up to three months during the first half of 2013, although mitigating plans are being put in place as a precaution.

The current panel, 303s, started ramping up in January and immediately hit a known fault area, resulting in reduced Q1 2012 output. It has now moved beyond the known fault area and is producing to plan.

Planned developments at Daw Mill have not been achieved for many years. To address this and the poor mining performance, the Board, having reviewed the strategic options for Daw Mill, implemented an intensive intervention in the day to day management of the mine to lift performance which has yielded positive results.

Notwithstanding this intervention, Daw Mill's performance led to the decision to suspend developments on those faces to be mined from 2014 and to start consultation with the workforce concerning the future of this mine. Discussions continue in this regard.

Kellingley

Production for 2011 finished ahead of plan following the successful transition from 501s to 502s. The experience gained from working the first panel in the Beeston seam, 501s, was successfully transferred to the new face. Developments continue to make good progress and are on track for completion in time for face installation. The next face change to 503 is due in the Autumn of 2012. Developments are progressing well as is our work to upgrade the face equipment to the same specification successfully used on 502s.

Thoresby

Production was on plan in the second panel of the Deep Soft seam, DS2, following a successful transfer from DS1.  Developments are continuing to progress and a transfer to DS3s has recently taken place, with the ramp up on DS3s beginning in Q1 2012.

As reported previously, we have had high stocks of unprocessed coal whilst additional washing capacity was commissioned.  These stocks had been reduced significantly by year end and have now fallen to normal levels. Development of DS4 is progressing well with the aim of producing coal in late 2012/early 2013.

Harworth

Harworth Colliery remains on a care and maintenance strategy. A small, dedicated planning team has begun investigations to see whether or not the mine should be reopened or capped and closed. It is envisaged that this decision will take place in 2012.

Reserves and resources - deep mines

We estimate that we have approximately 148.5 million tonnes of reserves and resources at our ongoing mines of which 34 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.

Following changes to the mining plans, our available reserves and resources across all mines have not changed significantly since last year and our estimates, as at December 2011, of deep mine coal reserves are set out in the following table:

Million Tonnes	Proved	Probable	Total reserves	Resources	Total
Daw Mill	1.5	14	15.5	42	57.5
Kellingley	3.5	5.5	9	56	65
Thoresby	1.5	8	9.5	16.5	26
Harworth	0	0	0	53	53
TOTAL	6.5	27.5	34	167.5	201.5

Reserve	Reserves which are accessible using the current infrastructure and 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.

These reserves are calculated on the basis that Daw Mill continues to operate beyond 2014. In the event of a decision to close Daw Mill in early 2014, estimated reserves regarding Daw Mill would reduce to between 4-5 million tonnes.

Our closed mines at Rossington, Thorne and Welbeck have 120 million tonnes of resources. We retain a licence on these resources for possible future exploitation.

These figures are based on the Group's best estimates.  A number of factors may cause the actual production to vary significantly from these estimates.  These factors include:

·  Ongoing seismic surveying of reserves to confirm production estimates

·  Sale price of future coal and cost increases - these could render production plans uneconomic or could allow extraction from areas previously thought unviable

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

As stated last year, we have changed our reporting basis and are now reporting our reserves and resources in accordance with the criteria for internationally recognised reserve and resource categories of the 'Australasian Code for Reporting Mineral Resources and Ore Reserves'. This is published by the Joint Ore Reserves Committee of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and the Minerals Council of Australia.

Surface mines

Key performance indicators

	2011	2010
Coal mined (million tonnes)	1.8	1.4
Revenue (£m)	111.4	66.1
Operating cost* (£m)	87.7	63.7
Operating cost* per tonne/ per Gigajoule (£/tonne/£/GJ)	47.3/1.97	45.1/1.91
Operating cost** (£m)	89.4	65.7
Operating cost** per tonne/ per Gigajoule (£/tonne/£/GJ)	48.2/2.01	46.5/1.97
Operating profit before non-trading exceptional items (£m)	22.1	0.4
Restoration spend (£m)	16.9	11.6
Sites with consent (number)†	6	7
Reserves on sites with planning consent (million tonnes)	5.1	5.3

*  before depreciation and excluding non-trading exceptional items

** after depreciation but excluding non-trading exceptional items

†   Includes sites where planning committee approval has been obtained and formal consent is pending

Production increased by 29% to 1.8 million tonnes compared to 1.4 million tonnes.

Operating costs increased in the year in absolute terms, primarily due to additional sites in operation and a significant increase in the cost of gas oil. Operating cost per Gigajoule showed a more modest increase year on year due to a change in the portfolio of mines being operated in 2011 compared to 2010 and their respective coal yield operating costs.

Production was ahead of plan due to additional production from Cutacre and Steadsburn sites as they entered their restoration phases in the year, combined with increased production at Potland Burn.

This increase against plan was offset by the delayed start to Butterwell due to additional environmental work and delayed planning permission for Lodge House Extension which came too late to begin work in 2011.  Butterwell began production in February 2012 and Lodge House commences mining shortly.  In addition, Minorca was granted planning permission in July 2011 and will enter production in late 2012.

These planning successes mean that 100% of 2012 production is consented with a similar level covered in 2013. Over the last two years we have completed a significant amount of restoration work on certain large former mine sites, especially Stobswood, Maiden's Hall and Steadsburn.  The level of restoration work required in 2012 will therefore be commensurately lower.

The Surface Mines business has been strengthened during the year with the external appointments of a Director of Surface Mining and Head of Business Development. A strong pipeline of development projects exists to support continuity and growth in the Surface Mining business with the aim of increasing production levels.

Reserves and planning - surface mines

We estimate that we have surface mining reserves and resources of 32.6 million tonnes (2010: 42.3 million tonnes) as shown in the table below.

The year on year reduction follows a comprehensive review of the development portfolio proposals which saw some long-term, low probability sites being removed and land sold.  As a result of this, the remaining developments offer a higher average probability of success.

Million Tonnes	Reserves			Resources	Total Reserves and Resources	Inventory coal	Total
	Proved	Probable	Total
Butterwell	1.0		1.0		1.0		1.0
Huntington Lane	0.3		0.3		0.3		0.3
Lodge House Extension	0.7		0.7		0.7		0.7
Minorca	1.2		1.2		1.2		1.2
Park Wall North	0.6		0.6		0.6		0.6
Potland Burn	1.3		1.3		1.3		1.3
Sites with planning	5.1		5.1		5.1		5.1
Bradley		0.5	0.5		0.5		0.5
Hoodsclose		2.1	2.1		2.1		2.1
Submitted for planning		2.6	2.6		2.6		2.6
Sites in development		6.5	6.5	18.4	24.9	45.2	70.1
2011 Total	5.1	9.1	14.2	18.4	32.6	45.2	77.8
2010 Total	5.3	11.2	16.5	25.8	42.3	33.7	76.0

Although we have been successful in the previous 15 applications, the planning environment for surface mines, notwithstanding the arrival of The National Planning Policy Framework, remains challenging.  This was demonstrated by the setback with our proposed Bradley site.  Despite having been recommended for approval by the Planning Officer, the Planning Committee voted against this scheme and we also lost on appeal. We are now seeking a judicial review and expect a decision in 2013.

We expect to submit planning applications during 2012 for in excess of 6 million tonnes of coal.

Coal reserves are the economically mineable part of the company's identified coal tonnage.  It includes allowances for losses that may occur when the coal is mined.  Reserves are sub-divided into proved and probable reserves:

- Proved reserves represent the highest confidence category of reserve estimate as detailed technical and economic studies have demonstrated that extraction is viable and sites are either working, have been granted planning permission or have a resolution to grant planning permission.

- Probable reserves have a lower level of confidence than proved reserves.  Detailed technical and economic studies have demonstrated that extraction is viable and planning applications have either been submitted or will be submitted in the short term.

Coal resource is that part of a coal deposit in such form, quality and quantity that there is a reasonable prospect for eventual extraction.     

Inventory coal is any occurrence of coal in the ground that can be estimated and reported without necessarily being constrained by economic and geological potential, or other modifying factors.

Tonnages quoted are in accordance with the Australasian code for reporting of exploration results, mineral resources and ore reserves as established in 1971 by the Joint Ore Reserves Committee.

Harworth Estates

Key Performance indicators

		2011	2010 (like for like)	2010
		£ million	£ million	£ million
RICS valuations of the property portfolio (£m)		282.3	279.6	338.9
Disposals
-Contracts exchanged in year* (net proceeds)		67.0		24.4
-Cash received in the year		64.5		22.7

* in addition we have conditionally exchanged contracts during 2011 on sales with potential net proceeds of £18.1 million where we expect conditions to be satisfied during 2012.

The Group's property division, Harworth Estates, produced a profit of £8.3 million (2010: £33.1million loss), including a gain on investment properties of £6.0 million (2010: £34.7 million loss), of which £3.3 million was unrealised (2010: £34.2 million loss). In addition, an accounting revaluation gain of £4.5 million was taken directly to reserves (2010: £1.2 million), being the gains recognised on former operating properties transferred to investment property status on their ceasing to be operational sites.

While the focus of the year was on our accelerated disposals programme, we continued to progress the promotion of strategic planning for our portfolio.

Disposals

Disposals during the year secured net proceeds after costs of £67.0 million from the sale of 10,200 acres of residential development sites and agricultural land (and associated properties). These sales resulted in a profit on disposal of £2.7 million. During the year we received £64.5 million of proceeds net of costs with the balance to be received in 2012.  These proceeds were principally used to repay bank debt.  We also exchanged conditionally on further residential and commercial land sales in 2011 which are expected to generate net proceeds of £18.1 million over the next 3 years.

During 2012 disposals of agricultural and commercial properties will continue to help reduce Group borrowing further.

Valuations

The successful 2011 accelerated land disposals programme achieved prices which underpinned the valuations of both the commercial and agricultural elements in our portfolio.  Overall the portfolio is valued at £282.3 million (a 1% increase on a like for like basis from 2010). 'Undeveloped land' showed a small gain against 2010 as our successes in gaining new or improved planning status on a number of sites offset some planning reversals. 'Agricultural land' continued to show improving values but our income yielding 'Commercial land' reduced in value slightly in a challenging marketplace. Rental levels in this segment have remained flat, a reflection of the difficult economic conditions facing businesses. Overall the progress made across the portfolio reflects the continuing difficult environment for commercial land in the geographical areas our portfolio covers.

A full independent valuation of our property portfolio was undertaken as at December 2011 in accordance with appraisal and valuation standards published by the Royal Institution of Chartered Surveyors.

The portfolio valuation is summarised in the table below;

			Dec-11		Dec-10		Dec-10
							like for like
			£m		£m		£m	%
Agricultural
	Retained for Surface Mining		21.9		25.4		21.6	1.4%
	Mixed		27.2		60.4		25.1	8.4%
	Low grade		3.5		6.1		3.7	-5.4%
			52.6		91.9		50.4	4.4%
Undeveloped land
	With planning		106.2		42.7		98.0	8.4%
	Application submitted		10.6		71.3		14.1	-24.8%
	Without planning		53.9		63.8		55.8	-3.4%
			170.7		177.8		167.9	1.7%
Commercial land with rental income
	Part or fully developed		27.7		28.6		28.6	-3.1%
	In development		16.2		16.0		16.4	-1.2%
			43.9		44.6		45.0	-2.4%
Investment Properties at valuation			267.2		314.3		263.3	1.5%
Operational
	Potential development		5.0		13.0		5.5	-9.1%
	Agricultural		3.6		5.1		4.4	-18.2%
	Other		6.5		6.5		6.4	1.6%
Operational Properties at valuation			15.1		24.6		16.3	-7.4%
Total Properties at valuation			282.3		338.9		279.6	1.0%

The like-for-like percentage change from December 2010 comparatives are after property reclassification and take into account adjustments for asset sales with a book value of £63.7 million and purchases, development expenditure and depreciation which together net to £4.4 million.

Active surface mine sites are included in the value above based on their restored land value of £15.1 million (2010: £24.6 million).  Sites currently being used by the Group for mining and other activities are recorded at cost less impairment and changes in valuations are not reflected in the balance sheet.  As at December 2011, a total of £nil (2010: £5.1 million) has not been included in the balance sheet as a result.  Operating deep mine sites are not included in the above valuation.

We continue to engage different valuation firms dependent on the type and location of our property and have used the same firms as in 2010. BNP Paribas Real Estate 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. 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 make the following statement, the same as last year, which is consistent with a significant number of other declarations made on portfolios throughout the country:

'Our valuation is on the basis of market value. This is an internationally recognised basis and is defined as:

"The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion."

'This basis of valuation is accepted as meeting the criteria for assessing "fair value" under International Financial Reporting Standards.  International Accounting Standard 16 requires that the fair value of land and buildings is usually determined from market based evidence; that is evidence derived from sales comparison. This is the approach we have generally adopted. However, where the property assets are of such a size or a nature that there is no direct evidence of sales to form a basis of comparison, we have had regard to residual development appraisals in part informed by gross development values derived from sales comparison.

'As a consequence, 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 our valuation (consistent with the guidance of the Red Book), is subject to material uncertainty.'

Market Conditions and Development

In a fragile property market, we have proved that there is still a market for the right product and location. Transaction volumes remain low and we have had to be more innovative in our offering at the design and planning stages to attract buyers and achieve values in line with expectations. Our confidence in creating and delivering value from our diverse portfolio has increased but cautiousness remains across the property market in the short term which may affect performance in 2012.

The benefit of our divisional structure is being realised with focused teams able to highlight and develop opportunities for both short term quick wins and longer term value creation. This structure has also improved accountability and the ability to focus spend and resources on projects where best opportunities are seen. Our developments generate jobs, build homes and provide new recreational facilities and we have shown our ability to increase land values and generate short term income streams using innovative methods such as harnessing energy from low carbon sources and recovery of previously waste materials.

Strategic land

Harworth Estates has a large and diverse land portfolio with significant potential given our industrial history. Our development sites have excellent strategic locations, substantial power supplies and are significant in size.

The Strategic Land division has a residential land bank totalling in excess of 7,500 plots and 4.4m sq ft of employment space, of which 969 plots and 0.3m sq ft are consented. In 2011:

·     Outline planning consent was obtained for a further 500 residential plots and ancillary commercial development at Ellington and Lynemouth, Northumberland

·     A further 400 at Mapplewell near Barnsley, South Yorkshire

·     Conditional contracts have been exchanged with Gleeson and Jones Homes to enable the development of sites at Barnsley, South Yorkshire and Harworth, Nottinghamshire.

In addition to the consented sites a further 42 sites (around 2,300 acres) have been promoted which, subject to planning, may generate 6,500 plots and 4m sq.ft of employment space. Our largest planning application to be submitted in 2012 is for an urban extension at Rossington, South Yorkshire to regenerate the former colliery site with around 1,200 new homes, a food store, pub/restaurant and hotel.

Harworth Estates continues to seek development partners for our consented sites and to deliver significant growth and employment opportunities.

Developments

Our Development portfolio includes four principal sites: 

·     Waverley, South Yorkshire

·     Prince of Wales, West Yorkshire

·     Harworth Colliery, Nottinghamshire

·     Yorkshire Main, South Yorkshire.

These represent over 6,000 residential plots as well as offices, retail and leisure uses of some 1.9m sq ft. Our largest development site (Waverley, South Yorkshire) conditionally exchanged residential sales contracts with Taylor Wimpey, Barratt Homes and Harron Homes on the first phase of construction for 254 homes.  A contract with Rolls-Royce PLC was conditionally exchanged for 17.4 acres on the Waverley Advanced Manufacturing Park to build a 170,000 sq. ft. high-tech manufacturing unit and the remainder of the Park has been allocated as an Enterprise Zone. This deal was completed on 18 April 2012.

To maximise value we are phasing plot availability and putting in the necessary infrastructure, such as road networks, wherever appropriate.

We will adopt similar strategies on other sites as required.

Business parks

We currently have 1m sq. ft. of built secondary industrial and business premises on 10 active business parks, some of which are former mine sites that provide low cost facilities and opportunities to various businesses.  We also have 120 acres of expansion land and a further 320 acres of land with planning consent, or an employment allocation, for commercial space. This gives us the potential to create 4.5 million sq. ft. of new build accommodation.

We are actively marketing these sites for further development either in-house as pre-let opportunities or with development partners to assist us in planning, promotion and realisation.  One such scheme is our Cutacre site, near Bolton, which is viewed as a major regional distribution site for the North West.

Our active and proposed business parks are valuable assets with the potential to grow the current rental income significantly and increase capital value, or realise capital receipts.

Natural resources

Our large and diverse portfolio provides opportunities for our land that is outside typical development areas. Our focus on these sites is to maximise the opportunities for low carbon energy generation and environmental operations.

In 2011:

·     A deal on Bilsthorpe, Nottinghamshire was completed to enable the construction of a 10MW wind farm, led by Peel Energy and John Laing Infrastructure

·     An Option with EDF for a wind farm at Hilltop, County Durham (6MW) was signed and terms with another wind farm developer on our Bewick Drift, Northumberland (6MW) scheme were agreed

·     £2m of secondary aggregates, coal fines and scrap metals were recovered from former mining sites as part of our restoration and remediation programme

·     A Waste to Energy partnership agreement was signed with Peel Environmental at 11 sites to enable the appraisal and development of various opportunities

·     A Memorandum of Understanding was signed with Linc Energy to explore the prospects of underground coal gasification at three of our sites.

Many of our brownfield sites provide significant power supplies, rail connectivity, minimal proximity to neighbours, links to emerging government regeneration policies or general opportunities for recycling redundant material following the closure of a mine or previous site activity.

We have a sustainable programme that promotes new opportunities and provides benefits to the Group in the short, medium and long term. We are currently looking at 60 potential schemes (covering over 11,000 acres) with proposals for mineral recovery, renewable energy, waste recycling, coal bed methane, gas storage and land reclamation projects.

Harworth Power

Harworth Power is the UK's leading coal mine methane power generator and operates a high quality clean energy portfolio with access to long term gas reserves. 

In 2011, Harworth Power made an operating profit of £2.4m (2010: £2.5m). Income increased by £1.7m but profitability remained flat due to a £1m credit in 2010 for sale of Carbon Credits and £0.2m profit on sale of assets.

It operates fourteen gas engines, with an installed capacity of 26MW, and generates enough energy from methane captured from four of UK Coal's deep mine sites to supply 30,000 homes with electricity.

We consider that there is value in this operating business as a standalone entity separate from UK Coal whilst retaining both a rental income stream and the opportunity to sell the methane gas generated from our mines. We have started a process to explore the potential sale of this business. We will update further on this should the process progress towards a definitive transaction.

Agriculture

Whilst 2011 saw the disposal of many agricultural sites, we still have a substantial portfolio that is either suitable for long term development including surface mining, adjacent to former mining activity or adjacent to potential development sites.

Our strategy is to sell agricultural land where there is no long term development potential or identify suitable development proposals where we can realise value but retain working rights agreements or clawback arrangements.

Sustainable Property Business

In the long term the aim is to become a leading regeneration specialist and create a sustainable property company with a large and varied land bank which generates significant future growth opportunities. We now have a strong track record in turning brownfield sites into economic opportunities.

FINANCIAL REVIEW

Group revenues have risen in the year to £488.2 million from £351.2 million in 2010.  This was achieved through higher sales volumes and higher realised sales prices.  The increase in sales volumes arose from improved production from surface mines and a stock lift from the abnormally high opening stock levels following the bad weather in December 2010.  The improvement in the average realised sales price was achieved through a strong market price for coal and the replacement of old, below market price, contracts with some newer contracts at current market prices.  At the end of 2011, only 0.5 million tonnes of these old contracts remained to be delivered predominantly in 2012 at a price of circa £1.65/GJ.  With these changes, we achieved an average sales price per gigajoule of £2.48/GJ compared to the £1.97/GJ in 2010.

Property disposals were made during the year with a net value of £67.0 million resulting in a profit on disposals of £2.7 million.  Net proceeds of £64.5 million were received in the year, being used to reduce Group debt, with the balance receivable in 2012..  The year end revaluation of the investment property portfolio produced an upward valuation of £3.3 million (2010: loss £34.2 million).

There was an improvement in the year in the operating profit before non-trading exceptional items, which at £65.2 million was £139.5 million better than the previous year's loss of £74.3 million.  This was driven by the significant improvement in group revenues noted above and a £3.3 million gain on investment properties compared to a £34.2 million loss in 2010.

There have been non-trading exceptional items during the year resulting in an exceptional income of £16.1 million in the period (2010: £13.1 million charge).  The charges/credits in the current year included:

·   Pension scheme past service cost

A past service gain of £16.4 million arose from the benefit changes made to the industry wide pension schemes and concessionary fuel scheme at the end of 2011 and their impact on assumptions as to future salary growth

·   Refinancing costs

Costs of £1.7 million were incurred in relation to professional fees relating to the refinancing exercise conducted in the first half of the year 

·   Pension scheme curtailment

There was a curtailment gain of £1.4 million in the first half of the year reflecting the reduction in the pension scheme deficit as relevant members ceased to be active members following current and prior year redundancies, mainly as a result of the closure of Welbeck in 2010.

The operating profit after these non-trading exceptional items for 2011 was £81.3 million compared with a loss of £87.4 million in 2010.  Group profit before tax was £58.0 million compared to a loss before tax of £124.6m in 2010. 

Financing expenses

Net finance expenses in the year were £22.9 million compared to £27.4 million in 2010 (excluding exceptional finance costs, which were £nil in 2011 (2010: £9.9 million)).  The reduction arose from a net repayment of loans during the year of £84.3 million (2010: net increase in loans £12.3 million) leading to a reduction in bank interest in the year to £9.2 million (2010: £11.6 million), and the fair value of interest rate swaps, which provided a credit of £0.1 million compared to a charge of £1.5 million.  These reductions were offset by an increase in the interest charge on generator loans and prepayments to £9.2 million (2010: £8.6 million) which arose on a higher average generator loan balance as the loans reached the maximum drawn value and entered repayment phases during the year.

The Group had cash deposits 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 £14.7 million and £8.9 million respectively at December 2011 (2010: £15.7 million and £8.8 million). In addition to the ring-fenced funds held on behalf of the Coal Authority, a £10.0 million insurance bond is held by the Coal Authority as further security against any possible surface damage claims. This bond matures in December 2012. These deposits were secured against liabilities as at December 2011 of £8.5 million and £16.5 million respectively (2010: £13.0 million and £15.4 million respectively).

Tax

The Group paid no corporation tax in 2011 (2010: £nil), although there was a tax charge for the year of £2.7 million (2010: £0.5 million) which related to deferred tax as outlined below.

At December 2011, the Group had estimated gross trading losses of £230 million (2010: £312 million) and gross timing differences of £230 million, the latter arising largely from unclaimed or disclaimed capital allowances (2010: £195 million), both of which are available to offset against future profits in the mining business.  The trading losses had a tax value of £57.7 million at a tax rate of 25% (2010: £84.2 million at 27%), while the gross timing differences had a tax value of £57.7 million at a 25% tax rate (2010: £52.7 million at 27%).  Capital allowances have been disclaimed where possible to allow flexibility for the future.  The reduction in gross trading losses in the year reflects both the operating performance and the result of disclaiming capital allowances.

The net deficit on the balance sheet in respect of retirement provisions represents an additional tax timing difference of £36.2 million at a tax rate of 25% (2010: £46.3 million at 27%).

The Group recognised a deferred tax asset of £31.5 million at December 2011 (2010: £34.5 million). The Group continues to review its deferred tax asset, given the nature of the business and its historic performance.  The deferred tax charge in the year arose due to the change in the rate at which deferred tax is provided from 27% at the end of 2010 to 25% in line with the forthcoming confirmed reduction in the rate of corporation tax, and adjustments in relation to prior year's deferred tax balances.  The impact of the rate change on the opening deferred tax asset was a charge of £2.4 million (2010: £0.9 million) in the income statement and a charge of £nil (2010: £0.3 million) direct to reserves.  The adjustment on prior year deferred tax balances was £0.3 million.  The charges were offset by a credit of £0.1 million (2010: £1.4 million) for deferred tax on the amortisation (out of the hedging reserve) of previously effective hedge accounting movements.  All previously effective hedge accounting movements have now been recycled out of reserves.

The Group has around £350 million of capital losses which can be offset against profits arising on disposals of properties which were held by the Group in 2002.  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 £1.2 million (2010: £1.3 million).

Earnings per share

The earnings per share for the period was 18.5 pence (2010: loss 41.8 pence).

Funding

Generator Loans/ Prepayments

The Group is party to certain contracts for coal supply which resulted in increased cash flows to the business in 2009, 2010 and 2011 compared to the original contracts in place. The increased cashflows have been treated in the financial statements, together with actual customer loans, as generator loans and prepayments.  During the year, these arrangements have moved from the drawdown phase into the repayment phase, and a net £17.1m was repaid in 2011 (2010 £25.8 million drawdown). The balance outstanding at the year end, including accrued interest, was £84.1 million (2010: £101.2 million).

The impact on our cashflows due to net repayment commitments for these generator loans and repayments is as follows:

£million	2012	2013	2014	2015
Net cash outflow	(49)	(21)	(17)	(10)

Bank facilities

At the year end, the Group had around £97 million of bank facilities and a further £10.0 million outstanding under finance leases.

Excluding the impact of future property disposals, the weighted average maturity of the facilities, as at December 2011 was 0.9 years (2010: 1.4 years).

Since the year end, we have renewed and extended our banking facilities, with the following principal changes:

·     Extensions to the maturity of the Revolving Credit Facility ("RCF"), the Additional Revolving Facilities ("ARF"), the Harworth Estate (Waverley Prince) Limited  facility and the EOS Inc. Ltd facility to the end of December 2013 have all been agreed

·     The financial profile of the ARF were modified so that the amount available to be drawn, which was initially increased to £27.5m, reduces by £7.5m on 30 September 2012 with the balance amortising to £nil over the period June 2013 to November 2013. The facility reduces from £20m to £12.5m for a short period at the end of 2012, before reverting to £20m, matching the profile of the Group's borrowing requirements.

Over and above these extended bank facilities, we have extended the term of the £10m of unsecured stand-by facility from Peel Holdings.This is available for drawing in the event that both the RCF, and part of the ARF, are drawn.

This facility has also been extended, amortising gradually from August  2013 to mature in November 2013.

Following the changes, a summary of our principal bank facilities at April 2012 is shown below:-

	Facility	Margin
	£ million	over LIBOR
RCF Additional revolving facilities	221,2  Up to 283	300 - 400 bps4 1,600 bps
HEWPL facility	271	450 bps
EOS facility	20	300 - 400 bps
Total	Up to 97

Notes

(1) Facility reduces £ for £ as proceeds from property sales are applied

(2) Reduces by £2 million over October and November 2012

(3) Facility reduces by £7.5m on 30 September 2012 and amortises to nil over the period June 2013 to November 2013, with a short period of reduction to £12.5m at the end of 2012.

(4) Margin dependent on level of committed facility

The above table excludes fully drawn finance leases and other small bank loans which totalled some £10 million at December 2011, and the Peel Holdings loan facility noted above.

The facilities at April 2012 reflect reductions resulting from property disposal receipts since the year ended December 2011. These totalled £3m in Q1.Net bank debt was £75m at the end of March 2012, including £9m of finance leases. Total net debt, including generator loans/prepayments but excluding restricted funds, at the end of March 2012 was £154m.

Movement in group net debt

A summary of movements in our group net debt position is set out below.

	2011	2010
	£ million	£ million
Operating profit/(loss) before non-trading exceptionals	65.2	(74.3)
Revaluation of property	(3.3)	34.2
(Profit)/loss on sale of fixed assets and investment properties	(3.3)	0.3
Depreciation/diminution	40.5	35.2
Cash impact of non- trading exceptionals	(0.3)	(13.1)
Non- cash movement in mining provisions	4.4	5.2
Net working capital movements	14.5	(1.1)
Finance costs/interest payments (including loan arrangement fees)	(21.2)	(12.2)
Other movements	1.3	2.3
	97.8	(23.5)
Deep mines
Capital expenditure - cash	(31.8)	(26.8)
Capital expenditure - new finance leases	-	(1.7)
Payments against provisions	(10.8)	(13.1)
Fixed asset disposal proceeds	1.3	0.3
	(41.3)	(41.3)
Surface mines
Amortisation of restoration assets	17.1	14.0
Pre-coaling expenditure	(2.6)	(5.4)
Deferred stripping adjustment	(0.9)	(3.0)
Restoration expenditure	(16.9)	(11.6)
	(3.3)	(6.0)
Harworth Estates
Net proceeds of sales of investment properties	64.3	22.7
Planning and development expenditure	(4.8)	(2.1)
	59.5	20.6
Pension contributions in excess of current service cost	(10.0)	(5.8)
Net movement in restricted funds	0.9	3.3
Generator loans	(17.1)	25.8
	86.5	(26.9)

The total decrease in net debt in the year was £86.5 million (2010: increase of £26.9 million).

The Group has continued to invest significantly in the business in the year.  A total of £31.8 million was invested in the mining business on fixed assets, with some £28 million incurred on face equipment and additional coal processing capacity at Daw Mill and Thoresby, all of which was paid during the year.  There were no new finance leases taken out in the year.  Capital investment in the year was lower than the £44.7 million in 2010 which included the final elements of the significant investments in the new seams at Kellingley and Thoresby which were completed in 2010. 

A further £2.6 million has been spent on pre-coaling expenses in preparation for the opening up of the three new surface mines opening in 2012 (2010: £5.4 million) and £4.8 million (2010: £2.1 million) on costs associated with gaining and fulfilling planning consents on investment properties.

Our ongoing project to dispose of surplus property assets has realised £64.3 million of net sales proceeds from investment properties (2010: £22.3 million), and a further £0.2 million from the sale of operating properties (2010: £0.4 million).  These proceeds have been applied against bank borrowings in the year.  The cash generated in the business has been used in part to repay £17.1 million of Generator loans, compared to the drawdown of these facilities of £25.8 million in 2010.

Balance sheet

The net assets of the Group at December 2011 were £146.0 million compared to £81.4 million in 2010.  The increase in net assets is due principally to the trading profit for the year of £55.2 million (2010: £125.1 million loss) and a decrease in the deficit on retirement obligations of £26.9 million.

Provisions

		2011	2010
		£ million	£ million
(i)	Employer and public liabilities	8.5	13.0
	Surface damage	16.5	15.4
(ii)	Restoration and closure costs of surface mines	41.2	51.6
(iii)	Restoration and closure costs of deep mines
	- shaft treatment and pit top	9.6	9.9
	- spoil heaps	2.5	2.9
	- pumping costs	-	2.8
	Ground/groundwater contamination	10.1	6.3
(iv)	Redundancy	0.4	3.2
		88.8	105.1

(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 2011, it held £14.7 million of cash deposits and £6.4 million of property assets to meet £8.5 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 increase in the surface damage provisions is in line with the mining pattern at Daw Mill and Kellingley.  As at December 2011, the Group had £8.9 million of ring-fenced deposits and an insurance bond, maturing in December 2012, for a further £10.0 million to provide security to meet £16.5 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, together with 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 2011, the Group had a non-current asset of £25.7 million (2010: £35.7 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 £41.2 million (2010: £51.6 million) after expenditure of £16.9 million 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	10.5
Closed mines	11.7
	22.2

47% of the deep mines provision relates to the three mines classified as 'operating' which will be utilised after the point of closure.  We expect that we may utilise £0.2 million of the closed mine provision in 2012 and £2.2 million in 2013, representing predominantly the costs in respect of the former Welbeck and Rossington collieries. The remaining balance of £9.3 million will be utilised beyond 2013.

(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.

Retirement benefit obligations

The Group has a deficit, calculated under International Accounting Standards, on its defined benefit pension and retirement schemes of £144.7 million (2010: £171.6 million).  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 deficit noted above includes a liability of £43.7 million (2010: £36.5 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 for these financial statements 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 2.0% (2010: 2.1%).

Changes to the status of the defined benefit schemes and the concessionary fuel scheme were agreed and implemented during the year, resulting in a credit of £16.4 million to the income statement in recognition of the effect of these changes on past service costs. 

Movements in the net liabilities of the schemes in 2011 are set out below.

	Pension*	Concessionary fuel	Total
	£ million	£ million	£ million
December 2010	135.1	36.5	171.6
Contributions paid less current service cost	(10.0)	(0.7)	(10.7)
Change in fund value compared to expected return	20.1	2.0	22.1
Actuarial (gain)/loss on liabilities	(28.0)	7.5	(20.5)
Gains on curtailment	(1.4)	-	(1.4)
Past service cost	(14.8)	(1.6)	(16.4)
December 2011	101.0	43.7	144.7

*Including Blenkinsopp scheme

There was a significant decrease in the deficit on the pension schemes of £34.1 million.  The main movements were:

·  The benefit changes agreed with stakeholders at the end of 2011 affected past service benefits with a resulting credit of £14.8 million.  The change with the largest impact on the liabilities was the introduction of a cap, restricting the benefit of future salary increases to inflation.

·  An actuarial gain on the funds' liabilities of £28.0 million arising from the change in actuarial assumptions.  Principally, this was due to a reduction in the assumed rate of growth of CPI relative to growth in RPI, but also included an experience gain of £5.5 million as salary growth was lower than expected.

·  A loss in the year of £20.1 million due to returns in the year on the funds' assets being lower than expected.

·  Contributions, above the current service cost, of £10.0 million.  In total, the Group paid £22.5 million to the schemes in 2011, covering both current service and deficit contributions.  Further deficit contributions of around £20 million are expected to be made in 2012 of which c.£15 million will be treated as deficit payments under IAS 19 with the balance expressed as finance costs.

£10.8 million of the movement in the deficit on the pension schemes has been credited to the Consolidated Statement of Comprehensive Income ("SOCI") in the year.

There has been an increase in the liability for the unfunded concessionary fuel scheme of £7.2 million, relating mainly to the increase in the cost of the fuel benefit, which averaged around 20% over the year.  The interest cost on the liability exceeded the contributions in the year and there was an actuarial loss of £7.5m on the liability.  These impacts were partly offset by a gain of £1.6 million arising from benefit changes agreed at the end of 2011, which reduced the benefits accruing in the future by 10%.  The increase in the cost of fuel benefits is reflected in the changes to the actuarial assumptions and has been charged to the SOCI.

Details relating to retirement benefit obligations are shown in note 25 to the financial statements in the Annual Report.

Pension schemes' funding levels

Contributions to the schemes are determined by the schemes' actuary on the basis of triennial valuations.  The last agreed triennial valuations, which were finalised during 2011, were as of 31 December 2009.  The Trustees of the schemes estimated that the combined deficit of the industry wide schemes as at the end of December 2009, but adjusted for the rule changes agreed in 2011, was around £250 million, using assumptions which differ from those that we are required to use under IAS 19. 

On the same set of assumptions used by the Trustees, but updated for changes in market rates, the Company has estimated that the deficit, calculated on this basis, had increased to £430 million at December 2011, with liabilities of around £875 million of which just under half were in respect of active members.  The next valuation date of the schemes for funding purposes will be 31 December 2012.  If the assumptions used by the Trustees result in a significantly increased deficit compared to the 2009 valuation, then it is likely that negotiations would result in significantly increased deficit funding levels compared to the currently agreed £20m per annum level.

 

END

 

 

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