Proposed Related Party Transaction with Peel

RNS Number : 3523I

UK Coal PLC

14 June 2011

 



The release, publication, transmission or distribution of this announcement in, into or from jurisdictions other than the United Kingdom may be restricted by law and therefore persons in such jurisdictions into which this announcement is released, published, transmitted or distributed should inform themselves about and observe such restrictions. Any failure to comply with the restrictions may constitute a violation of the securities laws of any such jurisdiction.

14 June 2011

UK COAL PLC

Proposed Related Party Transaction with Peel

UK Coal plc ("UK Coal" or the "Group") announces today a proposed Joint Venture with members of the Peel Group, UK Coal's largest beneficial shareholder, to develop waste facilities on 11 properties within the Group's Harworth Estate portfolio.

Overview of the proposed Joint Venture:

·     11 sites identified within UK Coal's portfolio which the Group has identified as being appropriate for waste related activities;

·     Sites are typically located on industrial sites which UK Coal has historically been unable to successfully develop for alternative commercial uses;

·     A new SPV will be incorporated for each site which will be owned equally by Peel and a member of the Group;

·     Each SPV's operations will be funded by entities within the Peel Group;

·     A Call Option (which is specific to each site) is exercisable by each SPV upon the receipt of planning permission to build waste related infrastructure;

·     Each SPV will pay a member of the Group a fee of £10,000 upon entering into the Call Option with a further £10,000 payable on the first anniversary thereof;

·     Proceeds received by the members of the Group are intended to be used to contribute towards the Group's working capital;

·     In the event of an exercise of the Call Option by the SPV, the SPV will pay a member of the Group a pre-agreed base value for each site using funds provided by entities within the Peel Group; and

·     The aggregate base value for all 11 sites is equal to £14.7 million.

A Circular containing details of the proposed Related Party Transaction and convening the General Meeting to be held at 2.00 pm on 11 July 2011 at Harworth Park, Blyth Road, Harworth, Doncaster, South Yorkshire DN11 8DB, in order to (if seen fit) approve certain matters necessary to implement the Joint Venture, is expected to be posted to Shareholders shortly and will be available on the Company's website, www.ukcoal.com.

Commenting on the proposed Joint Venture, Jonson Cox, Chairman of UK Coal said:

"This proposed waste to energy joint venture with the Peel Group will enable UK Coal to benefit from, and mitigate the risk and cost of, the development of eleven sites in the Company's property portfolio. These sites have not been identified as suitable for alternative development uses. This represents part of UK Coal's focus on simultaneously unlocking and developing the maximum value from its property portfolio."

Enquiries:

Analysts and investors:
David Brocksom	Group Finance Director	01302 755 002
Media:
Rupert Pittman/James Milton	Cardew Group	020 7930 0777

Evolution Securities Limited, which is authorised and regulated in the United Kingdom by the FSA, is acting exclusively for UK Coal and no-one else in connection with the Joint Venture and will not be responsible to anyone other than UK Coal for providing the protections afforded to clients of Evolution Securities Limited nor for giving advice in relation to the Joint Venture or any other matters referred to in this announcement.

The release, publication, transmission or distribution of this announcement in, into or from jurisdictions other than the United Kingdom may be restricted by law and therefore persons in such jurisdictions into which this announcement is released, published, transmitted or distributed should inform themselves about and observe such restrictions. Any failure to comply with the restrictions may constitute a violation of the securities laws of any such jurisdiction.

14 June 2011

UK COAL PLC

Proposed Related Party Transaction with Peel

1.   Introduction

UK Coal plc is pleased to announce that it and its relevant subsidiaries were proposing to enter into a Joint Venture with Peel Holdings and Peel Environmental, both members of the Peel Group, UK Coal's largest beneficial shareholder, to develop waste facilities on 11 properties within the Company's Harworth Estate portfolio.

The Peel Group is a significant shareholder of the Company due to the 29.09 per cent. shareholding of its wholly owned subsidiary Goodweather Holdings Limited. Therefore, the proposed Joint Venture with members of the Peel Group constitutes a related party transaction under the Listing Rules and is conditional, inter alia, on the approval of Independent Shareholders at the General Meeting of the Company.

2.   Information on UK Coal

UK Coal is the largest coal mining operator in the UK, producing approximately 41 per cent. of UK-mined coal in 2010. The Group was established in 1974 when it was awarded its first tendered surface mining contract and expanded through being awarded additional surface mining contracts and acquired its first private underground mine in 1990. The Group extended its operations significantly in 1994 through the acquisition of British Coal Corporation's coal mining assets in England during the coal privatisation process. Since then, the Company, which changed its name to UK Coal plc in 2001, has continued to engage in coal mining and related activities, including the development of an extensive property portfolio (including properties which relate to its mining activities).

Today, the Group has three operational deep mines, at Daw Mill (Warwickshire), Kellingley (Yorkshire) and Thoresby (Nottinghamshire) and it produced 5.8 million tonnes for the year ended 25 December 2010. The Group also had six operational surface mines producing around 1.4 million tonnes of coal a year over the same period, with further sites in the planning application process. As at 25 December 2010, the Group is estimated to have a total of approximately 137 million tonnes of coal reserves and resources, of which approximately 39 million tonnes of coal are classified as reserves at the Group's three operational deep mines.

In addition to its mining assets, UK Coal has an extensive property portfolio of approximately 13,350 hectares (approximately 33,000 acres) of land, including brownfield land with property development potential for residential, commercial and industrial usage. The majority of the portfolio is located on the A1/M1 corridor from Leicestershire to Northumberland in England with a small number of sites in North West England and Scotland. Much of the land was formerly used for coal operations and as such is well positioned for road, rail and electricity connections. As at 25 December 2010, independent valuations of the Group's properties (excluding the operating deep mine sites) gave an aggregate RICS valuation of £338.9 million.

3.   Information on Peel Group

The Peel Group is an infrastructure, transport and real estate group in Britain with assets owned and under management of approximately £6 billion. The Peel Group's environmental division, including Peel Environmental and Peel Holdings, is involved in developing new infrastructure to develop low carbon solutions and satisfy the property needs of the waste and environmental technology sectors.

The Peel Group's environmental division has demonstrated its ability to obtain planning permission for, and successfully market, sites for use as waste facilities, including through the recent establishment of a joint venture with Covanta Energy, an international owner and operator of energy-from-waste and power generation projects, to develop a £500 million 'eco-park' containing a 95MW energy-from-waste facility at Ince, 10 miles East of Chester. The facility will convert such household and business waste which cannot be otherwise economically recycled into steam generated heat and up to 95MW of electricity. The Peel Group has estimated that this volume of electricity is sufficient to meet the electrical needs of approximately 150,000 homes.

The Peel Group is a substantial shareholder of the Company, holding 29.09 per cent. of the Ordinary Shares through its subsidiary Goodweather Holdings Limited. Accordingly, the proposed Joint Venture constitutes a related party transaction under the Listing Rules and requires the approval of Independent Shareholders. Such approval requires a simple majority of the votes of those Independent Shareholders present and voting at the General Meeting, in person or by proxy, and whether voted upon by a show of hands or on a poll.

Members of the Peel Group (including Goodweather Holdings Limited) are not permitted under the Listing Rules to vote on the Resolution. Each of Peel Environmental and Peel Holdings, as the related parties to this transaction, are obliged to take all reasonable steps to ensure that their associates will not vote on the Resolution. Steven Underwood and Owen Michaelson are not considered as independent directors in relation to this transaction and will therefore not vote on and have not participated in the Board's consideration of, the Joint Venture.

4.   The Waste Market

The majority of non-recycled municipal (as collected by local authorities) and commercial/industrial (C&I) waste has historically been disposed of in inexpensive landfill sites on short term contracts. The drivers for moving municipal and C&I waste away from landfill, whilst overlapping, are not the same.

For municipal waste, the Landfill Allowances Trading Scheme ("LATS") was introduced in 2004 by the Landfill Allowances and Trading Scheme (England) Regulations 2004 in order to provide a cost effective way of enabling England to meet its targets for reducing the amount of biodegradable municipal waste sent to landfill under Article 5(2) of the Landfill Directive. The targets set by the Landfill Directive are to reduce the amount of this waste going to landfill by 35 per cent. of that produced in 1995 by 2020.

Since the introduction of LATS, the development of non-landfill residual waste treatment infrastructure for municipal solid waste, such as energy-from-waste, has significantly increased. Many waste disposal authorities in close proximity to the sites considered for this Joint Venture are in various stages of procurement of alternative waste treatment infrastructure targeted primarily at municipal solid waste and substantial funding has been granted through PFI credits to support such projects.

In contrast, as LATS does not apply to C&I waste, the main driver for C&I waste to be treated by alternatives to landfill is the size of the landfill tax. Historically the landfill tax has not been sufficiently high for non-landfill technologies to be able to compete with the cost of disposing of C&I waste in landfill sites (comprising primarily of the landfill tax and gate fee, being the fee charged to deposit waste at a landfill site). Accordingly, residual C&I waste continues to be predominantly disposed of in landfill. However, the UK Government signalled in the 2010 budget (and re-confirmed in the 2011 budget) an increase in landfill tax by £8/t each year from £48/t in 2010 to £80/t in 2014. At an £80/t landfill tax, the total cost of landfill would rise to approximately £100/t and at such levels it is considered that there are a number of alternative waste treatment technologies (including mechanical biological treatment, anaerobic digestion and large thermal plants such as incineration with energy recovery) which are capable of operating at a lower total cost to users than landfill.  Accordingly, there is an opportunity to target C&I residual waste for disposal in non-landfill treatment technologies.

Furthermore, Eunomia, UK Coal's waste adviser, estimates that at present in the UK there is approximately 8 million tonnes per annum of non-landfill treatment capacity in operation and only facilities for an additional 4 million tonnes per annum under construction (with a further 7 million tonnes per annum having received the necessary planning permissions to commence construction). When compared with Eunomia's estimated total UK residual waste disposal requirement of 30 million tonnes per annum by 2015, this represents a capacity gap of at least 10 million tonnes per annum that will continue to go to landfill unless additional treatment capacity is brought on stream.

The Company therefore considers that the non-landfill market provides a significant opportunity whereby residual commercial and industrial waste can be targeted by non-landfill treatment operations in the UK utilising the increased landfill tax rates as a benchmark for pricing.

5.   The Proposed Joint Venture

In light of Peel Environmental's expertise in exploiting potential energy-from-waste sites by obtaining planning permission and the opportunities existing within UK Coal's property portfolio, a number of sites have been identified as potentially suitable for development of waste facilities. Typically these sites are located on industrial sites (predominantly existing or former operating coal mining sites) which UK Coal has historically been unable to successfully develop for alternative uses. UK Coal, UKCML and EOS have entered into a contractual overarching joint venture agreement with Peel Holdings and Peel Environmental (conditional on the passing of the Resolution) relating to 11 sites within UK Coal's portfolio which UK Coal has identified as being appropriate for waste related activities.

Pursuant to the terms of the JVA, and upon shareholder approval being obtained, a new SPV will be incorporated for each site which will be owned equally by Peel Holdings and either UKCML or EOS, depending on which entity holds the property interest in the relevant site. Each SPV will enter into a Call Option with UKCML or EOS (as appropriate) pursuant to which, and in consideration for paying the Option Fee to UKCML or EOS (as appropriate), the SPV has the right, subject to certain conditions, to purchase or take a long lease interest in the relevant site. The Call Option (which is specific to each site) is exercisable by each SPV upon the receipt of planning permission to build waste related infrastructure. Planning applications must be submitted by Peel Holdings to UK Coal before the second anniversary of the Call Option.

Each Call Option will have an initial term of three years (with the exception of Cutacre which shall have an initial term of four years) and may be extended up to a further four years provided that sufficient progress has been made in relation to the planning process (failure of which could lead to the relevant SPV being required to surrender its option). Each SPV will pay UKCML or EOS (as appropriate) an Option Fee, comprising an amount of £10,000 payable upon entering into the Call Option and a further amount of £10,000 payable on the first anniversary thereof. In the event of an exercise of the option by the SPV, the SPV will pay UKCML or EOS (as appropriate) a pre-agreed base value for each site using funds provided pursuant to a Shareholder Loan from Peel Finco without recourse to UKCML or EOS (as appropriate). Such Shareholder Loan will accrue interest, payable only on repayment of the principal, at a rate of LIBOR plus 3 per cent per annum. The aggregate base value for all 11 sites is equal to £14.7 million (before indexation), as outlined in Table 1 below.

Each SPV will also enter into a Development Agreement with Peel Manco, the terms of which set out the basis upon which Peel Manco is engaged to provide services in connection with obtaining planning permission and carrying out enabling works to facilitate the construction of waste related infrastructure. Under the terms of the Development Agreement, Peel Manco will pay the day-to-day development costs of the SPV, including the Option Fee, in return for being paid a lump sum Development Fee following a Sale of the relevant land. 

In the event of an exercise of the Call Option and a disposal of the land the subject of the Call Option by the SPV, any profits after repayment of the SPV's costs (including Peel Manco's Development Fee and Peel Finco's Shareholder Loan (including any applicable interest)) will be shared equally between Peel Holdings and UKCML or EOS (as applicable). The profits generated by the Sale of the land then owned by the SPV are ring fenced in relation to that property (i.e. the profits of one SPV are not applied to offset the losses of another SPV).

In the event that the SPV itself is sold (as opposed to the land), the consideration is paid directly to the shareholders of the relevant SPV.

A full description of the agreements is set out in Part II of the Circular.

Table 1:           Joint Venture Sites

The following sites have been identified as potentially suitable for the development of energy-from-waste facilities. No firm decision has yet been taken as to the details of the proposed infrastructure at each site but technologies being considered include anaerobic digestion, gasification and other related EfW platforms.

Site	Area (acres) subject to the Joint Venture	% of the site owned by UK Coal that is subject to the Joint Venture	Base Value (£m) *	Market Value (£m) **
Asfordby	9.8	8%	1.4	1.2
Bilsthorpe	8.2	14%	0.9	0.8
Cutacre	10.9	1%	1.4	0.7
Gedling	6.8	2%	0.9	0.3
Houghton Main	9.3	35%	1.4	1.2
Kellingley	11.6	8%	2.3	0.3
Meriden	7.2	9%	0.9	0.01
North Selby	19.8	22%	1.4	0.3
Tetron Point	7.3	26%	0.8	0.4
Wardley	27.9	20%	1.8	0.8
Waverley AMP	4.4	7%	1.4	1.0
TOTAL***	123.1		14.7	7.0

Notes:  * Before indexation at RPI

** As at 10 May 2011

*** The totals may not sum due to rounding

The day to day operations of the SPVs will be run by a management committee comprised of equal numbers of representatives from the relevant Group entity and Peel Holdings. This committee will monitor progress in relation to the planning process. In the event that insufficient progress is being made, notice can be served on the relevant Peel entity and, if the non-performance persists, the Call Option may be terminated.

Whilst UK Coal considers the Joint Venture to be a positive development, there can be no assurance that planning permission will be issued for the above sites and, even if planning permission is obtained, no assurance that any of these sites will be sold or successfully developed.  In addition, whilst their sites remain subject to the Joint Venture, they cannot be developed for any other purpose.

6.   General Meeting

The proposed Joint Venture constitutes a related party transaction and is therefore subject to shareholder approval in accordance with Listing Rule 11.1.7(3). A notice convening the General Meeting, to be held at Harworth Park, Blyth Road, Harworth, Doncaster, South Yorkshire DN11 8DB at 2.00pm on 11 July 2011, at which the Resolution will be proposed to approve the Joint Venture, is set out at the end of the Circular. The Resolution is set out in full in the Notice of General Meeting.

This announcement contains certain forward-looking statements with respect to the businesses and plans of the Group and the Joint Venture. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that have not yet occurred. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. As a result, the Group's actual future financial condition, results of operations and business and plans may differ materially from the plans, goals and expectations that may be expressed or implied by these forward-looking statements. UK Coal undertakes no obligation publicly to update or revise forward-looking statements, except as may be required by applicable law and regulation (including the Listing Rules of the Financial Services Authority). Nothing in this announcement should be construed as a profit forecast or be relied upon as a guide to future performance.

Appendix 1

Expected Timetable of Principal Events

Joint Venture Agreement signed	14 June 2011
Latest time and date for receipt of Forms of Proxy for the General Meeting	2.00pm on 9 July 2011
General Meeting	2.00pm on 11 July 2011

(1)        If any of the above times and/or dates change, the revised times and/or dates will be notified to Shareholders by announcement through the Regulatory Information Service of the London Stock Exchange.

(2)        All references in this announcement are to London times unless otherwise stated.

Appendix 2

Definitions

The following definitions apply throughout this announcement unless the context requires otherwise:

Board	the board of directors of UK Coal;
Call Option	an agreement between an SPV and either UKCML or EOS (as appropriate) granting each SPV an option to purchase either the underlying freehold or leasehold title to the site;
C&I waste	commercial or industrial waste
Circular	The circular, dated 14 June 2011, issued by the Company in connection with the proposed Joint Venture, together with any supplements or amendments thereto;
Company or UK Coal	UK Coal plc, registered in England and Wales with number 02649340 and whose registered office is at Harworth Park, Blyth Road, Harworth, Doncaster, South Yorkshire, DN11 8DB;
Development	the construction of waste related infrastructure;
Development Agreement	an agreement between an SPV and Peel Manco for the provision of services in connection with obtaining planning permission and completing enabling works to facilitate the construction of waste related infrastructure;
Development Fee	a fee payable by an SPV to Peel Manco under the terms of a Development Agreement as described in paragraph 4(b) of Part II of this Circular;
EfW	energy-from-waste;
EOS	EOS Inc Limited (company no. 04006353) of Harworth Park, Blyth Road, Harworth, Doncaster, South Yorkshire DN11 8DB;
Eunomia	Eunomia Research & Consulting Ltd of 37 Queen Square, Bristol BS1 4QS;
Evolution Securities Limited	Evolution Securities Limited of 100 Wood Street, London EC2V 7AN;
Financial Services Authority	the Financial Services Authority acting in its capacity as the competent authority for the purposes of Part V of FSMA;
FSMA	the Financial Services and Markets Act 2000;
General Meeting	the general meeting of UK Coal to be held on 11 July 2011 (and any adjournment thereof);
Goodweather Holdings Limited	Goodweather Holdings Limited of PO Box 309, Ugland House, Grand Cayman, KY1 1104, Cayman Islands;
Group	the Company and its subsidiaries from time to time;
Independent Shareholders	Shareholders of UK Coal excluding Goodweather Holdings Limited;
Joint Venture	the joint venture between the relevant Group entities and the relevant entities of the Peel Group on the terms of the JV Agreements as described in the Circular;
JVA	The joint venture agreement between the Company, UKCML, EOS, Peel Holdings and Peel Environmental;
JV Agreements	the JVA, each Call Option, each Development Agreement and each Shareholder Loan;
Landfill Directive	Council Directive 99/31/EC of 26 April 1999 on the landfill of waste entered into force on 16 July 1999;
LATS	Landfill Allowances Trading Scheme;
LIBOR	London Inter Bank Offering Rate;
Listing Rules	the rules and regulations made by the UK Listing Authority under Part VI of FSMA as amended from time to time;
London Stock Exchange	London Stock Exchange plc;
Notice of General Meeting	the notice of the General Meeting which appears at the end of the Circular;
Option Fee	A sum of £10,000 (excluding VAT) to be paid by an SPV to either UKCML or EOS (as appropriate) on execution of the Call Option and a further £10,000 (excluding VAT) on the first anniversary of the date of that Call Option;
Ordinary Shares	ordinary shares of £0.01 each in the capital of the Company;
Peel	Peel Holdings Limited (company no. 2567V) of Billown Mansion House, Malew, Ballasalla, Isle of Man, IM9 3DL;
Peel Environmental	Peel Environmental Limited (company no. 04480419) of Peel Dome, the Trafford Centre, Manchester, M17 8PL;
Peel Finco	Peel Finance (UK) Limited (company no. 6945809) of the Peel Dome, the Trafford Centre, Manchester, M17 8PL;
Peel Group	Peel and its subsidiaries from time to time;
Peel Holdings	Peel Holdings Environmental (IOM) Limited (company no. 6664V) of Billown Mansion, Ballasalla, Malew, Isle of Man IM9 3DL;
Peel Manco	Peel Environmental Management (UK) Limited (company no. 7580930) of the Peel Dome, the Trafford Centre, Manchester, M17 8PL;
Regulatory Information Service	one of the regulatory information services authorised by the Financial Services Authority to receive, process and disseminate regulatory information in respect of listed companies;
Resolution	the resolution to be proposed at the General Meeting to obtain the approval of the Shareholders for the Joint Venture, as set out in the Notice of General Meeting;
RICS	Royal Institute of Chartered Surveyors;
RPI	retail price index;
Sale	(a) the sale of the site by the SPV; or (b) the grant by the SPV of a long lease of a site at a premium reserving a peppercorn or ground/turnover rent; or (c) the disposition of the control of the SPV by whatever means in which the equity value in the site is substantially realised other than a transfer of an interest by one of the members to an affiliate of the relevant member; control having the meaning currently defined in section 416 of the Income and Corporation Taxes Act 1988, on terms reached between a willing seller/landlord and a willing buyer/tenant acting at arm's length and in good faith;
Shareholder Loan	the loan to be provided by Peel Finco to an SPV to enable such SPV to exercise the Call Option and pay the base land value to UKCML or EOS (as appropriate);
Shareholders	the holders of UK Coal Shares;
SPV	a special purpose vehicle incorporated in respect of each site;
UK or United Kingdom	the United Kingdom of Great Britain and Northern Ireland;
UKCML	UK Coal Mining Limited, Harworth Park, Blyth Road, Haworth, Doncaster, South Yorkshire DN11 8DB;
UK Coal Shares	the ordinary shares of £0.01 each in the capital of the Company;
UK Listing Authority	the Financial Services Authority in its capacity as competent authority under the Financial Services and Markets Act 2000;
£	Sterling, the currency of the UK.

 

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