Preliminary Financial Results

RNS Number : 1766R

UK Coal PLC

27 April 2009

 



27 April, 2009 

UK COAL PLC ('UK COAL')

Preliminary Financial Results for Year Ended December 2008

• Average coal sales price up 18.5% to £1.92/GJ

• Value of property portfolio resilient 

• New/amended coal supply contracts on improved terms

• Significantly increased cash flow for 2009

Financial Highlights:

• Total sales up 19.5% to £392.5m reflecting higher average realised coal sales price

• Operating profit pre non-trading exceptionals and pre property revaluation profit £1.8m (2007 £5.3m)

• Non-cash property revaluation profit £23k (2007: 66.8m)

• Loss before tax £(15.6m) (2007: £69.0m)

• Net assets per share 191p (2007: 228p) largely due to increased pension deficit

• Net debt, excluding restricted cash £137.1m (2007: £104.3m)

Mining and Power

• Production 7.9m tonnes (2007: 7.9mt, ex Maltby)

  • Deep mines 6.2mt (2007: 6.4mt). Surface mines 1.7mt (2007: 1.5mt)

• Investments in Kellingley and Thorseby on track to access new areas of reserves at end 2009 and early 2010 respectively

• Will enable improved production rates, costs per tonne and reliability

• Surface mines on track for sustainable 2m tonnes pa production from end 2010

• First quarter 2009 production in line with 2008 at 1.7mt

New Coal Contracts

• New/amended contracts with Drax, EON, EDF Energy and Scottish and Southern Energy - a new customer

  • Significantly improved long-term contracted selling prices 

  • Immediate cash flow benefits - 2009 c£85m; 2010 a further c£15m

  • Provides greater certainty and improved economics. Underpins investment programmes

  • Pre-payment elements of new contracts to be accounted for as prepayments/loans, not profit

Harworth Estates Property 

• Value of property portfolio maintained despite property market conditions

• RICS valuation of property portfolio £422m (2007: £411m)

• Reflects progress on planning consents and growth of agricultural land values

• Crystallisation of Project Worth moved out by property market conditions

• Management estimate of worth in 2014 £886m - central estimate

Commenting, David Jones, Chairman said:

'In a challenging year, UK COAL has produced a creditable set of results. Despite the difficult geology and planned face changes, which we have previously reported on and which held back deep mine production, we have broadly met our production guidance and secured significantly higher average sales prices. Daw Mill also produced a European record for a single face mine. Our property business has proved resilient despite the extreme property market conditions, reflecting further strong progress on planning consents, the immaturity of the development phase of our portfolio and the continued strength of agricultural land values.

'We start the current year with the very good news that we have negotiated new or amended old long-term supply contracts with our electricity generator customers, Drax, EON and EDF Energy, and added a significant new core customer, Scottish and Southern Energy. These contracts materially increase our long-term contracted coal prices and our short-term cash flows. They improve our mining economics, place the funding of our investments on a more secure footing and enable us better to plan the future development of the group. 

'The cash flow benefits for 2009 will be around £85 million and, for 2010, around a further £15 million on top of this. In so far as these reflect prepayment against coal to be delivered in future, they will be accounted for as customer prepayments/loans.

'Our investments in our Kellingley and Thoresby mines both remain very much on track. They will enable these mines to switch production to new areas of reserves later this year and early next respectively, and this will enable improved volume, cost efficiency and reliability of production.

'Notwithstanding the very difficult property market conditions, the RICS value of our Harworth Estates property portfolio has held up well, increasing from £411 million to £422 million. Unsurprisingly, there is no property revaluation gain for last year, and it is the absence of this non-cash element which makes the biggest difference to our reported financials compared to the 2007 results.

'Looking further ahead, we and our property advisers, DTZ, believe the biggest impact of property market conditions is not so much to change the future estimates of the value of our portfolio as to move out the timing of the crystallisation of this value. Our central estimate more than doubles the worth of our portfolio over the next five years to around £866 million by 2014, not taking into account any future potential development phase value up-lift.

'There will always be unpredictabilities in mining; but the new coal contracts, as well as the planned impact of our deep mines investment programmes and the growing strength of our surface mining provide a more positive and more financially underpinned outlook. Together with our property business outperforming the market and its substantial future value creation to look forward to, our long-term growth platform remains absolutely in place and we continue to face the future with confidence.'

Enquiries: 

Media: 

Citigate Dewe Rogerson      
Anthony Carlisle

Tel: [phone] / Mobile: [phone]

Laure Lagrange

Tel: [phone] / Mobile: [phone]

Analysts and investors:

Jon Lloyd

Chief Executive, UK COAL PLC

Tel: [phone]

David Brocksom      

Group Finance Director, UK COAL PLC

Tel: [phone]

Citigate Dewe Rogerson      
Nick Cox-Johnson

Tel: [phone] / Mobile [phone]

A copy of the Annual Report and Accounts will be issued shortly by RNS and on the Company's website, www.ukcoal.com.

Notes to Editors:

UK Coal is the largest producer of coal in the UK, and a significant supplier of energy to the UK's electricity industry. In 2008 we mined and sold 7.9 million tonnes of coal, which represented approximately 15% of the total amount of coal burned in the UK. Predominantly our customers are in the electricity supply industry ('ESI') and our production therefore represented around 5% of the total energy used to supply the UK with electricity.  

At the 2008 year end, the Group had 4 operational deep mines and 5 surface mines. 

As a result of our heritage, we have a very large estate of around 45,000 acres (18,200 hectares) of land. This estate includes agricultural land which was originally acquired for its underlying coal reserves, and the sites of former mines and associated workings. The estate is largely focused on the UK coal fields along the A1/M1 corridor through Nottinghamshire and Yorkshire, and in Northumberland, although it also includes some very significant sites elsewhere. 

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

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

Financial Highlights  

	2008	2007
Income Statement
Total Group Revenue (£m) Average sales price per Gigajoule (£/GJ)	392.5 1.92	328.5 1.62
Operating profit before non-trading exceptional items and property revaluation uplift Non-cash property revaluation uplift (£m) Operating profit before non-trading exceptional items (£m) Operating (loss)/ profit (£m)	1.8 - 1.8 (2.2)	5.3 66.8 72.1 82.7
(Loss)/profit before tax (£m)	(15.6)	69.0
(Loss)/earnings per share (pence)	(10.0)	59.9
(Loss)/earnings per share excluding one-off tax credit (pence)	(10.0)	44.0
Divisional Breakdown - Operating profit/(loss) before non-trading exceptional items
Deep Mines (£m)	(14.1)	(14.6)
Surface Mines (£m)	10.4	8.5
Power (£m)	1.3	4.3
Others (£m)	(0.5)	0.7
Property (£m)	4.7	73.2
Balance Sheet
Net assets (£m)	300.4	358.2
Net assets value per share (£)	1.91	2.28
Year end gearing (%)*	46	29

* Gearing excludes restricted cash balances

OVERVIEW

For 2008, UK COAL is reporting an operating profit before exceptional items of £1.8 million, compared to £72.1 million in 2007, a loss before (and after) tax of £15.7 million, compared to a profit before tax of £69.0 million the year before and a drop in assets per share from 228p in 2007 to 191p. 

In terms of our reported financials, the biggest difference between the two years is that, in 2007, our property portfolio delivered a valuation gain of £66.8 million, compared with only £23,000 in 2008. These gains are non-cash items, but go through the profit and loss account. In addition, in 2007, we benefited both from non-trading exceptional profits of £10.5 million, compared to exceptional costs of £4.1 million in 2008, and from a one-off £25 million tax credit in 2007. The decrease in net assets is largely due to an increase in the deficit on retirement obligations, a direct reflection of the financial markets.

Throughout 2008, and since, the Group has continued to put safety at the heart of all aspects of our operations. Regrettably though we have to report on the loss of the life of a colleague during the year, strengthening our determination to strive towards Zero Incidents. Good progress has continued to be made in reinforcing the safety culture across the Group, and, although the overall reportable injury rate has not declined, the severity of the injuries has. I would like to thank the whole of our workforce for their commitment to the safety programme, which is clearly demonstrating that safety and operational performance go hand-in-hand. 

In mining, we start this year with a significant step forward in that we have successfully negotiated new or amended old long-term supply contracts with our core electricity generator customers, Drax, Eon and EDF Energy. 

We are also pleased to be able to announce the addition of a new customer, Scottish and Southern Energy. We have agreed to provide Scottish and Southern Energy's Ferrybridge power station, recently fitted with Flue Gas Desulphurisation equipment, with a total of 3.5 million tonnes of coal starting later this year with deliveries to 2015. These deliveries are at market prices, linked to international coal prices, but with caps and floor prices. They have also agreed to provide a loan, repayable over the period to 2014, to assist in funding our investment requirements.

These new contracts significantly increase both our long-term contracted coal prices and our short-term cash flows. These material benefits, compared to previous contractual arrangements, improve our economics and will facilitate the funding of our current investment in our deep mines. 

The total benefit in cash flow terms of these arrangements will be of the order of £85 million in 2009, with a further £15 million in 2010. To the extent that some of the short-term cash flow benefits represent part pre-payment of the improved prices under the long-term successor contracts, they will be treated in our accounts as customer prepayments/loans rather than being reflected as improved profitability in the near term. I would like to thank our customers for engaging with us in implementing these strategic changes to, what it is clear will be, mutual benefit.

In property, self-evidently, market conditions have been very difficult. However, the RICS valuation of our Harworth Estates property portfolio has held up well, growing like-for-like from £411 million in 2007 to £422 million. Taking development expenditure and disposals into account there was no overall change in the market value of our estate. For us, planning consents and other progress on our portfolio, coupled with the significant increase in the value of agricultural land, have helped offset the deterioration in the general property market.

Our property portfolio remains relatively immature, and we remain confident that it will generate significant additional value over time. The impact of property market conditions is not so much to change the future estimates of the value of Project Worth, but more likely to move out the timing of crystallisation of this value. Because of the difficulty in judging the pace of the recovery from the current recession and its effect on the property market, we have looked, with our property advisers DTZ, at a range of scenarios for generating the improved worth of our portfolio with the central scenario indicating a portfolio worth doubling to approximately £886 million over the next 5 years to 2014.

MINING

The international market price of coal was extraordinarily volatile last year. It climbed to exceptional highs of circa £4.40/GJ during last summer, but closed the year at £2.34/GJ as market concerns over the world economy were brought to bear. Our average selling price was inevitably constrained by the effect of legacy contracts, but, nevertheless, it was up 18.5% for the year to £1.92/GJ, a very satisfactory outcome. 

Tonnage sold from all mines was 7.9 million tonnes, in line with 2007, excluding Maltby, which we sold in 2007. This tonnage was less than we had originally hoped for, though broadly in line with the guidance we gave during the year. Our Kellingley and Thoresby deep mines encountered very difficult geological conditions, but our largest mine, Daw Mill near Coventry, produced a European record for a single face mine. It produced 3.2 million tonnes in the year, even after the slower start following commencement of its new face. This was a superb effort, and I congratulate all those involved at Daw Mill and the specialist support teams elsewhere.

Our deep mine investment programme is focussed on extending the lives of Kellingley and Thoresby, moving them from their current geologically difficult coal seams into new seams which will allow them to improve production rates to levels formerly achieved. This work is on or ahead of schedule. In addition, significant investment is being made at Daw Mill, as well as at Kellingley and Thoresby, aimed at increasing development rates and improving production efficiencies to underpin production reliability and out-turn in years to come.

Our surface mining business again grew stronger during the year with the production of 1.7 million tonnes, up 13% on 2007 (1.5 million tonnes). Planning applications and consents continued to programme, keeping us on track for our target of 2+ million tonnes a year sustainable surface mine production after 2010.

The strategic changes to our coal contracts, and the addition of Scottish and Southern Energy as a fourth major generator customer, reposition our mining business strongly for the medium and longer term. Against this backcloth, we decided to streamline our focus on supplying coal to the electricity supply industry and, in January 2009, we sold our 50% share in Coal4Energy to our partners, Hargreaves Services PLC. We now participate in the domestic and industrial coal markets through a long-term coal supply agreement with Hargreaves. 

Overall, our mining businesses, now including the methane operations, produced an operating loss before non-trading exceptional items of £2.4 million (2007: £1.8 million) with a loss in the deep mines business of £14.1 million (2007: £14.6 million) being offset by profits in surface mines and methane businesses of £10.4 million and £1.3 million respectively (2007: £8.5 million and £4.3 million respectively).

In the final quarter of 2008, we completed our strategic collaboration agreement on wind power generation with Peel Energy. Over time, it is hoped, that this collaboration will promote and maximise opportunities from this part of the business.

It is increasingly clear from Government statements, customer engagement and analyst research that coal will play a major role in the UK energy mix for the next two decades and beyond. The formation in October 2008 of a new Government Department for Energy and Climate Change (DECC) is welcomed, as is the Secretary of State's commitment to a strategic energy policy with an acknowledgment of energy security and affordability at its heart. We are well placed to play the leading role in the production of indigenous coal for Britain, and Government clearly recognises this.

HARWORTH ESTATES

Harworth Estates has continued to make strong progress on Project Worth, the plan to mature in planning terms 77 of our sites. Last year, further planning approvals were secured for over 1,200 homes and 140,000 sq m (1.5 million sq ft) of business space. Planning applications were additionally made for over 4,500 homes and 78,000 sq m (841,000 sq ft) of business space.

Overall, Harworth Estates produced an operating profit of £4.7 million (2007: £73.2 million). As expected, this was significantly lower than the previous year because of a reduction in revaluation gains on investment properties to £3.7 million from £70.5 million in 2007, of which £23,000 was unrealised (2007: £66.8 million). A further revaluation gain of £3.2 million (2007: £6.7 million) was taken directly to reserves, being the increase in value of former operating properties transferred to investment property status in the year on their ceasing to be operational sites.

Notwithstanding the unprecedented market conditions, particularly towards the end of 2008 which have clearly continued into 2009, our property portfolio has the potential to contribute very substantial shareholder value over the medium term. We have clearly mapped out our strategy for realising this value and our focus on this remains undiminished.

GOING CONCERN

Your Board recognises that deep mining has a high operating risk compared to the majority of industries. Recent economic turmoil especially in relation to commodity prices, the banking market and the property market has increased further the risk environment in which the Group operates. These risks are set out in the Operating and Financial Review and I would also draw your attention to those matters which the Board has felt it appropriate to take into account in forming its conclusion on going concern, set out in the Directors' Report and in the Financial Statements.

DIVIDEND

The Group continues to make significant investments in our mining business and in the planning phase of our Property businesses to the clear benefit of shareholders. For this reason and to preserve financial flexibility, the Board has decided not to recommend a dividend for 2008. Future dividend policy will be dependent both on our future performance and financial resources, market conditions and on our view on how best to drive total shareholder value.

OUTLOOK

The mining business has started this year in line with 2008 with first quarter production at 1.7 million tonnes (2008: 1.7 million tonnes). The new coal contracts, the planned impact of our investment programmes at Thoresby and Kellingley, the continued excellent performance at Daw Mill and the continued growing strength of surface mining combine to provide an increasingly positive outlook. Our property business, Harworth Estates, continues to out-perform the market and to look forward to substantial long-term value creation. We therefore face the future with confidence.

 

END

 

 

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