Annual Financial Report - par

RNS Number : 1762R

UK Coal PLC

27 April 2009

 



UK Coal plc

Annual Report and Accounts

Year Ended 27 December 2008

For RNS purposes graphs and page numbers have been omitted.

CONTENTS

Highlights

Chairman's Statement

Operating and Financial Review (OFR)

• Business overview

• Strategy]

• Objectives

• Mining]

  • Market overview

  • Deep mines

  • Surface mines

• Harworth Estates    

• Financial review

• Key risks and uncertainties

• Corporate Social Responsibility

• Board of Directors    

Directors' report    

Statement of Directors' Responsibilities

Corporate governance

Directors' remuneration report

Independent auditors' report

Consolidated Income Statement

Consolidated Statements of Recognised Income and Expense]

Balance Sheets    

Cash Flow Statements

Notes to the Financial Statements]

HIGHLIGHTS

	2008	2007
Income Statement
Total group revenue	392.5	328.5
Average sales price per Gigajoule (£/GJ)	1.92	1.62
Operating profit before non-trading exceptional items and property revaluation uplift (£m)	1.8	5.3
Non-cash property revaluation uplift (£m)	-	66.8
Operating profit before non-trading exceptional items (£m)	1.8	72.1
Operating (loss)/profit (£m)	(2.2)	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 tax (pence)	(10.0)	44.0
Balance Sheet
Net assets (£m)	300.4	358.2
Net assets per share (£)	1.91	2.28
Year end gearing (%)	46	29

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

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

MINING

Deep Mining

The Group operates 4 deep mines, located in Central and Northern England. The Group has reserves and resources of over 100 million tonnes at these mines and further mineral potential in addition. 

Surface Mining

The Group has 5 active surface mines and planning committee approvals or consents to mine a further 3 sites. We have applied for planning consents for a further 2 mines and expect to make applications for a further 3 sites during 2009.  Total surface mining reserves and resources, subject to planning, are estimated at approximately 55 million tonnes.

HARWORTH ESTATES

UK COAL owns approximately 45,000 acres (18,200 hectares) of predominantly agricultural land. Within this, around 3,800 net acres on 77 sites have been identified as offering prime prospects for development into a mix of residential, business park, distribution and community developments over the medium term.

The Group's property interests, excluding the deep mine sites, at current open market value were valued at December 2008 at £422 million. We estimate, however, that, with the benefit of currently envisaged planning consents, at current market values, our land portfolio would have a worth of some £668 million by 2012, and some £886 million by 2014, in each case with the potential for further development phase profits.

CHAIRMAN'S STATEMENT

A year ago, few predicted the scale of global economic downturn and its dramatic impacts on companies in all sectors. UK COAL was far from immune from these impacts and, in addition, we faced significant challenges of our own. Our financial results show this. What they do not show, until you dig beneath the surface, is the quality of management and operational performance, the underlying strengths of our business and the fact that our long-term growth platform remains absolutely in place. These are substantial achievements and I, and the whole Board, thank our executive team and all our employees.  

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. These are not figures I like reporting; but comparing 2008 with 2007 is like comparing apples with pears and, given the differences, I believe the results are in fact very creditable.

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 I 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.

DAVID JONES

CHAIRMAN 27 APRIL 2009

OPERATING AND FINANCIAL REVIEW (OFR)

BUSINESS OVERVIEW

UK Coal is the largest producer of coal in the UK, and a significant supplier of energy to the UK's electricity industry. In 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.

STRATEGY

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

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

OBJECTIVES

MINING

Deep mining

• To continually improve safety in our operations

• To reduce risk and variability in operational performance

• To optimise operating cost per tonne of output

• To achieve over time an optimum balance of long-term sales contracts, and access market prices for our coal

Surface mining

• To continually improve safety in our operations

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

• To maximise productivity and operating performance on our sites

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

HARWORTH ESTATES

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

• To participate in the development of these sites where this will optimise shareholder returns

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

REVIEW OF OPERATIONS BY BUSINESS

MINING 

2008 saw an improved underlying performance from deep mining and strong results from our surface mining business, offset by a fall in profits from our power business.

Surface mining operating profits before non-trading exceptional items increased from £8.5 million in 2007 to £10.4 million. Overall, our mining operations improved their financial performance from an operating loss before non-trading exceptional items of £6.1 million in 2007 to £3.7 million in 2008. Our power businesses delivered £1.3 million operating profit in 2008, compared to £4.3 million in 2007, due to lower gas volumes being produced from operating mine sites and the requirement to purchase EU Emissions Trading Credits for our Stillingfleet operation.

After a strong 2008 with record production, Daw Mill is now well set to continue to exploit the current panel during 2009.  Daw Mill's production compensated for the geologically difficult conditions experienced at both Kellingley and Thoresby, which are both developing the final panels in their current seams before production is transferred into the new Beeston and Deep Soft seams towards the end of this year and early next year respectively.

Key Performance Indicators ( 'KPIs' )

					2008	2007
Sales price per Gigajoule (£/GJ)					1.92	1.62
Tonnage sold excluding Maltby (million tonnes)					7.9	7.8
Tonnage produced excluding Maltby (million tonnes)					7.9	7.9

The new coal contracts that have been negotiated with our core electricity generator customers, and the gaining of a major new generator customer, will have a very positive future effect on our mining business, including cash flows generated this year and next. A summary of the new contracts and their impact is set out later in this Operating and Financial Review.

Market overview

The UK burned an estimated total of 53 million tonnes of coal last year, the vast majority of this being used to generate electricity.

Indigenous production, including our own 7.9 million tonnes last year, can only meet a portion of this demand, making the UK a substantial importer of coal. Demand will continue substantially to exceed our supply capacity.

The mining business operates in a commodity market where the basic cost of production in a crowded and economically prosperous country and the cost of transporting a bulk product limits the geography of its economic market.  In addition, we believe that the benefits to our customers of having a local supply helps them to mitigate the risks inherent from importing all their requirements from areas of potential political change thousands of miles away. This is important in a global climate where demand for fuels and the availability and security of energy supply will become a strategic issue.

Given the nature of the UK electricity supply industry, our predominant market, we have a small number of significant customers. However, the retro-fitting of flue gas desulphurisation equipment onto more power stations, such as at Ferrybridge this year, continues to expand the number of sites able to burn coal mined in the UK, which typically has a higher sulphur content than coalfields generally around the world.

Also affecting the demand for, and economics of, coal burn for electricity is the increasing focus on reducing environmental impact. Two pieces of environmental legislation came into effect in January 2008, the revised Large Combustion Plant Directive ('LCPD') and the second phase of the EU Emissions Trading Scheme ('EUETS').

The LCPD controls emissions of sulphur dioxide, nitrogen oxides and dust (particulate matter) from large combustion plants. To meet this directive a number of flue gas desulphurisation schemes were completed at coal fired power stations in 2008. 

The main instrument for the control of the CO2 emissions for combustion installations, the EUETS, began its second trading phase in January 2008. The new five year EUETS phase introduced tighter CO2 emission levels on UK generators who also received a reduced allocation of free allowances. Despite this, coal was still the fuel of choice for long periods of time throughout the year in response to high gas prices particularly in the winter months. The rules for the third phase of the EUETS, from 2013 to 2020, were agreed by the European Commission in December 2008.

In the long-term, carbon capture and storage ('CCS') will be required for coal to have a meaningful role in a low carbon economy. 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 UK government is undertaking a CCS Demonstration Competition which will be one of the first of its kind in the world and aims to demonstrate the full chain of CCS by 2014.  On 23 April, the Secretary of State made a major announcement to Parliament on the Government's strategy for CCS and the role of indigenous coal for the long-term, including the likelihood of 4 new coal fired power stations being built by 2020.

In the UK, 2008 saw the coal burn at power stations remain at 2007 levels, although the proportion of the electricity market fuelled by coal fell by 3% to 31% with relatively cheaper gas prices in the summer comparing favourably with the coal price at this time.

NW Europe Steam Coal Price

International energy prices saw unprecedented volatility in 2008, with coal being no exception. The last few months of 2008 saw a worldwide sharp economic downturn which saw energy prices and freight rates reduce sharply from the record highs in the summer.

International coal prices rose from around $118 per tonne at the beginning of the year to reach $220 per tonne in July, before falling back to $80 per tonne in December. Since the year end, and markedly since the middle of February, coal prices, particularly for near term deliveries fell further around the world and in NW Europe in particular. Forward pricing for later deliveries, and the contract prices agreed recently with our customers, indicate that this is expected by the market to be a short-term reaction to the unexpectedly quick decline in economic activity and therefore demand for electricity. Prices have recovered somewhat, though they remain volatile, especially for near term deliveries.

The fall in international coal prices, which are priced in US$, has been partly cushioned in sterling terms by movements in the sterling/dollar exchange rate. Over the past 12 months sterling has depreciated by 25% against the US$.

Historic steam coal prices together with the latest forward market prices for coal delivered to Amsterdam/Rotterdam/Antwerp ('ARA') are shown below. Large mining companies worldwide have been seen to be tailoring their short-term production to a period of reduced demand until global commodity consumption and economic growth is re-established. 

NW Europe Spot Steam Coal Price in $/t

[Graph omitted due to constraints of reporting service]

NW Europe Spot Steam Coal Price expressed in £/GJ

[Graph omitted due to constraints of reporting service]

UK steam coal market

Coal delivered into the UK is priced off the ARA price shown above, converted into sterling, with the additional cost of delivery into the UK market added on. The average forward price for 2009 on the ARA market at 31 December 2008 was $84 per tonne. Converted into sterling at $1.44:£1 and into its calorific value by dividing the tonnes by 25.121, this equated to a forward sterling price of £2.34/GJ. The additional cost of delivery to the UK brought this to a UK delivered price of around £2.59/GJ at that time. 

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

UK Electricity Supply Industry ('ESI')

[Graph omitted due to constraints of reporting service]

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

Percent of electricity generated by fuel type	2008	2007	2006	2005
	%	%	%	%
Coal	32	35	38	34
Gas	47	43	37	40
Nuclear	13	15	18	20
Oil, hydro & renewables	8	7	7	6
Total	100	100	100	100

Source: DECC Energy Statistics (2008 numbers based on provisional numbers)

Coal Contracts

The Group has adopted the strategy of moving towards a more diverse mix of long term contracts with customers, with shorter term contracts or spot sales to balance security of supply contracts with the ability to take advantage of current coal prices where beneficial. Our contracts position now includes an element of sales negotiated at market rates, along with contracts priced at capped and collared or fixed prices, which may be fixed in nominal terms or subject to inflation adjustments.

Following the discussions held with customers after the year end, and referred to in the Chairman's Statement, contractual commitments have increased to 36.1 million tonnes as of the start of calendar year 2009 compared to 24.0 million tonnes at December 2007. The negotiation of certain contracts has resulted in increased cashflows into the business in 2009 and 2010. These benefits will be treated as customer prepayments/loans which, together with implied interest, are to be repaid either out of later revenue or as separate repayments. Consequently, shown below are summaries of both our outstanding contractual commitments in revenue terms, and the incremental cash flow effects of these contractual changes and the prepayments/loans as of the start of the 2009 financial year.

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

Total commitments

	TOTAL	2009	2010	2011	2012	2013	2014	2015
	million tonnes	million tonnes	million tonnes	million tonnes	million tonnes	million tonnes	million tonnes	million tonnes
Fully floating	5.3	0.9	1.3	1.4	1.4	0.1	0.1	0.1
Floating within caps and floors*	7.4	0.2	0.7	2.0	3.1	0.5	0.6	0.3
Fixed, subject to indexation**	13.5	6.2	4.8	1.8	0.1	0.2	0.2	0.2
Fixed, not subject to indexation	9.9	0.5	0.7	1.8	1.7	1.8	1.7	1.7
Total	36.1	7.8	7.5	7.0	6.3	2.6	2.6	2.3
Options to purchase coal granted at fully floating prices	3.0	-	-	0.5	0.5	1.0	1.0	-

*    Caps and floor prices are subject to indexation**

**    Indexation will be generally based off RPI changes

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

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

Indicative outcome of contractual commitments given varying market pricing 

API 2 Assumptions* £/GJ	2009 £/GJ	2010 £/GJ	2011 £/GJ	2012 £/GJ	2013 £/GJ	2014 £/GJ	2015 £/GJ
£3.00	1.98	2.12	2.59	2.95	2.60	2.61	2.61
£2.75	1.96	2.07	2.53	2.85	2.58	2.60	2.59
£2.50	1.93	2.03	2.45	2.74	2.57	2.59	2.58
£2.25	1.90	1.97	2.33	2.57	2.52	2.53	2.53
£2.00	1.88	1.92	2.23	2.41	2.50	2.51	2.52
£1.75	1.85	1.87	2.17	2.32	2.48	2.49	2.50
*Each subject to 2% annual increase in line with RPI assumption

Although the number of gigajoules varies by customer and mine, as a guide, in 2008, the Group averaged 24.4 Gigajoules per tonne.

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

	2009	2010	2011	2012	2013	2014	2015
	£ m	£ m	£ m	£ m	£ m	£ m	£ m
Increase/(decrease) in cashflow £m	85	15	(32)	(50)	(18)	(20)	(11)

These contracts contain, in some cases, security over relevant coal mines, conditionality regarding investment levels and restrictions on paying dividends whilst certain advances are outstanding.

Customers

Details of coal sold by UK COAL (including sales from Maltby colliery in 2007) by customer type are summarised below. This profile is unlikely to change in the foreseeable future.

	2008		2007
	Tonnes (m)	%	Tonnes (m)	%
Electricity Supply Industry	7.5	94.9	7.4	92.5
Industrial	0.2	2.5	0.3	3.8
Domestic	0.1	1.3	0.2	2.5
Other	0.1	1.3	0.1	1.2
Total	7.9	100.0	8.0	100.0

Coal sales to the domestic and small industrial markets were carried out through sales to the Group's joint venture with Hargreaves Services PLC, Coal4Energy Limited.  This joint venture holding was sold to Hargreaves Services PLC in January 2009. An agreement to supply coal to Coal4Energy Limited until 31 May 2014 was also entered into at the same time and these contractual commitments are included in the customer commitments table above. Further details are provided in note 14 to the financial statements.

DEEP MINES

Our deep mines business consists of the operational mines at Daw Mill (Warwickshire), Kellingley (Yorkshire) and Thoresby and Welbeck (Nottinghamshire). The key performance indicators for this business are:-

Key Performance Indicators ( 'KPIs' )

		2008	2007
Coal mined (million tonnes)		6.2	6.6
Revenue (£m)		304.5	265.8
Operating cost* (£m)		284.8	246.2
Operating cost per gigajoule* (£/GJ)		1.87	1.54
Loss before non-trading exceptional items (£m)		14.1	14.6
Face gap times (weeks)		33	34
Development drivage metres		17,149	15,484

* (excluding non-trading exceptional items and depreciation)

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

As expected, overall operating costs in the business have increased across all collieries reflecting the impact of above RPI inflation experienced earlier in the year, especially in steel and other material prices. In addition, increased working hours, particularly at Daw Mill, to maximise production hours have further contributed to the rise in costs.  Operating costs per Gigajoule of production reflected these trends, but were compounded by the difficult coal conditions at Kellingley and Thoresby which reduced output.  

Colliery Performance Summary:

	Production		Operating cost*
	2008	2007	2008	2007
	m tonnes	m tonnes	(£m)	(£m)
Ongoing mines
Daw Mill	3.2	2.2	93.6	70.9
Kellingley	1.2	1.8	71.2	67.8
Thoresby	0.9	1.4	63.2	50.7
Welbeck	0.9	1.0	56.8	49.4
Ongoing deep mines	6.2	6.4	284.8	238.8
Closed or sold deep mines	-	0.2	-	7.4
Total deep mines	6.2	6.6	284.8	246.2

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

The primary objective for the collieries is to increase safely the reliability of production. This is being tackled with a set of initiatives:-

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

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

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

Increased development 'bank': as each of our mines usually operates a single face, it is important to ensure that the replacement face is available in time to start when the old face is finishing. Investment is being made in increased development labour hours and new development equipment in order to build, over time, a 'bank' of development work to mitigate any development delays should these occur.

Increased panel sizes: longer facelines in particular improve operational performance, increasing the ratio of face cutting time to the turnaround times at either end. They also reduce the ratio of development work required to achieve the same output, helping the drive to build a development 'bank'. To this end the next panel (32's) for Daw Mill will, at 357 metres, be 62 metres longer than the last, after the investment in around £18 million of face equipment in 2009.

Daw Mill

Despite a slow ramp up on its new panel, (302's), at the start of last year, Daw Mill produced a record breaking 3.2 million tonnes in 2008. Daw Mill continues to mine this same panel until the end of 2009, and will commence mining on its replacement (32's) panel in January 2010 which will last until March 2011.

The 2008 record production was achieved in spite of excessive down time caused by the unreliability of one of the main drift belts that raise the coal to the surface, largely through belt breakage. Tackling this unreliability has been one of our main objectives and we have now completed the replacement of all 4.3km of the belt on the worst affected section in the South Intake Drift 2 ('SID' 2), and have carried on to replace gradually all 3.6km of the next oldest belt, on section SID 3.

Costs during the period were slightly higher than originally anticipated, partly the result of increased shifts and partly the result of the salvage costs for the last (31's) panel. This latter suffered a heating which has necessitated the pumping of nitrogen into the waste to control its effects, whilst the equipment was salvaged. This salvage is now complete and the panel was sealed in April 2009.

The priority for Daw Mill is to increase the amount of development work, which suffered following the extensive required reworking of sections of gates undertaken in 2007. We have carried out an extensive replan of the mine layout to reduce the pressure on developments and to increase the total mineable reserves in the current (300's) block of coal. In particular, work has now commenced on the 300's block laterals developments and work on panel 303's gates will commence in Q4 2009 The 303's panel is scheduled to commence production in March 2011.

Kellingley 

Kellingley is working its way through the last of the Silkstone coal and, although not entirely unexpected, this coal has proved to be particularly problematic in both physical and environmental terms. The last face in this seam will be finished at the end of 2009, with the new, and more favourable, Beeston seams being accessed thereafter.

Notwithstanding that the coal was always going to be difficult in this area, the outturn for the year was badly affected by the delay in the start of the 409's panel in August 2008. The development of this panel hit problems over the summer after the main gate progress was severely slowed by increased geological stresses which started to deform the walls and roof. This necessitated the use of steel supports for 500 metres, rather than the more usual, faster and less expensive bolting technique, and meant that the developments were not completed in time to coincide with the completion of the previous panel. As a result of the delays incurred, the mine suffered a 6 week face gap in the summer. This delay has reinforced our intention to increase development activity in order to ensure, over the long term, an adequate bank of development in all of our mines in order to reduce the risk of face gaps. We have just started to drive 502's panel which is to be available for production in October 2010, and aim to have well over 6 months developments ahead of us at Kellingley by the end of 2009.

2009 will see 2 planned face changes during the course of the year, one completed in April and the second due at the end of May, with the first of the Beeston panels, 501's, starting at the end of the year upon completion of VW 412's panel. However, until the Beeston seams are accessed, Kellingley's output will continue to be lower than its historic norm of circa 2 million tonnes.

Thoresby

As with Kellingley, Thoresby is working the last of its existing Parkgate seam prior to starting in a new seam, the Deep Soft, at the start of 2010, and is suffering similarly from poor geology. 

Thoresby's particular problem is the interference from previous workings some 120 metres above. The required panel layout has resulted in the concentration of stresses caused by pillars (unmined coal left between worked out panels) in the former workings. As more of the panels in the current series are being worked, these geological stresses appear to be increasing, in effect, causing increased problems on the later panels. Although a face gap had been expected in the first quarter 2008, between the finish of 55's and the start of 56's panels, we believe that it was probably the increased pressure from these former workings which resulted in a unexpected significant amount of floor rise in the developments leading to a longer dinting (floor removal) programme and an increased face gap of 15 weeks. In September, as this panel was being mined, it encountered increased stresses that resulted in extensive delays as it progressed under the pillars of the former workings. 

In 2009, we have encountered similar problems as a second pillar has been negotiated on this same panel, although increased preparatory work has helped reduce the impact. The final face in the Parkgate seam, 57's, which is due to start production in May 2009, will also have to navigate under 2 pillars. Given the presumed increasing impact of the previous workings, the layout of the gates has been altered to mitigate significantly the effects, and work replanned accordingly.

Development work for the Deep Soft seam is on target, with DS1 due to start in January 2010. As with Kellingley, we are progressing with the task of building the development bank, with lateral work for the DS2 panel (which is due for coaling in March 2011) starting now.

Welbeck

Welbeck's output suffered at the start of 2008, when an 8 week face gap was incurred when 242's face installation was delayed. This followed the fatality in November 2007 on 244's panel, which delayed the salvage of the equipment needed for 242's face. It also suffered a further 4 week face gap prior to the start of 240's panel in October.

Welbeck will probably close at the end of 2009/start of 2010 unless further economically viable coal reserves can be identified. Until then it will undergo two face changes in 2009, one successfully achieved in April and the change to probably Welbeck's last panel, in August.

Pending an ultimate decision on a possible reopening of Harworth colliery, we are seeking to maintain as many of the experienced and motivated Welbeck workforce in our other mines, displacing work currently carried out by contractors. Identification of these opportunities and the selection and agreement of individuals is an ongoing process.

Electricity Generation from Methane

From a safety standpoint we need to extract methane from operating mines. Its use as a fuel source both contributes to our operations providing an economic fuel source and reduces the impact on the environment of venting methane, a greenhouse gas with approximately 21 times the environmental impact of CO2.  Our methane based electricity generation operations are now treated as part of our deep mine operations.

In 2008, we generated 165,834MWh of electricity (down 9% compared to 2007) from 29 MW of installed capacity from methane extracted at both operating mines and former mine workings effectively self supplying over 60% of our deep mine electricity requirements. Profitability in the year was reduced to £1.3 million (2007: £4.3m) due to lower gas production from the operating mine sites and the requirement to purchase EU Emissions Trading Credits for our Stillingfleet operation. Generation from our two non operating mine sites was better than expected with Stillingfleet utilisation being above 95%.

Harworth

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

PRODUCTIVITY AND FACE GAPS

There were 5 face changes in the year, incurring face gaps of 33 weeks (2007: 34 weeks). Face gaps consist of 15 weeks lost in the Thoresby face change, 6 weeks at Kellingley, and 12 weeks at Welbeck. 

In response to this, focussed effort has been made during the year on development drivage, with overall development drivage metres showing an 11% increase on 2007 to 17,149m.

Reserves and Resources

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

We estimate that we have approximately 105 million tonnes of reserves and resources at our ongoing mines of which 45 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.

During 2008, reserves and resources have remained unchanged despite mined output as a result of mine layout replanning. Mineral potential has fallen, recognising that Welbeck mineral potential will probably prove to be uneconomic to recover.

Our estimates as at December 2008 of our deep mine coal reserves are set out in the following table:

Ongoing colliery	Reserves	Resources	Total reserves and resources	Mineral potential	Total
	Million tonnes	Million tonnes	Million tonnes	Million tonnes	Million tonnes
Daw Mill	21	3	24	41	65
Kellingley	12	46	58	5	63
Thoresby	11	11	22	4	26
Welbeck	1	-	1	-	1
TOTAL	45	60	105	50	155
2007	45	60	105	64	169

Reserve     Reserves which are accessible using the broad infrastructure in place at the current time and which are in the current 5 year mining plan.

Resource     Reserves, which may require substantial development and other costs to allow accessibility and are not currently in the 5 year mining plan.

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

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

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

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

• Geological problems - despite the improved seismic surveying being carried out, there remains a risk that a coal panel is subject to unforeseen geological problems that makes production difficult

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

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

SURFACE MINES

Our surface mining business had a very successful year, despite a high fuel cost base for much of the year. Costs per Gigajoule had been expected to increase as the newer sites, having lower coal yield, were necessarily more expensive than older sites although this increase was exacerbated by the fuel costs.  

Production increased 13% to 1.7 million tonnes from 1.5 million tonnes in 2007 reflecting the coal from the new sites opened in 2007 at Long Moor, Steadsburn and Sharlston.  This increased tonnage, together with favourable sales prices, led to an increase in revenue of 44% to £76.5 million in 2008 from £52.9 million in 2007. Despite the higher cost base, this produced an increase in operating profit before non-trading exceptional items to £10.4 million (2007: £8.5 million).  

At the half year we reviewed the level of surface mine restoration provisions in the light of energy price trends at that point. Given the subsequent change in long-term economic conditions and energy pricing in particular, no overall change has been considered necessary at the year end in provisioning levels for diesel costs.

Key Performance Indicators ( 'KPIs' )

		2008	2007
Coal mined (million tonnes)		1.7	1.5
Revenue (£m)		76.2	52.9
Operating cost (£m)*		63.1	41.2
Operating cost per Gigajoule (£/GJ)*		1.61	1.11
Operating profit before non-trading exceptional items (£m)		10.4	8.5
Sites with consent (number)†		8	7
Reserves on sites with planning consent (million tonnes)		6.8	4.3

* excluding non-trading exceptional items and depreciation

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

Surface mines operations have a more variable cost base than deep mines.  Surface mine operating costs stated above are after charging amortisation of mine development and restoration assets.  The site by site cost per GJ will vary according to the nature of each site. The costs of planning gains and the coal yield at each site, along with variations associated to operating cost, efficiencies and weather, make year to year direct comparisons difficult. 

Planning and Reserves

We are now seeing a marked change in the success rate for surface mining consents with the various Local Authorities. Recognition is being given not only to the need for an indigenous supply of coal for both national and local requirements but also to the fact that the schemes are meeting high environmental standards both in design and operation. We have now been successful in 8 out of 8 of our last planning applications. The latest, for Huntington Lane in Telford has gone to appeal on the grounds of non-determination following delays.

We currently have planning consents in place for 8 sites equivalent to 6.8 million tonnes, and applications already submitted for a further 2 sites equivalent to 1.4 million tonnes. We expect during 2009 to submit planning applications for a further 3 sites equivalent to 3.3 million tonnes.

We estimate that we have surface mine reserves where the Group controls the majority of a site through ownership and working rights agreements totalling 22.8 million tonnes of which 8.2 million tonnes relate to sites that are currently operational or in the short-term plan with the remainder in the medium-term plan. Planning consent (or committee approval) has been received to date for 6.8 million tonnes of the 8.2 million tonnes.

In addition, using the same basis as above, resources of 32.6 million tonnes have been estimated at sites for which additional geological and planning work is required to confirm with a reasonable level of certainty the tonnage available to mine. In some cases third party landowner agreements may be required to access some of this coal.

In total therefore we estimate that we have reserves and resources of circa 55 million tonnes. As a very substantial proportion of this is subject to planning consent, we continue to exercise caution in estimating how much will ultimately be recoverable. We continue to estimate that we should recover at least 2+ million tonnes per annum for 10+ years.

We also estimate that we have the potential to access a further 29.2 million tonnes. To be more certain about the ability of the Group to extract all this coal the Group, in most instances, will need to acquire further control over the sites and to undertake a significant amount of geological and planning work. The outcome of these actions could materially change the coal available for extraction.

A summary of estimated remaining reserves at December 2008 through the various stages of planning is set out in the table below:

million tonnes	Sites with planning consent (or committee approval)	Applications submitted for planning, decision awaited*	Applications to be submitted in the following 12 months*
Cutacre	0.6	-	-
Steadsburn	0.9	-	-
Long Moor	0.3	-	-
Sharlston	0.1	-	-
Lodge House	0.9	-	-
Park Wall North	1.3	-	-
Blair House	0.7	-	-
Potland Burn	2.0	-	-
Bradley	-	0.5	-
Huntington Lane	-	0.9	-
Butterwell	-	-	1.0
Minorca	-	-	1.2
Chesterfield Canal	-	-	1.1
Total reserves in process 2008	6.8	1.4	3.3
Total reserves in process 2007	4.3	4.7	5.1
*Including tonnage not yet under the Group's control of 0.4 million tonnes

HARWORTH ESTATES

Our property division, Harworth Estates produced an operating profit of £4.7 million in 2008 (2007: £73.2 million), including a gain on investment properties of £3.7 million (2007: £70.5 million), of which £23,000 was unrealised (2007: £66.8 million). A further revaluation gain of £3.2 million was taken directly to reserves (2007: £6.7 million). This gain arose in respect of former operating properties which were transferred to investment property status on their ceasing to be operational sites.

Key Performance Indicators ('KPIs')

		2008	2007
RICS valuations of the property portfolio (£m)		422.3	410.7
Number of sites in Project Worth		77	76
Estimates of Project Worth
2012 (£m)		668	935
2013 (£m)		-	1,000
2014 (£m)		886	-

Harworth Estates, manages approximately 18,200 hectares (45,000 acres) of freehold land, predominately in England, on behalf of various Group companies. The majority of the portfolio is located on the A1/M1 corridor from Leicestershire to Northumberland. There are, in addition, a small number of sites in Scotland, North West England and North Wales.

Harworth Estates has three key objectives:

• to maximise the value of the Group's property portfolio in the medium and long-term

• to manage the Group's current income producing portfolio to maximise income and protect asset value and 

• to manage the Company's surface mine portfolio from an estates perspective.

During the course of 2008 Harworth Estates secured planning committees' approval for over 1,200 homes and 140,000 sq m (1.5 million sq ft) of business space, and made planning applications for over 4,500 homes and 78,000 sq m (841,000 sq ft) of business space.

Notwithstanding the serious difficulties in the property market which became more manifest through the final quarter of 2008, Harworth Estates made a very satisfactory contribution to the Group's overall performance.

Project Worth is our programme to add value to the Estates portfolio over time. Estimates of Project Worth are therefore not reflected in the accounts. Project Worth has been reviewed and updated with our property advisers DTZ in light of both market conditions and progress on the individual projects concerned. Due to the wide ranging market uncertainty on timing of recovery, values and volumes we have settled on a central estimate of Project Worth with a range of alternative outcomes. We believe that there is a general market assumption that crystallisation of planning gains will, due to the unprecedented market conditions recently experienced, have moved out by two years. We concur with this view.  

The table and graph below sets out the central planning assumptions and ranges of Project Worth for both 2014 and 2012 (for comparison purposes).  The central estimate is for an estimate of Project Worth of £886 million by 2014.

		2012		2014
		£m		£m
No Recovery		652		798
Slump and Steady Recovery		668		886
Deep and Prolonged Slump		553		781
Slump and Bounce		725		1,013

[Graph omitted due to constraints of reporting service]

Price Scenarios	Description
Central scenario 'Slump and Steady Recovery'	Nominal price falls for two years (2008 and 2009) of c.25% from peak. Flat or very modest growth 2010. Recovery picks up from 2011 but house price inflation modest by historic standards at 5% annual inflation 2011-17 Mortgage markets unfreeze - without return to cheap money, and with the confidence that the market has bottomed, stimulating demand.  Continued difficult economic environment and more limited credit availability constrain house price inflation below historic rates. Rental values increase in line with RPI, bringing cost of renting closer to cost of buying, providing more of an incentive to buy rather than rent.
Upside scenario 'Slump and Bounce'	Nominal price falls for two years (2008 and 2009) of c.25% from peak, turnaround starts in 2010. Bounce back with 10% annual house price inflation on average 2011-13. Settles back to 6% annual house price inflation 2014-17. Economy starts to recover in 2010, as does mortgage availability and confidence which lays foundation for return of strong demand in 2011. Shortage of supply underpins growth and encourages the return of investors to the market. Price growth from 2010 will improve revenues and sales rates.
'No Recovery'	Assumes December 2008 open market values and no market rebound. Growth comes purely from improved planning status over time.
Downside scenario 'Deep and Prolonged Slump with late Bounce'	Nominal price falls for three years (2008, 2009 and 2010) of c.35% from peak. No growth for two further years 2011 and 2012. Global financial problems cause contagion in the world economy, and mean the downturn is more prolonged and deeper than anticipated. Economy only starts to emerge from slow growth in 2013 when confidence returns to financial, economic and housing markets. The absence of activity for 5 years produces a strong bounce back with house price growth of over 10% pa. Lack of new supply in intervening years supports price growth.

PROPERTY VALUATIONS 

A full independent valuation of all our properties has been undertaken as at December 2008 in accordance with appraisal and valuation standards published by the Royal Institution of Chartered Surveyors.

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

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

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

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

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

				Like for like*
		Dec-08		Dec-07		Dec-07
		£'000		£'000		£'000
Agricultural
	Mixed	114,185		101,624		93,906
	Low grade	5,045		3,247		3,247
Undeveloped land
	With planning	64,070		67,965		33,145
	Application submitted	65,310		72,900		42,500
	In development pipeline	101,723		100,602		165,822
Commercial land with rental income
	Part or fully developed	32,600		34,500		34,500
	In development pipeline	21,725		11,171		11,171
Investment properties at valuation		404,658		392,009		384,291
Operational Sites
	With potential for development	8,792		8,007		8,007
	Agricultural sites	1,218		2,183		9,901
	Other operational sites	7,600		8,500		8,500
Operational properties at valuation		17,610		18,690		26,408
Total properties at valuation		422,268		410,699		410,699
*Like for like takes account of properties reclassified between segments during the year.

Active surface mine sites are included in the value above based on their restored land value of £17.6 million (2007: £26.4 million).  For so long as sites, otherwise being held for their long term investment potential, are being used by the Group for its mining and other activities, these properties are recorded at cost less impairment and changes in valuations are not reflected in the balance sheet. As at December 2008 a total of £6.8 million of revaluation gains (2007: £11.1 million) has not been included in the balance sheet as a result. Operating deep mine sites are not included in the above valuation.

PRINCIPAL DEVELOPMENT ACTIVITIES DURING 2008

Waverley / Orgreave, Rotherham 

This major regionally significant former operational site now consists of 3 principal development areas, each a major scheme in its own right.

Advanced Manufacturing Park (AMP)

The AMP consists of a part built-out serviced employment campus of 40 hectares (100 acres). One of the plots progressed during the year is Evolution Park, a 8,660 sq m (93,200 sq ft) hybrid industrial development undertaken in a joint venture with Strategic Sites Limited which completed in October 2008. Dormer Tools have taken occupation of the largest 1,750 sq m (18,800 sq ft) unit as at early February 2009, two further units are under offer and 11 remain available.

Along with our principal partners on the scheme, Yorkshire Forward, we continue to market the remaining plots to a wide range of suitable occupiers.

Highfield Commercial Business Park

A revised planning application was submitted to Rotherham Council in October 2008 seeking outline consent for our proposed 60,000 sq m (645,000 sq ft) Government Office Campus being jointly promoted with Helical Governetz Ltd. Timing for determination of planning is dependent on whether it is 'called in' by the Government, with the outcome likely Q2/Q3 2009. Infrastructure spend has been postponed in view of current market conditions and until the identification of first pre-let occupiers.

New Community

An outline planning application was submitted in August 2008 for 3,890 new homes and 17,100 sq m (184,200 sq ft) of associated leisure, retail and community uses. This application is subject to a Planning Performance Agreement with the Local Authority which targets a determination by May 2009. Delayed and complex responses from Statutory Consultees make it likely that this determination date will be extended, which it was always anticipated might be the case. The announcement of a Housing Growth Point status for South Yorkshire which, including Rotherham, helps significantly and supports the case for large scale residential development at Waverley.

Prince of Wales Mixed Use Scheme, Pontefract

Planning consent for 917 residential units and 24,250 sq m (261,000 sq ft) of office, retail and community uses was received in 2008, subject to completion of Section 106 Agreement. The development is likely to be phased over 8 years with the commencement of infrastructure to open up the site likely to be postponed until 2010 in light of current market conditions.

G Park Distribution Development, Lounge, Ashby de la Zouch 

We continue to work closely with our joint venture partner, Gazeley Plc, to progress the planning application for this 79,000 sq m (850,000 sq ft) rail connected distribution hub. The planning application was submitted in August 2007. Once approved the site will reuse the existing high quality rail sidings formerly used for coal dispatch. The site is one of three options put forward by the local authority in its Core Strategy to accommodate strategic distribution uses. In parallel with the progression of the planning application the joint venture is fully supporting the promotion of the site, which is the only one with a live rail connection, in the Local Development Framework Core Strategy by providing detailed technical information. A decision on the application is expected in mid 2009.

Gascoigne Wood, Selby, Yorkshire

Our agents DTZ continue to market the 66 hectare (165 acre) rail connected site and have secured significant long and short term interest in the site. Short term agreements with DB Schenker (formerly EWS) and British Gypsum, which make use of the rail sidings and 20,500 sq m (220,000 sq ft) of covered storage yard, are in place. Detailed discussions are underway with a number of parties who wish to have a long term interest in the site making use of the high quality rail access and power connectivity. An objector's challenge to the grant of planning consent was dismissed by the Court of Appeal during March 2009.

Rossington, Doncaster

During 2008 we continued to progress the Eco-town submission for 5000 homes ( 3500 on UK Coal land ) through the various stages of Government appraisal including substantial local and national consultation exercises on the sustainability and design principles for the scheme. During this process the number of competing sites reduced and we now await a Government decision over the coming months on which submissions, if any, are confirmed as Eco-town locations. The focus on the residential opportunities on this site means that in all likelihood, Eco-town or not, this will become a major residential led regeneration project as a major part of Doncaster's new Local Development Framework.

Industrial and Distribution Development, Ellistown, Leicestershire

Following Planning Committee approval, and a referral to Government Office, our planning application for 53,000 sq m (570,000 sq ft) of industrial/warehouse development has been returned to North West Leicestershire District Council to issue an Approval Notice following completion of a Section 106 Agreement anticipated in H1 2009. Infrastructure and site works will be deferred until 2010 unless identification of a pre-let prompts an early review.

Yorkshire Main, Edlington, Doncaster

Outline planning consent was granted for a mixed use regeneration scheme at the Yorkshire Main site during the year. The application comprises 250 residential units together with 14,000 sq m (150,000 sq ft) of employment space.

Residential Development Site, Coalville, Leicestershire

As part of our strategic planning work, we have been promoting residential development on approximately 40 hectares (100 acres) of land to the south east of Coalville, near the Ellistown site mentioned above. North West Leicestershire Council have identified our land together with third party land as a potential, much needed, residential urban expansion for the town. Consultation is ongoing through 2009 and it is hoped that the land will be allocated by the Council as an urban extension within their new Development Plan. 

North East Housing Growth Point, Newcastle / Gateshead

The Harworth Estates and surface mining team work closely together in areas where we own large tracts of land which have coaling and subsequent built development opportunities. We are currently preparing a strategy document that will outline regeneration opportunities on UK Coal land within the Derwent Valley, an area close to the south west of Newcastle/ Gateshead. This will involve setting out a strategic vision to deliver a package of regeneration benefits including substantial new housing, job creation and energy production through surface mining. 

Bleak House, Cannock 

This site, close to the Birmingham Northern Relief Road, is a former surface mine site being promoted in response to the Regional Spatial Strategy (which sets out the need for substantial housing growth in the area) as suitable for a major residential development. 24 hectares (60 acres) of the restored site together with 36 hectares (90 acres) of adjoining land under third party ownership could provide up to 2,000 homes together with significant local infrastructure improvements. A planning application for an initial phase of the development will be prepared for late 2009/early 2010. Our adjoining land at Bleak House is the subject of a wind farm application now being promoted through our wind farm Collaboration Agreement with Peel Energy.

Rufford, Nottinghamshire

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

In addition to this proposal, we have been preparing an outline planning application throughout 2008 for a new 24 hectares (60 acres) business park together with 16 hectares (40 acres) off-road motorcycle facility on the remainder of the former pit-head area. This application is expected to be submitted in summer 2009.

Housing Growth Point Opportunities

In summer 2008, the Government announced a number of Housing Growth Points within the Midlands and Northern England. We are currently promoting a number of development opportunities on land within these Growth Points.

The Growth Points provide additional public funding to help deliver new residential development, and also to provide for a significant increase in housing numbers required to be built over the current levels outlined in Regional Spatial Strategies.

We are working closely with various partners within the Housing Growth Point areas as a key stakeholder in the delivery of land suitable for sustainable residential and mixed use schemes over the coming decade.

The Growth Point areas cover land under our ownership in:

• South Yorkshire (Waverley, Rossington, Thorne, Kilnhurst and sites within Barnsley)

• Leeds City Region (Prince of Wales and other sites close to Wakefield)

• South East Northumberland (Ellington, Lynemouth, Bates Staithes)

• South East Durham (Eldon Deep)

• Gateshead (Marley Hill)

BUSINESS PARKS 

The business parks on the former mine sites at Asfordby and Whitemoor are the longest established within the Group and currently continue to benefit from low voids and increasing rental levels. A new 2,500 sq m (27,000 sq ft) building has been constructed under a pre-let agreement at Asfordby. This is being occupied on a 20 year lease by Omnichem. The first year of operation of the Riccall business park has proved successful, demonstrating demand in the A19 York / Selby corridor. The site is now 60% let and it is envisaged that this will increase despite the difficult economic conditions in 2009. Planning consent has been secured for two plots within Bilsthorpe Park where negotiations for a long term ground rent are underway with Nottinghamshire County Council (for a major highways depot) and Alkane who will generate electricity from mines gas.

PROPERTY DISPOSALS

Disposals during the year secured receipts of £5.5 million from the sale of 295 hectares (730 acres) of agricultural land (2007: £6.3 million of agricultural land and £7.1 million of commercial land). All land sold had either been mined and was therefore surplus to operational requirements and/or had no prospect of short or medium term development. Appropriate clawback or uplift arrangements were put in place on one site that was sold to a special purchaser. Due to current market conditions no development land or residential properties were sold, though a number of smaller lots were marketed throughout the year and that marketing continues, in difficult conditions.

We also sold 2.4 hectares (6 acres) of land at our Waverley Advanced Manufacturing Park into our 50/50 joint venture with Strategic Sites which generated proceeds of £1.3 million and now forms Evolution Park.

DEVELOPMENT AND MARKET CONDITIONS

Property market conditions worsened substantially throughout the second half of 2008. In line with many other major landowners and developers, Harworth Estates responded to these difficult conditions by significantly reducing planned expenditure on infrastructure and speculative construction but unlike some, we have maintained full scale planning application activities. There is no doubt that in due course market conditions will improve, we intend to remain capable and flexible enough to respond rapidly to those improvements.

PROJECT WORTH

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

VALUATIONS

BUSINESS PARKS / RENTED PROPERTIES
Type and Location	Description of Property	Valuation Band
Asfordby,  Melton Mowbray Leicestershire	28 hectares (69 acres) rail connected mixed use Business Park with 23,200 sq m (250,000 sq ft) of commercial space built. Masterplan in place for a further 37,100 sq m (400,000 sq ft). Current rent roll £1.02 million per annum plus service charge, 96% let.	£10m - £20m
Gascoigne Wood, Sherburn in Elmet, Selby, North Yorkshire	66 hectares (165 acres) regionally significant strategic rail connected former deep mine complex with surrounding agricultural land. Planning consent approved for rail related distribution covering 21,000 sq m (225,000 sq ft) on the phase 1 site with potential for approximately 93,000 sq m (1,000,000 sq ft) employment space. Two leases granted. Rental income expected of £0.35 million per annum in 2009. Substantially greater potential in the medium term.	£10m - £20m
Bilsthorpe, North Nottinghamshire	29 hectares (71 acres) rail connected former colliery with outline planning consent for B2 and B8. First phase built out buildings, 4,000 sq m (44,000 sq ft), 47% let, generating approximately £0.05 million per annum plus service charge. Negotiations ongoing to let majority of remaining units, plus ground leases.	£5m - £7.5m
Whitemoor,  Barlby, Selby, North Yorkshire	20 hectares (50 acres) former satellite mine, of which 9 hectares (22 acres) has been converted to mixed use Business Park with in excess of 6,700 sq m. (70,000 sq ft). Annual income circa £0.24 million per annum plus service charge. 70% let.	£2m - £5m
Riccall, Selby, North Yorkshire	27 hectares (67 acres) former satellite mine. Mixed use business park with in excess of 7,400 sq m (80,000 sq ft). 60% let with further negotiations ongoing. Rental income of £0.14 million per annum plus service charge.	£2m - £5m

DEVELOPMENT PROPERTIES WITH PLANNING CONSENT
Type and Location	Description of Property	Valuation Band
Highfield Commercial, Waverley, Rotherham, South Yorkshire	Existing consent for 51,250 sq m (557,000 sq ft) of B1, B2-B8 office space, a hotel and ancillary retail. Revised application to accommodate Helical Governetz Ltd. Government Campus proposal comprising 60,000 sq m (645,900 sq ft) of B1, a hotel and 975 sq m (10,500 sq ft) of ancillary retail due for determination Q2 2009.	£10m - £20m
Mid Cannock, Staffordshire	12.14 hectares (30 acres) rail connected site, fully let on 50 year lease from April 2005.	£5m - £7.5m
Waverley Advanced Manufacturing Park (AMP) (off the Sheffield Parkway, J33 M1), Rotherham, South Yorkshire	Around 24 hectares (60 acres) of land remaining for development which could accommodate up to 73,000 sq m (785,800 sq ft) being marketed through UK Strategic Partnerships Limited, our joint venture with Strategic Sites Limited.	£5m - £7.5m
Tetron Point, Swadlincote, South Derbyshire	99 hectares (245 acres) fully restored surface mine site. Substantially developed out through plot sales to third parties. Small 11.74 hectares (29 acres) rail head parcel of development land still held with remaining land approved for leisure development. Further appraisals being undertaken to incorporate additional mixed uses. Tenant selected for golf course and associated leisure uses.	£2m - £5m
South Leicester Disposal Point, Ellistown, Leicestershire	Former 29 hectares (72 acres) operational site with planning consent for 53,000 sq m (570,500 sq ft) of B1, B2 and B8 accommodation. Promoted in a joint venture with Graftongate, Phase I development subject to securing pre-let.	£2m - £5m

OTHER PROJECTS IN THE PLANNING PIPELINE
Waverley / Orgreave, (off the Sheffield Parkway, J33 M1), Rotherham, South Yorkshire	New housing led mixed use community comprising 3,890 residential units and around 17,000 sq m (184,000 sq ft) of retail, leisure and community uses. Planning determination anticipated Q3 2009.	£50m - £60m
Prince of Wales, Off J32, M62, Pontefract, West Yorkshire	Planning consent secured for Phase 1 Pit Yard redevelopment, 917 residential units and 24,250 sq m (261,000 sq ft) of office, retail and community uses. Phase II housing site of approximately 13 hectares (32 acres) provided as part of coal slurry extraction and reclamation scheme on adjoining spoil heap. Housing site being promoted through Wakefield's LDF with prospects significantly improved further following growth point announcement.	£20m - £50m
Cutacre, Off J4 M61, Bolton, Greater Manchester	Approximately 105 hectares (259 acres) of developable land at Cutacre identified within Bolton's Preferred Options - Core Strategy document. This includes 19 hectares (47 acres) of already allocated employment land.  Bolton anticipate publishing their Core Strategy and issuing to the Secretary of State at the end of 2009.	£10m - £20m
Rossington Colliery, Doncaster, South Yorkshire	145 hectares (358 acres) former colliery submitted as potential Eco-town contender during 2008, announcement on successful bids anticipated April 2009. Regardless of outcome, 50 hectares (124 acres) Pit Yard site offers ability to accommodate up to 1,700 new residential units which is recognised in Doncaster's emerging LDF. Any form of large scale redevelopment is dependent on construction of FARRRS motorway link road, which took a major step closer to realisation following the Regional Transport Board endorsement to allocate funding for White Rose Way, M18 improvement works and FARRRS itself.  Doncaster will now progress a major scheme business case for submission to Department of Transport in 2009.	£10m - £20m
Harworth Colliery, Harworth, Nr Doncaster, South Yorkshire	Outline planning application being prepared on former deep mine site which will include around 20 hectares (49 acres) of employment land and 24 hectares (59 acres) of residential land for submission Q3 2009. Proposals consistent with Bassetlaw District Council's aspirations for Harworth which they consider as a settlement capable of expansion aimed to take advantage of the anticipated growth of the sub-region, particularly the expansion of Doncaster Airport and the Sheffield City Region.  The application takes account of the potential to re-open this mine.	£10m - £20m
North Gawber, Barnsley, South Yorkshire	Brownfield 16 hectares (39 acres) former colliery. Planning application made 2008 for 500 houses. Withdrawn due to technical issues and to be resubmitted mid 2009.	£5m - £7.5m
Lounge, A42, Ashby de la Zouch, Leicestershire	42 hectares (104 acres) former coal disposal point with substantial rail infrastructure. Development agreement signed with Gazeley Plc to promote as a major B8 distribution hub. Planning Application submitted in 2007.	£5m - £7.5m
Bennerley, Broxtowe, Nottinghamshire	Rail connected former disposal point, substantially restored. Potential for 40 hectares (100 acres) mixed use regenerative development scheme with good access to J26 M1.	£5m - £7.5m
Ellington/ Lynemouth, Northumberland	11 hectares (27 acres) residential led regeneration scheme in Northumberland growth point. Scheme for 500 houses prepared for submission February 2009. Initial scheme for workspace provision agreed with grant aid from Castle Morpeth Borough Council and Northumberland Strategic Partnership.	£5m - £7.5m
Bates Staithes, Northumberland	6 hectares (15 acres) former coal disposal point. Joint venture with Banks Development for 300 house residential scheme. Planning application submitted, decision expected H1 2009.	£0m - £2m
Chatterley Valley, Stoke on Trent, Staffordshire	Rail connected 10 hectares (25 acres) former coal disposal point in land owner joint venture. Development agreement signed with Prologis to promote substantial distribution development in association with adjoining land. Application to intensify existing consent approved 2008. 37,200 sq m (400,000 sq ft) on UK Coal land.	£2m - £5m
Yorkshire Main, Edlington, Doncaster, South Yorkshire	19 hectares (47 acres) restored tip washing facility. Consent granted for mixed residential and commercial development use. Up to 250 homes and 15,000 sq m (160,000 sq ft) for employment use. Being marketed by DTZ.	£7.5m - £10m
Additional Sites	54 additional properties are in the early stages of the planning process, each with current year-end values of not more than £5 million. Head office & workshops	up to £5m £7.5m - £10m

Following internal reorganisation of subsidiary level activities within the Group, Harworth Estates now also manages the Group's wind farm portfolio as part of its objective to generate income and achieve asset growth over time. On 13 November 2008 the Group announced the signing of a collaboration agreement with Peel Energy, a wholly owned subsidiary of the Group's major shareholder, Peel Holdings. Under the Agreement, Peel Energy will undertake investigative work on 14 existing wind farm opportunities and where appropriate take forward, at their own cost, projects through the planning stages to ultimately identify joint venture wind farm development opportunities that can be entered into a site-by-site SPV structure. Dependent on the scale of the success of this initiative, shareholders will have the opportunity of approving co-investment with Peel Energy if this becomes the favoured route. Alternatively the Agreement provides for Peel Energy potentially becoming a commercial tenant of relatively small areas of land forming each of the wind farms. Harworth Estates will additionally work closely with Peel Energy, initially over the next two years, to identify further wind farm opportunities from within the portfolio.

FINANCIAL REVIEW

Group revenues have increased substantially during the year to £392.5 million from £328.5 million in 2007 reflecting the increase in realised sales prices in the year.

Overall, Group profit before tax has fallen to a loss before tax of £15.6 million from a profit of £69.0 million in 2007. Operating profit before non-trading exceptional items, totalled £1.8 million (2007: £72.1 million).  Of this, the property revaluation gain was £23,000 for the year (2007: £66.8 million).  

Non-trading exceptional items constituted a charge of £4.1 million in the period (2007: net credit of £10.5 million).  The charges in the current year included £3.5 million of costs associated with Harworth colliery. The prior year included an £8.5 million profit on the disposal of Maltby colliery.

As a result of the above, operating profit fell from £82.7 million in 2007 to an operating loss of £2.2 million in 2008.

Loss per share for the period was 10.0 pence, both before and after tax (2007: earnings 59.9 pence after a deferred tax credit of £25 million, or 44.0 pence excluding tax).

Financing expenses and funding 

Net finance expenses have increased by 5% to £14.9 million (2007: £14.2 million).  

During the year, where possible, we started to apply hedge accounting on our interest rate swaps. As a result, £7.3 million of mark to market adjustments have been charged to a hedging reserve, along with an associated deferred tax credit of £2.4 million.  However, as the banking market changed towards the end of 2008 and the LIBOR and Base Rates moved apart, the Group took advantage of its rights on certain facilities to pay interest on a Base Rate basis and so to lower its interest costs. This has had the accounting effect of rendering the hedges ineligible for hedge accounting from the dates involved.  Mark to market credit on interest rate swaps in the income statement was £0.7 million (2007: charge £1.9 million).

Excluding the change in fair value of interest rate swaps, finance expenses have increased by 20% to £18.6 million reflecting the higher level of drawn debt throughout the year.  Included in Group financing expenses is a charge for the unwinding of discounts in relation to the provisions in the balance sheet of £4.3 million (2007: £3.9 million).

The Group currently has circa £180 million of borrowing facilities and a further £8 million outstanding on finance leases. The borrowing facilities include a revolving credit facility of £52 million, circa £140 million secured on property and £5 million secured on surface mining and other plant. The average maturity of the facilities was 2.1 years (2007: 2.9 years).

As referred to in the Operating and Financial Review, the Group has entered into new or amended contractual arrangements with its customers. These have had the benefit of increasing cashflows to the Group in 2009 and 2010 by circa £85 million and £15 million respectively.

The Group has cash deposits which are held by our captive insurance company against insurance claims and similarly ring-fenced funds held on behalf of the Coal Authority securing surface damage claims resulting from mining. These totalled £20.4 million and £8.3 million respectively at December 2008 (2007: £25.7 million and £23.4 million). In addition to the ring-fenced funds held on behalf of the Coal Authority, a £10 million bond has been granted to the Coal Authority as further security against any possible surface damage claims; this bond allowed the release of £10 million of restricted funds in the year. These deposits were secured against liabilities of £18.7 million and £13.4 million respectively.

Gearing at the year end has increased as a result of the increase in the level in borrowings and a fall in the net assets value; the latter being particularly adversely affected by the increase in the deficits on retirement benefit obligations of £30.8 million.  The debt to equity ratio at the end of the year was 45.6% (2007: 29.1%).

Tax

The Group paid no corporation tax in 2008 (2007: £nil). A provision of £0.1 million was made in respect of a potential exposure to Petroleum Revenue Tax in respect of methane gas extracted at our Stillingfleet site.

At December 2008, the Group had gross trading losses of £153.5 million and gross timing differences of £138.5 million (arising largely from unclaimed or disclaimed capital allowances), both of which are available to offset against future profits in the mining business.  These had a tax value of £43.0 million (2007: £74.0 million), and £38.8 million (2007: £6.9 million) respectively.  Trading losses fell during the year, and timing differences increased, as capital allowances were disclaimed to allow increased flexibility in the future.  The net deficit on the balance sheet in respect of retirement provisions also represents a tax timing difference of £29.1 million (2007: £20.5 million).

The Group had recognised at December 2008 a deferred tax asset of £36.1 million (2007: £36.0 million). The Group continues to review its deferred tax asset, given the nature of the business and its historic performance. A net deferred tax credit of £0.1 million has been released directly to reserves, reflecting the £2.4 million deferred tax asset arising on the charge to reserves from hedge accounting for the mark to market adjustments on the interest rate swaps, offset by a £2.3 million charge against the carrying value of the asset recognised on the net balance sheet deficit in respect of retirement provisions.

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

Group cash flows

	2008	2007
	£m	£m
Cash (used in)/generated from operations	(1.1)	6.1
Interest and financing cost	(13.8)	(13.2)
Cash used in operating activities	(14.9)	(7.1)
Purchase of property, plant and equipment	(25.8)	(23.0)
Pre-coaling expenditure for surface mines	(6.2)	(4.7)
Development costs of investment properties	(14.1)	(7.5)
Proceeds on disposal of property, plant and equipment	0.2	0.8
Proceeds on disposal of investment properties	6.0	13.3
Proceeds on disposal of business	-	21.5
Net receipt/(payment to) from restricted funds	20.3	(6.8)
Other movements	2.1	3.4
Cash used in operating and investing activities	(32.4)	(10.1)
Net drawdown on bank loans	59.5	27.2
Net (repayments)/proceeds of obligations under hire purchase and finance leases	(5.7)	0.2
Increase in cash	21.4	17.3

There was a net cash outflow from operating activities of £14.9 million, mainly due to interest and financing costs of £13.8 million. The Group spent £46.1 million on investments, being the investment in the mining business, predominantly in deep mining, of £25.8 million, pre-coaling expenses in surface mines of £6.2 million and £14.1 million on investment properties, predominantly on the costs associated with gaining and fulfilling planning consents. These investments were partly funded by the release of £20.3 million from restricted cash deposits. 

BALANCE SHEET

The net assets of the Group fell by £57.8 million to £300.4 million. The decrease in net assets is largely due to increase in the deficit on retirement obligations of £30.8 million, which is discussed below. Other significant movements in the balance sheet during 2008 are in provisions and investment properties. Investment properties have been discussed within the Operating and Financial Review. 

Provisions

		2008	2007
		£ million	£ million
(i)	Employer and public liabilities	18.7	18.9
	Surface damage	13.4	16.4
(ii)	Restoration and closure costs of surface mines	59.4	54.6
(iii)	Restoration and closure costs of deep mines
	- shaft treatment and pit top	9.8	12.2
	- spoil heaps	2.9	3.2
	- pumping costs	5.3	6.3
	Ground/groundwater contamination	5.2	6.5
(iv)	Redundancy	1.2	4.1
		115.9	122.2

(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 2008, it held £20.4 million of cash deposits and £7.9 million of property assets to meet £18.7 million of liabilities.

Surface damage provision relates to the Group's liability to compensate for subsidence damage arising essentially from past deep mining operations. Claims can be lodged by the public up to six years after the date of relevant damage. The estimate is based on historical claims experience, following a detailed assessment of the nature of damage foreseen. The reduction in surface damage provisions is in line with the reduction in number of operating deep mines within the Group. As at December 2008, the Group had £8.3 million of ring-fenced deposits and an insurance bond for a further £10 million to provide security to meet these 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 tonnage of the mine.

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

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

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

As at December 2008, the Group had a non-current asset of £28.5 million, relating to expenditure on pre-coaling and similar expenses, deferred stripping costs and the recognition of restoration and rehabilitation liabilities on sites that had started coaling (2007: £20.1 million). At the same date, provisions for restoration and rehabilitation totalled £59.4 million (2007: £54.6 million).

New provisions have been created in the year for the sites at Steadsburn and Lodge House of £8.3 million and £2.6 million respectively.

(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 ongoing and closed mines.

	£ million
Ongoing mines	16.8
Closed mines	6.3
	23.1

73% of the deep mines provision relates to our four ongoing mines which will be utilised after the point of closure. New investment in the Beeston and Deep Soft seams at Kellingley and Thoresby respectively has extended the lives of these mines, and consequently the provisions, which are discounted for the time value of money, have reduced accordingly. We do not expect to utilise a significant amount of the closed mines provision in 2009, and then may use £2.1 million in 2010 and £1.0 million in 2011, representing predominantly the costs in respect of the Harworth and Rossington collieries, in part depending on any decision regarding the future of Harworth. The remaining balance of £3.2 million will be utilised beyond 2011. 

(iv) Redundancy Provisions

Redundancy provisions are created when the decision to make the redundancies has been made and communicated, usually through the representatives of the workforce. We expect to utilise all the remaining 2008 redundancy provisions in 2009.

Retirement Benefit Obligations

The Group has a deficit of £104.0 million (2007: £73.2 million) on its defined benefit pension and retirement schemes which are now closed to new entrants but are required to be open for future service. All new employees who joined after the privatisation in 1994 are eligible to join defined contribution schemes. 

The defined benefit pension and retirement schemes comprise two funded industry wide schemes, together with an unfunded concessionary fuel scheme. The above deficit includes a liability of £29.3 million (2007: £23.4 million) in relation to the unfunded concessionary fuel scheme. All of these schemes are valued annually by our independent actuaries, the Government Actuary's Department.  

The schemes have been valued under International Accounting Standard 19 (IAS 19), using the projected unit method and discounting future scheme liabilities on the basis of AA-rated corporate bond yields of over 15 years. The discount rate used, net of inflation, was 3.9% (2007: 2.5%). Contributions are determined by a qualified actuary on the basis of triennial valuations, using the projected unit method. The most recent valuations were at 31 December 2006 which were finalised during 2008.

Movements in the schemes in 2008 are set out below. 

	Pension*	Concessionary fuel	Total
	£ million	£ million	£ million
December 2007	49.8	23.4	73.2
Contributions paid less current service cost	(7.7)	(0.4)	(8.1)
Change in fund value compared to expected return	91.9	1.4	93.3
Actuarial (gain)/loss on liabilities	(59.3)	4.9	(54.4)
December 2008	74.7	29.3	104.0

*Including Blenkinsopp scheme

There has been a significant increase in the deficit on the pension schemes of £24.9 million comprising:

• A loss in the year of £91.9 million due to returns on the funds' assets being much lower than expected.

• This was offset by an actuarial gain on the funds' liabilities of £59.3 million arising from changes in actuarial assumptions. Principally, this is due to an increase in the assumed discount rate from 5.8% in 2007 to 6.5% in 2008 because of increases in AA-rated corporate bond yields which underpin this assumption.

• Extra contributions above service cost of £7.7 million.  In total, the Group paid £20.3 million to the schemes in 2008, covering both current service and deficit contributions.  The Group has agreed, as part of the triennial revaluation process as at December 2006, to fund both current service and deficit contributions at a rate of £21 million for 2009.

£33.6 million of the movement in the deficit on the pension schemes has been charged to the Statement of Recognised Income and Expenditure ('SORIE') in the year.

There has also been a significant increase in the liability for the unfunded concessionary fuel scheme of £5.9 million.  There are two main factors contributing to the increase:

• A loss arising from an increase in the cost of providing coal benefits to members. The liability is based on producers' prices as at the end of December 2008 and reflects changes in coal prices to that date.  

• This increase was offset by an actuarial gain arising from changes in actuarial assumptions, with the change in the discount rate noted above being the dominant factor.

The net effect of these items was an actuarial loss of £4.9 million which has been charged to the SORIE.

Details relating to retirement benefit obligations, as presented in the 2008 annual report and the most recent actuarial valuation, are shown in note 24 to the financial statements. 

KEY RISKS AND UNCERTAINTIES

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

MINING RISK

Health, Safety and Environment

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

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

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

Financing Risk

In part the Group finances its business through debt. The effect of the Credit Crisis has made the obtaining or refinancing of debt harder and its cost higher. The maturity of the Group's debt profile is shown in Note 19 to the financial statements.  Over the next 12 months there are no significant facility maturities. However, there is a longer term risk that the Group is unable to refinance its bank debt or is unable to obtain new or additional bank debt if this is required.

Around two thirds of the total current bank facilities of circa £180 million are provided by banks which, following the takeover by Lloyds TSB plc of HBOS plc, are now part of the Lloyds Banking Group plc.  Slightly less than 10% was provided by Landsbanki, the failed Icelandic bank which is seeking to close and recover its loan book as part of the bank's closure process.  Facilities provided by Landsbanki were largely fully drawn in advance of the collapse of the bank.

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

Fluctuations in Coal Prices

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

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

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

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

Major Unforeseeable Production Shortfalls or Geological Constraints

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

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

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

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

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

PENSION RISK

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

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

Under IAS19, as noted in note 24 to the financial statements, these schemes have a combined deficit of £74.1 million. This deficit is, in accordance with IAS, calculated using a discount rate in line with the market rate for corporate bonds. Under the Technical Provisions, which are the basis for the triennial calculation of the pension liabilities for the Pensions Regulator and for agreement on funding rates with the Trustees, different rates, based on gilt yields, are employed. At the end of December 2008, these rates were considerably lower than corporate bond rates and would have resulted in a significantly higher level of deficit. Depending on changes in these rates and investment performance by the time of the next calculation, scheduled for December 2009, a significantly higher deficit could lead to higher deficit contributions being needed in later years.

PROPERTY RISK

Property Market Downturn or Volatility

Harworth Estates is exposed to changes in the property market and the valuation of its estate will fluctuate in part with the general market. The UK market is currently undergoing a period of disruption, and this is particularly apparent in respect of the small part of our estates that is built out, where property yields have strengthened, with a commensurate fall in value. Conversely, our agricultural land has seen an increase in value per acre, without any change in planning, reflecting the increase in values for this type of land. 

The 'immaturity', in planning terms, of our brownfield sites means that a considerable amount of value can be added by the work that we do in advancing them through the planning process. This has helped largely to retain the RICS value of these sites in 2008, despite the fall in the general market. Notwithstanding this, we remain exposed to movements in the general market and the risk that this movement outweighs the planning gain.

Planning Approvals

The planning regime affects both Harworth Estates and our mining businesses, and any major changes could affect the business, either positively or negatively. During the course of 2008, we have seen improvements in the planning environment especially, in the planning regime surrounding the surface mine business, where greater recognition is being given both for the need of coal and the high environmental standards of the design and operation of the schemes. Of immediate impact, the resources available to planning authorities to process planning applications in a reasonable timescale continue to be a restraining factor on the Group, and in the development of activities meeting overall government targets and the 

Group's aspirations. 

Corporate Social Responsibility

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

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

Health and Safety

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

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

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

The Directors deeply regret the fatal accident at Kellingley colliery involving an experienced underground workman at the end of September 2008, and have extended their most sincere sympathy for the tragic loss of this colleague to his family and friends. 

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

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

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

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

In 2008, one fatal injury occurred within the Group compared with 2 in the previous year. There were 26 major injury accidents reported to the Health and Safety Executive of which 20 were in deep mines. The overall reportable injury rate was 24.0 per 100,000 manshifts compared with 23.9 and 27.8 in 2007 and 2006 respectively. The target will always be to achieve Zero Incidents in all Safety and Health categories. Through the direction of management and the involvement of all our people and stake holders the company will strive to make continuous improvements towards that goal.

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

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

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

Employees

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

We currently employ 3,152 people (2007: 3,100). We have maintained our policy of maximising the re-deployment of skilled and experienced mineworkers. 

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

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

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

Environment

The Environmental Policy commitments of the Group are to:

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

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

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

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

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

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

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

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

The first three-year period of certification to ISO 14001 for all surface and deep mined sites was reached at the end of 2007. The programme for expanding the on-going continuous certification saw the inclusion of both the Mining Services department and Harworth Estates early in 2008. Increasing the coverage of our certified system improves both the day to day operational procedures and longer-term environmental risk management over all our activities. Our Environmental Policy is reviewed by the Board, and both in-house and external audits ensure continued compliance. Monitoring and analysis of emissions to air, water and land, as well as the use of natural resources, are carried out and, where appropriate, programmes to reduce emissions, or to reduce the use of natural resources are designed and implemented. As new legislative regulations on waste and resources are introduced, our programmes to encourage reduction, re-use and re-cycling, continue to show positive benefits to the environment.

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

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

The success of our policies is judged internally by the use of internal performance indicators based on established criteria provided by DEFRA. These have been introduced throughout the ongoing mining sites where appropriate reduction programmes and data collection will help us achieve our objectives. Specific environmental success stories from ongoing mines in 2008 included; a 5% reduction in waste sent to landfill sites and an increase in recycled wastes of 3% when compared to 2007. The volume of recycled paper increased in 2008, to the equivalent of the previous two years combined.

Social and Community Issues

We have maintained our philosophy of supporting suitable community projects focused on the surface and deep mines and also on major property development operating at the heart of the communities in which they are based. In addition to the Community Fund commitments providing support for projects to those living close to surface mine sites, charitable donations in the year totalled £44,732 (2007: £4,200). 

This year, we have again agreed to match awards made by the Miners Welfare National Educational Fund pound-for-pound to the families of former and current employees studying full-time at a university or college or on a designated course of higher education. Each year, the fund provides grants of around £50,000, with UK COAL contributing over £27,000 in 2008 to 83 successful applicants. This initiative has been warmly welcomed by the communities in which we work and by the individuals that have received the support.  This figure is included in the above charitable donations sum.

In Derbyshire, as a Community project, we have now completed the stabilisation of a medieval stronghold of by-gone Britain, the Codnor Castle and Monument which dates back to shortly after the Norman Conquest of 1066.  Around £1.5 million has been spent on stabilising the castle and the nearby Jessop Monument tower and hall. 

Community fund projects associated with current approved surface mine schemes are providing access to funding totalling around £2 million to be allocated to local good causes. Surface mines schemes currently within the planning process could provide a further £800,000 of community funding if the schemes are approved.

Each year we typically plant up to 500,000 young trees on our restored surface mine sites and other land. In the last decade, we planted over 4 million trees - 1.1 million in the North East, 1.1 million in Yorkshire and 1.8 million in the Midlands. We have also planted around 0.4 million in Scotland and the North West. 

Contributions were also made to a wide range of individual and team activities, individual and group events and sporting and academic aspirations affecting all age groups. It is anticipated that a similar level of donations will be sustained in 2008.

Company Information and Advisors

Chairman	Auditors
David Jones +*	PricewaterhouseCoopers LLP
	Benson House
Chief Executive	33 Wellington Street
Jon Lloyd +#	Leeds
	LS1 4JP
Finance Director
David Brocksom
Non-executive Directors	Financial Advisers
Peter Hazell ■+ *	Gleacher Shacklock LLP
Michael Toms ■+ *#	Cleveland House
Kevin Whiteman■+ *#	33 King Street
Owen Michaelson	London
	SW1Y 6RJ
	Stockbroker
	Numis Securities Limited
	10 Paternoster Square
	London
	EC4M 7LT
	Solicitors
	Freshfields Bruckhaus Deringer
	65 Fleet Street
Secretary and	London
Registered Office	EC4Y 1HS
Richard Cole
Harworth Park, Blyth Road	Registrars
Harworth	Equiniti Limited
Doncaster	Aspect House
South Yorkshire	Spencer Road
DN11 8DB	Lancing
	West Sussex
	BN99 6DA
Company Registered No.	Bankers
2649340	Barclays Bank PLC
■Audit Committee	6 East Parade
+ Nomination Committee	Leeds
*Remuneration Committee	LS1 2UX
#Safety Committee
	Lloyds TSB
	6-7 Park Row
	Leeds
	LS1 1NX
	Bank of Scotland
	8th Floor
	40 Spring Gardens
	Manchester
	M2 1EN

Board of Directors

David Jones

Aged 66, he was appointed to the Board as a non-executive director in January 2003 and became Chairman in April 2003. He has extensive experience in the electricity supply industry and was Chief Executive at The National Grid Company PLC until March 2001. He is currently a non-executive director of United Utilities PLC.

Jon Lloyd

Aged 52, he was appointed as Chief Executive on 1 September 2007, having joined the Board as Property Director in July 2006. He is a Chartered Surveyor and was Head of Property at HBOS PLC. He was formerly Regional Managing Director for the North Region at DTZ Debenham Thorpe, and held senior roles at Yorkshire Water PLC, where he was Managing Director of Yorkshire Water Estates Limited, and Rosehaugh Heritage PLC.

David Brocksom

Aged 48, he was appointed Finance Director with effect from 18 September 2007. He qualified as a Chartered Accountant with Price Waterhouse and was previously Finance Director of Pace Micro Technology PLC and Avesco PLC.

Peter Hazell

Aged 60, Chairman of the property developers Argent Group PLC, he joined the Board in September 2003 as a non-executive director. He is also a non-executive director of Brit Insurance Holdings PLC and Smith & Williamson Limited and a member of the Competition Commission. Previously he was UK Managing Partner of PricewaterhouseCoopers and spent his early career at Coopers & Lybrand and Deloitte Haskins & Sells. He is Chairman of the Audit Committee and the Senior Independent Director.

Mike Toms

Aged 55, he joined the Board as a non-executive director and Chairman of the Remuneration Committee with effect from 3rd May 2006. He is a Chartered Surveyor, Town Planner and Economist by background and was formerly Group Director, Planning and Regulatory Affairs and Board member at BAA PLC. He is Chairman of Northern Ireland Electricity PLC, a non-executive director of Bellway PLC, a non-executive director of Birmingham Airport Holdings Limited and a non-executive director of Oxera Consulting Limited.  

Kevin Whiteman

Aged 52, he is Chief Executive of Kelda Group Limited and joined the Board as a non-executive director on 1 June 2007. He secured a degree in mining engineering at University College, Cardiff and started his career at British Coal. He joined the National Rivers Authority in 1993, becoming Chief Executive in 1995, before spending a year as Regional Director of the Environment Agency. In 1997, he joined Yorkshire Water and was appointed Chief Executive of Kelda Group in 2002. He is Chairman of the Safety Committee.

Owen Michaelson

Aged 42, he was appointed to the Board as a non-executive director with effect from 2 October 2007. He is a Chartered Surveyor and is Corporate Development Director of the Peel Holdings Group of companies. He has specialised in the remediation and development of brownfield and contaminated land, waste management operations and power generation. He is a member of the Coal Forum and a former Chair of the RICS Waste Policy Panel. 

DIRECTORS' REPORT

The directors present their report and the audited financial statements for 2008. These will be laid before the Annual General Meeting to be held on 19 June 2009. Details of all resolutions to be proposed at the 2009 Annual General Meeting are set out in the notice calling the meeting, which is enclosed with this report.

PRINCIPAL ACTIVITIES, BUSINESS REVIEW AND FUTURE DEVELOPMENTS

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

The Chairman's Statement and the Operating and Financial Review provide a review of the Group's business which includes the:

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

• Principal risks and uncertainties faced by the Group 

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

• Environmental and employee priorities facing the Group

• Group's future development and outlook for 2009

DIVIDENDS PER ORDINARY SHARE

There was no dividend paid during the year (2007: £nil). The directors are not recommending the payment of a final dividend in respect of the 2008 financial year (2007: £nil).

LAND AND PROPERTY

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

DEVELOPMENT

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

DIRECTORS

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

Under the Articles of Association, there is a process of rotation which ensures that approximately one third of all directors are required to retire and seek re-appointment at each Annual General Meeting. At the 2009 Annual General Meeting, Peter Hazell and Mike Toms will retire by rotation and will offer themselves (and are recommended by the Board) for re-election.  

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

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

CHARITABLE DONATIONS

The contributions made by the Group during the year for charitable purposes were £44,732 (2007: £4,200). No political donations were made in 2008 (2007: £nil). Charitable donations made were predominantly to associations and charities involved with the coal industry and local communities.  

EMPLOYEES

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

DISABLED PERSONS

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

HEALTH AND SAFETY

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

TREASURY POLICY AND LIQUIDITY

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

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

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

SUPPLIER PAYMENT POLICY

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

The Group had 58 days' purchases outstanding at December 2008 (2007: 68 days) based on the average daily amount invoiced by suppliers during the year.

ETHICAL POLICY

UK Coal is committed to working with our employees, customers, suppliers and contractors to promote responsible working and trading practices. It also provides assistance to the wider community by way of financial support for charitable and other local causes.

QUALITY AND INTEGRITY OF PERSONNEL

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

SUBSTANTIAL SHAREHOLDINGS IN THE COMPANY

The directors have been notified of the following substantial shareholdings as at 27 April 2009.

Company	Date of Notification	No of  Shares	% of  Issued  Share Capital
Goodweather Holdings Ltd *	31.10.08	44,058,000	28.02
Lazard Asset Management LLC	20.10.08	10,746,084	6.83
Artemis Investment Management Ltd	29.11.07	8,568,386	5.45
Ameriprise Financial Inc	20.10.08	7,853,895	4.99
Legal & General Group plc	09.04.09	6,111,937	3.88

• Member of Peel Holdings

SHARE CAPITAL, VOTING RIGHTS AND TRANSFER OF SHARES

Details of the structure of the Company's share capital and changes in the share capital during the year are disclosed in note 25 to the consolidated financial statements.

At the Annual General Meeting of the Company held on 20 May 2008, the directors were authorised to allot new shares up to an aggregate nominal amount of £250,000. A similar resolution will be proposed at the next Annual General Meeting (full details are available in the 2009 Notice of Annual General Meeting).

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

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

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

The instrument of transfer of a certified share may be in any usual form or in any other form which the Board may approve. The Board may refuse to register any instrument of transfer of a certified share which is not fully paid, provided that the refusal does not prevent dealings in shares in the Company from taking place on an open and proper basis. The Board may also refuse to register a transfer of certified share unless the instrument of transfer: (i) is lodged, duly stamped (if stampable), at the registered office of the Company or any other place decided by the Board accompanied by the certificate for the share to which it relates and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer; (ii) is in respect of only one class of shares, (iii) is in respect of a share on which the Company has no lien and (iv) is in favour of not more than four transferees. Transfers of uncertified shares must be carried out using the relevant system and the Board can refuse to register a transfer of an uncertified share in accordance with the regulations governing the operation of the relevant system and with UK legislation. Restrictions may also be imposed on certain Group employees who are required to seek approval from the Company before dealing in shares in accordance with the requirements of the Listing Rules of the United Kingdom Listing Authority.  

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

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

PURCHASE OF OWN SHARES

At the Annual General Meeting of the Company held on 20 May 2008, shareholders gave the Company permission, until the conclusion of the next Annual General Meeting to the Company, to purchase up to 15,712,822 ordinary shares of 1 pence of the Company. No such purchases were made during the year. The directors will seek renewal of this authority at the Annual General Meeting to be held on 19 June 2009 (full details are available in the 2009 Notice of Annual General Meeting). 

NEW ARTICLES OF ASSOCIATION

To take account of changes in English Company Law brought about by the phased implementation of the Companies Act 2006, the directors will be seeking authority from shareholders at the Annual General Meeting to approve revised Articles of Association to take effect from 1 October 2009.

SIGNIFICANT AGREEMENTS

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

The facility agreement dated 25 July 2007 for the committed term and revolving credit facilities provided to Harworth Estates (Waverley Prince) Limited by Bank of Scotland among others relating to the redevelopment of the Prince of Wales and Waverley/Orgreave, Rotherham sites contains mandatory prepayment provisions on a change of control of the Company.

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

The facility agreement dated 7 May 2008 for the term loan facility provided to EoS Inc. Ltd by Barclays Bank Plc includes a termination event entitling the Bank to terminate the facility on a change of control of the Company.

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

GOING CONCERN

The accounts are prepared on the basis that the Group is a going concern.  In forming its opinion as to going concern, the Board prepares a working capital forecast based upon its assumptions as to trading as well as taking into account the available borrowing facilities in line with the Treasury Policy above. The Board also prepares a number of alternative scenarios modelling the business variables and key risks and uncertainties, both as summarised in the Operating and Financial Review.  The key factors that have been considered in this regard are:

• the deep mines operate with a cost base which is largely fixed relative to current production levels. Consequently, unexpectedly large interruptions or prolonged reductions to production can have a material adverse impact on cashflow.

• although the vast majority of coal production for 2009 is on fixed or capped/floor pricing bases, revenues in respect of certain floating rate contracts and uncontracted coal will vary based upon the market price for coal, which is expressed in dollars, and sterling/dollar exchange rates. These variables have, over the last year, proved to be very volatile and therefore there is an increased risk of unpredictability in coal revenues and cashflows.

• the new contractual arrangements with its customers entered into since the year end and noted in the Operating and Financial Review. These arrangements provide increased funding to the Group either in the form of prepayments or loans and are noted in the Operating and Financial Review.  Certain of these arrangements contain pre-conditions as to the availability and timing of this increased funding including the obligation to make certain investments in the mines. The Board has taken the likelihood of these conditions being met into account in assessing the likely availability and timing of funding. If these conditions were not met this could have a material adverse effect on the availability or timing of additional funding.

• given recent general banking market difficulties the Board has to take account of the ability of the Group to access new or extended banking facilities. Certain facilities of £50 million and £52 million expire in May 2010 and September 2010 respectively. The Group is already actively engaged in seeking to replace and extend these facilities.  Meetings have taken place with a number of banks and leasing institutions in respect of both these facilities and new finance lease arrangements and the Board is very encouraged by these discussions.

• existing bank funding arrangements containing, in certain cases, covenants based upon loan to property value and net asset covenants. Given the current volatility of the general property market the market deterioration could outpace any planning gains, possibly resulting in a fall in property and net asset values.  Similarly net asset values would be affected by adverse changes in profit expectations.  In the event that this happens, the Group could breach these covenants which could result in the need to pay down in part some of these loans or a renegotiation of terms or, in extremis, a reduction or withdrawal of facilities by the banks concerned.

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

AUDITORS AND DISCLOSURE OF INFORMATION TO AUDITORS

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

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

By order of the Board

RICHARD COLE

COMPANY SECRETARY 27 APRIL 2009

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors are responsible for preparing the annual report, the directors' remuneration report and the financial statements in accordance with applicable law and regulation. Under the law the directors have prepared the Group and Parent Company financial statements in accordance with International Financial Reporting Standards (IFRSs), as adopted by the European Union.

The directors consider that in preparing the financial statements, the Company and the Group have used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates and comply with IFRSs as adopted by the European Union.

The directors have responsibility for ensuring that the Company and Group keep accounting records, which disclose with reasonable accuracy at any time the financial position of the Company and Group and which enable them to ensure that the financial statements comply with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulations. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Board is ultimately responsible for the Group's system of internal control and for reviewing its effectiveness. However, such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can provide only reasonable and not absolute assurance against material misstatement or loss. The directors are responsible for the maintenance and integrity of the website.

It is accepted that legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Board confirms to the best of its knowledge:

• The consolidated financial statements, prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and 

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

Corporate Governance

The Company recognises the importance of, and is committed to, high standards of Corporate Governance and the following sections explain how the Company has applied the main and supporting principles set out in the Combined Code on Corporate Governance, issued by the UK Listing Authority. The Board confirms that the Company has complied with the provisions set out in the Combined Code throughout the year ended December 2008. 

The Board of Directors

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

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

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

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

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

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

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

Attendance at Board Meetings

Attendance by individual directors at meetings of the Board and its Committees during 2008 is shown in the table below.

	Board		Audit		Remuneration		Nomination		Safety
	Possible	Actual	Possible	Actual	Possible	Actual	Possible	Actual	Possible	Actual
D H Jones	11	11			4	4	1	1
J S Lloyd	11	11					1	1	5	5
D G Brocksom	11	11
P F Hazell	11	11	4	4	4	4	1	1
R O Michaelson	11	11
M R Toms	11	11	4	4	4	4	1	1	5	5
K I Whiteman	11	10	4	3	4	3	1	1	5	5

Committees

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

Nomination Committee

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

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

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

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

Remuneration Committee

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

Audit Committee and Auditors

The Audit Committee comprises Peter Hazell (Chairman), Mike Toms and Kevin Whiteman. The Board is satisfied that Peter Hazell has recent and relevant financial experience and that all members of the Committee are independent non-executive directors. The Chairman, the Chief Executive, the Finance Director, the Group Internal Audit Manager and the external auditors are invited to attend meetings. The minutes of meetings of the Committee are circulated to all directors. The Committee meets at least four times a year to review the Company's accounting and financial reporting practices, the work of the internal and external auditors and compliance with policies, procedures and applicable legislation. The Audit Committee also reviews the half year and annual financial statements before submission to the Board and periodically reviews the scope, remit and effectiveness of the internal audit function and the effectiveness of the Group's internal control systems. It also reviews 'whistle-blowing' arrangements by which employees of the Group may, in confidence, raise concerns about possible financial or other improprieties. The terms of reference of the Audit Committee are available to shareholders on request and are also available on the Company's website. The Group Internal Audit Manager has a direct reporting line to the Committee.

The auditors throughout 2008 have been PricewaterhouseCoopers LLP. 

Fees to PricewaterhouseCoopers LLP
Ite	2008	2007
	£000	£000
Audit Fees	290	348
Other audit related fees	202	165
Tax compliance and advice services	111	212
	603	725

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

• The Audit Committee reviews the audit appointment periodically;

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

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

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

• The auditors report to the Directors and the Audit Committee confirming their independence in accordance with Auditing Standards.

Safety Committee

The Board has a Safety Committee to assist it in ensuring that the Company complies with its health and safety obligations and to review and recommend to the Board strategic options that may enhance the policies, standards and processes that operate within the Group. The Committee comprises Kevin Whiteman (Chairman) Mike Toms and Jon Lloyd and meetings are attended by all relevant senior managers.

Other Meetings

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

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

Directors' Development

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

Performance Evaluation

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

Executive Management Committee

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

Chief Executive                                                         Jon Lloyd

Finance Director                                                       David Brocksom

Production Director                                                   Bill Tinsley

Human Resources and Communications Director        Norman Haslam  

Commercial Contracts Director                                  Philip Garner

Company Secretary                                                  Richard Cole

Directors Conflict of Interest Procedures

With effect from 1 October 2008 a director has a duty under the Companies Act 2006 (the 'CA 2006') to avoid a situation in which he has or can have a direct or indirect interest that conflicts or possibly may conflict with the interests of the Company. This duty is in addition to the existing duty that a director owes to the Company to disclose to the Board any transaction or arrangement under consideration by the Company. The CA 2006 allows directors of public companies to authorise conflicts and potential conflicts where the Articles of Association contain a provision to that effect. Shareholders approved amendments to the Company's Articles of Association at the annual general meeting held on 20 May 2008 which included provisions giving the directors authority to approve such situations and to include other provisions to allow conflicts of interest to be dealt with in a similar way to the position that existed before 1 October 2008. The Board has a procedure when deciding whether to authorise a conflict or potential conflict of interest. Firstly, only independent directors (i.e. only those that have no interest in the matter under consideration) will be able to take the relevant decision. Secondly, in taking the decision the directors must act in a way they consider, in good faith, will be most likely to promote the Company's success. In addition, the directors will be able to impose limits or conditions when giving authorisation if they think this is appropriate. 

Relations with shareholders

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

Internal Control Risk Assessment

There is an ongoing process for identifying, evaluating and managing the significant risks of the Group, and this process has been in place throughout the year under review. Following a review by the Board, on 24 March 2009, of an updated strategic risk assessment and the effectiveness of the Group's system of internal controls, it concluded that there were no significant risks that had not been considered, nor any significant weaknesses in internal controls.  

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

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

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

Environmental Management 

Full details of the environmental policies and practices of the Group are set out in the Corporate Social Responsibility section.

Financial - these controls are considered under the following headings:

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

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

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

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

Assurance Procedures

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

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

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

Going concern

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

Annual General Meeting

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

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

Directors' Remuneration Report

* Denotes auditable elements of the Remuneration Report

Introduction

This report is made by the Board on the recommendation of the Remuneration Committee. The first part of the report provides details of UK Coal's Remuneration Policy. The second part provides details of the remuneration, service contracts and share interests of all the directors for the year ended December 2008. The Remuneration Report is un-audited unless otherwise disclosed. The Directors confirm that the Remuneration Report has been drawn up in accordance with the Directors' Remuneration Report Regulations 2002 and the Combined Code (2006) on Corporate Governance ('Combined Code').

The Remuneration Committee

Responsibility for reviewing Group remuneration strategy and policy, recommending any changes and approving individual remuneration packages for the Chairman, Executive Directors and members of the Executive Committee rests with the Remuneration Committee (the 'Committee'). The Committee consists of independent Non-Executive Directors and the Chairman and meets on at least two occasions each year. The members in 2008 were: Mike Toms (Committee Chairman) Peter Hazell, David Jones and Kevin Whiteman. The Committee may seek any information it requires from any employee or director, and all employees and directors are required to co-operate with any request made by the Committee. Richard Cole (Company Secretary) and Norman Haslam (HR Director) provided information to the Committee during the year.

The Remuneration Committee also meets without management and receives information and independent executive remuneration advice from remuneration consultants, Hewitt New Bridge Street ('HNBS'), who were appointed by the Remuneration Committee. HNBS does not provide any other services to the Group. Neither the Chairman nor the Executive Directors participate in discussions relating to their own remuneration. The Remuneration Committee liaises with the Audit Committee where appropriate; this includes confirmation of the Group's financial performance to assist in determining whether performance targets and measures have been achieved.

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

Directors' Remuneration Policy

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

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

This remuneration policy is expected to apply to 2009 and beyond.

The Company is required to seek shareholder approval for this report, and to put forward any new incentive schemes for shareholder approval at the Annual General Meeting.  There are no changes proposed to the remuneration policy for 2009.

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

Chairman

The Chairman receives fees commensurate with his duties, which include: managing the business of the Board and its Committees, maximising long-term shareholder value by reviewing short-term performance, risk management and long-term development of the Group, ensuring that corporate governance is in line with best practice, ensuring a management succession process is in place and working, making recommendations on the remuneration of all other Non-Executive Directors and agreeing with the Chief Executive the most appropriate role of the Chairman vis-à-vis stakeholders including government, shareholders, the financial community, customers, competitors, potential and actual partners, trade unions, employees, the media and the wider community. Following a review, it has been agreed that the Chairman's fee of £150,000 per annum will not increase in 2009.

Executive Directors

Remuneration mix

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

Base Salaries

Executive Directors' salaries are reviewed by the Remuneration Committee on an annual basis. In determining salary levels for executives, due regard is given to external market data in similarly sized companies across a range of sectors, personal and company performance and pay and employment conditions within the Group. Executive Directors' salaries are targeted at broadly mid-market levels for similarly sized companies.  To express personal leadership, both Mr Lloyd and Mr Brocksom have elected to forego a pay increase for 2009. Hence, their base salaries remain at £375,000 and £234,675 per annum respectively.

Annual Bonus 

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

The targets in 2008 were cash flow, profit, growth in property net asset value, safety and personal performance. There was no payment in respect of the first four targets and the bonus below is in respect of the personal performance element only.  Both Mr Lloyd and Mr Brocksom were set challenging personal targets. The performance against these targets reflected strong management and leadership in a challenging business environment.

In respect of 2008, Jon Lloyd will receive a bonus of £45,000 (2007 £168,327) and David Brocksom will receive a bonus of £24,641 (2007 £33,936 for the period from 18.9.2007) The bonus for the period represents 12% of basic pay for Jon Lloyd and 10.5% of basic pay for David Brocksom.  

In 2009 the following measures will be applied for each director in the proportions shown:

	Cash Flow (%)	Profit  (%)	Group Coal Sales (%)	Safety (%)	Personal (%)
Jon Lloyd David Brocksom	35 40	20 25	10 0	20 20	15 15

Long Term Incentive Plan ('LTIP')

Under the terms of the current LTIP, an award of shares up to a maximum value of 100% of base salary is conditionally allocated to each Executive Director. It is anticipated that grant levels in 2009 will be 60% of base salary for Jon Lloyd and 60% of base salary for David Brocksom, which awards are lower than in 2008. 

These shares are released to the Executive three years from the date of grant of award, contingent upon the Group achieving predetermined levels of performance, with performance being measured as the Company's Total Shareholder Return ('TSR') over a three year period. It is anticipated that the performance condition attached to awards to be made in 2009 will require TSR of between 75% and 150% over the three-year performance period, which represents a significant increase on the range applied to awards granted in 2008 of between 25% to 75%. TSR is calculated using a two month averaging period prior to the beginning and end of the performance period. In addition and in order for any shares to vest, the Company must achieve earnings per share growth of at least 3% over RPI per annum over the performance period. The Executive Director must remain in post throughout the three-year period (subject to exceptions as set out in the plan) in order to be entitled to this award.  

The TSR performance of the Company will be independently calculated and then verified by the Remuneration Committee.

TSR was chosen as the performance condition for the LTIP since it aligns the interests of Executives with those of shareholders. The Remuneration Committee considers absolute TSR to be the most appropriate performance measure given the lack of meaningful comparator companies for the Company and that this provides the most rounded and meaningful assessment of performance of both the mining and property interests of the Company.

LTIP awards may be satisfied with newly issued shares, or shares purchased in the market. 

Performance Graph

[Graph omitted due to constraints of reporting service]

The above graph displays the value, by the end of 2008, of £100 invested in the Company on 31 December 2003 compared with the value of £100 invested in the FTSE 250 Index (excluding investment trusts). The other points are the values at intervening financial year-ends.

For most of 2008, UK Coal was a member of the FTSE 250 Index. Accordingly, this has been selected as the most appropriate index against which to compare UK Coal's return to shareholders in the absence of any more specific sector index.

Other Terms and Conditions of Service

The Executive Directors' service contracts, including arrangements for early termination, are carefully considered by the Remuneration Committee and are designed to recruit, retain and motivate Executive Directors of the quality required to manage the Group. The Remuneration Committee considers that a notice period of no more than one year is appropriate. It is the Company's policy not to enter into service contracts that provide written notice of more than one year.

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

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

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

Non-Executive Directors

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

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

Non-Executive Directors are paid a basic fee of £40,000 per annum. Additional fees of £6,000 per annum are payable for chairing a committee. These fees will not be increased during 2009.

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

Directors' Service Contracts and Letters of Appointment

	Contract Date	Un-expired Term  (as at December 08)	Notice Period
Chairman
David Jones	12.12.08	3 years	3 months
Executive directors
Jon Lloyd	01.07.06	Rolling 1 year	1 year
David Brocksom	04.09.07	Rolling 1 year	1 year
Non-executive directors
Peter Hazell	31.08.06	9 months	3 months
Owen Michaelson	01.10.07	1 year 9 months	3 months
Mike Toms	13.04.06	4 months	3 months
Kevin Whiteman	29.05.07	1 year 5 months	3 months

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

Directors' Emoluments for the Year-Ended December 2008*

	Salary /Fees	Allowances	Annual Bonus	Benefits in Kind	Total 2008	Total 2007
	£000	£000	£000	£000	£000	£000
Chairman
David Jones	146	0	0	0	146	140
Executive directors
Jon Lloyd (i)	375	20	45	12	452	498
David Brocksom (ii)	235	10	25	5	275	124
Non-executive directors
Peter Hazell	43	0	0	0	43	39
Owen Michaelson	38	0	0	0	38	8
Mike Toms	43	0	0	0	43	39
Kevin Whiteman	43	0	0	0	43	20

(i)   Jon Lloyd received £6,325, which represented the balance of his relocation expenses entitlement and this is included in benefits in kind listed above. He also received a car allowance of £20,000 which is included in allowances above.

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

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

Pension Contributions*

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

Pension contributions on behalf of executive directors were as follows:

	Pensions Contributions  2008	Pensions Contributions 2007
	£000	£000
Jon Lloyd	109	78
David Brocksom	70(i)	Nil
	179	78

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

Long Term Incentive Plan* 

	Interest at  Dec  2007	Interest awarded during the year (i)	Interest lapsed during the year	Interest matured during the year	Interest at  Dec 2008 (ii)	Vesting date	End of  performance period
Jon Lloyd
Executive LTIP 2006 (iii)	65,060		65,060		0	03.07.09	Dec 08
Executive LTIP 2007 (iv)	27,789				27,789	02.03.10	Dec 09
Executive LTIP 2007 (iv)	39,560				39,560	18.09.10	Dec 09
Executive LTIP 2008 (iv)		82,599			82,599	22.04.11	Dec 10
Total	132,409	82,599	65,060	0	149,948
David Brocksom
Executive LTIP 2007 (iv)	44,955				44,955	18.09.10	Dec 09
Executive LTIP 2008 (iv)		51,690			51,690	22.04.11	Dec 10
Total	44,955	51,690	0	0	96,915

• The market value of the shares awarded, at the date of the awards for Messrs Lloyd and Brocksom, on 22 April 2008, was 452.5p.  

• The exercise price of all outstanding awards is £nil.

• The performance conditions for 2006 awards required absolute TSR growth of 75% or above (for 30% vesting), 100% or above (for 50% vesting) and 150% or above (for full vesting), with straight-line vesting between these points. In addition, the Company must achieve EPS growth of at least RPI+3% p.a. over the performance period. The TSR targets have not been achieved and hence Mr Lloyd's award has lapsed.

• The performance conditions for 2007 and 2008 awards require absolute TSR growth of between 25% and 75% for between 30% and 100% of an award to vest (with straight-line vesting between these points). In addition, the Company must achieve EPS growth of at least RPI+3% p.a. over the performance period.

Directors' Interests in Ordinary Shares

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

	Beneficial interest in ordinary shares at Dec 2008	Beneficial interest in ordinary shares at Dec 2007
David Jones	35,000	10,000
Jon Lloyd	25,000	-
David Brocksom	18,500	-
Peter Hazell	-	-
Owen Michaelson	25,861	-
Mike Toms	4,000	-
Kevin Whiteman	10,000	-

There have been no changes in Directors' interests in shares between the end of the year and 27 April 2009.

The market value of the Company's shares during the year ranged from 51.5p to 585.5p. The market value on 27 December 2008 was 93p.

External Appointments

None of the Executive Directors held positions as Non-Executive Directors with other companies during 2008

This report has been approved by the Board for submission to shareholders at the Annual General Meeting to be held on 19 June 2009, and signed on behalf of the Board by Mike Toms

By order of the Board

Mike Toms

Chairman, Remuneration Committee

27 April 2009

INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF UK COAL PLC

We have audited the Group and Parent Company financial statements (the ''financial statements'') of UK COAL PLC for the year ended 27 December 2008 which comprise the consolidated income statement, the Group and Parent Company balance sheets, the Group and Parent Company cash flow statements, the Group and Parent Company statements of recognised income and expense and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors' Remuneration Report that is described as having been audited.

Respective responsibilities of directors and auditors

The directors' responsibilities for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors' Responsibilities.

The directors are responsible for the maintenance and integrity of the Company's website. The maintenance and integrity of the UK COAL PLC website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions

Our responsibility is to audit the financial statements and the part of the Directors' Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company's members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors' Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors' Report is consistent with the financial statements. The information given in the Directors' Report includes that specific information presented in the Operating and Financial Review that is cross referred from the Business Review section of the Directors' Report. 

In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors' remuneration and other transactions is not disclosed.

We review whether the Corporate Governance Statement reflects the Company's compliance with the nine provisions of the Combined Code (2006) specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group's corporate governance procedures or its risk and control procedures.

We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises only the Directors' Report, the unaudited part of the Directors' Remuneration Report, the Highlights, the Chairman's Statement, the Operating and Financial Review and the Corporate Governance Statement. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinion

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors' Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group's and Company's circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors' Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors' Remuneration Report to be audited.

Opinion

In our opinion:

• the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group's affairs as at 27 December 2008 and of its loss and cash flows for the year then ended;

• the Parent Company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the Parent Company's affairs as at 27 December 2008 and cash flows for the year then ended;

• the financial statements and the part of the Directors' Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation; and

• the information given in the Directors' Report is consistent with the financial statements.

Going Concern

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

PricewaterhouseCoopers LLP

Chartered Accountants and Registered Auditors

Leeds

27 April 2009

 

END

 

 

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