Annual Financial Report - part 2 of 2

CONSOLIDATED INCOME STATEMENT

for the year ended 27 December 2008

Year ended 

27 December 2008

Year ended 29 December 2007 

Notes

£000

£000

Revenue

2

392,541 

328,485 

Cost of sales

(389,699)

(319,218)

Gross profit

2,842 

9,267 

Net appreciation in fair value of investment properties

23 

66,799 

Profit on disposal of investment properties

3,661 

3,688 

Gains on investment properties

3,684 

70,487 

Profit on sale of business

30

-

8,481 

Other operating income and expenses

4

(8,774)

(5,579)

Operating (loss)/profit 

2

(2,248)

82,656 

Finance costs

6

(17,817)

(17,121)

Finance income

6

2,919 

2,951 

Finance costs - net

6

(14,898)

(14,170)

Share of post-tax profit from joint venture

14

1,503 

537 

(Loss)/profit before tax

3

(15,643)

69,023 

Tax (charge)/credit

8

(100)

25,000 

(Loss)/profit for the financial year 

(15,743)

94,023 

Attributable to:

Equity holders of the Company

(15,743)

94,023 

(Loss)/earnings per share

pence

pence

Basic and diluted

11

(10.0)

59.9 

CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE

for the year ended 27 December 2008

Group

Group

Company

Company

Year ended 

27 December 2008

Year ended 

29 December 2007

Year ended 

27 December 2008

Year ended 29 December 2007

Notes

£000

£000

£000

£000

Actuarial (loss)/gain on defined benefit pension schemes

24

(33,900)

35,733

-

-

Actuarial gain on Blenkinsopp pension scheme

24

262

464

-

-

Actuarial (loss)/gain on concessionary fuel reserve

24

(4,911)

1,280

-

-

Movement on deferred tax asset relating to retirement benefit liabilities

8

(2,257)

(22,012)

-

-

Movement on deferred tax asset relating to cash flow hedges

8

2,378

-

-

-

Impact of change in UK tax rate on deferred tax

8

-

(2,383)

-

-

Revaluation of property transferred from operating to investment properties

13

3,170

6,733

-

-

Cashflow hedges

(7,354)

-

-

-

Net (loss)/gain recognised directly in equity

(42,612)

19,815

-

-

(Loss)/profit for the financial year

(15,743)

94,023

(168,440)

(1,867)

Total recognised (expense)/income for the year

(58,355)

113,838

(168,440)

(1,867)

Attributable to:

Equity holders of the Company

(58,355)

113,838

(168,440)

(1,867)

BALANCE SHEETS

at 27 December 2008

Group

Group

Company

Company

As at 27 December 2008

As at 29 December 2007

As at 27 December 2008

As at 29 December 2007

Notes

£000

£000

£000

£000

ASSETS

Non-current assets

Operating property, plant and equipment

12

181,801

199,551

-

-

Surface mine development and restoration assets

12

28,479

20,111

-

-

210,280

219,662

-

-

Investment properties

13

404,658

384,291

-

-

Investments in subsidiaries

14

-

-

300,310

473,224

Investment in joint ventures

14

2,778

342

-

-

Deferred tax asset

8

36,121

36,000

-

-

Trade and other receivables

15

1,527

1,613

-

-

655,364

641,908

300,310

473,224

Current assets

Inventories

16

46,752

39,756

-

-

Trade and other receivables

17

39,991

29,953

155,463

166,101

Derivative financial instruments

22

-

424

-

424

Cash and cash equivalents

18

71,102

70,068

40,682

20,063

157,845

140,201

196,145

186,588

LIABILITIES

Current liabilities

Borrowings

19

(7,306)

(27,320)

-

-

Trade and other payables

20

(104,052)

(100,213)

(224,308)

(217,618)

Provisions

21

(35,206)

(31,061)

-

-

(146,564)

(158,594)

(224,308)

(217,618)

Net current assets/(liabilities)

11,281

(18,393)

(28,163)

(31,030)

Non-current liabilities

Borrowings

19

(172,057)

(97,921)

-

-

Derivative financial instruments

22

(8,493)

(2,148)

-

(2,148)

Trade and other payables

20

(139)

(73)

-

-

Deferred tax liabilities

8

(815)

(815)

-

-

Provisions

21

(80,693)

(91,141)

-

-

Retirement benefit obligations

24

(104,016)

(73,171)

-

-

(366,213)

(265,269)

-

(2,148)

Net assets

300,432

358,246

272,147

440,046

Shareholders' equity

Capital and reserves

Called up share capital

25

1,572

1,571

1,572

1,571

Share premium

26

30,756

30,756

30,756

30,756

Revaluation reserve

27

130,339

143,014

-

-

Capital redemption reserve

27

257

257

257

257

Fair value reserve

27

175,904

177,851

-

-

Hedging reserve

27

(4,976)

-

-

-

Retained (loss)/earnings

26

(33,420)

4,797

239,562

407,462

Total shareholders' equity

300,432

358,246

272,147

440,046

The financial statements were approved by the Board of Directors 

on 27 April 2009 and were signed on its behalf by:

J S Lloyd

D G Brocksom

Chief Executive

Finance Director

CASH FLOW STATEMENTS

for the year ended 27 December 2008

Notes

Group

Group

Company

Company

Year ended 

27 December 2008

Year ended 

29 December 2007

Year ended 

27 December 2008

Year ended 29 December 2007 

£000

£000

£000

£000

Cash flows from operating activities

(Loss)/profit for the financial year

2

(15,743)

94,023

 (168,440)

 (1,867)

Depreciation of property, plant and equipment

12

37,913 

38,500

-

-

Amortisation of surface mine development and restoration assets

12

12,583 

8,723 

-

-

Net fair value appreciation in investment properties

13

 (23)

(66,799)

-

-

Net interest payable/(receivable) and unwinding of discount on provisions

6

14,898 

14,170 

(1,886)

4,695

Net charge for share-based remuneration

540

284

540 

284 

Share of post-tax profit from joint ventures

 (1,503)

(537)

-

-

Profit on sale of business

30

-

(8,481)

-

-

Profit on disposal of investment properties

 (3,661)

(3,688)

-

-

Profit on disposal of operating property, plant and equipment

 (82)

(1,598)

-

-

Capitalised surface mine restoration assets

(11,077)

(14,490)

-

-

Decrease in provisions

(18,265)

(38,818)

-

-

Tax charge/(credit)

8

100

(25,000)

-

-

Provision for impairment of investments

14

-

-

172,914

-

Increase in stocks

(6,996)

(3,116)

-

-

(Increase)/decrease in receivables

(9,952)

17,253

10,638

1,490

Increase/(decrease) in payables

3,805

(4,304)

6,690

30,084

Cash generated from operations

2,537

6,122

20,456

34,686

Loan arrangement fees paid

(1,231)

(1,610)

-

(601)

Interest paid

(12,518)

(11,578)

-

(4,669)

Cash (used in)/generated from operating activities

(11,212)

(7,066)

20,456

29,416

Cash flows from investing activities

Interest received

2,919

2,951

162

575

Net receipt from/(payment to) insurance and subsidence security funds

20,329 

 (6,794)

-

-

Net proceeds from sale of business

30

-

21,500

-

-

Proceeds on disposal of investment properties

6,032

13,335

-

-

Proceeds on disposal of operating property, plant and equipment

217 

787

-

-

Net (investment in)/receipts from joint ventures

(933)

400

-

-

Development costs of investment properties

(14,090)

(7,547)

-

-

Pre-coaling expenditure for surface mines and deferred stripping costs

 (9,874)

 (4,650)

-

-

Purchase of operating property, plant and equipment

(25,753)

(23,046)

-

-

Cash (used in)/generated from investing activities

(21,153)

(3,064)

162

575

Cash flows from financing activities

Proceeds from issue of ordinary shares

1

-

1

-

Net drawdown of bank loans

59,494

27,223

-

(12,476)

Net (repayments of)/proceeds from obligations under hire purchase and finance leases

 (5,767)

253 

-

-

Cash generated from/(used in) financing activities

53,728

27,476

1

(12,476)

Increase in cash

21,363

17,346

20,619

17,515

At January

Cash 

20,973

3,627

20,063

2,548

Cash equivalents

49,095

42,301

-

-

70,068

45,928

20,063

2,548

(Decrease)/increase in cash equivalents (net receipt from insurance and subsidence security funds) 

 (20,329)

6,794 

-

-

Increase in cash

21,363

17,346

20,619

17,515

71,102

70,068

40,682

20,063

At December

Cash 

42,336

20,973

40,682

20,063

Cash equivalents

28,766

49,095

-

-

Cash and cash equivalents

18

71,102

70,068

40,682

20,063

NOTES TO THE FINANCIAL STATEMENTS

1 ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 

Basis of preparation

These consolidated financial statements have been prepared in accordance with European Union ("EU") Endorsed International Financial Reporting Standards ("IFRSs"), IFRIC interpretations and those parts of the Companies Act 1985 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of investment properties taken through the income statement. IFRSs also require an alternative treatment to the historic cost convention in certain circumstances (principally in the areas of retirement benefit obligations, share based payments and financial instruments).

Trading accounts within the Group are made up to an appropriate week end date around 31 December each year. For 2008, trading is shown for the year ended on 27 December 2008 (2007: year ended 29 December 2007).

The Group has adopted the amendment to IAS 39 'Financial instruments: recognition and measurement' and IFRS 7 'Financial instruments: disclosures' in 2008 with no material impact on either the current or prior periods.

In preparing the 2008 financial statements, the following pronouncements which are not yet effective have not been adopted early by the Group or Company. 

IFRS 8 'Operating segments'. The new standard requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes. The Group will apply IFRS 8 from 1 January 2009. The expected impact is still being assessed in detail by management, but it appears likely that the number of reportable segments, as well as the manner in which the segments are reported, will not change materially from our current internal reporting provided to the chief operating decision-maker. 

IAS 23 (Amendment) 'Borrowing costs'. The standard is effective from 1 January 2009 and the amendment to the standard is still subject to endorsement by the EU. It requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The Group will apply IAS 23 (Amended) from 1 January 2009, subject to endorsement by the EU. The effect on the 2008 accounts would not be material. 

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 cash flow.

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 cash flows.

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.

Consolidation 

The consolidated financial information incorporates the financial statements of UK COAL ('the Company') and its subsidiaries, together 'the Group'.

Subsidiaries are entities over which the Group has power to govern the financial and operating policies. Control is presumed to exist where the Group owns more than half of the voting rights, unless in exceptional circumstances where it can be demonstrated that ownership does not constitute control. The consolidated financial statements includes all the assets, liabilities, revenues, expenses and cash flows of the parent and its subsidiaries, after eliminating intercompany balances and transactions. The results of subsidiaries sold or acquired are included in the consolidated income statement up to, or from, the date control passes. 

The Group uses the purchase method of accounting to consolidate subsidiaries. On acquisition, the identifiable assets, liabilities and contingent liabilities being acquired are measured at their fair values at the date of acquisition. Accounting policies are changed where necessary to bring them into line with those adopted by the Group.

Joint ventures are those entities over whose activities the Group has joint control established by contractual agreement. Interests in joint ventures through which the Group carries on its business are classified as jointly controlled entities and accounted for using the equity method. This involves recording the investment initially at cost to the Group, and then in subsequent periods, adjusting the carrying amount of the investment to reflect the Group's share of the joint venture's results less any impairment in carrying value and any other changes to the joint venture's net assets such as dividends.

Foreign currencies

The presentational currency of the Group is sterling. Transactions in other currencies are translated at the exchange rate ruling at the date of the transaction.

Monetary assets and liabilities are translated at year end exchange rates and the resulting exchange rate differences are included in the consolidated income statement within the results of operating activities if arising from trading activities and within finance cost/income if arising from financing.

All Group companies have a functional currency of sterling which is consistent with the presentational currency of the consolidated Group financial statements.

Segment reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns or whose operational characteristics are different to those of other business segments. A geographical segment is engaged in providing products and services within a particular economic environment that are subject to risks and returns which are different from those of segments operating in other economic environments.

The Group manages its business primarily by reference to business segments, and this approach is adopted in the accounting policies as the primary segment. Deep mining comprises the underground mining operations of the Group and related labour services and our captive insurance company. In addition from 2008, the methane generation operations which were formerly included within a separate Power division are now included within the deep mines segment. Surface mining incorporates all mining activities at surface level, together with the plant hire operations of the Group. The Property division, Harworth Estates, maintains, develops and rents the Group's property portfolio. Any activity not falling into any of these categories is included in the Other segment. As the Group is based and operates in a single geographical market, the United Kingdom, no secondary segmentation is provided. 

Revenue

Revenue comprises sales (excluding intra group sales) of coal, property rental income and other external sales, including sales of power and of labour services. 

Coal transactions

Revenue is recognised when delivery of the product or service has been made and when the customer has a legally binding obligation to settle under the terms of the contract and has assumed all significant risks and rewards of ownership.

A large proportion of production is sold under medium to long term contracts. Revenue is only recognised on individual sales when all of the significant risks and rewards of ownership have been transferred to a third party. In most instances this is when the product is despatched, being the point at which title to the product is transferred to the purchaser.

Service transactions

Rental income is recognised during the period in which rents due to the Group accrue. Sales of power are recognised when electricity is transferred into the local distribution network.

Exceptional items

Items that are both material and non recurring and whose significance is sufficient to warrant separate disclosure and identification within the consolidated financial statements are referred to as exceptional items and disclosed within their relevant income statement category within note 2, segmental reporting. Items that may give rise to classification as exceptional items include, but are not limited to, significant and material restructuring closures and reorganisation programmes, asset impairments, and profits or losses on the disposal of businesses.

Exceptional items are divided into non-trading and trading exceptional items, depending upon the impact of the event giving rise to the cost or income on the ongoing trading operations and the nature of the costs or income involved. Non-trading exceptional items include costs and income arising from closure, rationalisation and business disposals. 

Property related transactions, including changes in the fair value of investment properties, and profits and losses arising on the disposal of property assets are not included in the definition of exceptional items as they are expected to recur, but are separately disclosed on the face of the consolidated income statement, where material.

Coal Investment Aid

Coal Investment Aid is received as a contribution towards qualifying expenditure, as defined by the Department for Energy and Climate Change ("DECC"), incurred by the Group. If the expenditure has been charged in the consolidated income statement then the related investment aid is credited to the consolidated income statement in the same period. Where the investment aid relates to the purchase of property, plant and equipment, the investment aid is held on the consolidated balance sheet as deferred income and is credited to the consolidated income statement over the lives of the assets to which it relates.

Profit or loss on disposal

Disposals are accounted for when legal completion of the sale has occurred or there has been an unconditional exchange of contracts. Profits or losses on disposal arise from deducting the asset's net carrying value from the net proceeds (being net purchase consideration less clawback liability arising on disposal) and is recognised in the consolidated income statement. Net carrying value includes valuation in the case of investment properties and historic cost or deemed cost less accumulated depreciation in the case of all other property, plant and equipment. 

In the case of investment properties, the revaluation reserve, which arose on transfer from operating property to investment property, for the property disposed of is treated as realised on disposal of the property and transferred to retained earnings. 

Investment properties and operating properties 

The Group holds the following types of freehold property:

- Working deep mines in production

- Working surface mines in production

- Property held for administrative purposes

- Property held for rental income, capital appreciation or both

Working deep mines in production, working surface mines in production, and property held for administrative purposes are held as operating properties (as these assets are used or intended to be used within the operations of the Group) and are accounted for at historic depreciated cost, in accordance with IAS16 'Property, Plant and Equipment'. 

All other freehold properties are held as investment properties (as these are held to earn rentals or for capital appreciation or both) and are accounted for at valuation and in accordance with IAS40 'Investment Property' or if appropriate, in inventories as assets held for disposal. 

Investment properties 

Investment properties comprise freehold land and buildings and are measured at fair value. The fair values are determined by obtaining an independent valuation prepared in accordance with the current edition of the Appraisal and Valuation Standards published by the Royal Institution of Chartered Surveyors. External, independent valuation firms having appropriate, recognised professional qualifications and recent experience in the location and category of property being valued, value the portfolio at each reporting date. 

In accordance with IAS 40, for properties transferred from operating properties to investment properties, any difference between the book value and the first valuation on recognition as an investment property is taken to reserves. Subsequent gains or losses arising from changes in the fair values of assets are recognised in the consolidated income statement, net of any property clawback by DECC (see accounting policy on property clawback) on deemed disposal. Investment properties are not depreciated.

Properties being held for their long term rental income or capital appreciation but with the added potential for coal extraction are held as investment properties, being transferred to operating properties at fair value when planning permission to mine the site has been received and mining operations have commenced and are transferred back to investment properties once mining has terminated. 

Where the development of an investment property commences with a view to sale, the property is transferred from investment properties to inventories at fair value, which is then considered to represent deemed cost. 

Operating properties

Operating properties which are acquired or constructed are initially recorded at cost, being the purchase price of the asset and other costs incurred to bring the asset into existing use, and subsequently stated at historic cost less accumulated depreciation (other than freehold land which is not depreciated). Where properties are transferred from investment properties to operating properties, this transfer is made at fair value, which is then considered to represent deemed cost. 

Properties which have historically been used as working deep mines or working surface mines (operating properties) are transferred to property held for rental income or capital appreciation (investment properties), when there is a change in use, at the point when a decision is made to pursue planning with a view to future development (rather than for short term sale) or rental, and once mining has ceased. IAS 16 is applied up to the date of transfer and any difference at that date between the book value and fair value is taken to the revaluation reserve.

Properties in the course of development

Directly attributable costs incurred in the course of developing a property are capitalised as part of the cost of the property. For operating properties amortisation of these costs follows the depreciation policy for the property. Development costs on investment properties are capitalised and the change in value is recognised through the next revaluation.

Exploration and evaluation

Exploration and evaluation expenditure comprises costs that are directly attributable to:

- Researching and analysing existing exploration data;

- Conducting geological studies, exploratory drilling and sampling;

- Examining and testing extraction and treatment methods; and/or

- Compiling prefeasibility and feasibility studies.

Exploration expenditure relates to the initial search for deposits with economic potential. Evaluation expenditure arises from a detailed assessment of deposits that have been identified as having economic potential.

Capitalisation of exploration and evaluation (pre-coaling) expenditure commences when there is a high degree of confidence in the project's viability and hence it is probable that future economic benefits will flow to the Group. Such capitalised exploration and evaluation expenditure is reviewed for impairment when facts and circumstances indicate that its carrying value exceeds its recoverable amount.

Subsequent recovery of the resulting carrying value depends on successful development of the area of interest or sale of the project. If a project does not prove viable, all irrecoverable costs associated with the project net of any related impairment provisions are written off.

Plant and equipment

The cost of plant and equipment comprises its purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in accordance with agreed specifications. Plant and equipment is stated at historic cost less accumulated depreciation.

Once a mining project has been established as commercially viable, expenditure other than that on land, buildings, plant and equipment is capitalised under 'mine development assets' together with any amount transferred from 'exploration and evaluation'.

During the development of a mine, before production commences, development stripping costs are capitalised as part of the investment in construction of the mine (see accounting policy on mining assets).

Costs associated with commissioning new assets, in the period before they are capable of operating in the manner intended by management, are capitalised. Development costs incurred after the commencement of production are capitalised to the extent they are expected to give rise to a future economic benefit.

On conversion to IFRS, the Group opted to continue to measure operating property, plant and equipment (excluding investment properties) at historic cost, less accumulated depreciation, in the consolidated balance sheet.

Mining assets

Mine development

The purpose of mine development is to access and establish infrastructure in order to allow the safe and efficient extraction of recoverable reserves. Depreciation on mine development is charged from the time when full production commences or from when the assets are put to use. On commencement of full production, depreciation is charged over the estimated tonnage of the recoverable reserves. Coal extracted prior to the commencement of full production is credited against the cost of mine development where it can be clearly shown that the production of saleable material is directly attributable to bring the asset to the condition necessary for it to be capable of operating in the manner intended by management; otherwise such revenue (and the costs of producing the saleable material) is recognised in the income statement.

Mines and surface works 

Assets acquired on the privatisation of British Coal in 1994 were valued at discounted net recoverable value, based on the contemporary mining plans, in accordance with the accounting guidance existing at that time. Depreciation is charged over the estimated tonnage of the recoverable reserves. Subsequent additions to mines and surface works are accounted for at cost, and depreciated over their individual estimated reserves.

Seismic and geological mapping costs

Expenditure on seismic and geological mapping costs which increases the value of the reserves by identifying additional reserves over and above those previously recognised, or increases the value of the existing known reserves by providing information which enables reserve estimates to be increased, is capitalised. This expenditure is depreciated over the estimated tonnage of the recoverable reserves as these are extracted. If the information does not fulfil either of these criteria, the cost is charged to the consolidated income statement as incurred. 

Surface mine development and restoration assets

Costs incurred prior to coaling for surface mines are capitalised as surface mine development and restoration assets within tangible fixed assets and a separate provision for the outstanding restoration and rehabilitation obligations is established. Both of these costs are then charged to the consolidated income statement (net of any residual value) over the recoverable reserves of the mine. Expenditure on sites not expected to be worked within ten years is written off. 

Deferred stripping costs

Overburden and other mine waste materials are often removed during the initial development of a mine site in order to access the mineral deposit. This activity is referred to as development stripping. The directly attributable costs (inclusive of an allocation of relevant overhead expenditure) are capitalised as surface mine development assets and are amortised together with restoration and pre-coaling costs, once coaling commences, over the tonnage of coal expected to be extracted. 

The Group defers stripping costs incurred subsequently, during the production stage of its operations, for those operations where this is the most appropriate basis for matching the costs against the related economic benefits and the effect is material.

The amount of stripping costs deferred is based on the ratio obtained by dividing the tonnage of waste mined by the quantity of coal mined. Stripping costs incurred during the period are deferred to the extent that the current period ratio exceeds the remaining life of mine ratio. Such deferred costs are then charged against reported profits to the extent that, in subsequent periods, the current period ratio falls short of the life of mine ratio. Changes to the life of mine ratio are accounted for prospectively.

If the Group were to expense the production stage stripping costs as incurred, there would be greater volatility in the year to year results from operations and excess stripping costs would be expensed at an earlier stage of a mine's operation.

Depreciation

The costs of operating properties, excluding freehold land, and the cost of all other plant and equipment, less estimated residual value, are written off on a straight line basis over the asset's expected useful life. Residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Changes to the estimated residual values or useful lives are accounted for prospectively. The costs of heavy surface mining and other plant and equipment are depreciated at varying rates depending upon their expected usage. 

Indicative expected lives for non-current assets are set out below:

Freehold land

not depreciated

Operating properties (excluding land)

25 to 50 years

Mines and surface works - Heavy mining equipment

8 to 20 years

Plant and equipment

- Plant and equipment

3 to 15 years

- Motor vehicles

3 to 5 years

Impairment

Operating property, plant and equipment are reviewed for impairment if there is any indication that their carrying amount may not be recoverable.

The carrying value of cash generating units (taking into account related liabilities and allocated central net assets) is tested for impairment by comparison with expected relevant future cash flows discounted at the pre-tax cost of capital taking into account appropriate risk; provision is made for any impairment identified. Cash generating units comprise individual mines or groups of mines depending upon the nature of the income streams derived from each.

When a review for impairment is conducted, the recoverable amount is assessed by reference to the higher of 'value in use' (being the present value of expected future cash flows of the relevant cash generating unit) or 'fair value less costs to sell'. Where there is no binding sale agreement or active market, fair value less costs to sell is based on the best information available to reflect the amount the Group could receive for the cash generating unit in an arm's length transaction.

Future cash flows are based on: 

- estimates of the quantities of the reserves and resources for which there is a high degree of confidence of economic extraction

- anticipated production levels and costs

- anticipated coal prices

Cost levels incorporated in the cash flow forecasts are based on the current long term mine plan for the cash generating unit. For impairment reviews, recent cost levels are considered, together with expected changes in costs that are compatible with the current condition of the business and which meet the requirements of IAS 36, 'Impairment of assets'. IAS 36 'Impairment of assets' includes a number of restrictions on the future cash flows that can be recognised in respect of restructurings and improvement related to capital expenditure.

Hire purchases and leases - as lessee

Leases which transfer substantially all the risks and rewards of ownership to the Group are treated as finance leases. All other leases are treated as operating leases. Assets held under hire purchase and finance lease arrangements are capitalised and depreciated according to the depreciation rate of the applicable asset category. The outstanding capital obligations are included in payables. Interest is allocated to accounting periods over the hire purchase or lease term to reflect a constant rate of charge on the remaining balance of the obligation. Costs in respect of the operating leases are charged to the consolidated income statement as incurred.

Hire purchases and leases - as lessor

The Group grants leases over land and buildings in the course of its property business. These do not substantially transfer the risks and rewards of ownership to the lessee, and therefore they are accounted for as operating leases.

Financial instruments

The Group recognises financial instruments when it becomes party to the contractual provisions of the instrument. Financial assets are derecognised when the contractual right to receive the cash flows expire or it has transferred the financial asset and the economic benefit of the cash flows. Financial liabilities are derecognised when the obligation specified in the contract is discharged, cancelled or expires.

Financial instruments are used to support the Group's operations. Interest is charged to the consolidated income statement as incurred or earned. Issue costs for instruments subsequently recorded at amortised cost are netted against the fair value of the related debt instruments on initial recognition and are charged to the consolidated income statement over the term of the relevant facility. 

Financial instruments are recorded initially at fair value. Subsequent measurement depends on the designation of the instrument, as follows:

a) Financial assets/liabilities held for short term gain, including derivatives other than hedging instruments, are measured at fair value and movements in fair value are credited/charged to the consolidated income statement in the period.

b) Loans and receivables/payables and non-derivative financial assets/liabilities with fixed or determinable payments that are not quoted in an active market, are measured at amortised cost. These are included in current assets/liabilities except for instruments that mature after more than 12 months which are included in non current assets/liabilities.

The Group holds derivative financial instruments ('derivatives') to manage exposure to fluctuations in interest rates. Derivatives are designated as hedges, when applicable, and treated as such from the inception of the relevant contracts. Amounts payable or receivable in respect of interest rate swap agreements are recognised as adjustments to the interest expense over the period of the contracts.

Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised directly in equity, and the ineffective portion is recognised immediately in the income statement. If the cash flow hedge of a firm commitment or forecasted transaction results in the recognition of an asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or liability. For hedges that do not result in recognition of an asset or a liability, amounts deferred in equity are recognised in the income statement in the same period in which the hedged item affects net profit or loss.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement in the period.

Borrowing costs

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the consolidated income statement over the period of the borrowings using the effective interest method.

Inventories

Inventories are valued at the lower of cost and net realisable value. Values of spares and consumables are based on average purchase prices. Appropriate provisions are made for slow moving and obsolete stock. Coal is recognised as stock when delivered to the surface and is valued at the average cost of extraction. 

Trade receivables

Trade receivables are recognised initially at fair value and are subsequently reduced by any provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due. Indicators of impairment would include financial difficulties of the debtor, likelihood of the debtor's insolvency, default in payment or a significant deterioration in credit worthiness. Any impairment is recognised in the income statement within 'other operating income and expenses'. When a trade receivable is uncollectable, it is written off against the allowance account.

Subsequent recoveries of amounts previously written off are credited against 'other operating income and expenses' in the income statement.

Trade payables

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

Property clawback

Under the terms of the 1994 privatisation Sale and Purchase Agreement, DECC is entitled to a percentage of any property gain (above certain thresholds and after deducting an amount representing corporation tax thereon) accruing, or treated as accruing to the Group, as a result of the disposal or deemed disposal or major development of certain properties acquired at privatisation. The percentage applied is 36% for 2007, reducing by 3 percentage points per annum until 31 March 2015, when it reduces to zero. If properties are disposed of, or are deemed to have been disposed of during this period, a part of the relevant gain will become payable to DECC. A liability for clawback in respect of property disposals is recognised only when an actual or deemed disposal occurs. A liability for clawback on a deemed disposal as a result of granting a lease is recognised over the life of the lease. 

Cash and cash equivalents

In the preparation of the Group's and Company's cash flow statements, cash and cash equivalents represent short term liquid investments which are readily realisable. Cash which is subject to restrictions, being held to match certain liabilities, is included in cash and cash equivalents in the consolidated balance sheet. 

Provisions for restoration, rehabilitation and environmental costs

An obligation to incur restoration, rehabilitation and environmental costs arises when environmental disturbance is caused by the development or ongoing production of a mining property. These costs consist of shaft treatment and pit top restoration, spoil heap restoration, pumping activities and ground and ground water contamination at deep mines and soil excavation and surface rehabilitation at surface mines.

Such costs arising from the decommissioning of plant and other site restoration work, discounted to their estimated present value, are provided for and capitalised within property, plant and equipment at the start of each project, as soon as the obligation to incur such costs arises. These provisions do not include any additional obligations which are expected to arise from future damage and are estimated on the basis of a closure plan. These costs are charged against income over the life of the operation, through the depreciation of the asset as an operating cost and the unwinding of the discount on the provision as a financing cost. 

Costs for restoration of subsequent site damage which is created on an ongoing basis during production are provided for at their estimated present values and charged against income as extraction progresses.

Changes in the measurement of a liability relating to the decommissioning of plant or other site preparation work that result from changes in the estimated timing or amount of the cash flow, or a change in the discount rate, are added to, or deducted from, the cost of the related asset in the current period. If a decrease in the liability exceeds the carrying amount of the asset, the excess is recognised immediately in the income statement. If the asset value is increased and there is an indication that the revised carrying value is not recoverable, an impairment test is performed in accordance with the accounting policy above.

Other Provisions

Surface damage (subsidence)

Provision is made for the estimated present value of the cost of damage to structures on the surface as a result of settlement during the production phase of underground mining. The provision is calculated in respect of each colliery, location of mining activity and type of property affected or likely to be affected based on claims expected and claims submitted and using historical settlement experience. These costs are charged to the income statement. Movements in the provisions are presented as an operating cost, except for the unwinding of the discount which is shown as a financing cost.

Employer and public liability claims

The Group has established a UK Government approved and Financial Services Authority ("FSA") regulated UK based insurance subsidiary (Harworth Insurance Company Limited). This insures employer and public liability risks, buying reinsurance with third parties above certain levels. Provision is made for the estimated value of both known, and incurred but not reported, third party claims on an actuarially determined basis taking into account expected reinsurance recoveries.

Redundancy

Provision is made for the estimated present value of redundancy costs when there is a demonstrable commitment to terminate the employment of either an employee or group of employees. The expected amounts of redundancy payments, including any amounts in respect of ex gratia payments, are provided where the employment terminations have been communicated to employees. These costs are charged to the income statement. Movements in the provisions are presented as an operating cost, except for the unwinding of the discount which is shown as a financing cost.

Where contributions to redundancy costs have been firmly committed by third parties, these contributions are credited to the consolidated income statement in the same period to the extent, that the related redundancy cost has been recognised.

Employee benefits

Pension obligations

The Group operates pension schemes providing benefits based on final pensionable pay for employees who joined the Group on privatisation in 1994. Employees within defined benefit schemes are members of industry wide schemes, being either the Industry Wide Coal Staff Superannuation Scheme ("IWCSSS") or the Industry Wide Mineworkers' Pension Scheme ("IWMPS"), both of which commenced on privatisation following the Coal Industry Act 1994. The assets of the Schemes are held separately from those of the Group, being funds administered by Trustees of the Schemes. A qualified actuary assesses the cost of current service and revalue the schemes annually under the provisions of IAS 19 using the Projected Unit Credit Method. A full valuation for funding purposes is carried out by the Schemes' actuaries triennially. The Group accounts for pensions and similar benefits under IAS 19 'Employee benefits'. In respect of defined benefit plans, obligations are measured at discounted present value and plan assets are recorded at fair value. Service costs are charged systematically over the service lives of employees and financing costs are recognised in the periods in which they arise. Actuarial gains and losses are recognised in the consolidated statement of recognised income and expense.

The Group also operates defined contribution schemes in respect of all employees who joined after the privatisation date in 1994. The cost of this is charged to the consolidated income statement as incurred.

Concessionary fuel

Provision is made for the estimated liability arising from the obligation to provide concessionary fuel benefits to certain retired and current employees. The costs of the concessionary fuel benefits are determined annually by a qualified actuary using the same Projected Unit Credit Method adopted for the pension schemes. The arrangement is unfunded so no assets are held directly to meet the obligations. The regular service cost and interest on the scheme liabilities are charged to the consolidated income statement. Actuarial gains and losses are charged to the consolidated statement of recognised income and expense, representing the difference between actual and expected performance. 

Share-based payments

The fair value of share plans is recognised as an expense in the consolidated income statement over the expected vesting period of the grant. The fair value of share plans is determined at the date of grant, taking into account any market based vesting conditions attached to the award. Non-market based vesting conditions (e.g. earnings per share targets) are taken into account in estimating the number of awards likely to vest. The estimate of the number of awards likely to vest is reviewed regularly and the expense charged adjusted accordingly. The fair value of employee share option plans is calculated using a generally accepted simulation model. 

The proceeds received, net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium (any increment) when the options are exercised. 

On conversion to IFRS, the Group, in recognising fair values of share-based payments to employees, chose to apply the exemption only to include those awards made after 7 November 2002 which had not vested at 31 December 2003 in its calculations at the date of transition.

Taxation 

Current tax

The charge or credit for current tax is based on the results for the year adjusted for items that are either not subject to taxation or for expenditure which cannot be deducted in computing the tax charge or credit. The tax charge or credit is calculated using taxation rates that have been enacted or substantively enacted at the balance sheet date.

Deferred tax

Deferred tax is recognised using the balance sheet liability method on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit. Deferred tax is recognised in respect of all taxable temporary timing differences, with certain limited exceptions:

- deferred tax is not provided on the initial recognition of an asset or liability in a transaction that does not affect accounting profit or taxable profit and is not a business combination; and

- deferred tax assets are only recognised if it is probable that there will be sufficient profits from which the future reversal of the underlying timing differences can be deducted. In deciding whether future reversal is probable, the directors review the Group's forecasts and make an estimate of the aggregate deferred tax asset that should be recognised. This aggregate deferred tax asset is then allocated into the different categories of deferred tax, taking account of the fact that the deferred tax asset in relation to the pension deficit will be recognised over a longer period, as the pension liability reverses over the average remaining service life of employees.

In relation to investment properties, a deferred tax liability is provided on the basis of normal income tax rules for the proportion of the property's carrying amount expected to be recovered through use and is provided using capital gains tax rules in respect of the remainder of the property's carrying amount (including all land) expected to be recovered through sale. Provision is made for gains on disposal of property, plant and equipment that have been rolled over into replacement assets only where, at the balance sheet date, there is a commitment to dispose of the replacement assets.

Deferred tax is calculated at the tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited to the consolidated income statement, except where it applies to items credited or charged to equity, in which case the deferred tax is also dealt with in equity.

Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

Dividend distribution

Dividend distribution to the Company's shareholders is recognised in the financial statements in the year in which the dividends are paid (in the case of interim dividends) or approved by the Company's shareholders (in the case of final dividends).

Judgements in applying accounting policies and key sources of estimation uncertainty

Many of the amounts included in the financial statements involve the use of judgement and/or estimation. These judgements and estimates are based on management's best knowledge of the relevant facts and circumstances, having regard to previous experience, but actual results may differ from the amounts included in the financial statements. Information about such judgements and estimation is contained in the accounting policies and/or the notes to the financial statements, and the key areas summarised below.

Areas of judgement and sources of estimation uncertainty that have the most significant effect on the amounts recognised in the financial statements are:

Estimation of colliery asset lives

Capitalised mine development costs (deep and surface mines) are amortised over the tonnage of coal expected to be extracted in the future.

If the amount of coal expected to be extracted varies, this will impact on the amount of the asset which should be carried in the consolidated balance sheet. See accounting policy above.

Determination of coal reserve estimates

Reserves are used in the calculation of depreciation, amortisation and impairment charges, the assessment of life of mine stripping ratios and for forecasting the timing of the payment of close down and restoration and clean up costs.

In assessing the life of a mine for accounting purposes, mineral resources are only taken into account where there is a high degree of confidence of economic extraction. There are numerous uncertainties inherent in estimating coal reserves, and assumptions that are valid at the time of estimation may change significantly when new information becomes available.

Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change the economic status of reserves and may, ultimately, result in the reserves being restated.

Deferral of stripping costs

See accounting policy above.

Capitalisation of exploration and evaluation costs  

See accounting policy above.

Estimation of fair value of investment property

The fair value of investment property reflects, amongst other things, rental income from our current leases, assumptions about rental income from future leases and the possible outcome of planning applications, in the light of current market conditions. The valuation has been arrived at primarily after consideration of market evidence for similar property, although in the case of those properties where it is considered market value will be informed by their ultimate redevelopment potential, development appraisals have been undertaken 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, the values reported are subject to material uncertainty, and a change in fair values could have a material impact on the Group's results. Investment properties are disclosed in note 13.

Estimation of post retirement benefit obligations

Retirement benefits represent obligations that will be settled in the future and require assumptions to project benefit obligations and fair values of plan assets. Retirement benefit accounting is intended to reflect the recognition of future benefit costs over the employee's approximate service period, based on the terms of the plans and the investment and funding decisions made by the Group. These are subject to actuarial estimates of, amongst other items, rate of return on investments, rate of salary increases, rate of price inflation, the cost of funding future liabilities and post retirement life expectancy. Details of the significant estimates used are set out in note 24.

Estimation of other provisions (including clawback liabilities) 

Provisions are dependent on assessments of whether the criteria for recognition have been met, including estimates of the outcome and the amount of the potential cost of resolution. Provisions are recognised by a charge against income when it is probable that a liability has been incurred and the amount of such liability can be reasonably estimated.

Estimation of close down and restoration costs

Estimated provisions are established in the consolidated balance sheet and amortised in proportion to the coal expected to be extracted from a site. If that expected tonnage or the actual cost varies, then the provision may be under or over stated. Estimates for environmental restoration provisions are based on the nature and seriousness of the contamination as well as on the technology required for clean up. The provisions are disclosed in note 21.

Review of asset carrying values and impairment charges 

The Group performs impairment testing in accordance with the accounting policy above. The calculation of recoverable amount requires the use of estimates and assumptions consistent with the most recent budgets and plans that have been formally approved by management. Significant factors considered when using estimates to assess the carrying value of assets include future coal prices, expected annual production, expected colliery operating costs, remaining colliery lives and coal reserves and discount rates. Refer to note 12 for the key assumptions used in the calculations.

Recoverability of deferred tax assets

The recognition of deferred tax assets requires considerable judgement as to the future profitability of the mining business. The recognition of a deferred tax liability in relation to property revaluations requires an estimate to be made of the proportion of the value of a property which will be recovered through use, compared to the proportion of the value which will be recovered through sale. Deferred tax is disclosed in note 8.

2 SEGMENTAL REPORTING

Revenue

Year ended December 2008 

Year ended December 2007

Revenue from operations arises from:

£000

£000

Sale of goods

374,798