3rd Mar 2005 07:02
UK Coal PLC03 March 2005 UK COAL PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004 UK COAL PLC, the coal mining and property group, today announces its preliminaryaudited results for the year ended 31 December 2004. Financial and Operating Summary • Operating loss from continuing operations before exceptional items £28.7 million (2003: Loss £1.8 million) • Loss before tax £51.6 million (2003: Loss £1.2 million) • Cash outflow before use of liquid resources, financing and dividends £7.5 million (2003: £39.1 million inflow) • Final dividend 1 pence per share (2003: 5 pence per share) • Deep mine output 12.0 million tonnes (2003: 14.8 million tonnes) • Surface mine output 2.0 million tonnes (2003: 3.1 million tonnes) • Coal sales from UK operations of 14.3 million tonnes (2003:18.9 million tonnes) • Average selling price £1.18 per gigajoule (2003: £1.12 per gigajoule) • Total unit production costs £1.30 per gigajoule (2003: £1.16 per gigajoule) • Gross value of property before rehabilitation and restoration costs £202 million (2002 valuation: £174 million) • Property disposal proceeds of £4.3 million (2003: £9.7million) Chairman's Statement 2004 has proved to be a difficult year for our deep mines, which suffered fromgeological problems, industrial action and poor operational performance. Theresults have been disappointing. Decisive action was taken in September with theappointment of Gerry Spindler as Chief Executive. He has already madesignificant progress in reshaping and restructuring the business. Actions takenin the latter part of the year have placed the business in a stronger positionto develop in the future. Following the losses and cash outflow in 2004, and after taking intoconsideration future plans, the Board has concluded that it is in the bestinterests of shareholders to pay a reduced dividend, retaining cash within thebusiness. As a result, the Board is proposing the payment of a final dividend of1 pence per share. It is intended to pursue a progressive dividend policy from a base of 6p pershare, subject to improvements in operational performance. For further information, please contact: Financial: Ken Cronin(Gavin Anderson & Company) Tel: 0207 554 1400 Mob: 07887 591 499 Operational: Stuart Oliver Tel: 01525 381759 Mob: 07774 231178 Chief Executive's Report Deep Mines In 2004 our deep mines lost £37.8 million before exceptional items, adeterioration of £29.3 million compared to the prior year and a significantshortfall against the potential of these operations. It does not need furtherexplanation to conclude the year has been unsatisfactory. Some of this is due toexternal factors, some due to internal issues which can and will be remedied.The causes of the shortfall comparing to last year can be explained and serve todemonstrate both the potential for improvement in the business and thechallenges in 2005. On joining the business as Chief Executive, several key issues were apparent: •Common disputes with the workforce, principally over bonus structure at collieries. These caused disruptions to production in operations which were losing money in any case •Inadequate equipment availability •An inability to complete underground development and construction projects on time and on budget leaving gaps in production •Inadequate operating processes to handle adverse conditions at the face •An inability to maintain drivage rates sufficient to support new panel development •Low priced contracts not reflecting the current market price •Unforeseen geology Many of these are fundamental operating flaws and, while markets have been andshould continue to be buoyant, excellence for a coal company can only beachieved operationally. UK COAL has well equipped coal mines which reflect anaggressive level of investment, an experienced and knowledgeable workforce, andthe ability to achieve excellence as an ongoing business. We have a long journey ahead to fix these issues. We continue to make progressand great strides have already been made: • At two collieries, the workforce has agreed to a wage structure thateliminates bonuses and guarantees increases in machine available time. Theindividual employee gets more security in earnings. The company can conduct itsbusiness without the disruption of disputes over bonus structure and planworking time more effectively. The precedent has now been established. This willminimize face gaps, which, at the average UK colliery, cost £1,000,000 per week. • Structured daily maintenance. The new programme is designed to predictcomponent failure and identify component life, allowing scheduled replacementrather than unscheduled repairs. This eliminates the excess cost in both repairsand lost production resulting from unanticipated failure. Over the last fivemonths this has resulted in a 10% improvement in equipment availability. • Traditionally, UK mines have operated on a model which simply assumesall costs to be fixed and production to be the sole determinant ofprofitability. Recently introduced budgeting practice now requires that allexpenditure at the mine, including that which is not directly part of the miningprocess, is identified and managed as a series of separate projects, with costand completion targets. This change will result in a reduction in the annualcost of running a mine without adversely affecting productivity. • New techniques in ground control, including polyurethane injection,have been used with success to control adverse face conditions and accommodatefaster face advance. A standing face never gets any better and the ability tocontinue mining in adverse conditions improves all aspects of a minesperformance. These actions should significantly uplift earnings and the effort expended willbe focused and unstinting. The successes to date can only be described as workin progress, but we will be building on these programmes in the coming year torealise the potential of the business. This leaves adverse geology. Many problems encountered in the business can belaid at this door. Indeed, three collieries, Rossington, Kellingley and Welbeckare suffering adverse geology today, requiring investment in the early part of2005 in underground roadways. The process of reaching for new reservesinevitably incurs additional initial costs. New advances in seismic exploration will allow better definition of the unknown.The company has demonstrated a capacity to achieve the unthinkable and overcomethe unimaginable and will continue to maximize the accessibility of more than250 million tonnes of UK COAL'S deposits. Surface Mines There are nearly 100 million tonnes of surface mineable deposits at around 20 to1 ratio of overburden to coal, an eminently economic resource at today's sellingprices. There is room in the UK's requirement to utilize every tonne of thisresource, providing a sensible economic solution for part of the energy needs ofthe UK rather than stimulating imports at higher prices. All that is required isplanning permission, acknowledged to be a considerable hurdle. Nevertheless UKCOAL intends to expand its capacity in this arena, renewing efforts to obtainplanning permission based on improvements in the environmental acceptability ofbrownfield site regeneration. The end result will be not only additionalindigenous production but also sites restored to a standard and at a costimpossible without prior mining. Customers With respect to our markets and relations with customers, UK COAL will fullycomply with its existing contracts honoring its legal commitments. We havesuccessfully renegotiated a number of our contracts to reflect our expectedproduction and current market circumstances. We will, of course, resistburdening future unsold production with the low priced contracts of the past. Property The property portfolio continues to be a key focus of the company, continuallygaining value as planning permissions are obtained. We have identified three keystrands to the business, which promise to deliver value and growth in thefuture. •Business parks are a welcome addition to our rental income, which will grow as occupancy rates increase and further parks are added following the closure of Selby. This is a growth area of the business, which is expected to bring superior returns in the future as further new opportunities are realised. •Brownfield development and regeneration applies our considerable surface mining skills to remediate and rehabilitate land, after producing income from coal extraction, and exploiting opportunities which range from residential developments to light industrial and business parks. •Our significant portfolio of agricultural land provides a land bank for surface mining, but also added value opportunities, which are taken as appropriate. The strength of the management team in this area has been augmented with theappointment of James Shaw, formerly Property Director at AB Ports, to head theproperty team. The strategy for the property business remains robust, focused and dynamic. Weare adding planning permissions regularly. There continue however to besignificant opportunities emerging which will allow this business to mature inthe coming years. Summary and Outlook In summary, UK Coal is a company capable of internal growth through a number ofdifferent avenues. It not only has the ability, given continued marketconditions, to generate cash from its coal operations with the reserve life tofully fund liabilities, restore surface mine sites and reward investors, butalso has significant property potential. Decisive action taken in 2004 has positioned the business well to benefit fromincreased coal prices. We expect 2005 to be a transitional year to develop thepotential of our mining operations. We will continue to invest in underground development, catching up on shortfallsfrom 2004 as further coal reserves are accessed following geological faultingencountered at Kellingley, Rossington and Welbeck. The improved markets appear durable and in combination with lower costs andincreased productivity bode well for the future, returning the company toprofitability in 2006. Financial Review Profit and Loss Account The Group sustained an operating loss on continuing operations beforeexceptional items of £28.7 million (2003: £1.8 million). The losses resulted from reduced deep mine operational performance, industrialaction at Kellingley and face changes in all mines, except Daw Mill, as well asa longer than expected run down of the Selby complex of mines which finallyclosed in October 2004. The loss for the year before taxation was £51.6 million (2003: £1.2 million) andis stated after charging exceptional items of £29.8 million in particularrelating to the closure of Ellington, the recognition of additional liabilitiesin respect of the restoration of our Stobswood surface mine site, the write downof certain surface mine assets, redundancy costs and amounts recovered againstTXU. The loss is stated after the release of provisions of £16.4 million (2003:£11.3 million). Turnover in the year fell to £442.9 million (2003: £563.9 million) reflectinglower production in both deep and surface mines. Total coal sales from UKoperations were 14.3 million tonnes (2003: 18.9 million tonnes) and includedsales from coal stocks of 452,000 tonnes (2003: 775,000 tonnes). Average selling prices in the year were £1.18 per gigajoule (2003: £1.12 pergigajoule). This relatively small increase compared with rises in internationalcoal prices reflects contracts entered into when the international price of coalwas low. Total unit production costs were £1.30 per gigajoule (2003: £1.16 pergigajoule). Our surface mining land bank of mainly agricultural property and our businessparks generated rental income in the year of £3.9 million (2003: £3.8 million)and operating profit of £1.5 million (2003: £1.1 million.). Total disposals inthe year were £4.3 million (2003: £9.7 million) with a profit on disposal of£2.8 million (2003: £5.8 million). Exceptional Items Stobswood On 18th December 2003, the Group acquired certain of the assets and liabilitiesof Crouch Mining Ltd, a third party surface mining contractor operating on a UKCOAL owned site at Stobswood in the North East of England, to complete coalingand carry out land restoration work. As part of the transaction, the Group assumed additional liabilities in respectof land restoration on 3 sites with total estimated costs of £4.1 million, whichwere provided for. This represented the difference between the costs of work tobe undertaken by Crouch Mining Ltd and UK COAL's estimate of the costs. Planning permission to extend coaling operations at the site was subsequentlyrejected. If upheld on appeal this will result in the restoration work to beperformed being both larger and more costly than originally envisaged. To cover these and other additional costs, a further provision for therestoration works has been made amounting to £10.8 million. As 2004 was theaccounting period following acquisition we increased the goodwill relating tothe acquisition of Stobswood by this amount. However, after reviewing forimpairment, this was written down to its recoverable amount of nil. Surface Mining Plant With surface mine planning consent becoming increasingly difficult to obtain inEngland, plant has been identified which has become un-utilised. An additionalcharge of £4.3 million has been made to reflect the lower value of these assetseither in future use or on sale as appropriate. Ellington Colliery closure Following the announced closure of Ellington Colliery in early 2005, charges of£3.1 million have been made in the 2004 accounts, reflecting the write off ofassets to their recoverable amount. The cost of redundancies, which will dependon transfers to other collieries, of up to £3.8 million will be charged in the2005 accounts. Cash Flow The cash outflow in the period before the use of liquid resources, financing anddividend was £7.5 million (2002: £39.1 million inflow). Within the cash flowwere benefits from a reduction in coal stocks amounting to £11.2 million, anincrease in creditor days reflecting equipment purchases towards the year endgenerating £9.8 million, disposal proceeds of £19.8 million from the sale of ourAustralian subsidiary, Gloucester Coal, and the repayment of the outstandingbalance due from Gloucester Coal of £19.0 million following its disposal. Inaddition we received £15.2 million of Coal Investment Aid. During the year, £23.5 million was paid in respect of redundancy costs mainly onthe closure of the Selby complex. £8.1 million was expended in restoring andrehabilitating former surface mine sites, which have ceased coaling operations. Balance Sheet Capital Employed Capital employed in the year was reduced reflecting the loss before tax for theGroup. Capital expenditure was £51.4 million (2003: £23.0 million), whichincluded new face equipment for Daw Mill and Kellingley Collieries together of£25.4 million and capitalised development costs of £6.0 million (2003: £3.8million). The depreciation charge in the year was £53.4 million (2003: £52.6million). Provisions The Group makes provisions in respect of redundancies where there is anobligation at the balance sheet date. Provisions are also made in respect ofemployer and public liability claims, surface damages, surface and deep minerestoration and rehabilitation costs including shaft capping where appropriate.Obligations to pump minewater for closed collieries are also provided along withobligations in respect of the provision of concessionary fuel. As a requirement of the Financial Services Authority (FSA) and Coal Authority,cash is held to match provisions in respect of employer and public liabilitiesand surface damage respectively. At the year-end cash held for such purposes was£55.3 million (2003: £56.9 million). Cash Net cash at the year-end was £7.3 million (2003: 29.2 million). Net cashincluded leasing and hire purchase liabilities of £36.1 million (2003: £23.9million), bank borrowings of £12.2 million (2003: £7.2 million) and cash,including bonded cash, of £55.6 million (2003: £60.4 million). During the year additional leasing and hire purchase contracts were taken out inrespect of second sets of face equipment for Daw Mill and Kellingley collieries. Pensions The Company operates defined contribution schemes in respect of all employeeswho joined after privatisation in 1994. The Company also operates pension schemes providing benefits based on finalpensionable pay for those employees who transferred under the provisions of theTransfer of Undertakings, Protection of Employment regulations (TUPE). Theseschemes commenced on privatisation following the Coal Industry Act in 1994. The Company currently accounts for pensions under the provisions of SSAP 24.This resulted in a total charge in the year of £16.6 million (2003: £15.4million). At the year end the net prepayment in respect of pensions increased by£2.0 million to £3.3 million representing the difference between the company'scash contributions to the schemes and the charge to the profit and loss account. Under UK Accounting Standards, FRS 17 will replace SSAP 24 for the 2005accounting period. As required by the transitional rules of FRS 17 we havedisclosed the full effect on the profit and loss account and balance sheet hadwe adopted the Standard in 2004. Inclusion of pension charges and obligationsunder FRS 17 in the 2004 accounts would have resulted in an increased charge tothe profit and loss account of £1.2 million and a reduction in net assets of£116.5 million. The deficit has not been reduced in respect of taxation relief due to theGroup's brought forward tax losses. Funding At the year-end the Group had undrawn facilities of £42 million on its 3 year£50 million revolving facility, which expires in June 2007, and £2 millionundrawn under corporate leasing facilities, which expire in June 2006. Gloucester Coal During the year the Group disposed of its 97% investment in Gloucester CoalLimited (GCL), its mining activity in Australia. This sale was completed on 2ndApril 2004. The price for the sale of UK COAL's 75,572,049 shares in GCL was A$0.69 (28.5p)per share, resulting in net proceeds after transaction costs of A$47.8 million(£19.8 million). The consideration was received in cash. A profit on disposal of£2.5 million is included in the profit and loss account. GCL incurred a trading loss in the three months prior to the sale of £1.2million. Investment Aid For 2004 the Group has made claims for £20.9 million under the Government's CoalInvestment Aid scheme. Of this, £8.9 million was credited to the profit and lossaccount and £12.3million was included within deferred income. Cash receipts totalled £15.2 million, and £11.1 million was included in debtorsat the year end. On 16th September 2004 the Group was awarded a further £14.0 million in respectof its investment programmes for 7 collieries. As a result of the additional allocation, at 31st December 2004, the Group has£24.6 million of unclaimed Investment Aid allocated to it by the Dti which willbe received subject to capital and revenue expenditure disbursements in 2005 and2006. As a result of the closure of Ellington Colliery in February 2005, £0.6 millionof aid will not be claimed and will return to the scheme pool. Dividend The final dividend for the year of 1 pence per share (2003: 5 pence per share)will be paid, subject to approval at the AGM on 26th April 2005,on the 17th June2005 to shareholders on the register on the 20th May 2005. Contingent liabilities The transfer of employees to UK COAL PLC on privatisation was subject to theTransfer of Undertakings (Protection of Employment) 1981 regulations (TUPE). Todate, early-retirement pension-related redundancy arrangements for transferredemployees who become members of the Industry Wide Coal Staff SuperannuationScheme (IWCSSS) have been paid in accordance with arrangements in place at thetime of privatisation. A claim has now been commenced in the High Court and will be heard at the end ofthis year/beginning of 2006. This claim will determine whether, in the light ofa recent ruling in relation to TUPE by the European Court of Justice in anunrelated case, UK COAL is required to provide early-retirement pension-relatedbenefits on redundancy on the basis of service with UK COAL, salary at the dateof redundancy and certain service-based enhancements. Depending on the outcome of the court proceedings and determination of thevarious legal issues, the estimated cost to UK COAL in respect of redundanciesbefore 31 December 2004 has been estimated to range between zero and around £30million. This is dependent upon the exact nature of the eventual court ruling,the circumstances and age of individual employees at the date of redundancy andwhether any cost falls to be met by third parties. UK COAL is vigorously defending this claim. No provision has been made in the2004 year end accounts due to the uncertainties and difficulties in quantifyingany financial exposure. International Financial Reporting Standards (IFRS) The financial statements have been prepared under UK Generally AcceptedAccounting Practice. From 2005, UK listed companies will have to preparefinancial statements under IFRS. The new accounting standards will in some caseschange the balances and amounts recorded in the financial statements. UK COALwill be publishing its opening balance sheet for the 2004 year-end under IFRS inmid July 2005 ahead of its preliminary announcement of interim results inSeptember 2005. OPERATIONAL REVIEW Market Conditions The sharp increase in international coal prices seen in the last quarter of 2003has been maintained throughout 2004 and into the first quarter of 2005. Howeverwith much of our production committed to sales contracts already in place inrespect of the electricity generation market the Company will not derive thefull benefit from these market conditions in the short term. The price outlook for international coal remains strong, which will provide thebackdrop for improving realisations in the future. Electricity Supply Industry Total coal sales to the power station market at 12.1 million tonnes (2003: 16.8million tonnes) were adversely affected by lower than expected production. In 2004, •UK power stations consumed some 50.6 million tonnes (2003: 53.2 million tonnes) •Steam coal imports increased by 18% from 24.9 million tonnes to 29.5 million tonnes •International coal prices hit record highs during the year Even with high international prices, demand for coal for power generation hasremained close to last year's high levels. This was mainly the result of poorperformance at nuclear stations and high spot gas prices. The fuel mix forelectricity generation in 2004 compared to the previous year was: 2004 2003Coal 34% 35%Gas 41% 38%Nuclear 20% 22%Oil, hydro & renewables 5% 5% From 1st January 2005, UK power stations are required to participate within theEU Emissions Trading Scheme (EUETS). The EUETS is designed to limit carbondioxide emissions throughout the EU. Within the UK power stations are to beresponsible for achieving reductions above the level of other industries. Theeffect on coal consumption will be dependent on the price of carbon allowancestogether with the relative prices of coal and gas. During the year UK COAL has added to its portfolio of contracts, in line withthe policy of maintaining tapering levels of contract cover going forward. Intotal over the five years from 2005, 37.5 million tonnes is committed (beforesubtracting the estimated effects of force majeure on supplies to Drax). Thisreduces from 11.3 million tonnes in 2005 to 4.0 million tonnes in 2009. On 10thFebruary 2005 we invoked force majeure provisions within the agreements tosupply coal to Drax Power Limited. We have assessed that the events, relating toadverse geology at nearby collieries, have caused a shortfall of 750,000 tonnesin the contract year to March 2005 and will lead to projected shortfalls of500,000 tonnes for each future contract year. We will be taking reasonable stepsto minimise the effect of these circumstances on future delivery obligations andwe will keep Drax informed of any developments and periodically revise ourdelivery estimates. Industrial and Domestic Sales volumes into both the industrial and domestic markets have benefited fromthe rise in price of competing fuels, and at 2.2 million tonnes showed a slightincrease on the previous year. The domestic market continues to decline by more than 10% per annum. Despitethis, UK COAL maintained the same level of sales in 2004 compared to theprevious year at the expense of imported coals. Following increases in gasprices to domestic users and the rise in international coal, UK COAL has beenable to raise prices by around 25% during the year, the full benefit of whichwill be achieved in 2005. In the industrial market, a number of contracts have been renewed taking intoaccount the increased prices of competing international supplies. This processwill continue into 2005 as further existing contracts come to an end. Production DEEP MINES 2004 (million tonnes) 2003 (million tonnes)Ongoing mines Daw Mill 3.0 2.2Harworth 0.9 1.2Kellingley 0.9 1.6Maltby 1.4 1.4Rossington 0.6 0.9Thoresby 1.1 1.5Welbeck 0.9 1.6Sub Total 8.8 10.4 Closed or closing MinesClipstone 0.0 0.2Riccall 1.2 0.9Stillingfleet 1.4 1.6Wistow 0.1 1.1Ellington 0.5 0.6Sub total: 3.2 4.4Deep Mines Total 12.0 14.8Surface Mines Total 2.0 3.1Total UK Production 14.0 17.9 Deep Mines Output in the deep mines was 12.0 million tonnes including 2.7 million tonnesfrom the Selby Complex. Output was reduced in the continuing mines as a resultof geological conditions at Rossington and Welbeck and poor operationalperformance at Thoresby, Harworth and Kellingley. Deep mine unit costs were£1.34 per gigajoule (2003: £1.18 per gigajoule). Daw Mill performed well producing 3.0 million tonnes, achieving 100,000 tonnesin one week in the last quarter. Capital expenditure in 2004 amounted to £51.4 million. Second sets of faceequipment were purchased for Daw Mill and Kellingley collieries to significantlyreduce gaps in production in future mining plans. All of our continuingcollieries are equipped to be capable of working to high levels ofeffectiveness. On the 12th January 2005, Ellington Colliery encountered an ingress of water onits working face. This resulted in the loss of the current coalface andequipment. With a risk of further severe flooding in the mine, the decision wastaken to close the colliery on the 21st February 2005 for safety reasons.Ellington Colliery supplied all of its output to the nearby Alcan plant. Thecontract is currently being supplied from stocks held at the site, supplementedby local surface mines. Ellington stocks are expected to be exhausted by thesummer of 2005 but production from local surface mines will continue to beavailable. Following the review of operations at Harworth Colliery, new workingarrangements have been accepted by the workforce. We are carrying out a reviewat Kellingley Colliery and have recently completed our review at WelbeckColliery. The review process involves the workforce looking for new ways ofworking and improving performance. Surface Mines Surface mining activities declined in the year with the lack of planningconsents to mine new sites constraining output. Output was 2.0 million tonnesreflecting the completion of coaling operations at longer standing sites (2003:3.1 million tonnes) Unit costs were £1.10 per gigajoule (2003: £1.11 per gigajoule). The number of sites in restoration and rehabilitation increased during the yearto 38, £8.1 million being expended on this activity. Coaling operations ceasedat 5 sites; St Johns II and Moorhouse, both in Wakefield, Ferry Moor nearBarnsley, Forge and Monument in Derbyshire and Hicks Lodge in Leicestershire.One small new site was brought into production. Three sites with reserves of 2.7 million tonnes had planning approvalsubmissions rejected by the respective Mineral Planning Authorities during theyear. These decisions impacted adversely on costs for restoration works atexisting sites and on the under-utilisation of plant. Appeals are being lodgedagainst all three decisions and it is likely that these will now go to PublicInquiry in late 2005 and early 2006. We are continuing to work hard to secure the future of this business and areactively looking at additional sites in Wales and Scotland to utilise oursignificant surface mining plant and equipment and expertise. We are workinghard to secure planning permissions in England and applications to access afurther 3 million tonnes of reserves will be lodged in 2005. At the year-end,surface mining activities had reserves with planning consent amounting to 3.2million tonnes (2003: 5.2 million tonnes). Property The property activities of UK COAL have developed steadily. We are following thestrategy of securing planning for the development of former surface mines andcollieries, converting and cleaning brownfield sites and managing the incomefrom agricultural rents. We submitted planning applications in the year amounting to 80 acres andplanning permission for 40 acres to be used for industrial purposes was granted.Applications for 140 acres are being progressed. Business parks have continued to grow by further developments at Asfordby withthe proposed construction of new units, the intended re-use of the Selby sitefor industrial and commercial purposes and the establishment of a containerdepot at Cannock. Agricultural land continues to be managed on a tenancy basis to selectedoccupiers. Whilst incomes have remained static over the period, a strategy hasbeen introduced to capture development opportunities throughout the agriculturalportfolio. After taking into account capital appreciation from reductions inclawback liability on holding land transferred over in 1994, agricultural rentsand lettings provide an overall return of around 7%. Rental income for properties in the year was £3.9 million (2003 £3.8 million).Income from property sales was £4.3 million (2003 £9.7 million). We disposed of a number of properties in the year, predominately on our TetronPoint site. The property valuation was reviewed at the end of the year. The gross value,which is stated before deduction of restoration and rehabilitation costs,increased by £28 million to £202 million representing a 16% improvement comparedto 2002. The increase was a result of additional planning consents achievedsince the last valuation in December 2002 and a rise in property and landvalues. Other Businesses Monckton Coke and Chemical Ltd Monckton Coke and Chemical Company benefited from increases in the price of itscoking products. Profits were however held back due to a shortage of suitableinput coal in the early part of the year. Sales increased to £19.8 million andthe company made an operating profit of £0.3 million. With world coke pricesremaining high, the outlook for the business is improving. Lionheart Heating Services Lionheart heating services was sold in July 2004 for a consideration of £0.2million. The company made a loss in the period prior to disposal of £0.2million. This business supplied and installed heating systems and was non coreto the group. We were pleased to find a buyer who is able to develop thisbusiness. Harworth Power Harworth Power develops operations which use renewable and sustainable energyresources so reducing emissions to the atmosphere. Electricity generated by Harworth Power from methane and other sources had aninternal sales value of £4.0 million (2003: £4.0 million). 2004 has been another successful year in reducing greenhouse gas emissions. Wehave improved performance of our power generation equipment and installedadditional flare systems, which both reduces the amount of waste methanereleased into the atmosphere and utilises waste methane from mining to produceelectricity for our own and general consumption. These actions have reduced thevolume of emissions of CO2 to the atmosphere by the equivalent of 430,000 tonnesof CO2. By meeting our emission reduction targets we qualified for payments in 2004 of£3.0 million (2003: £3.2 million) under the UK Emissions Trading Scheme (UKETS) The increase of renewable generating capacity will play an important part in thereduction of greenhouse gas emissions. We have several former mining sites which may be suitable for wind powergeneration and we are currently investigating a number of projects with theintention of bringing them forward for planning consent. Health and Safety The health and safety of our employees continues to be of prime importance withregular health screenings and safety training given to all employees in miningoperations. Improvements in safety continued at all our operations. The deep mine operationshad 44 accidents classified as major in 2004 compared to 48 in 2003. Thenon-major injury rate per 100,000 manshifts similarly reduced to 26.0 comparedto 31.4 in 2003. The overall injury rate reduced to 29.5 per 100,000 manshifts,a significant improvement on the prior year rate of 34.7. Surface mines reducedmajor accidents to 2 (2003: 6). Directors In March 2004, Christopher Mawe was appointed to the Board as Finance Director.In August Graham Menzies was appointed as a non-executive Director and inOctober Gerry Spindler was appointed as Chief Executive. In October, Melvin Garness retired from the board after 20 years service with UKCOAL. Environmental Legislation As reported last year the market for our deep mined coal was under threatthrough the Large Combustion Plant Directive. If implemented as then proposed,it would have encouraged even those power stations fitted with highly efficientflue gas desulphurisation equipment to burn low sulphur coal at the expense ofUK deep mined coal. During the year we have had our concerns recognised, and thecurrently proposed implementation of the Large Combustion Plant Directive is notexpected to preclude us from our traditional markets. Consolidated Profit and Loss AccountFor the year ended 31 December 2004 2003 Notes £000 £000 Turnover: 2Continuing operations 433,818 533,767Discontinued operations 9,092 30,087=========================================================================================== 442,910 563,854Cost of sales before exceptional items (461,533) (558,982) Exceptional cost of sales 3 (29,797) 2,803===========================================================================================Cost of sales (491,330) (556,179)===========================================================================================Gross (loss)/profit (48,420) 7,675Coal Investment Aid 3 8,902 3,522Other operating income & expenses (11,707) (11,359)-------------------------------------------------------------------------------------------Operating loss on continuing operationsbefore exceptional items (28,704) (1,819)Exceptional items (20,895) 6,325-------------------------------------------------------------------------------------------Operating (loss)/profit -continuing operations (49,599) 4,506Operating loss - discontinued operations (1,626) (4,668)-------------------------------------------------------------------------------------------Operating loss (51,225) (162)Profit on sale of land and buildings 2,760 5,830Profit on sale of businesses 1,983 -===========================================================================================(Loss)/profit on ordinary activities beforeinterest and taxation (46,482) 5,668Interest receivable and similar income 4,605 3,141Interest payable and similar charges (3,868) (3,486)Unwinding of discount on provisions 7 (5,885) (6,570)=========================================================================================== Net interest payable and similar charges (5,148) (6,915)===========================================================================================Loss on ordinary activities beforetaxation (51,630) (1,247)Taxation - 5,109===========================================================================================(Loss)/profit on ordinary activities aftertaxation (51,630) 3,862Equity minority interest 51 138===========================================================================================(Loss)/profit for the financial year (51,579) 4,000Dividend (8,786) (14,591)===========================================================================================Loss sustained for the year (60,365) (10,591)===========================================================================================(Loss)/earnings per ordinary share (35.3)p 2.7pDiluted (loss)/earnings per ordinary share (35.0)p 2.7p There is no material difference between the loss on ordinary activities beforetaxation and the loss sustained for the year stated above and their historiccosts equivalents. Consolidated Statement of Total Recognised Gains andLossesFor the year ended 31 December 2004 2003 £000 £000 (Loss)/profit for the financial year (51,579) 4,000Exchange (losses)/gains on translation of overseas (854) 4,721subsidiariesSurplus arising on revaluation of tangible property assets - 220================================================================================Total recognised gains and losses for the financial year (52,433) 8,941================================================================================ Balance SheetAs at 31 December Group Group 2004 2003 Notes £000 £000ASSETSFixed assets:Tangible fixed operating assets 357,904 393,148Investment properties 6,720 6,720Investments - other - 27================================================================================ 364,624 399,895Current assets:Stocks 47,641 59,496Debtors: amounts falling due after one year 4,131 637Debtors: amounts falling due within one year 65,708 81,772Cash at bank and in hand 55,617 60,350================================================================================ 173,097 202,255================================================================================Total assets 537,721 602,150================================================================================LIABILITIESCapital and reservesCalled up share capital 1,462 1,460Share premium account 122 2Revaluation reserve 5,034 5,034Capital redemption reserve 257 257Profit and loss account 163,759 215,489================================================================================Shareholders' funds, attributable to equity interests 5 170,634 222,242Equity minority interest - 262================================================================================Capital employed 170,634 222,504Provisions for liabilities and charges 7 210,484 226,987Creditors: amounts falling due after more than one year 25,152 15,302Creditors: amounts falling due within one year 131,451 137,357================================================================================ 367,087 379,646================================================================================Total funds employed 537,721 602,150================================================================================ Consolidated Cash Flow StatementFor the year ended 31 December 2004 2003 Notes £000 £000Operating activitiesNet cash inflow from operating activities 17,333 46,026================================================================================Returns on investments and servicing of financeInterest paid on bank borrowings (1,731) (1,171)Interest paid on hire purchase and finance leases (1,763) (1,933)Financing costs (512) (203)Interest received 4,591 2,577Inland Revenue interest received 14 564================================================================================Net cash inflow/(outflow) from returns on investments 599 (166)and servicing of finance Taxation - 3,967Capital expenditure and financial investment:Development expenditure (5,995) (3,778)Purchase of fixed assets (45,375) (15,300)Receipts from sale of fixed assets 6,382 10,410=============================================================================== (44,988) (8,668)Disposal of businesses 6 19,988 -Cash disposed with sale of subsidiary (417) -Purchase of trade and assets - (2,076)================================================================================Cash (outflow)/inflow before use of liquid resources, (7,485) 39,083financing and dividendsEquity dividends paid (14,573) (14,521)================================================================================Cash (outflow)/inflow before use of liquid resources (22,058) 24,562and financingManagement of liquid resources:Cash deposited in subsidence security fund (1,521) (792)Cash expended to cover insurance requirements 3,143 4,471 Other cash security deposits 2,053 (2,053)=============================================================================== 3,675 1,626Net cash (outflow)/inflow before financing (18,383) 26,188Financing:Issue of ordinary share capital 122 128Drawdown/(repayment) of bank borrowings 5,067 (21,343)Hire purchase and finance lease capital repaid (9,986) (8,690)Increase in finance lease debt 22,185 4,737===============================================================================Net cash inflow/(outflow) from financing 17,388 (25,168)===============================================================================(Decrease)/increase in cash (995) 1,020=============================================================================== Reconciliation of Operating (Loss)/Profit to Net Cash Inflow fromOperating ActivitiesFor the year ended 31 December 2004 2003 £000 £000Continuing ActivitiesOperating (loss)/profit (49,599) 4,506Depreciation of tangible fixed assets 48.924 52,048Impairment of tangible fixed assets 6,579 -Net charge for surface mine development and 274 5,832restoration assets(Profit)/ loss on disposal of plant and machinery (557) 138Shares purchased to fulfil long term incentive (43) -plan liabilitiesDecrease in stocks 10,693 20,038Decrease in debtors 23,153 201Decrease in creditors (22,142) (35,976)DTI contributions to redundancy payments 5,200 4,800================================================================================Net cash inflow from continuing operating activities 22,482 51,587================================================================================ Discontinued ActivitiesOperating loss (1,626) (4,668)Depreciation on tangible fixed assets 161 568Net (credit)/charge for surface mine development (1,923) 1,213and restoration assetsDecrease/(increase) in stocks 135 (327)Increase in debtors (1,951) (3,052)Increase in creditors 55 705================================================================================Net cash outflow from discontinued operating activities (5,149) (5,561)================================================================================ Exceptional operating cash flowsIncluded within net cash inflow from continuing operatingactivities are amounts of £23.5 millionpaid in respect of redundancy payments , £15.2 million received under theGovernment's Investment Aid scheme and £5.0 million in respect of Selby postcoaling costs. Reconciliation of Net Cash Flow to Movement in NetFunds At 1 At 31 January Exchange Other non December 2004 Cash flow adjustment cash changes 2004 £000 £000 £000 £000 £000 Net cash at bank 1,384 (995) (63) - 326Liquid resources 58,966 (3,675) - - 55,291Bank borrowings (7,224) (5,067) - 66 (12,225)Hire purchase and finance (23,907) (12,199) - - (36,106)leases ============================================================================================== 29,219 (21,936) (63) 66 7,286============================================================================================== Major non-cash transactionsDuring the year the Group entered into finance lease arrangements in respect ofassets with a total capital value at the inception of the lease of£22,185,000 (2003 : £2,387,000). Notes to the Accounts 1 Accounting policies The financial statements are prepared in accordance with applicable accounting standards. 2 Segmental and geographical analysis 2004 Deep Mining Surface Mining Property Other Australia Total businesses £'000 £'000 £'000 £'000 £'000 £'000------------------------------------------------------------------------------------------------------------TurnoverContinuing operations 364,848 45,028 3,912 20,030 - 433,818Discontinued operations 2,874 6,218 9,092------------------------------------------------------------------------------------------------------------Total 364,848 45,028 3,912 22,904 6,218 442,910============================================================================================================ Operating result before exceptional itemsContinuing operations (37,820) 4,065 1,512 3,539 - (28,704)Discontinued operations (412) (1,214) (1,626)------------------------------------------------------------------------------------------------------------ Total (37,820) 4,065 1,512 3,127 (1,214) (30,330)============================================================================================================ Exceptional items (5,767) (15,128) - - - (20,895)Operating (loss)/profit (43,587) (11,063) 1,512 3,127 (1,214) (51,225)Profit/(loss) on sale of - - 2,760 (506) 2,489 4,743fixed assets and subsidiaries ------------------------------------------------------------------------------------------------------------ (Loss)/profit before (43,587) (11,063) 4,272 2,621 1,275 (46,482)interest and taxation ==================================================================Net interest payable (5,148)------------------------------------------------------------------------------------------------------------Loss before taxation (51,630)------------------------------------------------------------------------------------------------------------ Net assets/(liabilities) 115,969 (27,005) 91,949 (15,880) - 165,033 ==================================================================Unallocated net assets/(liabilities):Dividend payable (1,684)Net debt and finance leases 7,285------------------------------------------------------------------------------------------------------------Net assets 170,634===========================================================================================================2003 Deep Mining Surface Mining Property Other Australia Total businesses £'000 £'000 £'000 £'000 £'000 £'000------------------------------------------------------------------------------------------------------------ TurnoverContinuing operations 447,351 66,236 3,813 16,367 - 533,767Discontinued operations 4,454 25,633 30,087------------------------------------------------------------------------------------------------------------ Total 447,351 66,236 3,813 20,821 25,633 563,854============================================================================================================ Operating result before exceptional items Continuing operations (8,552) 668 1,061 5,004 - (1,819)Discontinued operations (676) (3,992) (4,668)------------------------------------------------------------------------------------------------------------ Total (8,552) 668 1,061 4,328 (3,992) (6,487)============================================================================================================ Exceptional items 6,325 - - - - 6,325Operating (loss)/profit (2,227) 668 1,061 4,328 (3,992) (162)Profit on sale of fixed - - 5,830 - - 5,830assets and subsidiaries ------------------------------------------------------------------------------------------------------------Profit/(loss) before (2,227) 668 6,891 4,328 (3,992) 5,668interest and taxation ================================================================== Net interest payable (6,915)--------------------------------------------------------------------------------------------------Loss before taxation (1,247)============================================================================================================ Net assets/(liabilities) 129,119 (13,729) 88,023 (12,217) 10,312 201,507 ==================================================================Unallocated net assets/(liabilities):Dividend payable (7,471)Net debt and finance leases 28,468------------------------------------------------------------------------------------------------------------Net assets 222,504============================================================================================================ The format of the segmental analysis has been changed from last year's to give aclearer presentation. Other businesses includes surface mine contract mining, manufactured fuel and combined heat and power and emissions trading which last yearwere shown separately but have been included together on the grounds of materiality. All turnover and profits/(losses) before taxation, with the exception of Australia, arose in the United Kingdom 2004 2003 £000 £000Geographical analysis of turnover by destination:United Kingdom 426,741 530,287Europe 9,951 9,525Asia - Pacific 6,218 24,042-------------------------------------------------------------------------------- Total 442,910 563,854================================================================================ 2004 20033 Exceptional items £000 £000Related Shares:
Harworth Gp