1st Mar 2007 07:07
UK Coal PLC01 March 2007 1 March, 2007 UK COAL PLC Preliminary Financial Results for Year Ended 31 December, 2006 Strong platform for value creation UK COAL PLC, the UK's largest producer of coal and the developer of one ofBritain's largest brownfield property estates, today announces its preliminaryaudited results for the year ended 31 December, 2006. Financial Highlights • Operating Profit pre Exceptional Items up £40m to £47.8m (2005 restated £7.4m) • Operating Profit up £52m to £27.6m (2005 restated: £24.1m loss) • Profit for the year up £50m to £17.5m (2005 restated: £32.8m loss) • Net Assets up 63% (£94m) to £244.1m (2005 restated: £150.0m) • Net Assets per Share up 54% to £1.56 (2005 restated: £1.01) • Net Debt to Equity reduced to 21% from 29% in 2005 • Net Debt at 31 Dec 2006 increased to £51.8m (2005: £43.3m) Operational Highlights • Deep Mining: Stronger market conditions. Improved operating performance - Power station burn at highest since 1996. Coal now has theleading share at 41% of UK electricity generation. International coal price up28% to $68/tonne from $53/tonne - Ongoing mines output up 9% at 8.2 mt. Sales price per GJ up 4%at £1.41 per GJ. Total operating cost per GJ down 3% (before Exceptional/non-recurring Items) at £1.55 per GJ - Cash cost of production per GJ for ongoing mines down 4%(before depreciation, amortisation, Exceptional & central costs) at £1.31 per GJ • Surface Mining: Increased activity - Reserves with consent up 11% at 4.1 mt - Reserves seeking consent up 6% (includes applications plannedin the next year) - Sales price per GJ up 11% at £1.58 per GJ • Property: Strategy presented. Execution progressing.Considerable value creation - RICS property valuation up 25% at £343.9 million. Managementestimate of £800m value in 2006 prices with benefit of permissions being sought - Planning permission gained for Waverley/Orgreave, Sheffieldfor 650,000 sq.ft. of mixed business use. Planning application has been made forPrince of Wales, Pontefract for 900 homes and 250,000 sq.ft. for mixed businessuse. Progression of development JVs and further permissions • Power Generation: Increased scale and profitability - Net income up 43% (excluding Emissions Trading Credits) David Jones, Chairman, commented: "2006 has been a year of considerable progress for UK COAL. This is reflected inthe increase in our reported profits, the strengthening of our balance sheet andthe development of our strategy to secure sustained value creation. "In mining, we have made clear that we will focus only on accessing and miningreserves where there is a clear prospect of creating substantial value overtime. This has led to a reduction in the number of deep mines in operation, aswell as creating an improvement in operating profit and a sounder basis fordeveloping the business in future. Our sale of the Maltby mine this weekreflects this strategy. "In property, we have presented the very large store of value which we believewe can realise, we have put in place a strong property management team and wehave set out our strategy. This has been well received, and we are aggressivelypursuing its execution. "Overall, during 2006, we have put in place a far stronger platform for futurevalue creation. 2007 will see the execution of our strategy go a great dealfurther, and we face the current financial year with confidence." For further information Financial Citigate Dewe Rogerson Tel: 020 7638 9571Anthony Carlisle Mobile: 07973 611 888Laure Lagrange Mobile: 07768 698 731Brett Jacobs Mobile: 07764 655 423 Operational Tel: 01525 381 759Stuart Oliver Mobile: 07774 231 178 The following Chairman's Statement is an extract from the Chairman's Statementas incorporated in the 2006 Annual Report & Accounts. CHAIRMAN'S STATEMENT Financial results Recognising the increasing importance of property to the group, we have adoptedthe convention of reporting changes in the value of a wider range of ourproperty interests through the income statement. On this basis, overalloperating profit before Exceptional Items increased to £47.8 million, comparedto £7.4 million for 2005 re-stated, and profit before tax was £17.6 millioncompared to a 2005 loss of £32.8 million. The impact of the change in reportingimproved the results by £47.9 million in 2006 and by £29.3 million in therestated 2005 results. We have also significantly strengthened our balance sheet. We took advantage ofthe sharply positive re-rating of our business by the stock market to strengthenour capital position through a share placing which raised £29.1 million. We haverecognised deferred tax assets for the first time, and we have included agreater number of our investment properties at open market value. As a result,net assets are up by 61%, and net assets per share are up by 54% against theirre-stated 2005 levels. As required by accounting rules, the financial statements report our InvestmentProperties at current fair values. With the benefit of the planning permissionsand development plans we already have in hand, however, we believe thisunder-states its potential value by a factor of well over two times. On pensions, we have made good progress in reducing the deficit in our definedbenefit schemes (which are closed to new members). The deficit has been reducedby £22.3 million to £95.7 million. This reflects the investment performance ofthe pension fund assets and additional contributions paid by the company of £6.4million. In addition, we have recognised a deferred tax asset of £35.7 million,which is available to offset against our scheme obligations in future years. We have managed our cash carefully, whilst continuing to invest significantly inour businesses and meet the costs of continuing rationalisation. As a result,our net debt has risen to £51.8 million, compared to £43.3 million; but our netdebt to equity ratio has improved to 21% from 29%. Board During the year, we have strengthened our Board further on both the executiveand non-executive side. We are delighted to have welcomed Jon Lloyd, who joinedus last July as Chief Executive of our property business and brings with him awealth of property development and management experience. We are also delightedto have welcomed Mike Toms, who joined as a non-executive director last May,bringing the considerable experience he has gained as a Town Planner andEconomist and from his senior roles and Board position over the past 25 yearswith BAA plc. Dividend The Group wishes to conserve cash to invest in our property and miningbusinesses in order to drive shareholder value, preserve financial flexibilityand continue to reduce overall risk. For these reasons, the Board is again notrecommending the payment of a final dividend. We will keep this under review;but future dividends will be dependent on our overall performance. Outlook Overall, during 2006, we have put in place a far stronger platform for futurevalue creation. 2007 will see the execution of our strategy go a great dealfurther, and we face the current financial year with confidence. David Jones, Chairman 1 March 2007 OPERATING AND FINANCIAL REVIEW The narrative below is extracted from the full Operating & Financial Review ("OFR") which is incorporated within the 2006 Annual Report & Accounts Summary Profit Performance by Business Segment Profit Summary by Segment Deep Mining Surface Property Power Generation Other Total2006 MiningPre-exceptional Operating (29.0) 0.5 73.3 3.1 (0.2) 47.7(Loss)/ProfitExceptional Items (24.2) 4.1 - - - (20.1)Operating (Loss)/Profit (53.2) 4.6 73.3 3.1 (0.2) 27.6 Deep Mining Surface Property Power Generation Other Total MiningProfit Summary by Segment2005 (restated)Pre-exceptional Operating (46.4) 3.3 45.7 3.3 1.4 7.3(Loss)/ProfitExceptional Items (32.0) (2.5) - - 3.1 (31.4)Operating (Loss)/Profit (78.4) 0.8 45.7 3.3 4.5 (24.1) Market Overview: Coal 2006 saw the highest coal burn at power stations since 1996, as record gasprices, coupled with a low carbon price made coal a fuel of choice forgenerators for most of the year. In response to demand, international coal prices rose throughout the year, from$53/tonne in January to around $68/tonne by the end of 2006. In addition to this28% rise during the year, the forward curve has also strengthened. Since 1 January 2005, UK power stations have been required to participate withinthe EU Emissions Trading Scheme. Generators therefore have to take into accountthe price of carbon allowances, together with the relative price of coal andgas, when determining which station to run. The high price of gas in the firstten months of the year combined with a low carbon price has encouragedgenerators to run their coal stations ahead of their gas plant. In 2006, UKpower stations consumed some 58 million tonnes (2005: 52 million tonnes) of coaland steam coal imports increased by 11% from 37 million tonnes to 41 milliontonnes. Electricity Supply Industry As the table below shows, coal now supplies the largest proportion of the fuelmix for electricity generation: 2006 2005 % %Coal 41 37Gas 29 33Nuclear 21 21Oil, hydro & renewables 9 9Total 100 100 During 2006, the Group's total coal sales to the power station market, were 8.8million tonnes (2005: 9.1 million tonnes), reflecting lower than expectedproduction. The contract cover with all customers, for the five years from, and including,2007 is 22.1 million tonnes, with supply obligations for 17.7 million tonnes. The directors believe there remains an appetite among UK COAL customers forprice certainty and secure supply, which the Group is able to satisfy. However,any future contracts must be based on sales prices that allow UK COAL to recoverthe investment and production costs needed to mine the coal, develop furtherfaces and provide adequate risk adjusted returns. The Group's discussions withits customers are informed by this stance. Industrial and Domestic In April, UK COAL launched a 50:50 joint venture company with HargreavesServices plc, called Coal 4 Energy (C4E), to jointly market UK COAL's large andgraded coal in the domestic and general industrial markets and build mutually onthis market position. This business is meeting the expectations of bothparties. Customers The profile of UK COAL's business customer base is summarised below, and thedirectors do not foresee any material change in the mix of the Group's coalsales in the foreseeable future. UK Coal Sales to 2006 2005Key Markets Tonnes (m) % Tonnes (m) %Electricity Supply Industry 8.8 90.7 9.1 90.0Industrial 0.3 3.1 0.4 4.0Domestic 0.3 3.1 0.3 3.0Other 0.3 3.1 0.3 3.0Total 9.7 100.0 10.1 100.0 REVIEW OF OPERATIONS BY BUSINESS Group Financial Summary by Business The Group's financial performance is summarised below for each of its businesssegments. Further segmental analysis is given in note 2 to the financialstatements. Profit Summary by Segment Deep Mining Surface Property Power Generation Other Total2006 MiningPre-exceptional Operating (29.0) 0.5 73.3 3.1 (0.2) 47.7(Loss)/ProfitExceptional Items (24.2) 4.1 - - - (20.1)Operating (Loss)/Profit (53.2) 4.6 73.3 3.1 (0.2) 27.6 Deep Mining Surface Property Power Generation Other Total MiningProfit Summary by Segment2005 (restated)Pre-exceptional Operating (46.4) 3.3 45.7 3.3 1.4 7.3(Loss)/ProfitExceptional Items (32.0) (2.5) - - 3.1 (31.4)Operating (Loss)/Profit (78.4) 0.8 45.7 3.3 4.5 (24.1) The Group achieved an operating profit of £27.6m (2005 re-stated: £24.1m loss)including property revaluation gains of £68.6m (2005 restated: £40.7m).Reported profit includes an accounting policy change which widens the investmentproperty portfolio which is stated at market valuation in the financialstatements. The effect on profit in 2006 and 2005 as re-stated is set out belowand only affects the property segment. Property 2006 2005 (Restated) £m £mOperating Profit applying 2005 accounting policies 25.4 16.4Effect of Accounting Policy change 47.9 29.3Operating Profit (restated 2005) 73.3 45.3 DEEP MINING Financial Review Deep mining improved its financial performance, producing a profit beforeExceptional Items over three of the four quarters of the year. In the thirdquarter, however, the division faced difficulties on several fronts, whichcontributed to a loss of 1.3 million tonnes of production across several minesequating to some £44m of lost revenues. These factors resulted in a loss for theyear for ongoing mines of £28.0m (2005: £35.0m). There were significant geological problems at Harworth and Rossington, whichproved insurmountable and ultimately led to the decision to close or mothballthese mines. These mines made an operating loss of £25.2m (2005: £43.4m) andinvolved exceptional closure costs of £25.4m (2005: £24.1m). As a result, total deep mining operating losses for the year were £53.2m (2005:£78.4m). Overall, the remaining five deep mines achieved a 9% increase in the Group'soutput of coal to 8.2 million tonnes (2005: 7.5 million tonnes), demonstrating amore robust platform for future operations. The profit performance of theongoing mines, which in 2006 included Maltby, and the closed mines is set out inthe table below, noting operating and cash costs per Gigajoule against salesprices per Gigajoule to indicate levels of production profitability. 2006 2006 2006 2005 2005 2005 £m £m £m £m £m Ongoing Closed Total Ongoing Closed TotalTurnover 285.6 25.3 310.9 248.6 41.3 289.9Operating (loss)/profit before (29.2) 0.2 (29.0) (27.1) (19.3) (46.4)Exceptional ItemsExceptional Items 1.2 (25.4) (24.2) (7.9) (24.1) (32.0)Operating (Loss) (28.0) (25.2) (53.2) (35.0) (43.4) (78.4) 2006 2006 2006 2005 2005 2005KPIs: Sales and Costs per Gigajoule Ongoing Closed Total Ongoing Closed TotalSales per Gigajoule £1.41 £1.40 £1.41 £1.35 £1.37 £1.35Operating Cost per GJ pre-Exceptional £1.55 £1.66 £1.54 £1.54 £2.16 £1.59ItemsCash cost per GJ pre-Exceptional £1.31 £1.43 £1.31 £1.39 £1.96 £1.36Items * Cash cost is defined as operating costs excluding depreciation, amortisationand central cash costs of £10m Operating costs Total operating costs per GJ reduced in the year to £1.54 (2005: £1.59),benefiting from lower infrastructure costs at Harworth and Rossington in the rundown to closure in 2006. Operating costs per Gigajoule exclude Exceptional orsignificant non-recurring items. Ongoing mines operating costs per GJ increased to £1.55 per GJ (2005: £1.54)reflecting the events of the third quarter. The increase in Sales price to £1.41 per GJ (2005: £1.35) helped to reduce thescale of losses. The increase in sales price in 2006 and further price increasesexpected in 2007 and beyond should provide greater leverage to improve deepmining profitability in the medium term. Cash costs per GJ also improved at £1.31 per GJ (2005: £1.36). This excludescentral, capital and exceptional costs, and is disclosed to indicate the levelof unit cash generation from the mines when comparing this cost to sales priceper GJ. Sale of Maltby Following the year end, we took the decision to sell our Maltby mine toHargreaves Group with a transfer of operational assets and liabilities, togetherwith the workforce. Hargreaves is the second largest customer for Maltby, andthe benefits to it of owning Maltby's metallurgical coal production and reservesshould improve the security of employment at the mine. The consideration of£21.5 million results in a profit on disposal of some £13 million. Maltbydelivered an operating loss of some £18 million last year after ExceptionalItems. Exceptional Items Exceptional Items of £24.2m (2005: £32.0m) primarily related to the closure ofHarworth and Rossington collieries and to the costs associated with a roof fallat Maltby. Harworth colliery incurred exceptional costs of £15.8m relating tocosts of closing operations. Of this, £10.3m was incurred in bringing thecolliery to closure. Additionally, assets were written off, including plant andequipment of £3.6m, and stores stocks of £1.9m. Exceptional costs of £5.3m wereincurred in closing operations at Rossington. Other Exceptional Items include income of £7.9m (2005: £14.6m) from the CoalInvestment Aid scheme which was in the last year of its operation, and pensionscheme gains of £4.4m (2005: £5.2m) arising from the effect of redundancies. Afull analysis of Exceptional Items in the year by colliery is tabled below: Exceptional Items Stores Asset write Closure cost Redundancy Other 2006 2005 stock offs Total TotalDeep Mining £m £m £m £m £m £m £mClosed mines - - - - -Harworth (1.9) (3.6) (10.3) - - (15.8) (11.6)Rossington (0.3) (0.2) (4.8) - - (5.3) (14.7)Central stores write offs (4.3) - - - - (4.3) -Coal Investment Aid - - - - - - 2.2Total closed mines (6.5) (3.8) (15.1) 0.0 0.0 (25.4) (24.1)Maltby - - - - (7.0) (7.0) -Daw Mill - - - - (2.4) (2.4) -Kellingley - - - - - - (7.7)Ellington - - - - - - (8.7)Other - - - (1.7) 4.4 2.7 (3.9)Coal Investment Aid - - - - 7.9 7.9 12.4Total ongoing mines 0.0 0.0 0.0 (1.7) 2.9 1.2 (7.9) Exceptional Items (6.5) (3.8) (15.1) (1.7) 2.9 (24.1) (32.0) Cash flow Total cash outflows for deep mining were £40.2m (2005: £63.6m). Redundancypayments were made of £10.0m (£16.1m), and payments were made of £11.5m (2005:£13.4m) to restore and rehabilitate mines and against surface damage andliability claims. After reducing liabilities, receipts from secured deposits forcoal and insurance claims were £9.9m (2005: £3.1m), and Coal Investment Aidreceipts were £11.1m (2005: £18.5m) in the last year of the scheme. Additionalpayments to the pension and concessionary fuel schemes of £6.4m (2005: £6.5m)reduced pension liabilities accordingly. Operating Review With the exception of the third quarter, ongoing deep mines were profitable in2006. However, third quarter performance, and our first fatalities since 2001,overshadowed a year of underlying improvement. Production and operatingperformance by colliery are set out below: Production 2006(mt) 2005 (mt)Ongoing mines Daw Mill 2.7 2.0Kellingley 2.1 2.0Maltby 0.7 1.1Thoresby 1.5 1.4Welbeck 1.2 1.0 Total Ongoing Mines 8.2 7.5 CLOSED MINESHarworth 0.5 0.8Rossington 0.2 0.5Ellington 0.0 0.2Total Closed Mines 0.7 1.5 Total Deep Mines 8.9 9.0 Ongoing mines Daw Mill: Output increased to 2.7 million tonnes (2005: 2.0 million tonnes),although this was overshadowed by two fatalities within two months in 2006, andan additional fatality since the year-end in January 2007. This has brought thecolliery into a period of intensive health, safety and environmental reviews andinvestigations. The underlying potential of Daw Mill, which has two sets of state of the artequipment and remaining reserves of some 21.5 million tonnes, however, remainsrobust. Kellingley: Output of 2.1 million tonnes improved on the excellent 2005 resultof 2.0 million tonnes. Productivity was sustained, and continuous production wasachieved despite two face changes. The colliery continues to be stronglyproductive in an area of difficult geology with a move planned to a new area ofreserve in 2008. The mine is currently developing into the new reserves, and thekey objectives remain focused on cost efficiencies. During this period ofintensive investment, however, cash generation from this colliery will belimited. Maltby: Output of 0.7 million tonnes (2005: 1.1 million tonnes) was severelyimpaired by a critical roadway closure throughout Q3 after a major roof fall.Localised old workings and hard ground severely restricted progress and almosthalted production. The team succeeded in recovering the roadway and fullproductivity was restored in Q4 after a difficult and highly challengingmid-year, with flexibility enhanced by a new five-shift pattern. Since the yearend this colliery has been sold. Thoresby: Output improved to 1.5 million tonnes (2005: 1.4 million tonnes)despite a 7 week face gap from August when ground movements prevented recoveryof vital equipment. Operational teams worked hard to overcome major salvagedifficulties and introduced a new more effective four shift pattern for the restof 2006, returning the colliery to full productivity. Welbeck: Output of 1.2 million tonnes exceeded 2005 (1.0 million tonnes)following a period of intense operational review and revised working practices.This was achieved despite face gap delays of 15 weeks after encounteringextremely difficult ground conditions caused by nearby old workings, whichgreatly slowed down a face transfer. The colliery has now increased round theclock shift patterns and has reduced face cycle times by up to 30% by increasingshearer cutting speeds. Closed and mothballed mines Harworth coaling was run down from the half year, finishing in August, afterattempts to develop a new face became impossible following geological faulting.The site is now in a state of care and maintenance to temporarily preserveaccess to alternate reserves if economic contracts can be secured. Rossington ceased production in April 2006, following the extraction of thefinal 0.2 million tonnes of coal. Face Gaps and Operational Costs The length of face gaps, when production changes from one area of the mine toanother, are a key performance driver of the business. This typically representsa period of no production when costs are running at normal levels, or in certaincases slightly higher. There were five face changes in the year, resulting inthree protracted face gaps totalling 26 weeks (2005: 33 weeks). Welbeck had aface gap of 15 weeks from May to July, Maltby had four weeks in Q1, and Thoresbyseven weeks in Q3. Management efforts and planning continue to focus on reducing these productiongaps. Face gaps and operating costs by quarter are set out in the followingtable: All Mines: Q1 Q2 Q3 Q4 TotalFace Gaps 2006 (weeks) 4 10 12 0 26Face Gaps 2005 (weeks) 3 23 7 0 33Tonnes 2006 (million) 2.9 2.4 1.5 2.1 8.9 Op. Costs per GJ 2006 £1.40 £1.40 £2.47 £1.26 £1.54 Operational costs per GJ improved in 2006 except in Q3 when costs increased dueto factors discussed above. Productivity Costs per GJ reduced in the fourth quarter when productivity improvements wereachieved as a result of initiatives to make the mines competitive with foreigncoal suppliers, including:- • Closure or mothballing of high risk, inefficient areas ofreserve. • Improved planning on a daily, weekly and long term basis. • Introduction of project control techniques to improve themanagement and accountability through the identification and delivery ofcritical activities to time and cost. • Focus on improving the maintenance regime at the mines inorder to improve machine availability and reduce down time. • Improving productivity through focus on performanceindicators, cycle time, detailed delay analysis and reduction. • Introduction of multi-disciplined Operational Improvementteams. • Introduction of more efficient technologies from aroundthe world in all aspects of the underground environment. At the ongoing mines the workforce agreements launched in 2005 are beingconsolidated across all the mines giving a much more flexible system of working. Future Prospects In the final quarter of 2006, deep mining production returned to operatingprofitability before Exceptional Items. Forward prices are projected to improve significantly as historic contractsexpire in the next two years, providing improved potential for deep mining cashgeneration. Our strategy continues to focus on mining only where access to reserves issufficiently economic. We are also undertaking a wide-ranging operational reviewto identify and implement further cost-efficiencies within operations. We continually review forward price and cost projections to seek out optimalmining decisions for shareholder value. Decisions have to take account oflong-term as well as short term projections. UK COAL continues to have a healthyprojection of reserves, which will be mined only where economic. Our reservespotential is described in more detail below. Reserves The reserves available in the ongoing deep mines are critical to the long termprospects of the Group. The definition of reserves is always subject to some elements of change. UK COALcontinues to utilise the latest technology in seismic exploration, including 3Drepresentations of seams, to provide better definition of reserves. Thesetechniques have been used at Daw Mill, Kellingley, and Thoresby to assess thereserves more effectively. The Group's latest estimate at January 2007 of itsdeep mine coal reserves, excluding Maltby, are as follows: Coal (million tonnes) Reserve Resource Mineral Potential Total: 173 40 70 63 Reserve: Proven reserves which are accessible using the broad infrastructure inplace at the current time, and which are in the current mining plan. Resource: Proven reserves, but reserves that require substantial development andother costs to allow accessibility and are not currently in any mining plan. Mineral potential: Coal that has been assessed (although possibly not to thesame extent as Reserve and Resource coal) but UK COAL does not have any licensesor planning permission to extract the deposits. These figures must be treated with caution, being based on the Group's bestestimate at the current time. A number of factors may cause the actualproduction to vary significantly from these estimates, including availability ofgovernment support, future coal prices and geological issues. SURFACE MINING Financial Review Surface mining's financial performance is set out below: 2006 2005 Surface mines Surface mines £m £mTurnover 21.7 33.4Operating profit before Exceptional Items 0.5 3.3Exceptional Items 4.1 (2.5)Operating profit 4.6 0.8 KPIsSales per GJ 1.58 1.42Controllable cash costs per GJ 1.46 1.25Operating cost per GJ 1.87 1.31 (before Exceptional Items and provision releases) Surface mining achieved a small profit on output of 0.6 million tonnes (2005:1.0 million tonnes). Profitability was held back, with only one site operatingfor most of the year and three sites being developed, increasing operating costper GJ to £1.87 (2005: £1.31). The result includes provision releases of £5.4mmainly in respect of restoration liabilities in the North East which have beenreassessed now that we have planning permission to extract coal in adjacentreserves. Exceptional income of £4.1m includes gains of £4.4m from the disposal ofunutilised plant, and £0.3m related to redundancy. Operating Review With the completion of coaling at Orgreave in January 2006, the Group operatedfor most of 2006 with only one surface mine, Maidens Hall, in Northumberland.This has since been supplemented by operations commencing at Stony Heap inAugust 2006, and Stobswood North and Cutacre in December. Surface mining made good progress in developing its potential reserves in 2006to 14.1 million tonnes, including applications planned to be submitted in 2007(2005: 13.1 million tonnes). Planning approval was gained for two sites in 2006. Reserves with planning consent at the year end were 4.1 million tonnes (2005:3.7 million tonnes), and planning applications submitted in the year were 5.4million tonnes (2005: 5.1 million tonnes). Applications expected to be submittedin the new financial year amount to 4.6 million tonnes (2005: 4.3 milliontonnes). Future Prospects UK COAL owns approximately 97 million tonnes of surface coal reserves situatedunder its owned land, which, at current prices, should be capable of economicextraction. With the import of coal potentially restrained by port and railcapacity in the country, our reserves should form an important national resourcewith economic value. Although planning permission for coaling has been difficult to obtain inprevious years, UK COAL believes this attitude is changing and is confidentthat, in future, schemes can be progressed. The Group is continuing its effortsto obtain further planning permission based on improvements in the environmentalacceptability of brownfield site regeneration. The end result will be bothadditional domestic production and sites restored to a standard and at a costwhich would be prohibitive without prior mining. The Group has significant surface mining plant, equipment and expertise and isactively looking at additional sites in England, Scotland and Wales in orderthat these resources may be used efficiently. A summary of remaining Reserves through the various stages of planning is setout in the table below: Surface Mines - Reserves Estimated Estimated(in thousands of tonnes) Reserves ReservesSite Dec 2006 Dec 2005 Maiden Hall Extension 465 920Cutacre 1,495 1,500Stony Heap 174 257North Stobswood 969 987Steadburn 1,000 -Sites with Planning Consent Gained 4,103 3,664 Sharlston 360 360Steadburn (consent gained in 2006) - 1,000Long Moor 725 725Lodge House 1,000 1,000Potland Burn 2,000 2,000Oxcroft 15 -Park Wall North 1,250 -Sites submitted for Planning 5,350 5,085 Huntington Lane 900 650Park Wall North - 1,000Blair House 700 1,000Chesterfield Canal 500 400Bradley 500 500Minorca 1,000 800Butterwell 1,000 -Sites to be submitted in the next year 4,600 4,350 Remaining Reserves in Process 14,053 13,099 PROPERTY Financial Review The property business performed strongly, achieving a 25% increase in bothmarket valuation of its assets to £343.9m (2005: £274.2m) and gross rentalincome of £6.0m (2005: £4.8m) mainly due to business parks income growth. Thislifted net rental profits to £3.3m (2005: £2.3m). After revaluation gains of£68.6m (2005: £40.7m), property activities generated a profit of £73.3m (2005:£45.7m). 2006 2005 Property Property Restated £m £mTurnover - Agricultural Land 2.6 2.7Turnover - Business Parks 3.4 2.1Gross Rental Income 6.0 4.8Operating Costs (2.7) (2.5)Net Rental income 3.3 2.3Profit on sale of assets* 1.4 2.7Operating profit 4.7 5.0Revaluation gains 68.6 40.7Total profit before interest and tax 73.3 45.7 * Disposal profits on a historic cost basis were £10.7m (2005:£9.6m) A strategic review of our property portfolio was completed in November,indicating significant potential for value creation. The great majority of our land is agricultural and is likely to remain so forthe long term. This land provides a flow of rental income and portions of it maybe selectively sold, thereby also potentially providing capital that can beredeployed into higher return brownfield site development activity. A portion of our land supports our continuing mining operations and providessites which may become surface mines with appropriate permissions - in a numberof cases also providing a potential pipeline of future development sites, oncemining activities are completed and the land is restored. Within our land portfolio, there are also a number of sites which representconsiderable potential for development and consequential considerable valuecreation. These represent the core of our brownfield site development proposalsand activities and are reported on below. Accounting Policy Change The Group has revised its accounting policies during the year to bring themarket value of its full range of properties held for investment on to thebalance sheet. Group properties are now classified either as: • Investment Properties. These are valued at market value if held forcapital growth, or rental income, or both, or • Operating Properties. These are properties used in the business andare held at historic or deemed cost from when consent to mine is gained untilmining completes. The group accounting policy of recognising initial revaluations in reserves andsubsequent revaluations in the income statement is unchanged. This is inaccordance with International Accounting Standards. The accounting policy change increased gains in the income statement by £47.9m(2005: £29.3m) and the property values in the balance sheet by £213.7m (2005:£165.7m). Deferred taxation of £1.1m (2005: £1.0m) has been provided on revaluation gains.The vast majority of UK COAL's property has capital losses available to offsettaxable valuation gains, and therefore no significant deferred tax liability hasbeen incurred. Expenditure on property development activities (net of grants) amounted to £3.4m(2005: £7.3m). The significant increase in the value of the property portfolio in 2006 of£68.6m (2005: £40.7m) was recorded on the balance sheet. Gains in the value ofproperty do not involve a cash flow until they are realised on sale. As aresult, this item does not appear in the cash flow statement Operating Review On 3 July, Jon Lloyd joined the Group board as Chief Executive of Property.Under his direction, a strategic appraisal of the Group's property business wascompleted and presented externally in November, outlining the Group's inherentproperty value and development strategy. This was well received and has led toa substantial market reappraisal of the potential value of our propertybusiness. The operating structure of the property business has been further strengthenedby three key appointments, Development Director, Estates Director and ForwardPlanning Manager. The Development Director will lead delivery on the planningconsents and on-site infrastructure and it's appropriate development through thedirection of highly skilled and motivated external project teams. The EstatesDirector and Forward Planning Manager will focus on growing the asset base andhalf yearly portfolio valuations by identifying and bringing forward additionalproperties over and above the 2,650 acres identified in the November 2006presentation. The Harworth Estates portfolio RICS valuation at the year end is summarised inthe table below: Like-for-like Dec 2006 Dec 2005 Dec 2005 to Dec 2006Business Parks 48,300 36,960 29.7%Commercial with planning 23,200 30,060 17.4%Other commercial & residential 157,312 116,164 34.8%Agricultural 115,110 90,985 31.4%Total 343,922 274,169 33.8% The valuation is before the deduction of rehabilitation and restoration costs of£51.7m (2005: £66.4m), which are provided in the accounts and relate mainly toworking surface mines and sites in aftercare. On a like for like basis, takinginto account disposals and development expenditure, the property portfolio hasshown a gain of £86m (34%). On a net basis after disposals and acquisitions, theportfolio value has increased by £69.7m, being 25%. We expect, however, that the valuation of UK COAL's property interest with thebenefit of the planning permissions currently in hand and envisaged would besubstantially greater than the valuation of our land and property interests intheir current usage and, in 2006 prices, could be around £800m by 2012. Principal development activity The principal areas of development activity in 2006 are summarised below. Waverley/Orgreave, Rotherham Planning approval was granted at Waverley for a business park area of 650,000 sqft offering mixed use. Work is progressing towards submitting further planningapplications to create a new community which in total will include up to 4,000new homes, a 60 acre business park, 20 acres other community use (social, healthand education) and a 300 acre country park. The Advanced Manufacturing Park isalready well established on this site and includes a number of companiesinvolved in the high-tech metals and aviation industries. Prince of Wales, Pontefract We submitted a planning application to Wakefield Metropolitan Borough Council atthe end of 2006 for the redevelopment and regeneration of this major site. Theplanning application includes over 900 homes and 250,000 sq ft of employmentspace along with community facilities. We have engaged in substantial pre-application discussions with the Local Authority and other interested partiesand are hopeful that planning approval will be granted during the middle of2007. Other Developments We are continuing to progress a large number of other development projects andhave entered in to a number of arrangements with blue chip key partners whichwill help us maximise value from these developments. We are discussing furtheropportunities and carrying on the process of working up new schemes to ensure wecontinue to add value across the whole of the portfolio. Business Parks Our business parks continue to be well-tenanted and attract strong demand whenunits become available. We are currently agreeing terms to add further capacityto our Asfordby business park with construction of a new, pre-let, building andwill continue to develop this area of the business. Sales We have continued our policy of disposing of land assets where we have maximisedvalue. This has included land at our Tetron and Denby developments, both ofwhich are now nearly sold out, and a successful auction of agricultural landwhich had little or no development potential, achieving proceeds some 60% aboveour market expectations for the 1,700 acres sold. Development Market Conditions The majority of our development land identified is classified as brownfield andas such, is well positioned to respond to and benefit from evolving Governmentpolicy. Kate Barker's report for the Government in December 2006 foreshadowschanging planning policy and processes that should both streamline the planningtimeline for our major sites and give further confidence as to the likelihood ofplanning success. Recent announcements by the Department of Communities and Local Government set avery strong platform from which we intend to build a nationally significantresidential development land bank. We will realise this through working inpartnerships with some of the UK's most successful house builders. Demand for our mixed use employment sites and our increasing residentialdevelopment sites remains strong and we expect it to be robust for the period ofour initial property strategy articulated to shareholders in November 2006. Rental income from our existing business parks and our agricultural estate isexpected to continue to grow. The primary opportunity for income and tradingprofits will come from the gaining of planning consents for our mixed useemployment land and residential development sites. Success will be measuredinitially by targeting and achieving planning consents for the maximum possibleacreage of employment development and optimum number of housing units. Ourparticipation in the residential market will principally be by way of gainingconsents and disposing of serviced sites to major house builders who will payboth full market value and offer a share of any super profit created during thebuild-out phase. We will both sell serviced plots and progressively build out anumber of our mixed use sites with best in class development partners. Future Prospects The Group is currently managing around 60 separate property projects andcontinues to seek out additional opportunities. In the short term, it is theintention of management to maintain, and enhance where possible, the currentincome streams while adding value by: • Completing master planning and gaining planning consents at ourkey development sites; • Completing construction and letting of development properties; • Commencement of master planning at appropriate sites; • Constructing new buildings at existing business parks, wheredemand for pre-let accommodation is strong; • Continuing the process of securing planning at sites wherethere is the opportunity to create value through new commercial or residentialdevelopment; • Identifying specific opportunities to extend the developmentprogrammed beyond the initial 60 sites • Specifically focusing on bringing forward a premium mixed usebusiness park at Cutacre Bolton • Exploiting the agricultural portfolio for surface mining,residential development and possible disposals of surplus land and properties. Valuation A full independent property valuation of all our properties in current usage wascarried out at 31 December 2006 in accordance with the "RICS Appraisal andValuation Standards" published by the Royal Institution of Chartered Surveyors. Of the portfolio valuation, £311.7m (2005: £251.2m), is recognised in thebalance sheet at market value under investment properties. POWER GENERATION Financial Performance Harworth Power's financial performance is set out in the table below: 2006 2005 £m £mExternal revenue 0.3 0.9Inter company revenue 6.2 3.3Total Revenue 6.5 4.2Emissions Trading credits 1.8 2.4Methane costs (1.8) (0.5)Other costs (3.3) (2.7)Operating profit 3.2 3.4 KPIs:MWh generated 119,717 104,526£ net income/MWh (excluding Emissions Trading Credits) £10.94 £8.76 Operating profit (excluding Emissions Trading income) grew by 43% to £1.3m(2005: £0.9m) from a 15% increase in electricity generation to 119,717 MwH(2005: 104,526 MwH), on improved power prices and lower operating costsfollowing a review of operating practices. Our total operating profit of £3.2m(2005: £3.4m) reflects the improved operating performance and reduced benefit ofUK Emissions Trading scheme credits for which 2006 represented the last year ofoperation. We are awaiting the final approval from the MoD before we start workon our Royal Oak site. We hope this will be later in the year. Harworth Power has continued to progress a series of planning applications toinstall wind turbines on Group property where this is economic and representsthe best use for the properties concerned, or can be combined with a sustainableproperty development. The planning process is lengthy. However, Harworth Powercurrently is progressing applications for 40 turbines, with a land bankcontaining further suitable sites which will be progressed when appropriate. During 2006 a planning application for a wind Farm at Stonish Hill consisting of7 turbines was turned down, although an appeal is currently being pursued. Afurther project at Lynemouth in Northumberland is currently under considerationby the local planning authority with determination due early in 2007. Threefurther projects are at varying stages of development for submission in 2007. Future Prospects Coal Mine Methane We expect to continue to extract methane from existing sites, while the newcapacity installation at Harworth mine will offset some of its mothballingcosts. Increased generation is forecast with the installation of new engines at minesites where methane capture is being improved. Capital will be invested whereadequate returns are available, principally in the installation of new enginesat mine sites. The UK Emissions Trading Scheme finished at the end of 2006,reducing the incentive to invest in certain emissions reduction projects.Harworth Power is actively involved in discussions as to the form of anyreplacement scheme. Wind farms The Group plans to progress further applications in respect of 30 turbinesgenerating 60MW during 2007. Harworth Power continues to identify other opportunities to generate additionalpower utilising renewable energy sources, assessing the commercial strengths andrisks of these schemes and the level of investment needed to make investment inthose schemes match the returns required by the Group. OTHER BUSINESSES Other businesses comprise our new joint venture, Coal 4 Energy, which made a£0.1m profit, and LHTC (Lionheart Trading Company) Ltd, a wholly ownedsubsidiary company, which mainly provides group support services andmaintenance. Overall profits were £0.2m. 2005 profits of £5.2m related tobusinesses and assets now disposed of. CAPITAL STRUCTURE UK COAL's net assets of £244.1m (2005 restated: £150.0m) comprise four majorelements: 2006 2005 £m £mProperty mainly at market value 326.8 265.4Mines acquired and machinery at depreciated cost 224.0 244.9Provisions for future costs and pensions deficits (233.1) (317.4)Net debt and working capital to fund operations (73.6) (42.9)Total net assets £244.1m £150.0m Provisions Deep mining provisions of £93.4m (2005: £106.0m) are held for all future costswhere an obligation exists at the balance sheet date. Of these provisions,£39.7m (2005: £40.0m) are funded by ring-fenced deposits, and £74.2m (2005:£70.8m) are expected to fall due after more than one year. Provisions have beenmade for employer and public liabilities, surface damage relating to deep minesactivities, restoration and closure costs of deep mines, spoil heap careobligations, pumping costs and groundwater contamination. Redundancy provisionshave been made for obligations only if they exist at the balance sheet date. Retirement benefit provisions The Group has a deficit of £120.4m (2005: £142.3m) on its defined benefitpension and retirement schemes, combined with it's concessionary fuel reserve,and are valued annually by independent actuaries applying InternationalAccounting Standard (IAS) 19. The deficit reduction in 2006 of £21.9m comprises: • Net actuarial gains of £11.6m (2005: £14.3m loss) arisingmainly from higher than expected asset returns. The gains are reported withinreserves in the statement of recognised income and expense (SORIE). • Additional payments to the pensions and benefit schemes of£6.4m (2005: £6.5m) representing the net difference between employercontributions payments made of £21.0m (2005: £19.3m) and the actuary'scalculation of the costs of benefits accrued in the year. • Gains on curtailments of £4.3m (2005: £5.2m) due to redundancylevels. These are reported in the income statement as Exceptional Items. • A deficit increase of £0.4m (2005: £2.8m), from interest costson scheme liabilities exceeding expected asset returns, which is charged toincome. Taxation Deferred taxation assets of £35.7m (2005: nil) are now recognised on the balancesheet. This represents tax relief anticipated to be available from futurepayments into the pension scheme to reduce the deficit. The full scale and origin of UK COAL deferred tax assets, recognised andunrecognised in the financial statements, is set out below. Due to the availability of losses within the Group, there is no current taxcharge for the period. The Group has potential gross deferred tax assets as at31 December 2006 of £369.6m representing potential future tax savings of£110.9m. Group net debt The Group secures borrowings against its property and operational assets. Intotal across the four business segments this amounted to £152m of facilitiescomprising a revolving credit facility of £54m, overdraft facilities of £10m,£66m secured on property, £9m on surface mining plant, and £13m of finance leasedebt outstanding. Average maturity of the facilities was 2.2 years (2005: 1.8years). Total borrowings of £97.7m (£2005: £96.5m) were drawn against debt facilities atthe year-end, leaving borrowing headroom of £47.3m (2005: £9.0m). Net debtincluding ring-fenced cash deposits was £51.8m (2005: £43.3m). Net Debt toEquity reduced to 21% from 29% in 2005 mainly as a result of increased propertyasset values recognised on the balance sheet. Interest The Group incurred £5.7m (2005: £3.6m) of financing costs in the year on averagedebt throughout 2006 of £50m (2005: £28m). Financing costs include £1.0m chargedin amortisation of fees. A summary of debt funding is set out below. 2006 2005 £m £mCash deposited to cover insurance requirements 19.6 25.4Subsidence security fund 22.7 26.8Other cash balances* 3.6 1.0Cash and cash equivalents 45.9 53.2 Debt (84.1) (75.3)Finance leases and hire purchase contracts (13.6) (21.2)Borrowings (97.7) (96.5) Net (borrowings) / funds (51.8) (43.3) *Cash balances within net funds of £45.9m include £2.1m cash balances held forrestricted use subject to property sale completion. Contingent liability Guarantees have been given in the normal course of business for performancebonds of £2.5m (2005: £ 2.1m) to cover the performance of work under a number ofGroup contracts. There are no other contingent liabilities. Consolidated Income Statementfor the year ended 31 December 2006 2005 Notes £000 £000Continuing operations RestatedRevenue 2 339,713 341,214Cost of sales (381,021) (417,136)Gross loss (41,308) (75,922)Coal Investment Aid 4 7,892 14,641Net appreciation in fair value of 68,622 40,668investment propertiesProfit on disposal of operating 416 463property, plant and equipmentProfit on disposal of investment 1,406 2,746propertiesProfit on sale of business - 3,100Other operating income and (9,383) (9,756)expensesOperating profit/ (loss) 27,645 (24,060)Finance costs 5 (12,376) (11,753)Finance income 5 2,261 2,992Finance costs - net 5 (10,115) (8,761)Share of post-tax profit from 105 -joint venturesProfit/ (loss) before tax 17,635 (32,821)Tax (143) -Profit/ (loss) for the year from 17,492 (32,821)continuing activities Discontinued operationsLoss for the year from - (72)discontinued operationsTotal loss from discontinued - (72)operationsProfit/ (loss) for the year 17,492 (32,893) Attributable to:Equity holders of the Company 17,492 (32,893) Earnings per share pence pence RestatedFrom continuing operations:Basic and diluted 11.7 (22.1) From discontinued operations:Basic and diluted - - From total operations:Basic and diluted 11.7 (22.1) The 2005 figures have been restated following a change in accounting policy to widen the Group's definition ofinvestment property (see Note 6). Consolidated Statement of Recognised Income and Expensefor the year ended 31 December Group Company 2006 2005 2006 2005 Notes £000 £000 £000 £000 Restated Actuarial gain/(loss) on defined 10benefit pension schemes 12,478 (10,286) - -Actuarial loss on concessionary 10fuel reserve (855) (3,995) - -Movement on deferred tax asset relatingto retirement benefit liabilities 35,752 - - -Property revaluation on transfer to 7investment properties - 53,370 - -Net gain recognised directly inequity 47,375 39,089 - -Profit/(loss) for the year 17,492 (32,893) (1,700) (22,878) 64,867 6,196 (1,700) (22,878)Prior year adjustment - 6investment properties 164,719 229,586 Attributable to:Equity holders of the Company 64,867 6,196 (1,700) (22,878) Balance Sheetsat 31 December Group Group Company Company 2006 2005 2006 2005 Notes £000 £000 £000 £000ASSETS RestatedNon current assetsOperating property, plant and equipment 6 237,942 254,387 - -Investment properties 7 311,677 251,161 - -Investments in subsidiaries - - 473,224 473,224Investment in joint venture 205 - - -Deferred tax asset 35,752 - - -Trade and other receivables 964 4,728 - - 586,540 510,276 473,224 473,224Current assetsInventories 36,640 42,168 - -Trade and other receivables 47,604 63,312 167,340 137,168Derivative financial instruments 675 - 675 -Cash and cash equivalents 45,928 53,220 2,548 425 130,847 158,700 170,563 137,593LIABILITIESCurrent liabilitiesFinancial liabilities - Borrowings 8 (15,501) (62,986) (12,476) (52,395)Trade and other payables (106,284) (104,927) (189,687) (144,220)Provisions 9 (27,931) (52,320) - - (149,716) (220,233) (202,163) (196,615)Net current liabilities (18,869) (61,533) (31,600) (59,022)Non current liabilitiesFinancial liabilities - Borrowings 8 (82,264) (33,555) - - - Derivative financial instruments - (55) - -Trade and other payables (312) - - -Deferred tax liabilities (1,172) (1,029) - -Provisions 9 (119,309) (121,778) - -Retirement benefit obligations 10 (120,495) (142,338) - - (323,552) (298,755) - -Net assets 244,119 149,988 441,624 414,202 EquityCapital and reservesOrdinary shares 1,566 1,485 1,566 1,485Share premium 30,756 1,771 30,756 1,771Revaluation reserve 141,040 141,040 - -Capital redemption reserve 257 257 257 257Fair value reserve 112,342 40,668 - -(Deficit on) / retained earnings (41,842) (35,233) 409,045 410,689Total equity 244,119 149,988 441,624 414,202 The financial statements on pages 1 to 15 were approved by the Board ofDirectors on 1 March 2007 and were signed on its behalf by: G R Spindler C MaweChief Executive Finance Director Cash Flow Statementsfor the year ended 31 December Group Group Company Company 2006 2005 2006 2005 £000 £000 £000 £000 RestatedCash flows from operatingactivitiesProfit/(loss) for the year 17,492 (32,893) (1,842) (22,878)Depreciation / impairment of property, -plant and equipment 45,577 52,030 -Net fair value appreciation in -investment properties (68,622) (40,668) -Net interest payable and amortisationof discount on provisions 10,115 8,376 2,654 3,750Net charge for share basedremuneration 198 173 198 173Net capitalised surface mine development and restoration costs (5,382) (2,298) - -Profit on disposal of investment property (1,406) (2,746) - -Profit on disposal of operating property, plant and equipment (416) (463) - -Profit on sale of interests in businesses - (3,100) - - Decrease in provisions (36,246) (21,378) - -Tax 143 72 - 72Operating cash flows before movementsin working capital (38,547) (42,895) 1,010 (18,883) Decrease in stocks 5,527 2,004 - -Decrease / (increase) inreceivables 18,797 (1,551) (30,847) 29,376Decrease/(Increase) in payables (5,072) (2,376) 45,466 (45,967)Cash (used in)/generated fromoperations (19,295) (44,818) 15,629 (35,474)Tax paid - (72) - (72)Financing cost (1,028) (738) - -Interest paid (6,939) (5,744) (3,322) (4,276)Cash (used in)/generated fromoperating activities (27,262) (51,372) 12,307 (39,822) Cash flows from investingactivitiesInterest received 2,261 2,992 668 526Net receipt from insurance and subsidence security funds 9,915 3,075 - -Disposal of businesses - 8,844 - -Proceeds on disposal of property, plant and equipment 24,191 15,861 - -Investment in joint venture company (205) - - -Net purchase of shares in subsidiaries - - - (26) Development costs of investmentproperties (3,256) (8,082) - -Purchase of operating property,plant and equipment (33,312) (19,433) - -Cash (used in)/generated frominvesting activities (406) 3,257 668 500Cash flows from financingactivitiesProceeds from issue of ordinaryshares 29,067 1,672 29,067 1,672Net drawdown of bank loans 8,829 63,464 (39,919) 39,275Proceeds from new finance leases 359 4,939 - -Repayments of obligations under hire purchase and finance leases (7,964) (19,799) - -Dividends paid to shareholders - (1,483) - (1,483)Cash generated from financingactivities 30,291 48,793 (10,852) 39,464Increase in cash 2,623 678 2,123 142 At 1 JanuaryCash 1,004 326 425 283Cash equivalents 52,216 55,291 - - 53,220 55,617 425 283 Reduction in cash equivalents (net receipt from insurance and subsidence security funds) (9,915) (3,075) - -Increase in cash 2,623 678 2,123 142 45,928 53,220 2,548 425At 31 DecemberCash 3,627 1,004 2,548 425Cash equivalents 42,301 52,216 - -Cash and cash equivalents 45,928 53,220 2,548 425 MORE TO FOLLOW This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Harworth Gp