Final Results

2nd Mar 2006 07:03

UK Coal PLC02 March 2006 UK COAL PLC Preliminary Announcement UK COAL PLC, the coal mining and property group, today announces its preliminaryaudited results for the year ended 31 December 2005. Financial Overview • Return to profitability in the final quarter• Full year operating loss before Exceptional Items £21.9 million (2004:£27.0 million)• Exceptional Items relating to closure, reorganisation andrationalisation, net of Investment Aid receivable £31.4 million (2004: £10.1million)• Loss for the year £62.2 million (2004: £33.5 million)• Debt at 31 December 2005 £95.5 million including leasing but excludingcash held in respect of insurance and surface damage liabilities (31 December2004: £48.0 million)• £58.8 million increase in the value of the property portfolio (excludinginvestment properties), to £181.5 million in excess of book value• Value of investment properties increased to £17.8 million (31 December2004: £6.7 million)• Prices increasing reflecting improved market conditions. Selling priceper Gigajoule £1.35 (2004: £1.18)• Deep mine cost per Gigajoule before Exceptional Items £1.49 (2004:£1.34)• Surface mine cost per Gigajoule before Exceptional Items £1.31 (2004:£1.10) Operational Summary • Market conditions remain strong, proportion of non contracted outputincreased• Progress made reorganising deep mines and improving productivity• Total deep mine production at 9.0 million tonnes reflects closure ofSelby complex in 2004 (2004: 12.0 million tonnes)• Surface mine planning consent received for 2 sites totalling 1.2 milliontonnes*• Surface mine production at 1.0 million tonnes reflects lack of planningconsents (2004: 2.0 million tonnes)• Property occupancy increased and rental income grown to £4.8 million(2004: £3.9 million)• Property proceeds of £15.0 million (2004: £4.3 million) from sale ofland where value has been obtained, generating profits of £9.6 million (2004:£2.8 million)• Planning application for first wind farm approved. Progressingapplications in respect of a further eight wind farms On commenting on the results, David Jones, Chairman, said "2005 has been animportant year for UK COAL. The Group is now well placed for the coming year,having returned to profitability in the final quarter of 2005. The outcome ofthe energy review, which we expect will recognise the importance of indigenouscoal supply in a balanced energy portfolio, will be important for UK COAL." * includes 987,000 tonnes obtained in February 2006 For further information, please contact: Financial: Ken Cronin/Michael Turner(Gavin Anderson & Company) Tel: 020 7554 1400 Operational: Stuart Oliver Tel: 01525 381759 Mob: 07774 231178 Chairman's Statement OperationsAs expected, 2005 proved to be a transitional year for UK COAL, especially inthe deep mine business, where the mining conditions required the Group toannounce the closure or mothballing of three collieries, although options arebeing reviewed to continue mining at Harworth. Geological problems elsewhere,especially at Daw Mill, caused lower than expected production. I am confidentthat the actions taken in the year to address these issues were the correct onesto secure the Group's future. In the final quarter of 2005, it was demonstratedthat the deep mines could produce coal economically over an extended period andthis, together with the profitability of our other businesses, makes meoptimistic that the Group will improve its performance in 2006. At the start of 2005, management had identified two deep mines as being highrisk, where geological problems might not permit economic production of coal.Costs incurred in attempting to overcome these problems and in subsequentlyclosing or mothballing the mines, along with the unexpected closure of Ellingtondue to flooding, resulted in large exceptional costs which have impactedperformance. At the ongoing deep mines, however, production recovered in the final fourmonths of the year, after issues caused by longer than anticipated face gaps inthe first half of the year were resolved. We are pleased with progress in surface mining, where we have been grantedpermission to extract 257,000 tonnes at Stony Heap and 987,000 tonnes atStobswood North and remain hopeful this signals a change in planning decisions.Production at the surface mining operations was 1.0 million tonnes (2004: 2.0million tonnes), reflecting the constraints imposed by the existing planningpermissions. There was a successful disposal of Monckton, the Group's coking business, inJune 2005. The total proceeds were £13.1 million, returning a profit on sale of£3.1 million. We continue to develop the Group's extensive property portfolio, with a strategyof increasing occupancy in the business parks, developing existing brownfieldsites and maximising planning consents on our agricultural land. Overall rentalsrose by some 24%. A revaluation of the portfolio was carried out at 30 June 2005and updated at the year end. This showed an increase, on a like for like basis,of 34% on the value at the end of 2004, and is some £181.5 million more than thebook value of the properties. Harworth Power's profitability decreased slightly compared to 2004 as a resultof lower Emission Trading credits. Methane capture rates grew as a result of thedevelopment of improved techniques. It was pleasing that planning permission wasgranted for the first wind farm the Group is to develop. Applications on afurther eight wind farms will be submitted in 2006. Financial ResultsDetailed reviews of both the operations and the financial results are set out inthe Operating and Financial Review. The Group made an operating loss beforeExceptional Items of £21.9 million (2004: £27.0 million), with the Groupreturning to profitability in the final quarter of 2005. Exceptional Itemsamounted to £31.4 million (2004: £10.1 million) and principally related to theclosure and mothballing of mines including redundancy costs and curtailmentgains, offset by credits relating to income under the Coal Investment Aid Schemeand the profit on sale of Monckton. As a result of the loss for the year of £62.2 million (2004: £33.5 million), theGroup has net liabilities of £14.7 million (2004: net assets of £56.8 million).If the Group's properties were included at their revalued amounts, the Groupwould have net assets of £166.8 million. The Group increased borrowings duringthe year to fund the rationalisation of the deep mines operations and to investin the ongoing mines. As a consequence borrowings, including finance leases,rose to £96.5 million (2004: £48.3 million). DividendFollowing the expenditure on rationalisation and investment in deep mines, andconsequent increase in borrowings, the Board is not recommending the payment ofa final dividend (2004: 1.0p per share). Future dividends will be dependent on areturn to profitability and a reduction in the borrowings of the Group. Directors and employeesPatrick O'Brien resigned from the Board on 28 November 2005. Patrick has servedthe Group in senior positions for many years, latterly as Director of SurfaceMine operations and will continue to be employed until March 2006. GrahamMenzies will be stepping down from the Board on 9 March 2006. Graham joined UKCOAL in 2004 and has made a significant contribution in his role as SeniorIndependent Director and Chairman of the Remuneration Committee. I would like totake this opportunity to thank Patrick and Graham for their contributions andwish them well in the future. We have been through a year which has unfortunately required a large number ofredundancies from the workforce. The decision to make redundancies is nevertaken before all other avenues have been investigated. I would like to thank allour employees, both serving and former, for their hard work and commitment tothe Group during 2005. Offer for the CompanyThe Board was approached during the early part of 2005 by a consortium headed byAlchemy Partners LLP regarding a possible offer for the Company. Thisunsolicited approach proved an unhelpful distraction to management. Followinghighly tentative discussions, the consortium indicated in November 2005 that itwould not be making any formal offer. UK Energy PolicyAt the end of last year the Government announced it would conduct a review ofthe UK's energy policy. The Department of Trade and Industry is leading thereview, and has launched a public consultation to consider the Government'sgoals of reducing CO2 emissions, maintaining secure energy supplies, promotingcompetitive markets, and making energy affordable for all. The energy review will be taking into account all the circumstances surroundingUK energy policy - including the role of domestically mined coal in the energymix. UK COAL currently provides around 7% of the country's energy needs forelectricity generation and will be actively engaging with the energy reviewprocess. UK COAL makes an important contribution to supporting policy objectiveson security, diversity of supply and price stability in coal markets that haverecently seen dramatic variations which are unhelpful to business and domesticelectricity consumers alike. The Group will be making the strongest possiblecase for a long-term, healthy and competitive coal industry in the UK, whichallows UK COAL to fulfil its social obligations, provides customers with a hedgeagainst price volatility and allows expensive investment in port and railcapacity to be deferred. The review will conclude in April with final policyproposals expected in late summer. The energy review represents an important opportunity to influence Governmentpolicy for years to come. UK COAL has already made a start in leading the debateby hosting a policy meeting in Parliament with MPs, Peers and the EnergyMinister, Malcolm Wicks MP. Over the next few weeks, UK COAL will be respondingto the review consultation and building the strongest possible base of supportin Parliament for the coal industry in the UK. OutlookThe actions taken in 2005 leave the Group well placed for the coming year andthis is supported by the performance in the final quarter of 2005 and the firstweeks of 2006. As noted above, we continue to talk to the Government on severalkey issues affecting the Group. I believe the current political and marketconditions herald a brighter future for coal as it is recognised that thecountry's needs must be supported by domestic production. UK COAL is wellpositioned to benefit from the changes this will bring. David JonesChairman2 March 2006 Operating and Financial Review Summary financial performanceUK COAL promised and has delivered an operating turnaround. Considerableexpenditure was incurred on rationalising the operations and the decision toclose or mothball three collieries, identified as high risk at the start of theyear, was announced. Operating losses before Exceptional Items were reduced to£21.9 million (2004: £27.0 million), with the Group returning to profitabilityin the last quarter of 2005. Exceptional Items were £31.4 million (2004: £10.1million), resulting in a pre interest loss of £53.3 million (2004: £37.1million). Net finance costs were £8.8 million (2004: £5.1 million), the increaseprincipally the consequence of higher borrowings as a result of the lossesincurred. The charge within finance costs reflecting the unwinding of discountsamounted to £5.1 million (2004: £5.9 million). Revenue in the year reduced to £341.2 million (2004: £433.8 million), reflectingthe lower production in both the deep and surface mine operations, followingcolliery closures in 2004 and 2005 and the sale of Monckton. Total coalproduction amounted to 10.0 million tonnes (2004: 14.0 million tonnes). The property portfolio, which consists of agricultural property, land held fordevelopment and business parks, generated rental income in the year of £4.8million (2004: £3.9 million) and operating profit of £16.4 million (2004: £4.6million), which includes a revaluation surplus of £4.5 million. Total disposalproceeds in the year were £15.0 million (2004: £4.3 million) with a profit ondisposal of £9.6 million (2004: £2.8 million). During the year The Monckton Coke & Chemical Company Limited ("Monckton") wasdisposed of for gross proceeds of £13.1 million and a profit on sale of £3.1million. At 31 December 2005 there was an unprovided deferred tax asset of £66.9 million(2004: £38.6 million). The Business Markets Despite the advent of the EU Emissions Trading Scheme at the start of 2005, coalconsumption in the UK in 2005 has remained strong. Record prices of othercompeting fuels, especially gas, have enabled coal fired power stations to runat consistently high load factors with the result that coal burn in theelectricity sector has increased slightly over the previous year. International coal prices have steadily fallen from the 2004 peak of $77.56 pertonne, to an average in 2005 of $60.66 per tonne to the price in January 2006 of$54.54 per tonne, a fall of 29.7%. The forward curve for 2006 and 2007 has,however, strengthened. Coal sourced on the international market is tradedactively, but does not provide the same level of security over supply and priceas indigenously mined coal. With its coal reserves, UK COAL is able to offerlonger term contracts at prices which provide a hedge against the volatility ofthe spot market. As noted in the Chairman's Statement, the Government is currently conducting anenergy review, seeking views on the medium and long-term energy policy issues.Since the last Energy White Paper, published in 2003, fossil fuel prices haverisen sharply, and are projected to rise further; the UK has become a net gasimporter sooner than expected and is now forecast to import around threequarters of our primary energy requirements by 2020. Against this background, UKCOAL, which currently supplies approximately 7% of the country's energy needsfor electricity, will be lobbying extensively to ensure indigenous coal has afuture role to play in the energy market, offering security of supply and pricestability in an uncertain energy world. Electricity Supply Industry In 2005: •UK power stations consumed some 52 million tonnes* (2004: 51 million tonnes) of coal; •Steam coal imports increased by 24% from 30 million tonnes to 37 million tonnes*. The fuel mix for electricity generation for 2004 and 2005 is shown in thefollowing table: 2005* 2004 % % Coal 34 33Gas 39 40 Nuclear 19 19 Oil, hydro & renewables 8 8 Total 100 100 * 2005 numbers based on provisional numbers from the Dti. From 1 January 2005, UK power stations were required to participate within theEU Emissions Trading Scheme. The establishment of this scheme is a major stepforward in EU policy to reduce carbon emissions. The effect on coal consumptionwill be dependent on the price of carbon allowances together with the relativeprices of coal and gas. During 2005, total coal sales to the power station market, were 9.1 milliontonnes (2004: 13.0 million tonnes) reflecting lower than expected production. UKCOAL successfully resolved the outstanding force majeure issue with Drax. Thecontract cover with all customers, for the five years from, and including, 2006is 29.5 million tonnes. As noted above, the spot price of coal on the commodity exchanges demonstrateshuge volatility. UK COAL believes there is an appetite among its customers forprice certainty and secure supply, which it is able to satisfy. However, anyfuture contracts must be based on sales prices which allow UK COAL to recoverthe investment needed to mine the coal, develop further faces and provideadequate risk adjusted returns. The Group will be concentrating its efforts onensuring any new contracts fulfil these requirements and will focus less onshort term international prices or projected forward prices, which have provedto be a poor predictor of the outturn. Industrial and Domestic In the industrial market, a number of contracts have been renewed taking intoaccount the increased prices of competing international supplies. This processwill continue into 2006 as existing contracts come to an end. Sales volumes into both the industrial and domestic markets at 0.9 milliontonnes (2004: 1.2 million tonnes) showed a decrease on the previous year, in adeclining market. Prices, however, have shown a significant improvement,benefiting from the rise in price of competing fuels. In this sector, UK COALincreased its prices by around 25% during 2005. Customers The Group has three major customer profiles: for coal; for property and forelectricity. Details of coal sold by customer type is summarised as follows: 2005 2004 Tonnes (m) % Tonnes (m) % Electricity Supply Industry 9.1 91.0 13.0 91.6Large industrial 0.1 1.0 0.2 1.4Small industrial 0.2 2.0 0.2 1.4Other 0.6 6.0 0.8 5.6Total 10.0 100.0 14.2 100.0 The directors do not foresee any material change in the mix of the Group's coalsales in the coming period. The Group's rental income derives from a large number of individual leases withconcerns ranging from companies leasing units on the business parks, toindividuals renting small parcels of agricultural land. Harworth Power provides supplies of electricity both internally and to the localdistribution network. Review of Operations A detailed review of each of the operating segments of the Group is set out inthe following paragraphs. A summary of the Group's results, by segment is setout below. A more detailed segmental analysis is given in note 2 to thefinancial statements. Exceptional 2005 Exceptional 2004 Operating Items within Total operating Items within Total profit/(loss) cost of sales profit/(loss) Cost of sales £000 £000 £000 £000 £000 £000 -------------------------------------------------------------------------------------------------Deep Mining (31,789) (46,649) (78,438) (30,262) (14,669) (44,931)Surface Mining 3,347 (2,504) 843 4,065 (4,323) (258)Property 16,418 - 16,418 4,600 - 4,600Harworth Power 3,362 - 3,362 4,239 - 4,239Other 4,482 - 4,482 (700) - (700)Operating loss (4,180) (49,153) (53,333) (18,058) (18,992) (37,050)Finance costs (8,761) (5,148)Loss from continuing (62,094) (42,198)operations Discontinued - 8,667operations Loss before tax (62,094) (33,531) Deep Mining Development and Performance The Group operates five ongoing deep mines, situated in Nottinghamshire,Yorkshire and the West Midlands. During the year the Group has closed one mineand announced the decision to mothball two others. Production amounted to 9.0million tonnes (2004: 12.0 million tonnes). The results for the deep minesoperations for the two years ended 31 December 2005 may be summarised asfollows: 2005 2004 £000 £000 Revenue 299,028 364,848 Operating loss before Exceptional Items (46,430) (39,164)Exceptional Items within cost of sales (46,649) (14,669)Coal Investment Aid 14,641 8,902Operating loss (78,438) (44,931) The year ended 31 December 2005 was, as expected, a transitional year for thedeep mine operations, which lost £46.4 million before Exceptional Items includedwithin cost of sales and Coal Investment Aid (2004: loss of £39.2 million).Exceptional Items within cost of sales amounted to £46.6 million (2004: £14.7million), resulting in a loss after Exceptional Items of £78.4 million (2004:loss of £44.9 million). However, the performance in the final quarter wasencouraging and demonstrates the deep mines can operate profitably. Thisimproved performance was maintained during January 2006. Several fundamental operational issues were identified during 2004, and a greatdeal of time and effort, both by management and the workforce, was expended inaddressing and resolving these issues. The actions taken included the following: • new wage structures introduced at four of the ongoing collieries. These eliminate daily bonuses, guarantee increases in machine available times, have increased the certainty of earnings for individuals and allowed the Group to plan working time more effectively, with reduced threat of industrial disputes; • the launch of a structured daily maintenance programme, which predicts component failure and allows pro active planned replacement, replacing reactive unscheduled repair during expensive downtime; • the introduction of better budgetary techniques improving project management and cost control and, ultimately, the profitability of the mines; and • utilisation of new techniques in ground control, including polyurethane injection, which help to control adverse face conditions and accommodate faster face advance. These risks continue to be reduced by utilising the latest seismic technology.Success has been achieved in increasing production at the five ongoing deepmines. However, it was necessary to close or mothball three mines in 2005, themain details are summarised below: •In January 2005, Ellington Colliery suffered a sudden ingress of water at its working face, resulting in the loss of that face and equipment. If mining continued, UK COAL could not guarantee the safety of its workforce and this, allied to the cost of pumping, recovery of equipment and development of a new face, resulted in the decision to close Ellington during January; •Following the introduction of many of the operational changes noted above, the output and financial performance at Harworth Colliery improved substantially in the early part of 2005. Unfortunately, high methane levels, together with extremely difficult geological conditions, meant that extraction of further reserves could not be carried out economically. The decision was taken to mothball Harworth, and the seam will be abandoned once the current coal panel is exhausted during the first quarter of 2006. Options are being pursued, which will allow mining to continue at Harworth following the development of improved ground control techniques: this is, however, dependent on securing a combination of appropriate finance; proceeds from customers sufficient to recover the development and coal extraction costs and to provide a risk adjusted return; and continued flexibility from the workforce; and •Rossington Colliery encountered difficult conditions in 2004. In an effort to keep the mine open a plan, which utilised advancing longwall panels, together with revised shift patterns, was adopted. Advancing longwall panels are rarely used in current mining practice, because of inherent problems controlling cycle times and gate roads. This approach proved unable to provide returns sufficiently high enough to maintain production and cover the substantial investment the mine required. As a result the decision was taken to close, and possibly mothball, the colliery. The decision to close or mothball a mine is never taken lightly. The costs tothe individuals and to the communities in which mines are located are carefullyconsidered. However, there has to be a reasonable prospect of an economic returnthe investment of substantial sums needed to develop new faces. Ongoing mines Face gaps at the ongoing mines in 2005 totalled 33 weeks, compared to 23 weeksin 2004. Management expended considerable effort in the year on controlling andmanaging these face gaps, however, total face gaps lasted some 18 weeks morethan planned. The majority of the down time occurred in the second quarter ofthe year, with some over runs into the third quarter, which affected unit costs. Quarter1 Quarter 2 Quarter 3 Quarter 4 TotalFace Gaps (weeks) 3 23 7 - 33Tonnes (000) 2,090 1,357 1,610 2,480 7,537Cost per Gj (£) 1.27 1.89 1.78 1.35 Production at the ongoing mines was lower in the second and third quarters dueto face gaps. At Daw Mill, the largest of the Group's mines, production wasreduced due to the need to resolve floor heave, which was not anticipated whenthe developments were designed. Production and efficiency increased sharply atall mines in September following the ramp up of new faces and holiday periods inJuly and August. Cost per Gigajoule ("Gj") is a key measure of how efficientlythe mines are operating. This improved significantly in the last quarter andprovides a good platform for the start of 2006. Investment Aid During the year ended 31 December 2005, the Group credited £17.1 million (2004:£8.9 million) to the income statement arising from claims under the Government'sCoal Investment Aid Scheme, of which £4.4 million (2004: £0.3million) wasreleased from the deferred creditor in the balance sheet. The deferred creditorat 31 December 2005 was £14.0 million (2004: £14.0 million). £2.5 million was written off the Investment Aid debtor during the year. Thisrelated to amounts owed to UK COAL as reimbursement for investments made atcollieries which had to be closed or mothballed. These amounts are included asExceptional Items. Despite having made the investment and safeguarded jobs, theDti has indicated that if investment is made which is lost due to geological orother unforeseen events, it may be repayable. This is a situation which has tobe resolved before the Group will claim under any further aid scheme. As aresult, future investments will be considered assuming no aid is available, andthe viability of collieries will be assessed on this basis. Cash received in respect of Investment Aid amounted to £18.5 million and thedebtor at 31 December 2005 was £7.3 million (2004: £11.1 million). The Investment Aid Scheme is now in its final year. The Group has entered intodialogue with the Government over the form and extent of a replacement scheme.Management of UK COAL believes that any replacement for the Coal Investment AidScheme must be in a significantly different form, preferably includingGovernment guarantees or with a more appropriate view of risk, in order to helpwith major investment in collieries. Production The production tonnages for the two years ended 31 December 2005 may besummarised as follows: 2005 2004 Million tonnes Million tonnes Daw Mill 2.0 3.0Kellingley 2.0 0.9Maltby 1.1 1.4Thoresby 1.4 1.1Welbeck 1.0 0.9 Harworth 0.8 0.9Rossington 0.5 0.6Ellington 0.2 0.5Riccall - 1.2Stillingfleet - 1.4Wistow - 0.1 Total Deep Mines 9.0 12.0 Exceptional Items The deep mine operations incurred several exceptional costs during the year,principally relating to the mothballing of Harworth and Rossington, the closureof Ellington and the additional mining costs relating to the force majeure eventat Kellingley. It is possible that further such costs will be incurred in 2006but at present it is not possible to quantify them. Other redundancy costsrelate to the reorganisation and rationalisation of the head office to reflectthe reduced scale of activities within the Group and redundancies made followingreorganisations of ongoing collieries. The Exceptional Items within the deepmine operations may be summarised as follows: Stores Asset Closure stock impairment costs Redundancy Other* Total £000 £000 £000 £000 £000 £000 Harworth (1,685) (967) (8,913) (11,565)Rossington (933) (5,634) (3,331) (4,843) (14,741)Kellingley (7,708) (7,708)Ellington (14) (5,635) (3,077) (8,726)Other (2,064) 249 (6,924) 4,830 (3,909)------------------------------------------------------------------------------------Total (4,696) (6,601) (5,386) (22,245) (7,721) (46,649) ------------------------------------------------------------------------------------ * Other costs refers to the additional labour costs incurred at Rossington andKellingley consequent to the revised mining plans following invocation of theforce majeure clause of the Drax contract, offset by curtailment gains on postretirement benefits, relating to redundancies during 2005. The Exceptional Items are discussed in greater detail in notes 3 and 4 to thefinancial statements. Future Prospects In the final quarter of 2005, the deep mines operated profitably. The tonnageextracted in the fourth quarter was encouraging, and tonnes per manshift, whilstat a five year high, have the potential to be increased further. There is only one scheduled face gap in 2006, for four weeks in March at MaltbyColliery. Apart from this, and in the absence of unforeseen problems, continuousproduction at all mines should be possible. The reserves available in the deep mine operations are critical to the long termprospects of the Group. New advances in seismic exploration, allowing 3Drepresentations of seams, provide better definition of the reserves at theremaining mines. These techniques have already been put into use at Daw Mill andKellingley, and the seismic interpretation has improved understanding of thereserves. The Group's latest estimate of its deep mine coal reserves are set out in thefollowing table: Coal (million tonnes) Reserve 64Resource 119Mineral Potential 90Total 273 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, however these require substantial development andother costs to allow accessibility and are not currently in any mining plan. Mineral Coal that has been assessed (although possibly not to the same extent asReserve and Potential: Resource coal) but UK COAL does not have any licenses or planningpermission to extract the deposits. These figures must be treated with caution; they are based on the Group's bestestimate at the current time. A number of factors may cause the actualproduction to vary significantly from these estimates. These factors include,but are not limited to: •Ongoing seismic surveying of reserves - these could result in either an increase or a decrease to the production estimates; •Geological problems - despite the improved seismic surveying being carried out, there remains a risk that a coal face is subject to unforeseen geological problems that makes production unsustainable; •Sales price of future coal and cost increases; these could render production plans uneconomic or could allow extraction from areas previously believed to be unviable; and •Government support - this could allow investment into new areas of mines not included in current plans. Harworth Insurance Limited Harworth Insurance is the Group's captive insurance company and providesinsurance services for Group companies to cover risks which are eitheruninsurable on the open market or where premiums are at uneconomic levels. Theseprincipally relate to deep mining operations. Centechnology (UK) Limited During 2005, the Group established a new trading subsidiary, Centechnology (UK)Limited, to supply skilled labour to fulfil mining and other associatedrequirements. Centechnology (UK) Limited will add flexibility to UK COAL'slabour and will allow the Group to earn revenue externally when there is sparecapacity. Surface Mining Development and Performance With the completion of coaling at Orgreave in January 2006, the Group iscurrently operating only one surface mine, Maidens Hall, in Northumberland. Inaddition, there are 33 sites (2004: 38 sites) at which mining has beencompleted, and which are subject to restoration and rehabilitation, inaccordance with the terms of the planning permission. The results for the surface mine operations for the two years ended 31 December2005 are summarised as follows: 2005 2004 £000 £000 Revenue 25,203 45,028 Operating profit before Exceptional Items 3,347 4,065Exceptional Items within cost of sales (2,504) (4,323)Operating profit / (loss) 843 (258) The surface mining operations produced a profit, before Exceptional Items, of£3.3 million (2004: £4.1 million). After Exceptional Items of £2.5 million(2004: £4.3 million) this resulted in an operating profit of £0.8 million (2004:loss of £0.3 million). £10.8 million (2004: £8.1 million) was spent onrestoration and rehabilitation projects in the year. Exceptional costs were inrespect of redundancy payments and the write down of redundant assets. Production amounted to 1.0 million tonnes (2004: 2.0 million tonnes), thereduction compared to 2004 being due to the completion of coaling at four sites,with no replacements being available as a result of the lack of planningconsents to mine new sites. Unit costs were £1.31 per Gj (2004: £1.10 per Gj).This rise reflects the inefficiencies which result from operating a limitednumber of sites. 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, these reserves should form an important nationalresource. Planning permission for coaling has been difficult to obtain inprevious years, however UK COAL believes this attitude is changing, and isconfident that in future, schemes can be progressed. The Group is continuing itsefforts to obtain planning permission based on improvements in the environmentalacceptability of brownfield site regeneration. The end result will be not onlyadditional domestic production but also sites restored to a standard and at acost 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. Planning approval was received forone site, Stony Heap in 2005 and a further site at Stobswood North in 2006. APublic Inquiry has been held on the Group's proposals for Long Moor, followingwhich a decision is still awaited. Applications to mine at four sites withreserves of 4.4 million tonnes were submitted to the respective Mineral PlanningAuthorities during 2005 and appeals have been lodged against the decision toreject coaling at two further sites, these should be heard at Public Inquiriesduring the first half of 2006. Applications to mine in excess of four milliontonnes at a further six separate sites will be lodged during the coming year. At31 December 2005, surface mining reserves with planning consent amounted to 2.7million tonnes (2004: 3.2 million tonnes). A summary of activity is set out in the table below: Site Tonnage Remaining (000 tonnes) Maidens Hall Extension 920Cutacre 1,500Stony Heap 257Stobswood North 987Sites With Planning 3,664 Sharleston Colliery 360Steadsburn 1,000Long Moor 725Lodge House 1,000Potland 2,000Sites in Planning 5,085 Chesterfield Canal 400Dawley Road 650White Lea 1,000Blair House 1,000Bradley 500Minorca 800Sites to come into Planning 4,350 Property Development and Performance Significant progress in the property business has been made during 2005: • Strong increase in property valuation - 34% on like for like basis • Increase in profit on sale of assets to £9.6 million from £2.8 million • Growth in commercial rental income of 32% to £2.1 million • Growth in agricultural rental income of 18% to £2.7 million • Received planning permissions on an additional 140 acres for commercialdevelopment with a further 80 acres submitted and awaiting decisions The results for the property operations for the two years ended 31 December 2005are summarised as follows: 2005 2004 £000 £000 Revenue 4,841 3,912 Profit on sale of assets 9,611 2,760Operating profit* 16,418 4,600 Valuation (including investment properties) 274,169 208,626 * Operating profit in 2005 includes £4.5 million in respect of revaluation ofinvestment properties and the profit on sale of assets. Income derived from the Group's property portfolio may be summarised by type ofrental as follows: 2005 2004 Rental income Rental income £000 % £000 % Agricultural land 2,701 55.8 2,296 58.7Business parks 2,140 44.2 1,616 41.3Total 4,841 100.0 3,912 100.0 Agricultural Land Agricultural land continues to be managed on a tenancy basis to selectedoccupiers. The portfolio comprises in excess of 600 individual tenancies, onwhich income rose by 18% in the year, in what continues to be a difficultmarket. This growth was achieved by a combination of rent reviews, increasedland usage and additional income from land returned from surface mining usefollowing restoration. Business Parks Income at the Group's business parks grew by some 32% in the year, from higheroccupancy, rent reviews and new leases. Asfordby and Whitemoor both had anoccupancy rate of around 95% at the year end. During 2005 the new lease at MidCannock and the first lease at Gascoigne Wood contributed to the year on yearprofit increase. A new development at Bilsthorpe is proceeding well; the first20,000 sq ft building was completed during 2005 and is under offer for lease. Investment Properties Asfordby Business Park was classed as an investment property in 2003. WhitemoorBusiness Park and the Group's land at Mid Cannock, a vacant site leased for 50years, have been classed as such during 2005. In accordance with accountingstandards, £4.6 million of gains on the initial recognition of investmentproperties have been taken to reserves, while £4.5 million of gains onsubsequent revaluations have been recognised in the income statement. Futuremovements in the value of the investment properties will similarly be taken tothe consolidated income statement. At 31 December 2005, investment propertieswere valued at £17.8 million, compared to £6.7 million at 31 December 2004. Development Properties During 2005, the Group received planning permission for commercial use on 140acres of land, including 80 acres at phase 2 of Waverley AMP. This represents asignificant step forward in the development of these sites. A further 15 acreshas been allocated for mixed development in the Gedling Local Plan. During theyear, applications were made to Selby District Council for permission to use theStillingfleet, Riccall, Wistow and Gascoigne Wood sites for alternativepurposes. Unfortunately these applications have been rejected. We will, however,appeal these decisions and dialogue continues with Selby District Council abouthow these sites can be developed to meet both parties' respective goals. Profits from property sales amounted to £9.6 million (2004: £2.8 million),arising from partial disposals at Tetron Point, Houghton Main, Denby Hall andWaverley AMP. These sales generated proceeds of £15.0 million (2004: £4.3million). These disposals relate to land where we believe we have extracted fulladded value opportunities. We have continued to add value through development of our portfolio and in 2005we spent £7.8 million on various projects to improve and add value to ourexisting properties. The major areas of spend were: • Continued infrastructure works at Tetron Point; • Site preparation and building works at Bilsthorpe; • Infrastructure works at Denby; • Contribution to infrastructure costs at Waverley AMP; • Compaction costs at Waverley (Orgreave); and • Planning and consultation costs at Waverley (Orgreave) and Prince ofWales. Valuation Like for Like Land Category Dec-04 Jun-05 Dec-05 Dec-04 to £000 £000 £000 Dec- 05 Business Parks 17,410 18,960 19,210 55% Development Properties Commercial with Planning 34,004 33,140 30,060 17% Other commercial or residential 91,406 115,167 114,992 24% Agricultural 59,086 92,991 92,157 57% Total excluding investment properties 201,906 260,258 256,419 35% Investment Properties 6,720 17,750 17,750 24% TOTAL 208,626 278,008 274,169 34| A full independent property valuation of all properties was carried out at 30June 2005, with an update at the year end, in accordance with the "RICSAppraisal and Valuation Standards" published by the Chartered Institute ofSurveyors. This follows the limited update to the 2002 valuation carried out at31 December 2004. The gross valuation (excluding investment properties) has increased by 29.8% to£256.4 million (31 December 2004: £197.6 million), the major reason being theuplift in the agricultural valuation (including residential properties) since2002 and the planning consents obtained since that date. The valuation is beforethe deduction of rehabilitation and restoration costs of £66.4 million (31December 2004: £77.2 million), which are provided in the accounts and relatemainly to working surface mines and sites in aftercare. On a like for likebasis, taking into account disposals and development expenditure, the propertyportfolio (excluding investment properties) has shown a gain of £67.0 million(35%). The valuation has declined slightly since the half year; the result ofsales in the second half but on a like for like basis shows no movement. Thevaluation exceeds the amount recorded in the books by £181.5 million (31December 2004: £126.3 million). The valuation of the non-agricultural properties was undertaken by NAI FullerPeiser acting in the capacity of external valuers. The basis of value is marketvalue, but subject to a number of assumptions, the most important of which are: •The sites will be cleared of redundant buildings, levelled and prepared ready for development; •The values are on the basis that no material environmental contamination exists on the subject or adjoining sites, or where this is present the sites will be remediated by UK COAL to a standard consistent with the intended use; and •No deduction or adjustment has been made in relation to clawback provisions, or other taxes which may be payable. It should be noted that changes, such as planning approvals, could have amaterial effect on future valuations. The agricultural land in the north of England and Scotland was valued by BellIngram with the remaining land valued by Smiths Gore. Both valuations usedmarket value subject to existing tenancies and were based on existing use. Future Prospects The Group is currently managing around 40 separate property projects. In theshort term, it is the intention of management to maintain, and enhance wherepossible, the current income streams while adding value by: •Completing master planning at our key development sites; •Completing construction and letting of development properties; •Commencement of master planning at appropriate sites; •Constructing new buildings at existing business parks, where demand for pre let accommodation is strong; •Continuing the process of securing planning at sites where there is the opportunity to create value through new commercial development; •Exploiting agricultural portfolio for surface mining, residential development and possible disposals of surplus land and properties; and •Continuing infrastructure works and disposal programme at appropriate development sites. Harworth Power Development and Performance The results for Harworth Power for the two years ended 31 December 2005 aresummarised as follows: 2005 2004 £000 £000 External revenue 862 76Inter company revenue 2,868 3,881Total Turnover 3,730 3,957Emissions Trading credits 2,446 2,972Methane costs (to Deep Mining) (475) -Other costs (2,341) (2,690)Operating profit 3,360 4,239 During the year, Harworth Power made an operating profit of £3.4 million (2004:£4.2 million), achieved by the generation of 104,526 MWH of electricity (2004:104,234 MWH). The fall in profit arises from a decrease in credits from the UKEmissions Trading Scheme to £2.4 million (2004: £3.0 million), together with theintroduction by the deep mines of charges for methane, amounting to £0.5 millionin 2005 (2004: £nil). Planning permission was received in the year for the operation of three windturbines at the Royal Oak site in County Durham, generating some 3.9 MW. It isanticipated that construction will commence during 2006, with the expectationthat the wind farm will commence operations during the first half of 2007.Harworth Power has a total installed capacity of 32 MW (2004: 32 MW). Future Prospects Extraction of methane from existing sites is expected to continue into theforeseeable future. Generation is forecast to increase with the installation ofnew engines at mine sites where methane capture is being improved. Capital willbe invested where adequate returns are available, principally in theinstallation of new engines at mine sites. The UK Emissions Trading Schemefinishes at the end of 2006, reducing the incentive to invest in certainemissions reduction projects. UK COAL is actively involved in discussions as tothe form of any replacement scheme. The Group will submit further applications in respect of eight wind farms,generating 80MW from 74 turbines during 2006. Provided the applications aresuccessful, commissioning of these farms would be phased during 2007 and 2008. The Group has identified other opportunities to generate additional powerutilising renewable energy sources. It is evaluating the commercial strengthsand risks of these schemes and the level of investment needed and will makeinvestment in those schemes that match the returns required by the Group. Monckton Monckton, which produces coke and high quality coking products, was sold duringJune 2005. Monckton made an operating profit of £1.4 million during the sixmonths to June 2005 (2004: £0.3 million for twelve months). Monckton was sold for a consideration of £13.1 million, with £8.3 millionreceived in the year and the remainder to be paid in instalments ending June2007. The terms of the sale grant UK COAL a royalty on future sales, in additionto opening a sales channel for suitable products at favourable prices. Capital Structure The Group had net liabilities of £14.7 million at 31 December 2005, compared tonet assets of £56.8 million at 31 December 2004, a reduction of £71.5 million.It should be noted that the Group's properties have been valued at an amountwhich is £181.5 million higher than their book value. If the properties wereincluded at their revalued amounts, therefore, the Group would have net assetsof £166.8 million, excluding provision for any clawback or taxation liabilities. The major movements in the balance sheet are summarised in the followingparagraphs: •Property, plant and equipment have decreased by £36.2 million in the year, the result of additions of £27.5 million being offset by depreciation / impairment of £54.2 million, disposals of £8.9 million and transfers to investment properties of £1.9 million. •Two further properties have been included as investment properties in the year in accordance with the Group's accounting policy. •The Group has reduced its inventories by some £5.5 million, a reflection of lower activity levels in both deep and surface mines together with provisions against stores stocks for closed or mothballed mines. •The Group makes provisions in respect of redundancies where there is an obligation at the balance sheet date. Provisions are also made in respect of employer and public liability claims; surface damage; surface and deep mine restoration and rehabilitation costs including shaft capping where appropriate; and pumping costs at closed sites. A table containing detailed financial information is set out in note 9 to the financial statements. •Retirement benefit obligations have increased by £5.2 million. This movement may be summarised as follows: Pension Concessionary Fuel Total £m £m £m 1 January 2005 (114.5) (22.6) (137.1)Employer's current service costs (12.8) (0.5) (13.3Expected return on assets 16.1 - 16.1Interest on deficit (18.1) (0.8) (18.9)Net actuarial losses (10.3) (4.0) (14.3)Gains on curtailments 2.2 3.0 5.2Employer's contributions 19.4 0.6 20.031 December 2005 (118.0) (24.3) (142.3) Net actuarial losses represent the difference between the actuarial gains(actual returns over those expected from the schemes' assets), and actuariallosses (losses as a result of changes in assumptions used to value theliabilities). The retirement benefit obligations position noted above should beread in conjunction with note 9. The retirement benefit obligation valuationsare subject to a number of uncertainties, including, but not limited to, theestimation of future rates of return from the pension scheme assets and theactuarial assumptions underpinning the liabilities, including life expectancy,inflation and salary increases. •The pension deficit has recorded a modest increase of £3.5 million, the result of an increase in the value of liabilities of £73.3 million, largely reflecting lower bond yields, outweighing the investment returns of £53.1 million and contributions of £16.7 million (net of benefits paid). The discount rate used is determined by reference to AA rated corporate bond yields, which are at a historic low. •During the year ended 31 December 2005, additional contributions amounting to £6.5 million were paid to the pension schemes. It is anticipated these additional contributions will continue, and the deficit will reduce over a ten year period. Cash Flow and Funding Net cash at 31 December 2005 and 31 December 2004 is summarised as follows: 2005 2004 £000 £000 Cash deposited to cover insurance requirements 25,447 29,747 Subsidence security fund 26,769 25,544 Other cash balances 1,004 326 Cash and cash equivalents 53,220 55,617 Debt (75,295) (12,225) Finance leases and hire purchase contracts (21,246) (36,106) Borrowings (96,541) (48,331) Net (borrowings) / funds (43,321) 7,286 As a requirement of the Financial Services Authority and The Coal Authority,cash is held to match provisions in respect of employer and public liabilitiesand surface damage and shaft treatment liabilities. At the year-end, cash heldfor such purposes was £52.2 million (2004: £55.3 million). The Group has increased its borrowings by £48.2 million in the year. The majoritems are summarised as follows: •Capital expenditure amounted to £18.7 million; receipts from the sale of plant, property and equipment were £15.9 million; •Receipts from the sale of Monckton in the year were £8.3 million; a further £4.8 million will be recovered in 2006 and 2007; •Repayment of finance leases were £19.8 million; •Coal Investment Aid received of £18.5 million; •Additional payments to pension schemes of £6.5 million; •Redundancy payments amounted to £16.1 million; and •Other payments were £31.3 million in relation to the restoration of former surface mines and deep mines, surface damage claims, and insurance settlements. At 31 December 2005, the Group had committed banking facilities of £105.5million, consisting of £74.0 million on its syndicated revolving creditfacility, which expires in July 2007, £21.5 million on a property anddevelopment loan expiring in 2008, and a £10.0 million overdraft facility. Sincethe year end, the Group has negotiated an increase in its banking facilities to£143.0 million, plus leasing. Contingent liability No amounts in relation to the ongoing proceedings concerning early-retirement,pension-related redundancy payments for employees transferred to the Group onprivatisation have been provided in the financial statements. The contingentliability should be noted as, if UK COAL loses its case, the effect on theresults and cash resources could be significant. Full details are set out innote 10. Income StatementFor the year ended 31 December 2005 2004 Notes £000 £000Continuing operationsRevenue 2 341,214 433,818Cost of sales 3 (412,606) (470,787)-------------------------------------------------------------------------------------------------------Gross loss (71,392) (36,969)Coal Investment Aid 4 14,641 8,902Appreciation in fair value of investment 4,530 -propertiesProfit on disposal of property, plant and 10,074 3,317equipmentProfit on sale of business 5 3,100 -Other operating income and expenses (14,286) (12,300)------------------------------------------------------------------------------------------------------Operating loss (53,333) (37,050)Interest payable and similar charges 6 (11,753) (9,753)Interest receivable 6 2,992 4,605------------------------------------------------------------------------------------------------------Net finance costs 6 (8,761) (5,148)------------------------------------------------------------------------------------------------------Loss before tax (62,094) (42,198)Tax - -------------------------------------------------------------------------------------------------------Loss for the year from continuing activities (62,094) (42,198)------------------------------------------------------------------------------------------------------ Discontinued operationsLoss for the year from discontinued operations (72) (1,626)Profit on disposal of discontinued operations - 10,293------------------------------------------------------------------------------------------------------Total (loss) / profit from discontinued (72) 8,667operations------------------------------------------------------------------------------------------------------ Loss for the year (62,166) (33,531)------------------------------------------------------------------------------------------------------ Attributable to:Equity holders of the parent (62,166) (33,480)Minority interest - (51)------------------------------------------------------------------------------------------------------ (62,166) (33,531)------------------------------------------------------------------------------------------------------Loss per share p p From continuing operations:Basic and diluted (41.9) (29.0) From discontinued operations:Basic and diluted - 6.0 From total operations:Basic and diluted (41.9) (23.0) Statement of Recognised Income and ExpenseFor the year ended 31 December 2005 2004 £000 £000 Loss for the year (62,166) (33,531) Actuarial losses on defined benefit pension schemes (10,286) (14,025)Actuarial (loss) / gain on concessionary fuel reserve (3,995) 2,307Accrual for long term incentive plan liabilities 173 (211)--------------------------------------------------------------------------------------------------- Net losses not recognised in income statement (14,108) (11,929) Total recognised expense for the year (76,274) (45,460)=================================================================================================== Attributable to:Equity holders of parent (76,274) (45,409)Minority interests - (51)--------------------------------------------------------------------------------------------------- (76,274) (45,460) ================================================================================================== Balance SheetsAt 31 December 2005 2004 Notes £000 £000ASSETSNon current assetsProperty plant and equipment 322,050 358,232Investment property 17,750 6,720Trade and other receivables 4,728 4,131---------------------------------------------------------------------------------------------------- 344,528 369,083 ===================================================================================================Current assetsInventories 42,168 47,641Trade and other receivables 63,312 62,358Cash and cash equivalents 53,220 55,617---------------------------------------------------------------------------------------------------- 158,700 165,616====================================================================================================LIABILITIESCurrent liabilitiesFinancial liabilities- Borrowings 7 (55,575) (12,225)Trade and other payables (104,927) (106,871)Obligations under hire purchase and finance leases 7 (7,411) (10,998)Provisions 8 (52,320) (46,837)---------------------------------------------------------------------------------------------------- (220,233) (176,931)----------------------------------------------------------------------------------------------------Net current liabilities (61,533) (11,315)----------------------------------------------------------------------------------------------------Non current liabilitiesFinancial liabilities- Borrowings 7 (19,720) -- Derivative financial instruments (55) -Obligations under hire purchase and finance leases 7 (13,835) (25,108)Provisions 8 (121,778) (138,812)Retirement benefit obligations 9 (142,338) (137,059)---------------------------------------------------------------------------------------------------- (297,726) (300,979)----------------------------------------------------------------------------------------------------Net (liabilities) / assets (14,731) 56,789---------------------------------------------------------------------------------------------------- EquityCapital and reservesOrdinary shares 1,485 1,462Share premium 1,771 122Revaluation reserve 4,565 -Capital redemption reserve 257 257Fair value reserve 4,530 -Retained earnings (27,339) 54,948----------------------------------------------------------------------------------------------------(Deficit) / surplus on total shareholders' equity (14,731) 56,789---------------------------------------------------------------------------------------------------- Cash Flow StatementsFor the year ended 31 December 2005 2004 £000 £000----------------------------------------------------------------------------------------------------Cash flows from operating activitiesLoss for the year (62,166) (33,531)Depreciation / impairment of property, plant and equipment 50,119 55,336Fair value appreciation in investment properties (4,530) -Net interest receivable and amortisation of discount on provisions 8,376 5,148Net charge / (credit) for share based remuneration 173 (211) Net credit for surface mine development and restoration costs (3,356) (1,649) Profit on disposal of property, plant and equipment (10,074) (3,317) Profit on sale of interests in businesses (3,100) (10,293) Decrease in provisions (23,676) (29,200)Tax 72 -Dti contributions to redundancy payments - 5,200----------------------------------------------------------------------------------------------------Operating cash flows before movements in working capital (48,162) (12,517) Decrease in stocks 2,004 10,828(Increase) / decrease in receivables (1,551) 24,589 Decrease in payables (5,936) (5,524)----------------------------------------------------------------------------------------------------Cash (used in) / generated from operations (53,645) 17,376Tax paid (72) -Financing cost (738) -Interest paid (5,744) (4,006)----------------------------------------------------------------------------------------------------Cash (used in) / generated from operating activities (60,199) 13,370---------------------------------------------------------------------------------------------------- Cash flows from investing activitiesInterest received 2,992 4,605Net receipt from insurance and security provision funds 3,075 3,675Disposal of businesses 8,844 19,571Proceeds on disposal of property, plant and equipment 15,861 6,382 Purchase of property, plant and equipment (18,688) (51,370)----------------------------------------------------------------------------------------------------Cash generated from / (used in) investing activities 12,084 (17,137)----------------------------------------------------------------------------------------------------Cash flows from financing activitiesProceeds from issue of share capital 1,672 122New bank loans raised 63,464 5,067Purchase of treasury shares - (43)Proceeds from new finance leases 4,939 22,185 Repayments of obligations under hire purchase and finance leases (19,799) (9,986) Dividends paid to shareholders (1,483) (14,573)----------------------------------------------------------------------------------------------------Cash generated from financing activities 48,793 2,772----------------------------------------------------------------------------------------------------Effects of exchange rate differences - (63)----------------------------------------------------------------------------------------------------Increase / (decrease) in cash 678 (1,058)==================================================================================================== At 1 JanuaryCash 326 1,384Cash equivalents 55,291 58,966---------------------------------------------------------------------------------------------------- 55,617 60,350Reduction in cash equivalents (net receipt from insurance and (3,075) (3,675)security funds) Increase / (decrease) in cash 678 (1,058)---------------------------------------------------------------------------------------------------- 53,220 55,617====================================================================================================At 31 DecemberCash 1,004 326Cash equivalents 52,216 55,291----------------------------------------------------------------------------------------------------Cash and cash equivalents 53,220 55,617==================================================================================================== Notes to the Accounts 1 Accounting Policies These financial statements have been prepared in accordance with InternationalFinancial Reporting Standards ("IFRS") and IFRIC interpretations and with thoseparts of the Companies Act 1985 applicable to companies reporting under IFRS (asendorsed by the EU). The consolidated financial statements have been preparedunder the historical cost convention, as modified by the revaluation ofinvestment properties in accordance with IAS 40 'Investment Property'. The rules for first time adoption of IFRS are set out in IFRS 1 'First timeadoption of International Financial Reporting Standards'. In preparing thefinancial statements, these rules have been applied to the amounts previouslyreported under UK GAAP. IFRS 1 generally requires full retrospective applicationof the standards and interpretations in force at the first reporting date.However IFRS 1 allows certain optional exemptions in the application ofparticular standards to prior periods in order to assist companies with thetransition process. UK COAL's decisions in respect of these exemptions are asfollows: •UK COAL has adopted IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations' with effect from 1 January 2005, with no restatement of comparative information for 2004. •UK COAL has opted to continue to measure property, plant and equipment (excluding investment property) at historical cost, less accumulated depreciation. •UK COAL has elected to recognise all cumulative actuarial gains and losses in respect of retirement benefit schemes in reserves on transition rather than recognising certain of them through the consolidated income statement prospectively over a period of time. •UK COAL has, in recognising fair values of share based payments to employees, chosen to apply the exemption only to include those awards made after 7 November 2002 which had not vested at 31 December 2003 in its calculations at the date of transition. •UK COAL has assumed cumulative translation differences for foreign operations to be zero at the date of transition. This related to the Australian subsidiary, Gloucester Coal, at the date of transition. At 31 December 2004 and 31 December 2005, UK COAL had no foreign subsidiaries. •UK COAL has not retrospectively applied IFRS 3 'Business Combinations' to business combinations that occurred before the date of transition. •UK COAL has elected to adopt IAS 32 'Financial instruments: Disclosure and presentation' and IAS 39 'Financial instruments: Recognition and measurement' with effect from 1 January 2005. This allows the recognition of derivatives for the first time in the accounting period ending 31 December 2005 and does not require comparative figures to be restated. The comparative numbers were prepared under UK GAAP. No significant adjustments to the comparative numbers would be required for them to comply with IAS 32 and IAS 39. •A number of IFRS Standards and Interpretations are not yet mandatory but can be adopted early under their respective transition arrangements. UK COAL has adopted early IFRS 6 'Exploration for and Evaluation of Mineral Resources' and the amendment to IAS 19 'Employee Benefits: Actuarial Gains and Losses, Group Plans and Disclosures'. A reconciliation of the Group's results for the year ended 31 December 2004 andthe net assets at 1 January 2004 and 31 December 2004, as reported under UKGAAP, to those reportable under IFRS was sent to all shareholders with theinterim report. 2 Segmental reporting RevenueRevenue from continuing operations arises from: 2005 2004 £000 £000 Sale of goods 334,355 428,865Rendering of services 6,859 4,953------------------------------------------------------------------------------------------------------ 341,214 433,818------------------------------------------------------------------------------------------------------ Primary reporting format - business segmentsYear ended 31 December 2005 Deep Surface Harworth Mining Mining Property Power Other Total £000 £000 £000 £000 £000 £000-------------------------------------------------------------------------------------------------------Continuing operationsRevenue - gross 312,191 59,278 4,841 3,730 11,280 391,320 Revenue- intra group (13,163) (34,075) - (2,868) - (50,106)-------------------------------------------------------------------------------------------------------Revenue 299,028 25,203 4,841 862 11,280 341,214-------------------------------------------------------------------------------------------------------Gross (loss) / profit before (37,337) 6,048 6,754 916 1,380 (22,239) Exceptional Items within cost of salesExceptional Items within cost of (46,649) (2,504) - - - (49,153)sales------------------------------------------------------------------------------------------------------Gross (loss) / profit (83,986) 3,544 6,754 916 1,380 (71,392) Coal Investment Aid 14,641 - - - - 14,641Appreciation in fair value of - - 4,530 - - 4,530propertiesProfit on disposal of property, 305 158 9,611 - - 10,074plant and equipmentProfit on disposal of business - - - - 3,100 3,100Other operating income and (9,398) (2,859) (4,477) 2,446 2 (14,286)expenses------------------------------------------------------------------------------------------------------Operating (loss) / profit from (78,438) 843 16,418 3,362 4,482 (53,333)continuing operations------------------------------------------------------------------------------------------------------Interest expense (11,753)Interest income 2,992--------------------------------------------------------------------------------------------------------Loss before tax (62,094)Tax (relating to discontinued operations) (72)------------------------------------------------------------------------------------------------------- Loss for the year (62,166)------------------------------------------------------------------------------------------------------- Segmental assets 318,531 71,297 125,167 8,357 523,352Segmental liabilities (377,444) (106,213) (10,061) (330) (494,048)Unallocated liabilities - net debt and finance leases (44,035)-------------------------------------------------------------------------------------------------------Net liabilities (14,731)------------------------------------------------------------------------------------------------------- Other segmental items Capital expenditure 17,533 7,730 2,226 26 - 27,515Impairment 6,601 500 - - - 7,101Depreciation 37,114 8,794 - 919 270 47,097------------------------------------------------------------------------------------------------------- Year ended 31 December 2004 Deep Surface Harworth Mining Mining Property Power Other Total £000 £000 £000 £000 £000 £000-------------------------------------------------------------------------------------------------------Continuing operationsRevenue - gross 381,819 86,616 3,912 3,957 19,954 496,258Revenue - intra group (16,971) (41,588) - (3,881) - (62,440)-------------------------------------------------------------------------------------------------------Revenue 364,848 45,028 3,912 76 19,954 433,818-------------------------------------------------------------------------------------------------------Gross (loss) / profit before (27,225) 7,041 1,685 1,267 (745) (17,977)Exceptional Items within cost ofsalesExceptional Items within cost of sales (14,669) (4,323) - - - (18,992)------------------------------------------------------------------------------------------------------- Gross (loss) / profit (41,894) 2,718 1,685 1,267 (745) (36,969)Coal Investment Aid 8,902 - - - - 8,902Appreciation in fair value of - - - - - -propertiesProfit on disposal of property, 58 499 2,760 - - 3,317plant and equipmentProfit on disposal of business - - - - - -Other operating income and expenses (11,997) (3,475) 155 2,972 45 (12,300)-------------------------------------------------------------------------------------------------------- Operating (loss) / profit from (44,931) (258) 4,600 4,239 (700) (37,050)continuing activities Discontinued operationsRevenue - external 9,092 9,092--------------------------------------------------------------------------------------------------------Segment result (1,626) (1,626)Profit on disposal of business 10,293 10,293-------------------------------------------------------------------------------------------------------Total profit from discontinued operations 8,667 8,667------------------------------------------------------------------------------------------------------- Interest expense (9,753)Interest income 4,605-------------------------------------------------------------------------------------------------------Loss for the year (33,531)------------------------------------------------------------------------------------------------------- Segmental assets 353,448 84,095 96,824 5,482 10,495 550,344Segmental liabilities (351,322) (129,207) (4,548) (3,274) (12,489) (500,840)Unallocated liabilities - net debt 7,285and finance leasesNet assets 56,789------------------------------------------------------------------------------------------------------- Other segmental Items Capital expenditure 48,050 9,597 1,261 285 24 59,217Impairment of assets 2,256 4,323 - - - 6,579Depreciation 41,071 13,304 - 677 758 55,810------------------------------------------------------------------------------------------------------- Secondary format - geographic segments The Group manages its business segments on a global basis. Following the sale ofthe Australian subsidiary in 2004, the Group is now entirely based in the UnitedKingdom. The United Kingdom is the home of the parent company. An analysis ofrevenue by destination, together with capital expenditure and segment assets isgiven in the following table: Revenue Segment Capital assets expenditure 2005 2004 2005 2004 2005 2004 £000 £000 £000 £000 £000 £000Continuing operationsUnited Kingdom 333,272 423,867 523,352 550,344 27,515 59,018Europe 7,942 9,951 - - - -------------------------------------------------------------------------------------------------------- 341,214 433,818 523,352 550,344 27,515 59,018------------------------------------------------------------------------------------------------------Discontinued operationsUnited Kingdom - 2,874 - - - -Europe - - - - - -Asia - Pacific (Australia) - 6,218 - - - 199------------------------------------------------------------------------------------------------------ 341,214 442,910 523,352 550,344 27,515 59,217------------------------------------------------------------------------------------------------------ 3 Cost of sales Notes 2005 2004 £000 £000Exceptional Items within cost of salesRedundancy 4a (24,249) (6,277)Selby post coaling 4b 249 (6,223)Ellington post coaling 4c (5,635) -Ellington impairment 4d - (3,109)Stores equipment 4e (4,696) -Impairment of assets at Harworth 4f (967) -Impairment of assets at Rossington 4g (5,634) -Recovery costs at Kellingley and Rossington 4h (12,551) -Surface mine equipment 4i (500) (4,323)Pension obligation in respect of companies disposed of in 4j - (1,299)prior yearsAmount recovered against TXU debt 4k - 2,239Costs incurred following approach for company 4l (350) -Post retirement benefits 4m 5,180 ---------------------------------------------------------------------------------------------- (49,153) (18,992)Other cost of sales (363,453) (451,795)--------------------------------------------------------------------------------------------Total cost of sales (412,606) (470,787)--------------------------------------------------------------------------------------------- 4 Exceptional Items 2005 2004 £000 £000 Exceptional Items within cost of sales (49,153) (18,992)Other Exceptional Items -Coal Investment Aid 4n 17,143 8,902Amount provided against Coal Investment Aid claim 4o (2,502) -Profit on disposal of businesses 4p 3,100 ------------------------------------------------------------------------------------------------Total Exceptional Items (31,412) (10,090)----------------------------------------------------------------------------------------------- Operating loss before Exceptional Items (21,921) (26,960)Net charge for Exceptional Items (31,412) (10,090)----------------------------------------------------------------------------------------------Operating loss (53,333) (37,050)---------------------------------------------------------------------------------------------- a) Costs for redundancies announced during the year at deep mines collieries(other than the Selby Complex), surface mining operations and head officereorganisation, including senior management (2004: costs predominantlyassociated with the closure of the Selby mines and surface works and head officereorganisation). b) Costs incurred between cessation of coaling and commencement ofrestoration work at Selby not provided at December 2002 when the impairment invalue was recognised. c) Costs incurred at Ellington Colliery following the cessation of miningoperations in January 2005. d) Following the announced closure of Ellington Colliery, the carrying valueand estimated useful economic lives of the mine and surface works has beenreviewed giving rise to an impairment in value of £2,256,000 and a write-down inthe value of stores stocks of £853,000. e) Write down in value of redundant stores equipment. f) Following the announcement to mothball Harworth Colliery, the assets ofthe colliery were reviewed, giving rise to an impairment in value of £967,000and a write down in the value of stores stocks of £1,685,000 (included withinitem 4e). g) Following the announcement of the mothballing of Rossington Colliery, thecarrying value and estimated useful economic lives of the mine and surface workshas been reviewed giving rise to an impairment in value of £5,634,000 and awrite-down in the value of stores stocks of £933,000 (included within item 4e). h) Additional labour costs incurred at Rossington and Kellingley consequentto the revised mining plans following invocation of the force majeure clause ofthe Drax contract. i) Write down in value of redundant surface mine equipment. j) Pension obligations in respect of Blenkinsopp Collieries Ltd which wentinto liquidation after UK COAL disposed of its interest in a previous year. k) Additional monies credited to the income statement as UK COAL'sentitlements, under the agreement selling its claim against TXU, becomingclearer as resolution of the agreement progresses. l) Costs incurred following an approach from a consortium looking toacquire the Company. It comprises fees from property advisors, lawyers andfinancial advisors. m) Reduction in the Group's liability to provide post retirement benefits inretirement in respect of staff leaving UK COAL's employment during the financialyear 2005. n) Coal Investment Aid receivable under the Government Aid Scheme. Includes£1.8 million relating to the accelerated release of Investment Aid. o) Claims for Coal Investment Aid which are being challenged followingclosure or mothballing of collieries or revised coaling approaches. p) Profit on disposal of Monckton business. 5 Profit on sale of business On 17 June 2005 the Group disposed of its wholly owned subsidiary, The MoncktonCoke & Chemical Company Limited, for a consideration (before transaction costs)of £12.0 million plus an incremental adjustment in respect of working capital inthe sum of £1.1 million. £8.3 million of the proceeds were received in the year,with the remainder to be paid in instalments ending June 2007. £000 Property, plant and equipment 5,557Inventories 3,469Trade and other receivables 4,314Cash and cash equivalents (844)Trade and other payables (1,222)Provisions (1,588)------------------------------------------------------------------------------------------------ 9,686Profit on disposal 3,100-----------------------------------------------------------------------------------------------Cash consideration, net of transaction costs 12,786----------------------------------------------------------------------------------------------- 6 Net finance costs 2005 2004 £000 £000 Interest payable on bank borrowings (4,018) (1,731)Amortisation of issue costs of bank loan (344) (446)Interest payable on hire purchase agreements and (1,877) (1,691)finance leasesDiscounting of non current receivables (391) -Unwinding of discounts on provisions (5,123) (5,885)-----------------------------------------------------------------------------------------Interest payable and similar charges (11,753) (9,753)Interest receivable 2,992 4,605-----------------------------------------------------------------------------------------Net interest payable (8,761) (5,148)----------------------------------------------------------------------------------------- 7 Financial liabilities - Borrowings Current 2005 2004 £000 £000 Bank loans and overdrafts due within one year or on demand:Secured 55,575 12,225Unsecured - ------------------------------------------------------------------------------------------- 55,575 12,225Finance lease obligations 7,411 10,998------------------------------------------------------------------------------------------- 62,986 23,223------------------------------------------------------------------------------------------ Non current 2005 2004 £000 £000 Bank loans and overdraftsSecured 19,720 -Unsecured - ------------------------------------------------------------------------------------------- 19,720 -Finance lease obligations 13,835 25,108------------------------------------------------------------------------------------------ 33,555 25,108------------------------------------------------------------------------------------------ Bank loans and overdrafts due within one year or on demand are stated afterdeduction of unamortised borrowing costs of £556,000 (2004: £441,000). Noncurrent bank loans and overdrafts are stated after deduction of unamortisedborrowing costs of £280,000 (2004: £nil). The Group's Revolving Credit Facilitycomprises one month rolling drawdowns, and are thus disclosed under amountsfalling due within one year. The facility is, however, committed until 2007. The bank loans and overdrafts are secured by way of fixed and floating chargesover certain assets of the Group. The exposure of the Group to interest rate changes when borrowings reprice is asfollows: 1 year 1-5 years 5 years Total £000 £000 £000 £000 As at 31 December 2005Total borrowings 82,706 13,661 174 96,541Effect of interest rate swaps (17,000) 17,000 - ------------------------------------------------------------------------------------------- 65,706 30,661 174 96,541------------------------------------------------------------------------------------------ As at 31 December 2004Total borrowings 23,223 24,759 349 48,331 The effective interest rates at the balance sheet date were as follows. 2005 2004 Bank overdraft 5.5% 5.8%Bank borrowings 6.1% 6.1%Finance lease 6.6% 6.8%------------------------------------------------------------------------------------------ The carrying amount of the Group's borrowings are denominated in sterling. The minimum lease payments under finance leases fall due as follows: 2005 2004 £000 £000 Not later than one year 8,733 16,268Later than one year, but not more than five years 15,310 23,825More than five years 186 372------------------------------------------------------------------------------------------ 24,229 40,465Future finance charges on finance leases (2,983) (4,359)------------------------------------------------------------------------------------------Present value of finance lease liabilities 21,246 36,106------------------------------------------------------------------------------------------ 8 Provisions As at At 01-Jan Provided Released Subsidiary Utilised Unwinding 31-Dec 2005 in year in year sold in year of 2005 discount £000 £000 £000 £000 £000 £000 £000GroupEmployer and public 20,780 3,300 (332) - (6,685) 935 17,998liabilitiesSurface damage 22,652 6,016 (3,345) - (4,015) 680 21,988Claims 1,026 559 - - (47) - 1,538Restoration and 77,207 530 (2,828) - (10,863) 2,316 66,362closure costs ofsurface minesRestoration andclosure costs ofdeep minesshaft treatment and 23,324 6,560 (3,114) - (8,934) 658 18,494pit topspoil heaps 5,389 275 - - (797) 162 5,029pumping costs 8,130 790 - - (4) 69 8,985Ground/groundwater 11,043 - (281) (1,582) - 303 9,483contaminationRedundancy 16,098 26,394 (2,145) - (16,126) - 24,221-------------------------------------------------------------------------------------------- 185,649 44,424 (12,045) (1,582) (47,471) 5,123 174,098-------------------------------------------------------------------------------------------- Provisions have been analysed between current and non current as follows: 2005 2004 £000 £000 Current 52,320 46,837Non current 121,778 138,812 174,098 185,649 Provisions are expected to be settled within the timescales set out in thefollowing table. It should be noted that these are based on the informationavailable at the time the financial statements were prepared and are subject toa number of estimates and uncertainties, as noted below. Within 1 1-2 years 2-5 years More than 5 Total year years £000 £000 £000 £000 £000 Employer and public liabilities 9,026 3,613 3,704 1,655 17,998Surface damage 4,837 4,398 9,675 3,078 21,988Claims 1,538 - - - 1,538Restoration and closure costs of 15,846 11,907 33,945 4,664 66,362surface minesRestoration and closure costs ofdeep minesshaft treatment and pit top 2,584 220 2,628 13,062 18,494spoil heaps 337 50 150 4,492 5,029pumping costs - - - 8,985 8,985Ground/groundwater contamination - - - 9,483 9,483Redundancy 18,152 6,069 - - 24,221-------------------------------------------------------------------------------------------- 52,320 26,257 50,102 45,419 174,098-------------------------------------------------------------------------------------------- The total of provisions created net of provisions released was £32.4 million(2004: £24.6 million). This included £29.6 million (2004: £6.3 million) inrespect of Exceptional Items and £2.8 million (2004: £18.3 million) in respectof non-exceptional items. A brief description of the nature of the Group's obligations and an indicationof the uncertainties surrounding each of the above provisions is provided below: Employer and public liabilities - provisions are made for current and estimatedobligations in respect of claims made by employees and the general publicrelating to accident or disease as a result of the business activities of theGroup. Surface damage - provision is made for the Group's liability to compensate forsubsidence damage arising from past mining operations. Claims can be lodged bythe public up to six years after the date of relevant damage. The estimate isbased on historical claims experience following a detailed assessment of thenature of damage foreseen. Claims - where surface mine sites owned by the Group are mined by externalcontractors and mining conditions vary from those specified in the contract, theexternal contractors may be entitled to claim further costs incurred. Claims aresettled with individual contractors, generally at the completion of a surfacemining site. All claims provisions are based on known mining conditionsencountered, historical experience and contracted rates. Restoration and closure costs of surface mines - provisions are made for thetotal costs of reinstatement of soil excavation and for surface restoration suchas topsoil replacement and landscaping. Costs become payable after coal mininghas been completed. Further liabilities for after-care can extend afterrestoration, for a period of up to six years. Restoration and closure costs of deep mines: Shaft treatment and pit top - provisions are made to meet the Group's liabilityto fill and cap all mine shafts and return pit top areas to a conditionconsistent with the required planning permission. No liabilities will ariseuntil decommissioning of each individual colliery. The current pit top provisionreflects existing planning permissions that require pit areas to be restored toformer use, usually agricultural. The Group will, where possible, seek planningpermission for development use, which, if successful, may reduce the expectedcost. Spoil heaps - provisions are made for the costs payable to bring spoil heaps toa condition consistent with required planning permission and to completeapproved restoration schemes. An element of spoil heap restoration is ongoing,although the majority of costs will be incurred on decommissioning of acolliery. Pumping costs - there is a legal requirement to continue pumping activities atcertain mine sites following closure and for a period into the future. Theprovision is based on current experience and the net present value of futurecost projections. Pumping costs on continuing operations are expensed asincurred. Ground/groundwater contamination - provisions are made for the Group's legal orconstructive obligation to address ground and groundwater pollutants at itsoperating sites. The provision is based on estimates of volumes of contaminatedsoil and the historical contract costs of ground contamination treatment. Thesecosts will usually be incurred on the decommissioning of a site. Redundancy - provision is made for current estimated future costs of redundancyand ex-gratia payments to be made where this has been communicated to thoseemployees concerned. 9 Retirement benefit obligations Defined Contribution Pension Schemes The Group operates defined contribution pension schemes in respect of allemployees who joined after the privatisation date in 1994. Contributions todefined contribution schemes amounted to £1.7 million (2004: £2.1 million). Defined Benefit Pension Schemes The balance sheet amounts in respect of retirement benefit obligations are: 2005 2004 £000 £000 Industry Wide Schemes 116,730 113,181Blenkinsopp 1,299 1,299Concessionary Fuel 24,309 22,579--------------------------------------------------------------------------------------------- 142,338 137,059--------------------------------------------------------------------------------------------- Contributions to defined benefit schemes during the year amounted to £19.3million (2004: £16.9 million). Industry Wide Schemes The Group operates pension schemes providing benefits based on final pensionablepay. The majority of the employees within defined benefit schemes are members ofindustry wide schemes, being either the Industry Wide Coal Staff SuperannuationScheme (IWCSSS) or the Industry Wide Mineworkers' Pension Scheme (IWMPS), bothof which commenced on privatisation following the Coal Industry Act 1994.Contributions are determined by a qualified actuary on the basis of triennialvaluations using the projected unit method. The most recent valuations were at31 December 2003. The assumptions which have the most significant effect on theresults of the valuation are those relating to the rate of return on investmentsand the rates of increase in salaries and pensions. The main assumptionsunderlying the valuations of the UK COAL sections of each scheme were asfollows: 2005 2004 Discount rate 4.70% pa 5.25% paRate of return on investments 7.00% pa 7.00% paRate of salary increases 2.70% pa 2.75% paRate of price inflation 2.70%pa 2.75% paRate of return on equities 7.00%pa 7.00%pa Pensions in payment are assumed to increase in line with price inflation. Post retirement mortality has been estimated using applicable standard mortalitytables. Normal health and ill health pensioners have been rated up by betweenone and three years and by five years respectively. The overall expected rate of return on assets is based on a historic view of theyields from equities and the rates prevailing on applicable bonds at the balancesheet date. The amounts recognised in the balance sheet are as follows: 2005 2004 £000 £000 Present value of funding obligations (418,270) (344,925)Fair value of plan assets 301,540 231,744-------------------------------------------------------------------------------------------Net liability recognised in the balance sheet (116,730) (113,181)------------------------------------------------------------------------------------------- None of the pension schemes own any shares in the Company. A deferred tax asset of £35.0 million (2004: £34.0 million) would offset thegross deficit if the Group generates sufficient taxable profits before thedeficit is accounted for. The amounts recognised in the income statement are: 2005 2004 £000 £000 Current service cost (12,802) (13,043)Interest cost (18,053) (15,815)Expected return on plan assets 16,109 13,740Effect of curtailment or settlement 2,191 1,808------------------------------------------------------------------------------------------- (12,555) (13,310)------------------------------------------------------------------------------------------- The above amounts are charged to cost of sales, except for the interest cost,which is included in administrative expenses. A further £10.3 million (2004:£14.0 million) has been charged to the statement of recognised income andexpense in the year. This represents the net effect of experience and actuarialgains and losses on the schemes in the year. Change in assets 2005 2004 £000 £000 Fair value of plan assets at 1 January 231,744 193,324Expected return on plan assets 16,109 13,740Actuarial gains on assets 36,975 10,171Employer contributions 19,292 16,889Plan participants contributions 3,903 4,677Benefits paid (6,483) (7,057)-------------------------------------------------------------------------------------------Fair value of plan assets at 31 December 301,540 231,744------------------------------------------------------------------------------------------- The major categories of assets as a percentage of total plan assets are asfollows: 2005 2004 £000 £000Asset categoryEquity securities 256,060 193,262Debt securities 45,480 38,482---------------------------------------------------------------------------------------------Total 301,540 231,744--------------------------------------------------------------------------------------------- Change in defined benefit obligations 2005 2004 £000 £000 Present value of defined benefit obligation at 1 (344,925) (296,059)JanuaryCurrent service cost (12,802) (13,043)Interest cost (18,053) (15,815)Plan participants' contributions (3,903) (4,677)Curtailment gain 2,191 1,808Actuarial loss (47,261) (24,196)Benefits paid 6,483 7,057---------------------------------------------------------------------------------------------Present value of defined benefit obligation at 31 December (418,270) (344,925)--------------------------------------------------------------------------------------------- Analysis of the movement of the balance sheetliability 2005 2004 £000 £000 1 January (113,181) (102,735)Total expense as above (12,555) (13,310)Contributions 19,292 16,889Net actuarial losses from participants gains (10,286) (14,025)recognised in year 31 December (116,730) (113,181)--------------------------------------------------------------------------------------------- Cumulative actuarial gains and losses recognised inequity 2005 2004 £000 £000 1 January (14,025) -Net actuarial losses in the year (10,286) (14,025)----------------------------------------------------------------------------------------------31 December (24,311) (14,025)--------------------------------------------------------------------------------------------- The actual return on plan assets was £53.1 million (£23.9 million). Experience gains and losses 2005 2004 £000 £000Actual return less expected return on schemes' assets 36,975 10,171Experience losses arising on schemes' liabilities (5,242) (7,074)Changes in assumptions underlying present value of (42,019) (17,122)liabilities Net actuarial loss (10,286) (14,025)--------------------------------------------------------------------------------------------- History of experience gains and losses 2005 2004 2003* 2002* £000 £000 £000 £000 Actual return less expected return on 36,975 10,171 19,694 (53,260)schemes' assetsPercentage of year end scheme assets 12% 4% 10% 36%Experience (losses) / gains arising on (5,242) (7,074) 5,650 1,396schemes' liabilitiesPercentage of the present value of schemes' 1% 2% 2% 1%liabilities \* The amounts for 2002 and 2003 are those disclosed under FRS17, as reported inprior years. The contribution expected to be paid in 2006 to the schemes during the yearending 31 December 2006 amounts to £20.7 million. Blenkinsopp Blenkinsopp is a section of the industry wide mineworkers scheme covering thepension arrangements of the various companies comprising parts of the formerBritish Coal. Blenkinsopp Collieries Limited was sold by UK COAL in 1998,however the purchaser has since gone into receivership and the retirementliabilities have reverted to UK COAL. The liability of £1.3 million (2004: £1.3million) has been calculated on an ongoing basis. Concessionary fuel The Group operates a Concessionary Fuel arrangement in the UK. An actuarialvaluation was carried out by an independent actuary at 31 December 2005. Themajor assumptions used by the actuary were: 2005 2004------------------------------------------------------------------------------------------- Discount rate 4.70% 5.30%Inflation assumption 2.70% 2.80%Coal price inflation 2.70% 1.80%------------------------------------------------------------------------------------------- The amounts recognised in the balance sheet are as follows: 2005 2004 £000 £000------------------------------------------------------------------------------------------- Net liability recognised in the balance sheet (24,309) (22,579)------------------------------------------------------------------------------------------- The arrangement is unfunded so no assets are held directly to meet the emergingliabilities. A deferred tax asset of £7.3 million (2004: £6.8 million) wouldoffset the gross deficit if the Group generates sufficient taxable profitsbefore the deficit is accounted for. The amounts recognised in the income statement are: 2005 2004 £000 £000 Current service cost 489 636Interest cost 795 1,296Effect of curtailment or settlement (2,989) -------------------------------------------------------------------------------------------- (1,705) 1,932------------------------------------------------------------------------------------------- The above amounts are charged to cost of sales, except for the interest cost,which is included in administrative expenses. A further loss of £4.0 million(2004: gain of £2.3 million) has been charged to the consolidated statement ofrecognised income and expenses in the year. This represents the net effect ofexperience and actuarial gains and losses on the schemes in the year. Analysis of the movement of the balance sheet liability 2005 2004 £000 £000 Concessionary Fuel reserve at beginning of the year (22,579) (23,444)Current service cost (489) (636)Benefits paid to former employees during the year 560 490Interest cost (795) (1,296)Actuarial (loss) / gain (3,995) 2,307Gains on curtailments 2,989 -----------------------------------------------------------------------------------------------Concessionary Fuel reserve at end of the year (24,309) (22,579)---------------------------------------------------------------------------------------------- Cumulative actuarial gains and losses recognised inequity 2005 2004 £000 £000 1 January 2,307 -Net actuarial losses in the year (3,995) 2,307--------------------------------------------------------------------------------------------- 31 December (1,688) 2,307--------------------------------------------------------------------------------------------- Experience gains and losses 2005 2004 £000 £000 Experience gains on Concessionary Fuel reserve - 3,186Changes in assumptions underlying present value of (3,995) (879)liabilitiesTotal amount recognised in statement of income and expense (3,995) 2,307--------------------------------------------------------------------------------------------- History of experience gains and losses 2005 2004 2003* 2002* £000 £000 £000 £000 Experience gains on Concessionary Fuel reserve - 3,186 4,297 829Percentage of Concessionary Fuel reserve 0% 14% 17% 3% \* The amounts for 2002 and 2003 are those disclosed under FRS17, as reported inprior years. 10 Contingent liabilities Guarantees have been given in the normal course of business for performancebonds of £2.1 million (2004: £2.2 million) to cover the performance of workunder a number of Group contracts. In our Report and Accounts for the year ended 31 December 2004, we referred to aclaim against the Company to determine whether the Company may be required toprovide certain early retirement pension related benefits on redundancy. Neitherthe legal analysis of the merits of the claim nor the difficulties inherent inquantifying any financial cost to the Company have changed, and therefore noprovision has been made in the accounts. As reported in our interim accounts forthe period ended 30 June 2005, the Board considers, on the basis of legal andactuarial advice, that the cost to the Company is estimated to be between zeroand £40 million (31 December 2004: between zero and £30 million). However, thecomplexities of the legal issues involved, and the difficulties in quantifyingfinancial exposure, mean there remains a possibility that the cost to theCompany may exceed £40 million. The increase in the range of estimated cost is principally the result ofredundancies announced since 31 December 2004, and a better estimate ofpensionable salary which could require top up by the Company to pensions inpayment and already paid by the former British Coal Corporation. The hearing date for the case has been re-scheduled and is now expected to beheard in the High Court during July 2006. The Company continues to vigorouslydefend the claim. 11 Statutory Accounts Financial information contained in this document does not constitute statutoryaccounts within the meaning of section 240 of the Companies Act 1985 ("theAct"). The statutory accounts for the year ended 31 December 2005 will be filedwith the Registrar of Companies following the Company's Annual General Meeting.The auditors have reported on these accounts: their report was unqualified anddid not contain a statement under section 237(2) or (3) of the Act. This information is provided by RNS The company news service from the London Stock Exchange

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