UK Coal Annual Report and Accounts 2011

RNS Number : 1945C

UK Coal PLC

27 April 2012

UK COAL PLC

Annual Report and Accounts 2011

For RNS purposes graphs and page numbers have been omitted.

Chairman's statement

Results for 2011

For the first time in four years UK Coal delivered a profitable year, with overall pre-tax profits of GBP58.0m, compared to the loss of GBP124.6m for 2010 and cumulative losses from 2008 to 2010 of GBP269m. This improved performance is in line with our Recovery Plan, with an increase in revenue from improved production, stock reductions and realised sales price, and from our initial steps in addressing our cost base.

Net bank debt fell to GBP55 million at 31 December 2011 against GBP141m in 2010. This reflects the realisation of value from our property portfolio, with sales of GBP67m achieved at prices slightly ahead of book values.

Recovery Plan

In my statement last year I set out an assessment of UK Coal's business performance as I had found it on becoming Chairman in November 2010. Shortly afterwards, we announced the detailed priorities for the first steps of our Recovery Plan, which has delivered a profit in 2011. We have made some significant progress during the year:

i. We were very clear that our highest priority was to improve the safety of our mining operations and made initial good progress. Our All Accident Rate for 2011 improved by around 20%. A fatality in September further accelerated our efforts, through our Critical Safety Review, on the changes that are needed around behaviours and working practices.

ii. Our property business, Harworth Estates, performed well with net receipts from property disposals of GBP65m in the year.

iii. We made substantial progress in addressing high, and unaffordable, workforce costs and the future service cost of the Group's defined benefit pension schemes. Service costs have been halved. Labour agreements reached during the year are expected to hold per capita employment costs broadly at 2010 levels until the end of 2013.

iv. We started work on balancing long term security of sales contracts with more flexibility around market conditions.

v. Good progress was made in improving financial and operational controls across all areas of the business. We continue to fight inefficiency and high costs, although much remains to be done.

vi. We started work on rebuilding the management of the Company with significant new appointments to our mining team in the second half of the year.

vii. At year end, net bank debt, excluding restricted funds, was reduced from GBP141m to GBP55m. Total net debt, excluding restricted funds but including loan prepayments, has reduced from GBP242m to GBP139m.

viii. By the end of 2011 we had completed the re-building of the Board, with the appointment of four new Non-Executive Directors since late 2010. These appointments have contributed a fresh outlook and new determination to the Board.

Current progress

While there were significant achievements made in 2011, difficulties at Daw Mill from late 2011 highlighted how much remains to be done to put the UK Coal mining business on a stable footing.

We highlighted in April last year that the Company once again faced a potential three-month "face gap" at Daw Mill, following the four-month face gap in 2010 which cost the Company the majority of the GBP100m raised in October 2009. Our mining team developed a two-part mitigation strategy to avoid a 2011 face gap.

At the end of 2011, the element of mitigation which relied on extending the 32s face at Daw Mill failed as a result of combined geological, workforce and management problems. Work started in January 2012 on the second part of the mitigation strategy which was to commence the next face early. The ramp-up of this face was very slow, taking three months in Q1 2012.

The high fixed cost structure inherent in our deep mines and a two week cash conversion cycle coupled with poor operational performance has an immediate impact on the Group's financial position. The current structure, whereby all mines are in the same corporate entity, can quickly result in one mine putting the entire Group at risk.

The problem of operational vulnerability is compounded by the level of our pension deficit and debt to customers and banks. The pension deficit, under the principles used by the Trustees to determine future funding, has almost doubled from around GBP250m at the last valuation in 2009 to approximately GBP430m.

As a result, the Company has recently announced its intention to restructure the Group to isolate the operating risk of each deep mine from the Group as a whole and mitigate future financial uncertainty arising from operations at Daw Mill or other mines. It was also announced that a consultation process has begun regarding the early closure of Daw Mill in 2014, subject to the option to retain Daw Mill under a new structure and operating model.

2012 restructuring

Our proposal to parties with an economic interest in UK Coal would entail a more formal separation of mining and property interests, each with an appropriate capital structure. The plan is intended to isolate the operating and financial risk of each deep mine from the Group as a whole and to address the funding and debt structure of the Group.

We have continued constructive discussions with our principal banking partners, Lloyds Banking Group, together with Barclays Bank, the Pension Funds, our customers, the Department for Energy and Climate Change and the Coal Authority. We are in the process of tabling our detailed plan to these parties.

Our intended plan involves a substantial reduction of the pension, and other, liabilities of UK Coal. Under this plan, the Board believes that the value inherent in the mining business can be properly exploited for the benefit of all stakeholders. A minority equity stake in the mining business, together with an interest in the future cash stream from the realisation of the property portfolio, would be offered in consideration for the reduction of pension scheme and, potentially, other stakeholder liabilities.

The Board believes that there is potential value to be realised from our substantial brownfield property portfolio through the development process. It is proposed that the property company would take over the bank debt of the Group and an agreed liability as part of a compromise of the pension scheme. Our proposal is that equity funding, which will be ring fenced to the property business, will need to be raised for the period of time required to pay down bank debt whilst the development process releases this value.

The Board believes that this plan is the only practicable way to create a sustainable structure for the Group. We recognise that this will require significant co-operation and support from all of those with an economic interest in the Group. Without this support there would be a significant risk to the Group, and, in particular, to the continuation of the mining business. We hope to be able to report on the result of our negotiations at our AGM in June.

Outlook

The reliance on coal in the current energy mix continues. During this recent winter, mild as it was, coal generated around half of the electricity needed in the UK. The proposed introduction of the carbon support price may reduce the demand for coal, but coal remains a key factor in keeping energy bills as low as possible.

In the short and medium term, as the UK manages the transition to a cleaner energy future, in a way that also maintains an affordable price for electricity, coal continues to be part of the energy mix. With over 100 years of reserves left in the UK, it is important that we continue to use coal mined in the UK rather than relying solely on imported coal.

We have two immediate over-riding priorities:

i. To operate the business safely and successfully, delivering the continuing targets of our recovery plan and in particular to improve production at Daw Mill where the recovery of 32s face still has to be achieved and the equipment transferred to 33s on a timely basis.

ii. To set out and negotiate, with our very wide range of stakeholders, a new structure for the Group to enable it to continue into the medium and longer term.

UK Coal has made significant progress on achieving the objectives set at the beginning of the year. I believe we now have a realistic and practical solution for taking the Group forward and would like to thank all those at UK Coal who have contributed to this progress.

Jonson Cox

Chairman

27 April 2012

Company Information and AdvisErs