Chairman's Statement

Surface mining operations, like this at the Lodge House site in Derbyshire, increased output during the year by 13%.

A year ago, few predicted the scale of global economic downturn and its dramatic impacts on companies in all sectors. UK COAL was far from immune from these impacts and, in addition, we faced significant challenges of our own. Our financial results show this. What they do not show, until you dig beneath the surface, is the quality of management and operational performance, the underlying strengths of our business and the fact that our long-term growth platform remains absolutely in place. These are substantial achievements and I, and the whole Board, thank our executive team and all our employees.

David Jones
Chairman

OVERVIEW

For 2008, UK COAL is reporting an operating profit before exceptional items of £1.8 million, compared to £72.1 million in 2007, a loss before (and after) tax of £15.7 million, compared to a profit before tax of £69.0 million the year before and a drop in assets per share from 228p in 2007 to 191p. These are not figures I like reporting, but comparing 2008 with 2007 is like comparing apples with pears and, given the differences, I believe the results are in fact very creditable.

In terms of our reported financials the biggest difference between the two years is that, in 2007, our property portfolio delivered a valuation gain of £66.8 million, compared with only £23,000 in 2008.

These gains are non-cash items but go through the profit and loss account. In addition, in 2007, we benefited both from non-trading exceptional profits of £10.5 million, compared to exceptional costs of £4.1 million in 2008, and from a one-off £25.0 million tax credit in 2007. The decrease in net assets is largely due to an increase in the deficit on retirement obligations, a direct reflection of the financial markets.

Throughout 2008, and since, the Group has continued to put safety at the heart of all aspects of our operations. Regrettably though I have to report on the loss of the life of a colleague during the year, strengthening our determination to strive towards Zero Incidents. Good progress has continued to be made in reinforcing the safety culture across the Group, and, although the overall reportable injury rate has not declined, the severity of the injuries has. I would like to thank the whole of our workforce for their commitment to the safety programme which is clearly demonstrating that safety and operational performance go hand-in-hand.

In mining, we start this year with a significant step forward in that we have successfully negotiated new, or amended old, long-term supply contracts with our core electricity generator customers, Drax, Eon and EDF Energy.

We are also pleased to be able to announce the addition of a new customer, Scottish and Southern Energy. We have agreed to provide Scottish and Southern Energy’s Ferrybridge power station, recently fitted with flue gas desulphurisation equipment, with a total of 3.5 million tonnes of coal starting later this year with deliveries to 2015. These deliveries are at market prices, linked to international coal prices, but with caps and floor prices. They have also agreed to provide a loan, repayable over the period to 2014, to assist in funding our investment requirements.

These new contracts significantly increase both our long-term contracted coal prices and our short-term cash flows. These material benefits, compared to previous contractual arrangements, improve our economics and will facilitate the funding of our current investment in our deep mines.

The total benefit in cash flow terms of these arrangements will be of the order of £85 million in 2009, with a further £15 million in 2010. To the extent that some of the short-term cash flow benefits represent part pre-payment of the improved prices under the long-term successor contracts, they will be treated in our accounts as customer prepayments/loans rather than being reflected as improved profitability in the near term. I would like to thank our customers for engaging with us in implementing these strategic changes to, what it is clear will be, mutual benefit.

Our property portfolio remains relatively immature, and we remain confident that it will generate significant additional value over time. The impact of property market conditions is not so much to change the future estimates of the value of Project Worth, but more likely to move out the timing of crystallisation of this value. Because of the difficulty in judging the pace of the recovery from the current recession and its effect on the property market, we have looked, with our property advisers DTZ, at a range of scenarios for generating the improved worth of our portfolio with the central scenario indicating a portfolio worth doubling to approximately £886 million over the next 5 years to 2014.

MINING

The international market price of coal was extraordinarily volatile last year. It climbed to exceptional highs of circa £4.40/GJ during last summer, but closed the year at £2.34/GJ as market concerns over the world economy were brought to bear. Our average selling price was inevitably constrained by the effect of legacy contracts but, nevertheless, it was up 18.5% for the year to £1.92/GJ, a very satisfactory outcome.

Tonnage sold from all mines was 7.9 million tonnes, in line with 2007, excluding Maltby, which we sold in 2007. This tonnage was less than we had originally hoped for, though broadly in line with the guidance we gave during the year. Our Kellingley and Thoresby deep mines encountered very difficult geological conditions, but our largest mine, Daw Mill near Coventry, produced a European record for a single face mine. It produced 3.2 million tonnes in the year, even after the slower start following commencement of its new face. This was a superb effort, and I congratulate all those involved at Daw Mill and the specialist support teams elsewhere.

Our surface mining business again grew stronger during the year with the production of 1.7 million tonnes, up 13% on 2007 (1.5 million tonnes). Planning applications and consents continued to programme, keeping us on track for our target of 2+ million tonnes a year sustainable surface mine production after 2010.

The strategic changes to our coal contracts, and the addition of Scottish and Southern Energy as a fourth major generator customer, reposition our mining business strongly for the medium and longer term. Against this backcloth, we decided to streamline our focus on supplying coal to the electricity supply industry and, in January 2009, we sold our 50% share in Coal4Energy to our partners, Hargreaves Services PLC. We now participate in the domestic and industrial coal markets through a long-term coal supply agreement with Hargreaves.

It is increasingly clear from Government statements, customer engagement and analyst research that coal will play a major role in the UK energy mix for the next two decades and beyond. The formation in October 2008 of a new Government Department for Energy and Climate Change (DECC) is welcomed, as is the Secretary of State’s commitment to a strategic energy policy with an acknowledgment of energy security and affordability at its heart. We are well placed to play the leading role in the production of indigenous coal for Britain, and Government clearly recognises this.

HARWORTH ESTATES

Harworth Estates has continued to make strong progress on Project Worth, the plan to mature in planning terms of 77 of our sites. Last year, further planning approvals were secured for over 1,200 homes and 140,000 sq m (1.5 million sq ft) of business space. Planning applications were additionally made for over 4,500 homes and 78,000 sq m (841,000 sq ft) of business space.

Overall, Harworth Estates produced an operating profit of £4.7 million (2007: £73.2 million). As expected, this was significantly lower than the previous year because of a reduction in revaluation gains on investment properties to £3.7 million from £70.5 million in 2007, of which £23,000 was unrealised (2007: £66.8 million). A further revaluation gain of £3.2 million (2007: £6.7 million) was taken directly to reserves, being the increase in value of former operating properties transferred to investment property status in the year on their ceasing to be operational sites.

Notwithstanding the unprecedented market conditions, particularly towards the end of 2008 which have clearly continued into 2009, our property portfolio has the potential to contribute very substantial shareholder value over the medium-term. We have clearly mapped out our strategy for realising this value and our focus on this remains undiminished.

GOING CONCERN

Your Board recognises that deep mining has a high operating risk compared to the majority of industries. Recent economic turmoil especially in relation to commodity prices, the banking market and the property market has increased further the risk environment in which the Group operates. These risks are set out in the Operating and Financial Review and I would also draw your attention to those matters which the Board has felt it appropriate to take into account in forming its conclusion on going concern set out in the Directors’ Report and in the Financial Statements.

DIVIDEND

The Group continues to make significant investments in our mining business and in the planning phase of our property business to the clear benefit of shareholders. For this reason and to preserve financial flexibility the Board has decided not to recommend a dividend for 2008. Future dividend policy will be dependent both on our future performance and financial resources, market conditions and on our view on how best to drive total shareholder value.

OUTLOOK

The mining business has started this year in line with 2008 with first quarter production at 1.7 million tonnes (2008: 1.7 million tonnes). The new coal contracts, the planned impact of our investment programmes at Thoresby and Kellingley, the continued excellent performance at Daw Mill and the continued growing strength of surface mining combine to provide an increasingly positive outlook. Our property business, Harworth Estates, continues to out-perform the market and to look forward to substantial long-term value creation. We therefore face the future with confidence.

David Jones
Chairman
27 April 2009